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日本法トピックス「最新立法」No.5 “Reform of Insider Trading Regulations”(若林 泰伸(比較法研究所研究員、法学学術院教授))

Recent Legislations in Japan (Commercial Law)

Reform of Insider Trading Regulations

Professor Yasunobu WAKABAYASHI
(Research Staff, Faculty of Law)
(on 15 April 2014)

EAmendment of the Financial Instruments and Exchange Act of 2012

In Japan, after revision of the Commercial Code of 1997, the law of corporate merger was amended, some means for reorganization was created(Share Exchange & Share Transfer, and Company Split), and a legal system for facilitating corporate group management was provided in the Code and the Companies Act of 2005. However, it has been pointed out that insider trading regulations under the Financial Instruments and Exchange Act do not provide a neutral provisions for multiple reorganizational means and could hinder corporate reorganization.

Therefore, the Act on Partial Revision of the Financial Instruments and Exchange Act, established in September 2012, revised the insider trading regulations for the purpose of facilitating corporate group management.

(1) Under the Act, before revision, insider trading regulations applied to equity transfer through assignment of business. However, transfer of equity arising from mergers or company splits was not covered by insider trading regulations. Therefore, it was determined that transfer of specified securities, etc., for listed companies via mergers or company splits would be a target of insider trading regulations (main clause of paragraph 1 of Article 166 of the Financial Instruments and Exchange Act).

(2) In cases of transfer of equity via reorganization, if the possibility of insider trading through reorganization is low, it is appropriate to eliminate such cases as targets of insider trading regulations. Therefore, in cases of transfer of specified securities via mergers, company splits or assignments of business, if the percentage of book value of transferred assets accounted for by book value of such specified securities is under 20% , insider trading regulations do not apply (items 8 through 10 of paragraph 6 of Article 166 and items 8 through 10 paragraph 5 of Article 167 of the Financial Instruments and Exchange Act).

(3) Disposition of treasury stocks constitutes transfer of issued securities. Thus, insider trading regulations have been applied to such issuance. However, when treasury stocks are transferred as consideration of reorganization, such consideration is determined through negotiation in comparison with value of the assets to be transferred and other factors. Thus, the possibility of insider trading would be low. Therefore, disposition of treasury stocks for consideration of reorganization is eliminated from the targets of insider trading regulations (items 11 of paragraph 6 of Article 166 and item 11 of paragraph 5 of Article 167 of the Financial Instruments and Exchange Act).

 

EAmendment of the Financial Instruments and Exchange Act of 2013

The bill for revision of the Financial Instruments and Exchange Act, passed at an ordinary session of Diet in 2013, was based on the intention to adopt regulations on tipping and recommendation or solicitation to buy or sell securities as insider trading regulations.

In recent years in Japan, a spate of insider tradings occurred together with stock sales and short selling upon public offering of new shares, and this caused sharp declines in stock prices. The Securities and Exchange Surveillance Commission imposed surcharges on such insider trading cases. Despite this fact, it was thought that the Financial Instruments and Exchange Act in Japan did not clearly regulate tipping and recommendation or solicitation to buy or sell securities as targets of insider trading regulations. Thus, the Act was not sufficient to regulate insider trading cases by tippees.

Therefore, based on the amendment in question, corporate parties that have knowledge of material, non-public facts must not transmit such material facts or solicit trading for the purpose of causing other parties to perform trading prior to announcement of such material facts, and thus gain profits or avoid losses. Moreover, it has been proposed that the same type of regulations be established for insider trading related to tender offers and purchases of large quantities of stocks (new establishment of Article 167-2 of the Financial Instruments and Exchange Act).

In case that tippees or others have performed trading prior to announcement of material, non-public facts based on information transmission or recommendation or solicitation to buy or sell securities, such tippees would be subject to surcharges (new establishment of Article 175-2 of the Financial Instruments and Exchange Act) and criminal punishment (new establishment of items 14 and 15 of Article 197-2). It is expected that public announcement of the names of and other information identifying officers and employees of securities firms that have been involved in violation (new establishment of Article 192-2 of the Financial Instruments and Exchange Act) would deter insider trading.

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