Share Buyback Rules under Japanese Corporate Law and Shareholders’ Return
Abstract
This paper deals with the development of the rules on share buybacks under Japanese corporate law and analyses recent changes in the attitudes of management and shareholders towards this instrument. The authors observe that share buybacks are recognized today as a popular tool of shareholder return, whereas the deregulation of share buyback rules by the reform of 2001 was originally intended to give management a countermeasure against hostile takeovers under the market situation of stock price decline.
The first part outlines the gradual deregulation of the rules on share buybacks and the historical development from an absolute ban on share buybacks in the former Commercial Code to today’s rules in the Companies Act, which in principle allows for share buybacks and treasury shares provided certain conditions are met. Particular attention is given to the various interests involved in the law-making process, the lobbying by business circles as well as the legislator’s aims against the backdrop of the continuing economic slump.
In the second part the authors take a closer look at the reaction both by corporations and by shareholders to the deregulation of share buyback rules. Through statistical data it is shown that many shareholders view share buybacks positively and expect the corporation to use this instrument to increase their total return ratio. By contrast, the management of many corporations tends to take a negative view. Still, even corporations increasingly see share buybacks as a useful tool to enhance the attractiveness of their shares and to add flexibility to their financial policy. Some corporations today have made share buybacks an integral part of their strategy and explicitly commit to the market to engage in share buybacks.
(The Editors)
