This article reprinted by permission of Lawmoney.com
© 2000 Lawmoney.com All rights reserved.

In the latest developments of Japan's commercial code, the Ministry of Justice has approved changes to legislation that will help Japanese companies become more competitive globally. The amendments, recommended by the Ministry of International Trade and Industry (MITI), will allow corporate divestitures and spin-offs. This relaxation in corporate law will enable further restructuring.

The changes, passed recently, allow previously prohibited spin-offs, according to Osamu Moriya, director of the Industrial Organization Division at MITI. He says that corporations can now create subsidiaries that are owned by the same shareholders that own the holding company. Reorganizing the holding company will now become much easier. Combined with earlier changes to the commercial code regarding mergers and acquisitions, a merger of subsidies can now occur after only one shareholder meeting. And if a large company is absorbing a small company, a shareholder meeting is unnecessary.

Andrew Castle, partner in UK firm Allen & Overy's Tokyo office, says: "This will be relevant to MBO's (management buy-outs) and will help the MBO market, spinning off subsidiaries and selling them on. The problem with some trading houses is that there are stronger divisions and weaker divisions and they cannot write these off. If they have subsidiaries, they can more clearly see which are profitable and which aren't, and it encourages people in individual subsidiaries that they have to make a contribution." He adds: "It is a good thing and it will help Japanese businesses."

Moriya thinks that the benefits of the new system are clear: "This will make the reorganization of corporate group management more easily done," he says. "You can now have a holding company and a division operating as a subsidiary. Subsidiaries can either be sold or acquire another company as a subsidiary. They may merge with another subsidiary or can divide into two, perhaps selling one and maintaining another. Formation can be more easily done."

The new system will be applied when the Mizuho Group is formed. This merger between the Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank, changes from a single holding company, into a group consisting of an investment bank, a consumer bank and a corporate bank.

Moriya says that all the revisions associated with corporate reorganizations have now been completed. But he adds: "There is just one major element remaining, the consolidated tax return system. This has not yet been introduced." He hopes it will be by 2002. Moriya explains: "Companies will be taxed as a group of companies, not as singular ones, which has been the case until now. Even if there is a deficit in one company and a profit in one company, you cannot write-off the profit with the loss. But in a consolidated system, as a group, you are able to do that, which will make it easier to perform group management."

The commercial code changes will be welcomed by Japanese companies, according to Teruo Kato, UK firm Field Fisher Waterhouse's Japanese corporate partner . Kato points out that he does not practice Japanese law but comments: "The commercial quarter has been so restrictive. There have been a lot of cases where there is a shortage of freedom allowed compared to the US and EU systems. Public opinion is that restriction prevents Japanese companies are realizing their full potential. Because of restrictions they lose out on business opportunities for purely technical reasons." He adds that the more open reforms are heading in the right direction. His only concern is whether the proposals are sufficient to deliver what is intended.