Welcome to the July edition of our Japanese finance regulatory update, which aims to provide you with in-depth analysis and practical insights on select legislative updates that bring significant implications to Japanese corporates and international companies operating or investing in Japan.
We hope you find these updates useful, and we look forward to having a further discussion with you on the topics and any other regulatory issues.
Introduction
On May 1, 2026, an amendment ("Amendment") to the Financial Instruments and Exchange Act ("FIEA") came into effect. The Amendment, among others, intended to promote constructive dialogue between listed companies and investors while improving transparency and fairness in capital markets. The amendments introduced significant changes to the Large Shareholding Report (tairyou hoyu houkokusho) system and the Tender Offer (koukai kaitsuke) system.
This July edition covers the key changes to the Large Shareholding Report system. The August newsletter will address the amended Tender Offer system.
Executive summary
Amendments to the Large Shareholding Report System
- Clarification of "Important Proposals, etc.": The Financial Services Agency ("FSA")'s Q&A has identified three key perspectives for assessing whether investor engagement constitutes "Important Proposals, etc."
- Clarification of "Joint Holders": Institutional investors conducting collaborative engagement may, subject to certain conditions, fall outside the definition of Joint Holders.
- Regulation of Cash-Settled Equity Derivatives: Derivatives without physical shareholdings may now clearly be included in the calculation of shareholding ratios in certain cases.
- Greater Enforcement Focus: Recent enforcement actions and regulatory scrutiny highlight the increasing importance of strict compliance with Large Shareholding Report obligations.
Key changes
1. General Overview of the Large Shareholding Report System
Under the Large Shareholding Report system, any person whose shareholding ratio of share certificates, etc. of a listed company exceeds 5% (a "Large Holder") is required to disclose information including their shareholding ratio, purpose of holding, and source of acquisition funds.
Specifically, a Large Holder must file a Large Shareholding Report through EDINET (the electronic disclosure system for securities filings) within 5 business days from the date they become a Large Holder, or from the date of any subsequent change of 1% or more in their shareholding ratio.
2. Clarification of "Important Proposals, etc."
A Large Shareholding Report must state the investor's purpose of holding. The distinction between "for the purpose of Important Proposals, etc." and "pure investment or other purposes" directly affects a filer's eligibility for the special reporting system, which provides relaxed filing deadlines. The ambiguity of this boundary had been pointed out as creating a chilling effect on engagement activities by institutional investors.
The FSA has now provided guidance identifying the following three perspectives when assessing whether an investor's conduct constitutes "Important Proposals, etc.":
- Is a proposal being made to the issuer?
- Does the proposal relate to a matter specified in the relevant Cabinet Office Ordinance?
- Is the proposal intended to cause a material change to, or have a material impact on, the issuer's business?
Note: These are reference perspectives based on the FSA's Q&A and are not statutory requirements themselves. Individual determinations will depend on the specific facts and circumstances of each case.
3. Clarification of "Joint Holders"
Previously, where multiple investors were classified as "Joint Holders"—i.e., those who have agreed to jointly exercise voting rights or other shareholder rights—their combined shareholding ratio was used for Large Shareholding Report calculations. The scope of "Joint Holders" was unclear under the law, which had been identified as an obstacle to collaborative engagement by institutional investors.
Under the Amendment, it is now clarified that multiple investors do not constitute "Joint Holders" unless they enter into an "agreement that materially affects management." For example, jointly making proposals regarding dividend policy or capital policy changes that are not directly related to corporate control would not constitute such agreement.
Entities eligible for this exception are limited to securities companies, investment management businesses, banks, trust companies, and insurance companies.
4. Regulation of Cash-Settled Equity Derivatives
Prior to the Amendment, the FIEA did not cover a long position in a cash-settled equity derivative transactions clearly and only FSA's Q&A mentioned such cases.
Under the Amendment, holders of cash-settled equity derivatives meeting certain requirements are now deemed "holders" for purposes of the Large Shareholding Report system. This addresses so-called "stealth accumulation"—building up substantial economic exposure through derivatives without directly acquiring physical shares, thereby effectively circumventing disclosure obligations.
Specifically, any person falling under any of the following is deemed a "holder" for purposes of the Large Shareholding Report system:
- a person who has the purpose of acquiring share certificates, etc. from the counterparty of the derivative transaction;
- a person who has the purpose of conducting Important Proposals, etc. by demonstrating to the issuer that they hold rights relating to the derivative transaction; or
- a person who has the purpose of influencing the exercise of voting rights held by the counterparty of the derivative transaction.
5. Greater Enforcement Focus
To ensure the effectiveness of the Large Shareholding Report system, the FIEA provides for administrative monetary penalties (surcharges equal to 1/100,000 of the issuer's market capitalization) and criminal penalties (imprisonment of up to 5 years or a fine of up to JPY 5 million, or both).
Furthermore, according to press reports, the FSA has commenced an investigation into whether large shareholders of listed companies are making appropriate disclosures (including whether they are specifically stating the content and timing of proposals when shares are acquired for the purpose of seeking changes to management policies) with respect to all reports disclosed on or after May 1, 2026.
Accordingly, the importance of strict compliance with Large Shareholding Report obligations has been increasing significantly in recent years.
Other author: Chiharu Takatori, Associate.