Japan FSA mulls securities rule changes to support investor engagement

It comes following sustained pressure by investor groups.

The Japanese Financial Services Agency (FSA) has created a working group to consider revisions to local shareholding reporting rules under efforts to boost collaborative investor engagement.

Under Japan’s securities law, “acting in concert” – where two or more shareholders coordinate their influence over a company through voting or ownership decisions – can trigger onerous disclosure filings or invite scrutiny by the government.

Major foreign shareholders – those which hold between five to 10 percent of company shares – are allowed to make simplified and fewer securities filings, as long as the shareholding is not used for the purposes of “controlling the business activities” of the issuer.

Examples of activism given by the governing regulation include appointing or dismissing directors, or changing company dividend policies and organisational structures.

Major shareholders are also required to disclose the stakes of other investors that have agreed to jointly exercise voting and other shareholder rights, when making statutory filings. Investors which are deemed as coordinating proxy voting activities are known as “joint holders”, and verbal discussions may be sufficient to trigger joint holder status.

The designation also applies to subsidiaries of a shareholder which owns shares in the same company.

Meeting notes seen by Responsible Investor show that a new working group convened by the FSA last month to assess whether the scope of what constitutes activism and the joint holders rule “should be limited or clarified from the viewpoint of promoting collective or collaborative engagement”.

The working group was established under the FSA’s Japan Corporate Governance Forum, a Japanese government initiative to canvas investor views from around the world. Forums have already been held with US and Canadian investors, the Asian Corporate Governance Association (ACGA) and the International Corporate Governance Network (ICGN) since its formation late last year.

The FSA did not respond to a request for comment on the details on the working group’s members, timeline and deliverables.

Concerns over Japan’s acting in concert rules have been raised by the FSA’s expert advisory groups on the local stewardship and corporate governance codes in recent years, and are described as having a “chilling effect” on engagement initiatives. Groups such as ICGN  petitioned the government for more clarity on the topic as early as 2016.

The FSA’s director of corporate governance Toshitake Inoue previously acknowledged the need to review the rules and consider relief for investors in an RI interview earlier this year.

“The notion of acting in concert in Japan is deeply unclear, especially for European investors, so we may want to qualify the notion that there will be in a safe harbour,” Inoue said. “There should not be any acting in concert concerns for ESG issues which are usually thematic and does not target individual companies.”

The FSA’s corporate government initiatives currently fall under the remit of newly appointed director Akira Nozaki, following director Inoue’s reassignment to the FSA’s enforcement department.

Much of the regulatory landscape in Japan is derived from the US, where acting in concert rules are perceived in some quarters as a key regulatory barrier to collaborative shareholder engagement. Criticism levied by US conservative groups against the Climate Action 100+ for example has notably described the investor network as being “a coordinated conspiracy” over concerns that it falls foul of acting in concert rules.

The FSA’s review of acting in concert rules comes months after it published a workplan to boost corporate governance. This is in line with a broader government initiative to improve the competitiveness of Japanese companies announced by prime minister Fumio Kishida in 2022.