As the business environment facing companies changes with the growing emphasis regarding returns on equity among corporate managements and the introduction of market value accounting practices, the dissolution of cross-shareholdings is steadily progressing. Worsening of the demand-supply balance due to the steady dissolution of cross-shareholdings has been one of the factors causing the prolonged slump in the stock market and continues to be a major barrier to reviving the Japanese economy.
To promote structural economic reforms, companies should be able to dissolve cross-shareholdings in a manner that does not negatively affect the market and to buy back their own shares in order to help stimulate stock market activity.
In light of such needs, we recommend that the following provisional measures be implemented with a limit of approximately three years, in order to institutionalize a system to facilitate the acquisition of own shares through the mutual exchange of crossholdings and establishment of special tax measures related to such exchanges.
Special measures regarding methods of share repurchase
When the board of directors of a publicly-traded company repurchases its own shares based on authorized articles of incorporation, the acquisition of shares mutually held for at least five years (including shares held through a subsidiary or other affiliated company) through an exchange should be approved on a provisional basis.
The same type of acquisition should be approved even in cases when the articles of incorporation have already been authorized.
From the perspective of securing a fair transaction price, the price for acquisition by exchange should be based on market values.
Treatment of the acquired shares
Similar to the current system for normal share buybacks, shares that are repurchased through a mutual exchange must be cancelled immediately.
However, in the case of financial institutions, provisional measures may be necessary in order to maintain capital requirements.
Since the dissolution of crossholdings may result in a problem of establishing a quorum at shareholders meetings, this issue needs to be addressed separately.
Special measure on cancellation of shares acquired via mutual exchange
When companies acquire their own crossheld shares via a mutual exchange (including the acquisition of shares held through a subsidiary or other affiliated company), tax measures should be adopted so that the amount of the cancellation of shares up to the capital gains at the time of the exchange can be treated as an expense by the company.