Koji Toshima of Mori Hamada & Matsumoto analyses the groundbreaking Japanese listing and its effect on the TSE’s listing rules

The record-setting initial public offering (IPO) of Alibaba Group Holding in 2014 has elevated global discussion of the issue of weighted voting rights. Alibaba ultimately chose a US stock exchange for its IPO after Hong Kong officials rejected its request to allow a small group of company insiders to nominate the majority of its board. After losing the world's largest IPO, in August 2014 the Hong Kong Stock Exchange issued a concept paper on weighted voting rights to seek views on whether a corporate governance structure that gives founders or early investors disproportionate voting rights should be permissible.

In the US, after intense debate in 1980s, stock exchanges have permitted companies to use a dual-class stock structure in IPOs. Companies with a dual-class structure have both a low-vote class of common stock entitled to one vote per share, and a high-vote class of common stock entitled to multiple votes per share (often 10). These companies sell the low-vote common stock to the public in the IPOs while the founders or early investors retain the high-vote common stock. Google adopted the dual-class stock structure in 2004, and has been followed by several IT companies, including Facebook, Groupon, LinkedIn and Zynga.

The easy use of the dual-class stock structure in the US is attractive to companies that are located in jurisdictions like Hong Kong where the weighted voting right structure is prohibited. On the other hand, the dual-class structure is always controversial. Institutional investors often criticise the dual-class structure, as it makes it nearly impossible for shareholders to replace directors or force change-in-control transactions. Whether to allow the adoption of a dual-class structure has been a tough question for non-US stock exchanges around the world, including the Tokyo Stock Exchange (TSE).
In 2008, the TSE amended its listing rules to permit the use of certain kinds of dual-class stock structures in IPOs. In March 2014, Cyberdyne became the first company with a dual-class structure to list its common stock on the TSE. After the IPO of Cyberdyne, the TSE again amended its listing rules on dual-class structures.

The dual-class structure in Japan

Whereas it is possible for US companies to create a separate high-vote class of shares, the Japanese Companies Act does not permit a separate multiple-vote class of shares. Instead of giving multiple voting rights to shareholders, a unit share system is used to create a dual-class structure in Japan.

Under the Companies Act, a shareholder is entitled to one voting right for each unit of shares. The unit share system was introduced in 2001 to enable companies with a large number of shareholders to reduce their administrative costs in managing shareholders. However, the unit-share system opened the door to a dual-class structure because it is possible to set a different size of units for each class of shares.

Cyberdyne is authorised to issue two classes of shares – common stock and class B stock. Shareholders of both classes of stock have the same rights with respect to dividends and distributions upon liquidation. However, the company's articles of incorporation provide that there are 100 shares in each unit of common stock and only 10 shares in each unit of class B stock. Accordingly, when they hold an equal number of shares, a class B shareholder will have 10 times as many voting rights as a common shareholder given the different unit sizes.

More specifically, after its IPO, Cyberdyne had a total of 10,853,400 shares of common stock and 7,770,000 shares of class B stock. Due to the differently sized share units, common shareholders had a total of 108,534 voting rights and class B shareholders had a total of 777,000 voting rights. Therefore, class B shareholders held 41.7% of all outstanding shares but were entitled to 87.7% of total voting rights. Class B shares were held only by Yoshiyuki Sankai, the president and CEO of the company, and two foundations for which he serves as a representative director.

2008 amendments to TSE rules

Although the TSE did not have any rules regarding a weighted voting right structure before 2008, as a practical matter the TSE had not previously allowed existing or newly-listed companies to adopt a weighted voting rights structure. The only exception was Inpex Corporation, a privatised oil company, that had shares with veto rights (so-called golden shares) owned by the Japanese government.

As listed companies became concerned about anti-takeover measures after some hostile takeovers were attempted in the mid-2000s, the TSE amended its listing rules in 2008 after a two-year discussion period to relax regulations on the use of dual-class structures.

The 2008 amendment did not allow currently-listed companies to issue any high-vote shares. It only permitted IPO companies to use a dual-class structure. In addition, unlike the US, the TSE rules set a number of requirements for using a dual-class structure.

Breakthrough rule

The TSE rules provide that high-vote shares will be converted into low-vote shares if, following a bid, an offeror holds at least a certain percentage of all outstanding shares. This rule was implemented by reference to the breakthrough rule which was introduced by an EU takeover directive in order to prevent excessive disproportionality between risk bearing and control. It is quite interesting that the breakthrough rule has been successfully implemented in Japan, while most EU member states have not adopted the breakthrough rule.

Conversion upon transfer of high-vote shares

The TSE rules force high-vote shares to be converted into low-vote shares if the high-vote shares are transferred to a third party. High-vote shares are also converted upon the death of an individual shareholder holding high-vote shares. While it is not expressly required by the US rules, Google and its followers have similar terms in their articles of incorporation, and the TSE introduced such conversion features as a mandatory requirement.

Measures to protect minority shareholders

Unlike in the US, a controlling shareholder in Japan does not owe a fiduciary duty to other shareholders. In order to protect the interests of minority shareholders, the TSE rules require a company with a dual-class structure to have internal rules to prevent conflicts of interest, such as a rule to hear opinions from a third party independent of executives.

Alternative protections for low-vote shareholders

The Japanese Companies Act requires companies with multiple classes of shares to obtain approval from a class shareholders meeting for each class of shares, if certain corporate actions are 'likely to be detrimental' to a particular class. The corporate actions which could require a class vote include an amendment to the articles of incorporation, a share split or reverse share split, a rights offering and a merger or other type of reorganisation (including a short-form merger, which does not otherwise require shareholder approval). Because of the ambiguity of what is 'likely to be detrimental', companies with multiple classes of shares have generally held class votes as much as possible.

Due to criticism of ambiguity in the legal requirements, the Companies Act was amended in 2005 to provide that, if it is so provided in the articles of incorporation, approval of class shareholders meetings is not required for corporate actions, except for amendments to the articles of incorporation.

Since a dual-class structure makes less sense if each corporate action requires a separate class vote, the articles of incorporation of companies with a dual-class structure generally provide that a separate class vote is not required to the extent permitted by the Companies Act. However, given that elimination of class shareholders meetings could be detrimental to low-vote shareholders, the TSE requires companies with a dual-class structure to implement alternative protections for low-vote shareholders.

Cyberdyne's dual-class structure

Cyberdyne was established by Sankai, a professor at the University of Tsukuba, Japan, in order to develop his concept for the Hybrid Assistive Limb (HAL). HAL is the only autonomously-controlled wearable robot in the world, with technology that uses bio-electric signals originating from the human brain. HAL is the world's only cyborg-type robot, by which a wearer's body functions can be improved, supported and enhanced.

Given that this technology could be misused for weaponry or other destructive purposes, Cyberdyne introduced a dual-class structure upon its IPO in order to ensure that its technology would only be used for peaceful purposes.

Another reason for the dual-class structure was to improve corporate value by keeping Sankai involved in the business. The revolutionary technology of the company has been developed mainly by Sankai, and his continued commitment to the business was necessary for the best interests of the company and its shareholders. Such rationale was important not only for gaining acceptance of the dual-class structure from investors, but also for obtaining approval of the listing from the TSE. In fact, after Cyberdyne's IPO, the TSE amended its rules to require necessity and appropriateness of the dual-class structure. In this context, the TSE put aside the use of technology for peaceful purposes, and only considered the importance of Sankai's continued commitment in their examination of the listing.

Class B shareholders

Unlike in the US, the TSE examined the identity of the class B shareholders in considering the rationale for using a dual-class structure. In Cyberdyne's case, the class B shares are owned only by Sankai and two foundations. Some early investors and executives converted their class B stock into common stock before the listing in order to prevent them from gaining a higher percentage of voting rights than expected, especially upon a triggering event that would require the class B stock held by Sankai to convert to common stock.

In order to comply with TSE rules, Cyberdyne's class B stock automatically converts into common stock upon certain triggering events involving class B shareholders, including the death of an individual class B shareholder or the transfer of class B stock other than to an existing class B shareholder.

Breakthrough and sunset clause

The articles of incorporation of Cyberdyne provide that class B stock automatically converts into common stock if, following a tender offer, an offeror holds 75% or more of all outstanding shares. For the calculation of this shareholding ratio, both common stock and class B stock are counted equally.

In addition to the breakthrough clause, Cyberdyne's articles of incorporation provide a so-called sunset clause,that could force class B common stock to be converted into common stock. Under the sunset clause, Cyberdyne is required to confirm the intention of all shareholders of common stock and class B stock if Sankai ceases to be an officer of Cyberdyne. Such confirmation is also required every five years after Sankai's retirement. For purposes of this confirmation, class B share units are deemed to be 100 shares, meaning that shareholders of both common stock and class B stock have equal voting rights. Class B stock will convert into common stock if two-thirds of all shareholders (both common and class B) represented at the confirmation procedure approve the conversion, provided that shareholders holding at least one-third of outstanding shares indicate their intent.

The company introduced this sunset clause because Sankai intends to transfer part of his class B stock to other class B shareholders (the foundations he represents), and such a change of shareholders could be contrary to the intention of common shareholders.

Measures to prevent conflicts with controlling shareholders

Since Sankai continues to be a controlling shareholder after the IPO, Cyberdyne committed to obtain approval from a special committee consisting of outside directors and statutory auditors if Cyberdyne were to enter any transaction with Sankai or his foundations. In order to prevent a conflict with the University of Tsukuba, Cyberdyne also committed to obtain approval from directors who have no relationship with the university, at least half of whom are independent directors.

These commitments are not provided in the articles of incorporation or any agreement, but are provided in the registration statement and offering circular.

Alternative to class shareholders meeting

Cyberdyne's articles of incorporation provide that a separate class vote of common shareholders is not required to the extent permitted by law. In lieu of class shareholders meetings, class B stock is automatically converted into common stock if Cyberdyne is merged into another company or becomes a wholly-owned subsidiary of another company through a share-for-share exchange. Also under the articles of incorporation, the common stock and class B stock are to be treated equally in the case of a share split, reverse split or a rights offering.

2014 amendments to TSE rules

The TSE again amended its listing rules in July 2014. While the 2014 amendments did not apply directly to Cyberdyne's IPO, the amendments were considered necessary in the course of the detailed examination of Cyberdyne's listing. The major points of the amendments were to require: (i) necessity and appropriateness for use of a dual-class structure; and (ii) a sunset clause.

Necessity and appropriateness

The 2014 amendments require that: (i) a dual-class structure is necessary from the perspective of the common interests of shareholders to ensure that a certain person continues to be involved in the business; and (ii) the structure is appropriate to achieve such necessary purpose.

This requirement made it clear that not all companies can use a dual-class structure even if they comply with all the requirements for the structure provided in the TSE rules implemented in 2008. Under the new rules, the TSE determines if a dual-class structure is necessary from the perspective of the common interests of shareholders.

Sunset clause

The TSE amendment made mandatary a sunset clause by which the weighted stock converts to common stock if the necessity of the dual-class structure ceases to exist. Cyberdyne has a sunset clause that would become applicable upon the retirement of Sankai. While the TSE rules of 2008 provided that either a breakthrough clause or a sunset clause is required, the rules implemented in 2014 now generally require both clauses.

Lessons learned

The weighted voting rights structure is always controversial and is criticised by advocates of corporate governance. On the other hand, US stock exchanges (the New York Stock Exchange and NASDAQ), which are the largest in the world, permit the use of a dual-class structure upon an IPO. That raises a difficult question for stock exchanges and financial authorities in other countries. Also, the dual-class structure is useful in facilitating non-listed companies to go public, giving the public more investment opportunities.

The debate will no doubt continue, and there seems to be no clear answer. However, the recent example in Japan may prove to be instructive. The TSE permits an IPO company to use a dual-class structure, but it also tries to prevent misuse of the structure by requiring things like a breakthrough clause and a sunset clause, and by examining the necessity and appropriateness of the structure. On the other hand, it may be challenging for the TSE to determine which companies satisfy the necessity and appropriateness requirements. It remains to be seen how well the TSE administers the new rules and how many companies successfully follow in Cyberdyne's footsteps.


  First published by our sister publication IFLR magazine. Take your free trial today.


Koji Toshima


Mori Hamada & Matsumoto



About the author

Koji Toshima is a partner at Mori Hamada & Matsumoto. His main areas of practice are corporate and securities law, including M&A, corporate governance, private equity and capital markets. He is a graduate of Tokyo University (LLB 1998) and Columbia Law School (LLM 2005) and was admitted to practise in Japan (2000) and New York (2006). He worked for the Tokyo Stock Exchange's listing department from 2006 to 2007. He acted for the TSE when it implemented the 2008 amendments to the listing rules, and also acted for the issuer on Cyberdyne's IPO.