In this chapter of Minority Shareholders, I continue the story of Norio Takano. He is not a specific person; he is a character created for my book out of some high rollers who had existed during the bubble period.
As a young lawyer, I witnessed the generation of enormous wealth from scratch. A minority shareholder of a family company brought an action to the court and succeeded in taking hundreds and thousands of yen. I saw it firsthand. Ten years after the bubble popped, I started work related to corporate governance. In this book my fictional characters tell the story of problems that persist in joint-stock corporations. What is an organization called a company? What if Norio Takano were reborn in this era?
This story is a work of fiction. Any resemblance to actual characters or organizations is entirely coincidental and unintentional. ー Shin Ushijima
Read earlier chapters of the series.
CHAPTER 14: Sumida Ironworks and the Quick Response
Continuing from Chapter 13: Lawyer Ooki is discussing the value of shares to Auntie Sumida. It's not just a matter of the parties agreement on a price, he explains.
"But if the company has assets and even if it doesn't earn profits on the surface, when the company is dissolved, the assets of the company are to be allotted to its shareholders in proportion to their shareholding." [...] the amount of money per share would be much higher than ￥160, and the shareholders would be able to receive more.
"This is clear to you, right?"
"It's nonsense to talk about it, isn't it? You lawyers like to split hairs."
Ooki smiled wryly. What Auntie Sumida said sounded plausible. There was little likelihood that the company would be dissolved.
"But when the court assesses the value of a company, it takes into consideration how much the company would be valued if it were dissolved."
"Isn't it strange?"
"No, not necessarily. What is strange about the company is that if anyone gains a majority stake, he can take control of the entire company."
"Yes, only if he has a majority stake, right? But mine is only a 7% stake."
"But your 7% stake may count for more. Because when the court determines the price, it includes the assets and the profits of the company."
"I don't quite get it, but if the court says so it must be true."
A Certified Request
"It's a non-contentious case. Unlike a trial, it's not about winning or losing. The court decides on a proper price at its discretion."
"It's nice of you to explain such a difficult matter to this old woman. Anyway, Sensei, I really appreciate your cooperation on this matter."
After the meeting between Auntie Sumida and Ooki ended, some lawyers at Ooki's firm got cracking on the procedures.
First of all, they started preparing a notice to Sumida Iron Works from the lawyers assigned to Auntie Sumida, assignor. They produced the notice with the names of Ooki and Ms Miwako Tsujita, a partner, along with the names of fifteen other lawyers.
It was a content-certified mail saying, "Mrs Sumiyo Kawano, our client, desires to assign 30,000 shares of your company to Himonya Land and Building, Co, Ltd. We would appreciate your approval of this matter. In case you decline, we herein demand that your company buy her shares or designate a third party as a purchaser of her shares."
Sumida Ironworks Replies
A reply came immediately. The company was compelled to take action against it as soon as possible.
It is stipulated in the Companies Act that if the company leaves it unaddressed for more than two weeks, it is interpreted as a sign that the seller's demand is duly approved. The company can buy the shares on its own. But in that case, it has to convene a general shareholders' meeting and it will become known to the other minority shareholders that the transfer of Auntie Sumida's shares has been approved. And they would soon be able to know the price as well. Some of them might come forward to demand that the transfer of their own shares be approved too.
Therefore it is often the case that the president, usually the owner of the company, himself becomes an assignee or asks a reliable third party to buy the shares. If the president becomes an assignee, the price will be higher because he is a family shareholder.
Even if a new company is made for the purpose of buying the shares as a third party, the question arises as to who actually owns that new company. In the usual case, the president or the company owns it. In that case, too, the price will be higher because he is of kin.
The Nephew's New Company
Upon hearing that Ooki had received a reply from Sumida Iron Works, Takano bolted off toward his firm in a flash.
Looking through a copy of the reply, Ooki said, "That's what I expected. Mr Souhei Kawano, he is the president of Sumida Iron Works, isn't he? He says he has reluctantly decided to buy the shares. He designated Kyoujima Property as the purchaser. It's a company he newly set up. The representative is Mr Isao Kino. Do you happen to know who he is?"
"No idea. Never heard of the name."
"Their lawyer is Mr Yuzuru Ohida. I guess he is a young lawyer.
I wonder how he is going to explain the reason why such a new company is buying the shares of Sumida Iron Works. The book value of net assets of the company alone amounts to ￥100 million. And their land has enormous value. So when calculating money to be set aside, they may face unimaginable figures."
If they refuse to approve the transfer on the transferor's terms, they have to set aside such an amount of money to be calculated by multiplying the book value of net assets by a percentage of the shares to be transferred. It is stipulated in the law. The price of the land as of the land transaction date was recorded in the books. If it was bought years ago, the current price of the land is normally much higher than before.
Let the Haggling Begin
"And what will ensue?" Takano asked.
Ooki said, "First of all we will have to haggle over the price. The other party won't say 'yes' to the price we name. So we will have to bring it before the court. You know, this is a so-called 'non-contentious' case. I guess it will be settled within a year."
Tsujita, sitting next to Ooki, nodded in agreement to his answer.
"Non-contentious cases are settled much quicker than trials, right?" Takano asked in an excited tone as if he could hardly wait to see how things would pan out.
"Depends on the case. The court determines it anyway."
"That man, Souhei Kawano, is Auntie Sumida's nephew-in-law. To my dismay, no matter how many times she asked him for a favor, he always brushed her off. And that guy came to say 'please allow me to buy the shares.' Ha-ha, it's extraordinarily invigorating."
Continues in: Minority Shareholders, Chapter 15: Who Can Catch the Spider's Thread?
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Minority Shareholders is a work of fiction and any similarity to real characters, companies and cases is purely coincidental and unintentional. Sign up to join our mailing list and look for the next chapter every Saturday on JAPAN Forward.
Author: Shin Ushijima
The founding partner of Ushijima & Partners, lawyer Shin Ushijima has an enormous wealth of experience in international transactions, merger and acquisition, dispute resolution, system development, anti-monopoly law, labor, and tax law. Concurrently, he heads an NPO called the "Japan Corporate Governance Network." And in his leisure moments, he writes fiction. Additional details on Shin Ushijima's career, awards, publications and more are available at his website: Ushijima & Partners, Attorneys-at-Law.
