Stock Option Issuance Procedures in Practice: From the Shareholders' Meeting Resolution to Registration and Tax Filings

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Discussions of stock options tend to focus on design, but in actual matters, much of the hands-on work goes into the various procedures that follow once the design is settled. The shareholders' meeting resolution, the preparation of the terms of issuance and the allotment agreement, the maintenance of the share option registry and so on may look routine as documents, but if the steps or statutory deadlines are confused, they can become a source of difficult explanations in later due diligence.

In this article, I explain step by step the procedure for issuing tax-qualified stock options, following the flow of the documents prepared in actual matters. The requirements for tax qualification themselves are covered in the basic guide, and the issues that tend to cause difficulty in applying those requirements are covered in the advanced guide.

Note that this article mainly addresses non-public companies that do not have a board of directors (companies that impose transfer restrictions on all of their shares). Because the resolving body and other matters differ depending on the corporate governance structure and the provisions of the articles of incorporation, please check your own articles of incorporation when actually issuing options.

The Overall Issuance Schedule, Counted Back from the Allotment Date

The overall procedure follows this sequence: design (the policy on grantees, number of options, vesting and exercise price); calculation of the exercise price in cooperation with a tax accountant; resolution of the offering terms at the shareholders' meeting; a class shareholders' meeting where necessary; notice to applicants and applications; the decision on allotment and notice of allotment; execution of the corresponding allotment agreement; arrival of the allotment date (on which the grantees become share option holders, Article 245 of the Companies Act); entry in the share option registry; application for registration of the change; submission of the statement to the tax office; and operation after issuance.

The deadline to keep particularly in mind in schedule management is the registration of the change. Registration of the change resulting from the issuance of share options must be applied for at the Legal Affairs Bureau within two weeks from the allotment date (Article 915, paragraph 1 of the Companies Act).

The timing of the resolution should also be considered. It is common to include the issuance of stock options among the agenda items of the annual shareholders' meeting and resolve it at the same time as the financial statement items and other matters. While this reduces the burden of holding a separate extraordinary shareholders' meeting, the design and share valuation must be completed in time for the annual meeting, so starting the analysis two to three months before the meeting helps keep the process on track.

Written Resolutions of the Shareholders' Meeting and Whether a Class Shareholders' Meeting Is Required

In a non-public company, the offering terms of share options for subscription are, as a rule, decided by a special resolution of the shareholders' meeting (Article 238, paragraph 2 of the Companies Act). For stock options issued without payment, the fact that they are issued without payment is set as an offering term, and where issuance without payment constitutes particularly favorable terms for the subscribers, the necessity of issuing on those terms is explained at the shareholders' meeting. Recording the reasons, such as the incentive purpose, in the materials as well makes it easier to confirm the background of the resolution. It is also possible to delegate the decision on the offering terms to the directors (or, in a company with a board of directors, to the board of directors) by a shareholders' meeting resolution, but under an ordinary delegation based on Article 239 of the Companies Act, the allotment date must fall within one year from the date of the resolution. In addition, under the stock option pool system based on the Industrial Competitiveness Enhancement Act, special rules on the matters and period of delegation are permitted upon receiving confirmation from the competent minister.

At startups with a limited number of shareholders, it is customary to use the omission of resolutions under Article 319 of the Companies Act (so-called written resolutions or deemed resolutions) instead of holding a meeting at which the shareholders actually gather. In practice, a document combining the proposal and the consent form, styled a "Proposal for Omission of Shareholders' Meeting Resolution and Consent," is prepared, and a resolution is deemed to have been adopted when all shareholders entitled to exercise voting rights on the proposal consent in writing or by electromagnetic record (the consent of all shareholders without voting rights is not uniformly required). For a written resolution of the board of directors in a company with a board of directors (Article 370 of the Companies Act), the requirements are a provision in the articles of incorporation, the consent of all directors who may participate in the vote and, in a company with company auditors, no objection from the company auditors. The directors' consent is obtained in writing or by electromagnetic record.

In a company that issues class shares, you also check whether a class shareholders' meeting is required. Whether it is required depends on the provisions of the articles of incorporation and the terms of issuance, for example, a class shareholders' meeting where the shares underlying the stock options are shares with restriction on transfer (Article 238, paragraph 4 of the Companies Act, except where the articles of incorporation provide otherwise or where there are no class shareholders entitled to vote at that meeting), or where there is a risk of causing detriment to shareholders of a certain class (Article 322 of the Companies Act). Rather than mechanically holding every class shareholders' meeting, decide according to your company's circumstances. Where preferred shareholders include overseas investors, collecting consent forms may take several days, so confirming whether a meeting is needed early in the schedule helps prevent delays.

Items in the Terms of Issuance and the Practice of Combining Them with the Allotment Agreement

The terms of issuance (issuance guidelines) are the basic document that sets out the content of the share options themselves. They clearly set out the class and number of underlying shares, the fact that the options are issued without payment, the exercise price and its adjustment clause, the exercise period, the exercise conditions (restrictions on exercise before listing and the period during which options may be exercised upon an acquisition), the grounds for acquisition by the company without consideration, transfer restrictions, treatment upon reorganization, and matters concerning the amounts to be recorded as stated capital and capital reserve.

From the perspective of tax qualification, consistency between the exercise price and the exercise period is particularly important. Because the exercise price must be at least the fair market value at the time the agreement is concluded, set the exercise price at or above the value calculated under the applicable valuation method, and cross-check that the exercise price stated in the terms of issuance matches the one in the allotment agreement (the approach to calculation is explained in the advanced guide). As for the exercise period, confirm whether the general rule of "from two years to ten years after the date of the grant resolution" applies or the special 15-year rule for unlisted companies less than five years from incorporation on the date of the grant resolution, by checking the date of incorporation in the commercial register against the relevant reference date. When granting options to residents abroad, verify the period of service in Japan, tax treaties and local regulations, and, where necessary, prepare separate terms of issuance from the domestic version to manage the conditions.

Under the Companies Act, the issuance of share options involves a series of steps: notice to those intending to apply for subscription, application, decision on allotment and notice of allotment. In practice, a widely used method consolidates these into a single agreement styled a "Share Option Allotment Agreement and Application Form." The procedure proceeds with the document expressly stating that it also serves the functions of the notice, application and allotment notice under the Companies Act, but signing the agreement alone does not allow the company to omit its formal allotment decision. Observe the order of application and allotment resolution, and arrange the process so that the number allotted is notified by the day before the allotment date. Where a total number subscription agreement (Article 244 of the Companies Act) is used, the application and allotment procedures (Articles 242 and 243 of the same Act) do not apply, but whether a resolution approving the conclusion of the agreement itself (Article 244, paragraph 3 of the same Act) is required must be checked separately. Whichever method is used, there is no difference in the fact that grantees become share option holders on the allotment date.

The allotment agreement includes not only procedural matters under the Companies Act but also tax-qualification requirements such as the prohibition on transferring the share options, the annual exercise price limit and the custody of shares after exercise, as well as the company's design conditions such as vesting conditions and treatment upon departure. Because the number allotted and the vesting start date differ for each grantee, careful cross-checking of the grantee list against the agreements is essential.

Registration, Statutory Statements and Ongoing Management of Rights After Issuance

Once the allotment date arrives, the follow-up procedures proceed in turn.

First is the preparation of the share option registry. It records to whom, when, how many and what kind of share options were issued. Although no statutory period such as the two weeks for commercial registration is set for preparing the registry itself, it is the ledger that serves as the starting point for subsequent exercise of rights, waivers of rights, responses to tax reforms and due diligence, so it should be prepared and updated promptly each time options are issued.

Next is the application for commercial registration. Within two weeks from the allotment date of the share options, apply to the Legal Affairs Bureau for registration of the change reflecting the content of the terms of issuance (Article 915, paragraph 1 of the Companies Act). In addition to the application form, gather the attachments, such as the minutes of the shareholders' meeting (for a written resolution, minutes stating the matters on which a resolution was deemed to have been adopted), the shareholder list and a power of attorney to a judicial scrivener or other agent. Because a delay in registration may be subject to a non-penal fine, secure the planned date of the registration application in advance once the allotment date is set.

The submission of statutory statements to the tax office follows. A company that has granted tax-qualified stock options submits the statement regarding the grant to the competent tax office by January 31 of the following year. Check the submission deadline and form in the National Tax Agency's guidance, including how the deadline is treated when it falls on a holiday. Note that confirmation of the tax-qualification requirements is not a procedure completed only at the time of grant. At the time of exercise as well, the company receives a written pledge and other documents under Article 29-2, paragraph 2 of the Act on Special Measures Concerning Taxation and follows a procedure to confirm whether the holder is a major shareholder or similar person and the status of the annual exercise price.

Day-to-day operation after issuance also determines whether the procedures succeed. When an employee departs, identify the applicable treatment in line with the design of the terms of issuance and the allotment agreement, such as approval of exceptional exercise, acquisition without consideration under an acquisition clause (Articles 273 to 275 of the Companies Act), waiver by the holder, or extinguishment due to inability to exercise (Article 287 of the Companies Act), and reflect it in the registry (also bear in mind that collecting waiver forms from all departing employees is not necessarily legally required). In addition, the transitional measure concerning amendments to agreements for previously issued options introduced in the 2024 tax reform (with a deadline of December 31, 2024) has already ended, but if new tax reforms are made in the future, existing agreements may need to be reviewed. Always keeping the terms of issuance, allotment agreements, share option registry and capitalization table consistent forms the foundation for calmly dealing with future system changes and due diligence. The scope of our support, from preparing the terms of issuance to registration and tax filings, is described on our Startup Legal and Fundraising Support page.