Preferred Share Issuance Procedures: From Amending the Articles and Class Shareholders' Meetings to Registration and Closing

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

In financings through preferred shares, starting with a Series A, it can feel as if the biggest hurdle has been cleared once negotiations on the investment agreement and shareholders' agreement are settled. In reality, however, a series of procedures still lies ahead, including resolutions, collection of documents, and registration, and arranging the documents and resolutions often takes more time than expected.

Even when the parties have agreed on the contract terms, getting from there to valid resolutions under the Companies Act, receipt of payment, and completion of registration requires preparing multiple documents in parallel and organizing the collection of signatures and consents from the parties involved. Particularly in companies with multiple existing shareholders, or companies that have already issued another class of shares, simply identifying which resolutions are needed takes a certain amount of review time.

If the payment date (closing date) has been fixed first, build the schedule so that the preparation of resolution documents and the collection of consents from shareholders can be finished before that date. If documents are not ready just before the payment date, or signatures from overseas investors cannot be collected in time, completing the procedures as planned becomes difficult. Also schedule the registration filing date after payment, and confirm the statutory deadline for each change that takes effect.

Below, I explain the steps by which the issuing company prepares the necessary documents for issuing preferred shares, moving in order from the resolutions and contracts before payment to the registration after payment. The discussion mainly assumes a non-public company (a company in which all shares are subject to transfer restrictions) without a board of directors. In a company with a board of directors, the delegation of the decision on offering terms and the corporate governance structure differ, so a separate analysis is needed.

Issues to Confirm at the Outset of Designing the Resolutions

Before going into the specific steps, here are the issues to confirm at the initial stage of designing the procedures:

• Whether the articles of incorporation need to be amended (creating the terms of the class shares or setting the total number of authorized shares of each class)
• Arranging the special resolution of the shareholders' meeting to determine the offering terms of the shares for subscription
• Whether a class shareholders' meeting resolution is required because the issuance may cause harm to existing class shareholders
• Whether the articles contain a provision excluding class shareholders' meetings, and distinguishing matters that cannot be excluded even by the articles
• Whether there are other agenda items to be resolved at the same time, such as the conversion of J-KISS or the issuance of stock options

The Procedural Flow Worked Backward from the Payment Date

In a preferred share financing, after the term sheet is agreed, due diligence and contract negotiations proceed. After the resolutions, the contracts are executed, payment is received, and then registration is filed. Even after the contract terms are fixed, preparing the resolution documents and collecting consents from shareholders takes considerable time, so it is realistic to build a schedule working backward from the payment date.

Specifically, first set the desired payment date, and work backward so that the preparation and collection of resolution documents and the execution of the contracts can be completed before that date. Confirm receipt of funds on the payment date itself, and secure time after payment so that the registration can be filed within the statutory period after the changes take effect. In companies with many shareholders or deals involving overseas investors, collecting signatures alone may take several days to several weeks, so allow ample room for this period.

Even if the content of the contract is fixed, simply receiving funds without the necessary resolutions does not complete a lawful share issuance. Identifying the necessary resolutions early, in parallel with contract negotiations, helps prevent confusion just before closing. The overall flow of the financing is covered in detail in What Is Financing Through Class Shares (Preferred Shares)? An Overview of Series A Contracts and Procedures, so please refer to it as well if you want to see the overall picture starting from contract negotiations.

Amending the Articles and Resolutions of the Shareholders' Meeting and Class Shareholders' Meetings

The resolutions required to issue preferred shares are easier to organize if you think of them as falling into three broad bundles.

The first is the amendment of the articles of incorporation. When newly issuing class shares such as preferred shares, the terms of those class shares (dividends of surplus, distribution of residual assets, voting rights, put options, call provisions, etc.) must be set out in the articles, which constitutes an amendment of the articles (Articles 108 and 466 of the Companies Act). Setting or changing the total number of authorized shares of each class is also a matter for amendment of the articles. Amending the articles requires a special resolution of the shareholders' meeting (Article 309, paragraph 2, item 11 of the Companies Act).

The second is the determination of the offering terms. When a non-public company issues shares for subscription, the offering terms are, as a rule, determined by a special resolution of the shareholders' meeting (Articles 199 and 309, paragraph 2, item 5 of the Companies Act). However, even in a company without a board of directors, the shareholders' meeting can, by special resolution under Article 200 of the Companies Act, delegate the determination of the offering terms to the directors by setting a maximum number of shares for subscription and a minimum amount to be paid in. This delegation is effective for offerings whose payment date, or the last day of the payment period, falls within one year of that resolution. Therefore, a company without a board of directors is not always limited to having the shareholders' meeting decide directly.

The third is the class shareholders' meeting. Article 199, paragraph 4 of the Companies Act requires, as a rule, a resolution of the class shareholders' meeting where the shares offered are shares with transfer restrictions. Separately, Article 322 of the same Act requires a resolution of the class shareholders' meeting where the issuance of new shares or the like may cause harm to the shareholders of a certain class. For each, confirm any exceptions in the articles and whether there are shareholders who can exercise voting rights. Many matters can be made exempt from a resolution by including an exclusion provision under Article 322, paragraph 2 of the Companies Act in the articles, and such exclusion provisions are widely used in practice. However, certain amendments to the articles, such as adding a class of shares (excluding changes relating to the number of shares constituting one unit, etc.), cannot be excluded even by the articles under Article 322, paragraph 3 of the Companies Act. Whether a resolution under Article 322 is required is determined by examining the act concerned and whether it may cause harm to the shareholders of that class. When a company that has already issued preferred shares conducts a second or subsequent round, it is important to determine early which class shareholders' meetings will be needed for common shareholders and for each class of existing preferred shareholders.

In non-public companies with a limited number of shareholders, it has become established practice to use the omission of resolutions (deemed resolutions) provided by the Companies Act instead of actually holding a shareholders' meeting. When a director or shareholder makes a proposal and all shareholders who can exercise voting rights on that proposal consent in writing or by electromagnetic record, the resolution is deemed to have been adopted (Article 319, paragraph 1 of the Companies Act). This system applies mutatis mutandis to class shareholders' meetings under Article 325 of the Companies Act. The key point is that consent is obtained from "all shareholders who can exercise voting rights on the matter," rather than uniformly collecting consent from all shareholders including those without voting rights.

In practice, a common method is to prepare a document that combines the proposal and a consent section, and to collect it from all relevant shareholders. In a company that has issued multiple classes of shares, written resolutions of class shareholders' meetings may be carried out separately for common shares and for each class of preferred shares, in which case separate documents are prepared for each class and collected individually from the corresponding shareholders. Where overseas investors are included, it is not unusual for signature collection to take several days due to time differences and the availability of electronic signatures, so it is useful to build this collection period into the schedule in advance.

The Total Number Subscription Agreement, Receipt of Funds, and Registration Procedures

In the procedure for issuing shares for subscription, as a rule the company receives applications and then makes allotments in response, as individual steps. However, if a contract for the subscription of the total number of shares offered is executed, these individual application and allotment steps can be omitted (Article 205, paragraph 1 of the Companies Act). The procedures are not omitted merely by formally placing total number subscription wording in a contract; it must actually be a contract under which the total number of shares offered is subscribed. The resolution determining the offering terms itself is also carried out separately. Furthermore, for shares with transfer restrictions, unless the articles provide otherwise, an approval resolution of the shareholders' meeting or the like is, as a rule, separately required under Article 205, paragraph 2 of the Companies Act. In practice, the design of incorporating a total number subscription clause into the investment agreement itself is widely adopted, so that execution of the contract connects to the subscription procedure.

On the payment date, confirm that payment from each investor has been received, and prepare a document certifying that payment has been made (payment certificate). Under Article 209 of the Companies Act, the investor becomes a shareholder on the payment date if a payment date has been set, or on the day the contribution is made if a payment period has been set. In a design in which multiple investors participate, even if payment from some investors is delayed, the shareholder status of other subscribers who have completed payment is not automatically denied under the Companies Act. However, if the investment agreement makes completion of payment by all investors a condition precedent to closing, receipt of funds from all investors will be confirmed as satisfaction of that contractual condition.

After payment is completed, file the change registration at the location of the head office within two weeks of the effective date (Article 915, paragraph 1 of the Companies Act). If a payment period has been set, the filing is due within two weeks from the last day of the period for the changes as of that last day. Also, if the effective date of the amendment of the articles is set before the payment date, the deadline for changes to registered matters differs, so the payment date is not uniformly the starting point.

As for the amount of stated capital, an amount not exceeding one-half of the amount paid in may be recorded as capital reserve (Article 445 of the Companies Act). Because the amount set as stated capital also affects the tax burden, consider it in coordination with a tax accountant or similar advisor. The registration and license tax for a change registration relating to a capital increase is 7/1,000 of the amount of the increase in stated capital (JPY 30,000 per filing if the calculated amount is less than JPY 30,000). This is the general tax amount for the capital increase registration and is distinct from the overall cost, which includes other registration and license taxes accompanying amendments of the articles and any special measures.

For the registration filing, prepare the minutes of the shareholders' meeting and the shareholder list, plus the minutes of the class shareholders' meeting where necessary. In addition to the total number subscription agreement evidencing the subscription, also assemble the payment certificate and the certificate concerning the recording of the amount of stated capital, depending on the procedure adopted. Even if the documents have formal defects, the Legal Affairs Bureau may allow corrections, but to avoid delaying the procedure, it is practical to set up a checklist in advance and check the necessary documents.

Handling Related Agenda Items at the Same Time and Post-Closing Steps

At a Series A closing, it is not unusual for resolutions on the conversion of existing J-KISS and the issuance of stock options to be submitted to the same shareholders' meeting, in addition to the issuance of preferred shares. For example, agenda items accompanying the conversion of J-KISS, the issuance of stock options, and the election of officers may be handled at the same shareholders' meeting.

For the conversion of J-KISS, a method of collecting consents to the amendment of the terms of the share acquisition rights from all investors is sometimes used, but this is one possible route and not necessarily the form used uniformly in every case. Whether to create, in the articles, a separate conversion class (Shadow) different from the Series A preferred shares as the conversion target also depends on the design. In that case, prepare both the creation of the conversion class and the collection of the necessary consents to the amendment of terms. The details of J-KISS conversion procedures are covered in J-KISS Conversion (Exercise) Procedures: A Practical Guide to Avoid Scrambling in the Series A.

The issuance of stock options also requires resolutions such as the determination of offering terms under Article 238 of the Companies Act, and these are often resolved at the same shareholders' meeting as the preferred share issuance. The procedural flow can be found in Stock Option Issuance Procedures in Practice: From the Shareholders' Meeting Resolution to Registration and Reports. Where multiple agenda items overlap in a single closing, fix the list of agenda items before starting to prepare the resolution documents, and list the resolutions (shareholders' meeting and class shareholders' meetings) required for each item; this prevents rework later. Registration of changes resulting from the exercise of share acquisition rights may also be filed under Article 915, paragraph 3 of the Companies Act by combining the changes as of the end of each month and filing within two weeks from that month-end.

The procedures after closing are also important. The shareholder register does not need to wait for completion of registration; it should be updated promptly in line with the fact that the investors have made their contributions and become shareholders. Reflect in the shareholder register the name, address, and class and number of shares held by each investor who has newly become a shareholder.

Also, if there is an existing shareholders' agreement, update it through an amendment agreement or a joinder agreement in connection with the participation of the new investors. As a rule, this should be in place at closing, but even if some tasks remain, complete them promptly.

With a view to undergoing due diligence in a future round or M&A transaction, it is also important to keep minutes, contracts, the shareholder register, and the like in a state where they can be managed centrally. Organizing the documents at each closing and being ready to disclose them to appropriate parties after confirming confidentiality obligations and access rights helps subsequent procedures proceed smoothly. Legal preparation in general is also covered in Preparing for Legal Due Diligence in a Series A. Our support from designing the resolutions for preferred share issuance through closing is summarized on the Startup Legal and Fundraising Support page.

Frequently asked questions

What resolutions are required to issue preferred shares?

As a rule, a special resolution of the shareholders' meeting is required for the amendment to the articles of incorporation setting out the terms of the class shares and for the determination of the offering terms. Depending on the company's situation, a resolution of a class shareholders' meeting may also be required.

When is a class shareholders' meeting required?

It is required in cases such as an amendment to the articles that may cause harm to the shareholders of a certain class. When a company that has already issued preferred shares conducts an additional round, it is especially necessary to confirm whether one is required.

By when must the change registration be made?

A change registration for an issuance of new shares must be made within two weeks from the effective date. It is important to work backward from the closing date and arrange in advance for collecting the necessary documents and filing the registration application.