Recently, a famous legal topic in Japan wasthe case of a petition for preliminary disposition of injunction concerningIdemitsu Kosan Co., Ltd.

The outline of this case is as follows:


1. Idemitsu Kosan Co., Ltd.("Idemitsu") and Showa Shell Sekiyu KK ("Showa Shell") areboth large, listed oil companies in Japan.


2. In December 2016, Idemitsu, as apreparation for merging with Showa Shell, acquired 117,761,200 shares of ShowaShell (31.3% voting rights ratio) from a subsidiary of Royal Dutch Shell.


3. In March 2017, the founder families(“Founders”) having approximately 33.92% of Idemitsu Kosan shares announcedthat they opposed the merger between Idemitsu and Showa Shell. In addition,they invited to oppose the reassignment of the current management team at theannual general shareholders' meeting held in June 2017.


4. Idemitsu was unable to merge with ShowaShell if the Founders maintained their shareholding ratio. To initiate themerger, they needed to get a special resolution of the general meeting ofshareholders, but unless they lowered the Founders’ shareholding ratio, therewas no hope to get it.


5. Therefore, in July 2017, the board ofdirectors of Showa Shell decided to issue 48 million shares of stock by way ofpublic offering. When this new stock issue would be realized, the shareholdingratio of the Founders would be reduced from approximately 31.3% to 26.09%, soit would be possible to acquire the special resolution of the generalshareholders meeting.


6. The Founders alleged to the TokyoDistrict Court that Idemitsu's issue of new shares should be temporarilysuspended because it was "carried out in an extremely unfair way"according to Article 210, Item 2 of the Companies Act.


(For your reference)

Companies Act

Article 210           Inthe following cases, if shareholders are likely to suffer disadvantage,shareholders may demand that the Stock Company cease a share issue ordisposition of Treasury Shares relating to solicitation under Article 199(1):

(ii)          Incase where such share issue or disposition of Treasury Shares is effected byusing a method which is extremely unfair.



The Tokyo District Court rejected thepetition of the Founders on July 18, 2017, stating as follows:


(1) Issuance of Shares solicited under the"Extremely Unfair Method" prescribed in Article 210, Item 2 of theCompanies Act refers to a case where the issue of shares is used as a means ofachieving an unfair purpose, and when there is a dispute over the company'scontrol and if the current management team issues new shares for the mainpurpose of lowering the shareholding ratio of a specific shareholder contendingfor control and maintaining and securing control over it, it is a case done asa means to achieve an unfair purpose.


(2) In this case, the current managementteam and the Founders are in a relationship of virtually competing for thecontrol of Idemitsu, and the issuance of new shares in this case is beneficialto the present management team by lowering the shareholding ratio of the Founders.Therefore, it is reasonable to once suppose that the current management teamhas a purpose to place themselves in a good position.


(i) However, since the issue of new shares in this case will be conducted bythe public offering method, shareholders who are opposed to the currentmanagement team may also be allocated shares and, compared to third-partyallotment, the certainty of attenuating the Founder-side control ofshareholders is weak.


(ii) There is no evidence to suggest that ageneral shareholders meeting will be held immediately after the issue of thesenew shares, and that a merger with Showa Shell will be an agenda item at themeeting.


(iii) In addition, although there is doubtabout the necessity and reasonableness of funding in most cases that wereinsisted by Idemitsu, the necessity to prepare repayment funds for purchasing ShowaShell stocks is objectively apparent.


Therefore, there is no sufficient evidenceto assert that the main purpose of the issue of the new shares is not tofinance funds but to put the current management team in an advantageousposition in the substantial battle over company control.


(4) Therefore, it cannot be said that thisissue was made by the "extremely unfair method," so there is noreason for the Founders’ petition.


(My comment)
The judgment of the court requires that the unfair purpose of the managementside is the main one and even if management has an unfair purpose, if thenecessity of financing is recognized elsewhere, an unfair purpose is not a"major" thing, and it does not fall under the "extremely unfairmethod".

However, there are always some fundingdemands in the company, so there is almost no room for the suppression of newshares as an "extremely unfair method". Indeed, from our lawyer’sview, it is easy to advise the company about planning the issuance of newshares that does not fall under the "extremely unfair way," but thisresult is not considered justice.

I think that it should be interpreted thatif there is an unfair purpose on the manager's side, issuance of new sharesshould not be permitted even if there are other funding demands. I wonder ifthe interpretation of the precedents will change like that.