Unshackling investors in Japan (1)

Part 1: Looking back

From one perspective, the original intent of the FIEA constraints on large-shareholder behaviour was laudable: to ensure that the market is informed as to why an investor has acquired a substantial stake of more than 5% in a company  and what, if any, specific plans it has regarding control.

Japanese securities law in this area dates back to the early 1970s and is closely modelled on US law. Both impose a higher burden than comparable regulation in other developed markets. In Australia, the United Kingdom, parts of Europe and much of Asia, a new "substantial" owner need only inform the market that it has acquired 5% or more and when. In Japan, as in the US, large shareholders must also disclose their source of funds and the reasons for acquiring the stake (ie, whether they are merely financial investors or intend to influence management and/or try to control the company). The rules are relaxed in Japan for financial intermediaries continuously buying and selling securities.

Unfortunately, the language and restrictive intent of the FIEA conflicted with the more liberal spirit of the new Stewardship Code. Although not a law, the Code sought to encourage more "dialogue" between institutional investors and listed companies, in the process giving investors greater standing to speak to management teams on a wide range of governance topics. In contrast, the Act controls what large shareholders can and cannot say privately to companies through the concept of the "material proposal". In brief, if the shareholder makes a proposal that could have a significant impact on the "business activities of the issuer", then it must be disclosed promptly. These rules affect a wide swathe of investors given that many own stakes above 5%.

While the Act defines "material proposal" only in general terms, a more detailed  definition is contained in a key piece of  subordinate regulation, the "Cabinet Order for Enforcement of the Financial Instruments and Exchange Act". This lists 13 topics considered likely to be material, ranging from things that most would agree are impactful , such as seeking to remove a company's "representative director", to topics that have become routine in modern governance like recommending changes to dividend policies and board composition.

The FIEA added another layer of complexity by listing multiple channels through which material proposals could be made. These not only included the annual shareholder meeting and other investor meetings with companies, but also any discussion with company "officers", an extremely broad group that extended beyond directors and senior executives to those responsible for operations, accounting advisors, company auditors, and "equivalent persons".

The collective dilemma

While the material-proposal concept sowed confusion and some fear, at the end of the day it applied only to shareholders with stakes of more than 5%—a fact broadly understood by the market. What compounded the problem and really instilled anxiety among both Japanese and foreign investors was the application of Japan's concert-party ("joint holder") rules to the large shareholding reporting system.

The law defined a joint holder as someone who has "agreed to jointly acquire or transfer" shares or to "jointly exercise voting rights and other rights" with another shareholder of the same issuer. In simple terms, if two or more investors have agreed to act together and their combined stake in a company exceeds 5%, then they must file a large-shareholding report within five days of becoming joint holders. They also need to disclose increases or decreases of 1% in their aggregate holding within five days. 

It is not hard to see that such detailed and continuous disclosure would be a deal-breaker in a classic collective engagement scenario, where a number of institutional investors come together to write to a company or engage it through a group meeting. Calculating their combined stake at any point in time would be challenging enough, not least because some institutions would be unwilling to share such details with their peers, who are also their competitors. But keeping track of it over time across multiple institutions—often 20 to 30 or more—would be an administrative nightmare.

Here too the vague language of the rules sent a chill through the market. An agreement to vote shares jointly seemed reasonably clear, but what if you were voting in a similar or identical manner to other members of the group yet had no intention to act together? Investors rightly feared that such situations could lead to a perception of joint action.

Clarification falls short

Anticipating market confusion, the FSA released a document in 2014 that sought to clarify these issues. It laid down a three-point test for assessing whether something met the criteria to be a “material proposal”. First, it must fall under one of the 13 items in the Cabinet Order mentioned above. Second, it must be intended to make a significant change to, or have a significant impact on, the business of an issuer. Third, it must be a proposal to a company to do something. 

One nifty piece of advice given to investors by regulatory officials was to “ask questions, not make proposals”, since this would constitute an exchange of views or information gathering rather than an obvious attempt to force change on a company.  Investors would also be in the clear if a company initiated dialogue with them or invited their opinions on particular matters.

The document also outlined a few scenarios that may or may not be classified as material proposals. For example, asking a company to explain its management policies, including those relating to governance and capital management, was unlikely to qualify. Nor would explaining one's own voting policies or asking questions at an AGM. Conversely, putting forward a proposal at an AGM or requesting a company change its management policies in some way would likely qualify as significant.

Although the FSA’s intentions were sound, the brevity and generality of these explanations and examples raised more questions than they answered. Being selective, they could never cover the full range of conversations investors were likely to have with companies. And the built-in uncertainty around what constituted a material proposal— "In any case, the final determination will be made on a case-by-case basis"—did not help.

As for the issue of acting in concert, the document was even briefer.

Two related tests had to be met to qualify as a “joint holder”: the existence of an agreement, implicit or explicit, oral or written, between shareholders; and a decision to exercise a statutory shareholder right. An agreement to propose a joint resolution or vote together at an AGM would, for example, meet both tests. In contrast, an exchange of views on an issue, or even an agreement to take some general action such as asking a company for dialogue, would not.

But what if investors jointly wrote to a company or sought a meeting to lobby it to change its board composition or pay higher dividends? This would tick the material proposal and agreement boxes, though not necessarily the box on exercising shareholder rights. Depending on how the engagement meeting was managed, meanwhile, the discussion could easily veer from asking questions to making suggestions.  What investors needed was a clearer guide through this regulatory obstacle course.

As the Institutional Investors Collective Engagement Forum (IICEF), a group of large Japanese passive investors, said in a letter to the regulator as late as April 2025: "The Financial Services Agency has long maintained that mere discussions among investors regarding the exercise of voting rights at shareholders' meetings do not constitute joint holding. However, in practice, concerns persisted that exchanging opinions on matters related to agenda items could be interpreted as "jointly agreeing" on the exercise of voting rights. This led to a tendency for investors to refrain from discussions and exchanges of views prior to shareholders' meetings."

A question rarely asked in the past was why corporate management in Japan needed such protection from their shareholders? The simple answer is that they did not. Companies then as now have every right to listen to investor suggestions and politely ignore them. Despite the burdensome nature of the rules, dialogue between investors and companies did in fact steadily increase in the first decade of the Stewardship Code, with both sides learning how to work within the law—albeit in a constrained and inefficient way, and with investors in particular forced to bear unproductive legal costs.

The real value of the large-shareholder regulation, in the minds of many officials, is that it helps to keep an eye on activists—not to deter them, but to let the market and management know they are coming and what their intentions might be. A recent example was an announcement by Elliott Management in November 2025 that it had raised its stake in Toyota Industries Corporation (TICO) from around 3.6% to above 5% and was unhappy with the terms of the company’s privatisation by the Toyota Group. Not long afterwards, Elliott announced two further increases in its TICO holding.

The 2024 turning point

The official starting whistle for reform was blown in 2022 by the FSA's Council of Experts Concerning the Follow-Up of Japan’s Stewardship Code and Japan’s Corporate Governance Code, a standing advisory group made up of academics, investors, corporates and other market participants which expressed concerns that the large shareholder reporting rule was hindering company-investor dialogue.

In April 2023, the FSA released its first "Action Program for Accelerating Corporate Governance Reform: From Form to Substance", which highlighted the issue as something to be resolved. Then in December 2023, a working group of the agency's Financial System Council published a report on reforming the rules and addressing certain other regulatory bottlenecks, including making it easier for companies to find out who their beneficial owners are.

The amendments to the law finalised in May 2024 and subsequent changes to subordinate Cabinet Orders and Ordinances go a long way to unburdening investors of existing regulatory shackles. Regulators recognised that the market had changed in certain fundamental ways and accepted that the scope of the material-proposal concept needed to be clarified to "allow institutional investors to engage in in-depth dialogue".

Similarly, the FSA said that the definition of joint holders needed to be updated to "promote collaborative engagement that contributes to improving corporate value in the medium to long term".

A structural obstacle: “friendly shareholders”

Before moving on to explain the new rules and their likely impact, one further point of context about the Japanese market is required. This is the existence of networks of friendly corporate shareholders who provide voting support to other listed companies and help to protect their management from independent minority shareholders. These relationships are based on either intra-group cross-shareholdings, such as are found in the Toyota Group (see our article “Toyota tests the system, falls short”), or equity holdings in firms with which companies do business. Often called “strategic shareholders” or “allegiant shareholders”,  they still wield significant influence despite the campaign over the past decade to reduce such cross-shareholdings.

Figures from the most recent annual Japan Exchange (JPX) Shareownership Survey show that business corporations held 18.7% of all equity on the country’s four stock exchanges as of the end of 2024. Although notably lower than the 25-30% they averaged for much of the 1990s, the numbers have not dramatically changed for the past 25 years. Over the same period, trust banks, which can generally be relied upon to support their corporate clients, increased their share from 10% in the early 1990s to 22.4%. In very broad terms, therefore, listed companies can rely on friendly support from around 40% of the voting rights held by domestic shareholders compared to the 32.4% held by foreign investors. And this is before one includes shares owned by city and regional banks (1.8%), insurance companies (3.3%), securities companies (3.1%) and local retail shareholders (17.3%).

It is possible to quibble with the specific figures above. For example, domestic institutional investors have grown in importance in recent decades, typically hold their shares through trust banks and securities companies, and do not always vote in support of management. Yet for the most part they do, because of the close relationships their parent companies have with listed corporates.

The question this begs is why aren’t listed corporates expected to sign up to the Japan Stewardship Code? Directors are the primary stewards of companies and routinely make capital allocation decisions. These funds belong to the company and by extension the owners of the company. Yet a common feature of much investor engagement with companies is a refusal by management and boards to explain in any detail why they hold equity in other firms, how they vote these shares each year (ie, thoughtful justifications for supporting management), and whether the capital could be better allocated in another way.

It is true that there has been pressure on corporate pension funds to sign up to the Stewardship Code, with numbers increasing from a handful five years ago to more than 60 today. This group includes numerous banks as well as industrial companies such as Panasonic, Eisai, NTT and Ricoh.

The story took another turn in March 2025 when a new entity, the Corporate Pension Stewardship Promotion Council, signed up to the Stewardship Code on behalf of its then 269 corporate pension fund members (now 311). The Council was established by the Pension Fund Association, a long-term proponent of improving corporate governance, to represent the thousands of corporate pension funds that are too small to commit to the Code’s requirements. In practical terms this means that it will monitor how external asset managers are implementing their stewardship responsibilities on behalf of asset owners (the corporate pension funds).

While these latest developments are positive, they do not fundamentally change the relationship between the Code and listed corporates. This is even more reason why the 2024 amendments to the FIEA are significant. Read on in Part 2 about the new tools investors will be able to deploy in company engagement in future.

End of Part 1.

Copyright: Ninepin Ltd, 2026