of the equity markets in circa If the applicable laws, rules and/or regulations were in place prior to the market fall, please say so.

Transcription

1 Questionnaire Regarding Recent Developments and Trends in the Standards Applicable to Listed Companies Japan By Toru Ishiguro and Yasuzo Takeno of Mori Hamada & Matsumoto EXHIBIT A Questions 1 Answers Is the standard a requirement 1. Board Are there any practices, No. N/A N/A standards or requirements regarding board independence? If so, what proportion of the board is required to be or has 1 All questions relate to standards applicable only to domestic listed companies. The questions are not meant to deal with the situation of foreign companies listed in a country. 2 Where the standard is only a practice (not mandatory under any existing or proposed laws, rules or regulations), please provide, where possible, an estimate of how widespread the practice is. 3 The objective is to determine whether the applicable laws, rules or regulations have changed in their text or in their application in response to the fall of the equity markets in circa If the applicable laws, rules and/or regulations were in place prior to the market fall, please say so. 4 The Japanese Law for special exceptions to the commercial code concerning audit, etc. of Kabushiki-Kaisha rules depend on the size of the companies. A large company is a company whose capital amount is 500,000,000 yen or more, or whose total amount entered in the liabilities section of the balance sheet is 20,000,000,000 yen or more. In accordance with the criteria to list on the Tokyo Stock Exchange, all listed companies are large companies as a result. Therefore, company herein means a large company. DOCS #67041 v4a(21f104a.doc)---

2 conventionally been independent? 1.2. How do the principles of board independence work? 1.3. What types of relationships would preclude a member of the board from being considered independent (i.e. company s investment or commercial banker, shareholder, major client, etc)? Is there a requirement that independent directors meet without the participation of management or interested directors? N/A N/A N/A N/A N/A N/A N/A N/A N/A 5 Note: Board independence standards seem to vary in detail but not in principle. They have also been subject to extensive comparative commentary in many countries, especially the European Union, the U.K. and the U.S. We suggest the technique used in our draft U.S. answers for initial responses in this area, i.e. a very general discussion with attached standards. 2

3 1.5. Are there rules concerning director conflicts of interest? If so, do such rules provide for a duty of the interested director to abstain from participating in meetings or voting? If a director has a conflict of interest regarding any matter to be resolved, he must abstain from participating in the meeting and therefore is not entitled to vote at the meeting. Requirement. The Commercial Code of Japan Article 265 paragraph Are there specific requirements or practices with respect to the nomination and compensation of members of the board (i.e. decisions to be made by special compensation or nomination committees, maximum compensation, limits on stock options, etc.)? A resolution of the board of directors is required for the appointment and dismissal of important employees such as a manager, and on the decision of directors remuneration. Requirement. The Commercial Code of Japan Article 260 paragraph 2 item Is a two-tier board No. N/A N/A required or permitted? If permitted, is one frequently used? What is the division of functions between the two boards? 1.8. Is there any requirement No, there is no requirement of N/A N/A 3

4 or practice with respect to the separation of the roles of chairman of the board and chief executive officer? separation. The chairman of the board is sometimes (but not always) an honorary position Are employee or trade union representatives required to sit on the board? No. N/A N/A Are any specific procedures required to ensure that financial and other information is provided to the board by management? 6 Management is required to prepare a balance sheet every financial year, which must then be approved by the board of directors. Requirement. The Commercial Code of Japan Article 281; Article Please specify whether such procedures place the onus on management to keep the board informed, or whether board members are required to request information (and if so, whether management is required to comply with such requests). 4

5 2. Audits, Auditors and Audit Committees Is there a requirement that audit firms rotate? Is there a requirement that audit partners rotate? 2.2. Is there a requirement that accounts be audited by more than one audit firm? 2.3. Are there standards or requirements on auditor independence? The certified public accountants are required to rotate after 7 fiscal periods and are subject to a 2-year interval thereafter. The audit firms are not required to rotate. No. There is no practice of using two firms. (But two or more CPAs must cooperate in an audit.) Yes. A director, employee or other persons who have special interests in a company cannot become an independent auditor 7 Requirement N/A(the more-than-two-cpas rule is a requirement) requirement At present it is self-regulation by The Japanese Institute of Certified Public Accountants. From April 1 st 2004, it will be regulated by law. N/A(the two or more-cpas rule requirement will be adopted from April 1 st 2004) 7 The Japanese audit system consists of an internal audit and an external audit. With regard to an internal audit, the company shall have (internal) auditors, all of whom shall constitute a board of auditors. If the Company has company maintaining committees, the company may not have auditors but shall maintain an Audit Committee. With regard to external audit, a company shall request the audit to be carried out by an independent auditor. An independent auditor shall be a certified public accountant( CPA ) or an incorporated accounting firm(audit firm). In practice, there are a few companies with company maintaining committees, and most listed companies are audited by an audit firm. 5

6 2.4. Are there limitations on the type of non-audit work an auditor (or a consulting firm related to the auditor) can do for an audit client? Yes. A CPA who continuously receives remuneration for nonaudit work from a company, cannot participate in an audit of the company. requirement From April 1 st Have any specific internal approval procedures been prescribed for approving non-audit services to be performed by auditors? 2.6. Are there any restrictions on the employment of auditors or former auditors by the audit client? 2.7. Are there any other restrictions on, or disclosure requirements relating to, the extent of the relationship between the auditor and the audit client, including the disclosure of fees for any nonaudit services? N/A N/A N/A Yes. A CPA who audits a company cannot become a director of the audited company before the end of the next fiscal period. Requirement From April 1 st 2004 N/A N/A N/A 6

7 2.8. Are auditors subject to self-regulation or are they regulated by an independent or state body? Yes. They are subject to selfregulation provided by the Japanese Institute of Certified Public Accountants (JICPA). Requirement. The foundation of the JICPA and its power are constituted by the CPA law. Since Is there a requirement to have a separate audit committee (or internal board of auditors)? Are there any independence standards or requirements for audit committees (or internal board of auditors) that are different from general standards applicable to boards of directors and other board committees? Yes, an internal board of auditors or audit committee is required. An (internal) auditor shall not be a director, a manager or any other employee of the company or an affiliated company or an executive officer of the affiliated company at the same time. The board of directors cannot decide the remuneration of (internal) auditors. In addition, one or more of the (internal) auditors shall not have been a director, executive officer of the company in the five years preceding his assumption of office. There is a similar regulation on Requirement After May 1 st 2005, half or more of (internal) auditors shall not have been directors, etc. 7

8 members of the audit committee of a company Are there specific guidelines or requirements allocating power between management and the audit committee (or internal board of auditors)? Is the audit committee responsible for the selection and oversight of external auditors? May the audit committee, on its own initiative, hire independent consultants or advisers? 8 maintaining committees The internal board of auditors is exclusively entitled to approve the proposal for the shareholders resolution on appointment of a company auditor and an (external) accounting auditor. As to company maintaining committees, the audit committee is entitled to elect an accounting auditor. 1. Yes. But the external auditor shall be appointed at a general meeting of shareholders.the directors make a proposal concerning the appointment of an external auditor and must obtain the consent of the board of auditors. Requirement 1.and 2.: requirement 3 : practice Pre (Introduced for the company maintaining committee,in this year) 1,3, pre (Introduced for the company maintaining committee in this year) 8 If a company is required to have an internal board of auditors in your country, please also explain how such auditors are selected. 8

9 2. In the case of a company maintaining committees, the audit committee makes the proposal. 3. Neither the board of auditors nor the audit committee may hire independent consultants or Is there a formal requirement that complaint procedures exist allowing accounting-related complaints and irregularities to be brought directly by employees to the audit committee? 9 advisers on their own initiative. N/A N/A N/A 3. Monitoring of Management 3.1. Are there any requirements for board or shareholder approval of executive compensation? Have The remuneration to be received by directors is fixed by a resolution of a general meeting of shareholders. Requirement. The Commercial Code of Japan Article If specific procedures are required for processing external (non-employee) complaints, please describe them as well. 9

10 there been any recent instances of shareholder objection to or revolt over executive compensation? On January 28 th, 1988, the Tokyo district court ruled that: If the amount of executive compensation cannot be made clear, or research is required in order to clarify the amount, an explanation needs to be given as to why the amount cannot be clarified, and as to how such uncertainty will not act to the detriment of the financial interests of the shareholders Are there any disclosure requirements with respect to top management compensation? Are there any legal limits on executive compensation? If so, do such disclosure requirements and/or limitations apply on an ongoing basis, or only in specific circumstances? No. The company should give written information about management compensation in the invitation to the shareholders meeting. The shareholders meeting is only permitted to decide on the maximum amount of compensation, therefore it usually only decides on the maximum. N/A N/A 10

11 3.3. Is there any requirement or practice with respect to the enactment and maintenance of a code of ethics governing management? 3.4. Except in the case of banks, is there a prohibition on company loans to directors or executive officers? 4. Shareholder Participation and Voting 4.1. Is there a requirement that all or certain types of shareholders (i.e. institutional investors) vote? The directors are obliged to obey any law or ordinance, the articles of incorporation and the resolutions adopted at general meetings, and to perform their duties faithfully on behalf of the company. If a director intends to receive loans from the company, or if the company guarantees the liability of the board of directors, the approval of the board of directors has to be obtained. Requirement Requirement. No. N/A N/A The Commercial Code of Japan Article The Commercial Code of Japan Article Are there any legal or practical limits on the voting The company is not entitled to vote in respect of its own stock, Requirement. The Commercial Code of Japan Article 222 paragraph 4; 11

12 rights (or the exercise thereof) of certain types of shareholders? 10 resolution-restricted stock, or stocks mutually held between companies. Article 241 paragraph 2; Article 241 paragraph Are longer term holders afforded greater voting rights? 4.4. Are there any requirements for institutional investors to disclose their voting records and/or voting policies? No. N/A N/A No. N/A N/A 4.5. Are there any requirements to permit minority shareholder initiatives to be included in proxies? A shareholder, who has continuously for the last six months been in possession of one-hundredth or more of the voting rights of all of the shareholders, or three hundred or more votes, may request the Requirement. The Commercial Code of Japan Article paragraph 1 10 Please describe any legal limitations or customary procedures which may disadvantage certain types of shareholders. For example, electronic voting procedures, limitations on proxy voting or proxy collections, ability of registered shareholders to split vote (i.e. depositaries), minimum holding period requirements, etc. 12

13 directors in writing to make certain matters the object of a general meeting, at least eight weeks before the meeting. Provided however, that this will not apply if the matters raised are not those to be resolved at a 4.6. Are shareholder initiatives required to be distributed by the company at the company s own expense? general meeting. Yes. The agenda of GSM is distributed by the Company at the company s own expense. See above. See above Are shareholders agreements required to be made public? Generally no. However, shareholders whose ownership percentage is greater than five percent of the voting equity securities (such person is referred to as a substantial shareholder ) must file a shareholding report with the government, including in particular, disclosure of material agreements with respect to share certificates, Securities Exchange Law of Japan Article paragraph 1 13

14 5. Disclosure 5.1. Have there been significant changes in disclosure requirements during the last 3 years? If so, what kinds? 5.2. How frequently must listed companies file periodic disclosures? which may include shareholders agreements. 1.(a) The information about corporate governance, risks and MD&A became a requirement for disclosure. A confirmation of fairness by the representative director is now required to be attached when the disclosure documents are filed. (b) The procedures for disclosure became easier and faster. (c) Conversely, the range of private placement was expanded. 2. Relating to 1(b), web-site disclosure started.(edinet; Electronic Disclosure for Investors, NETwork) 1.Requirement 2.practice 4 times a year Practice; Tokyo Stock Exchange requests. [240] companies to file 4 times a year as of June April 1 st Initiated on June 1 st Now a practice, and will be a requirement from June Tokyo Stock Exchange have made requests since June

15 5.3. Have any increases in Yes. See 5.2 See 5.2 See 5.2 the frequency of disclosures been recently required? 5.4. What types of disclosures, if any, must be made on a continuous basis? If the system is a continuous disclosure system, how is it enforced? Any listed company is required to prepare and file with the authority a securities report and a semi-annual report every year, and from time to time an extraordinary report. 1.It is required by the law. 2.Timely disclosure is also required by the rules of Tokyo Stock Exchange. This disclosure is broader and faster. 1.pre It became a requirement in September Is there a requirement for companies to have specific internal disclosure controls and procedures? 5.6. Is there a requirement or practice of having a disclosure committee? (If so, has this practice developed among listed companies not also listed in the U.S.?) No N/A N/A No. N/A N/A 15

16 6. Enforcement 6.1. Please indicate whether the securities regulator has any of the following enforcement tools at its disposal: Consent decree/plea bargaining authority Authority to remove and/or bar officers and directors from service at a public corporation Authority and ability to investigate Power to fine corporations and/or individuals Power to require the forfeiture of salary or bonus Power to order disclosure Power to block or suspend transactions Power to order specific performance or to <available> Authority and ability to investigate Power to fine corporations and individuals.(imprisonme nt with labor is applied to an individual as well) Power to order disclosure Power to block or suspend transactions Power to subpoena corporate documents <NOT available> Consent decree/plea bargaining authority Authority to remove and/or bar officers and directors from service at a public corporation Power to require the forfeiture of salary or Requirement Pre

17 enjoin certain conduct Power to subpoena corporate documents bonus Power to order specific performance or to enjoin certain conduct 6.2. How frequently are enforcement actions taken by the securities regulator? 11 From July 2002 to June 2003, the Securities and Exchange Surveillance Commission filed 10 complaints (concerning 22 people) with the public prosecutor for violating the securities exchange law. 12 and advised the Prime Minister and the Commissioner of the Financial Services Agency to execute administrative orders in 30 cases. 11 Provide this information only if it is readily available. 12 In the ten years since its establishment on July 20,1992, the Securities and Exchange Surveillance Commission (SESC) has filed a total of 43 complaints:16cases of insider trading; seven cases of a loss of compensation; three cases of spreading rumors; five cases of market manipulation; nine cases of submitting securities reports containing false information, etc.; two cases of selling securities using deception; and one case of failing to submit reports on large shareholders. 17

18 6.3. Has there been any recent increase in enforcement by the securities regulator? Can shareholders seek damages against management, directors and/or the corporation formally as a group? Yes. The number referred to in 6.2 hit a new high since the establishment of the SESC in No N/A N/A 6.5. Can directors liability be limited by the board or shareholders? 6.6. Is there a requirement that an unsuccessful plaintiff Yes. The liability of directors with respect to violating laws or the articles of incorporation in good faith or for non-gross negligence can be limited by a majority vote of two-thirds or more of the total number of voting rights of shareholders. Other liability of directors can be limited by approval of all the shareholders. No. But the Cabinet is considering introducing a Requirement. adopted in 2001 N/A N/A 13 Anecdotal views are acceptable. 18

19 pay the defendant s legal fees? 7. Overview 7.1. In your opinion, have the recent corporate fraud scandals and developments in corporate governance, auditing and disclosure regulations in other jurisdictions significantly influenced the local independent or state regulators to adopt new regulations? requirement to some extent. (The Japanese bar association strongly opposes as the new rule will limit the opportunity for people to sue directors.) Yes. Some important changes have been made recently and more will be made soon In your opinion, how effective have the recent changes described above been in improving investor confidence? 7.3. Do you think that recent developments have led to significant improvements in It is difficult to give an opinion on this at this stage. It is difficult to say that recent developments have led to significant improvement. 19

20 compliance with pre-existing corporate governance, auditing and disclosure standards? 7.4. Do you expect to see greater international convergence of corporate governance, auditing and disclosure standards in the near future? How is this process likely to be affected, if at all, by unique local social, economic and/or political conditions in your country? Yes. It is expected to be implemented by statutory regulation and self-regulatory rules, although it is not likely to be completed within a short period of time. 20