No. 20 — May 19, 2000

 

Weekly Review

NOTES

The Diet's lower house approved May 11 the final component of a three-part package to help corporate Japan with the restructuring needed to regain global competitiveness (see JEI Report No. 20A, May 19, 2000). The bills, which are expected to clear the upper chamber before the scheduled June 17 close of the current legislative session, will make it easier for companies to spin off unprofitable divisions. They also will fill a void in the Commercial Code, which lacks rules governing corporate breakups. While executives welcome the coming changes, they point out that important details remain undecided.

The pending legislation will provide clear rules and procedures for two situations: the conversion of a division into a freestanding company and the sale of a division to an existing firm. In both cases, executives will be required to obtain approval of the breakup from their board of directors, draw up a spin-off plan or sales contract and then submit the deal to shareholders.

A companion set of bills, approved by the lower house May 12, covers employees affected by a spin-off or a sale, guaranteeing the continuation of labor contracts in both instances. Companies, however, will have the right to transfer workers to the spin-off or the acquirer without employees' consent. Managers argue that the language of this package is so vague that many situations will arise where its application will not be clear-cut. Until the Ministry of Labor issues clarifying guidelines or seeks additional changes in current laws, employers will have to tread cautiously.

Also up in the air are tax rules for the sale and or the transfer of corporate divisions. This issue could be a big stumbling block since little consensus exists on such important topics as valuing intangible assets, defining acceptable accounting methods and apportioning tax liabilities. Despite the unresolved issues, policymakers believe that they have given executives the set of legal tools they need to realign operations, including a holding company structure (see JEI Report No. 9B, March 7, 1997), stock swaps (1998) and, soon, rules covering corporate breakups.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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