As one of the major reforms of the Big Bang taking place in Japan designed to enhance competition and increase the efficiency of financial markets, laws enabling the creation of financial holding companies came into effect as of March 11, 1998.
The Prior Prohibition of Holding Companies in Japan
Prior to recent amendment of the Antimonopoly Law, the incorporation of holding companies holding shares in Japanese companies was prohibited irrespective of the effect upon competition in the market (operating companies were allowed to hold shares in other companies subject to certain restrictions). This prohibition was designed to prevent the emergence of the huge conglomerates which dominated major industries in Japan during the pre-World War II period. Foreign holding companies whose principal business was to control Japanese companies were also subject to this prohibition.
Liberalization of Holding Companies
Pursuant to the recent amendment of the Antimonopoly Law and other relevant laws, the ban on holding companies (including financial holding companies) was lifted. At present holding companies can be freely created unless it would result in an "excessive concentration of the power to control industry".
The Japan Fair Trade Commission ("JFTC") announced new guidelines on December 8, 1997 clarifying the meaning of the phrase "excessive concentration of the power to control industry" in the amended Anti-Monopoly Law. With respect to financial holding companies, the following holding companies are still prohibited on this basis:
(i) holding companies controlling both (a) a financial institution having total assets exceeding 15 trillion yen and (b) a company not engaging in the finance industry or a closely related industry, and whose assets exceeds 300 billion yen; and
(ii) holding companies controlling companies whose businesses are interrelated (such as banks, securities firms, credit card companies, lending institutions and non-life insurance companies) 5 or more of which are either within the top three with respect to market share or have 10% or more of the market share in their respective markets. Further, holding companies and subsidiaries thereof whose total assets exceed 300 billion yen are obligated to file annual business reports with the JFTC.
What are the advantages of financial holding companies?
Under the Financial System Reform Act of 1993, crossover entry between the banking and securities industries was permitted by allowing banks and securities firms to directly establish subsidiaries in each other's industries, although the 1993 act did not allow such subsidiaries to offer a full range of services. Pursuant to this 1993 reform, major banks have established subsidiaries acting as securities firms. As of March 11, 1998, banks may establish bank holding companies, and these holding companies may acquire or establish subsidiaries which operate as securities firms. The establishment of holding companies is attractive because it enhances the isolation of financial risks among subsidiaries and the enforcement of "fire wall" restrictions, and acquisitions are facilitated. The option of establishing holding companies will provide mobility to strategic alliances among existing financial institutions, enable existing financial institutions to form subsidiaries for each line of business to gain mobility and flexibility in management, and facilitate entry into and exit from various financial markets. The holding company will also play a role as a vehicle to rescue troubled financial institutions, a method which banks tend to prefer over the merger of such institutions.
5% Rule Applied to Operating Financial Institutions Under the Antimonopoly Law
The Antimonopoly Law prohibits financial institutions from holding 5% or more of the outstanding shares of a domestic corporation (10% or more in the case of insurance companies), with certain exceptions in cases such as banks with securities subsidiaries under the Financial Reform Act. The new JFTC guidelines relax application of this 5% rule for financial holding companies. Financial companies can hold an unlimited percentage of the shares of other financial companies. Further, financial holding companies and their group companies are permitted to hold up to a total of 15% of the outstanding shares of non-financial corporations. Still, financial institutions are in principle prohibited from directly holding 5% or more of the outstanding shares of a non-financial corporation. The objective of this 5% rule is to prevent financial institutions from controlling non-financial industries.
Regulatory Requirements for Bank Holding Companies
Incorporation and conversion into a bank holding company requires approval from the Minister of Finance. The bank holding company may hold domestic and foreign subsidiaries which engage in the banking or securities industries, or other companies which engage in industries related to finance. Bank holding companies are not allowed to hold as subsidiaries those companies engaging in non-financial operations. Further, at present insurance companies cannot become subsidiaries of bank holding companies. Under the Financial System Reform Act bill which is currently being debated in the Diet and which will take effect on December 1, 1998 if passed, bank holding companies can hold as subsidiaries financially troubled insurance companies. As stated above, bank holding companies and their group companies cannot hold more than a total of 15% of the outstanding shares of a non-financial company.
A new law was also enacted to facilitate the formation by existing banks of bank holding companies. The law allows a resolution to be adopted by the shareholders of the existing bank, obligating them to exchange the shares of the surviving corporation (which will succeed the bank) that such shareholders would receive as a result of the merger with the surviving bank, for the shares of the holding company of the surviving corporation (a scheme similar to a triangular merger under US law).
Regulatory Requirements for Insurance Holding Companies
Incorporation and conversion into an insurance holding company requires the approval of the Minister of Finance. The insurance holding company may hold as subsidiaries both foreign and domestic companies engaging in the insurance (life and non-life), securities and other related industries. Unlike bank holding companies, insurance holding companies are allowed to hold subsidiary companies engaging in non-financial industries. Further, the shareholding percentage that an insurance holding company and its group companies can hold in non-financial companies is in principle unrestricted.
Regulatory Requirements for Securities Holding Companies
Securities holding companies can be freely established and are subject only to certain reporting requirements and the obligation to allow on-site inspection to ensure the government's regulatory control over the securities industry.
The Tax Consequences of Forming Financial Holding Companies
Leaders of big businesses have commented that holding companies will not be utilized by Japanese companies unless the corporation tax law is amended to allow consolidation of income among group companies (currently prohibited under the corporation tax law). So far, no such amendment has been passed and it remains to be seen whether such a taxation scheme will be introduced. Nevertheless, various tax relief measures have been enacted in relation to the transfer of assets to subsidiaries in the course of forming a holding company.
Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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