Surprisingly, it was not until this year that incentive stock options to be issued by a Japanese corporation to its directors and employees ("Stock Options") were provided for under the Japanese Commercial Code (the "Commercial Code"). Before the amendment to the Commercial Code of this year, Japanese companies were forced to use warrants detached from its stock in combination with warrants or the shares of stock held by a founding shareholder, etc. to provide a Stock Option for its directors and employees (treasury stock is in principle impermissible under the Commercial Code). Further, it has been recently announced that in order to promote the dissemination of Stock Options, a special tax provision similar to qualifying stock option plan provisions under the Internal Revenue Code, will be introduced beginning in 1998 (See our article on this topic).

The amendments to the Commercial Code permit a company to issue Stock Options through the use of either treasury stock or subscription warrants. A company may not issue Stock Options concurrently using both methods. For both treasury stock and subscription warrants, the names of the directors and/or employees to whom the Stock Options are granted and the appropriate reason therefor must be disclosed at a shareholders' meeting. Stock Options must be exercised within ten years from the date of the resolution of the shareholders' meeting approving the granting of the Stock Options. The number of shares available for Stock Options is up to 10% of all the issued and outstanding shares of the company.

(a) A company may purchase and hold treasury stock for the purpose of transferring the same to its directors or employees, subject to a resolution at the annual shareholders' meeting and only to the extent of the amount of dividends distributable under the Commercial Code. A grantee will have the right to purchase the existing shares of stock.

(b) In order for a company to grant Stock Options in the form of subscription warrants to its directors or employees, the Company's Articles of Incorporation must authorize such a grant (the amendment of the Articles requires a special resolution of the shareholders), and this must be registered in the Commercial Registry. Further, granting Stock Options in the form of subscription warrants is subject to a special resolution of shareholders, and the number of new shares available upon the exercise of such Stock Options must be registered in the Commercial Registry. A grantee will have the right to subscribe to new shares to be issued by the company if and when the Stock Option is exercised.

(c) While Stock Options in the form of subscription warrants are less costly than Stock Options in the form of treasury stock, the former are subject to more burdensome procedures. However, there is no resultant difference with respect to tax treatment.

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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(c) Komatsu, Koma & Nishikawa 1997

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