Identification of shareholders

Japanese companies have long sought a mechanism to identify beneficial (actual) shareholders, rather than merely nominal shareholders recorded on the shareholders register. In this context, beneficial shareholders are those who exercise, or instruct the exercise of, voting rights, whereas nominal shareholders are the entities registered as shareholders on behalf of underlying investors. The stated objective of introducing such an identification regime is to enable issuers to engage in meaningful and constructive dialogue with those investors who are in a position to influence the company's strategy and corporate governance.In April 2025, the Ministry of Justice (MOJ) established a Working Group to examine the issue with a view to amending the Companies Act. The MOJ is currently considering the introduction of two complementary shareholder identification mechanisms, both of which could have significant implications for foreign banks providing custody services in Japan.The first mechanism would be issuer-driven, whereby an issuer could request shareholder identification information through the custody chain. The framework would broadly mirror the approach adopted under the European Union's Shareholder Rights Directive II (SRD II). Custodians would be required to respond to such requests and could be subject to monetary penalties for failing to provide the requested information or for providing inaccurate information.The second mechanism would require large shareholders to disclose their holdings directly to both the issuer and the relevant authorities, in a manner similar to Japan's existing large shareholding reporting regime for holdings exceeding 5%. Failure to comply could result in the suspension of the shareholder's voting rights.With respect to the first mechanism, the proposed obligation would apply only to intermediaries that are also registered as nominees on the shareholders register. In practice, this would place the reporting obligation—and the associated penalties—primarily on non-Japanese global custodians, rather than on Japanese intermediaries that merely facilitate the opening and maintenance of securities accounts at the central securities depository, JASDEC, without themselves acting as registered nominees.This approach risks creating significant loopholes in the proposed identification framework while imposing an uneven regulatory burden on Japanese and non-Japanese custodians. Such differential treatment could undermine the principle of competitive neutrality and raise concerns regarding consistency with Japan's international trade commitments, including the principles underpinning the WTO framework. Consideration has also been given to extending sanctions beyond monetary penalties to include the suspension of voting rights.Under the second mechanism, the principal sanction for non-compliance would be the suspension of voting rights. The MOJ proposes that the issuer itself determines whether voting rights should be suspended and would notify the beneficial shareholder accordingly. As the proposal does not contemplate prior judicial review, it creates a potential risk that issuers could exercise this authority inappropriately or inconsistently.To mitigate this risk, any suspension of voting rights should be subject to robust procedural safeguards. At a minimum, such a decision should require formal approval by the board of directors, including the support of independent outside directors, and should be limited to cases involving intentional non-compliance or gross negligence rather than inadvertent or technical breaches.(Kindly contributed by International Bankers Association of Japan)