28 February 2006

The new Corporation Law is expected to come into effect on 1 May 2006. The creation of this Corporation Law is a radical change. Since it brings together into one law several laws containing provisions relating to companies, namely the Limited Liability Company Law, the corporate laws in the Commercial Code, and the Law for Special Provisions for the Commercial Code Concerning Audits, etc., it represents a whole new body of law. The overarching objective of the revisions is to modernize the law in both form and substance. The modernization in form means a shift from obscure Meiji-period language to modern terminology. The key element of the modernization in form, to cite the aspect of most relevance to ourselves, is increased flexibility of institutional design. In other words, it will become easier to design institutions in response to corporate governance issues. We have always said that corporate governance should be left to each company's discretion, but in the current revisions, in the choice between Companies established by Committees, etc. and Companies established by Audit Committee, there are parts which touch on the duties and responsibilities of auditors.

The revision aims to ease restrictions and enable companies to operate flexibly*1 . The background to it is the long-running malaise in the Japanese economy, and the main thrust is to deregulate corporate business reorganizations. In practice, this means increased price flexibility for mergers etc., an easing of the conditions for simple-form organizational restructurings, the establishment of a procedure for abridged organizational restructurings, and the introduction of defensive strategies against hostile takeovers. We plan to produce a separate report discussing hostile takeover defenses. In addition, the style of the law has been substantially improved by the fact that it is expressed in everyday language. Overall, although some people are of the view that the Law moves in the direction of eliminating discrepancies between the Commercial Code and the Securities and Exchange Law, there is also a view that it may not be wise to liberalize everything without taking measures to ensure market health, transparency and efficiency.*2
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*1.The New Company Law, Tetsu Aizawa
*2.The Revision of the Corporation Law Waseda University, Tatsuo Uemura

The purpose of this document is to enable an overall grasp of what kind of proposed resolutions will be submitted to Stockholdersﾕ General Meetings (mainly held in June) as a result of the present revision of the Corporation Law, and how to assess them. We must add the major caveat that we cannot be sure of the results until the proposed resolutions are actually submitted. Also, in the period during which the Lawﾕs transitional measures are in operation, it is left to companies' discretion how to respond. For fund managers it is very important to prepare hypothetical proposals for stockholders' meetings, so that they can consider in advance what kinds of proposed resolutions may appear in practice as a result of the revisions in the Corporation Law, and how they will vote in response to them.

This document has been prepared by exchanging opinions and information with specialists and a large number of interested parties. However, it is only a report produced by this company independently, and its accuracy cannot be guaranteed. In addition, readers should note that since transitional measures apply in relation to the new law, not all items will apply to all public companies at this yearﾕs stockholdersﾕ meetings.

For numerical documents (financial statements), for reasons of timing, we guess that it will be realistic in this yearﾕs results to use the old law, based on the provisional measures. With regard to data disclosure, however, it is said that some companies will comply voluntarily with the new law as far as possible. It is very difficult to forecast the number of companies taking this approach or the approach they will take to disclosure and similar issues. Insofar as there is increased disclosure of items related to corporate governance and management, we plan to add to our database the information on companies which make new disclosures, particularly in areas like directors, auditors and internal controls.

[Changes to Articles of Incorporation I; Changes of Form]

We expect the revision of the law to lead to a large number of proposals to change Articles of Incorporation. At GV, we classify these as purely formal changes to Articles of Incorporation. Since there is no particular reason to oppose them, in principle we accept them. There is, however, scope to consider how to vote in cases where this type of formal change is submitted as a single proposal along with a substantial change. In general, if there is one element we oppose, we will oppose the whole proposal. There is said to be a policy of tabling separately any changes to Articles of Incorporation which shareholders are determined to have passed this year. We plan to compile data on changes to Articles of Incorporation giving a detailed breakdown by category.

Since the procedures for changes to Articles of Incorporation based on the "deeming regulations", require that changes be passed at the first Stockholders' Meeting after the implementation date, there are likely to be a large number tabled in cases where this year's Stockholders Meeting fits that description.

Public announcement methods

1

Institution

2

Authorized number of shares

3

Issue of share certificates

4

Number of shares per tradable unit

5

Additional purchases by shareholders holding less than a unit

6

Administrator of register of shareholders-change in name of transfer agent

7

Provisions for treatment of shares (can be changed by resolution of Board of Directors)

8

Method for Special Resolutions

9

Casting of proxy votes-number of people can be limited by provision

10

Right to select Directors

11

Representative Directors and Directors with Title

12

Decision-making procedures at Board of Directors-Board of Directorsﾕ resolutions by letters

13

Remuneration

14

Method of selecting auditors and audit committee

15

Periods of service

16

Standing auditors

17

Remuneration of auditors

18

Appointment of auditors of accounts

19

Period of service of auditors of accounts

20

Remuneration of auditors of accounts

21

Discharge of auditors of accounts

22

Business term

23

Dividend rejection period

Changes to Articles of Incorporation-II

These are changes to the Articles of Incorporation for which we think it is particularly necessary to examine the details carefully in accordance with fund management policies. In the section below we also give the opinions of Governance Visions.

1

Rights of shareholders holding less than a unit
It has become possible to restrict the rights of sub-unit shareholders. *3
If the amendment to the Articles of Incorporation is passed, the rights of sub-unit shareholders to file shareholder lawsuits, receive share allotments, etc. will be curtailed. Please note that there are concerns that stub stock resulting from the exercise of convertible bonds, etc. will lose its rights.

*3.§189−(2)

2

Record date
The Board of Directors can decide by resolution which registered shareholders may exercise their rights, or which shareholders are registered. It is extremely unlikely that companies will table this resolution as a countermeasure against hostile takeovers, but it is possible

3

Period of service
In some cases this is a purely formal change to the Articles of Incorporation, but in cases where the service period is to be changed from 2 years currently to 1 year, a re-election proposal may be tabled conditional on the passage of the change to the Articles of Incorporation, so caution is needed.

4

Maintenance of resolutions to dismiss directors
Resolutions to dismiss directors require a majority quorum (this can be set at one third or more in the Articles of Incorporation), and are passed if a majority of shareholders in attendance (Articles of Incorporation can specify a weighting by voting rights) support them. Mainly as a defense against hostile bids, there is a move to table amendments to the Articles of Incorporation which change resolutions to dismiss directors into special resolutions. This is expected to be opposed by most institutional investors, so some observers take the view that companies will not dare to do this. Since it is the right of shareholders to appoint and dismiss directors, many institutional investors, and we ourselves at Governance Visions, oppose this amendment.

5

Waiver of directorsﾕ liability
The upper limit of the waiver is shown. According to §423-I of the Commercial Code, in cases of good faith, and where there has been no grave negligence, the Company may bear the cost above the amount specified in the Articles of Incorporation up to a previously specified sum, or up to four times the remuneration of a director, and six times the remuneration of a representative director, whichever is the higher. In cases of directorﾕs terms, or dividends from capital surplus, the directors agreeing to waive liability must accept unlimited joint liability to the company for the total amount paid. It is stipulated that directors may not be exonerated of liability for negligence (or irresponsibility if they can prove an absence of negligence), in their executive roles.
There is no problem about inserting this provision as such. Waivers of auditorsﾕ liabilities are limited to twice remuneration. Check the service terms of external auditors.

6

Waiver of liability of auditors of accounts
There is no problem about inserting this provision, but in Japan auditors of accounts have long service periods compared with those in the US. Waivers of liabilities of auditors of accounts are limited to twice remuneration.

7

Record date for dividends from capital surplus or interim dividends
It is a condition that directorsﾕ service terms be one year. According to §459-(1), dividends from capital surplus may be determined by resolution of the Board of Directors. For interim dividends, in the past, any number of dividend payments could be decided by a single resolution of the directors in a term. In addition, companies whose Board of Directors have made a resolution to pay a dividend out of capital surplus can also make resolutions at meetings of the Board of Directors to buy back their own shares. This means that buy-backs of shares will become possible even if the conditions specified in §459−(2) are not fulfilled.

8

9

Appointment of auditors ﾐ if specified in the Articles of Incorporation, the appointment may be extended.

Other items to check are as follows. These are not directly related to proposed resolutions, but should be borne in mind as background or related considerations when making a judgement on proposed resolutions.

There are also some items whose wording will change slightly

[ Number of external auditors]

Under the new law, half of the auditors must be external, but transitional measures apply, so not all companies are likely to have an adequate number this year. As a general trend, we expect an increase in usage of external auditors.

[Increased scope of subsidiaries]

Because the guideline will change from half of the voting rights to effective control (for all consolidated entities), attention needs to be paid to this when examining proposed resolutions.

[Changes to regulations for directors]

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*4 §3 72
*5 §370

This document has been written with the objective of enabling institutional investors (including fund managers) to exercise their voting rights smoothly and more effectively. As things stand, various undesirable practises occur at the General Stockholdersﾕ Meetings concentrated in June, and we feel that a convenient document like this is unavoidably necessary. Given the introduction also of the new Law, there may be some places in which we have made legal errors or our explanation is inadequate. We accept no liability in such cases. This is not a legal document. Please use it only as a guide in exercising voting rights.