Statutory definition

Share delivery is a reorganization provided for in Article 774-2 and subsequent provisions of the Companies Act. First, consider the basic obligation imposed on a stock company undertaking it.

A stock company may undertake a share delivery. In that case, it must prepare a share delivery plan.

A stock company may undertake a share delivery and must prepare a plan when doing so. The acquiring company is called the share-delivery parent, and the target is the share-delivery subsidiary. Article 774-3 defines them as follows:

The trade name and address of the share-delivery subsidiary (the stock company issuing the shares acquired by the share-delivery parent (the stock company undertaking the share delivery; the same applies hereinafter) in that transaction; the same applies hereinafter).

The share-delivery parent is the stock company undertaking the transaction; the share-delivery subsidiary is the company whose shares are acquired. Share delivery is a method of acquiring a subsidiary using the acquirer’s own shares as consideration instead of cash. For its place within the broader reorganization tax regime, see Overview of Reorganization Taxation I am organizing with.

Overview

What Must a Share Delivery Plan Specify?

Article 774-3 of the Companies Act prescribes the plan’s contents as follows:

When a stock company undertakes a share delivery, its share delivery plan must specify the following matters.

One principal item is the minimum number of shares to be acquired.

The minimum number of shares in the share-delivery subsidiary to be acquired by the parent in the share delivery (or, if the subsidiary issues classes of shares, the classes and minimum number of each class).

Because participation is voluntary for shareholders, a minimum must be set. The shares delivered as consideration are addressed as follows:

The number of parent shares to be delivered as consideration to transferors of subsidiary shares in the share delivery (or, for a company issuing classes of shares, the classes and number of each class), or the method of calculating that number, and matters concerning the parent’s stated capital and reserves.

Matters concerning stated capital and reserves must also be specified. Allocation is addressed as follows:

Matters concerning allocation of the parent shares referred to in the preceding item to transferors of subsidiary shares.

The plan must also address matters such as cash or other consideration and acquisition of share acquisition rights, etc. The effective date is prescribed as follows:

The date on which the share delivery takes effect (hereinafter in this Chapter the “effective date”).

An effective date must be specified. Share exchanges and share transfers also use shares to acquire wholly owned subsidiaries, but share delivery differs because it does not require wholly owned status. These differences are compared in Share Exchanges and Share Transfers.

How Are Corporate Shareholders’ Transfer Gains or Losses Treated?

The treatment of corporate shareholders’ gains or losses in a share delivery is prescribed as a special rule in Article 66-2 of the Act on Special Measures Concerning Taxation, rather than in the Corporation Tax Act itself. Its scope and exclusions are as follows:

Where a corporation transfers shares it holds (hereinafter in this paragraph “held shares”) through a share delivery making their issuer a share-delivery subsidiary under Article 774-3, paragraph 1, item 1 of the Companies Act, and receives shares in the share-delivery parent defined in that item (the same applies in this article), excluding cases where the value of parent shares received is less than eighty percent of the total money and value of non-monetary assets received, or where the parent immediately after the transaction is a family company under Article 2, item 10 of the Corporation Tax Act (limited to a company that remains a family company even after any non-family-company corporate shareholders used in that determination are excluded from its basis).

The rule covers transfers of held shares through a share delivery making their issuer the subsidiary, in return for parent shares. It excludes cases where shares account for less than 80 percent of consideration and where the parent immediately afterward is a family company that remains so even after non-family-company corporations are excluded from the shareholder test. Article 61-2 of the Corporation Tax Act then applies as follows:

For purposes of Article 61-2, paragraph 1 of the Corporation Tax Act, the amount in item 1 shall equal the sum of the held shares’ book value immediately before the share delivery multiplied by the share-delivery ratio (the value of parent shares received as a proportion of the total money and value of non-monetary assets received, excluding those received as dividends of surplus), plus the total money and value of non-monetary assets received excluding parent shares and money or other assets received as dividends of surplus.

Article 66-2 replaces the amount in Article 61-2, paragraph 1, item 1 with the sum of the pre-transaction book value multiplied by the share-delivery ratio and the money and value of non-monetary assets received, excluding parent shares and dividends of surplus. The share-delivery ratio excludes dividends of surplus. Its calculation base therefore differs from that of the 80-percent threshold determining eligibility.

How Are Individual Shareholders’ Capital Gains, etc. Treated?

Article 37-13-4 of the Act on Special Measures Concerning Taxation provides a similar rule for individual shareholders. Its scope and exclusions are as follows:

Where an individual transfers shares held (hereinafter in this paragraph “held shares”) through a share delivery making their issuer a share-delivery subsidiary under Article 774-3, paragraph 1, item 1 of the Companies Act, and receives shares in the parent defined in that item (the same applies in this article), excluding cases where parent shares account for less than eighty percent of the total money and value of non-monetary assets received, or where the parent immediately afterward is a family company under Article 2, item 10 of the Corporation Tax Act (limited to a company remaining a family company even after non-family-company corporate shareholders or associations without legal personality, etc. under Article 2, paragraph 1, item 8 of the Income Tax Act used in the test are excluded from its basis).

The rule covers transfers of held shares in return for parent shares through a share delivery making their issuer the subsidiary. Its exclusions are broadly the same as for corporate shareholders, but differ from Article 66-2 in also excluding associations without legal personality, etc. under Article 2 of the Income Tax Act from the family-company shareholder test. Capital-gain provisions then apply as follows:

For purposes of Articles 37-10 through the preceding article or Articles 27, 33, or 35 of the Income Tax Act, the held shares transferred shall be deemed not to have been transferred (where money or non-monetary assets other than parent shares are received, limited to the portion prescribed by Cabinet Order other than the portion corresponding to the total money and value of non-monetary assets received excluding parent shares).

Except for the portion corresponding to cash and other consideration, as prescribed by Cabinet Order, no transfer is deemed to have occurred. The portion exchanged solely for shares produces no capital gain, etc. For shareholder taxation, see Reorganizations and Shareholder Taxation We are dealing with that.

Points that require care in practice

• Articles 66-2 and 37-13-4 do not impose the qualified-reorganization requirements of Article 2 of the Corporation Tax Act. Assuming a share delivery under the Companies Act, eligibility is determined by the consideration condition and family-company exclusion.
• There is no provision excluding dividends of surplus when calculating the 80-percent eligibility threshold. Dividends are excluded in calculating the share-delivery ratio used to determine the deferred amount. These two calculations must not be confused.
• The family-company test uses an unusual standard: whether the company remains a family company after excluding non-family-company corporate shareholders (and, for individual shareholders, associations without legal personality, etc.).
• The share-number calculation method and stated-capital and reserve provisions in the plan directly affect consideration, so their specific terms must be checked.
• For individual shareholders, Cabinet Order defines the portion for which a transfer is still recognized. The detailed calculation must be checked in the Enforcement Order of the Act on Special Measures Concerning Taxation.
• For corporate shareholders, matters such as application to foreign corporations and the acquisition cost of parent shares received are also delegated to Cabinet Order.

Legal basis

• Companies Act, Article 774-2 (Preparation of a Share Delivery Plan) / Quoted wording: “A stock company may undertake a share delivery. In that case, it must prepare a share delivery plan.”
• Companies Act, Article 774-3, paragraph 1, opening provision (Share Delivery Plan) / Quoted wording: “When a stock company undertakes a share delivery, its share delivery plan must specify the following matters.”
• Companies Act, Article 774-3, paragraph 1, item 1 (Share Delivery Plan) / Quoted wording: “The trade name and address of the share-delivery subsidiary (the stock company issuing the shares acquired by the share-delivery parent (the stock company undertaking the share delivery; the same applies hereinafter) in that transaction; the same applies hereinafter).”
• Companies Act, Article 774-3, paragraph 1, item 2 (Share Delivery Plan) / Quoted wording: “The minimum number of subsidiary shares to be acquired by the parent in the share delivery (or, for a subsidiary issuing classes of shares, the classes and minimum number of each class).”
• Companies Act, Article 774-3, paragraph 1, item 3 (Share Delivery Plan) / Quoted wording: “The number of parent shares delivered as consideration to transferors of subsidiary shares (or, for a company issuing classes of shares, the classes and number of each class), or the calculation method, and matters concerning the parent’s stated capital and reserves.”
• Companies Act, Article 774-3, paragraph 1, item 4 (Share Delivery Plan) / Quoted wording: “Matters concerning allocation of the parent shares in the preceding item to transferors of subsidiary shares.”
• Companies Act, Article 774-3, paragraph 1, item 11 (Share Delivery Plan) / Quoted wording: “The date on which the share delivery takes effect (hereinafter in this Chapter the ‘effective date’).”
• Act on Special Measures Concerning Taxation, Article 66-2, paragraph 1 (Special Recognition of Share Transfer Gains or Losses in a Share Delivery) / Quoted wording: “Where a corporation transfers held shares through a share delivery making their issuer a subsidiary under Companies Act Article 774-3, paragraph 1, item 1 and receives shares in the parent defined there, excluding cases where parent shares represent less than eighty percent of total money and non-monetary assets received or the parent immediately afterward is a family company under Corporation Tax Act Article 2, item 10 that remains so after excluding non-family-company corporate shareholders from the test, the amount under Corporation Tax Act Article 61-2, paragraph 1, item 1 shall equal the pre-delivery book value of the held shares multiplied by the share-delivery ratio (parent-share value divided by total money and non-monetary asset value received, excluding dividends of surplus), plus the money and non-monetary asset value received excluding parent shares and dividends of surplus.”
• Act on Special Measures Concerning Taxation, Article 37-13-4, paragraph 1 (Special Taxation of Capital Gains, etc. on Transfers of Shares for Shares, etc.) / Quoted wording: “Where an individual transfers held shares through a share delivery making their issuer a subsidiary under Companies Act Article 774-3, paragraph 1, item 1 and receives shares in the parent defined there, excluding cases where parent shares represent less than eighty percent of total money and non-monetary assets received or the parent immediately afterward is a family company under Corporation Tax Act Article 2, item 10 that remains so after excluding non-family-company corporate shareholders and associations without legal personality, etc. under Income Tax Act Article 2, paragraph 1, item 8 from the test, the held shares shall be deemed not to have been transferred for purposes of Articles 37-10 through the preceding article or Income Tax Act Articles 27, 33, or 35. Where money or other assets besides parent shares are received, this treatment is limited to the portion prescribed by Cabinet Order other than that corresponding to the money and non-monetary asset value received excluding parent shares.”