In Option C, companies will postpone the AGM and the year-end dividend for 2019 fiscal year to sometime beyond 3 months of the year end without changing the record date. This means that the record date for voting rights at the AGM and the year-end dividend will be more than 3 months prior to the date of AGM and resolution of payment of the year-end dividend.
Article 124 provides that a record date is required to be a date not more than 3 months prior to the date on which shareholders may exercise certain shareholders’ rights for which the record date is fixed. Article 124 does not address the issue whether the record date loses validity or not, if 3 months passes since the record date before the company sets a date for shareholders to exercise their rights.
Before the 2004 amendments to the Companies Act, companies could use either or both of a record date and closure of register of shareholders in order to determine which shareholders are entitled to exercise certain shareholders’ rights. When the register of shareholders is closed, shareholders who traded their shares were not able to make an entry of name change. In order not to hamper share trading, companies were required to reopen the register of shareholders when 3 months passed since the closing. The record date was also considered to lose validity when 3 months passed since the record date. If a company sets a record date and closes the register of shareholders the next day, and if 3 months passes since the closing day before setting a date for shareholders to exercise their rights, it had to reopen the register and let shareholders make an entry of name change where needed. In this case, names of shareholders in the register were renewed upon the elapse of 3 months. However, the 2004 amendments to the Companies Act abolished the closure of register of shareholders, and setting a record date does not prevent shareholders from making an entry of name change when shares are transferred after the record date. Under the current Companies Act, there is no such strong need for the 3 months restriction on the record date as on the closure of register of shareholders.
When a record date is set for certain shareholders’ rights, especially for dividend, it is necessary not to cause shareholders unforeseeable damage, because shareholders may trade shares, usually at a low price, assuming that they are entitled to receive payment of dividend even after they sold and lost their shares.
Article 124 is based on the principle that it is preferable that shareholders as of the date of exercising shareholders’ rights exercise the shareholders’ rights. The difference between shareholders as of the record date and shareholders as of the date of exercising shareholders’ rights should be as small as possible.
However, we think that Article 124 can be construed as meaning that the principle of smaller difference of shareholders does not always have priority over the prevention from causing shareholders unforeseeable damage. We think that under Article 124, in the event that a company cannot set a date for shareholders to exercise their rights within 3 months of the record date due to an event beyond its control, the record date prescribed in the company’s articles does not lose validity, and the company may set a date for exercising shareholders’ rights on a date beyond 3 months of the record date without changing the record date. In the pandemic situation of the new coronavirus, companies may postpone the AGM scheduled in June to September without changing the record date of March 31.
In Option C, the notice of AGM should be sent to the shareholders as of the record date as prescribed in the company’s articles of incorporation. The year-end dividend should also be paid to the same shareholders. Even if the AGM is postponed to September, companies should send notice to the shareholders as of March 31 as prescribed in the articles of incorporation and should pay dividend to the shareholders as of March 31.
There is a possibility that a shareholder argues that the record date lost validity, and the notice has not been sent to all the shareholders who became shareholders after the record date, and that the shareholder brings a lawsuit requesting the courts to revoke the resolution made at the AGM held in September. However, we think that such argument is not tenable, because the shareholders after the record date cannot be shareholders as of the record date unless the company changes the record date.
(This information is for informative purposes only and should not be relied upon as legal advice. Please seek legal advice from professional advisers on a specific case. We always welcome your questions and comments.)
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