5.Financing

|Q7 (Third Party Valuation for CB)

Typically, a convertible bond with warrant (CB) is a security in which the holder contributes the bond upon the exercise of a warrant to purchase shares. If this is considered a contribution in kind, isn’t a valuation by a third party evaluator required?

Strictly speaking, the contribution of the debt and exercise of the warrant under a CB is a contribution in kind, which would require a valuation by a third party evaluator. However, a CB typically falls within one of the exemptions from the valuation requirement. Specifically, there are certain exemptions from the valuation requirement (Companies Law, Article 284, Section 9):

(1) if the number of shares issued under the exercised warrant does not exceed 1/10 of the total outstanding shares of the company;

(2) if the designated total value of the contributed asset does not exceed 5,000,000 Japanese yen; or

(5) in the case that the contributed asset is a monetary claim (limited to those claims that are due and payable), if the designated value of the monetary claim for purposes of the contribution in kind does not exceed the book value of the liability.

In practice, the company will designate the exercise price for each warrant as not more than 5,000,000 Japanese yen in order to utilize exemption (2) above.

(Posted: January 27, 2012)