Share consolidation (株式の併合 - kabushiki no heigō), often known internationally as a reverse stock split, is a corporate action where a company reduces its number of issued shares by combining multiple existing shares into a smaller number of new shares. While this action has several legitimate business purposes, it also interacts with Japan's "4x authorized shares rule," a provision designed to protect shareholders in public companies from excessive dilution. Amendments to the Companies Act have clarified and strengthened how this rule applies in the context of share consolidations.

This article will explain that if a public company in Japan consolidates its shares, thereby reducing the total number of issued shares, its total number of authorized shares must also be concurrently managed (and if necessary, adjusted) so that it does not exceed four times the new, lower number of issued shares. Crucially, the shareholders' meeting resolution approving the share consolidation must now also specify this new compliant total for authorized share capital.

The "4x Authorized Shares Rule" for Public Companies: A Shareholder Protection Mechanism

Before discussing share consolidations, it's essential to recall the "4x authorized shares rule" applicable to public companies (公開会社 - kōkai kaisha) in Japan:

• Authorized Shares (発行可能株式総数 - hakkō kanō kabushiki sōsu): The maximum number of shares a company is permitted to issue, as set in its articles of incorporation (teikan).
• Issued Shares (発行済株式の総数 - hakkō-zumi kabushiki no sōsu): The shares actually held by shareholders.
• The Rule: For public companies, the total number of authorized shares generally cannot exceed four times the number of issued shares (Companies Act, Article 37, Paragraph 3 for establishment; Article 113, Paragraph 3 for subsequent increases in authorized shares).

The primary rationale for this rule is to limit the discretion of the board of directors in a public company. Boards of public companies can often issue new shares up to the authorized limit without seeking specific shareholder approval for each issuance (unless, for example, the price is particularly favorable to subscribers). The 4x rule prevents the board from having an excessively large "overhang" of authorized but unissued shares, which could be used to significantly dilute existing shareholders' stakes without them having a say in increasing the overall share issuance capacity.

Share Consolidation: Mechanics and Immediate Effects

Share consolidation is a process where a company reduces its number of outstanding shares by combining them. For example, a company might consolidate its shares at a ratio of 10-for-1, meaning every ten existing shares are converted into one new share.

• Primary Effect: The most immediate and obvious effect is a reduction in the total number of issued shares.
• Potential for Fractional Shares: Consolidations can result in shareholders being entitled to fractions of a new share. The Companies Act provides procedures for dealing with such fractional shares (e.g., cash-out).
• Typical Motivations: Companies undertake share consolidations for various reasons, such as:
  • Increasing the trading price per share (if it has fallen very low).
  • Meeting minimum share price requirements for stock exchange listings.
  • Simplifying a complex shareholder register by reducing the number of small shareholdings (often through the cash-out of resulting fractional shares).
  • Restructuring capital.

The Previous Legal Landscape: Authorized Shares Remained Unchanged by Default

Prior to amendments to the Companies Act, the legal situation regarding authorized shares during a share consolidation was different:

• When a company consolidated its shares, the number of issued shares decreased as a direct result of the consolidation ratio.
• However, the total number of authorized shares stipulated in the company's articles of incorporation did not automatically decrease. It remained at its pre-consolidation level unless the company took separate action to change it.
• If a company wished to reduce its authorized share capital (for instance, to maintain a specific ratio relative to the new, lower number of issued shares, or for other corporate reasons), it had to undertake a separate amendment to its articles of incorporation. This required a distinct special resolution of its shareholders specifically for the purpose of reducing the authorized share capital.
• Consequently, there was no automatic legal requirement for a public company to reduce its authorized shares in conjunction with a share consolidation. This meant that immediately after a consolidation, the ratio of authorized shares to issued shares could easily exceed the 4:1 limit if the authorized shares were not proactively reduced. The 4x rule was not self-enforcing in this scenario.

The Amended Companies Act: Integrating the 4x Rule with Share Consolidation

Recognizing that the policy objectives of the 4x rule are equally relevant when the number of issued shares is significantly reduced, the Companies Act was amended to directly address this situation.

Rationale for the Change:
If a share consolidation drastically reduces the number of issued shares while the authorized share capital remains high, the board of directors would suddenly possess a much larger relative capacity to issue new shares without needing further shareholder approval to increase the authorized limit. This could undermine the shareholder protection against unchecked dilution that the 4x rule aims to provide. Therefore, the law was changed to ensure the 4x rule is actively considered and applied during the share consolidation process itself.

New Mandatory Content for the Share Consolidation Resolution (Companies Act, Article 180, Paragraph 2, Item 4):
The shareholders' meeting resolution approving a share consolidation (which must be a special resolution under Article 309, Paragraph 2, Item 4) must now include not only the traditional details (ratio of consolidation, effective date, etc.) but also a new, critical item:

• The total number of authorized shares that the company will have, effective on the day the share consolidation takes effect.

Application of the 4x Rule for Public Companies Post-Consolidation (Companies Act, Article 180, Paragraph 3):
For a public company undertaking a share consolidation, the law now explicitly states that:

• The total number of authorized shares, as specified in the shareholders' resolution approving the consolidation (and therefore effective on the consolidation date), must not exceed four times the total number of issued shares that will result after the consolidation takes effect.

This means that when shareholders vote on a share consolidation, they are simultaneously setting a new, compliant ceiling for the company's authorized share capital.

Deemed Amendment to the Articles of Incorporation (Companies Act, Article 182, Paragraph 2):
The total number of authorized shares is a matter required to be stated in a company's articles of incorporation. Since the shareholder resolution for share consolidation now directly determines this new authorized number, the Companies Act provides a streamlining mechanism:

• The articles of incorporation are deemed to have been amended to reflect this new total number of authorized shares on the effective date of the share consolidation.
• This means a separate special resolution of shareholders solely for the purpose of amending the AoI to change the authorized share capital figure is not required if this matter is properly addressed and resolved as part of the share consolidation resolution itself, in compliance with Article 180, Paragraphs 2 and 3.

Commercial Registration (登記 - Tōki) Following a Share Consolidation

After a share consolidation takes effect, the company must apply to the Legal Affairs Bureau to register the changes, typically within two weeks.

A. Key Registrable Matters:
The registration will primarily reflect:

1. The change in the total number of issued shares (and details by class, if applicable) resulting from the consolidation.
2. The effective date of the consolidation.
3. Crucially, if the total number of authorized shares changed as a consequence of the deemed amendment to the articles of incorporation (i.e., because the consolidation resolution specified a new authorized share number that complies with the 4x rule), this new total number of authorized shares must also be registered concurrently.

B. Registrar's Verification for Public Companies:
When processing the registration for a public company, the registrar at the Legal Affairs Bureau will verify that the newly registered total number of authorized shares does not exceed four times the newly registered (post-consolidation) total number of issued shares.

C. Essential Attached Documents for Registration:
The primary documents required to support the registration application are:

1. Minutes of the General Shareholders' Meeting: This is the central document. It must evidence the special resolution that approved:
   • The share consolidation itself (including the consolidation ratio and effective date).
   • The new total number of authorized shares for the company, effective post-consolidation, which must be compliant with the 4x rule.
     The PDF source (Q18) notes that these minutes serve as the basis for registering both the effect of the share consolidation on issued shares and any change to the total authorized shares.
2. For Companies Issuing Physical Share Certificates (株券発行会社 - kabuken hakkō kaisha):
   • Documents proving that the legally required public notice (株券提供公告 - kabuken teikyō kōkoku) was made to shareholders, instructing them to submit their existing share certificates to the company by a certain deadline before the consolidation takes effect.
   • Alternatively, if the company does not issue physical share certificates for any or all of its shares (e.g., if it's a company whose shares are managed through the book-entry transfer system and has abolished physical certificates), a document from the company certifying this fact may be required instead of proof of the public notice for certificate submission.

D. Registration License Tax (登録免許税 - Tōroku Menkyo Zei):
The standard registration license tax for registering a share consolidation is ¥30,000. According to the information in Q18 of the source material, this single fee typically covers the bundle of changes registered as a result of the share consolidation resolution, including the deemed amendment to the authorized share capital when it is determined as part of that same resolution.

Practical Implications for Public Companies Undertaking Share Consolidation

This integration of the 4x rule into the share consolidation process has important practical consequences for public companies:

• Mandatory Calculation and Determination: When planning a share consolidation, companies must now also proactively calculate and determine a new total authorized share capital figure that will comply with the 4x rule relative to the reduced number of issued shares post-consolidation.
• Inclusion in Shareholder Resolution: The shareholders' meeting resolution approving the share consolidation must explicitly state this new total number of authorized shares.
• Streamlined AoI Amendment: The "deemed amendment" provision simplifies the process by avoiding the need for a separate AoI amendment resolution just for the authorized shares, provided it's correctly handled within the consolidation resolution.
• Proactive Compliance: This ensures that the 4x rule is maintained proactively at the point of consolidation, rather than leaving a potential regulatory breach that would require a subsequent, separate AoI amendment to fix.

Conclusion

The Japanese Companies Act has evolved to ensure that the "4x authorized shares rule"—a key shareholder protection measure in public companies—is actively applied even when the number of issued shares decreases due to a share consolidation. By requiring the shareholders' resolution that approves the consolidation to also set a new, compliant ceiling for the total authorized share capital, the law ensures that a reduction in issued shares does not inadvertently grant the board of directors excessive and unchecked authority to issue new shares in the future. This "deemed amendment" to the articles of incorporation simplifies the procedural aspects while upholding the core principle of limiting potential dilution without appropriate shareholder consent for increases in overall share issuance capacity. Public companies planning share consolidations must now integrate this consideration into their approval and registration processes.