Valuing Shares in Japanese Non-Listed Companies: What Approaches (Net Asset, Income, Market) Are Used in Disputes and How Do Courts Decide?

Japanese Attorney at Law - Bengoshi L.L.

28 May 2025 • 10 min read

Determining the fair value of shares in non-listed companies is a frequent and often contentious issue in Japanese corporate law. Unlike their publicly traded counterparts, these shares lack a readily ascertainable market price, necessitating the use of specific valuation methodologies when disputes arise. Such situations are common, for example, when a court must determine the price for restricted shares in transfer approval disagreements, in dissenting shareholder appraisal rights cases stemming from mergers or other significant corporate actions, or when assessing whether a new share issuance was made at an "advantageously low" price.

This article explores the primary valuation approaches—Net Asset, Income, and Market—employed in Japan for non-listed company shares, discusses their respective strengths and weaknesses, and examines how Japanese courts navigate these complex methodologies to arrive at a "fair price" in legal disputes.

Why is Valuing Non-Listed Shares a Challenge?

The core challenge in valuing shares of non-listed Japanese companies stems from several inherent factors:

Absence of a Continuous Market: Without regular trading on a public exchange, there's no objective, transaction-based market price to serve as a primary reference point.
Information Asymmetry: Information about the company's performance, prospects, and financial details may not be as readily available or as thoroughly scrutinized as it is for listed entities. Insiders, such as management or controlling shareholders, often possess significantly more information than minority shareholders or external parties involved in a valuation dispute.
Subjectivity in Projections: Many valuation methods, particularly income-based approaches, rely heavily on forecasts of future earnings, cash flows, and growth rates. For private companies, these projections can be more speculative and subject to greater uncertainty than for established public companies with longer track records and analyst coverage.
Lack of Liquidity: Shares in non-listed companies are generally illiquid. There isn't an easy mechanism for shareholders to sell their shares at a known price, which inherently affects their value compared to freely tradable shares.

These challenges mean that share valuation in this context is less about observing a price and more about constructing a reasoned estimate of economic worth based on available information and accepted financial theory.

Common Valuation Approaches in Japan for Non-Listed Shares

Japanese courts and valuation practitioners typically consider three main categories of valuation approaches. Ideally, a comprehensive valuation should capture the entirety of a shareholder's rights, which include both rights to future cash flows (like dividends and liquidation proceeds) and rights related to control or influence over the company. However, because control rights are notoriously difficult to monetize directly, valuation methodologies often focus primarily on assessing the present value of expected future cash flows or the underlying asset values.

A. The Net Asset Approach (純資産方式 - Junshisan Hōshiki)

This approach, also known as the asset-based approach, seeks to determine the value of the company based on the assets it holds, net of its liabilities.

Core Concept: The company's shares are valued by reference to the net worth as reflected (or adjusted) on its balance sheet.
Common Methods:
1. Book Value Net Asset Method (簿価純資産法 - Boka Junshisan Hō): This is the simplest method, calculating net asset value using the figures directly reported on the company's balance sheet. Its primary drawback is that book values (often based on historical acquisition costs less depreciation) may bear little resemblance to the current fair market values of the assets or the company's overall economic worth, especially for long-held assets or intangibles not fully reflected on the balance sheet.
2. Adjusted (Fair Market Value) Net Asset Method (時価純資産法 - Jika Junshisan Hō): This method attempts to address the shortcomings of the book value approach by adjusting the company's assets (and sometimes liabilities) to their estimated current fair market values. This is generally considered more relevant than the pure book value method. Within this, two sub-approaches are common:
  - Liquidation Value Method (清算価値法 - Seisan Kachi Hō): This assesses the net amount that would be realized if the company were liquidated—its assets sold off (often at distressed prices) and liabilities paid. This is most relevant when the company is not a going concern or when liquidation is a probable outcome.
  - Replacement Cost Method (再調達価値法 - Saichōtatsu Kachi Hō): This estimates the cost of replacing the company's existing assets with similar assets in their current condition (not necessarily brand new).
Pros and Cons: The net asset approach can be relatively straightforward if asset values are readily ascertainable (e.g., for companies with significant tangible assets like real estate or marketable securities). However, for most operating businesses, particularly those with significant intangible value (goodwill, intellectual property, skilled workforce), this method fundamentally fails to capture their future earnings capacity and is thus generally considered unsuitable as a primary valuation technique for a going concern. It tends to provide a liquidation-oriented perspective.

B. The Income Approach (収益方式 - Shūeki Hōshiki)

This approach focuses on the company's ability to generate future economic benefits for its shareholders. It is theoretically the most appropriate method for valuing a going concern.

Core Concept: The value of a share is the present value of the future income or cash flows it is expected to generate for the holder.
Common Methods:
1. Dividend Discount Model (DDM) (配当還元法 - Haitō Kangen Hō): This method values shares based on the present value of the dividends the shareholder is expected to receive in the future.
  - Actual Dividend Method (実際配当還元法 - Jissai Haitō Kangen Hō): This variant often uses historical actual dividend payments as a basis for projecting future dividends. While sometimes employed by courts, especially for valuing minority shareholdings (on the premise that minority shareholders primarily realize value through dividends), it can be problematic if the company's past dividend policy has been erratic, non-existent, or artificially suppressed by controlling shareholders (e.g., to reinvest all earnings or for tax planning).
  - Normalized/Standard Dividend Method: Recognizing the limitations of the actual dividend method, some Japanese courts and valuators attempt to normalize dividend expectations, for example, by considering industry-standard payout ratios or the company's underlying capacity to pay dividends, rather than just its historical payments. One example is the Osaka District Court decision of July 16, 2015 (Kinyu Shoji Hanrei No. 1478, p. 26), where the court, noting the company's low payout ratio, used a standard industry payout ratio to forecast future dividends.
2. Earnings Capitalization / Discounted Cash Flow (DCF) Methods (収益還元法 / DCF法): These methods value the entire company (from which per-share value is derived) based on the present value of its expected future earnings or, more commonly, its free cash flows (FCF).
  - Free Cash Flow (FCF): FCF is typically defined as the cash flow generated by the company's operations, less the capital expenditures necessary to maintain its productive capacity and growth. It represents the cash flow available to all capital providers (both debt and equity).
  - DCF Process: This involves forecasting the company's FCF over a discrete projection period (e.g., 5-10 years), estimating a "terminal value" representing the value of all cash flows beyond that period, and then discounting both the projected FCFs and the terminal value back to the present using an appropriate risk-adjusted discount rate. The most common discount rate used in a corporate DCF is the Weighted Average Cost of Capital (WACC).
Pros and Cons: The income approach is theoretically the most sound for valuing going concerns because it directly assesses future value-generating capacity. However, its accuracy is heavily dependent on the quality and reasonableness of numerous assumptions: future financial projections (revenues, costs, capital expenditures), growth rates (both short-term and perpetual), and the discount rate (which itself involves estimating the cost of equity, cost of debt, and risk premiums). These assumptions are often subjective and can be major points of contention in valuation disputes, as even small changes can significantly impact the resulting value.

C. The Market Approach (比準方式 - Hijun Hōshiki)

This approach values the subject company's shares by reference to market data from comparable public companies or transactions involving comparable companies.

Core Concept: The market provides an indication of value for similar assets or businesses.
Common Methods:
1. Comparable Company Analysis (CCA) (類似会社比準法 - Ruiji Kaisha Hijun Hō): This involves identifying a set of publicly traded companies that are reasonably comparable to the subject company in terms of industry, size, operating model, risk profile, and growth prospects. Various financial multiples (e.g., Price-to-Earnings (P/E), Enterprise Value-to-EBITDA (EV/EBITDA), Price-to-Sales (P/S)) are calculated for these comparable companies from their market data and financial statements. These multiples are then applied to the corresponding financial metrics of the subject company to derive an estimate of its value.
2. Comparable Transaction Analysis (CTA) (取引事例法 - Torihiki Jirei Hō): This method examines the prices paid in recent, arm's-length M&A transactions involving companies comparable to the subject company. It can also look at past transactions in the subject company's own shares, though for non-listed companies, such internal transaction data is often scarce, outdated, or not conducted at arm's length.
Pros and Cons: The market approach directly incorporates current market sentiment and pricing for similar businesses or transactions. However, its reliability hinges critically on the degree of comparability. Finding truly comparable public companies or transactions for a unique, non-listed entity can be exceptionally difficult. Significant adjustments are often needed to account for differences in size, growth, risk, and profitability, and these adjustments can themselves be subjective.

When faced with the task of determining a "fair price" for non-listed shares in legal disputes (such as appraisal rights under Article 117 or setting the price for restricted shares under Article 144, paragraph 3), Japanese courts are granted considerable discretion. The Companies Act typically refers to a "fair price" but does not prescribe a specific valuation methodology.

Key trends and principles observed in judicial practice include:

No Single Mandated Method: Courts are not bound to use any one valuation method. They consider the specific facts of the case, the nature of the company, its industry, its financial condition, and future prospects.
Combination of Methods: It is very common for Japanese courts to employ a combination of different valuation approaches or methods within an approach. For example, a court might use both a DCF analysis and a net asset valuation, perhaps assigning different weights to each. This eclectic approach is often justified as a way to mitigate the inherent limitations and potential biases of any single method and to arrive at a more balanced and robust valuation. The Fukuoka High Court decision of May 15, 2009 (Kinyu Shoji Hanrei No. 1320, p. 20) explicitly stated that since each method has pros and cons, using a single method can amplify its shortcomings, making a combination of suitable methods with appropriate weighting preferable.
Primacy of Income Approach for Going Concerns: For companies that are clearly viable going concerns with established earnings or cash flow generation, courts and influential legal scholarship in Japan tend to give greater weight to income-based methods (like DCF or earnings capitalization). This reflects the financial principle that the value of a business primarily derives from its ability to generate future economic benefits.
Net Asset Value as a Potential Floor: The liquidation value, derived from the net asset approach, is often considered a theoretical "floor" price. Influential scholarly views suggest that if a going-concern valuation (e.g., DCF) results in a value below the company's orderly liquidation value, then the liquidation value should prevail. The rationale is that, in such a scenario, liquidating the company would actually maximize shareholder value, and a court-determined price should reflect this economic reality.
Considerations for Minority Share Valuations: When valuing minority stakes, courts have sometimes given significant weight to dividend discount models, especially using actual past dividends. The rationale has been that minority shareholders typically realize their returns through dividends, as they lack control over reinvestment or liquidation decisions. However, this approach is problematic if the company has a history of artificially suppressing dividends (e.g., due to control by a majority shareholder who prefers reinvestment or other forms of benefit extraction). Recognizing this, some more sophisticated court decisions and analyses have attempted to use normalized dividend payout ratios or methods like the DCF or Gordon Growth Model that implicitly account for the value of retained earnings being reinvested for future growth (e.g., Hiroshima District Court, April 22, 2009, Kinyu Shoji Hanrei No. 1320, p. 49). There is a strong scholarly argument that valuations should always reflect a minority shareholder's pro-rata claim on all company value, including retained earnings, to prevent unfair expropriation by controlling shareholders if the minority is forced to sell based on an artificially low dividend-based valuation.
Use of Court-Appointed Experts: In non-contentious proceedings like appraisal rights cases, courts have the authority to appoint their own independent valuation experts. Their reports often carry significant weight, sometimes more so than expert reports commissioned by the disputing parties.

Two types of adjustments often discussed in the context of non-listed share valuation are discounts for lack of control (minority discount) and discounts for lack of marketability (illiquidity discount).

Minority Discount: Applying a "minority discount" simply because the shares represent a non-controlling interest can be controversial. If the base valuation method (e.g., a DCF of the entire company's cash flows, then divided by the number of shares to get a per-share value) already provides a pro-rata value of the going concern, this value inherently reflects a minority financial interest. Applying an additional discount for lack of control might be inappropriate unless the initial valuation was explicitly a "control value" (which might include a control premium that a minority share would not command). The PDF commentary argues against such minority discounts when the base valuation is already on a pro-rata, non-control basis.
Illiquidity Discount (非流動性ディスカウント - Hi-ryūdōsei Disukaunto): A discount for lack of marketability is generally considered more justifiable for shares in non-listed companies. Because these shares cannot be easily and quickly converted to cash at a known price, they are inherently less attractive and thus less valuable than otherwise identical shares that are publicly traded and liquid. This economic reality can be reflected in valuations by:
- Increasing the discount rate used in income-based models (as investors would demand a higher rate of return to compensate for the illiquidity risk).
- Applying a direct percentage discount to the value derived from other methods after an initial valuation is established.

Conclusion

Valuing shares in Japanese non-listed companies is a complex, fact-intensive exercise that lacks the direct benchmarks available for publicly traded securities. Japanese courts and practitioners employ a flexible, multi-faceted approach, drawing from net asset, income, and market-based methodologies. While there's a theoretical preference for income-based approaches for viable going concerns, courts often combine methods to arrive at a "fair price" that considers all relevant circumstances. The determination of future prospects, appropriate discount rates, and the selection of comparable data remain challenging and often contested aspects.

For businesses, investors, and legal professionals involved in disputes requiring the valuation of non-listed Japanese shares, it is crucial to understand these various approaches, their inherent assumptions and limitations, and the nuanced manner in which Japanese courts weigh them. Given the significant financial implications and the technical expertise required, obtaining independent, expert financial advice alongside thorough legal counsel is indispensable in navigating these valuation challenges.