Note 3-53

53 Under the current Commercial Code of Japan, in the event of a corporate merger, the shareholders of the company that will cease to exist are compensated with shares of the company that will remain in business. However, this might result in drop in the equity stake of the shareholders of the remaining company (dilution of the distributed profit), which will suffer loss. This problem has caused a widespread discussion as to whether it would be possible to offer compensation other than shares of the remaining company (in particular, cash). Also, the common practice dictates that, in the event that a company turns another company into a subsidiary through stock swaps, the shareholders of company that is to become a subsidiary should be compensated with shares of the company that will become the parent company, but the Commercial Code restricts the definition of "company" to "domestic enterprise," and the above-mentioned practice is not recognized for foreign firms. "Easing of rules on compensation for mergers and other transactions" is the policy for solving such problems that will enable "cash-out mergers" (offering of cash as compensation to shareholders of the company that will cease to exist) and "triangular mergers" (offering of shares of the parent company of the company that will remain). These are common practice in corporate mergers in the US and other countries, and their adoption by Japan is expected to facilitate the implementation of international corporate mergers.