WO2004063959A1 - Shareholder protection plan - Google Patents

Abstract

The present disclosure provides a device and method for protecting existing shareholders from being disadvantaged by a corporate raider without treating shareholders in a discriminatory manner. The device of the present invention includes a stockholders option plan, a right to subscribe to options on a new stock, and options on new stock.

Description

SHAREHOLDER PROTECTION PLAN

[0001 ] This application is a continuation in part of our prior provisional applications

Serial Nos. 60/331,980 filed November 21, 2001; 60/337,110 filed December 6, 2001; and 60/343,695 filed December 27, 2001, each of which is hereby incorporated by reference. Background of Invention

[0002] The present invention relates to a device and method for protecting the rights of shareholders (or stockholders), especially the rights of minority shareholders. One embodiment of the present invention provides a poison pill for use by companies incorporated under the laws of Japan. Summary of Invention

[0003] I. Legal structure of the poison pill in the U.S. and Japan

[0004] Over the past thirty years in the U.S., hostile takeovers have experienced times of boom and bust, depending upon general economic conditions, the robustness of the stock markets and the willingness of potential acquirers to overcome legal barriers and defensive techniques. The poison pill, perhaps the most effective defense technique, was initially developed in the mid-1980's as a device to deter junk-bond, bust-up tender offers. See, Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. of Penn. Law Review 1, at 11. (Mr. Lipton is generally thought to have invented the poison pill.) In that kind of transaction the acquirer, in the first step, buys a controlling interest in the target, using a large amount of high interest rate loans, with the intent of merging the target into its company. The assets of the target are then sold to repay the junk bonds and, in a second step, the remaining shareholders are paid less for their shares than those who tendered to the raider in the first step. This process is considered to be an abuse of the rights of the remaining minority shareholders because they are forced to accept a lower price for their shares compared to the price paid to the shareholders who tendered in the first step. The so-called "Flip-over" pill (described below) was developed to address this problem.

[0005] It subsequently became apparent that some raiders were willing to acquire a partial, but controlling, interest in the target company without immediately merging the two companies. Once in control of the target company, the raider has a great deal of flexibility to deal with its assets in a self-serving way (called self-dealing). The raider is also free to acquire further blocks of shares and can compel any remaining shareholders to sell him their shares, provided that the raider has accumulated over 90% of the outstanding shares. Thereafter, the acquirer can merge the companies without a vote of the shareholders (known as a clean-up or squeeze-out merger). In some situations, the raider quietly acquires up to 5% of the shares of the target then quickly acquires another 10-15% more in the period between the date on which it is required by U.S. securities law to report the acquisition of more than 5% and the date on which that threshold is actually crossed (known as a creeping acquisition). The so-called "Flip-in" pill was designed to address these problems.

[0006] Several developments have occurred that together have dramatically changed the risk to a Japanese corporation that it might be the subject of a hostile takeover attempt. For instance, currently, the shares of many Japanese corporations trade at or below their book values. Additionally, cross-shareholdings among Japanese corporations are steadily declining. (If existing shareholders are unwilling to sell their shares, a situation that generally occurs when there are significant cross-shareholdings, the threat of a hostile takeover is minimal.) Moreover, because there has been little need to worry about defense techniques until recently, Japanese firms have not considered defensive techniques. As a result, many Japanese companies are, in effect, more vulnerable to hostile takeovers than American and European companies are.

[0007] Furthermore, Japanese firms are vulnerable to hostile takeovers in ways that were not thought relevant before. Traditionally, Japanese management has relied on structural impediments to protect the company from corporate raiders. (For a detailed discussion of "traditional" Japanese corporate defense techniques, see Kelly C. Crabb, The Realty of Extralegal Barriers to Mergers and Acquisitions in Japan, Vol. 21, No. 1 The International Lawyer 97 (1987)). The Japanese Commercial Code's super- majority shareholder voting requirements for mergers and the sale of a significant portion of the company's assets, the duties of the Board of Directors to act for the benefit of the corporation which is taken to mean the best interests of not only the shareholders but also of other stakeholders (such as creditors, suppliers and employees) and the cross- shareholdings that turned the other stakeholders into stockholders have performed this function.

[0008] Current Japanese law does not prevent a creeping acquisition. (A person who acquires more than 5% of the shares of a listed Japanese company must report its acquisition within 5 days to the local finance bureau of the Ministry of Finance. Following that report, the acquirer must report that fact to the relevant stock exchange and the Securities Dealers Association without delay.) Nor does current Japanese law prevent a group of existing shareholders from assembling a sufficient block of to affect the ownership of the firm. (Indeed, such a grouping apparently happened when Vodafone assembled shares in Japan Telecom for its recent takeover.) Additionally, under current Japanese law, hostile persons are free to purchase a controlling interest in a firm, although it may be difficult to say exactly what constitutes a "controlling interest" in a Japanese firm.

[0009] Similarly, current Japanese law permits a third party to make an inadequately priced or structurally coercive two-tiered tender offers. (In contrast to Japanese law, some European countries have "mandatory bid" rules that force the bidder who seeks to acquire a certain amount of shares (e.g., 30% or more in the U.K.) to tender for all of the remaining shares on the same terms. This has the effect of inhibiting coercive two-tiered offers. Japan's tender offer rules permit coercive two-tiered offers. Any person who seeks to acquire more than 5% of the common stock of a company is required to use the Tender Offer Bid (hereinafter also "TOB") process but is exempted from doing so if he would acquire those shares from less than 10 persons. This exemption does not apply in the event that a "blocking interest" would be acquired (e.g., more than l/3^rd of the outstanding shares). Furthermore, the Tender Offer Bid rules do not apply once the acquirer has purchased 50% or more of the company's common stock.) A raider who controls 66.7% of the shares may dominate the corporate decision-making process, subject only to the appraisal rights of dissenting minority shareholders. A raider who controls 33.4% of the shares may also effectively block board initiatives. The poison pill can effectively address these concerns.

[0010] hi essence, the poison pill is an option to purchase the shares of the company at a deep discount based on the expected long-term value of those shares (e.g., in 5 to 10 years). The modern poison pill, or shareholder rights plan as it is technically known, is generally thought to provide a number of other benefits. For instance, a shareholder rights plan may reduce the risk of coercive two-tiered, front-end loaded (a "two-tiered" offer is a tender offer with two different prices: a higher price for shares tendered immediately (called the "front end") and a lower price for shares purchased (whether for cash or securities) in a subsequent merger (called the "back end"). The "junk-bond, bust- up tender offer" is but one example of a two-tiered offer. A "partial" offer is a tender offer for a "controlling interest" in a company, but less than all of the issued and outstanding shares. Such partial offers which may not provide all shareholders with fair value. A shareholder rights plan may also deter market accumulators who through open market or private purchases may achieve a position of substantial influence or control, without paying to selling or remaining shareholders a fair control premium. Such a plan may also deter market accumulators who are simply interested in putting the company in play (e.g., to put a company "in play" means to draw attention to the fact that it may be possible or desirable for others to acquire control of that company.) and thereby position themselves to greenmail the target company. In addition, a shareholders rights plan may preserve the bargaining power and flexibility so that the Board of Directors can deal with third-party acquirers and thus maximize value for all shareholders. It is important to note that the shareholders rights plan is not designed to deter a proxy contest (for control of the corporate decision-making process by controlling the directors) or a fair offer for the entire company. ] Importantly, circumstances similar to those circumstances that led to the development of the poison pill in the U.S. now exist in Japan. However, until recently, it was generally thought that Japanese law did not permit the creation of such devices. On November 6, 2001, the Japanese Parliament (the "Diet") passed certain amendments to the Commercial Code (the "Amendments") that made stock options widely available to a number of parties, including shareholders, beginning April 1, 2002. We believe that these new provisions can be used to create a device that is somewhat different from, but nevertheless the functional equivalent of, a U.S. style poison pill. Furthermore, in what follows, we will compare the major provisions of a standard U.S. shareholder rights plan typically employed by thousands of U.S. companies today (the Rights Plan) with the relevant Amendments to demonstrate why it should be possible to create a Japanese shareholder option plan (the Japanese Option Plan). Our purpose here is to create a conceptual framework for the implementation of a poison pill in Japan. Each company must, based on its individual circumstances and with the advice of its legal and financial advisers, decide which of the following design elements best suit its needs. As a technical matter, the Amendments have created a new contractual device known as Shinkabu Yoyaku Ken no Hikiuke Ken (subscription for an option to purchase new shares) (hereinafter referred to as Hikiuke Ken) and a new "security" known as "Shinkabu Yoyaku Ken" (option to purchase new shares). BRIEF DESCRIPTION OF THE FIGURES:

[0012] Figure 1 illustrates a process for implementing a shareholders protection plan according to the present invention;

[0013] Figure 2 illustrates a process for putting a shareholders protection plan according to the present invention into effect; [0014] Figure 3 illustrates a shareholders protection plan according to the present invention might be used to protect shareholders from a predatory hostile takeover bid;

[0015] Figure 4 illustrates the relationship among several alternative embodiments of the present invention; and

[0016] Figure 5 illustrates a computer network implemented embodiment of the present invention. DETAILED DESCRIPTION

[0017] In an alternative embodiments of the present invention, the invention is structured to comply with the relevant laws in the European Union, Germany, Italy, South Korea, France, Great Britain, or a combination of these jurisdictions.

[0018] Structure of the Standard U.S. Poison Pill

[0019] Shareholder Approval

[0020] Over the years, many variations of the poison pills have been developed.

Poison pills can generally be classified as plans that affect voting rights and those that affect economic considerations. They can further be classified as (a) calls, which allow the holder to acquire common stock at a deep discount, or (b) puts, which allow the holder to exchange common stock for a specified amount of cash, debt securities, preferred stock or some combination of the above. Currently, the "standard" poison pill in the U.S. is structured as an economic device with call features.

[0021] As a practical matter today, most Rights Plans are created by the Board of

Directors of the company without a vote of the shareholders. This is possible because they are usually effectuated by the declaration of a dividend in the form of an option to purchase preferred or common stock that has been reserved for this purpose ("Rights"). (In a few cases, the pill has not be issued as a dividend but as a security that was issued, listed and traded separately from the publicly held common stock. See Arthur Fleischer, Jr. and Alexander R. Sussman, Takeover Defense, Sixth Edition, § 504[C] at 5-535-54.) In the U.S., shareholder approval is typically not needed for the declaration of dividends. The details of the Rights Plan are contained in a contract executed by the company and a bank or trust company (on behalf of the shareholders) and in the company's by-laws. It is also fair to note that many institutional investors are opposed to poison pills because they feel that they do not need management to protect them from the potential negative effects of a hostile bid. Accordingly, in the U.S., a shareholder approval vote is generally not sought before a Rights Plan is adopted.

[0022] Unequal Treatment

[0023] One of the key features of the standard Rights Plan that makes it so powerful is that it treats the raider differently from the other shareholders. (Poison pills are effective because they provide for discriminatory treatment between non-board - approved acquirers and other shareholders. Nonetheless, the pill in the Household case (which was the first poison pill case considered by the Delaware Supreme Court) did not contain this discriminatory feature. As a result, by the terms of a typical U.S. Rights Plan, a raider is not permitted to exercise the options that are, in effect, embedded in the common stock when the plan is created. Initially, this discriminatory feature of the pill was challenged in the courts. A Delaware court approved a discriminatory pill by holding that the exclusion of the non-board-approved acquirers of the triggering level of the company's stock from the benefits of the pill amounted to a restriction upon the voting rights of the stockholder, not variations in the voting powers of the stock per se. (Baker v. Providence & Worcester Co., 378 A. 2d 121, 123 (Del. 1977))

[0024] Some courts in other states held that discriminatory pills were invalid because they violated the "principle of shareholder equality" with respect to shareholders of the same class of stock. (Delaware General Corporation Law does not require that all shares of the same class to be treated alike. However, the corporate codes of most states provide that, although shares can be issued in different classes or series having different preferences, privileges and terms, all shares within the same class must have the same terms. See, Fleischer and Sussman, supra, §5.06[B] at 114.) Nevertheless, the legislatures of many states specifically amended their corporate codes to permit discriminatory Flip-in and Flip-over pills. (See Fleischer and Sussman, supra, §5.06 [B] at 115-116.)

[0025] Issuance of Rights

[0026] In the United States, the Board of Directors, after consulting with its lawyers and financial advisers, determines that the issuance of Rights is in the best interests of the company and its shareholders. As noted above, this is accomplished through the declaration of a dividend. Each Right entitles the holder to purchase a certain amount of preferred shares that are convertible into common stock at a price at which the common ' stock is likely to be trading at the expiration of the Plan, in five to ten years (e.g., typically two to five times the current market price of the company's common stock). For example, if the common stock were trading at $20 at the time the Rights Plan is adopted, the exercise price might be set at $100. Upon the occurrence of a Flip-in or Flip-over event (described below), the Rights are triggered and the holder becomes entitled to purchase the convertible preferred shares and eventually the common stock of the target company (i.e., "Flip-in") or the acquiring person (i.e., "Flip-over") at a 50% discount. The discount occurs because the Plan in this example provides by its terms that, at the time of exercise, the holder is entitled to purchase common stock worth $200 for the payment of $100. For example, assuming that the common stock were trading at $25 per share prior to the Triggering Event (defined below), each holder of a Right may buy eight shares ($200 ÷ $25 = 8) at a purchase price of $12.50 each ($100 ÷ 8 = $12.50).

[0027] Exercise of the Rights

[0028] At the time that the Rights Plan is adopted, the Rights are not exercisable.

Rather, under the typical Rights Plan, the Rights are only exercisable after a Triggering Event occurs. Additionally, the Rights do not exist or trade on the stock exchange separately from the common stock, i other words, initially the common stock certificates represent both the common stock and the Rights.

[0029] the typical U.S. Rights Plan, the Rights detach from the common stock, and are distributed and trade separately (e.g., a Rights Certificate is issued), and become exercisable following a Triggering Event. Desirably, any one of the following events would qualify as a Triggering Event: (i) 10 business days following a public announcement that a person or group of affiliated persons (called an Acquiring Person) has acquired a certain percentage (usually 10%, 15% or 20%) or more of the outstanding shares of common stock (the Stock Acquisition Date) or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group acquiring a certain percentage (typically between 10% and 30% or more) of the company's common stock. [0030] The date on which the Rights Certificates are distributed is referred to as the

Distribution Date.

[0031] In accordance with the provisions of a typical U.S. Rights Plan, the Board of

Directors may postpone the date on which the Rights become exercisable — i.e., the Distribution Date — without amending the plan. This ability to postpone the Distribution Date gives the board sufficient time to negotiate with the raider or find alternative proposals for the shareholders.

[0032] Flip-in Events

[0033] When an Acquiring Person triggers the pill as provided above, the typical U.S.

Plan provides that, upon exercise of the Rights, each holder (other than the Acquiring Person) will be entitled to purchase common stock of the company with a value at the time of such event (called a Flip-in Event") equal to two times the exercise price of the Rights. As the typical Rights Plan prevents the Acquiring Person from exercising any Rights following the occurrence of a Flip-in Event, the Acquiring Person's equity interest in the company is substantially diluted.

[0034] Flip-over Events

[0035] A Flip-over Event is deemed to have occurred when one of the following occurs after the Distribution Date:

[0036] (i) the company engages in a merger or other business combination transaction in which the target company is not the surviving corporation;

[0037] (ii) the target company engages in a merger or other business combination transaction in which the company is the surviving corporation and the common stock of the target company is changed or exchanged; or [0038] (iii) fifty percent (50%) or more of the target company's assets, cash flow, or earning power is sold or transferred.

[0039] In the typical U.S. Rights Plan, the occurrence of a Flip-over Event entitles the holders of the Rights (other than the Acquiring Person) to purchase at a 50% discount (calculated as provided with Flip-in Events) the most senior voting securities of the ultimate parent corporation resulting from the transaction. This would typically occur when a shell corporation is formed by the Acquiring Person and the target is merged into the shell corporation or vice versa. Conceptually, this is possible because the Rights Plan is a contractual arrangement with the shareholders that would be in effect at the time of the merger. The Flip-over Right is also incorporated into the by-laws of the target corporation. Anyone attempting to purchase the shares of the target company with a view to merging the company into its own organization would review the Rights Plan and the by-laws and conclude that in order to legally consummate the merger, it must comply with the terms of the Rights Plan, the by-laws and the other contracts to which the target company is legally bound. Accordingly, the raider is deterred unless it is willing to make its own publicly traded shares available to the Rights holders at half price.

[0040] The Flip-over Events are designed to make any second-step transaction economically prohibitive and thereby deter two-tiered or partial offers but there is usually an exception for an offer for all of the outstanding shares of the common stock which the independent directors, after receiving advice from one or more investment bankers, determine to be fair and not inadequate and to otherwise be in the best interests of the target company and its stockholders (called a "Qualified Offer"). There is also an exception for a clean-up merger, following acquisition of more than 90% of the outstanding stock of the company.

[0041] Redemption

[0042] The typical Rights Plan provides that the Board of Directors may redeem the

Rights at any time prior to the point at which the Rights become non-redeemable (e.g., the Distribution Date of the Rights Certificates). In this regard, it must be remembered that the Board of Directors may postpone the Distribution Date as it sees fit.

[0043] hi the typical U.S. Rights Plan, the redemption price is set at a nominal amount, usually $0.1 per Right. The Rights Plan is intended to enable the Board of Directors to respond to unsolicited acquisition proposals in a manner which is in the best interests of the target company and its shareholders. Accordingly, if there is a proposed takeover which the Board deems advantageous, the Board would be in a position to redeem the outstanding Rights at a nominal consideration.

[0044] Amendments

[0045] The typical U.S. Rights Plan provides the Board with significant flexibility to amend the terms of the Plan prior to the Distribution Date. Indeed, the Board is generally free to amend any provision of the Rights Plan other than the key economic terms of the Rights (e.g., the redemption price, the purchase price and the final expiration date). Moreover, following the Distribution Date, the Board is also free to amend the terms of the Rights Plan so long as such amendment does not adversely affect the interests of the holders of the outstanding Rights.

[0046] U.S. Tax Treatment [0047] As the Rights have no value when they are issued, they are not a taxable event for either the company or the shareholders receiving the Rights. Questions as to how they would be taxed if exercised are moot because they are designed economically so that the Distribution Date and issuance of the Rights Certificate will not, as a practical matter, occur.

[0048] Preferred Embodiments of a Japanese Pill

[0049] Shinkabu Yoyaku Ken

[0050] The Amendments to Japanese Commercial Law provides that the Board of

Directors may, without shareholder approval, issue either Hikeuke Ken or Shinkabu Yoyaku Ken at a price to be decided by the Board of Directors. These statutory amendments also provide that the company may issue either instrument without compensation. As is the case with other options (e.g., employee stock option plans), the Board of Directors may establish a plan of the present invention pursuant to which it will issue options to its shareholders (the "Japanese Option Plan"), which may be substantially similar to the U.S. Rights Plan.

[0051 ] In a preferred embodiment of our present invention, options of a Japanese

Option Plan are not distributed as a dividend. The Commercial Code, as amended, provides that a company may distribute dividends in the form of common or preferred stock. However, the Japanese Commercial Code imposes restrictions on the source of funds for the payment of dividends and requires shareholder approval for the payment of a dividend. Furthermore, while the Japanese Commercial Code does not require that contracts are supported by consideration, there is no particular reason why the rights granted under a Japanese Option Plan should be characterized as a dividend payment. [0052] The first U.S. Rights Plan structured the Rights issued as a dividend distribution to ensure that the courts would not invalidate the granted Rights as a "contract" with the shareholders for which no consideration was paid. While it appears today that a U.S. court would not invalidate a Rights Plan because of a failure of consideration, U.S. Rights Plans continue to be structured as a dividend distributions.

[0053] Notwithstanding such considerations, in a preferred embodiment, the Japanese

Option Plan of the present invention is submitted to the shareholders for approval. Among things, shareholder adoption before the emergence of a hostile bidder would minimize the argument that management created the plan to entrench itself to the detriment of the shareholders if it is ultimately challenged in court. (But see the discussion of potential legal challenges below).

[0054] In one preferred embodiment of the present invention, the Rights, e.g., the

Shinkabu Yoyaku Ken, issued is directly convertible into common stock.

[0055] The amended Japanese Commercial Code provides that a company may issue convertible securities and well as preferred shares. Convertible preferred shares can be created by designating the preferred shares as convertible in the by-laws. Japanese law currently limits the number of preferred shares that a company may issue to ^λh rd of the number of common shares issued and outstanding. However, that limit increased to Vi in April 2001.

[0056] Because preferred shares may also be used as a financing device, in one embodiment of the present invention a company could issue a Shinkabu Yoyaku Ken that converts into common stock rather than preferred shares. [0057] In another embodiment of the present invention, the Rights are issued as convertible preferred shares. The use of convertible preferred shares may preserve the company's ability to use authorized, but unissued, common shares for later issuance in connection with a financing. In such an embodiment, if the by-laws of the company do not provide for the issuance of preferred shares, it is preferred that the by-laws are amended prior to the adoption of the Rights Plan. In this embodiment, it is further preferred that the by-laws are amended and that the amendment to the by-laws is approved by a Special Resolution of the shareholders. It is yet further preferred that the

shareholder approval is by a ²h vote.

[0058] In an embodiment of the present invention in which shareholder approval is sought to authorize additional common, or preferred, shares, it is desired that such approval is sought at the next annual shareholders meeting or at a special meeting of the shareholders. It is also desirable that the Board of Directors proposes amendments to the by-laws that include the terms of the Japanese Option Plan. In a further preferred embodiment, the directors submit to the shareholders for approval any other mechanisms that might be useful in deterring bids that the directors consider coercive or unfair to the shareholders.

[0059] Unequal Treatment

[0060] While the Japanese Commercial Code does not expressly provide for shareholder equality, legal scholars believe that shareholder equality is implicitly required. For support for this proposition, legal scholars point to the articles that provide for voting, new share subscriptions, the right to claim distributions of profits and dividends and the right to claim a portion of residual assets upon liquidation of the corporation. These basic rights of a shareholder to vote and to receive the financial fruits of his investment in the company are embedded in every share.

[0061] Accordingly, the discriminatory principle common to U.S. Rights Plans cannot be incorporated in the Japanese Option Plan if it affects the basic rights of holders of shares. Because of the principle of shareholder equality, it is preferred that the poison pill of the present invention is embodied, from inception, in some instrument other than the company's stock.

[0062] Hikiuke Ken (i.e., subscription rights for options) and Shinkabu Yoyaku Ken

(i.e., stock options), are in essence, contracts with each shareholder to whom they are awarded, that set forth the terms on which he is entitled to receive the right obtain share options or purchase shares. The recent Amendments to the Japanese Commercial Code give the Board of Directors the authority to structure the content of the Shinkabu Yoyaku Ken and has very few mandatory provisions. In fact, the only mandatory provision related to Shinkabu Yoyaku Ken is that, if issued to shareholders, they must be issued in an amount that is pro rata to their shareholding at the time of issuance. By contrast, the Commercial Code has specific and numerous mandatory provisions with respect to various classes of stock (i.e., common and preferred).

[0063] Private parties cannot contract out of the mandatory provisions of the

Japanese Commercial Code. But the new provisions on Shinkabu Yoyaku Ken of the present invention do not affect the rights of shareholders in connection with the rights embodied in their shares. If the Diet had intended to affect shareholder rights, they would have amended the sections of the Commercial Code that relate to stock. Instead, the Diet created a completely new concept. It is believed that the principle of freedom of contract should dictate that the company and the persons with whom it contracts are entitled to determine the content of those contracts, even if they happen to be holders of shares. Therefore, to the extent that there is discriminatory treatment by contract, it is external to the shares and not embedded therein, and should be enforced.

[0064] The principal public policy reason behind the shareholder equality rule is the protection of minority shareholders. It should be emphasized that the primary function of the poison pill is the protection of minority shareholders such as individuals and small holders (but not institutional investors) who need the Board to act their agent in a hostile situation because they have neither the ability nor the time to properly evaluate unsolicited buy-out proposals. Indeed, in the U.S., institutional investors generally oppose poison pills because they do have the ability and the time to evaluate all proposals. Upon the occurrence of a take over bid ("TOB"), institutional investors can act quickly but the small investor can be coerced into selling his shares because of the time limitations involved. The problem is acute when a two-tiered offer is made. The poison pill of the present invention addresses this problem.

[0065] New Preferred Shares

[0066] hi a preferred embodiment of the present invention, it is preferred that the bylaws of the company are amended to incorporate a provision setting forth the conditions under which the Shinkabu Yoyaku Ken, or the preferred shares, could be converted into common stock. Each Shinkabu Yoyaku Ken would provide that it is an option on the part of the holder to purchase one share of common stock, hi an alternative embodiment, the by-laws are structured to provide a right to purchase one preferred share, which in turn is convertible into one share of common stock. [0067] Hikiuke Ken

[0068] As noted above, the recent Amendments to the Japanese Commercial Code provide that the Board of Directors may also, without shareholder approval, issue subscription rights for Shinkabu Yoyaku Ken. While some commentators have indicated that the Shinkabu Yoyaku Ken will be treated as a security under Japanese law, there are currently no provisions in the Rules of the Tokyo Stock Exchange that would allow a company to list this instrument. Even though the Board has the equivalent authority to set the terms of both the Shinkabu Yoyaku Ken and the Hikiuke Ken, it is quite clear that the latter can be characterized as a contract that does not rise to the level of a tradable security.

[0069] Perhaps the most important distinction between the U.S. Rights Plan and the

Option Plan of the present invention is that the Rights in the U.S. style poison pill are embedded in the common stock until the Distribution Date. Prior to that time, nothing is separately issued to the Rights holders. As the Shinkabu Yoyaku Ken is in some ways analogous to the Rights Certificate under the U.S. Plan in that the Rights at that point are evidenced by a separately tradable and listed security, the inventors believe that the Hikiuke Ken may be the more appropriate instrument to issue to the shareholders initially.

[0070] Thus, in a highly preferred embodiment of the present invention, the Option

Plan of the present invention would provide that the Hikiuke Ken will be issued in uncertificated form. It is further preferred that the Hikiuke Ken cannot be transferred without the prior written consent of the Board of Directors. In this embodiment, if the Board consents to a transfer, the Board will issue a certificate to the holder. Subsequently, in this embodiment, the Shinkabu Yoyaku Ken is issued to the shareholders to whom the Hikiuke Ken were issued, or their registered transferees, a predetermined number of business days following the occurrence of a Triggering Event. For instance, in a particularly preferred embodiment of the present invention, the Shinkabu Yoyaku Ken are issued 10 business days following the occurrence of a Triggering Event. It is highly preferred that such date may be extended by the Board of Directors, more preferably in their sole discretion.

[0071] Desirably, the common stock of the Japanese company will trade separately from these rights. The terms of the Hikiuke Ken will provide that it is not transferable to third parties without the consent of the Board of Directors ~ a transfer restriction. It is further desired that the Board monitor the activity in the trading of its common stock and attempts to sell the Hikiuke Ken. If the Board identifies a potential raider, it is preferable that the Board shall refuse to consent to the transfer of Hikiuke Ken to the potential raider. In other words, it is preferred that the Board can keep the pill from getting into the hands of a raider.

[0072] In another embodiment of the present invention, the terms of the Hikiuke Ken provide that it is not exercisable by any holder who owns common stock in excess of the amount provided in the Triggering Event. This amounts to unequal treatment but does not violate the principle of shareholder equality because it is imposed as a matter of contract law on the Hikiuke Ken, which is not a constituent part of the company's stock.

[0073] ' In a preferred embodiment of the present invention, one, or more, shareholders, at the time of a Triggering Event are not the same as the owners of the rights — i.e., the owner of a share who received the right may have transferred the share, as he was free to do, but not the right, the transfer of which is restricted. This divergence of interests may lead one to question whether the policy considerations for protection of shareholder interests inherent in the concept of the poison pill are adequately addressed by the Shinkabu Yoyaku Ken and the Option Plan of the present invention. The answer is that the threat that Shinkabu Yoyaku Ken of the present invention might be exercised, even though not by the original shareholders, is still a powerful weapon in the hands of the Directors motivated to protect the interests of the current shareholders.

[0074] In fact, neither management nor the raider wants to see the Rights exercised.

Indeed, in the U.S., there is only one reported case in which such Rights have actually been issued. See Crown Zellerbach Corp v. Goldsmith, 609 F. Supp 187 (S.D.N.Y. 1985).

[0075] Terms

[0076] The Amendments to the Japanese Commercial Code provide that the Board of

Directors may determine the terms of any Shinkabu Yoyaku Ken. a preferred embodiment of the present invention, the Board would by resolution provide that each shareholder, as of a certain record date, would be issued a certain number of Hikiuke Ken that will be used to acquire an equal number of Shinkabu Yoyaku Ken, without the payment of additional money for either instrument. As noted above, there is no need in Japan to issue the Hikiuke Ken or Shinkabu Yoyaku Ken as a dividend. The Japanese Option Plan of the present invention would provide that each Shinkabu Yoyaku Ken represents the right to buy one share of common stock, or if thought necessary to reserve the common stock for other purposes, one preferred share. Such a preferred share would, in turn, be convertible into one share of common stock. While it is possible to denominate preferred shares in fractions in order to minimize the amount that would needed to be issued for conversion to common stock Japan, unlike Delaware, does not impose franchise taxes based on the amount of authorized shares. Accordingly, there are no particular reasons why one would want to limit the number of authorized preferred shares. If fractions were used, each preferred share might represent 100 or 1,000 shares of common stock and exercise price would be adjusted accordingly.

[0077] i one embodiment of the present invention, where the common stock is currently trading at ¥1,000, for example, and the Board of Directors determines that following the completion of its business plan in ten years, the stock will be trading at ¥5,000, a desirable exercise price for each Shinkabu Yoyaku Ken would be ¥5,000 each. In an alternative embodiment, if the common stock of the company were trading at ¥1,500 each upon the occurrence of a Triggering Event, the holder of the Hikiuke Ken would be entitled to purchase the target company's common stock worth ¥10,000 for ¥5,000 (¥10,000 ÷ ¥1,500 = 6.66 shares) or 6.66 shares at a purchase price of ¥750 each (¥5,000 ÷ 6.66 = ¥750).

[0078] As noted above, the Board of Directors is given wide latitude to fashion the terms of the Shinkabu Yoyaku Ken and the Hikiuke Ken, pursuant to the recent Amendments to the Japanese Commercial Code and the principle of freedom of contact. There should be no reason why most of the terms contained in the U.S. Rights Plan could not be incorporated into the Option Plan of the present invention, including definitions of Triggering Events and the exercise price. The Board would also have the power to redeem the Hikiuke Ken for 0.1 yen each. In one embodiment of the present invention, the Shinkabu Yoyaku Ken, would not have a redemption price because it would (like the Rights Certificate in the case of a Rights Plan) be unredeemable once issued.

[0079] Under this analysis, it is quite clear that the Flip-in Events can be covered by the Option Plan of the present invention. Preferably, the Shinkabu Yoyaku Ken is in essence an option to purchase the target company's common stock at a discount.

[0080] ILSteps necessary to implement the Japanese poison pill

[0081 ] The Option Plan of the present invention would be implemented with essentially the same steps that are involved with the implementation of an U.S. Rights Plan with certain adjustments that are necessary to conform to Japanese law and practice, hi particular, it is preferred that:-

[0082] The Board Acts. The Board of Directors, after consultation with its legal and financial advisors and after due consideration of the terms of the Option Plan of the present invention, adopts resolutions authorizing adoption and implementation of such an Option Plan and setting a record date for the shareholder entitled to receive Hikiuke Ken (convertible to Shinkabu Yoyaku Ken) that ultimately give the holder the right to purchase twice the number of common shares held on the record date. As noted above, this may be done without shareholder approval. Nonetheless, in one embodiment of the present invention, the Board would seek shareholder approval for the (i) Option Plan of the present invention, (ii) the issuance of preferred shares, (iii) the increase of common shares into which the options will be exercised, or (iv) a combination thereof. In such an embodiment of the present invention, the Board may call a special meeting of the shareholders (or times the adoption of the Option Plan so that it will coincide with the next General Shareholders meeting) and prepare resolutions for adoption by the shareholders.

[0083] Shareholders Meeting. It is further preferred that the Board submits one or more resolutions relating to the Option Plan of the present invention, as well as any other defense mechanisms that would require shareholder approval, to the shareholders.

[0084] Amendment of the company's by-laws. It is still further preferred that if any actions of the Board and or the shareholders require amendment of the by-laws (e.g., the creation of anew class of preferred stock or the increase of the amount of authorized common stock), those changes are made and registered with the local Legal Affairs Office in which the company's headquarters is located and with the local finance bureau of the Ministry of Finance in connection with the company's securities filings. Depending upon its business, the company it may be desirable to file any such amendments with other regulatory agencies.

[0085] Public Announcement. Following the adoption of the Board Resolutions

(and the shareholder resolutions, if deemed necessary), it is yet further preferred that the company issue a press release announcing adoption of the plan and summarizing its terms.

[0086] Option Plan. It is also preferred that the company creates an Option Plan according to the present invention which desirably contains detailed presentation of the terms of the Option Plan of the present invention, including the terms of the Hikiuke Ken and the Shinkabu Yoyaku Ken. The Company also enters into a contract with the stock transfer agent in connection with the issuance of Shinkabu Yoyaku Ken. [0087] Listing Application. It is also preferred that if the company's common stock is listed on a Stock Exchange, the company files an application to list the Shinkabu Yoyaku Ken.

[0088] FSA Filings. It is also preferred that a securities registration statement is filed with the Financial Services Agency regarding Shinkabu Yoyaku Ken.

[0089] Summary of Options and letter to shareholders. Following the record date for the creation of the Hikiuke Ken, the company desirably mails a description of the Option Plan of the present invention to all shareholders of record who own the common stock. Desirably the mailed description is a summary of the major terms of the Option Plan and the rights of the holders of the Shinkabu Yoyaku Ken.

[0090] IV.Possible Legal Challenges

[0091] Poison pills in U.S. practice are very flexible devices which are neither per se valid nor per se invalid. Each pill must be examined on a case by case basis to determine whether it achieves an accepted purpose (e.g., shareholder protection) or amounts to an abuse of the discretion of the Board of Directors (e.g., entrenchment). In the past, both the design and implementation of poison pills have been legally challenged in U.S. courts by raiders, other stockholders, third parties interested in an acquisition and some of the directors themselves. In all cases, it is useful to analyze the pill both as a response to a hostile acquisition attempt and as a pre-planned defensive technique. It is likely that poison pills used in Japan will be challenged as well on similar grounds.

[0092] It is well beyond our purposes here to describe the complexity of the standards by which U.S. courts judge the conduct of the Board of Directors in designing and implementing a poison pill (For an excellent summary of the various standards applicable under Delaware law, see an article by Martin Lipton, TAKEOVER LAW AND PRACTICE, IN NEW STRATEGIES FOR FINANCIAL INSTITUTIONS IN THE E-COMMERCE ECONOMY, Practicing Law histitute Course Handbook B-1206 at 219.). Nonetheless, it is useful to keep the following in mind:-

[0093] The basic validity of the poison pill under the laws of most U.S. jurisdictions is no longer in doubt but modern litigation often focuses on whether the Board has the obligation to redeem the pill in certain hostile situations.

[0094] The actions of the Board of Directors in making corporate decisions

(including the design and implementation of poison pills) are presumed to be valid by the courts and will not be independently scrutinized provided that the duties of good faith, loyalty and due care have been observed by the Board (the so-called Business Judgment Rule); (Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985) aff'g 490 A.2d 1059 (Del. Ch.).

[0095] hi the Household case, the Delaware Supreme Court upheld the lower court's finding that a Shareholders Rights Plan was valid. The court held that the plan in question was permitted by Section 1 7 of the Delaware General Corporation Law and that the actions of the Board of Directors in adopting the plan in question were protected by the business judgment rule. The court also noted that the implementation of the pill as a defensive tactic in a hostile situation would also be reviewed under the business judgment rule.

[0096] If the court determines that the Board breached one of its duties of good faith, loyalty or due care, it may subject the Board's decisions to higher levels of court scrutiny to determine the fairness of the action to the shareholders, by examining the process by which the Board reached its decision and the action it took (the so-called Enhanced Scrutiny Standard enunciated in the Unocal case); (Unocal Corp. v Mesa Petroleum Co., 493 A. 2^nd 946 (Del. 1985). If it appears that the majority of the Board of Directors has an actual conflict of interest when approving a particular transaction, the process and the price may be scrutinized by the court to determine if it was entirely fair to all of the shareholders (the so-called Entire Fairness Standard).

[0097] It should be obvious that corporate action taken as a planning device and not in response to a specific threat is more likely to be judged, if challenged, under the presumption of the Business Judgment Rule. Once a hostile takeover had been commenced, the actions of the Board may or may not be judged, depending upon how the pill and other defensive techniques are implemented, by the stricter Enhanced Scrutiny and Entire Fairness Standards. The facts of each case are critical here.

[0098] Both the Civil Code and the Commercial Code, when read together, impose the duty of loyalty and due care on directors of Japanese companies (called Zenkan Chu-I Gimu"). As there have been only a handful of Japanese cases which examine the scope of these duties, none of them have examined these questions in the context of a hostile takeover or the adoption of a poison pill. Nevertheless, it is generally thought among legal practitioners that Zenkan Chu-I Gimu is substantially similar, in effect, to the Delaware Business Judgment Rule. Whether Japanese courts will develop rules that are similar to the Enhanced Scrutiny or Entire Fairness Standards to measure the appropriateness of Board action in connection with poison pills is speculative at this point but the value of adopting an Option Plan according to the present invention such as the one described above, prior to a hostile takeover attempt, should be obvious. If shareholder approval for adoption of the Option Plan according to the present invention is obtained, the arguments in favor of its validity are even stronger.

[0099] Typically, the rights to acquire options expire at some predetermined date after their issuance, generally between 1 and 15 after issuance, hi a preferred embodiment of the present invention, the rights to acquire options might expire 10 years after they were issued. Alternatively, the rights to acquire options might expire 1, 2 or 3 years after they were issued.

[0100] It is preferred that the right to acquire the stock options are not transferable. It is still further preferred that the owner of the Rights under the present invention are not exercisable by persons holding more than a predetermined number of shares.

[0101] hi a particularly preferred embodiment of the present invention, the Option

Plan of the present invention is managed through the use of a computer network. For instance, once the Option Plan is approved by the Board of Directors, they arrange for the Option Plan to be submitted to the shareholders at the next meeting thereof. If the next annual meeting of the shareholders is a substantial time in the future, say three months, or more, the Board could call a special meeting of the shareholders. It is particularly preferred that any special meeting is called by an email notice.

[0102] In a preferred email notice embodiment of the present invention, when a person (legal or natural) acquires one or more shares in the Company, they register an official email address with the Company's transfer agent. At a periodic interval, for instance, weekly, fortnightly, or monthly, the transfer agent sends a Welcoming Email to each new holder of shares in the Company. The Welcoming Email provides the recipient with a reply form that when completed and sent, creates an encryption key that permits the recipient to send secure email to the Company's transfer agent. The Reply to the Welcoming Email also creates an Email Register Record for the replying shareholder.

[0103] In a more preferred embodiment of the present invention, the Company' s transfer agent checks to ensure that each new holder of shares in the Company has replied to the Welcoming Email within a reasonable time from when the Welcoming Email was posted. If the check identifies one or more new holders of shares in the Company who have not replied to the Welcoming Email, or replied in a manner that did not create the appropriate encryption key, then the transfer agent sends out a Second Notice requesting a reply and if properly responded to, the reply to the Second Notice creates the encryption key. In addition, the Reply to the Second Notice creates an Email Register Record for the replying shareholder.

[0104] In a still more preferred embodiment of the present invention, the Company's transfer agent checks to ensure that each new holder of shares in the Company was sent a Second Notice replied to the same within a reasonable time from when the Second Notice was posted. If the check identifies one or more new holders of shares in the Company who have not replied to the Second Notice, or replied in a manner that did not create the appropriate encryption key, then the transfer agent sends out a Registered Mail Notice to, and creates a Mail Notice Record of, such shareholders.

[0105] In a yet further preferred embodiment of the present invention, the Company's transfer agent solicits email addresses from each of the existing holders of shares in the Company. In this embodiment, to the extent the transfer agent is able to, the transfer agent sends a Welcoming Email to each of the existing holders of shares in the Company. The transfer agent follows the procedures outlined above for new shareholders for the existing shareholders to ensure that the transfer agent is able to communicate by secure email with as many shareholders as possible. As a result, the existing shareholders are added to either the Email Register Record or the Mail Notice Record.

[0106] It is also desired that the transfer agent removes or otherwise updates the

Email Register Record and the Mail Notice Record when shareholders increase or decrease the number of shares they hold.

[0107] Provided a predetermine percent of the holders of shares in the Company are on the Email Register Record, in a still further preferred method of the present invention when the next scheduled shareholders meeting is more than a predetermined time in the future, for instance, more than three months in the future, the Board calls for a special meeting of the shareholders in a manner that complies with the formal requirements of the jurisdiction under whose laws the Company was created. To the extent permissible, the Board sends the appropriate notice to shareholders on the Email Register Record by email. The Board sends a traditional notice to all shareholders on the Mail Notice Record.

[0108] To the extent permissible, the email notice contains an encrypted electronic ballot by which a shareholder can vote his shares in conjunction with the matters under consideration. In the above-noted instance where the Board is submitting the Option Plan of the present invention to the shareholders for their ratification, the email notice contains an encrypted electronic ballot that permits the receiving shareholder to vote for, or against, the Option Plan. Once cast, the encrypted electronic ballots form a reply email that is dispatched to the transfer agent. [0109] If the appropriate majority (or supermajority) approves the Option Plan of the present invention, it is put into effect. The Board then has the transfer agent issue the appropriate number of rights to subscribe to options to each shareholder of record as of a specified date. Desirably, each right to subscribe to options contains a Transfer Restriction, an Exercise Option, or both.

[0110] hi an alternative embodiment of the present invention, the Board enacts the

Option Plan of the present invention without needing to, or actually, submitting the plan to the shareholders for their approval.

[0111] It is also preferred that the transfer agent monitor for the occurrence of a

Triggering Event as defined above. When, as and if such a Triggering Event occurs, the transfer agent notifies the Board who under to adopted Option Plan is empowered to set a Distribution Date.

[0112] While the Board can postpone the Distribution Date, if the Distribution Date occurs, then the transfer agent determines the market price of the shares 30 days before the Distribution Date and issues an option to purchase an additional share to each holder of a right to subscribe for each right said holder owns at 50% of the market price of the shares 30 days before the Distribution Date. Additionally, the transfer agent also files the papers necessary to permit the issued options to be listed on the relevant stock market.

[0113] In a preferred Option Plan of the present invention, if the Distribution Date occurs and the options on new stock are issued, the holders of the options can exercise these options by tendering the requisite fees to the Company via the transfer agent. The transfer agent in turn issues the appropriate number of additional shares to each holder of the options to purchase new stock who properly exercises the options. [0114] hi a particularly preferred embodiment of the present invention, the transfer agent constitutes a computer with appropriate program modules to perform each of the transfer agent's functions. Example 1 [0115] A preferred embodiment of the present invention has the following components: [0116] 1. A Stockholders Option Plan-

[0117] written plan which contains detailed terms, definitions, redemption mechanism and amendment provisions. [0118] Contract with stock transfer agent regarding issuance of Shinkabu Yoyaku

Ken and administrative matters. [0119] may or may not be approved by a meeting of the shareholders-

[0120] may or may not be included in the by-laws of the company

[0121] 2. Hikiuke Ken (right to subscribe to options on new stock)-

[0022] issued free of charge to all shareholders as of the record date, which by its terms, is not be transferable- [0123] Desirably, the Hikiuke Ken will be subject to the provisions of the

Stockholders Option Plan of the present invention. [0124] More desirably, the Hikiuke Ken cannot be exercised until the Distribution

Date. [0125] Acquiring Person may not exercise the Hikiuke Ken or the Shinkabu Yoyaku

Ken. [0126] 3. Shinkabu Yoyaku Ken (options on new stock)-

[0127] issued to record holders of Hikiuke Ken on the Distribution Date following a

Triggering Event.

[0128] issued free of charge

[0129] convertible into common shares

[0130] exercise price is 50% of current market price 30 days prior to Distribution

Date

[0131] will be listed as a security on the relevant stock exchange

[0132] will be registered with the Financial Services Agency, or other appropriate regulatory agency

[0133] transfers not allowed without Board approval

[0134] will include restrictions on exercise by an Acquiring Person; and

[0136] will state that it is subject to the terms of the Stockholders Option Plan.

[0137] Circumstances are changing in Japan in ways that will leave incumbent management and minority shareholders vulnerable to certain types of hostile takeovers. The Japanese Shareholders Option Plan that we have proposed will not bar full priced tender offers for all of the shares nor will it interfere with the proxy contest rules. As Japan does not currently have rules that prohibit coercive two-tiered or partial offers, the interests of minority shareholders can be severely compromised. The purpose of the fundamental principle of shareholder equality is the protection of minority shareholders but they will not be protected in the current circumstances unless the Board of Directors implement the Shareholders Option Plan. Indeed, one of the principal purposes of the poison pill is the protection of minority shareholder rights. As in the U.S., if the Board of Directors attempt to abuse their position to entrench themselves through unfair design or implementation of the poison pill, there are reasons to believe that the Japanese courts will intervene to ensure fairness through an application of doctrine of Zenkan Chu-I Gimu. Because new instruments in the form of Hikiuke Ken and Shinbaku Yoyaku Ken have been created by the Diet, unequal treatment of rights holders versus stockholders does not violate the principle of shareholder equality.

[0138] Example 2

[0139] A shareholders plan of the type described in Example 1 is presented to the

Board of Directors of the company. After due consideration, the Board adopts resolutions authorizing adoption and implementation of the Option Plan of the present invention and setting a record date for the shareholders entitled to receive Hikiuke Ken. The Board then calls for a special shareholders meeting to approve the Option Plan of the present invention, and desirably provides the shareholders with a two week notice of the meeting and stating the matters to be considered at the special shareholders meeting.

[0140] The company preferably sends the notice of the special shareholders meeting to the shareholders by a digital means, for example, by email, upon consent of the shareholders. This notice states the maters that are to be considered at the special shareholders meeting. Also, attached to the notice of the special shareholders meeting is a reply document that enables the shareholder to vote on the Option Plan, and any other matters on the agenda for the special meeting.

[0141] After the notice is given, and the special shareholders meeting held, and the

Option Plan approved, it is thereafter implemented. [0142] Example 3

[0143] In another embodiment of the present invention, one, or more, of the members of the Board of Directors cast their vote to adopt the Option Plan of the present invention by a conventional digital means. For instance, a member of the Board of Directors might log onto a secure web page and fill out a "ballot form."

[0144] Example 4

[0145] hi a further example of the implementation of the Shareholder Protection Plan of the present invention begins with a first step in which the Board of Directors adopts a Shareholders Option Plan 1 in Fig. 1. Optionally, the next step is for the shareholders, at a meeting of the shareholders, 2 in Fig. 1, to approve the adoption of the Shareholders Option Plan proposed by the Board of Directors, with the requisite number of votes ~ as determined by the corporate governance of the Company. The shareholders meeting may be either a regular meeting of the shareholders or a special meeting. Thereafter, the Company and a stock transfer agent enter into a contract through which the stock transfer agent identifies each of the shareholders of a specified record date and the number of shares held on said record date by each shareholder, 3 in Fig. 1. The stock transfer agent also records the identity and holdings of each shareholder as of the record date.

[0146] Subsequently, the Board declares the distribution of the rights to acquire

Options to the shareholders of the specified record date in amounts proportional to their holdings as of the record date, 4 in Fig. 2. Typically, the stock transfer agent will record this distribution with a conventional data storage device, generally including information sufficient to identify shareholders on a specified record date, the number of shares held by said shareholders as of said specified record date and associated data regarding said shareholders and rights to acquire options that are issued to shareholders as of said record date.

[0147] Generally, the next step is to give notice to the shareholders of the distribution of the right to acquire the options, 5 in Fig. 2. Next, the public is generally advised of the distribution of the rights to acquire the options, typically by means of a press release, 6 in Fig. 2.

[0148] The next step is a triggering event, 7 in Fig. 3. Typically, triggering event 7 occurs when a group of one or more shareholders acquires a predetermined number of shares in the Company. For instance, triggering event 7 could be when a group acquires 30% of the outstanding shares in the Company.

[0149] Preferably, when triggering event 7 occurs, the Board of Directors declares that the right to acquire options are now exercisable and issues a notice to that effect to the holders of the rights to acquire Options. Thereafter, the Company issues Options to the holders of the right to acquire Options, 8 in Fig. 3. Typically, these options permit the holder of the option to acquire additional shares in the Company for a predetermined fraction of the prevailing price of the shares, for instance at 30 or 50 percent of the prevailing share price, 9 in Fig. 3. It is believed that the exercise of such options would so dilute the value of the shares as to make a hostile tender for the Company prohibitively expensive, and thus impracticable.

[0150] In an alternative embodiment, the stock transfer agent is authorized to, and indeed does issue the options to acquire new stock when triggering event 7 occurs. [0151] Desirably, the right to acquire options can be redeemed by the Board of

Directors, 10 in Fig. 3. If the Board of Directors redeems said right to acquire the options, then the options are not issued. Generally, it is anticipated that the Board of Directors would redeem the right to acquire the options if the Board of Directors determined that an offer to acquire the Company was fair.

[0152] In a further embodiment of the present invention, if the governing law so permits, the right to acquire the options is circumscribed so that they cannot be exercised by persons who have alone, or in combination with others, acquired a predetermined amount of the shares of a company, for instance 30 %, or a person who has tendered an offer for less than all of the shares of the company. This embodiment of the present invention is also referred to an Exercise Restriction.

Claims

We claim:

1) A shareholder protection system, wherein the shareholder protection system is equipped with a storage section to store shareholder information including information to identify shareholders on a specified record date, a number of shares held by said shareholders as of said specified record date, and associated data regarding said shareholders and rights to acquire options that are issued to shareholders of said record date, an exercise notification means which, in response to an accumulation of a specified number of shares by a shareholder group comprising at least one shareholder, sends a notice to said shareholders of said specified record date that the right to acquire options granted is exercisable within a specified period; and an option right execution means which, in response to an order to exercise said option, upon receipt of payment transfers a specified number of additional shares to the shareholders of said specified record date exercising said option to buy shares and updates the data in said storage section regarding a number of shares which each shareholder holds. 2) A minority shareholder protection plan comprising: a) a stockholders option plan; b) a right to subscribe to option on new stock; and c) an option to new stock. 3) A method of protecting the rights of minority stockholders comprising: a) creating a stockholders option plan; b) creating a right to subscribe to option on new stock; and c) creating an option to new stock.

4) A method according to claim 3 further comprising permitting the shareholders to vote on the adoption of the Option Plan by digital means.

5) A method of adopting a plan to protect the rights of minority shareholders comprising: a) submitting to at least one member of the Board of Directors by digital means a proposal to establish: i) a stockholders option plan; ii) a right to subscribe to an option on new stock; and iii) said option on new stock.

6) A method of adopting a plan to protect the rights of minority shareholders comprising: a) submitting to at least one stockholder by digital means a proposal to establish: i) a stockholders option plan; ii) a right to subscribe to an option on new stock; and iii) said option on new stock.