Internet Initiative Japan, Inc.
February 17, 2003
Jonathan G. Katz
Re: Paragraph (c)(2)(i)(A) of the Proposed Rule on Standards Relating to
Dear Mr. Katz:
I am pleased to submit this letter on behalf of Internet Initiative Japan, Inc. ("IIJ") and Crosswave Communications Inc. ("Crosswave" and, together with IIJ, the "Registrants "), two Japanese corporations with equity securities registered under the Securities Exchange Act of 1934, as amended, and quoted in the form of American Depositary Shares on the Nasdaq National Market. The Registrants wish to present their concerns regarding the scope of the exemption for foreign private issuers from certain requirements of the Proposed Rule on Standards Relating to Listed Company Audit Committees (File No. S7-02-03) (the "Proposed Rule") and its potential impact on Japanese corporations.
The Registrants appreciate the comprehensive efforts being undertaken to restore confidence in the U.S. markets. The Registrants believe that such responsiveness to the needs of investors, issuers and other market participants has helped to make the U.S. capital markets the leading securities markets in the world.
The Registrants also appreciate the recognition by the Securities and Exchange Commission (the "SEC") that the requirements of the Proposed Rule may conflict with legal requirements, corporate governance standards and the methods for providing auditor oversight in the home country of some foreign issuers. The Registrants applaud the SEC's efforts to formulate a suitable exemption for such issuers.
The Registrants are concerned, however, that the proposed condition in Paragraph (c)(2)(i)(A) of the Proposed Rule would have an inconsistent impact on Japanese issuers subject to and meeting identical corporate governance standards in Japan. The proposed language of Paragraph (c)(2)(i)(A) provides, as a condition to the exemption contemplated by Paragraph (c)(2)(i) of the Proposed Rule, that the "securities of the foreign issuer are also listed or quoted on a securities exchange or inter-dealer quotation system outside the United States". Although the release describing the Proposed Rule does not specify the reason for inclusion of this condition, the Registrants understand that the stock exchanges of some countries, including the United States, impose corporate governance requirements in addition to those mandated by applicable statute. In such countries, the proposed condition might be reasonable as companies failing to meet the condition would not be subject to the strictest standards of corporate governance required in such countries.
In Japan, however, corporate governance requirements are established solely by statute, namely by the Japanese Commercial Code and the Law for Special Exceptions to the Commercial Code concerning Audits, etc. of Corporations. Corporate governance requirements are statutorily determined by the size of a company's capitalization and indebtedness. Japanese exchanges and OTC markets do not establish additional corporate governance requirements. In other words, listing on a Japanese exchange or quotation on a Japanese inter-dealer quotation system has no impact on the corporate governance requirements applicable to a Japanese company. For your reference, we have attached as Exhibit A the memorandum of Asahi Koma Law Offices summarizing the sources of corporate governance requirements in Japan.
In 1999, IIJ became the first Japanese company without a domestic listing in Japan to conduct a registered public offering of its equity securities in the United States without pursuing a concurrent domestic listing in Japan. Crosswave, an affiliate of IIJ, followed thereafter. Despite meeting listing eligibility standards in Japan, both of the Registrants decided there were compelling business reasons to list solely in the United States rather than establishing and maintaining a dual listing.
Application of the proposed condition in Paragraph (c)(2)(i)(A) in its current formulation would result in the Registrants not qualifying for the exemption available to Japanese issuers that are listed in Japan, despite being subject to identical corporate governance requirements as Japanese issuers that are listed in Japan.
The Registrants believe that the purpose of shareholder protection is adequately served under the Japanese corporate governance system which is a function of statute, not listing rules in Japan, and that distinguishing between Japanese companies listed in Japan and Japanese companies not listed in Japan will neither further investor protection nor promote participation by Japanese companies in the United States financial markets.
Accordingly, the Registrants respectfully request that the SEC modify Paragraph (c)(2)(i)(A) to clarify that paragraph (c)(2)(i)(A) applies only where the exchanges or inter-dealer quotation systems of a country impose restrictions beyond those mandated by the laws and regulations of the country. The Registrants propose that (c)(2)(i)(A) be amended to the effect that:
The Registrants believe that this or similar language would allow issuers such as the Registrants to maintain their listing, while ensuring that private foreign issuers choosing to list in the United States meet the strictest corporate governance standards mandated in their home jurisdictions.
The Registrants hope that the SEC will address the Registrant's concerns discussed above. Representatives of the Registrant would be happy to provide the SEC with further information or discuss with the SEC staff any aspects of this letter.
Dear Mr. Suzuki:
This memorandum discusses the Japanese corporate governance requirements relating to the directors and the board of directors, the statutory auditors and the board of statutory auditors, the relationship between the board of statutory auditors and the external accounting auditor, and a committee system-based companies, as follows:
The corporate governance requirements of joint stock corporations (Kabushiki Kaisha) in Japan are established solely by statute, namely by the Commercial Code of Japan and the Law for Special Exceptions to the Commercial Code concerning Audits, Etc. of Corporations (the "Commercial Code" and the "Law for Special Exceptions to the Commercial Code", collectively, the "Commercial Code, Etc."). The Commercial Code, Etc. stipulates corporate governance requirements including but not limited to the election and authority of directors and the board of directors, the election and authority of statutory auditors and the board of statutory auditors, the relationship between the board of statutory auditors and the external accounting auditor, and, for those companies choosing to adopt a committee system once this becomes an option, the requirements in respect of the committee. These Japanese corporate governance requirements are statutorily determined by the size of a company's capitalization and indebtedness.
Under Japanese law, these corporate governance requirements are regarded as matters solely to be determined by the Commercial Code, Etc., and thus, the Japanese stock exchanges and over-the-counter market ("OTC Market") do not establish additional corporate governance requirements.
The exchange's role in corporate governance matters is limited essentially to confirmation, in connection with the initial listing application, that corporate governance is operating in the manner contemplated by the Commercial Code, Etc. Article 2 of the Stock Listing Examination Criteria of the First and Second Sections of the Tokyo Stock Exchange ("TSE"), which is the most important and largest stock exchange in Japan, stipulates that at the time of the initial stock listing examination, the following items shall be examined: (1) continuity and profitability of a corporation, (2) healthiness of a corporation, (3) appropriateness of the disclosure, and (4) other items that the TSE regards necessary from viewpoints of the public interest and protection of investors. With respect to item (1) above, for example, TSE guidelines state that whether an applicant corporation for listing establishes and administers its management system including internal company rules in an appropriate manner so as to ensure the stability of its assets and its effective management shall be scrutinized.1 Regarding item (2) above, the guidelines stipulate that whether the relationship among or composition of directors and statutory auditors of the company is detrimental to the fair, loyal and sufficient performance of their duty or effective performance of their audit shall be examined2. Accordingly, although the TSE scrutinizes whether an applicant corporation has established and is maintaining a corporate governance system, including a management system and audit system, the TSE's listing criteria does not go so far as to regulate and establish additional corporate governance requirements other than those set forth by the Commercial Code, Etc. These criteria are merely to confirm that an applicant corporation for listing is operating effectively within the Japanese corporate governance requirements under the Commercial Code, Etc. and do not to impose additional requirements on the listed companies.
The above noninterventionist approach regarding substantive corporate governance requirements for stock exchange regulations also applies to other Japanese stock exchanges and the OTC market. For example, as part of the hearing for listing on the Mothers market of the TSE for newly established ventures, the state of the organization and administration of the business management system and the internal audit system are reviewed3. With respect to applicant companies for the Japanese OTC Market (JASDAQ)4, review of the effectiveness of the management-supervision system, such as the internal audit and the check-and-balance system, is included among the factors covered by the review prior to quotation. However, consideration of these factors as part of the listing review are merely to confirm effective operation and management within the corporate governance requirements established by the Commercial Code, Etc.
Accordingly, listing on a Japanese exchange or quotation on a OTC Market has no impact on the corporate governance requirements applicable to a Japanese company under the Commercial Code, Etc.
Should you have any questions, please do not hesitate to contact us.