Listing maintenance rules after transitional measures end

Key points

• When transitioning to a new market, even companies that did not meet the normal continued listing criteria could be eligible for the relaxed standards as a transitional measure if they disclosed a “plan for compliance with the continued listing criteria.”
• The TSE decided to end the transitional measures on January 30, 2023 and apply the original continued listing criteria from a record date that arrives after March 1, 2025.
• Companies that fail to meet standards are given a one-year improvement period in principle, and six months for trading volume standards. If the company does not comply within that period, its shares proceed through designation as a Security Under Supervision or Security to Be Delisted, generally for about six months, before delisting.

Why were transitional measures established?

In the April 2022 market reorganization, existing listed companies independently chose whether to move to Prime, Standard, or Growth. However, at the time of the transition, there were some companies that did not meet the normal standards for remaining listed on the list.

Therefore, TSE has established a transitional measure that applies the relaxed standards only if a company does the following two things:

1. Disclose plans for compliance with continued listing criteria
2. Continuously disclose progress afterwards

For example, in the prime market, the market capitalization of tradable shares must be at least 10 billion yen, and the tradable-share ratio must be at least 35%. During the transitional measures, relaxed standards were used, such as market capitalization of tradable shares of 1 billion yen or more and tradable-share ratio of 5% or more.

It was a rational system in terms of making the transition smooth. On the other hand, because the end date was initially set as “for the time being”, companies that met the normal standards and companies that submitted plans and were subject to the relaxed standards appeared to be in the same market segment from the outside. This has led to criticism that differences in market segments are not substantive.

Until the end of transitional measures is decided

In July 2022, TSE established a follow-up meeting regarding the review of market segments. This is to continuously consider the effectiveness of new markets, incentives for improving corporate value, and the handling of transitional measures.

After soliciting opinions in the fall of the same year, TSE announced its response policy on January 30, 2023. The main points are as follows.

• Terminating the application of transitional measures
• The original standards will be applied from the judgment reference date for the continued listing criteria that will arrive after March 1, 2025
• Companies that do not meet the targets will be subject to the same improvement period system as regular listed companies.
• Certain special provisions will be made for companies that, as of March 31, 2023, have already disclosed plans that expire after March 1, 2026.

For many companies whose fiscal year ends in March, the first reference date is now March 31, 2025. However, the judgment date differs depending on the company's fiscal year end and shareholder record date. Instead of understanding that “all judgments were made in March 2025”, IR personnel need to check what is the reference date for their company.

Basic procedures after March 2025

If the original continued listing criteria are no longer met, the procedures generally proceed in the following order.

flowchart TD
    A["Judging <br/> continued listing criteria based on each company's reference date"] --> B{"Does it meet all criteria?"}
    B -->|"yes"| C["Continue listing"]
    B -->|"No"| D["Improvement period <br/> principle is 1 year <br/> trading volume standard is 6 months"]
    D --> E["Disclose initiatives for <br/> compliance and <br/> implementation timing within 3 months"]
    E --> F{"Compliant within the improvement period?"}
    F -->|"yes"| G["Continue listing"]
    F -->|"No"| H["Security Under Supervision / Security to Be Delisted <br/> In principle, about 6 months"]
    H --> I["Delisting"]

    classDef pass fill:#e6efe1,stroke:#3d6b3a,color:#1f3a1d
    classDef warn fill:#f9eecc,stroke:#a07e3a,color:#3a2d10
    classDef fail fill:#f4d5d0,stroke:#8a3f3a,color:#3a1614
    class C,G pass
    class D,E,H warn
    class I fail

1. Judgment based on reference date

In principle, the number of shareholders, number of tradable shares, market capitalization of tradable shares, tradable-share ratio, etc. are determined once a year based on the situation at the end of the business year. For companies where the end of the business year and the record date for recording the status of major shareholders are different, the record date for shareholders, etc. may be used.

2. Improvement period

As a general rule, companies that fail to meet standards enter a 1 year improvement period. The trading volume standard is 6 months. After announcing that a company has not met standards, it is required to disclose a plan that describes the efforts to achieve compliance and the timing of implementation.

The improvement period cannot be extended simply by submitting a plan. It is necessary to actually comply with the standards within the period.

3. Designation as a Security Under Supervision or Security to Be Delisted and delisting

If a company fails to meet the criteria by the end of its improvement period, its shares may be designated as a Security Under Supervision while compliance is checked. If delisting is then decided, they are designated as a Security to Be Delisted and generally remain tradable for about six months before delisting.

Depending on the type of standard, compliance can be determined immediately at the end of the improvement period, so in some cases the designation as a Security Under Supervision (under confirmation) may not be necessary. Therefore, not all companies enter the “six months of supervision” on the same schedule.

Exceptions and transitional treatment

There are limited exceptions to the system.

Companies with compliance plans extending beyond the transition deadline

As of March 31, 2023, a company that has disclosed a compliance plan with a deadline that exceeds the first record date that occurs after March 1, 2026 will be treated as a company with a compliance plan extending beyond the transition deadline. The company will continue to be designated as a Security Under Supervision until its compliance with the disclosed plan deadline is confirmed.

Special provisions for tradable-share ratio due to business revitalization support

If a third party holds a certain amount of shares to support business revitalization and TSE deems that the third party is likely to meet the tradable-share ratio criteria within five years, a longer than normal improvement period for the tradable-share ratio may be granted.

These systems do not allow companies to freely extend deadlines according to their wishes. It is necessary to meet the conditions set forth in the listing rules and receive confirmation from the TSE.

Four options available to companies

Companies that find it difficult to comply with normal standards have four main options.

1. Meet the criteria in your current market segment

Companies can seek compliance within the improvement period through secondary offerings, selling cross-shareholdings in the market, canceling treasury stock, raising stock prices and market capitalization through improved business performance, and expanding the investor base.

Here again, the correspondence between measures and standards is important. For example, a reverse stock split typically does not change the tradable-share ratio. Even the acquisition of treasury stock may not lead to an improvement in the ratio unless it is canceled. It is necessary to select measures based on the formula confirmed in 3.2.

2. Change to another market segment

A company unable to meet Prime Market criteria may apply to transfer to the Standard Market if it meets that market’s criteria. Failure in its current market does not automatically transfer it to another market. In principle, a transfer requires screening equivalent to an initial listing examination.

In 2023, a one-time system was established for companies that moved from the former First Section to Prime to be able to re-elect the Standard Market. This special provision has already ended, and the standard market classification change procedure is now the norm.

3. Choose to go private or integrate with another company

Some companies compare the costs and benefits of remaining listed and choose MBO, TOB by parent company or operating company, or integration with other companies. However, the causal relationship between failure to meet the continued listing criteria and individual M&A differs from case to case. The privatization of a company that fails to meet the criteria should not automatically be attributed to the listing rules.

4. Aim for compliance using the improvement period

If it is not possible to complete the measures by the deadline, the company will disclose its plans to achieve this within the improvement period and explain its progress to the market. The plan needs to specifically state the current values for each standard, the necessary improvement range, measures, implementation timing, and major risks.

From “listed” to “maintaining standards”

With the end of the transitional measures, listed market status is no longer a qualification that can be maintained once acquired. Every year, companies must check whether their current shareholder structure, liquidity, market capitalization, net assets, etc. conform to market standards.

This change has three implications.

First, IR and finance are linked. The market capitalization of tradable shares depends on the stock price and the number of tradable shares, the tradable-share ratio depends on the shareholder composition, and the trading value depends on the market trading conditions. Neither can be managed solely by IR or finance alone.

Second, changing market segments becomes a management option. Rather than aiming to maintain prime status, it is necessary to select a market by considering consistency with target investors, disclosure system, listing costs, and capital policy.

Thirdly, the quality of the plan is questioned. Failure to meet standards cannot be hidden. The company needs to clarify which numbers will be improved, by when, and with which measures, and update its progress.

Suggestions for IR personnel

1. Check your company's criteria date. "March 1, 2025" is not your company's judgment date. The standard is the end of the business year that comes after that.
2. Manage the margin for each standard numerically. Sensitivity that reflects not only current prices but also stock price declines, changes in major shareholders, share buybacks, etc. is estimated on a monthly or quarterly basis.
3. Prepare a plan in advance for when targets are not met. It is too late to think about measures after entering the improvement period. Back-calculate the time required for board meetings, shareholder meetings, and examinations for secondary offerings, cancellations, market classification changes, etc.
4. Do not simply refer to a change in market segments as a "downgrade." If the investor base, disclosure burden, liquidity, and consistency with capital policy can be explained, it can be conveyed as a rational market choice.
5. Check the latest list. Securities subject to an improvement period, companies with compliance plans extending beyond the transition deadline, and Securities Under Supervision and Securities to Be Delisted will be updated on the JPX website. Rather than keeping a fixed number of companies in the document, it is more practical to link to the latest list.

Source/reference materials

• Japan Exchange Group “End of transitional measures regarding continued listing criteria”: https://www.jpx.co.jp/equities/follow-up/04.html
• Japan Exchange Group “Summary of issues at the follow-up meeting regarding the review of market segments and future responses of TSE” (January 30, 2023): https://www.jpx.co.jp/news/1020/20230130-01.html
• Japan Exchange Group “List of stocks subject to improvement period”: https://www.jpx.co.jp/listing/market-alerts/improvement-period/
• Japan Exchange Group “Summary of Delisting Criteria”: https://www.jpx.co.jp/equities/listing/delisting/outline/01.html
• Japan Exchange Group “tradable shares – Details of standards for maintaining listing”: https://www.jpx.co.jp/equities/listing/continue/details/02.html
• Japan Exchange Group “List of stocks with market classification changes”: https://www.jpx.co.jp/listing/stocks/transfers/
• Japan Exchange Group “Follow-up on market segments review”: https://www.jpx.co.jp/equities/follow-up/

Related articles

• 3.1 -- From 4 categories to 3 categories: Overall picture of market restructuring with transitional measures in place.
• 3.2――tradable-share ratio: Reasons for not achieving standards and improvement effects of each capital policy.
• 3.4――TOPIX reform: Review of index adoption that proceeds separately from market segments.
• 4.3 - List of companies disclosing information on the TSE: Another mechanism to encourage corporate behavior through public disclosure.
• 5.4 - How to handle unsolicited acquisitions: Basics of M&A procedures including going private.