MEMO FOR RECORD: (SCAPIN - 1848)
WKL/TEM/HJR /ah
2 January 1948
1. The cancellation of War Indemnities by the Japanese Government on 30 October 1946 caused practically every financial institution in Japan to sustain losses considerably in excess of its capital structure. As a consequence, practically all financial institutions were forced to undertake reorganization procedures.
2. These procedures were provided for by the Financial Institutions Reconstruction and Reorganization Law which became effective 11 August 1946. This law provided, among other things, for the calling for payment of unpaid capital if and when it was determined to be necessary to cover losses. An amendment to the law provides for the termination of liability against a shareholder who does not meet the call for payment of the unpaid portion of his stock, thus providing the shareholder with the option to pay up and retain his stock or forfeit it without further liability.
3. The early completion of the reorganization of financial institutions is desirable as a basis for providing better financial support for the recovery of the Japanese economy. This reorganization is dependent upon the calling for payment of unpaid capital and it is desirable that as much capital as possible be paid up for the purpose of absorbing losses. Although legal provision has been made for calling unpaid capital, the Japanese Government has not intended to do so until the new capital stock is issued.
4. By calling the unpaid capital at the present time stockholders who do not meet the call will lose any preferential claims which they would otherwise have on the issuance of new capital. To maintain this preference, it is expected that some shareholders will pay in full. Without making the call before the issuance of new stock there would be little or no incentive to pay for otherwise no special benefits would accrue by such payment.
5. In order to expedite the reorganization of financial institutions it is necessary to effect a prompt call for unpaid capital. However, this call will be at variance with the present law in two respects:
a. Continuing liability should attach to shareholders who do not meet the call for payment of unpaid capital. (The amendment to the Financial Institutions Reconstruction and Reorganization Law which was reviewed in August 1946, and which passed the Diet on 26 November 1947 intended to place the liability of owners of capital stock of financial institutions on the same status as owners of capital stock of industrial corporations, as provided for in the Enterprise Reconstruction and Reorganization Law, since the latter stockholders are relieved of liability upon failure to meet the call. However, due to the apparent unwillingness of stockholders to pay the unpaid portion, and to the heavy losses which the banks will suffer, now that a more accurate estimate can be made, it is believed that this liability should continue. In order to protect the buyers in good faith of capital stock between 26 November and the date of this directive, this liability should not apply to them. However, to prevent the unethical shifting of title and relief of liability of shareholders who are holding stock as of 26 November, it is believed that the liability should be restored as of the date of this directive.)
b. Forfeiture of stock ownership should not apply to the Nationals of Allied Nations who do not meet the call for payment. During the war such shareholders did not have the privilege of transferring this stock and may not now be in position to be informed of present procedures.
6. The foregoing procedures are accomplished by the attached proposed directive to the Japanese Government. Recommend approval.
7. The Korean area is not affected.
8. Concurrences: CPC
GS (no interest see attached c/n)
ESS/AC E. C. Welsh
W. K. L.