What Is Contribution in Kind?
A contribution in kind refers to a capital contribution made with non-monetary assets—such as real estate or securities—when a joint-stock company issues new shares (i.e., increases its capital).
To prevent disadvantages to existing shareholders or creditors caused by overvaluation of assets, an investigation by a court-appointed inspector is, in principle, required.
However, if certain exceptions specified in the Companies Act are met—such as when the value of the contributed assets does not exceed 5 million yen—this complex investigation can be omitted.
This article explains the procedures for contributions in kind and the conditions under which the inspector’s investigation may be waived.
What Is a Contribution in Kind?
Before explaining what a contribution in kind is, it is helpful to understand when it arises.
A joint-stock company may issue new shares (a capital increase) by soliciting subscribers.
Typically, subscribers pay money to acquire the newly issued shares, but they may also contribute non-monetary assets.
Such non-monetary contributions are called contributions in kind (Companies Act, Article 199(1)(iii)).
In summary, a contribution in kind is one method by which a subscriber (who will become a new shareholder) contributes assets in a capital increase, where the assets contributed are something other than money.
Advantages for the subscriber include being able to acquire shares even without having cash on hand.
Disadvantages include the complexity of the procedures due to legal regulations on contributions in kind.
Why Contributions in Kind Are Regulated
Unlike monetary contributions, contributions in kind are subject to stricter regulations under the Companies Act.
This is because if the value of the contributed asset is excessively overestimated compared to its actual value, an excessive number of shares may be issued. This could harm the interests of existing shareholders, and creditors who rely on the stated capital may also suffer losses.
For example, if an asset with an actual value of 5 million yen is valued at 20 million yen for purposes of contribution, shares worth an extra 15 million yen would be issued, unfairly harming shareholders and creditors.
Therefore, contributions in kind are regulated through the requirement of inspection by a court-appointed inspector.
Inspector’s Investigation
A company must petition the court to appoint an inspector to investigate the value of assets contributed in kind (Companies Act, Article 207(1)–(3)).
The inspector conducts the necessary investigation and reports the findings to the court (Article 207(4)–(6)).
If the court finds that the company’s valuation of the contributed assets (as defined under Article 199(1)(iii)) is inappropriate, it must revise the valuation (Article 207(7)).
If the valuation is revised, the number of shares allocated to the new shareholder will also change, potentially causing unexpected disadvantages.
Thus, the subscriber may withdraw their intention to contribute within one week after the court’s revision (Article 207(8)).
Exceptions to the Inspector Requirement
As a general rule, contributions in kind require an inspector’s investigation.
However, there are five exceptions under which the investigation is waived, based on the rationale that such cases present little risk of harming shareholders or creditors.
1. The number of shares allocated to the subscriber does not exceed one-tenth of the total issued shares
(Companies Act, Article 207(9)(i))
Example: If 100 shares are issued, contributions in kind are exempt if the subscriber receives 10 shares or fewer.
2. The company’s valuation of the assets contributed does not exceed 5 million yen
(Companies Act, Article 207(9)(ii))
Example: Any contribution in kind valued at 5 million yen or less needs no inspection.
3. The contributed asset is marketable securities, and the contribution is made at or below market value
(Companies Act, Article 207(9)(iii))
Example: Listed stock with a market price of 1,000 yen per share may be contributed at 1,000 yen per share without inspection.
4. An attorney, CPA, or tax accountant certifies that the company’s valuation is fair
(Companies Act, Article 207(9)(iv))
This applies to assets without a market price, such as unlisted shares.
For real estate contributions, a real estate appraiser’s valuation is also required.
5. A matured monetary claim against the company is contributed at or below its book value
(Companies Act, Article 207(9)(v))
This is known as a debt–equity swap (DES).
Since book value is clear, unfair overvaluation is unlikely.
Summary
This article explained the basics of contributions in kind.
Although it is possible to become a shareholder without cash by contributing assets in kind, the process generally requires a complicated investigation by an inspector.
However, if one of the five exceptions applies, the inspection can be skipped.
Therefore, when considering a contribution in kind, it is advisable to examine whether your case falls under an exception, or whether it can be structured to fall under one.
Since obtaining certification from an attorney or accountant is often faster than undergoing inspection, this is also worth considering.
Our office provides support for contributions in kind during company formation or capital increases, so please feel free to consult us if you face such issues.
