We conduct business on a global scale across a broad range of business areas and utilize sophisticated, specialized technologies to carry out our operations. Therefore, we are exposed to risks attributable to the economic environment, risks inherent in individual industrial sectors and business lines and risks related to our operations. Investment in our securities also involves risks.
The following risks and countermeasures are based on assumptions we consider reasonable as of June 22, 2022, the date of submission of Annual Securities Report (The 153rd Business Term). The countermeasures below will not necessarily eliminate the effects of the risks and may not effectively mitigate the effects.
Our business is influenced by the global economy, economic and geopolitical conditions in certain regions or countries. We are affected by downward economic trends in regions, countries and Japan. The rising interstate conflicts and tensions represented by the situation in Ukraine, could cause decline in consumer spending or capital investment and subsequently reduced demand for our products, systems and services, which could adversely affect our business, financial condition, and results of operations.
In response to this risk, we combine the many different aspects of the Social Innovation Business in a range of business fields and regions, and we aim to take prompt countermeasures against geopolitical changes through risk evaluation, etc.
Since we conduct business in many foreign countries, our business activities are exposed to risks from fluctuations in foreign currency exchange rates. We sell products, provide services and purchase raw materials and components in local currencies. Therefore, fluctuations in foreign currency exchange rates may result in lower revenues or higher costs in yen to us and thus affect our results of operations, which are reported in Japanese yen. Our price competitiveness may decline if we seek to increase prices in local currencies to compensate for lower revenues or to increase prices in yen to absorb the higher cost, and thus our results of precautions may be harmed. In addition, since we hold assets and liabilities denominated in foreign currencies, fluctuations in foreign currency exchange rates may adversely affect our financial condition presented in Japanese yen through foreign currency translation.
To mitigate the risk, we hedge the foreign exchange risks using forward exchange contracts and currency swap agreements and promote our strategy of selling locally produced goods and services.
Our primary sources of funds are cash flows from operations, borrowings from banks and other institutional lenders, and funding from capital markets, such as offerings of commercial paper and other debt securities, as well as equity securities. We need liquid funds to pay our operating expenses, the principal of and interest on our debt and dividends on our capital stock. We also need long-term financing to fund, among other things, capital expenditures and research and development expenses. We currently believe our cash flows from operations, borrowings from banks and other institutional lenders and funding from the capital markets can provide sufficient funding for our operations and other liquidity needs. However, a global economic downturn could adversely affect our cash flows from operations, business results and financial condition and may adversely affect our credit ratings. If our ratings are downgraded, our ability to obtain additional financing on terms we consider favorable may be negatively affected.
Our reliance on banks and institutional lenders exposes us to risks related to rising interest rates, and we may need to increase our reliance on external sources of funding. An increased reliance on debt instruments may adversely affect our credit ratings, which might affect our ability to successfully obtain additional financing on terms we consider favorable. The inability to successfully obtain such financing may increase our financing costs, and therefore could adversely affect our financial condition and results of operations. To reduce risks related to rising interest rates, we enter into interest rate swap agreements.
Furthermore, failure of one or more of our major lenders or a decision by one or more of them to change the terms and conditions of their loans or to stop lending to us could have an adverse effect on our access to funding.
We invest in securities to maintain or promote our business or other relationships with other companies. These securities are exposed to the risk of declining stock prices. Such declines may require that we write down equity securities that we hold. Further, contractual and other obligations may require us to maintain our holdings of these securities despite declining share prices and this may lead to material losses.
To deal with those risks, we, under the basic policy, will not acquire and hold other companies' shares except for cases where acquiring or holding such shares is necessary in terms of transactions or business relationship. The Company also promotes reducing shares that it already owns unless significance of holding shares and economic rationales of are confirmed.
Our manufacturing operations rely on external suppliers for supplies of materials, parts, components and services of adequate quality and quantity, delivered in a timely manner at a reasonable price. External suppliers may not have sufficient capacity to meet all of our needs during periods of excess demand. Shortages of materials, parts, components and services may cause a sharp rise in their prices. In addition, prices of certain raw materials, parts and components which we purchase in local currencies, principally the U.S. dollar and the euro, could be adversely affected by fluctuations in foreign currency exchange rates. Increases in the market price of petroleum and other materials, such as copper, steel, synthetic resins, rare metals and rare-earth minerals, can increase our production costs and may adversely affect our results of operations. Conversely, decreases in commodity prices, such as for raw materials, parts and components, can result in write-downs of inventory. If natural disasters disrupt the operations of our suppliers and damage supply chains, it may adversely affect our production. If there are violations of laws or regulation at 28 suppliers, including infringements of rights of workers such as child labor and forced labor, our reputation as an entity that places orders may decline and the stable procurement of raw materials or parts from the suppliers may be hindered, which may adversely affect our business, financial condition and results of operations.
To deal with those risks, we establish close relationships with suppliers, appropriately react to changes in demand in different regions, promoting a strategy of selling locally produced goods and services, formulates a business continuity plan (BCP) at domestic bases and major bases overseas to strengthen the abilities to deal with business interruption risk and use and strengthen the procurement function of our entire group. To prevent violations of laws and regulations at suppliers, we carry out inspections and audits using questionnaires and initiatives to understanding.
We make transactions with diverse customers and suppliers in Japan and other countries. We sell our products to certain customers on credit and pay in advance for products or services provided by certain suppliers. Credit deterioration or failure of one or more of them could adversely affect our financial condition, results of operations and cash flows.
To deal with those risks, we take measures to manage counterparty credit risk, such as regularly monitoring credit conditions of such customers or suppliers and setting a limit on transaction amount according to their credit conditions.
We seek to expand our business, including our Social Innovation Business, in overseas markets as part of our business strategy. Through such overseas expansion, we aim to increase our revenues, reduce our costs and improve profitability. In many of these markets, we face barriers in the form of long-standing relationships between our potential customers and their local suppliers. In addition, various factors in foreign countries where we operate may adversely affect our overseas business activities. These factors
include:
Because of these factors, there can be no assurance that we will be able to achieve the aims of our overseas growth strategy. This may adversely affect our business growth prospects and results of operations.
To deal with those risks, we constantly determine global political and economic conditions and analyze their effects on our businesses. Based on the analysis, we take group-wide steps.
An increase in business costs due to carbon taxes, taxes on fuel and energy consumption and/or the introduction of carbon emission rights trading, etc., loss of selling opportunities due to delays in the development of technology for products and services, delay in the transition from businesses using fossil fuels to those that do not, and investors and society's disapproval of the Group's stance on addressing the issue of climate change may adversely affect the Group's business activities, management performance and financial condition.
In response to these risks, the Group has established its Hitachi Environmental Innovation 2050 long-term environmental targets, has been implementing an array of activities to achieve carbon neutrality. The Group will accelerate its efforts to achieve its targets. Divisions are aiming to achieve carbon neutrality for own operations by fiscal 2030. They promote the introduction of energy-efficient equipment and power generation using renewable energy through the introduction of Hitachi Internal Carbon Pricing, continue to streamline production and transportation, and promote the use of electric power from non-fossil energy, etc. to prevent or reduce an increase in carbon taxes and other business costs and to reduce the risk of negative assessment. Businesses are aiming to develop and increase sales of innovative products and services that will lead to the reduction of CO2 emissions, develop energy-efficient products that will help reduce energy consumption, and transition from products currently using fossil fuels to products using electricity.
With the increased importance of information systems to our operating activities, disruptions in such systems due to computer viruses and other factors could have a negative impact on our operating activities, results of operations and financial condition. The expansion of remote work is at risk of generating new security risks, including information leakage.
To deal with those risks, we continuously promote cybersecurity measures and strictly prescribe and implement rules, products and procedures that apply to remote work. However, they may not be effective if unprecedented cyberattacks occur, such as cyberattacks, or there are any vulnerabilities in systems that are not managed by us.
We believe recruiting and retaining additional people who are highly skilled in connection with our operations is indispensable to remaining competitive. We look particularly for human resources who can work globally, those who can identify customer needs, working near them, and provide optimal solutions and services and those who can take the lead in digital transformation. However, the number of skilled personnel is limited and the competition for attracting and maintaining such personnel is intense. We cannot ensure that we will be able to successfully attract new or maintain our current skilled personnel.
To deal with the risk, we expand overseas direct recruitment of digitally savvy human resources to hire human resources needed in Japan and overseas in a timely manner. We create employee-friendly workplaces where diverse human resources work and employs excellent global human resources in a globally common personnel system. Using a group-wide, globally common learning management system and an in-house education program, we aim to maintain and cultivate excellent human resources.
New technologies are rapidly emerging in the segments in which we conduct business, with the pace of technological innovation. The development of new and advanced technologies, the continuous, timely and cost-effective incorporation of such technologies into products, systems and services and the effective marketing of such products, etc. are indispensable to remaining competitive. It is important to respond to technological innovations, including 5G, automation and electrification using technologies such as AI, IoT and robots, remote and non-contact technologies and environmentally friendly technologies. While introducing such products, etc. requires significant resource commitment to research and development, there can be no assurance that our research and development will be successful. Failure in our endeavors to develop and incorporate such advanced technologies into products and services in a timely manner, or to achieve market acceptance for such products, etc., may negatively affect our business, financial condition and results of operations.
To mitigate those risks, we promote open innovation involving industry, government and academia, recruit and cultivate digitally savvy human resources and strengthens Lumada. Through those activities, we work to create an innovation ecosystem.
The spread of COVID-19 has caused restrictions on movement, including lockdowns on cities and stay-at-home orders and requests, closures of business establishments, restrictions on production activities, decreases in consumer spending and capital expenditure, supply chain disruptions, sporadic violent fluctuations on capital markets worldwide and deterioration in the financing environment. As a consequence, it has caused economic deterioration of the world and had adverse effects on the Group's businesses, financial position and operating results. The COVID-19 may have additional adverse effects depending on its future course.
In response to those risks, we are continuing manufacturing activities as far as safety is ensured, bringing in diverse ways of working, including remote work, while enhancing the digital environment, strengthening cash management, and cutting cost by changing the business structure.
We have many facilities, including our R&D facilities, manufacturing facilities and our headquarters in Japan. Historically, Japan has experienced numerous natural disasters such as earthquakes, tsunamis and typhoons. Natural disasters in the future may have a significantly adverse effect on an array of our corporate activities, from production to sales. We also have overseas facilities in Asia, the U.S. and Europe, which are also subject to similar natural disasters. Natural disasters in each of the areas may cause damage on certain of our plants and offices and the operations of our suppliers and customers. Due to climate change, large-scale natural disasters, including drought, rising sea levels, long heat waves and floods, may become more serious. Such significant natural disasters may directly damage or destroy our facilities, which could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would result in significant losses. Furthermore, even if such significant natural disasters do not directly affect our facilities, they could result in disruptions in distribution channels or supply chains. The spread of infectious diseases and geopolitical and social instability, such as terrorism, crime, civil disturbance and conflict, etc., may also disrupt our operations, render our employees unable to work, reduce consumer demand for our products or disrupt our supply and distribution channels. In addition, we are not insured against all potential losses, and even losses that insurance covers may not be fully covered and may be subject to challenges of or delays in payment. Direct and indirect disruption of our operations as a result of natural disasters or other events could have a negative impact on our operating activities, results of operations and financial condition.
To deal with those risks, we work to strengthen its ability to deal with business interruption risk by formulating BCPs. When we build a new plant, we determine the layout, taking into consideration possible floods.
We enter into a substantial number of long-term projects, particularly in connection with the construction of infrastructure systems. When the outcome of a construction can be estimated reliably, we recognize revenue and expenses by reference to the stage of completion of the contract activity. In this case, revenue is recognized mainly based on the progress of the project mostly based on the cost incurred relative to the estimated total cost. When the outcome of a construction cannot be estimated reliably, we recognize revenue only to the extent of contract costs incurred that it is probable will be recoverable, and recognize contract costs as expenses in the period in which such costs are incurred. The revenue recognition for such long-term projects requires us to make significant assumptions about the estimated total cost, estimated total selling price, contract risks and other factors. However, these estimates are subject to change. We regularly review these estimates and adjust them as we deem necessary. We charge any anticipated losses on fixed price contracts to operations when we are able to estimate such losses. While we employ our best judgment based on available information, these estimates are subject to change. Fluctuations in costs can occur for a variety of reasons, many of which are beyond our control. In addition, we or our counterparties may cancel these contracts. These factors would require us to revise our initial assumptions regarding a particular contract, and may adversely affect our business, financial condition and results of operations.
To deal with those risks, we aim to identify and manage risks before the execution of contracts, and our operating division and finance division continue to manage and share identified risks after the execution of contracts for accurate estimates in a timely manner.
We are subject to intense competition in many of the markets in which we operate, and this may adversely affect our results of operations. We compete with diverse competitors ranging from huge global corporations to specialized companies including startups. Advanced products, systems and services are becoming commoditized. The production and development of them and the provision of services in low-cost regions, and use of the cloud and automation are expanding. As a result, price competition is intensifying. To succeed in this competitive environment, we believe that our products, etc. must be price competitive. The commoditization of such products, etc. affects our ability to set prices for our products, etc. If we are unable to charge comparable prices to those of our competitors, our competitiveness and overall profitability may be harmed. On the other hand, charging comparable prices to those of our competitors may require us to sell products and services at a loss. Our products, etc. must also be competitive in terms of engineering sophistication, quality and brand value. We must introduce our products and services to the markets in a timely manner. There can be no assurance that the products, etc. that we offer will be competitive. The failure of such products, etc. to be competitive may negatively affect our business, financial condition and results of operations.
To deal with those risks, we promote enhancing innovation through research and development, expansion of Lumada business, collaborative creation with customers and strives to produce high value-added products.
Oversupply in the markets in which we compete may lead to declines in sales prices, revenues and profitability. In addition, adjustment to demand may force us to dispose of excess supply or obsolete equipment or reduce production, which can result in losses. For example, the imbalance between supply and demand in information equipment, elevators, semiconductor and automotive equipment industries and a resultant deterioration in market conditions could negatively affect our businesses, financial condition and results of operations.
To deal with those risks, we work to strengthen the competitiveness of our products, etc. and control the supply and inventory of products, etc. based on demand forecasts.
We implement "the Hitachi Smart Transformation Project," which promotes cost reductions in all activities of our value chain by thoroughly overhauling our cost structure across our group. We seek to stabilize earnings and strengthen cash flows by improving our management efficiency through the Project. The Project may be less successful than we currently anticipate. Even if the Project is successful, there is no assurance that we will be able to sustain or increase profitability.
Our business strategy seeks to build our business portfolio and achieve a business structure with high growth potential and profitability mainly by strengthening our Social Innovation Business, which supplies advanced social infrastructure supported by information and communication technology. We plan to devote significant resources including capital expenditures and R&Ds and are making investments in mergers and acquisitions and in new projects to strengthen our Social Innovation Business. In addition, we attempt to design suitable organizational structure for promoting our Social Innovation Business more effectively in response to market changes. To implement this strategy, we have incurred and may continue to incur considerable expenses. Our efforts to implement this strategy may be unsuccessful or less successful than we currently anticipate. Even if these efforts are successful, there is no assurance that we will be able to sustain or increase profitability.
To deal with those risks, we work to manage implementation in a phase gate process in each business unit (BU) and analyze and discuss market trends, trends at competitors, technological trends and potential risks, among other issues, from a range of perspectives, in the Investment Strategy Committee, Senior Executive Committee, the Board of Directors and Audit Committee.
In every operating sector, we depend to some degree on acquisitions of other companies, joint ventures and strategic alliances with outside partners to design and develop key new technologies and products, to strengthen competitiveness by scaling up and to expand into new regions through acquiring local bases or distribution channels. Such transactions are inherently risky because of the difficulties in integrating operations, technologies, products and personnel and achieving return of the investment. Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could adversely affect our business. Decisions made by or the performance of alliance partners that we cannot control or adverse business trends may also negatively affect the success of our alliances. We may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to integration or restructuring of acquired businesses. If it is expected that the amount invested is irrecoverable due to a decline in the profitability of an investee, we may incur significant losses, including impairment loss for goodwill. There can be no assurance that these transactions will be beneficial to our business or financial condition. We recorded goodwill of 1,137,719 million yen in the IT segment, 513,616 million yen in the Energy segment and 168,475 million yen in the Industry segment as of March 31, 2022. Even assuming these transactions are beneficial, there can be no assurance that we will be able to successfully integrate acquired businesses or achieve all or any of the initial objectives of these transactions.
To deal with those risks, we work to manage implementation in a phase gate process in each BU and analyze and discuss market and industry trends, strategies, purchase prices, PMI (post-merger integration) processes and potential risks, among other issues, from a range of perspectives, in the Investment Strategy Committee, Senior Executive Committee, the Board of Directors and Audit Committee.
Our business strategy seeks to build our business portfolio and achieve a structure with high growth potential and profitability in part by:
Our restructuring efforts may not be implemented in a timely manner or at all, including due to governmental regulations, employment issues or a lack of demand in the M&A market for businesses we may seek to sell. In addition, we have listed subsidiaries and from time to time the interests of these listed subsidiaries' shareholders may conflict with our interests. Such conflicts of interest may result in difficulties in timely implementing group-wide policies, including mergers, company splits and other similar to which the listed subsidiaries are parties. Restructuring efforts may also bring about unintended consequences, such as negative customer or employee perceptions, and have caused and may continue to cause us to incur significant expenses and other costs, including additional impairment losses on our fixed assets and intangible assets, write-offs of inventory and losses on the disposal of fixed assets and losses related to the sale of securities. Current and future restructuring efforts may be unsuccessful or less successful than we presently anticipate and may adversely affect our business, financial condition and results of operations.
To deal with those risks, we analyze and discuss market and industry trends, strategies, sale prices, processes and potential risks, among other issues, from a range of perspectives, in the Investment Strategy Committee, Senior Executive Committee, the Board of Directors and Audit Committee.
We use the equity-method to account for a number of associates and joint ventures. If one or more of such associates or joint ventures, accounted for using the equity-method, records a loss during a given period, we must record that loss in a manner proportionate to our ownership interest in our consolidated financial statements. In addition, if the carrying amount of our equity-method investments in associates or joint ventures is below the recoverable amount of the investments, we could be required to record an impairment loss.
To deal with those risks, we promote investment income management using return on invested capital (ROIC) and concentrate investment in fields where profitability and growth are high. We monitor achievement of business plans and financial position at equity method affiliates in which we invest and sell businesses with low profitability and investee companies whose competitiveness we are concerned about.
We face risks of being involved in litigation and alternative dispute resolution and regulatory investigation and actions in connection with our operations. Lawsuits or any other legal procedures for resolving disputes and regulatory actions may seek payment of large, indeterminate amounts or otherwise limit our operations, and their existence and magnitude may remain unknown for substantial periods of time. In past, we have been the subject of several investigations of alleged antitrust violations in relation to certain product markets in Japan, Europe and North America, etc. and received claims for damages from our customers, etc., which may have adverse effects on our financial condition or profitability. These investigations or disputes may result in significant penalties or compensation for damages, etc. Such substantial legal liability or regulatory action could have an adverse effect on our business, results of operations, financial condition, cash flows, reputation and credibility.
In addition, our business activities are subject to various governmental regulations in countries where we operate, which include investments, exports, tariffs, antitrust, anti-bribery, consumer and business taxation, intellectual property, foreign trade and exchange controls, human rights, employment and labor, environmental and recycling requirements. These regulations limit, and other new or amended regulations may further limit, our business activities or increase operating costs. In addition, the enforcement of such regulations, including the imposition of fines or surcharges for violation of such regulations, may adversely affect our results of operations, financial condition, cash flows, reputation and credibility.
To deal with those risks, we work to identify operations where regulations are applied, assess risks, take steps in response to risks and provide education to employees.
We increasingly provide products and services utilizing sophisticated technologies. Reliance on external suppliers reduces our control over quality assurance. The occurrence of defects in our products and services could negatively affect our reputation for quality of products and services, expose us to liability for damages caused by such defects and negatively affect our ability to sell certain products. A significant product defect could adversely affect our results of operations, financial condition and future business prospects.
To deal with those risks, in addition to strengthening our quality assurance system, we conduct activities to prevent accidents and comply with technical laws and regulations. We provide education on thorough risk assessment, quality, reliability and reactions when product accidents occur.
We maintain and manage personal information obtained from our customers, as well as confidential information relating to our technology, research and development, or R&D, production, marketing and business operations and those of our customers and clients, in various forms. Unauthorized disclosures of such information could subject us to complaints or lawsuits for damages or could otherwise have a negative impact on our business, financial condition, results of operations, reputation and credibility.
To deal with those risks, we establish and implement rules on the management of confidential information and implement identity management and access control through encryption and the building of authentication infrastructure. We also examine information security at suppliers.
We depend in part on proprietary technology and our ability to obtain patents, design right, trademarks and other forms of intellectual property rights covering our products, product design, manufacturing processes and software-based services in Japan and other countries. The fact that we hold such intellectual property rights does not ensure that they will provide a competitive advantage to us. Various parties may challenge, invalidate or circumvent our patents, design right, trademarks and other intellectual property rights. There can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our technology. Effective patent, design right, copyright and trade secret protection may be unavailable or limited in some of the markets in which we operate, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons.
To deal with those risks, we search known examples before applying for intellectual property rights to increase the probability of obtaining rights and to obtain rights suitable for business. In countries where intellectual property protection is unavailable or limited, we strive to curb unauthorized use of intellectual property primarily through contracts with employees and contractors.
We design many of our products to include software or other intellectual property licenses from third parties. Competitors may not make their protected technology available to us, or may make it available to us only on unfavorable terms and conditions. There can be no assurance that we will be able to maintain a license for such intellectual property if obtained, for economic or other reasons, or that such intellectual property will give us the commercial advantages that we desire.
To deal with those risks, we endeavor to maintain good relations with the third parties through contracts and negotiations to exercise intellectual property rights.
From time to time, we are sued or receive notices regarding patent, design right and other intellectual property claims. Whether or not these claims have merit, they may require significant resources to defend against and may divert management attention from our business and operations and result in harm to our reputation. In addition, a successful infringement claim and our inability to obtain the license for the infringed technology or substitute similar non-infringing technology may adversely affect our business.
To deal with those risks, we work to avoid disputes with other companies chiefly by conducting a patent clearance study before selling a new product or providing a new service and by changing the design of products or services if necessary.
We have a significant amount of employee retirement benefit costs that we derive from actuarial valuations based on a number of assumptions. Inherent in these valuations are key assumptions used in estimating pension costs including mortality, withdrawal and retirement rates, changes in wages and the discount rate. We are required to make judgments regarding the key assumptions by taking into account various factors including personnel demographics, market conditions and expected trends in interest rates. Although management believes that its key assumptions are reasonable in light of the various underlying factors, there can be no assurance that the key assumptions will correspond to actual results. If our key assumptions differ from actual results, the consequent deviation of actual pension costs from estimated costs may have an adverse effect on our financial condition and results of operations. A decrease in the discount rate may result in an increase in the amount of projected benefit obligations. In addition, we may change these key assumptions, such as the discount rate. Changes in key assumptions may also have an adverse effect on our financial condition and results of operations.
To mitigate the risk, on April 1, 2019, we changed the corporate pension plan for employees of the Company from a defined contribution plan to a risk-sharing corporate pension plan to fix the Company's premium payments and reduce investment risks.
The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the American Depositary Shares, or ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay dividends and distributions collected from us as and to the extent provided in the deposit agreement. However, ADS holders will not be able to bring derivative actions, examine our accounting books and records, or exercise appraisal rights through the depositary.
We are incorporated in Japan with limited liability. A significant portion of our assets are located outside the United States. As a result, it may be more difficult for investors to enforce against us judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States or judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal securities laws of the United States.
The Companies Act allows companies to establish a "unit" of shares for the purpose of exercising voting rights at the general meetings of shareholders. Under our articles of incorporation, one unit of our shares is composed of 100 shares, equivalent to 50 ADSs. Each unit of our shares has one vote. A holder who owns shares or ADSs in other than multiples of 100 or 50, respectively, will own less than a whole unit (i.e., for the portion constituting fewer than 100 shares, or fewer than 50 ADSs). Our articles of incorporation, in accordance with the Companies Act, impose significant restrictions on the rights of holders of shares constituting less than a whole unit, which include restrictions on the right to vote, to attend a shareholders meeting and to bring derivative actions. In addition, less than whole unit shares cannot be traded on Japanese stock markets. Under the unit share system, holders of our shares constituting less than one unit have the right to require us to purchase their shares and the right to require us to sell them additional shares to create a whole unit of 100 shares. However, holders of our ADSs are unable to withdraw underlying shares representing less than one unit and, as a practical matter, are unable to require us to purchase those underlying shares. The unit share system, however, does not affect the transferability of ADSs, which may be transferred in lots of any number of whole ADSs.
We may issue additional shares in the future within the unissued portion of our authorized share capital and sell shares held as treasury stock, generally without shareholder vote unless the subscription or sale price is significantly lower than the market price. Issuances and sales of our shares in the future may be at prices below the prevailing market prices and may be dilutive.
Market prices for our ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the amount of cash dividends or other cash payments made to holders of ADSs will decline if the value of the yen declines against the dollar.
