Regarding the Third Party Committee Report

November 5, 2010

Kirin Holdings' Third Party Committee Report (Summary)

Kirin Holdings' Third Party Committee

Committee Chair: Nobuo Gohara

Committee Members: Toru Kajikawa

Takeo Kikkawa

1. Objectives of the Committee

The objectives of this committee regarding the misconduct of false and circular transactions by Mercian Corporation (hereafter "ME"), a consolidated subsidiary of Kirin Holdings Company, Limited (hereafter "KH"), in its fishery feed business is to assess the soundness of KH's governance practices up to the time of the event and whether any legal and/or social liability is generated in KH as a result, as well as to consider future measures to prevent repeated occurrences within the Kirin Group.

2. General Statements on Parent Companies' Legal and Social Liability

Parent companies and their subsidiaries are essentially separate legal persons. In principle, the directors of the parent company are not held liable for violation of manager's due duty of care under Japan's Companies Act based on a subsidiary's misconduct, barring such situations in which the parent company neglects to review reports from the subsidiary or respond to problems discovered in those reports.

Also, concerning the duty to establish internal control systems for a business group under the Companies Act, as directors are generally considered to have a broad discretionary domain, securing subsidiary independence is justified from the perspective of protecting minority shareholders' profit in the case of listed subsidiaries, and in reality excessive intervention by the parent company is difficult. Even when the parent company adopts a loose control policy toward its listed subsidiaries, it is not directly held liable for violation of the duty to establish internal control systems.

Under the Financial Instruments and Exchange Act, directors may incur civil and/or criminal liability with the submission of an Internal Control Report containing any fake statement on important matters. Nonetheless, a material weakness in internal control on the part of a subsidiary does not necessarily directly constitute a material weakness in internal control on the part of the parent company across the group.

Even when there is no basis for legal liability it is not uncommon for a parent company to undergo strict social censure regarding a subsidiary's misconduct, especially today when corporate accounting is geared toward consolidated financial statements. However, ME is not a wholly owned subsidiary as one segment in its parent company's business; KH owns a percentage of ME shares only slightly exceeding the majority. Moreover, ME is socially evaluated and judged by its own brand, and assumes responsibility for securities markets as an independent listed company, and thus there are limits to the extent of the parent company's management and oversight.

3. Assessment of KH's Legal and Social Liability

The committee investigated the state of the governance system within KH in relation to its Group companies as well as the state of its management and oversight of ME by reviewing related documents and conducting hearings with involved persons. KH gives Group companies that are listed special status under its basic provisions for Group management and adopts a policy that respects their independence. KH did have in place a mechanism that executed a certain level of governance toward ME, a listed subsidiary, as well. Also, there is no evidence that ME had reported to KH suspicion of the current matter of inappropriate trading.

In light of our statements in 2 above, the directors of KH will not be held legally liable for not having detected the current matter of inappropriate trading, of which only a limited number of persons held suspicion even within ME. It would also be difficult to say that the governance mechanism that KH adopted toward ME deviated from proper discretion and was inappropriate as a means of internal control. In addition, given the size of impact on KH's consolidated accounts and that the misconduct can be considered a problem of the limitations of internal control, having been carried out through collusion between ME's top employees and business partners, the current matter of inappropriate trading does not lead to the assessment that Internal Control Report of KH contains a fake statement on important matters. Therefore, it is judged that no legal liability in relation to this problem arises for KH's directors.

Also, the current matter is a problem that would have been extremely difficult to prevent or detect early on with the general governance practices of some parent companies. We do not acknowledge that there were particular problems with the practices of KH as those carried out by a parent company toward its listed subsidiary, and we think there is no basis by which KH can be held socially responsible as a corporation.

4. Consideration of Measures to Prevent Subsidiary Misconduct

Departing from the viewpoint of liability, we considered measures to prevent misconduct in KH's Group companies by considering what response KH could have taken when the problem started and in the process of its spread based on all the facts that are clear to us at the current time, including the history of the acquisition of ME, the unique characteristics of ME's fishery feed business and its operations, and past issues surrounding its fishery feed business.

KH's governance practices at the time of and subsequent to the acquisition of ME were typical for a Japanese corporation and were in no particular way problematic. Still, from the perspective of preventing repeated occurrences, one task worthy of consideration is recognizing certain aspects of the uniqueness of operations, transactional relationships, and ME's fishery feed business that led to and caused inappropriate trading as risk factors and to respond to future events accordingly.

As an approach for preventing future occurrences of similar subsidiary misconduct, the method of generally enhancing management and oversight has its limits considering that, for listed subsidiaries, the subsidiary's administrators themselves assume liability toward securities markets and the independence and autonomy of the subsidiary's administration requires due consideration. Thus, assessing and responding appropriately to risk at stages before and after an acquisition should be given special importance. Even with listed subsidiaries, when factors exist that can be recognized as risks enabling misconduct, intervention in the subsidiary by the parent company at a level exceeding normal management and oversight for a risk response will likely be accepted in some situations.

First, the parent company should assess to the greatest extent possible the risks of the company to be acquired—as a whole and for each of its business segments—and should factor those risks into its decision to acquire or not, as well as use the assessment as basic information for enhancing management and oversight according to risk size after the company is made a subsidiary through acquisition. It is also necessary that the parent company, post-acquisition, assesses the level of risk by sufficiently utilizing risk-related information gained during the acquisition, and when conditions arise that lead to an understanding that the risk has grown, enhances management and oversight of the subsidiary.

5. Proposed Methods for Future Prevention of Misconduct

Based on the above review, we propose the following:

• (1) Reconfirm the state of governance throughout the Group, and strengthen cooperation on governance and compliance with listed subsidiaries.
• (2) Conduct a sweeping review of investigations for assessing risk for company acquisitions.
• (3) Channel all post-acquisition risk-related information to the department in charge of subsidiary risk.
• (4) Match governance practices to risk size for each subsidiary.