Japan Corporate Law

 

Main points of Japan Corporate Law

The purpose of this page is to outline the main points of the new Japanese Corporate Law and outline some difference with previous Japan corporate legislation. It is provided for illustration purpose only and cannot replace advice licensed legal professionals.

Directors

Corporations may now have only one director instead of a minimum of 3 previously.

Directors are no longer permitted to simultaneously serve as a regular employee of the corporation. Under the previous law, directors were subject to strict liability standards. Directors could be held jointly and separately liable for matters they approved. In order to escape liability they had to prove they had clearly opposed the matter.

Suit can be filed by the corporation, or via shareholders, in a shareholders derivative suit, so long as they have held the shares of the corporation for at least six months. Shareholders can also file suit against subsidiaries. Under the new Corporations Law, the shareholders can only file suit on behalf of the corporation, and may not file suit when it appears that it is in their own self-interest, or for the benefit of a third party, or where it appears that the case is filed with the intention of damaging the corporation. Moreover, before a shareholder files suit, it must ask the corporation do it on its own. If the corporation does not file suit, it must give a written explanation as to its reasons.

Under the new Corporations Law, however, directors are now subject only to the negligence standard of liability. Only in the cases of self-dealing, where they profited, and the company lost, are they subject to strict liability. Joint and separate liability for merely voting for a subject matter has been dropped. Clear limits on the amount that a director can be held liable for have also been provided. A representative director can be held liable for up to six years worth of his compensation as a director. A regular director for four years compensation and an outside director for two years compensation. Outside directors can also limit their potential liability by contract. Liability can also be limited when the director can prove he acted in good faith and with no gross negligence.

Directors can be held liable on a negligence standard if they can not prove that they were not negligent for:
–Paying illegal dividends
–Providing benefits (as to “sokaiya”)
–Violating laws, regulations or the articles of incorporation.

Directors do not have authority to audit business (verifying whether the directors or violating laws, regulations or the articles of incorporation) and that function is given to shareholders in the following situations:
–There is only one director
–A director and corporate statutory auditor (but only empowered to audit the accounting)
–A board of directors and an audit referee
–A board of directors and a corporate statutory auditor (but only empowered to audit the accounting)
In such situations, when a shareholder recognizes an illegal situation he can call a board of directors meeting. and shareholders have the right to file suit to stop the illegal activity.

Resolutions of the boards of directors previously could not be made by mail or documents. The new Corporations Law permits resolutions through the mails or documents when all the directors agree and there is no objection from the corporate statutory auditor.

Board of Directors Meeting

Meetings of the board of directors may now be conducted by telephone conference calls.

The new Corporations Law requires real meetings of the board of directors every three months. Of course, if there is no board of directors, this is not required.

The board of directors can decide on important matters such as borrowing large amounts of money, the handling of major assets transactions (acquisitions or disposals) the appointment, hiring or dismissal of managers and important staff. Important matters include such as the opening, changing or closing of major facilities such as factories and branches.

The system of joint representative directors permitting multiple representative directors has been abolished under the new Corporations Law.

When a director dies or resigns, it is necessary to call a shareholders meeting to appoint a new director unless the corporation has adopted a system for the temporary appointment of directors, who will serve out the remaining term until the next regular annual shareholders meeting.

The compensation of directors and managers is set by the compensation committee of the corporation. That committee is made up of three directors or more, over half of which must be outside directors.

Other committees include an appointments committee, which must also have 3 or more directors, over half of which must be outside directors. The appointments committee  gives determinations on appointments and dismissals of directors and audit referees for approval by the shareholders meeting. Finally there is also the audit committee. Same composition requirement. Its duties are to audit the job performance of directors and managers.

Having the above committees is in substitution for having a corporate statutory auditor. So they make no decisions on the appointment and dismissal of corporate statutory auditors, their compensation or job performance as there is no corporate statutory auditor if there are these committees.

This system of committees was introduced through 2004 legislation. The new Corporations Law makes it possible for all corporations, including small and medium sized corporations to also have such committee institutions.

If such committees are established in the corporation, that fact must be registered at the local office of the Ministry of Justice’s corporate registry, Legal Affairs Bureau.

Corporate Statutory Auditor

Under the new Corporations Law the corporate statutory auditor is optional. Under the old law the corporate statutory auditor for small corporations only audited the accounting. In large corporations they audited the business as well. Under the new Corporations Law, this distinction ends. In both large and small corporations the corporate statutory auditor can audit the accounting and the business. In non-public corporations with restrictions on share transfers it is possible to restrict the role of the corporate statutory auditor to auditing the accounting only. In that case the power of shareholders is strengthened in auditing the business of the company. The shareholders are empowered to call a board of directors meeting, for example.

The auditing of the financial statements is done by the corporate statutory auditor (or board of corporate statutory auditors (consisting of three or more corporate statutory auditors)) or the accounting auditor or accounting audit firm. Accounting auditors and accounting audit firms are corporate outsiders, not executives of the corporation. If a corporation does have a board of corporate statutory auditors over half must be outside auditors. If there is no board of directors there can not be a board of corporate statutory auditors.

Note: The auditing of the accounting involves checking that the accounting documents and financial statements are correctly prepared. The auditing of the business is to audit that the directors are not violating, laws, regulations and the articles of incorporation.

Shareholders Meeting

The new Corporations Law makes it much easier to call shareholders meeting.

For example, it is possible to call for a shareholders meeting even for the following day.
This is particularly true for corporations with no board of directors.
If there is no board of directors, it is possible to call a shareholders meeting in only one week. Even shorter if so provided in the articles of incorporation.

It is no longer necessary to call a shareholders meeting via mail. Orally, or even via the telephone is now permissible.

The subject matter of the meeting is also no longer required to be included in the notice of the meeting. Even for the regular scheduled (annual) shareholders meeting, it is no longer necessary to attach the accounting documents and financial statements.

All restrictions on the location where a shareholders meeting can be called have also been dropped in the new Corporations Law.

If it so provided in the articles of incorporation, the new Corporations Law allows that certain shareholders shall not have voting rights in the shareholders meeting. This is the case for non-public corporations which have restrictions imposed on the transfer of their shares. In order to amend the articles of incorporation to achieve such, an extraordinary resolution of the shareholders meeting is required. This requires the approval of the majority of the shareholders attending and 3/4ths of the total voting rights

If a corporation has no BOARD OF DIRECTORS, any shareholder, no matter how long they have held the shares, or the number of shares that they hold, can submit a resolution to the shareholders meeting.

Financial Statements Change

The “Statement of Earned Surplus (for profitable corporations) and the ‘Disposition of Deficit’ (for loss generating companies) shall be dropped and replaced with a “Statement of Changes of Shareholders Equity”

This shall apply not only to kabushiki kaisha but also to goshi kaisha, gomei kaisha, the new LLC (godo gaisha) and yugen gaisha continuing in existence.

Corporations are also being given more freedom in their accounting for their equity. With the approval of the general shareholders meeting, it will now be possible to funds in reserves and transfer it to paid up capital. It will also be possible to use reserves to cover deficits. It will also be possible to transfer funds from the surplus to paid up capital or reserves.

Reductions in paid up capital are possible with the passage of an extraordinary resolution at the shareholders meeting. If the reduction in paid up capital is for the purpose of covering a deficit, then an ordinary resolution will be possible.

Dividends

Traditionally Japanese corporations have paid dividends once a year although mid term dividends have also been permissible.

Under the new Corporations Law, with the resolution of the shareholders meeting, it is possible to pay dividends at any time.

Corporations with net assets (equity) of less than 3 million yen are not permitted to pay dividends. This is meant as a measure to protect creditors.

It is expected the most likely result of the changes will be many corporations adopting quarterly dividends with corporations now making quarterly announcements of their business results.

It is illegal to make dividend payouts greater than the amount permitted. In general that is the amount of reserved profits in equity. More specifically, it is

surplus minus the book value of treasury stock minus others such as the price paid on dispositions of treasury stock since the end of the previous term plus the profits shown in the recent term (quarterly, etc)

If such excess dividends are paid out, the directors approving such excess  dividend payments are liable to make restitution to the corporation unless they can prove that it was not the result of intentional acts or negligence. Shareholder approval of the payment is not a defense.

No Minimum paid in Capital

Minimum paid up capital requirements has been abolished.

Categories of Japanese Corporations Public Non-Public

There will officially be Share Transfer Restricted Companies (non-public companies).

The majority of corporations are in fact share restricted companies, where the consent of the board of directors is required to transfer shares. However, in those corporations where there is no board of directors, the decision shall be made by the shareholders meeting.

Public companies are those which have no restrictions on the transfer of shares, in part or in toto.

Non-public company:
Requires no board of directors
Can give directors, statutory auditors and accounting counselors terms of up to ten years
Possible to limit directors to only coming from shareholders.
Need not issue certificates

In addition, the new Corporations Law provides that corporations with paid up capital of 500 million yen or more or liabilities over 200 million yen are called “large corporations,” while the other corporations are called “small & medium sized corporations.

Stock Certificates

Share certificates are not necessary, unless specifically provided in the articles of incorporation. Even in that case, they need not be issued unless so requested by the shareholder.

Trade Name investigation

It will no longer be required to conduct an investigation as to whether the trade name of the new corporation is the same as, or similar to that of another corporation in the same region engaged in the same line of business.  However, there is still need not to violate trademarks in accord with the Unfair Competition Prevention Law.

Articles of Incorporation

In preparing the articles of incorporation, it is no longer necessary to provide for the number of shares to be issued or the method the corporation will utilize to make public announcements.

Foreign Corporations

In theory, foreign corporations are those which are established in other nations under the laws of those nations. There are some however, although established based on the laws of other countries, in fact have their head office in Japan and primarily do business in Japan. In theory, under the previous laws, these corporations were to be treated the same as Japanese corporations established in Japan. In fact, however, as they were not caught, they were able to get around this. Under the new Corporate Law, however, these kinds of foreign corporations will be have stop doing business in Japan, although this will not affect foreign corporations already in Japan.

Disclaimer:
This information is given for information purpose only . Companies should consult with a licensed legal professional before making any decision