Companies Act - Overview
Professor of Commercial Law
Chuo Law School
(1) Sources of Law (Governing Statutes)
Until recently in Japan the legal provisions relating to the company system were scattered over the Commercial Code and numerous other pieces of legislation, however the enactment of the 2005 Companies Act brought almost all the relevant legal provisions together in one law. The Companies Act came into effect on 1 May 2006 and an English translation of Articles 1 through 742 (of a total of 979 articles) has been released on the following websites (accessed on 20 August 2007): http://www.cas.go.jp/jp/seisaku/hourei/data2.html (list of Translations of Laws and Regulations)
http://www.cas.go.jp/jp/seisaku/hourei/data/CA1_4.pdf (English version of the Act)
http://www.cas.go.jp/jp/seisaku/hourei/data/CA1_4_2.pdf (bilingual version of the Act)
For the sake of convenience the legal provisions in force prior to the enactment of the Companies Act are collectively referred to below as the "prior regime."
The details of the rules made under the Companies Act are the responsibility of the Ministry of Justice. To be specific, the following three pieces of subordinate legislation are important sources of law supplementing the Companies Act: the Ordinance for the Enforcement of the Companies Act, the Corporate Accounting Rules and the Electronic Public Notice Rules. Whilst due to a 2004 amendment to the Commercial Code almost all notices between companies and shareholders may be given by electronic means, such as through websites or e-mail, the commentary below takes into consideration circumstances where the written form is used for the sake of simplicity.
(2) Types of Companies
The old regime provided for four types of companies; the kabushiki kaisha (stock company), the yugen kaisha (limited company), the gomei kaisha (general partnership company) and the goshi kaisha (limited partnership company). In contrast, the Companies Act prescribes the following four types of companies; the stock company, the general partnership company, the limited partnership company and the godo kaisha (limited liability company). It must be added that it is accepted that companies incorporated pursuant to the old regime prior to the enforcement of the Companies Act on 1 May 2006 will remain in existence for the moment, for what is anticipated to be a fairly long period (they are also permitted to become stock companies). As at the end of November 2006 there were 1,231,000 stock companies, 1,920,000 limited companies, 87,000 limited partnership companies and 3,000 limited liability companies in existence in Japan.
The general partnership company and the limited partnership company respectively equate to the German "offene handelsgesellschaft" and "kommanditgesellschaft," the French "soci?t? en nom collectif" and "soci?t? en commandite simple," and the British and American general "partnership" and "limited partnership." In other words, in a general partnership company, all "partners" (contributors; the same as "mitglieder" in Germany and "partners" in Britain and America) bear unlimited liability towards the company's creditors, whereas a limited partnership company is comprised of a mix of unlimited liability partners and limited liability partners. However, whilst in Germany or Britain and America company tax is not, in principle, levied on these enterprises, in Japan Articles 2(i) and 3 of the Companies Act provide that general partnership companies and limited partnership companies are juridical persons and subject to company tax. Moreover limited liability partners in limited partnership companies may execute company operations but are liable to compensate the company for losses where there is negligence in that execution (Article 596).
The limited liability company is a company format newly established by the Companies Act in 2005. This format has the feature that whilst the legal relationship between partners is, as with general partnership companies and limited partnership companies, primarily prescribed by the articles of incorporation, all partners bear only limited liability towards the company's creditors. Note that general partnership companies and limited liability companies can be formed with even just one partner. In the interests of brevity the Companies Act refers to general partnership companies, limited partnership companies and limited liability companies collectively as "membership companies" (Article 575). Although the limited liability company was introduced for the purpose of promoting the incorporation of venture firms, it seems that it is in fact mostly used as a special purpose company under joint ventures or securitization schemes.
Note that there is no company format in Japan equivalent to the German "kommanditgesellschaft auf aktien" or the French 'soci?t? en commandite par actions', formats reminiscent of 'publicly-traded partnerships'.
The old regime had the stock company format, which was intended for public companies and the limited company format, which was intended for private companies, coexisted, this being a legal structure close to those of Germany and France. However in reality almost all of Japan's stock companies are closed in nature. The causes include that the 'limited company' label was disliked by management at small and medium-sized enterprises (SMEs) due to the popular misunderstanding that the label indicated that the enterprise lacked creditworthiness and that this prevented SMEs from obtaining loans from banks. This reality meant that even the old regime contained a large number of provisions that contemplated closed stock companies. The 2005 Companies Act took a different approach, facilitating the use of the stock company format irrespective of distinctions between large and small or public or private companies, a structure similar to those of Britain and America.
The old regime prescribed minimum amounts of capital to be invested at the time of incorporation of stock companies and limited companies (minimum capital; JPY 10 million and JPY 3 million respectively). The abolition of the minimum capital requirement in the Companies Act has made it possible to set up a stock company with an investment of JPY 1 (1 yen). Note that a company can be incorporated with just one shareholder.
The commentary below omits explanation in relation to general partnership companies, limited partnership companies and limited liability companies and comments solely on the rules applicable to stock companies.
2. Stock Companies: Basic Concepts
Stock companies must hold shareholders meetings and have at least one director. The corporate structures other than shareholders meetings and directors are a board of directors, a company auditor, a board of company auditors, an accounting advisor and an accounting auditor. The company auditor and accounting advisor systems are rare in the West (see 10. and 11. below). An accounting auditor is either a Certified Public Accountant or an audit corporation (see 12. below).
Stock companies are categorized according to the size of their assets and whether or not their shares are transferable. Article 2(vi) of the Companies Act provides that a company that has stated capital of at least JPY 500 million (500,000,000 yen) or liabilities of at least JPY 20 billion (20,000,000,000 yen) is a "large company." Under Article 2(v), a company where there are no restrictions placed on the transferability of shares is a "public company." Even a company that has not listed its shares on a stock exchange can fall under the public company category. Note that whilst a company for which the articles of incorporation anticipate the issuing of several classes of shares may stipulate whether or not transfers will be restricted for each class of shares, the existence of even one class of freely transferable shares will mean that the company falls within the public company category.
The question of what structures will be set up for each company is decided by the type of company and the articles of incorporation. A company that is not a large company and non-public in nature is able to decide which structures to set up in a fairly free manner by means of its articles of incorporation. On the other hand, the structural design of large companies and public companies is restricted by statute. Every company that is both a large company and a public company is obligated to appoint an accounting auditor and must use either a board of company auditors or the committee system. The committee system is a system incorporated into the law by 2002 amendments, with reference to the business practices of listed companies in America. It involves the establishment of all three of the following committees; an audit committee, a nominating committee and a compensation committee, with outside directors forming the core of managerial supervision (see 13. below).
3. Stock Companies: General Principles
(1) Ultra vires doctrine
Under Article 34 of the Civil Code a juridical person has rights and assumes duties solely to the extent of the purposes prescribed in the articles of incorporation, and this provision is also applicable by analogy to companies. However the Second Petty Bench of the Supreme Court has given a very broad interpretation of purposes, holding that "acts necessary for the execution of purposes, even if not included in the actual purposes stated in the articles of incorporation…belong within the extent of purposes," further holding that "whether or not (an act) is necessary for the execution of purposes…is to be decided from observation of the actual statements in the articles of incorporation, according to the standard of whether it could be objectively necessary in an abstract sense" (15 February 1952, Minshu Vol. 6 No. 2: 77). There have, in fact, been no case precedents published after World War II holding that a company's acts were outside its purposes.
The question of the legality of a company making legitimate political contributions was raised in connection with this issue in a Supreme Court decision of 24 June 1970 (Minshu Vol. 24 No. 6: 625). The court held in that case that a stock company could legally make political contributions on the basis that political contributions do not contravene the purpose of making profits.
(2) Piercing the corporate veil
As in America and Germany, the principles regarding piercing the corporate veil are also established in Japanese case law. A Supreme Court decision of 27 February 1969 introduced this legal doctrine into Japan, remarking that that "where the legal personality of [a company] is nothing more than a mere shell, or where it is misused in order to avoid the application of legislation…it will be necessary to pierce the corporate veil."
4. Stock Companies: Incorporation
There are two kinds of incorporation for a stock company; "wholly subscribed" incorporation where the incorporator subscribes to all shares issued at incorporation, and "stock offer" incorporation, where persons other than the incorporator also subscribe to shares. It is possible for a juridical person to be the incorporator.
In practice, shareholders are not sought at large at the time of incorporation and even in cases where a company is incorporated within a circle of associates "stock offer" incorporation is rarely used. In concrete terms, the "stock offer" incorporation process is used where some of the proposed investors are averse to bearing the liability of an incorporator, or where some of the proposed investors are foreigners (such as foreign juridical persons). It is possible to incorporate a company with only one shareholder. The minimum stated capital system was abolished by the 2005 Companies Act (see 1.(3) below).
(2) Preparation of the articles of incorporation and securing contributions
The incorporation of a stock company involves progressing through the processes of preparing articles of incorporation, securing contributions, appointing directors and other officers and the registration of incorporation. The articles of incorporation record the company's purposes, trade name, head office location, value of property to be contributed at incorporation or the minimum amount of the same and the names and addresses of the incorporators (Article 27) and the incorporators sign the articles of incorporation (Article 26(1)). In cases such as where property other than money is contributed, this must be recorded in the articles of incorporation (Article 28). The articles of incorporation must be certified by a notary public (Article 30).
Contributions are, in principle, made in monetary form by bank transfer to a designated bank (Article 34(2)), which is known as the "payments institution" and payment of the full amount is required (Article 34(1)). Since a record showing that the prescribed amount has been transferred to the bank (such as a deposit passbook) must be attached in order to register an incorporation, this is a mechanism by which the payment in of contributions at the time of incorporation is secured. Note that in the case of stock offer incorporation, the bank issues a certificate of safekeeping for deposits (Article 64) and these certificates are prescribed as required documentation at the time of registration of the incorporation (Article 47(2) (v) of the Commercial Registration Act), in order to protect share subscribers other than the incorporators.
Although contributions of property other than money (contributions in kind) are permitted, the following procedure is required in those cases. The names of persons contributing property other than money, descriptions of the contributed property and the value of the same and the number of shares to be allotted to those contributors and other matters must be stated in the articles of incorporation (Article 28(i)) and, except for where the amount of property is small or where the value of the property is established objectively, the property must be investigated by a court-appointed inspector (Article 33). A lawyer is usually appointed as the inspector. Having received the inspector's report the court will order the company to reduce the valuation recorded in the articles of incorporation if it determines that the property has been given an excessive valuation (Article 33(7)).
Whilst this does not constitute a contribution, it is also the case that where it is agreed prior to incorporation that the company will acquire property after incorporation (property acquisition), a description of the property, its valuation and the name of the transferor must be recorded in the articles of incorporation (Article 28(ii)), and in the same manner as with contributions in kind, an inspector must, in principle, investigate the property. This rule is aimed at preventing evasion of the regulations on contributions in kind. It must be added that, although a special resolution of a shareholders meeting is, in principle, required when companies that are within two years of incorporation acquire large amounts of property (post-incorporation; where a purchase agreement is entered into after incorporation), however examination by an inspector is not required (Article 467(1)(v)). Further, the company after its incorporation is liable to pay the necessary expenses of the incorporation such as rent for an incorporation office and the wages of incorporation office staff (incorporation expenses), only to the extent of the amount stated in the articles of incorporation (Article 28(iv)). Unlike in the case of contributions in kind, there is no need to record descriptions of individual transactions or parties in the articles of incorporation.
A company may not carry out business activities during its incorporation procedures, which means at the stage when the company is not yet incorporated. When an unincorporated company has entered into agreements to purchase goods, the other party cannot claim the purchase price from the company after incorporation and may claim solely against the incorporators.
Incorporators are understood to be in a partnership relationship under the Civil Code in relation to the incorporation (incorporators' partnership). This means that where a transaction of the above nature is included in the purposes of the incorporators' partnership, it is not only the incorporators who were involved in the transaction but also any other incorporators who are liable to pay the purchase price (Second Petty Bench of the Supreme Court, 9 December 1960, Minshu Vol. 14, No. 3: 2994).
As mentioned above, in so far as activities in preparation for business after incorporation (acts preparatory to commencing business) are concerned, the legislation regulates only the acquisition of property. Case precedents and academic opinion are divided as to other preparatory acts. The cases hold that the analogous application of the agency theory that an agent who has held himself or herself out as the agent of a non-existent principal bears liability in Article 117 of the Civil Code extends to where an unincorporated company has entered into agreements using its trade name, and uphold the incorporators' liability (Supreme Court, 24 October 1958, Minshu Vol. 12 No. 14: 3228). It has further been held that where a company has acquired property without a record in the articles of incorporation or an investigation by an inspector, the transaction will be invalidated and the company cannot validate the transaction by ratification after incorporation (Supreme Court, 11 September 1986, Hanrei Jiho No. 1215: 125).
There are instances where a person without capital fabricates the appearance of payment in of capital and incorporates a company, such as for example by borrowing monies from a third party and depositing the same in the bank account designated by the incorporators and then withdrawing the deposit after the company's incorporation and returning the funds to the third party. A case has held that this kind of act does not constitute valid payment in, and the share subscribers' obligation to contribute still remains (Supreme Court, 6 December 1963, Minshu Vol. 17 No. 12: 1633).
5. Stock Companies: Shares
Contributors to stock companies acquire rights to "shares". It is a requirement that in order to obtain the shares, share subscribers pay the entire sum of the amount prescribed; partial payment is not acceptable. A shareholder's liability is limited to the subscription price of the shares to which he or she subscribed (limitation of shareholders' liability; Article 104).
According to case precedent, where A has subscribed to shares using B's name with B's consent, A becomes the shareholder (Supreme Court, 17 November 1967, Minshu Vol. 21 No. 9: 2448).
There are instances where shares are owned jointly by several persons due to succession or similar. Where several shareholders hold shares jointly, unless the co-owners specify one person who exercises the rights in relation to those shares and notify the company of that person, the co-owners may not exercise the rights in relation to those shares (Article 106). If opinions differ between the co-owners as to who should be specified as the person who exercises the rights, then the matter is to be decided according to the opinions of a majority of the co-owners' co-ownership shares (Supreme Court, 29 January 1997, Hanrei Jiho No. 1599: 139).
Article 120(1) provides that a stock company shall not give property benefits to any person regarding the exercise of shareholders' rights. Although this prohibits the easy giving of benefits in money or kind to the corporate racketeers known as sokaiya, the recipients of the benefits in money or kind are not restricted to shareholders. The interpretation of the condition "regarding the exercise of shareholders' rights" is unclear and there is a recent decision on the issue (see Supreme Court, 10 April 2006, Minshu Vol. 60 No. 4: 1273). If benefits in money or kind are given unlawfully then the directors involved and the recipients of the benefits will be subject to criminal penalties (Article 970).
(2) Provisions of the articles of incorporation
Stock companies may, if provision is made in the articles of incorporation, issue multiple classes of shares. Even where classes are not provided for, the following three provisions can be included in the articles (Companies Act Article 107); ① that the consent of the company is required for transfers of shares ("shares with restrictions on transfer"; Article 2(xvii)), ② that shareholders have put options in respect of the company ("shares with put option"; Article 2(xviii)), and ③ that the company has call options in respect of shareholders ("shares subject to call"; Article 2(xix)). In cases where classes of shares are issued, the company can include the following six provisions in addition to the provisions in ① through ③; ④ classes of shares regarding dividends of surplus, ⑤ classes of shares regarding the distribution of residual assets, ⑥ classes of shares regarding voting rights at shareholders meetings, ⑦ classes of shares where it is possible for the Stock Company to acquire the entire class of shares by resolution of a shareholders meeting, ⑧ classes of shares that have a right of refusal for certain matters, and ⑨ classes of shares that have the right to elect directors and auditors. Whilst the articles of incorporation must prescribe the number of shares that the company can issue, this number may be increased or reduced by procedures to amend the articles of incorporation (Article 113). Where there is provision for classes of shares in a company's article of incorporation, there must also be provision for the number of shares that can be issued for each class (Article 114).
A stock company must treat its shareholders equally in accordance with the features and number of shares they hold (the doctrine of the equality of shareholders; Article 109(1)). This means that the company can focus on certain shares but is not permitted to focus on shareholders, treating certain shareholders differently. However it should be added that it is permissible to prescribe provisions in the articles of incorporation to the effect that different shareholders will be treated differently in the case of a stock company that is not a public company (Article 109(2)).
(3) Share transfers and shareholder registry
Share certificates in relation to the rights known as shares are issued in some cases and not issued in other cases. A company that has provisions in its article of incorporation to the effect that share certificates will be issued is known as a "company issuing share certificates" (Article 117(6)). At a company issuing share certificates, the transfer of shares is ineffective unless the share certificates are delivered (Article 128(1)).
Whilst the price is sometimes printed on share certificates, at law the price stated on share certificates (face value) has no legal effect (the rules on face value were all abolished by the June 2001 amendments to the Commercial Code).
Share certificates are bearer certificates and a person who receives share certificates from a person without title acquires valid title if the recipient has no knowledge of or is not grossly negligent as to that defective title (Article 131(2)).
A stock company must prepare a shareholder registry that records the names, addresses and other details of shareholders (Article 121). A person who acquires shares may request that the company change the name in the shareholder registry to that person's name (Article 133(1)). It is a requirement, in order for the person who acquires shares to assert ownership of those shares against the company, that the name of the person acquiring the shares be stated in the shareholder registry (Article 130). The system with respect to German bearer share certificates where rights are exercised by presenting the share certificates to the company (for example when attending shareholder meetings or receiving dividends) does not exist in Japan.
Note that it is rare for share certificates to be actually traded when the shares of listed companies are traded; settlement is conveniently achieved through the securities depository system. This system is scheduled to be altered to a new transfer system in January 2009. When the new system is implemented, shares traded will be recorded solely by increases or reductions in account figures and existing share certificates will simultaneously lose validity on a day prescribed by legislation.
(4) Restrictions on transfer
Although the transfer of shares is in principle, free (Article 127), shares for which restrictions on transfer are prescribed ("shares with restrictions on transfer"; Article 2(xvii)) may not be transferred without the approval of the company. As stated above in 1.(2), although there are 1,231,000 stock companies in existence in Japan, there are no more than 4,000 listed companies and almost all stock companies provide for restrictions on transfer in their articles of incorporation.
The procedure for approval for transfers of shares with restrictions on transfer is prescribed in detail in Articles 136 ff of the Companies Act. Note that even in cases where the company does not approve, a contract for sale is valid as between the parties to the trade (Supreme Court, 15 June 1973, Minshu Vol. 27 No. 6: 700).
If A enters into an agreement to sell shares with restrictions on transfer to B, A may request that the company approve the transfer (Article 136). The purchaser B can also make the same request (Article 137). In these situations, if the company does not give approval, A and B may request that the company notify A and B of an alternative purchaser (Article 138(i)(c)). The alternative purchaser (designated purchaser) may be a third party C, or the company itself.
The corporate structures that approve transfers are the board of directors in companies with a board of directors and the shareholders meeting in companies without a board of directors (Article 139(1)). The corporate structures that determine designated purchasers are the shareholders meeting when the company is the purchaser (Article 140(2)) and the board of directors in companies with a board of directors and the shareholders meeting in companies without a board of directors when a third party C is the purchaser (Article 140(5)).
Although the purchase price is determined by discussion between the seller and the designated purchaser (Article 144(1)) in cases where the company has not given approval and has designated a designated purchaser, if agreement cannot be reached, a petition for the determination of the sale price may be made to the court (Article 144(2)). The court is to determine the sale price by considering a variety of factors (Article 144(3), however in practice dividend discount models, and in particular the method known as the Gordon Model is often used (Osaka High Court, 28 March 1989, Hanrei Jiho No. 1324: 140).
Note that contractual restrictions on the transfer of shares are in wide use in addition to or in place of restrictions on transfer under the articles of incorporation. To offer one example, companies adopting "employee holdings systems" where the company has employees hold its shares are not uncommon in Japan, whether listed or unlisted, some of which have employees hold shares at a low price with a stipulation that the employee sell the shares at a designated price on retirement. The Supreme Court held this kind of contract to be valid in a decision of 25 April 1995 (Shumin No. 175: 91).
(5) Acquisition of treasury shares
The shares a stock company holds in itself are known as "treasury shares" (Article 113(4)). Until the June 2001 revision the acquisition of treasury shares was, in principle, prohibited by Japanese law, with only a narrow range of permitted exceptions. However this revision made it possible, in principle, for companies to freely acquire treasury shares, which led to the imposition of regulations in respect of the monetary amount of acquisitions and acquisition procedures.
The monetary amount of an acquisition of treasury shares is, as with dividends, limited to the "distributable amount" (Article 461). Broadly speaking, the distributable amount is the amount of net assets less the amount of stated capital, capital reserves, retained earnings reserves and treasury shares held by the company.
The following procedure is prescribed for the acquisition of treasury shares in the interests of preserving equality between shareholders.
For a company to acquire treasury shares it is, in principle, required that the maximum number and monetary amount of shares to be acquired be prescribed by resolution of a shareholders meeting. This resolution of a shareholders meeting must be prescribed as valid for a period not exceeding one year (Article 156). In order to actually acquire treasury shares the company, in principle, carries out public notification and purchases the treasury shares either from all willing shareholders or through the market (Article 165(1) for takeover bids prescribed by the Securities Exchange Act or market purchases; Article 157 ff in other cases). If there is an offer to sell more than the number of shares the company was to acquire, the company shall buy the shares using the proportional distribution method (Article 159).
Note that if provision is made in the articles of incorporation, it is possible to prescribe the acquisition of treasury shares by resolution of a shareholders meeting, without going through a resolution of the shareholders meeting every year, however, in this case the acquisition methods are limited to takeover bids or in the market (Article 165(2)).
In contrast, there are strict procedures prescribed in Article 160 for a company to undergo when it intends to acquire treasury shares from specific shareholders.
The accepted view is that an acquisition of treasury shares in violation of the above procedures is invalid (Supreme Court, 5 September 1968, Minshu Vol. 22 No. 9: 1846).
Note that the acquisition of the shares of a parent company by a subsidiary is, unlike the case of treasury shares, in principle prohibited, the only permitted exceptions being cases prescribed by law (Article 135). The liability for damages of the directors of the parent company was raised in a case where a subsidiary had unlawfully acquired shares in the parent company (note that the court upheld the demonstrated losses; Supreme Court, 9 September 1993, Minshu Vol. 47 No. 7: 4814).
(6) Share unit system
A company may prescribe a certain number of shares as one share unit in its articles of incorporation (Articles 2(xx) and 188(1)), provided that this number may not exceed 1000 (Ordinance for the Enforcement of the Companies Act, Article 34). Shareholders of companies that have adopted the share unit system have one vote in respect of 1 share unit and cannot exercise voting rights in relation to shares in a number less than 1 share unit (Article 189(1)). Since the company is not required to post shareholders meeting convocation notices to shareholders holding only shares less than one unit, this facilitates shareholder administration cost savings for the company.
6. Stock Companies: Share Issues and Dispositions of Treasury Shares
The Companies Act provisions on the "Issue of Shares for Subscription" are found at Article 199 ff. The "issue of shares for subscription" is a concept that incorporates share issues and the disposition of treasury shares and common legal regulations extend to both. The commentary below focuses on share issues.
(2) Procedures for determinations
The fundamental principle for public companies is that the board of directors makes determinations on share issues (Article 201), provided that where the issue price is exceedingly favorable to purchasers (in other words, where it would be unfair to established shareholders) a special resolution of a shareholders meeting is required (favorable issue). Although there are cases where the conditions of a favorable share issue are prescribed by a shareholders meeting (Article 199(3), the shareholders meeting may delegate determination of the specific conditions of share issues to the board of directors, limited to share issues within a one year period and prescribing the maximum number of shares to be issued and the minimum issue price. A special resolution of a shareholders meeting is required in either case.
In contrast, the shareholders meeting determines share issues for private companies (Article 199).
Note that the fundamental principle is that payments in by share subscribers be made in cash by bank transfer into the designated bank account (Article 208(1)) and that when a contribution is made in property other than monies, an inspector's investigation is required (Article 207).
When a public company issues new shares in accordance with a determination by the board of directors, a public announcement must be made of information concerning the share issue, prescribing a date for payment in at least two weeks after the board of directors meeting (Article 201(3) ff).
The articles of incorporation of a stock company will contain provisions on the total number of authorized shares (Article 113) and share issues must be carried out within the limits of that total number of authorized shares. On the other hand, there is no statutory regulation of share entitlements for established shareholders (it is possible, when carrying out a share issue, to prescribe that the company will allow shareholders to subscribe to the shares; Article 202).
Share issues become effective on the date for payment in prescribed in advance, when the share subscribers who have effected payment in become shareholders (Article 209) and share subscribers who fail to effect payment in lose that right (Article 208(5)).
(3) Relief for existing shareholders
In cases where a share issue is in violation of legislation or the articles of incorporation, or "such share issue or disposition of treasury shares is effected by using a method which is extremely unfair," shareholders may demand an injunction against the share issue, so long as it is prior to the date on which the share issue becomes effective (Article 210). An example of the former is where a favorable issue is carried out without a resolution of a shareholders meeting. The latter is known as an "unfair issue" and contemplates cases where an improper share issue is carried out in connection with the right to control the company.
This right to an injunction is, in general exercised by means of the provisional disposition (temporary restraining order) prescribed by the Civil Provisional Measures Act. The reason for the details of a share issue being publicly announced at least two weeks in advance is to allow shareholders dissatisfied with the share issue to petition for a temporary restraining order.
Shareholders may file a suit to invalidate a share issue even after the date on which an issue has become effective, so long as it is within 6 months of that date (Article 828(1)(ii)). It must be added that there is a trend for the courts to invalidate share issues only in cases where there has been a serious breach of legislation (see, for example, Supreme Court, 14 July 1994, Hanrei Jiho No. 1512: 178, Supreme Court, 28 January 1997, Minshu Vol. 51 No. 1: 71).
Examples of disputes where the appropriateness of issue prices at listed companies was in dispute include the following; a Tokyo High Court decision of 27 July 1973 (Hanrei Jiho No. 715: 100), a Supreme Court decision of 8 April 1975 (Minshu Vol. 29 No. 4: 350) and a Tokyo District Court decision of 1 June 2004 (Hanrei Jiho 1873: 159). The last of these is a case where an order for a provisional disposition in the form of a temporary restraining order was given on the basis that a company attempted to carry out a favorable issue without a resolution of a shareholders meeting.
The are also numerous examples of cases where the issuing of new shares by managers to friendly third parties as a defensive measure against a hostile takeover bid (where shares are bought up without the managers' approval) has been disputed as constituting an unfair issue in a hearing for a provisional disposition in the form of a temporary restraining order. The Japanese courts have adopted the approach of using the standard of whether the raising of capital or maintaining the ruling blocs right to control was the primary objective of a new share issue, refusing to grant an injunction where raising capital was the primary objective and granting an injunction where maintaining the ruling bloc's right to control was the primary objective. Putting aside some exceptional cases decided around 1990, such as a Tokyo District Court decision of 25 July 1989 (Hanrei Jiho No. 1317: 28), the majority of decisions have refused to grant an injunction on the basis that the raising of capital was the primary objective (See Soichiro Kozuka, (2006) "Recent Developments in Takeover Law: Changes in Business Practices Meet Decade-Old Rule," 21 Zeitschrift f?r Japanisches Recht 5, 12, 17).
In recent court decisions the courts have, in contrast, engaged in more rigorous deliberation and there has been an increase in cases where an injunction has been ordered. A famous example involved the allotment of, not shares, but stock options to a third party (Tokyo High Court, 23 March 2005, Hanrei Jiho No. 1899: 56), whereas an example of an injunction being granted on the basis that a share option issue with special conditions attached to the exercise of the rights (proportionally allotted to all shareholders) constituted an unfair issue is found in a Tokyo High Court decision of 15 June 2005 (Hanrei Jiho No. 1900: 156). On the other hand, in one case the court refused to grant an injunction in relation to a defensive measure (share split) implemented in order for the managerial bloc threatened by a takeover bid to gain time and information, against a background of looser regulation of takeover bids under the Securities Exchange Act in Japan in comparison to Europe (Tokyo District Court, 29 July 2005, Hanrei Jiho No. 1909: 87).
The following article is a useful introduction to the Tokyo High Court case of 15 June 2005 (Hanrei Jiho No. 1900): 156; Curtis J. Milhaupt, (2005) "In the Shadow of Delaware? The Rise of Hostile Takeovers in Japan," 105 Colum. L. Rev. 2171.
7. Stock Companies: Share Options
"Share option" means a right that entitles the holder to acquire shares in a stock company by exercising the right against that stock company (Companies Act Article 2(xxi)). A determination of the matters prescribed in Article 236(1) of the Companies Act is required in order to define the features of share option rights.
The typical uses of share options include distribution as an incentive for managers and key staff by a company that is listed or planning to list on a stock exchange (known as "stock options") or for use in combination with bonds as a type of financial product (such as convertible bonds). However there are no restrictions under Japanese law on the purposes for which share options can be issued and moreover, almost no regulation of the number that can be issued (there is a restriction under Article 113(4) that at the time the share options are exercised the total number of authorized shares shall not be exceeded). A variety of uses have recently been attempted for share options, including to design defensive measures against hostile takeovers similar to the American 'poison pill' defense (See 6.(3)).
Regulations similar to those for new share issues are in place for share option issues, including regulations for the structures that determine issues (Articles 238 through 240), payment in (Article 246) and injunctions (Article 247).
8. Stock Companies: Shareholders Meetings
Shareholders meetings are, in principle, called by board of directors meetings (Article 298) and a notice of convocation stating the day and time, place and agenda is posted to shareholders (Article 299). Companies with at least 1000 shareholders with voting rights have a duty to forward "reference documents" containing detailed explanations of the agenda and shareholders may exercise their voting rights by post using the "voting form" included with those reference documents (Article 301).
Resolutions of shareholders meetings are revoked by civil suit where convocation procedures were in violation of legislation or the articles of incorporation (Article 831(1)(i)). However, even in that case, the resolutions of shareholders meetings where all shareholders have gathered and agreed to holding a meeting will be validated due to the "full attendance meeting" (Supreme Court, 20 December 1985, Minshu Vol. 39 No. 8: 1869).
Shareholders may propose shareholders meeting agenda items and proposals by 8 weeks prior to the due date for a shareholders meeting by written request (Articles 303 through 305). The Sapporo High Court decision of 28 January 1997 (Shiryoban Shoji Homu No. 155: 107) is an example of a dispute over whether or not a company handled a shareholder proposal appropriately.
Article 310 is a provision on the exercise of voting rights by proxy. Most articles of incorporation of Japanese companies contain a clause to the effect that "Shareholders may exercise their voting rights at shareholders meetings through proxies. Provided, however, that the proxies shall be limited to shareholders of the company." The cases hold that this kind of clause in the articles of incorporation is valid (Supreme Court, 1 November 1968, Minshu Vol. 22 No. 12: 2402), yet there is also considerable academic opinion to the contrary. However, as there is also a case where the exercise of voting rights by a proxy other than a shareholder was accepted (Supreme Court, 24 December 1976, Minshu Vol. 30 No. 11: 1076), it is presumably also the fact that the courts do not apply the provisions of articles of incorporation unconditionally, but adjust their conclusion in light of the circumstances by comparing the risk of confusion and disturbance that may arise from persons other than shareholders attending shareholders meetings with the scale of disadvantage suffered by shareholders if proxies are not recognized.
9. Stock Companies: Directors and Boards of Directors
Directors are selected by a shareholders meeting (Article 329). Although the term of office for a director is in principle, two years, this may be extended to a maximum of ten years at a private company by provisions in the articles of incorporation (Article 332). The persons ineligible to become directors, including juridical persons, are prescribed by Article 331(1).
Shareholders may request that a company use cumulative voting (a type of proportional representation). However it is possible to exclude this right by provision in the articles of incorporation (Article 342(1)) and most Japanese companies are in fact said to have a provision in their articles of incorporation excluding this right.
In companies that do not have a board of directors, the directors, in principle have the authority to execute operations and represent the company (Articles 348 and 349). In contrast, at companies that do have a board of directors, only the directors specifically selected by the board of directors have the authority to execute operations and represent the company (Articles 362(3) and 363(1)). A case where the failure to fulfill a promise exchanged between siblings to succeed to the position of representative director and president (a contract binding the exercise of voting rights on a resolution of the board of directors) was grounds for a damages dispute) is noteworthy (Supreme Court, 30 May 2000, Hanrei Jiho No. 1750: 169).
A director may be removed at any time by ordinary resolution of a shareholders meeting. It should be added that where there are no reasonable grounds for removal, the company must compensate the losses of a director who has been removed (the damages amount would probably be an amount equivalent to the director's remuneration for the remaining period of his or her term of office).
(2) Boards of directors
Each director has one vote on resolutions of the board of directors and resolutions are passed when a majority of directors are present and a majority of the directors present are in favor of the resolution (Article 369(1). Directors who have a special interest in relation to the content of a resolution may not participate in the vote (Article 369(2). There is a case to the effect that candidate directors do not fall within persons with a special interest when the board of directors selects representative directors, however when the board of directors removes a representative director from his or her position, the director concerned does qualify as a person with a special interest and may not participate in the vote (Supreme Court, 28 March 1969, Minshu Vol. 23 No. 3: 645).
The board of directors is a structure that determines the execution of important operations, including the sale and purchase of important assets and borrowings in significant amounts and it is not permitted for these matters to be delegated to individual directors (Article 362(4)). A case where the interpretation of "disposition of important assets" was disputed is noteworthy in this context (Supreme Court, 20 January 1994, Minshu Vol. 48 No. 1:1). Note that the matters on which the board of directors is to pass resolutions are narrowly prescribed at companies with committees (Article 416(1) and (4)). For a case in relation to the effectiveness of transactions carried out without the necessary resolution of the board of directors see the Supreme Court decision of 22 September 1965 (Minshu Vol. 19 No. 6: 1656).
(3) Duties of directors
Directors have a duty to manage the business of the company with the due care of a prudent manager (Companies Act Article 330, Civil Code Article 644). Moreover, procedures are prescribed for the following situations in particular where a director's interests conflict with those of the company; competing transactions, conflicting transactions and remuneration.
A director who carries on a similar line of business to that of the company, either for himself or herself or on behalf of a third party, must obtain the prior consent of the board of directors (at a company without a board of directors, a shareholders meeting (Companies Act Articles 356(1)(i) and 365(1)). See the Supreme Court decision of 26 March 1981 (Hanrei Jiho No. 1015: 27) for an example of where the fact that the president of listed company A continued to freely control A, whilst having a separate company B, in which the president had invested, engage in the same business, was in issue.
A director must also obtain the prior approval of the board of directors (for companies with no board of directors, a shareholders meeting) where he or she transacts with the company on his or her own behalf, or on behalf of a third party (Articles 356(1)(ii) and 365(1)). Further, even where a person other than a director transacts with a company, where the act is, in substance, such that the director's interests and the company's interests are likely to conflict, for example where the company guarantees a loan to the director, the same procedure is required (Article 356(1)(iii)). See the Supreme Court decision of 25 December 1968 (Minshu Vol. 22 No. 13: 3511) for a case where the effectiveness of transactions carried out in violation of these regulations was at issue.
The directors' remuneration must be prescribed by the articles of incorporation or a resolution of a shareholders meeting (Article 361). Provided, that remuneration is prescribed by the remuneration committee at a company with committees (Articles 404(3) and 409). There are numerous cases in relation to determinations of remuneration by shareholders meetings (for example, Supreme Court, 21 February 2003, Kinpo No. 1681: 31, Supreme Court 18 December 1992, Minshu Vol. 46 No. 9: 3006 and Supreme Court, 15 February 2005, Hanrei Jiho No. 1890: 143).
(4) Liabilities of directors
When a director neglects his or her duties, the director will be liable to compensate the company for losses arising in the company as a result (Article 423(1)). Since the filing of suits where shareholders pursue the liability of directors as company representatives (shareholder derivative suits) is recognized in Japan, the system by which directors are liable to compensate the company has great significance.
There is a case to the effect that when the execution of operations by a director is in violation of legislation, if the director has no knowledge of the legislative violation and the lack of knowledge was not negligent, the director is not liable (Supreme Court, 7 July 2000, Minshu Vol. 54 No. 6: 1767). On the other hand, there is a duty at large-scale companies to have sufficient systems in place to prevent losses arising in advance (known as "risk management systems" and "systems of internal controls") and there is also a famous case where the directors' liability to compensate a massive amount was upheld on the basis of violation of this duty (Osaka District Court, 20 September 2000, Hanrei Jiho No. 1721: 3; see the following article for an introduction to this case Bruce E. Aronson, "Reconsidering the Importance of Law in Japanese Corporate Governance: Evidence from the Daiwa Bank Shareholder Derivative Case," (2003) 36 Cornell Int'l L.J. 11). Another case rejected the liability of a director of a parent company on the basis that it was the subsidiary's management that was inadequate (Tokyo District Court, 25 January 2001, Hanrei Jiho No. 1760: 144).
Shareholders may demand an injunction against a director at the point when the director has not yet carried out an unlawful act. It is usual for this right to an injunction to be exercised through the provisional disposition (temporary restraining order) prescribed by the Civil Provisional Measures Act. It should be added that as there is a danger of misuse of this right by shareholders Article 360 prescribes strict requirements for this injunction to be granted. See the decision of the Tokyo Supreme Court of 23 June 2004 (Kinhan No. 1213: 61) for a recent decision on this rule.
Although peculiar in terms of comparative law, Japanese law has a provision to the effect that when a director engages in inappropriate acts, the director is liable to compensate third parties (Article 429(1)). In concrete terms, the liability of the director arises when he or she acts "with knowledge" or is "grossly negligent in performing their duties." See the Supreme Court decision of 26 November 1969 (Minshu Vol. 23 No. 11: 2150) in relation to the meaning of this rule. This rule is well used, especially when an SME has gone bankrupt in situations where parties transacting with the company pursue the liability of directors instead of the company and is therefore said to be the provision with the most case law. Where non-director A is registered as a director, the analogous application of Article 908(2) of the Companies Act means that if A has contributed to the false registration, A will bear liability to third parties under Article 429 (First Petty Bench of the Supreme Court, 15 June 1972, Minshu Vol. 26 No. 5: 984). However, the question of whether or not the person concerned contributed to the false registration will be determined with care (see Supreme Court, 16 April 1987, Hanrei Jiho No. 1248: 127 for a case that found against the liability of director who had retired).
The cases are in disagreement in respect of whether or not shareholders fall within "third parties" in Article 429(1) and the matter is not settled.
Directors who have made false statements including in financial statements, registrations and public notices, are also liable to third parties (Article 429(2)). In these cases a director can avoid liability to compensate if he or she can prove the absence of negligence.
10. Stock Companies: Accounting Advisors
Although the financial statements of stock companies are prepared by the directors, they are prepared jointly with accounting advisors at companies with accounting advisors (Article 374). Accounting advisors must be certified practicing accountants, audit firms, certified public tax accountants or tax accountant corporations (Article 333(1) and are elected by a shareholder's meeting (Article 329(1)).
The accounting advisors system was newly introduced by the Companies Act. Since most SMEs do not have the capacity to prepare financial statements, certified public tax accountants have, in practice, prepared financial statements to date. The accounting advisors system builds on this business practice and strives to give it status under the Companies Act. It should be added that companies are not obligated to have accounting advisors. As was the case until now, it is still possible to in fact engage a certified public tax accountant for assistance.
Turning to the merits of having accounting advisors, accounting advisors are "officers" of the company (Article 329(1)) and are liable to the company and third parties if they neglect their duties (Articles 423 and 429). Shareholders can file shareholder derivative suits in order to pursue the liability of accounting advisors to the company (Article 847). This means that accounting advisors can be expected to carry out their duties in good faith, and as a result there is a strong presumption that the financial statements of companies that have accounting advisors are correct. This would no doubt make it easier for the company to, for example, borrow from a bank. Whilst the aim of the system is for companies to, in this way, voluntarily make their financial procedures transparent, it is not clear at this point whether or not the accounting advisor system will take root.
11. Company Auditors and Boards of Company Auditors
Company auditors audit the execution of duties by directors (Article 381(1)) and are elected by a shareholders meeting (Article 329(1). A company auditor may not act concurrently as a director or employee of the company or its subsidiary (Article 335(2)). Although the company auditor system is an unusual system rarely seen in the West, it has been in existence in Japan for over a century, from the time of enactment of the old Commercial Code. Company auditors differ from accounting advisors or accounting auditors in that no special qualifications are required. The audits performed by company auditors are broadly divided into business audits and accounting audits. There is disagreement as to scope of business audits, however the majority view is that company auditors may audit the propriety of directors' acts, and may not audit whether or not directors' business judgment was appropriate (this point differing from mitglieder der aufsichtsrat (company auditors) in Germany, and outside directors in America). Accounting audits are audits as to whether or not the financial documents prepared by directors comply with the law and accounting standards. Note that in private companies if provision is made in the articles of incorporation, the authority of company auditors may be restricted to accounting audits (Article 389(1)).
Company auditors prepare an audit report once a year (Article 381(2) for company auditors who perform business audits, Article 389(2) for company auditors who do not perform business audits). The following rules apply solely to company auditors who perform business audits (see Article 389(7)).
Company auditors attend board of directors meetings and must state their opinions if necessary (Article 383(1)). In cases where there is a risk of directors violating legislation, company auditors have authority to enjoin the relevant acts (Article 385(1). Company auditors may, at any time, request reports on the business from directors and others, or investigate the status of the company's operations and finances (Article 381(2)).
Large companies that are public companies are obligated to have a board of company auditors (excluding companies with committees; Article 328(1)). At companies that have a board of company auditors, there must be at least three auditors, a majority of whom are outside company auditors (defined in Article 2(xvi); Article 335(3)). Further, full-time company auditors must be selected from among the company auditors (Article 390(3)).
An introduction to the company auditor system can be viewed in English on the Japan Corporate Auditors Association website http://www.kansa.or.jp/english/about_00.html (accessed on 20 August 2007). Further, information on the history of the company auditor system and the accounting auditor system can be viewed in English http://www.hp.jicpa.or.jp/english/e-history.html (accessed on 20 August 2007).
12. Accounting Auditors
Accounting auditors audit the company's financial statements and prepare an accounting audit report (Article 396(1)). Accounting auditors are elected at shareholders meetings (Article 329(1)) and must be certified public accountants or audit firms (Article 337(1)).
Companies with accounting auditors must, without fail, have a structure that carries out business audits. In specific terms this will be either company auditors with authority to perform business audits or an audit committee at a company with committees (because the company with committees has an audit committee) (Article 327(3) and (5)). This is in order to prevent the accounting auditor from being subject to unfair pressure from, and colluding with, company managers. Company auditors (boards of company auditors) and audit committees are given the right to reject the selection of a candidate for accounting auditor by the directors (Article 344), the authority to relieve an accounting auditor who cannot perform his or her duties properly from his or her position (Article 340(1)) and the right to reject determinations by the directors of accounting auditors' remuneration (Article 399).
The Japanese Institute of Certified Public Accountants has a useful English language website on the Japanese system of certified public accountants: http://www.hp.jicpa.or.jp/english/ (accessed on 20 August 2007).
13. Stock Companies: Companies with Committees
Companies with committees are a system introduced by the 2002 reforms to the Commercial Code with reference to business practices in listed companies in America, which came into effect from April 2003.
According to a survey conducted by the Japan Corporate Auditors Incorporation there were 105 companies with committees in Japan as at 21 December 2006, and of that number 68 were listed companies and 37 were private companies. This number is by no means large when viewed against the roughly 4,000 listed companies in Japan. On the other hand, there were 9 companies that had at one point switched to being a company with committees, but had then returned to being a company with a board of company auditors.
Three committees are established at a company with committees; a nominating committee, an audit committee and a compensation committee (Article 2(xxii)). Each committee is comprised of at least 3 persons and these are chosen from among the directors by the board of directors (Article 400(1) and (2)). A majority of each committee must be comprised of outside directors (Article 400(3)). Article 2(xv) stipulates that outside director "means a director of any stock company who is neither an executive director (…) nor an executive officer, nor an employee, including a manager, of such stock company or any of its subsidiaries, and who has neither ever served in the past as an executive director nor executive officer, nor as an employee, including a manager, of such stock company or any of its subsidiaries." The members of an audit committee may not serve concurrently in roles such as that of executive officer of the company or its subsidiaries (Article 400(4)).
The execution of operations at a company with committees is carried out by "executive officers" (Articles 402 and 418). The status of directors as directors disqualifies them from executing the operations of a company with committees (Article 415), however executive officers may act concurrently as directors (Article 402(6)).
The authority of each committee is prescribed in Article 404. The term of office of directors at a company with committees is one year (Article 332(3)).
See the following article for an introduction to the rules governing companies with committees and an analysis of the current state of affairs. Ronald J. Gilson and Curtis J. Milhaupt, (2005) "Choice as Regulatory Reform: The Case of Japanese Corporate Governance," 53 Am. J. Comp. L. 343.
14. Accounting for Stock Companies
The accounting rules for stock companies are set forth in Article 431 ff. Article 431 states, "The accounting for a stock company shall be subject to the business accounting practices generally accepted as fair and appropriate". It is understood that, at large-scale companies, the various accounting standards established by the Financial Accounting Standards Foundation (FASF) fall within "the business accounting practices generally accepted as fair and appropriate." Note the FASF provides an overview of accounting standards in English on its website at: http://www.asb.or.jp/index_e.php (accessed on 20 August 2007).
Further, for SMEs, it is understood that the Accounting Guidelines for SMEs (Japanese only) prepared by the Japan Federation of Certified Public Tax Accountants' Incorporations, the Japanese Institute of Certified Public Accountants, the Japan Chamber of Commerce and Industry and FASF will fall within "the business accounting practices generally accepted as fair and appropriate." These guidelines were established in August 2005 and revised in April 2007.
See the Tokyo District Court decision of 19 May 2005 (Hanrei Jiho No. 1900: 3) for a case where whether changes in accounting standards meant that "the business accounting practices generally accepted as fair and appropriate" changed was at issue.
Article 433 provides in relation to the right of shareholders to inspect account books. "Financial statements" means balance sheets, profit and loss statements and consolidated statements of changes in shareholders' equity (Companies Act Article 435(2), Corporate Accounting Rules Article 91(1)). The specific details of the format of financial statements are prescribed in the Corporate Accounting Rules, whilst the procedures for the preparation, audit and approval of financial statements is prescribed by the Companies Act (Articles 435 through 439).
In terms of dividends of surplus, it is permissible to make distributions in money and also in property other than money (Article 454 ff). Although distributions are, in principle, determined by a shareholders meeting (Article 451(1)), when certain conditions are met it is possible for the board of directors to act on its own in determining distributions (Article 459).
The amount of distributions of dividends of surplus is restricted by the concepts of stated capital and surplus (Article 461(1) and (2)). Note that, these restrictions are not limited to distributions in the narrow sense and also apply to cases where a company acquires treasury shares (Article 461(1). Procedures on increases and reductions in capital and reserves are prescribed for the protection of shareholders and creditors (Articles 447 through 451).
Articles 676 through 742 prescribe matters in relation to bonds issued by companies. Note that these provisions apply to not only stock companies but also to general partnership companies, limited partnership companies and limited liability companies (collectively, "membership companies").
These provisions include provisions on bond registries (Article 681 ff), bond certificates and the assignment of bonds (Article 687 ff). However the most distinctive provisions are the provisions concerning bond managers and bondholders' meetings.
The system of bond managers is a system close to the indenture trustee system under British and American law. Article 702 stipulates, "In cases where a company will issue bonds, the company must specify a bond manager and entrust the receipt of payments, the preservation of rights of claim on behalf of the bondholders and other administration of the bonds to that manager; provided, however, that this shall not apply in cases where the amount of each bond is 100,000,000 yen or more, and other cases prescribed by the applicable Ordinance of the Ministry of Justice as cases where it is unlikely that the protection of bondholders will be compromised." The law makes the establishment of a bond manager, in principle, compulsory, in the interests of protecting the interests of bondholders as a whole, on the assumption that bondholders will be spread far and wide. However in practice there are many cases that fall within exceptions and in general bonds do not have bond managers.
The bondholders meeting exists as a structure for bondholders to protect their own interests (Article 715 ff). Bondholders meetings are in some cases called by the company issuing the bonds and in others by the bond manager or bondholders (Articles 171(2), 718).
An important issue in practice is the scope of application of the provisions Japanese law relating to these bonds. Article 2(xxiii) of the Companies Act states that, "'Bond' (shasai) means any monetary claim owed by a company by allotment under the provisions of this Act and which will be redeemed in accordance with the provisions on the matters listed in the items of Article 676." Those in the Ministry of Justice responsible for involvement in enacting the Companies Act have made the following statement on the basis of this provision; "Japanese companies are obligated to establish bond managers even where they issue "Bonds" (shasai; as defined in the Companies Act) overseas. (However) although there are instances where bonds (saiken) are issued overseas subject to the governing foreign law, those bonds are not "Bonds" under the Companies Act. The provisions in the Companies Act on "Bonds", including the provisions on the duty to establish a bond manager do not apply in regard to that type of bonds. On the other hand, even if foreign companies issue bonds labeled as "Bonds" within Japan, these bonds are not "Bonds" under the Companies Act and the foreign companies are not obligated to have bond managers in relation to those bonds."
It must be said that there is strong opposition to this view in academic circles. In other words, the academic view is that the provisions in the Companies Act contemplate the issuing and circulation of "Bonds" within Japan and are provisions designed to protect investors residing in Japan, in particular in order to restrict the insertion of disadvantageous clauses curtailing the rights attached to "Bonds" into "Bond" contracts. For this reason, Japanese law applies where "Bonds" are issued in Japan or are expected to primarily circulate on the Japanese market, even in cases where foreign companies are the issuers.
16. Fundamental Changes
This section covers fundamental changes, namely changes in; articles of incorporation, dissolution, liquidation, entity conversion, assignment of business, mergers, company splits, share exchanges and share transfers.
(1) Amendment of articles of incorporation
Stock companies carry out amendment of their articles of incorporation, in principle, by special resolution of a shareholders meeting (Article 467, 309(2)(xi)). A strict "extraordinary resolution" of a shareholders meeting is required when an amendment to the articles of incorporation is made imposing restrictions on the transfer of freely transferable shares (Article 309(3) etc.). Note that although it is possible to make the conditions even stricter (making it harder to amend the articles) by provisions in the articles of incorporation, it is not permitted to relax the conditions by the same means.
General partnership companies, limited partnership companies and limited liability companies "may change (their) articles of incorporation with the consent of all partners, unless otherwise provided for in the articles of incorporation" (Article 637). At these companies it is permitted to relax the conditions for amending the articles of incorporation by provisions in the articles.
(2) Dissolution and liquidation
The provisions for the dissolution of a stock company are found at Article 471 ff and for liquidation at Article 475 ff. For membership companies the provisions for dissolution are at Article 641 ff and for liquidation at Article 644 ff. The retention of accounting materials for ten years after the completion of liquidation is compulsory for both stock companies and membership companies (Articles 508(1) and 672(1)).
See the Tokyo District Court decision of 18 July 1989 (Hanrei Jiho No. 1349: 148) for a case where shareholders filed suit seeking a judgment for dissolution of a stock company. The propriety of a dissolution of a limited liability company was disputed in the Supreme Court decision of 13 March 1986 (Minshu Vol. 40 No. 2: 229).
(3) Entity conversion
The changing of a stock company to one of the membership company forms while maintaining the same legal personality, or the changing of one of the membership company forms to a stock company is known as "entity conversion" (Article 2(xxvi)). Entity conversions are provided for in Articles 743 through 747 and 775 through 781.
Note that an internal change from one form of membership company to another category of membership company (general partnership company, limited partnership company or limited liability company) does not fall within "entity conversion" and constitutes one type of amendment of articles of incorporation (see Articles 638 and 639).
(4) Assignment of business
A special resolution of a shareholders meeting is required, in principle, where a company assigns all or a significant part of its business (Article 467(1)). There is a famous decision of the Grand Bench of the Supreme Court of 22 September 1965 on the meaning of "the assignment of a significant part of the business" (Minshu Vol. 19 No. 6: 1600).
There are detailed provisions on exceptions where a resolution of a shareholders meeting is not required (see Articles 467(1)(ii) and 468) and a right to demand that the company purchase their shares is given to existing shareholders of the company at the time of the assignment of business (Article 469 ff).
There are two types of mergers; the absorption-type merge and the consolidation-type merger. An absorption-type merger "means any merger companies effects with other companies whereby the surviving company succeeds to any and all rights and obligations of the absorbed companies." Consolidation-type merger "means any merger effected by two or more companies whereby the new company incorporated by the merger succeeds to any and all rights and obligations of the companies consolidated by the merger."
The provisions on absorption-type mergers are found at Articles 749～752 (common to the surviving company and the absorbed companies, Articles 782～793 (applying only to the absorbed companies) and Articles 794～802 (applying only to the surviving company). The provisions on consolidation-type mergers are found at Articles 753～756 (common to the consolidated and the new company incorporated), Articles 803～813 (applying only to the consolidated companies) and Articles 814～816 (applying only to the newly incorporated company).
Shareholders and others may file suit to invalidate a merger in cases such as where there is illegality in the merger procedure (Article 828(1)(vii) and (viii)) and if the suit is upheld the merger loses its future effectiveness in regard to the future (Article 843). However, the wording of the provision is not clear as to in what cases a decision invalidating a merger will be handed down and is open to interpretation. It is thought that the fact that a merger ration is unfair will not constitute grounds for invalidation (Tokyo High Court, 31 January 1990, Shiryoban Shoji Homu No. 77: 193). In another case where shareholders filed suit seeking damages under a derivative suit on the grounds that the merger ratio was unfair, the court rejected the suit on the basis that the company had not suffered loss (Osaka District Court, 31 May 2000, Hanrei Jiho No. 1742: 141).
Note that under the Companies Act it is not necessary for the consideration given to the shareholders of the absorbed companies by the surviving company in an absorption-type merger to be shares in the surviving company; any form at all is sufficient if the consideration has property value. Deregulation has also been implemented in relation to the consideration given by newly incorporated companies to the shareholders of consolidated companies, however not to the same extent as with absorption-type mergers.
(6) Company splits
There are two types of company splits; absorption-type company splits and incorporation-type company splits. An absorption-type company split "means any company split whereby the succeeding companies succeed, after the company split, in whole or in part, to any rights and obligations, in whole or in part, in connection with the business of the stock companies or the limited liability companies that are split" (Article 2(xxix)). An incorporation-type company split "means any company split whereby the new companies incorporated by the company split succeed to any rights and obligations, in whole or in part, in connection with the business of the stock companies or the limited liability companies that are split" (Article 2(xxx)).
The company that splits is called the "split company". The company that succeeds to rights and obligations in an absorption-type split is called the "successor company". In an incorporation-type split the company that succeeds to rights and obligations is called the "new incorporated company".
The consideration the successor company delivers to the split company does not have to be shares in the successor company. Where shares in the successor company are delivered then, the split company may also immediately distribute (allot) the shares it receives to its own shareholders, simultaneously with the split becoming effective.
There has been only minor deregulation of consideration in relation to consideration for incorporation-type company splits. Where shares in the new incorporated company are delivered to the split company the split company may immediately distribute the shares it receives to its own shareholders, simultaneously with the split becoming effective.
The provisions on absorption-type company splits are found are Articles 757～761 (common to split companies and successor companies), Articles 782～793 (applying only to split companies) and Articles 794～802 (applying only to successor companies). The provisions on incorporation-type company splits are found at Articles 762～766 (common to split companies and new incorporated companies), Articles 803～813 (applying only to split companies) and Articles 814～816 (applying only to new incorporated companies).
(7) Share exchanges
A share exchange "means any exchange of shares whereby a stock company causes all of its issued shares (hereinafter referring to the shares issued by a stock company) to be acquired by another stock company or limited liability company" (Article 2(xxxi)).
A company that becomes a subsidiary through a share split is called a "complete subsidiary" and a company that becomes a parent company is known as a "complete parent company." The provisions on share splits are found at Articles 767-771 (common to complete subsidiaries and complete parent companies), Articles 782-793 (applying only to complete subsidiaries) and Articles 794～802 (applying only to complete parents).
(8) Share Transfers
A share transfer "means any transfer whereby a stock company causes all of its issued shares to be acquired by a newly incorporated stock company" (Article 2(xxxii)).
Companies that become subsidiaries through share transfers are called "complete subsidiaries" and newly incorporated companies are known as "(newly incorporated) complete parent companies." The provisions on share transfers are found at Articles 772～774 (common to complete subsidiaries and complete parent companies), Articles 803～813 (applying only to complete subsidiaries) and Articles 814～816 (applying only to complete parent companies).
(9) Triangular mergers
About the new legal scheme for triangular mergers in the“Modernization of the Corporate Law” project, see,
- Yoshihisa Hayakawa "International Mergers & Acquisitions: Issues under
Private International Law and Triangular Mergers," Kigyo Kaikei 33-39
(This paper is one of the products of International Seminar on Japanese Corporate Law with the American Chamber of Commerce in Japan and the Tokyo Bar Association (20 Feb 2007 at the Tokyo American Club) )
17. Foreign Companies
A foreign company "means such a juridical person incorporated under the law of a foreign country or such other foreign organization that is of the same kind as a company or is similar to a company (Company Act Article 2(ii)).
The provisions of Article 817 ff of the Companies Act prescribe rules for foreign companies. See the following article; Yasuhiro Okuda, "The Legal Status of Foreign Companies in Japan's New Company Law," (2006) 22 Zeitschrift für Japanisches Recht 115.
About the change of the regulations against foreign corporations in the “Modernization of the Corporate Law” project, see,
- Yoshihisa Hayakawa, Japanese Regulations against Foreign Corporations and Global Competition in Corporate Law, Basedow and Kono (eds.), Economic Analysis of Private International Law (2006) at 233- 243.
About the theory of International Corporate Law in Japan
- Tomotaka Fujita, International Corporate Law in Japan, 48 Japanese Yearbook of International Law 22 (2005);
- Dai Yokomizo, International Company Law in Japan (soon published).