| \n (Case) A representative director was dismissed on the ground of a policy conflict, and the company was then sued for damages<\/strong><\/p>\n Foreign company A dismissed B, the representative director of its Japanese subsidiary, by an ordinary resolution of the shareholders meeting on the ground of a conflict over management policy. B, however, sued the company asserting that this was \u201ca dismissal without justifiable grounds,\u201d and the court ordered the company to pay damages equivalent to the remuneration for the remaining term of office. The dismissal itself was valid, but the company ended up bearing an unexpected financial burden.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n (1) Dismissal is possible \u201cat any time,\u201d but it is not entirely \u201cfree\u201d<\/p>\n Under Japan’s Companies Act, a director may be dismissed at any time by an ordinary resolution of the shareholders meeting (Companies Act, Article 339, paragraph 1). Looking at this point alone, dismissal appears easy for a shareholder holding a majority of the voting rights. However, where a director is dismissed without justifiable grounds, the company is liable to the dismissed director for damages (Companies Act, Article 339, paragraph 2). The amount of damages is generally regarded as the equivalent of the remuneration that the director would have received during the remaining term of office, and the longer the remaining term, the higher the amount becomes. \u201cBeing able to dismiss\u201d and \u201cbeing able to dismiss at no cost\u201d are separate questions, and this is the point that foreign companies tend to overlook.<\/p>\n (2) The scope of \u201cjustifiable grounds\u201d is limited<\/p>\n What is recognized as justifiable grounds is limited to objective circumstances, such as difficulty in performing duties due to a mental or physical disorder, a violation of laws and regulations or of the articles of incorporation, or marked unfitness for the office. As a general matter, a mere difference in management policy or a loss of the relationship of trust is not recognized as justifiable grounds. Accordingly, when considering a dismissal, recording and organizing in advance the facts that substantiate justifiable grounds, and also taking into account the timing of the expiration of the term of office, constitute effective preventive measures.<\/p>\n (3) The \u201caction seeking dismissal\u201d where the dismissal proposal is rejected<\/p>\n Conversely, even where a company wishes to dismiss a director who has committed misconduct, that director may hold a large number of voting rights, so that the dismissal proposal is rejected at the shareholders meeting. Even in such a case, minority shareholders who satisfy certain requirements may petition the court for the dismissal of the director (Companies Act, Article 854; action seeking dismissal). The fact that a conflict which cannot be resolved by majority vote alone can be corrected through court proceedings is one of the features of Japan’s Companies Act.<\/p>\n <\/p>\n \uff12\uff0eDefects in Shareholders Meeting Resolutions \u2014 Contested by an \u201cAction for Rescission,\u201d Not as \u201cInvalidity\u201d<\/strong><\/span><\/p>\n (Case) A resolution was rescinded on the ground of inadequate calling procedures <\/strong>(calling procedures), and a planned M&A fell through<\/strong><\/p>\n Foreign company C held most of the shares in its Japanese subsidiary and therefore considered the shareholders meeting to be a mere formality; without sending a notice of calling to D, a Japanese minority shareholder holding 20%, it approved the planned M&A at the shareholders meeting. Although the resolution had been carried in terms of voting rights, D filed an action seeking rescission of the resolution on the ground of a defect in the calling procedures, and the court rescinded the resolution.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n (1) A defective resolution does not automatically become \u201cinvalid\u201d<\/p>\n What foreign companies tend to misunderstand is the notion that \u201cif there is a defect in the procedure, the resolution automatically becomes invalid.\u201d Under Japanese law, the way of contesting a resolution differs according to the type of defect. Where the calling procedures or the method of resolution violate laws and regulations or the articles of incorporation, an action seeking rescission of the resolution applies (Companies Act, Article 831); where the content of the resolution itself violates laws and regulations, an action for a declaratory judgment of invalidity of the resolution applies (Companies Act, Article 830, paragraph 2); and where the defect is so serious that the resolution cannot be evaluated as existing at all, an action for a declaratory judgment of the non-existence of the resolution applies (paragraph 1 of the same Article).<\/p>\n A defect in the calling procedures is, among these, a matter of \u201crescission.\u201d What is important is that, until an action for rescission is filed and a judgment of rescission becomes final and binding, that resolution is treated as valid for the time being. Moreover, an action for rescission must be filed within three months from the date of the resolution, and once this period has passed the resolution can no longer be contested even if it is defective. Accordingly, the party asserting the defect must file suit within that period.<\/p>\n (2) Key points of lawful calling procedures<\/p>\n In order to avoid the rescission of a resolution, it is important to follow the calling procedures accurately, down to matters of form. The basics are: (i) to send notice to all shareholders entitled to vote; (ii) for a Public Company, to send it by two weeks before the date of the meeting (one week before, for a non-public company); and (iii) to state the agenda (the purposes of the meeting) clearly in the notice. Point (i) in particular requires attention, because if notice is omitted to some of the shareholders, it can constitute grounds for rescission even where the resolution was carried by majority vote. The idea that procedural defects will not matter as long as one holds a majority does not work in Japan.<\/p>\n As for the method of notice, a Company with a Board of Directors sends the notice of calling in writing as a general rule (Companies Act, Article 299, paragraph 2), but where the consent of the shareholder has been obtained, notice by electronic means (e-mail, etc.) is also permitted (paragraph 3 of the same Article). If consent to receive notice by electronic means has been obtained from the shareholders in advance, it is also possible in practice to send the notice of calling by e-mail with a PDF attachment. Conversely, using e-mail without having obtained such consent, or without satisfying the periods and required particulars described above, results in a defect.<\/p>\n <\/p>\n \uff13\uff0eManagement of the Registered Seal and the Bank Seal (Inkan and Ginkoin) \u2014 A Physical \u201cKey\u201d Brings the Business to a Halt<\/strong><\/span><\/p>\n (Case) A representative director resigned while holding the registered seal and the bank seal, and the company’s day-to-day operations came to a stop<\/strong><\/p>\n Representative director E resigned while retaining the company’s registered seal (Jitsuin) and bank seal (Ginkoin). As a result, the company became unable to file registration applications, to execute important contracts, or to carry out banking transactions, and its day-to-day operations were temporarily suspended. The cause was that the physical seals had been concentrated in the hands of a single person.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n (1) The seal culture unique to Japan<\/p>\n In Japan, seals (Inkan) play an important role in situations such as the execution of contracts, banking transactions, and administrative procedures. In particular, a company’s \u201cregistered company seal (Kaisha Jitsuin), i.e., the representative’s seal (Daihyosha-in),\u201d is filed with the Legal Affairs Bureau (Homukyoku) and is used for registration applications and the like, while a \u201cbank seal (Ginkoin)\u201d is used for banking transactions. Because a seal is a physical \u201cobject,\u201d if the person holding it leaves, a situation may arise in which the company cannot carry out important procedures. It should be noted that in recent years a move away from seals has also been progressing \u2014 for example, filing a seal has been made optional for online applications for commercial registration \u2014 but seals are still widely used in practice, and putting a management structure in place for them is indispensable.<\/p>\n (2) Seal management as an internal rule<\/p>\n The Companies Act does not directly regulate seal management, but the methods of keeping and managing seals and related matters need to be provided for as one element of the internal control system (Companies Act, Article 362, paragraph 4, item 6). In other words, a company needs to establish clear internal rules on the method of managing its seals.<\/p>\n Where a foreign company conducts business in Japan, putting the following rules in place is indispensable.<\/p>\n <\/p>\n \uff14\uff0eSummary<\/strong><\/span><\/p>\n Japan’s Companies Act has distinctive features in the \u201cform and procedure\u201d that are hard to see from the perspective of foreign systems, such as (i) damages accompanying a dismissal, (ii) the litigation procedures for contesting a defect in a resolution, and (iii) seals as a physical object of management. By understanding these Japan-specific issues in advance and by putting internal regulations and a support structure provided by professionals in place, unexpected problems can be greatly reduced.<\/p>\n <\/p>\n Contact Us<\/span><\/strong><\/span><\/p>\n In our Japan Business Law Guide, we will continue to share useful information tosupport your business expansion and operations in Japan. <\/p>\n <\/p>","protected":false},"excerpt":{"rendered":" From the perspective of a foreign company, a major distinguishing feature of Japan’s Companies Act is th … <\/p>\n |
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