NEW
JAPAN
CORPORATIONS LAW (Translation.)
SUMMARY:
ONE CORPORATIONS LAW
There will be only one unified corporations law.
Previously corporations
were covered by the Yugen Gaisha Law, Chapter II of the Commercial Code
and the
Commercial Code Special Corporations Law (1974).
YUGEN GAISHA, LLC & LLP
It will no longer be possible to establish yugen gaisha
Yugen gaisha will be able
to convert into kabushiki kaisha or to continue as yugen gaisha. If
they do
convert into a kabushiki kaisha, they are not permitted to turn back
into a
yugen gaisha.
If it continues as yugen
gaisha it will still be able to not make public announcements of
balance sheet
(as required by kabushiki kaisha) and need not set term limits on
directors.
Kabushiki kaisha must
annually publish its balance sheet in a newspaper or in the KANPO
(Official
Gazette) or in a web site if it is listed for five years.
LLC (godo kaisha) and LLP
also need not publish their annual balance sheet.
LLC (limited
liability corporation) and LLP (limited liability partnerships) are new
organizations provided for under the new Corporation Law.
LLCs have no shareholders.
They have "corporate members." Corporations can be "corporate
members." Only property can be used in paying paid up capital. This
includes cash. Services such as labor are not permissible. LLCs can be
converted into kabushiki kaisha only upon the agreement of all the
corporate
members.
LLPs are not corporations,
but partnerships. The LLP is not subject to corporate tax, the income
is taxed
directly to the partners. Losses in the LLP can be used to offset other
profits
of the partners, although there are limits on the amount so used.
A yugen gaisha, with the
consent of its members, may convert to a kabushiki kaisha by:
--changing its trade name from yugen kaisha to kabushiki kaisha
--cancel the registration as a yugen gaisha
--register as a kabushiki kaisha
Establishment expenses for
kabushiki kaisha:
registration fee = 150,000 yen
stamp
tax
40,000 yen
notarization fees 50,000 yen
TOTAL 240,000 yen.
LLC godo kaisha
registration fee = 60,000 yen
stamp tax -
40,000 yen
TOTAL 100,000 yen
LLP
Registration fee - 60,000 yen
For all corporations, a
one-person board of directors will be possible. If there is only one
director,
appointing a representative director is not permitted. In fact, it is
not
permitted for a company with one director to call himself a
representative
director.
Previously 3 directors and
1 corporate statutory auditor were required. Nevertheless, under the
new law,
if the corporation elects to establish a board of directors, then once
again,
they must have at least 3 directors and one corporate statutory
auditor.
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.
AUDIT
REFEREE
The corporate statutory auditor may be replaced by an audit
referee who
must be a certified public accountant or a tax accountant (zeirishi) or
tax
accounting firm.
The audit referee is to
prepare the accounting documents and financial statements together with
the
directors and must explain them to the shareholders meeting. They are
also
required to maintain such records for five years on their own,
separately from
the corporation. Such disclosure is to be made to both shareholders and
creditors. Since the audit counselor is classified as a corporate
officer, just
like a director or corporate statutory auditor, and it can thus also be
sued in
corporate litigation, just like them.
During his term as audit
counselor he may not simultaneously serve as director, corporate
statutory
auditor, accounting auditor, executive or otherwise be employed by the
corporation or its subsidiaries.
The audit counselor is
appointed at the shareholders meeting. usually for a period of 2 years
but may
be appointed for up to 10 years. If during the joint preparation of the
accounting documents the audit referee and the director can not agree,
then the
documents can not be prepared. The audit counselor can either resign or
report
his opinion to the shareholders meeting. He can also file a court suit
on
behalf of the corporation.
NO
MINIMUM PAID UP CAPITAL
Minimum paid up capital requirements will also be abolished.
Previously, a special law permitted the establishment of kabushiki
kaisha with
a paid up capital of only one year, provided, however, that they had to
bring
up their paid up capital for kabushiki to the traditional 10 million
yen within
five years or be dissolved. Under the new law, by merely amending the
articles
of incorporation, deleting that part requiring dissolution if paid up
capital
of 10 million yen is not achieved within five years and registering the
amendment with the local Justice Ministry Office for corporate
registration.
PUBLIC VS.
NON-PUBLIC CORPORATIONS
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
The new company law introduces the principle that share certificates
not be
issued, unless specifically provided in the articles of incorporation.
Even if
so provided in the articles of incorporation, they need not be issued
unless so
requested by the shareholder.
Trade Name Investigations
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.
Bank Certification
When 10 million yen was
required to establish a kabushiki kaisha, it had to be deposited with a
bank
and when carrying out the incorporation procedure a certification was
required
from the depository bank, often a major endeavor. This is no longer
required
due to the no minimum capital requirement under the new Corporations
Law. It is
simply adequate to provide a validated account balance is adequate.
Corporations may now have
only one director. If that is the case they can not be called
representative
director.
Under the new Corporations
Law, parties who have still not recovered their rights after declaring
bankruptcy can still qualify as directors, unthinkable under the
previous law.
Even parties who have been convicted of a crime may serve as directors
so long
as they have finished their punishment. In the case of criminal
violations of
the Corporations Law or closely related laws, such as the Securities
Exchange
Law, must wait an additional two years past the end of their
punishment.
On the other hand,
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
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 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.
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 (homu kyoku)
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 provides 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.
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.
These changes will also
result in new corporate tax returns.
Corporations are also
being given much greater 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 will be possible with the passage of an extraordinary
resolution at the
shareholders meeting. If the reduction in paid up capital will be for
the
purpose of covering a deficit, then an ordinary resolution will be
possible. An
ordinary resolution will also be adequate if it is made
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.
Note: 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.
Under the new Corporations
Law, it will become possible to issue nine classes of shares. To be
able to do
so requires that such provisions be provided in the articles of
incorporation.
Such amendments to the articles of incorporation require a special
resolution
approved by a majority of the shareholders present and 3/4ths of the
total
voting rights. Such amendments must also be registered with the local
Ministry
of Justice corporate registrar (homu kyoku)
These are possible
classes of shares:
1. Shares with dividend
provisions giving such shares extra rights or lesser rights to
dividends.
Note: It is not possible to a class of shares completely stripped of
rights to
dividends.
2. Shares with provisions providing for the distribution of excess
assets.
Giving shares extra rights or lesser rights to distribute excess
assets.
Note: It is not possible to have a class of shares stripped of all
rights to
excess assets.
3. Shares with provisions concerning voting rights. With respect to
certain
matters shares can be given or denied voting rights.
Note: It is permissible to have shares with no voting rights.
4. Shares with veto rights. Classes of shares are given rights of veto
with
respect to designated matters. Called "Golden Shares" and key to
corporate defenses against takeovers. Upon certain conditions, such as
a
foreign company take over attempt these shares may be useful.
5. Director-Auditor appointment rights shares. Classes of shares giving
the
owners thereof the right to select directors or auditors.
6. Shares with restrictions concerning the transfer of shares. Classes
of
shares can be created such that their transfer required the approval of
the
company.
7. Shares with redemption rights. Classes of shares for which the
owners of
which can demand that the shares be bought back by the corporation.
8. Mandatory share purchase restricted shares. Classes of shares for
which the
corporation can acquire the shares upon the occurrence of certain
events.
9. Total buy-back restricted shares. Upon the approval of a
shareholders
meeting the company can buy back all of the shares of the class.
10. Convertible shares. These may even be mandatory as where upon
certain
conditions shares must be converted into another type, such as those
with veto
rights, or limited voting rights, or no voting rights, or even shares
losing
their subscription rights upon shareholdings reaching a certain level.
Defense is up to the
creativity of the lawyer.
Under the previous law,
when one corporation took over another corporation and created a new
corporation, the shareholders of both of the former acquiring
corporation and
the acquired corporation received shares in the new corporation, at
predetermined ratios.
Under the new Corporation
Law, it will be possible to acquire a corporation with cash or other
property
such as land. The reason for the delay of one year was to prepare
against
foreign acquisitions. In theory, under the new law, a foreign
subsidiary in
Japan could use the shares of its parent company. With the massive
valuation of
some foreign firms it is feared that they could easily acquire Japanese
corporations.
Nevertheless, as these
three cornered mergers, involving the use of the shares of the parent
company
would still require the agreement of the shareholders meeting. This is
thought
likely to make such transactions difficult.
Simplified measures for
mergers, corporate de-mergers, and share exchanges, if the amount of
assets to
be handed over to the shareholders of the disappearing corporation is
less than
20% of the net assets of the continuing corporation, then only the
approval of
the board of directors of the surviving corporation is all that is
required.
In addition, when a
controlling corporation owns more than 90% of the voting rights of the
controlled corporation, if the controlling company makes the controlled
corporation a 100% subsidiary the approval of the controlled company is
not
required. Opposing minority shareholders can demand that their shares
be
bought. They can also file suit if they feel that that laws,
regulations or the
articles of incorporation are being violated. Only in the case where
the
controlled corporation is one with restrictions on share transfers,
then the
permission of the controlled corporation may be required.
CORPORATE
BONDS
Under the new Corporations Law, all corporations other than continuing
yugen
kaisha can now issue corporate bonds. Previously corporations,
particularly
smaller corporations were overwhelmingly dependent on bank borrowings.
Small and medium sized
corporations will be able to make private placements of bonds by
offering them
to an investors group of 50 or fewer.
CONTROL OF
SUBSIDIARIES
Under the former law, the definition of a subsidiary was another
corporation in
which the parent corporation had over half the voting rights. Under the
new
Corporations Law, this has been changed to a standard of "Real Control"
as where the parent company sends directors to the subsidiary. This
brings the
Corporations Law into coordination with the Securities Exchange 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.
CONTRIBUTION IN
KIND
In establishing a corporation, the investors not only used cash as
their
investment in the new corporation, but also other property such as
land. In
order to avoid cases where the value of such assets are incorrectly
valued (the
investor over-values the assets) the previous law required an official
evaluation of the assets be assessed with exclusions provided only
where the
assets were less than 1/5th of total paid up capital and 500 million
yen. Under
the new Corporations Law this has been relaxed to only less than 500
million
yen, making it easier for smaller, cash-poor corporations to be
established.
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.