2003 JAPAN LAW: SHAREHOLDERS RIGHTS
Keywords: Corporate Law, Shareholders Rights, Director’s Liability
Copyright 2004. All rights reserved Attorney Roderick H. Seeman
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One of the major changes in the shareholder situation in Japan in the 1990s has been the weakening of the shield of friendly corporate shareholdings where friendly corporations, banks and other financial institutions held most of the shares of publicly listed companies. Although this structure was meant to enhance corporate ties and defensively to prevent takeovers, the other result was the ability to virtually ignore ordinary small shareholders. This resulted in the comedy of shareholders meetings in Japan, overwhelming held at the end of June, and usually lasting less than fifteen minutes. The primary concern of management in these meetings has not been shareholders concerns but trying to limit the damage caused by extortion artist sokaiya who attempt to blackmail the companies with juicy underhanded information about the company. Thus the short meetings, holding thousands of shareholders meetings usually in a two day meeting. No concern for legitimate shareholders, only attempting to save face from embarrassment. Make the meetings short, overwhelm the sokaiya with the large number of meetings in a short period. They can not possibly attend them all.

Management could afford such a strategy as these friendly corporate shareholders constituted the majority of shareholders. In the 1990s however, holdings by such shareholders declined from over 60% at the peak to less than 40%. Moreover the trend has been towards greater holdings by small individual shareholders and, more worrisome, those meddlesome foreigners who expect shareholders to have rights. During this year’s shareholders meetings however, some Japanese management went so far as to apologize to shareholders. Tepco apologized for its cover up of dangerous conditions at its nuclear reactors, Nagoya Railroad apologized for falsifying accident reports, contrary to the law, Daiwa Securities and Nikko Cordial both apologized for violating securities laws, Duskin apologized for having a president who appears to have misappropriated 180 million yen in company funds, Nippon Meat Packers apologized for lying about the source of its beef. Japan Airline Systems and UFJ Holdings apologized for their massive losses.

Other shareholders took substantially stronger, and thus much strAnger, action in filing court cases against corporate management. Shareholders of three construction companies (Kumagai Gumi, Penta-Ocean Construction and Wakachiku Construction) have filed court cases against the management of the company’s in relation to their payment of bribes to members of the ruling Liberal Democratic Party in Nagasaki Prefecture. The cases were filed in the District Courts of Tokyo, Fukuoka and Fukui. Although the defendants, and the ruling party called the payments “donations,” in July the Nagasaki District Court in February 2002 called this a violation of the Public Offices Election Law and convicted two members of the party. The plaintiffs are seeking 339 million yen, with 135 million for such donations made during 1993-2001 and 204 million yen for fines imposed by the national government for bid-rigging by the firms on a port construction project by the Nagasaki Prefectural government.

One shareholder of Mitsubishi Motors Corp filed suit against the company’s executives for 1.1 billion yen to be paid for the damages to the company caused reduced customer confidence in the firm due to  scandals from the company’s cover-up of defects. The government inspected the company twice in 1999 and the company hid almost all serious complaints. A settlement was later made for 180 million yen which would be used to reorganize the company’s legal framework. Called a “compliance fund” as in legal compliance, many mentioned it as perhaps a model for future settlement of such shareholder suits.

Despite such hopes, many large public corporations, deciding caution is the wiser course amidst this environment of increasingly assertive shareholders, are adopting a system limiting the personal liability of directors and statutory auditors. This system permits such officials to completely avoid such liability and has now been adopted by over 300 large companies,  doubling in one year, led by such major firms as Matsushita Electric Industrial, Japan Air Systems (formerly JAL), Nomura Holdings and major trading companies. The system also is said to “improve” corporate governance as otherwise it would be increasingly difficult to recruit outside directors. The system was introduced as of May, 2002 due to an amendment of the Commercial Code. The revision limited the maximum liability of representative director to five years of total compensation, ordinary directors to 4 years of total compensation and outside directors to 2 years of total compensation.