7/87 SHAREHOLDERS RIGHTS

The Japanese police were taking no chances. They showed out in a force of 6,000 on June 26 1987 in major hotels and conference centers, primarily in Tokyo but also in Osaka and Nagoya. That evening they declared their action a success, in 99% of the cases it was all over in less than two hours. Was this due to a warning on a major international terrorist attack? A summit meeting of world leaders held in Tokyo needing the highest levels of security?

No,

this

was

general

shareholders

meeting

day

in

Japan.

On June 26, 1987 in one single day, 1,067 out of about 2,000 companies listed on Japanese stock exchanges held their shareholdings meetings, most of them in the morning. Why are all of these meetings, most of them in the morning. Why are all of these meetings held simultaneously? The Commercial Code does require that corporations hold their general shareholders meeting within 3 months after the end of the business year and all of the above companies are March term companies with business years ending March 31. That still does not explain why they all hold them on the same day. The real reason for this is to overwhelm the Sokaiya, Japan’s semi-gangster shareholders who blackmail corporations into making payoffs to them either by threatening to reveal the dirty linen of the corporation at the shareholders meeting, or, if they receive a payoff, keep otherwise critical shareholders quiet at the shareholders meeting, by force if necessary. By holding all the shareholders meetings at the same time, it is possible to sharply limit the number of shareholders meetings these sokaiya can attend. Japanese police are bursting their buttons with pride over their recent success in limiting the activities of these thugs. Their measure of success? How many shareholders meetings were there that lasted more than two hours? They note that there was only one shareholders meeting in April, 1987 that lasted more than two hours, compared to five a year earlier. Still, only in Japan would it be possible for police officers to boast at being able to limit shareholders meetings to under two hours.

The probable cause of this success has been the increased prosecution of corporate officials for making payoffs to silence these irksome sokaiya. Under an October 1982 amendment to the Commercial Code, it became illegal to make such payments and during the past year the Japanese police have prosecuted 19 company officials from Konica, Noritake Co., Sumitomo Marine & Fire Insurance, Konishiroku Photo Industry and Sogo Co. In the previous four years a total of only four cases had been brought by the police. This year the police even had a special meeting with the presidents of the powerful city banks, warning them not to make payoffs. The police believe that the prestige conscious bankers are easy targets for the sokaiya. As the amendment to the Commercial Code prohibits the payment of money or gifts to these sokaiya, some sokaiya have taken to merely asking to be put on the list of preferred customers who will be given an allotment when a company makes a convertible bond issue. The convertible bond issues almost always go up afterwards, assuring these preferred customers of a quick profit. As this does not involve the direct payment of money or gifts, many companies have been willing to agree, but now the police are cracking down on this as well. As the primary method of operation of the sokaiya is to threaten to disrupt the general shareholders meeting and embarrass management, a small cottage industry has developed among Japanese attorneys giving advice to corporate management on how to run their shareholders meetings. One of the primary changes has been the general adoption of question period and limit the questioning period to only one hour. The company also need not answer questions not directly related to the matters under discussion at the meeting (election of officials, balance sheet and income statement, etc) and may refuse to answer other questions altogether if not presented earlier to the meeting in writing according to appropriate procedures. Proving the effectiveness of the revision of the Commercial Code and crackdown by police, the number of sokaiya in business has decreased from over 6,800 prior to the amendment, to only about 1,400 now. Of those, only about 120 go to shareholders meetings on a regular basis and only about 70 actively ask questions at the shareholders meetings. So the sokaiya are slowly being weeded out, but it appears doubtful whether the objective of the 1982 Commercial Code amendment, the strengthening of shareholder rights at shareholders meetings, has been achieved. Indeed, success indicators in Japan tend to indicate otherwise.

THE JAPAN LAWLETTER, July, 1987. By Roderick Seeman