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The Outline for the Companies Act Reform in Japan and Its Implications
University of Tokyo – Graduate School of Law and Politics
November 1, 2013
Zeitschrift für japanisches Recht / Journal of Japanese Law, vol. 35 (2013)
In September 2012, the Companies Act Subcommittee of the Legislative Council submitted an “Outline of the Companies Act Reform” to the Minister of Justice. A reform bill based on this outline has been practically finalized by the Ministry of Justice and is expected to be submitted to the Diet in its extra session in the autumn of 2013.
The first major issue addressed is an important corporate governance matter: the desirability or necessity of having independent outside directors on Japanese company boards. So far, only slightly more than fifty percent of all listed Japanese companies have appointed at least one outside director on their boards. This figure is low by international standards, and “outside” does not necessarily mean “independent”. In the traditional Japanese view, the duty of most directors is to execute the business of the company, and the board is thought to be the highest authority for making business decisions rather than being the monitor of the CEO. However, the emerging global standard is to have outside independent directors on the board to act as monitors in the interest of public shareholders, with a focus on the evaluation of the CEO’s performance.
The Outline acknowledges – in the author’s view for the first time in Japanese official document – the general desirability of outside independent directors. First, the Outline recommends imposing higher requirements on directors to be “outside” to meet the global standard of “independent” directors to some extent. Second, it suggest a soft-law “comply-or-explain” approach regarding outside directors, though it refrains from introducing an outright obligation to appoint at least one outside director. Instead, listed companies that do not have an outside director on their boards must disclose in their annual business reports the reason for this, and the stock exchanges will be required to impose the obligation on listed companies to make a sincere effort to appoint at least one “independent director” by their listing rules. Additionally, a new type of governance structure, a company with an audit and supervisory committee, will be introduced.
Other reform measures include the introduction of an approval requirement by the shareholders’ meeting for large private placement of shares and the introduction of a new procedure for squeeze-outs.
Furthermore, the article addresses issues that were first on the reform agenda but were withdrawn later. Initially, some DPJ politicians and labor unions proposed that some of the statutory auditors should be elected by the employees of the company. Another initial proposal was to introduce a new rule for liability of the parent company against its subsidiary and to allow a shareholder of the subsidiary to enforce this liability by a derivative action. Both proposals were dropped because of intense objections from industry.
The objection for the latter topic showed the strong antipathy of industry against derivative actions by shareholders. Under current Japanese law, there is no requirement for the amount of shares necessary to be a plaintiff of a derivative action, and there is substantially no measure to interrupt a derivative action against the will of the shareholder who filed the suit. Modification of this uniqueness of Japanese law is likely to be on the agenda of the next reform project, combined with measures for further promotion of outside directors.
Number of Pages in PDF File: 26
Keywords: Japanese law, corporate governance, independent directors, private placement of shares, squeeze out, liability of parent company, derivative action
JEL Classification: K22