Recent Developments Regarding Possible Amendments to the Companies Act of Japan
The Ministry of Justice of Japan announced a proposed amendment to the Companies Act (the "Proposed Amendment") on December 7, 2011 and invited public submissions. If the Proposed Amendment is implemented, it will be the first large amendment of the Companies Act since its renewal in 2005.
The main purpose of the Proposed Amendment is to reform (i) the corporate governance system and (ii) the regulation of the relationship between a parent company and its subsidiaries. Therefore, the Proposed Amendment includes many important topics, such as outside directors, third party allocations of shares upon the change of a controlling shareholder, lawsuits brought against the directors of a company by shareholders of its parent company on the company's behalf, and statutory cash out. Some of these topics are outlined below.
Under the current Companies Act, it is at each company's discretion whether to have an outside director. In order to enhance the corporate governance of certain companies, the Proposed Amendment suggests that companies above a certain size (e.g. the company’s capital stock is not less than JPY 500,000,000 or its debt is not less than JPY 20,000,000,000), listed companies or certain other categories of companies have at least one outside director. The Ministry of Justice has also proposed, as an alternative, that the current Companies Act be kept unchanged.
In addition, the Proposed Amendment proposes stricter requirements for an outside director. Put simply, the current definition of an outside director under the Companies Act is a director who is not, and at no stage was, an executive director or employee of the company or one of its subsidiaries. The Proposed Amendment suggests excluding the following persons, amongst others, from the definition of an outside director: (i) directors and employees of the parent company of the relevant company and (ii) certain relatives of the relevant company's directors and employees. The Ministry of Justice has also proposed, as an alternative, that the current Companies Act be kept unchanged.
Third Party Allocations of Shares
Under the current Companies Act, a resolution of shareholders is not required to issue shares simply because the number of issued shares is large enough to result in a change of the controlling shareholder. (Please note, however, that the rules of certain stock exchanges may require such a resolution.) The Proposed Amendment proposes that a resolution of shareholders be required whenever a company intends to conduct a share issue, by way of third party allocation, which will result in a change of the controlling shareholder. This gives the existing shareholders control of such a share issue, rather than just the company’s management. The Ministry of Justice also suggests, as an alternative, that the current Companies Act be kept unchanged.
Lawsuits Against Company Directors Brought by a Parent Company's Shareholders on Behalf of the Company
Under the current Companies Act, the shareholders of a parent company are not entitled to directly bring a derivative lawsuit against a subsidiary's directors on behalf of the subsidiary. In order to secure the rights of the parent company's shareholders, the Proposed Amendment proposes giving shareholders of a parent company, under certain conditions, the right to file a derivative lawsuit against a wholly-owned subsidiary's directors on behalf of the subsidiary. The Ministry of Justice also suggests, as an alternative, that the current Companies Act be kept unchanged.
Under the current Companies Act, “cash out” (squeezing minority shareholders out by giving monetary consideration) can be made by (i) reorganisation procedures, such as exchanging shares for monetary consideration, or (ii) using class shares subject to a class-wide call. In practice, both methods incur procedural costs and time. Therefore, in order to reduce such costs and save time, the Proposed Amendment proposes that a special controlling shareholder (who has not less than 90% of all the voting rights of the company) should have the right to call other shareholders to sell their shares to the special controlling shareholder.
The Proposed Amendment is only an interim proposal from the Ministry of Justice. The issues raised by the Proposed Amendment, including the topics described above, are still under consideration—not only regarding the details but also whether to adopt them at all. The working group of the Ministry of Justice will further develop the Proposed Amendment in light of the public submissions it received prior to the close of submissions, which was at the end of January, 2012. It is therefore important to carefully monitor the working group’s progress.
Anderson Mori & Tomotsune is one of the largest full service law firms in Japan with over 50 years of experience advising international clients. Through specialized teams of Japanese and foreign attorneys equipped to meet the needs of international real estate investors, Anderson Mori & Tomotsune is proud to offer a full-range of real estate advice, including deal structuring advice, legal due diligence, contract negotiation and closings, to sellers, purchasers, trustees, asset managers, financiers and arrangers.
Yuichiro Nukada, a partner at Anderson Mori & Tomotsune, practices in the fields of M&A (takeover bids, share acquisitions, business transfers, statutory corporate reorganizations, JVs, general corporate), general corporate matters, real estate (J-REIT, TMK), financing, international transactions, sport (professional football clubs) and entertainment. In addition to his professional experience at AM&T, he worked for the Financial Services Agency of Japan where he was in charge of maintaining laws and regulations for modernising the Companies Act, the Securitization Law (TMK Law), the REIT Law and other financial areas. He was also engaged in the preparation, revision and formulation of the Financial Instruments and Exchange Act (June 2004 - June 2005). He has also worked for Slaughter and May in London as a foreign visiting associate (September 2006 - March 2007).
Yuichiro can be contacted on +81-3-6888-1110 or by email at email@example.com.