An Amendment t0 the c。mmerciaー Law= Creating L2WS f。r Cー

Commercial LaW
An Amendment to the Commercial Law: Creating Laws
for Class-Shareholders' Meeting and U.S. Style Committee
Governance System etc.
Law N0.44, May 22, 2002 (Effective on April 1, 2003).
Background :
The world economy surrounding Japanese corporations has been dramatically changing over the last decade. During this period, many cor-
porations, including large corporations, went bankrupt and the numbers
of unemployed persons and suicides have increased extraordinarily. But
the Japanese government could not overcome this serious recession in
spite of taking many measures. Under these circumstances, significant
reforms of corporate governance system have been seriously needed at
the level of commercial law.
The law reforms in 2002 are also a part of a series of measures to
restructure the commercial law. Particularly, they aim to diversify and
improve the ways to manage companies, and they are focusing on one
of the core parts of the corporate governance system: the separation of
management and observation, that is, the separation of the officer who
manages and the director who mainly observes. And it has been also
needed to foster venture entities which can play a vital role in the future
Japanese economy. This is why the reform also aim to make it easier for
venture entities to finance or draw investment from venture capital .
These fundamental changes in the commercial law can be said to
comprise certain changes in the Commercial Code that were proposed
in the 154th ordinary session of the Diet and were finally enacted in the
Diet on May 22, 2002.
The principal contents of these changes are (i) certain revisions
regarding the management system of companies and (ii) certain revisions
regarding the company's accounting provisions. The former relates to
the goal of "Ensuring the efficiency of corporate governance," while the
latter speaks to the goal of "Accommodating the internationalization
of companies' activities." A draft of the summary of these revisions
(the "Summary") was prepared by the corporate sub-council of the
Council on January 1 6, 2002 and was finalized by the Council and
submitted to the Minister of Justice (the "MOJ") on February 1 3, 2002.
The MOJ prepared a final draft bill for the proposed changes to the
Commercial Code and other relevant laws (the "Bill") on the basis of the
Summary and the Cabinet submitted the Bill to the Diet on March 1 8,
2002. The Bill was passed in the Diet on May 22, 2002.
Main Provisions:
(a) Introduction of the Committee System
This change gives Large Companies (Dai-Kaisha) and some Medium
Companies (Minashi Dai-Kaisha) the option to adopt a US-type corporate governance system if there is such a provision in the articles
of incorporation. More specifically, upon enactment of the revisions,
a company adopting such a system (a "Company with Committees
(Iinkai-to-setchi-kaisha)") must establish an "Appointment Committee",
"Audrtmg Commrttee" and "Compensatron Commrttee". The appointment Committee has the power to nominate candidates for directors
and to decide a bill concerning the dismissal of directors (The Law for
Special Exceptions to the Commercial Code, 2 1 .8 para. I ). The auditing
Committee has the almost the same power as statutory auditors (The Law
for Special Exceptions to the Commercial Code, 21 .8 para. 2, & 21.10).
The Compensation Committee has the power to decide the contents
of the compensation of individual directors and officers (The Law for
Special Exceptions to the Commercial Code, 21.8 para. 3, & 21.11).
Importantly, the determination of each committee is the final one, that is,
the board may not override it.
Such a company must also have officers (Daihyou Shikkouyaku and
Shikkouyaku) who manage, and importantly, it may not have auditors,
unlike Japanese traditional companies which have representative directors and executive directors, who are members of the board but mainly
manage the company, other directors who are just members of the
board and who mainly observe the representative directors and executive
directors, and statutory auditors. The revisions stipulate that more than
half of the members of the above-mentioned committees must be outside
directors. At a Company with Committees, the board of directors may
properly delegate substantial management authority to officers. For
example, the board may delegate the authority to approve issuances of
new shares of capital stock and bonds to officers (The Law for Special
Exceptions to the Commercial Code, 21.5, 21 .7 para. 3 & 21 . 12).
By these restructurings, companies can adopt a corporate governance
system which accomplishes the separation of management and observation, and is entirely different from the Japanese traditional governance
(b) Introduction of the Committee for Important Assets
This change enables a Large Company (other than a Company with
Committees), having I O or more directors (including at least one or
more outside directors), to establish a "Committee for Important Assets
(Jyuyozcasan unkal) " This commrttee should consrst of 3 or more
directors of the company. The board of the company may delegate its
decision-making authority with respect to the disposition or acquisition
of important assets and large borrowings to this committee (The Law for
Special Exceptions to the Commercial Code, Art. I .3). The purpose of
this change is to allow flexible and prompt management decisions.
(c) Simplification of Procedures for Shareholders' Meetings
This change primarily relates to medium- or small-sized joint stock
companies (Kabushiki-kaisha) (hereinafter referred to as a "KKs").
Upon the enactment of the revisions, the procedures pertaining to
shareholders' meetings for medium- or small-sized companies may be
simplified, allowing the company to conduct meetings in a manner more
akin to a limited liability company (Yugen-kaisha) (hereinafter referred
to as a "YK"). The specific contents of this item are as follows:
1 With the consent of all of the shareholders, such companies may
omit the convocation process of shareholders' meetings (Art. 236).
2 Closed Companies (companies requiring, in their articles of incorporation, board approval for transfers of shares) may, upon authorization in the articles of incorporation, shorten the notice period for
shareholders' meetings (Art. 232, para. I ).
3 As with a YK, a resolution in writing or in an electronic format will
be permitted for general shareholders' meetings (Art. 253).
(d) Relaxation of the Quorum Requirement for Shareholders' Meetings
Under the former Commercial Code, the statutory quorum requirement for a special resolution of a general shareholders' meeting was
a simple majority of the total voting shares. However, a company could
not relax this requirement even by its articles of incorporation. Upon
the revision, a company is allowed to relax this requirement down to
one-third ( I /3) of the total number of voting shares by its articles of
incorporation. In such a case, the relevant provision authorizing these
lesser quorum requirements must be specifically set forth in the articles
of incorporation (Arts. 343, para. I & para. 2).
(e) Appointment of Directors and Corporate Statutory Auditors in
a Class Meeting
This change enables a Japanese company to issue a new class of
shares with certain rights regarding the appointment and/or dismissal of
directors or corporate statutory auditors.
In order to facilitate the foundations of joint ventures, to make
it easier for venture entities to finance from venture capitals, and to
protect legally shareholders' interests, something which had previously
been accomplished by contracts among shareholders, it is provided
that a closed company which restricts alienation of shares may issue
some types of shares which are different in their contents concerning
the appointment and/or dismissal of directors and/or auditors in a class
meeting (Art. 222, para. I ). For example, a company may issue Type A
shares entitling holders to an exclusive right to elect 3 out of 5 members
of the board of directors and Type B shares entitling holders to an
exclusive right to elect the remaining 2 directors. These changes serve
to supplement the earlier changes regarding shares with limited voting
rights. Under the earlier changes, shares having an exclusive right
to appoint a certain numbers of directors could not be issued due to
the limitation on the number of shares having limited voting rights
(i.e., one-half ( I /2) of all outstanding shares at the maximum).
When a closed company issues class shares, the directors and/or
auditors of the company shall be appointed in the same class meeting,
not in a general meeting (Arts. 257.1 & 280), and they shall be dismissed
in the same class meeting in principle (Arts. 257.3 & 280).
(D Nullification Procedures for Share Certificates
This change establishes a new system for handling lost share certifi-
cates. Under this new system, a shareholder who has lost a share certificate can request the issuing company to reissue the share certificate
without public notice of stock cancellation and in the absence of a stock
cancellation judgment by simply registering the loss of the certificate
with the issuing companies. Since an application by the shareholder will
be made to the issuing company, the company will have an opportunity to
check its stock registration book. Therefore, even after the introduction
of this system, the rights of a bona fide purchaser of such lost shares will
be fairly and sufficiently protected (Arts. 230 & 230.2-230.8).
(g) Consolidated Financial Statements
To ensure adequate disclosure, this change requires a publicly traded
Large Company to prepare a consolidated balance sheet and profit and
10ss statement and to report such statements to its _ shareholders at the
annual shareholders' meeting (The Law for Special Exceptions to the
Commercial Code, Arts. 19.2 & 21.32).
(h) Delegation of Accounting Matters to Ministerial Ordinances
This change abolishes the provisions in the Commercial Code
regarding the details of such accounting matters as the method for
valuing assets and delegates such matters to relevant ministerial ordi-
nances. After this change, the Commercial Code itself has only a basic
conceptual provision with regard to accounting matters. The purpose
of this change is to enable the flexible adjustment of accounting regulations under the Commercial Code to the changes in the accounting
principles and to ensure unity between accounting carried out under
the Commercial Code and that under the Securities and Exchange Law
(Arts. 285 & 281 , para. 5).
(i) Creation of a Certification System for the Value of Assets Provided
as a Consideration for New Shares, etc.
This change broadens the scope of the use of certifications issued by
professionals such as lawyers, accountants or tax accountants, that may
be used as an alternative to an inspection by a court-appointed investigator (Arts. 173, para. 2, n0.3, 246, para. 3, & 280.8, para. 2).
G) Abolishment of Office Requirement for Foreign Companies
Under the former law, foreign companies that engage in business
in Japan on a continuous basis were required to set up a branch office
in Japan. This change abolishes this requirement and, instead, requires
more detailed disclosures by foreign companies as a means of ensuring
the protection of Japanese parties that may be doing business with such
foreign companies. For example, a requirement that such foreign companies disclose their financial statements in Japan is added (Art. 479,
para. 2).
Editorial Note :
As stated above, the main purpose of this reform was to diversify and
improve ways to manage corporations. Inter alia, a noticeable change in
good corporate governance for corporations, particularly large corpora-
tions, was made by separating management and observation. It may be
said that the purposes of the series of reforms have been almost accomplished by this reform in 2002. The issues remaining after the completion
of these reforms are scheduled to be resolved in 2003 and thereafter.
One of these remaining issues relates to the current requirement of
the issuance of physical share certificates. For some time now, many
closed companies have requested the Japanese government to permit the
exemption of such issuance requirements to closed companies. In addition, even for publicly traded companies, it is a rare case that the physical
delivery of a share certificate is actually made at the time of a transfer of
shares and, in many cases, investors themselves do not require the physical delivery of certificates by depositing the shares with their securities
firms or using the custody and book-entry transfer system. With regard
to this issue, the possibility of the non-issuance of physical share certificates on the basis of these circumstances will be discussed as well as
related issues such as the manner to effectuate a transfer of shares.
Assuming smooth progress in the substantial changes in Japanese
commercial law, the last thing necessary to do is to modernize the terms
of the Commercial Code. MOJ has already begun the process of reviewing the problems that may occur when the plain Japanese is used for the
provisions of the Commercial Code. But since, as a result of the abovementioned changes, almost all of the provisions of the Commercial Code
will be amended to some degree, MOJ will carry out the adoption of
colloquial Japanese after such substantial changes have completed to
a large extent.