6.5 Company law

Japanese company law, rooted in the Companies Act of 2005, balances shareholder interests with stakeholder considerations. It incorporates elements from Anglo-American and European traditions, adapted to Japan's unique corporate culture.

The law recognizes various business entities, including the popular Kabushiki kaisha (KK) and Godo kaisha (GK). It also covers corporate governance, incorporation processes, finance, mergers and acquisitions, and social responsibility, shaping Japan's business landscape.

Overview of company law

• Japanese company law derives from the Companies Act of 2005 which modernized and streamlined business regulations
• Balances shareholder interests with stakeholder considerations reflecting Japan's unique corporate culture
• Incorporates elements of both Anglo-American and continental European legal traditions adapted to Japanese business practices

Types of business entities

Kabushiki kaisha (KK)

• Most common form of incorporated business entity in Japan similar to a joint-stock company
• Offers limited liability protection to shareholders and allows for easy transfer of ownership through stock sales
• Requires a minimum capital of 1 yen and at least one director appointed by shareholders
• Subject to more stringent disclosure and reporting requirements compared to other business structures

Godo kaisha (GK)

• Introduced in 2006 as a hybrid between partnerships and corporations modeled after the American LLC
• Provides flexibility in management structure and profit distribution among members
• Offers limited liability protection while maintaining simpler administrative requirements than KK
• Popular among small and medium-sized enterprises and foreign companies entering the Japanese market

Other business structures

• Gomei kaisha resembles general partnerships with unlimited liability for all members
• Goshi kaisha combines elements of limited and unlimited partnerships for different classes of members
• Sole proprietorships (kojin jigyo) remain common for small-scale individual business operations
• Non-profit organizations (NPOs) and cooperatives serve specific social or economic purposes under separate regulations

Corporate governance

Board of directors

• Responsible for strategic decision-making and oversight of company operations
• Composition varies based on company size and structure (one-tier or two-tier board system)
• Outside directors increasingly required to enhance transparency and accountability
• Duties include loyalty to the company, due care in decision-making, and avoiding conflicts of interest

Shareholders' rights

• Entitled to vote on major corporate decisions (mergers, dissolutions, board appointments)
• Can propose resolutions at annual general meetings (AGMs) with sufficient shareholding
• Enjoy information rights including access to financial statements and board meeting minutes
• Derivative suits allow shareholders to litigate on behalf of the company against directors for breaches of duty

Corporate auditors

• Kansayaku system unique to Japan provides internal oversight separate from the board of directors
• Audit & Supervisory Board members monitor directors' performance and company financial reporting
• Independent from management to ensure objective evaluation of corporate governance
• Collaborate with external auditors to enhance overall corporate accountability and transparency

Incorporation process

Registration requirements

• Submit application to the Legal Affairs Bureau with required documents and information
• Provide company name, address, business purpose, and initial shareholders/directors
• Obtain certificate of seal registration (inkan toroku shomeisho) for company representative
• Pay registration taxes based on initial capital amount and receive company registration certificate

Articles of incorporation

• Fundamental document outlining company structure, purpose, and governance rules
• Must include company name, business objectives, location of head office, and share structure
• Specify rights and responsibilities of shareholders, directors, and other key stakeholders
• Notarization required before submission to the Legal Affairs Bureau for official registration

Capital requirements

• Minimum capital of 1 yen for both KK and GK entities since 2006 legal reforms
• Initial stated capital can be increased through subsequent share issuances or capital injections
• Non-cash contributions (property, intellectual property) allowed but subject to stricter valuation rules
• Adequate capitalization important for credibility and accessing financing despite low legal minimum

Corporate finance

Share issuance

• Companies can issue common shares, preferred shares, and other classes of stock
• Rights offerings allow existing shareholders to maintain proportional ownership
• Private placements to specific investors subject to less stringent disclosure requirements
• Public offerings require extensive documentation and regulatory approvals from financial authorities

Debt financing

• Corporate bonds (shasai) can be issued by larger companies subject to credit ratings
• Bank loans remain a primary source of debt financing for Japanese businesses
• Syndicated loans allow multiple lenders to participate in large financing arrangements
• Convertible bonds and warrant bonds offer flexibility in capital structure management

Dividend distribution

• Board of directors typically proposes dividend amounts subject to shareholder approval
• Interim dividends allowed if specified in articles of incorporation
• Restrictions on distributions based on retained earnings and other financial metrics
• Tax considerations influence timing and structure of dividend payments to shareholders

Mergers and acquisitions

Procedures for M&A

• Statutory mergers (gappei) involve full integration of companies including assets and liabilities
• Share exchanges (kabushiki kokan) allow creation of parent-subsidiary relationships
• Business transfers (jigyo joto) involve sale of specific business units or assets
• Tender offers required for acquisitions of public companies beyond certain ownership thresholds

Regulatory approvals

• Japan Fair Trade Commission reviews transactions for potential antitrust concerns
• Foreign investment reviews conducted by relevant ministries for sensitive industries
• Financial Services Agency oversees M&A activities involving financial institutions
• Industry-specific regulators may need to approve transactions in sectors like telecommunications or energy

Shareholder protections

• Appraisal rights allow dissenting shareholders to request share buyouts at fair value
• Disclosure requirements ensure shareholders receive adequate information for informed decisions
• Squeeze-out provisions allow majority shareholders to forcibly acquire minority stakes under certain conditions
• Courts can intervene to protect minority shareholder interests in cases of unfair treatment

Corporate social responsibility

Legal obligations

• Companies required to consider interests of employees, customers, and local communities
• Disclosure of non-financial information increasingly mandated for larger corporations
• Corporate governance code promotes sustainable growth and increased corporate value
• Stewardship code encourages institutional investors to engage with companies on ESG issues

Environmental regulations

• Environmental Impact Assessment Law requires evaluation of large-scale development projects
• Waste management and recycling laws impose obligations on manufacturers and retailers
• Energy conservation measures mandated for large consumers of electricity
• Emissions trading schemes and carbon pricing mechanisms under development to address climate change

Labor standards

• Labor Standards Act sets minimum requirements for working conditions and employee rights
• Equal Employment Opportunity Law prohibits discrimination based on gender, age, or disability
• Work Style Reform laws aim to reduce excessive overtime and promote work-life balance
• Collective bargaining rights protected for labor unions to negotiate with management

Foreign investment regulations

Restrictions on foreign ownership

• Certain industries (broadcasting, airlines) have caps on foreign ownership percentages
• National security considerations may limit foreign investment in defense-related sectors
• Prior notification required for investments in designated business sectors
• Post-investment reports mandatory for significant foreign ownership changes

Joint venture requirements

• No general legal requirement for local partners in most industries
• Practical considerations often favor joint ventures for market entry and cultural alignment
• Careful structuring needed to balance control, profit-sharing, and dispute resolution mechanisms
• Technology transfer agreements common in joint ventures subject to intellectual property protections

Foreign direct investment laws

• Foreign Exchange and Foreign Trade Act governs cross-border investments and capital flows
• Screening process for investments in sensitive sectors or above certain ownership thresholds
• Promotion of inward FDI through tax incentives and streamlined administrative procedures
• Regional economic partnership agreements influence bilateral investment protections and dispute settlement

Corporate dissolution and liquidation

Voluntary dissolution

• Shareholder resolution required to initiate voluntary dissolution process
• Appointment of liquidators to wind up company affairs and settle outstanding obligations
• Distribution of remaining assets to shareholders after creditor claims are satisfied
• Final tax returns and deregistration from company registry conclude the process

Bankruptcy proceedings

• Civil Rehabilitation Act provides framework for business reorganization similar to Chapter 11 in the US
• Corporate Reorganization Law applies to larger companies with more complex restructuring needs
• Bankruptcy Act governs liquidation proceedings when rehabilitation is not feasible
• Court-appointed trustees manage assets and negotiate with creditors during insolvency proceedings

Creditor rights

• Secured creditors maintain priority claims on specific collateral in liquidation scenarios
• Unsecured creditors paid pro rata from remaining assets after secured claims are satisfied
• Preference periods allow clawback of certain pre-bankruptcy transfers to ensure fair distribution
• Cross-border insolvency rules facilitate recognition of foreign proceedings and asset recovery

Corporate compliance

Internal control systems

• Companies Act requires establishment of systems to ensure proper business operations
• Risk management policies and procedures must be documented and regularly reviewed
• Internal audit functions evaluate effectiveness of control systems and report to board/auditors
• IT governance frameworks increasingly important for data protection and cybersecurity compliance

Whistleblower protection

• Whistleblower Protection Act safeguards employees who report corporate misconduct
• Companies required to establish internal reporting systems and investigate allegations
• Prohibition on retaliation against whistleblowers including demotion or termination
• External reporting channels available through regulatory agencies for serious violations

Anti-corruption measures

• Unfair Competition Prevention Act prohibits bribery of foreign public officials
• Internal policies and training programs required to prevent corrupt practices
• Due diligence necessary for third-party relationships and international business transactions
• Cooperation with international anti-corruption initiatives (OECD Anti-Bribery Convention)

Corporate taxation

Corporate income tax

• Combined effective tax rate (national and local) approximately 30% for large corporations
• Progressive rates apply to small and medium-sized enterprises with lower income thresholds
• Consolidated tax filing allowed for corporate groups subject to certain conditions
• Various deductions and credits available for research and development, capital investment, etc.

Withholding tax

• Domestic source income payments subject to withholding at source (dividends, interest, royalties)
• Reduced rates or exemptions may apply under tax treaties to avoid double taxation
• Special rules for foreign-sourced income received by Japanese residents and non-residents
• Withholding obligations extend to certain service fees paid to foreign providers

Tax incentives for businesses

• Special economic zones offer reduced tax rates and simplified administrative procedures
• Research and development tax credits promote innovation and technological advancement
• Accelerated depreciation allowances for qualifying capital expenditures
• Carryforward of net operating losses allowed for up to 10 years (with limitations)

Intellectual property protection

Patents and trademarks

• Patent protection available for inventions meeting novelty and inventive step requirements
• Trademark registration protects distinctive signs used in commerce for goods and services
• Utility model system provides shorter-term protection for incremental technical innovations
• Design patents safeguard ornamental aspects of industrial products

Trade secrets

• Unfair Competition Prevention Act protects confidential business information
• Reasonable measures required to maintain secrecy of valuable commercial information
• Remedies available for misappropriation including injunctions and damages
• Criminal penalties possible for theft or unauthorized disclosure of trade secrets

Copyright in business context

• Copyright protection automatic for original works of authorship (software, marketing materials)
• Work-for-hire doctrine generally attributes employee creations to employing company
• Moral rights of authors recognized but can be waived in employment contexts
• Licensing and assignment of copyrights common in business transactions and collaborations

Dispute resolution

Commercial litigation

• District courts have jurisdiction over most corporate and commercial disputes
• Specialized divisions in major cities handle complex business cases
• Discovery process more limited compared to common law jurisdictions
• Loser-pays principle applies to allocation of legal costs with some exceptions

Arbitration in corporate matters

• Arbitration Act based on UNCITRAL Model Law facilitates alternative dispute resolution
• Japan Commercial Arbitration Association (JCAA) provides institutional arbitration services
• Enforceability of arbitration agreements and awards supported by New York Convention
• Increasing use of arbitration for international commercial disputes involving Japanese parties

Mediation for business disputes

• Court-annexed mediation available through summary courts for smaller claims
• Private mediation services offered by various organizations and individual mediators
• Non-binding nature allows flexible and creative solutions to preserve business relationships
• Confidentiality of mediation process encourages open communication between parties