Amendments to the Companies Act, 2019
OSAKI, Yasuhiro
Professor, Faculty of Law, Waseda University
(March 26, 2021)
1 Partial Amendment of the Companies Act of 2005
On December 11, 2019, the Act for Partial Amendment of the Companies Act of 2005 (Act No. 70) and the Act for Amendments of Relevant Laws associated with the 2019 Amendment of the Companies Act of 2005 (Act No. 71) were promulgated.
2 Major Amendments to the Companies Act
(1) General Meeting of Shareholders
(i) Electronic provision of materials for general meetings of shareholders
The new law establishes a system of electronic provision of materials related to general meetings of shareholders, such as reference documents for the meetings. In particular, for Large Companies under the Companies Act that submit annual securities reports, electronic provision of materials is required in principle, and written materials will be delivered to shareholders upon request only in exceptional cases. Electronic provision of materials related to general meetings of shareholders is not only beneficial for companies in terms of saving printing and mailing costs, but also for shareholders in terms of earlier access to corporate information than is possible with written materials. The practice of general meetings of shareholders in Japan is currently moving in the direction of IT utilization, including the computerization of voting (e.g., through the use of ICJ platforms).
(ii) Partial restriction of right to make shareholder proposals
Recently, there have been cases of abusive exercise of the right to make shareholder proposals in Japan, which leads to calls for legislative responses from those involved in shareholder meeting practice. The revised Companies Act limits the number of proposals that one shareholder can request to be included in the convocation notice to 10.
(2) Directors
(i) Stock Remuneration
In practice, it has not been uncommon to provide directors with shares in the company as remuneration. However, it has been pointed out that the procedures for granting such shares are complicated with regard to the remuneration provisions of the Companies Act. In the revised Companies Act, the procedures are made clear using the term “Stock Remuneration.”
(ii) Remuneration Policy for Directors
Although companies with a board of *kansayaku were not necessarily required to determine the remuneration policy for their directors, the revised Companies Act requires that the Remuneration Policy for Directors of companies with an audit and supervisory committee (excluding directors who are also the audit and supervisory committee members) and companies with a board of kansayaku (limited to Large Companies under the Companies Act that file annual securities reports and are also Public Companies under the Companies Act) be determined in the same manner as for companies with nominating, remuneration, and auditing committees. Accordingly, for all three company types, the remuneration policy shall be decided at the general meeting of shareholders and the specific amount of remuneration to be paid to directors shall be decided in accordance with that policy.
* Kansayaku is a company officer under the Companies Act, which is unique to Japan, Korea and China.
Kansayaku supervises directors, but can not dismiss a director who has committed illegal acts.
Although not directly related to the revised Companies Act, in Japan an increasing number of companies with a board of kansayaku have voluntarily established nominating and remuneration committees, due in part to the influence of the Japanese Corporate Governance Code.
(iii) Compensation agreements and directors and officers liability insurance contracts (known as D&O insurance)
The practice of compensation by a company for costs incurred by directors to respond to a shareholder lawsuit in which they are held liable for the performance of their duties had been prevalent in Japan, along with directors/officers liability insurance. However, the Companies Act was not regulating these practices. Issues of moral hazard and transparency have been pointed out from the academic sector. The revised Companies Act clarifies the scope of compensation and insurance coverage (some details are delegated to ministerial ordinance) and establishes rules for procedures leading to the conclusion of contracts and for disclosure of the contents of compensation and insurance coverage. The aim is to eliminate the possibility of adverse effects due to the risk of conflicts of interest caused by excessive compensation and insurance coverage.
(iv) Compulsory appointment of an outside director for companies with a board of kansayaku that are Large Companies under the Companies Act and submit annual securities reports
Companies with a board of kansayaku that are listed companies were not previously required to have an outside director, but the revised law makes it compulsory. Although the appointment of multiple outside directors had been almost realized in listed companies through the Japanese Corporate Governance Code, the revised law clearly stipulates it.
(v) Delegation of business execution to outside directors
Even if outside directors are entrusted to negotiate and handle MBOs and other specific situations, this is not regarded as inconsistent with the definition of the term “outside director” in the Companies Act.
(3) Others
(i) Share Delivery
A “Share Delivery” system has been established for the formation of subsidiary companies that are not wholly owned by existing companies. The procedures are almost the same as those for share exchanges and share transfers for the formation of 100% parent-subsidiary companies. The tax treatment is regarded as the remaining issue.
(ii) Management of corporate bonds
The Companies Act requires the establishment of a corporate bond administrator, but there are some exemptions, and in practice there have been many cases where the exemptions have been used to avoid the establishment of a corporate bond administrator. A system of assistant bond administrators has been established in order to protect bondholders by improving the management of bonds. The authority of bondholders’ meetings has also been revised.
(iii) Deletion of adult wards from reasons for disqualification of directors
Adult wards and others have been deleted from the list of reasons for disqualification of directors, kansayaku, and other officers under the Companies Act in response to suggestions that it was an obstacle to promoting the use of the adult guardianship system.
3 Date of Enforcement
Most of the revised Companies Act will come into effect on a date specified by Cabinet Order within a period not exceeding one year and six months from the date of promulgation (December 11, 2019). However, there are some provisions of the amended law that have different effective dates, such as the part regarding electronic provision of materials for general meetings of shareholders, which will come into effect on a date specified by Cabinet Order within a period not exceeding three years and six months from the promulgation date. This is due to the fact that it takes time to develop a system to comply with the revised Companies Act.
Note: The effective date of the main part of the amended law was established by Cabinet Order No. 70 (November 20, 2020). It is March 1, 2021.
