Importance of Compliance with Company Regulations
Dec 11, 2017
For businesses that are fully controlled by a small number of directors who are also the shareholders, it may seem troublesome to hold annual directors and shareholders meetings and keep up the company records up to date. However, failure to follow the rules can incur an administrative penalty of less than 1 million yen to the Representative Director personally.
The procedural rules concerning the convening of meetings are also very important because an unhappy director, shareholder or otherwise related person can apply for resolutions be set aside in certain situations.
This article aims to highlight:
- ・basic information about the company to obtain to review company’s compliance status
- ・common pitfalls to avoid
Our office can provide the knowledge and assistance to support companies in dealing with compliance issues and welcome interested person to email us at email@example.com.
Basic information to obtain
Articles of Incorporation
Every company has one because it is an essential document needed at the time of incorporation. It contains important rules and information that relate to how the company is to be managed. If you have lost the Articles of Incorporation one of the options is to gain a certified copy from the Notary Public’s office (公証役場) if the company was incorporated within the last 20 years. Of course, any changes since the last lodgment will not be reflected in the copy and a company will need to update it if necessary.
Information in the Articles of Incorporation to note are:
- ・Within which area is the head office to be located?
- ・Is a Board of Directors established?
- ・What are the maximum numbers of directors and representative directors the company can have?
- ・What are the maximum office terms for directors, representative directors and statutory auditor?
- ・Does the Articles of Incorporations allow deemed resolutions in lieu of actual meetings?
- ・How many shares were issued, distributed and to whom?
- ・What restrictions are placed on share transfer?
- ・Any rules for the convening of meetings?
It is not uncommon for companies (especially small ones) to forget about the Articles of Incorporation after incorporation. However, without knowing the company’s situation and rules it has set for itself, it is not possible to know what rules are applicable. This document is also vital for applications for things such as government funding; governmental license; bank account; bank loan; and updating the Company Registry.
The Company Registry is a document that lists out the important registered record of a company and can be obtained from the Ministry of Justice. Information includes things like the company number, name, company type, address, date of incorporation, capital, amount of maximum share, share issued, officeholders’ names and addresses and date of inauguration. There should be no discrepancy between the Articles of Incorporation and the Company Registry.
For private companies, management of Shareholders’ List is normally created and managed by the companies themselves. Although the list is required for certain applications, there is no governmental system requiring shareholders’ information be registered similar to the Company Registry. For public companies or private companies proceeding to become public, a designated Shareholders’ List manager is necessary.
Pitfalls to avoid
Failure to update Company Registry
Article 915 (1) of the Companies Act states that:
When there is a change to the matters listed in the items of Article 911 (3) or in the items of the preceding three Articles with regard to a Company, the registration of the change shall be completed at the location of the head office within two weeks.
The “matters” in simple terms refer to information contained in the Company Registry. Some common examples include change of office location and appointing directors.
Failure to comply may result in an administrative penalty (under 1 million yen) to the representative director personally. Non-compliance is generally not detected until the company files for an application. Therefore, it is not uncommon for companies to neglect this matter for many years and then be fined. The penalty is administrative in nature so the representative director’s criminal record is safe.
It is important to check when officers’ term of office expires, hold meetings for re-election and update the Company Registry accordingly. The law allows directors to hold office for a maximum of 10 years. Therefore companies may stipulate the 10 years term in their Articles of Incorporation to reduce the burden of record keeping.
Failure to follow meeting protocols
Failure to follow protocols concerning the convening of meetings can result in resolutions being declared invalid which can have serious ramifications for the company. Depending on the importance of the matter to be decided, the type of meeting and the corresponding rules differ.
The two most common resolutions for Shareholders’ Meeting are:
- 普通決議 (Ordinary Resolution) – Matter generally involves management of company’s and shareholders’ property. For example, officer’s remuneration, approval of accounts, distribution of dividends. Generally, the quorum requires the majority of shareholders and resolutions need to be passed by majority also.
- 特別決議 (Extraordinary Resolution) – Merger and acquisition matters, shares restructuring, change of Articles of Incorporation. Resolutions require at least 2/3 majority, however, the quorum can be reduced to 1/3 of the shareholders with voting rights in certain circumstances.
Some general rule for convening Shareholders’ Meeting include:
- ・The Shareholders’ Meeting needs to be held within a reasonable time, generally within three months, after the end of the company’s fiscal year. (Article 296).
- ・Shareholders holding at least a valid share are eligible.
- ・One share equals one voting right.
- ・Prior to the Shareholders’ Meeting, A Directors’ Meeting is convened and the date, location, reporting agendas and agendas for deliberation for the Shareholders’ Meeting are decided.
- ・All shareholders to be notified at least 2 weeks before the Shareholders’ Meeting.
Exceptions: For companies that have Articles of Incorporation stating restrict on share transfers, the minimum notice period can be shortened to 1 week.
When there is consent from all shareholders eligible to vote, Shareholders’ Meeting can take place without advance notification. No need for changing of Articles of Incorporation, the consent is limited to one meeting only.
When all shareholders eligible to vote agree on the agendas in writing or via other electronic means, the resolutions are deemed to have been decided at the Shareholders’ Meeting.
- ・A meeting must be attended by shareholders whose combined voting rights exceed half of total shares issued.
Exception: In some circumstances, the required quorum can be reduced to 1/3 of the total voting rights if stated in the Articles of Incorporation.
Examples of Negative Consequences
- ・A director’s remunerations can be under attack and if the resolution is set aside, the director would be required to repay the money received as well as other sanctions.
- ・Penalties can be imposed if a company attempts to update the Company Registry (such as changing directors) without holding the Shareholders’ Meeting.