Corporate Law Changes to Come
Aug 18, 2014
- Japanese corporate law
- legislative changes
On June 20, 2014, the Revised Companies Act was enacted. This Act will come into force within one and a half years of publication. It will make several changes to corporate governance in Japan. Some of these, such as the changes to promote the appointment of outside directors, will be gladly welcomed (and in fact were sought after) by foreign investors.
We wanted to provide you – our valued clients – a brief rundown on the most significant changes.
1) New “comply or explain” approach to outside directors
As mentioned, this is perhaps the most called for change in the legislation. It responds to requests from foreign investors to encourage the appointment of outside directors in order to boost corporate governance. Currently, only 62.2% of companies listed in the first department (typically larger companies) of the Tokyo Stock Exchange have an outside director.
Under Article 327-2 this change will incorporate a “comply-or-explain” approach to regulation. It does not force companies to take on outside directors, but does require them to report their reasoning for not doing so to the general shareholders’ meeting following the conclusion of the fiscal year.
Please note that the target of these amendments are large, public companies with a board of company auditors which need to submit an annual report.
2) New structure of company (Article 399-2 etc.)
The amendment act introduces companies with an audit etc. committee (kansatou iinkai secchi kaisha) as a new corporate governance structure. Currently, there are only two structures of monitoring systems: the board of company auditors, and committees. Given that company presidents typically do not wish to lose their power to control via the power of selection of representative directors and remuneration, they have been unwilling to use the committee system, in which they need to appoint an outside director.
In order to increase the number of companies using outside directors, and also to diversify the monitoring system, this structure was created.
In essence, this new structure will encourage improved monitoring. It will do so by enhancing the power and functions of audit committee members by partially using the committee system which includes outside directors.
3) Cash-out (Article 179 etc)
The Act also provides for a new cash-out system for shareholders with 90% or more of the voting rights. It allows them to buy out all shares, stock acquisition rights, and bonds with stock acquisition rights held by the minority shareholders without obtaining a resolution at a shareholders’ meeting.
This shortens the timeline from takeover bid to cash out. It is hoped this will reduce the pressure faced by minority shareholders prior to the amendments. As such, this system was adopted.
4) New requirement on parent companies transferring shares in subsidiaries (Article 467(1)(2)-2)
Under the Revised Companies Act, parent companies will be required to obtain approval from its shareholders’ meeting before selling shares in a subsidiary if:
a) The book value of the shares exceeds 20% of the total assets of the parent company, and
b) The parent company will not be a majority shareholder following the transaction.
Other amendments include changes to protect creditors in cases where corporations have split for a fraudulent purpose. The law introduces a multiple derivative action suits system as well. There are many changes being made at this time, so it is wise to keep an eye on these.
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