LEGAL FRAMEWORK OVERVIEW OF THE NEW COMPANY LAW

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1 1 LEGAL FRAMEWORK OVERVIEW OF THE NEW COMPANY LAW KEY CHANGES ARISING FROM THE COMPANY LAW SURVIVAL OF THE YUGEN KAISHA UNDER THE COMPANY LAW SURVIVAL OF THE BUSINESS CORPORATION UNDER THE COMPANY LAW FOREIGN COMPANIES OVERVIEW OF THE NEW COMPANY LAW [ 5-100] Introduction In Japan, the incorporation, organisation, operation and administration of a company were previously regulated by Chapter Two of the Commercial Code (shou hou) and the Limited Company Law (yugen kaisha hou). However, the Company Law (kaisha hou, Law No 86 of 2005) and the Law Concerning Coordination, etc, of Related Laws in Connection with Enforcement of the Company Law (kaisha hou no sekou ni tomonau kankei houritsu no seibi-tou ni kansuru houritsu, Law No 87 of 2005) (the Coordination Law) were enacted and became effective on 1 May 2006, and Chapter Two of the Commercial Code and the Limited Company Law were consolidated into the Company Law. As of the effective date, the Company Law has become the main source of laws regulating companies, followed by judicial precedents, commercial customary laws, the Civil Code and various special laws and regulations (eg the Financial Instruments and Exchange Law and the Bankruptcy Law). [ 5-110] History of statutes regulating companies In Japan, the general statute regulating companies was enacted first in Chapter One sec 6 of the old Commercial Code in This was replaced by Chapter Two of the Commercial Code in Then Chapter Two of the Commercial Code was amended many times to appropriately cope with social changes. Some of the amendments include the: introduction of stock option, simplification of merger procedures and strengthening of penalties for illegal pay-offs to a corporate racketeer, etc, in 1997; introduction of share exchanges (kabushiki koukan) and stock transfers (kabushiki iten), etc, in 1999; introduction of corporate demergers and simplification of the procedure on acquisition of all businesses, etc, in 2000; (iv) lifting of a ban on treasury stocks, etc, in June 2001; Japan Corporation Law Guide 5-110

2 2 Legal Framework (v) (vi) (vii) (viii) (ix) improvement of share purchase warrants, introduction of flexibility into class shares and introduction of digitisation of corporate documents, etc, in November 2001; extension of term of office of a statutory auditor (to four years), introduction of a system to reduce the liabilities of directors and statutory auditors, and review of derivative action, etc, in December 2001; introduction of class shareholders rights of election/dismissal of a director, etc, introduction of expiration procedure of certificate of share, relaxation of quorum of the special resolution of a shareholders meeting, etc, introduction of a corporation with committees etc and deemed large corporation, introduction of a consolidated financial statement, and rationalisation of regulations for foreign companies, etc, in 2002; relaxation of a regulation of treasury stocks and reformation of a method to calculate the maximum amount of interim dividend in 2003; and introduction of the measure of electronic public notice, reformation of a procedure of creditors protection and introduction of non-issuance of certificates of shares, etc, in [ 5-120] New comprehensive Company Law Effective date The Company Law was enacted on 26 July 2005 and became effective on 1 May Need for the new law The enactment of a new comprehensive Company Law was made in order to rectify, among others, the following issues: Various statutes regulating companies existed and were not user-friendly. Certain statutes, including the Commercial Code, were written in kata-kana characters, an old-fashioned Japanese language, and thus were difficult for users to understand. The Commercial Code was modified various times for a very short period of time to cope with the rapid and drastic changes in the economy and society in recent years. However, it lacked consistent and systematic views, and a substantial number of issues were not resolved. [ 5-130] Consolidation of statutes Simultaneously with the enactment of the Company Law, the Coordination Law was enacted on 26 July The Coordination Law came into effect on 1 May 2006, the same day as the new Company Law came into effect. The Coordination Law provides for transitional measures and necessary amendments to the relevant statutes concerning the enforcement of the Company Law CCH Japan Limited

3 Legal Framework 3 The following statutes were consolidated into the Company Law by the Coordination Law: (iv) Chapter Two of the Commercial Code, which was a main statute regulating the incorporation, organisation, operation and administration of companies; The Law on Special Provisions for the Commercial Code Concerning Audits, etc, of Joint Stock Corporations (kabushiki kaisha no kansa-tou ni kansuru houritsu) (the Special Audit Law), which provided special provisions concerning audits, board of statutory auditors, accounting auditors, corporations with committees etc, and the like relating to joint stock corporations; The Limited Company Law (yugen kaisha hou), regulating the incorporation, organisation, operation and administration of limited companies (yugen kaisha); and Other various statutes associated with the above-referenced laws. In order to reflect changes in the practice of commercial registration as required by the enactment of the Company Law, the Commercial Registration Law and associated ordinances were also amended as of the effective date of the Company Law (Art 135 of the Coordination Law). [ 5-140] Governmental and ministerial ordinances The ministerial and governmental ordinances listed below, among others, provide details necessary for the enforcement of the Company Law and the Coordination Law, including matters delegated by the Company Law. These ordinances also came into effect on 1 May (iv) (v) Company Law Enforcement Regulations (kaisha hou sekou kisoku) (Ordinance of Ministry of Justice No 12 of 2006, as amended). Company Accounting Regulations (kaisha keisan kisoku) (Ordinance of Ministry of Justice No 13 of 2006, as amended). Electronic Public Notice Regulations (denshi koukoku kisoku) (Ordinance of Ministry of Justice No 14 of 2006). Company Law Enforcement Order (kaisha hou sekou rei) (Governmental Ordinance No 364 of 2005). Ordinance to Provide Transitional Measures in Connection with Enforcement of the Law Concerning Coordination, etc, of Related Laws in Connection with the Enforcement of the Company Law (kaisha hou no sekou ni tomonau kankei houritsu no seibi-tou ni kansuru houritsu no sekou ni tomonau keikasochi wo sadameru seirei) (Governmental Ordinance No 367 of 2005). Japan Corporation Law Guide 5-140

4 4 Legal Framework KEY CHANGES ARISING FROM THE COMPANY LAW [ 5-200] Key changes arising from the Company Law The new Company Law brought about changes in relation to the types of companies recognised, abolition of the limited company (yugen kaisha), creation of the limited liability company (goudou kaisha), the removal of minimum capital requirements, greater flexibility in structuring internal corporate organisations, the creation of a new officer called the accounting advisor, the relaxation on the types of consideration in organisational corporate restructure and the relaxation on restriction for dividends. Each item is discussed in turn below. [ 5-210] Types of companies recognized under the Company Law The Company Law recognizes and regulates the incorporation, organization, operation and administration of the following four types of companies (Art 1 and Art 2, item 1 of the Company Law): (iv) Joint stock corporations (kabushiki kaisha); Partnership companies (goumei kaisha); Limited partnership companies (goushi kaisha); and Limited liability companies or joint companies (goudou kaisha). [ 5-220] Abolition of limited company (yugen kaisha) system Before 1 May 2006 (ie the effective date of the Company Law), a limited company was one of the main types of entities (especially for small and medium-sized companies) and was sometimes used as a vehicle in a financial transaction such as the securitization of real estate. A limited company was previously regulated by the Limited Company Law. The Limited Company Law was repealed simultaneously with the effectiveness of the Company Law (Art 1, item 3 of the Coordination Law). Accordingly, no limited company may be incorporated on and after the effective date of the Company Law. A limited company in existence as of the effective date of the Company Law survives the abolition of the Limited Company Law and is referred to as a special limited company (tokurei yugen kaisha). See below. The Limited Company Law was repealed because it was considered that the new Company Law had made adequate provisions for such entity through the transferrestricted corporation (a type of joint stock corporation having its articles of incorporation containing a restriction on transfer of any class of shares without approval of the joint stock corporation). The transfer-restricted corporation has characteristics similar to the limited company. The key similarities are listed below CCH Japan Limited

5 Legal Framework 5 [ 5-230] Creation of limited liability company (goudou kaisha) The Company Law has created a new type of company, goudou kaisha (a Japanese version of a limited liability company). The limited liability company (the LLC ) is a hybrid of a joint stock corporation and a partnership. Similar to a joint stock corporation, the liability of each LLC member is limited to the amount of his or her capital contribution stated in the articles of incorporation (Art 580, cl 2 of the Company Law). Similar to a partnership, the operation of an LLC is to be conducted by its members (Art 590 of the Company Law), and transfer of a member s equity interest in an LLC may be made upon unanimous consent of all other members (or transfer of any non-management member s equity interest in an LLC may be made upon unanimous consent of all management members), unless otherwise provided for in the articles of incorporation (Art 585, cl 1 and 2 of the Company Law). The LLC is different from the US version of a limited liability company. A key difference is the tax treatment of the entity the LLC in Japan is not yet treated as a pass-through entity for the Japanese tax purpose. The Law Concerning the Limited Liability Business Partnership Contracts (yugen sekinin jigyou kumiai keiyaku ni kansuru houritsu) (the LLP Law) addresses this issue by creating a new form of enterprise, a limited liability business partnership (yugen sekinin jigyou kumiai) (the LLP ) which is treated as a pass-through entity for Japanese tax purposes. The LLP Law became effective as of 1 August While the LLP is legally a contractual partnership, each partner of LLP is, unless otherwise agreed, not liable beyond the amount of his or her contribution (Art 15 of the LLP Law). [ 5-240] Removal of minimum capital requirement Previously, at the time of incorporation, a joint stock corporation was required to have a capital amount of 10 million under Art of the Commercial Code, and a limited company was required to have a capital amount of 3 million under Art 9 of the Limited Company Law. In order to facilitate incorporation of joint stock corporations, the minimum capital requirement for a joint stock corporation has been removed. Under the Company Law, a joint stock corporation can be incorporated with a capital contribution of 1. However, no dividend of surplus (dividend of profits) may be made if the book value of the company s net assets is less than 3 million (Art 458 of the Company Law). With the removal of the minimum capital requirement under the Company Law, the exception previously in place exempting small- and medium-sized companies from the minimum capital requirement has also been repealed (Art 447 of the Coordination Law). Previously, under the Law Concerning the Promotion of New Business Activities of Mid and Small-sized Companies (chuushou kigyou no aratana jigyou-katsudou no sokushin ni kansuru houritsu) (the New Business Promotion Law, which replaced the New Business Creation Promotion Law (shin jigyou soushutsu sokushin hou)), the minimum capital requirement for joint stock corporations and limited companies were exempted for the initial five years of incorporation if the company was incorporated by a person who had received a confirmation as a founder from the Minister of Economy, Trade and Industry. Japan Corporation Law Guide 5-240

6 6 Legal Framework [ 5-250] Flexibility in structuring corporate organisation Previously, a joint stock corporation, regardless of its size, was required to have the following internal organisations: (vi) a shareholders meeting; at least three directors; ; and at least one statutory auditor (or, alternatively, audit committee and other committees). The Company Law gives greater flexibility in structuring internal organisations, particularly for the benefit of small- or medium-sized joint stock corporations. Under the Company Law, the minimum requirements for any type of joint stock corporation are the following internal organisations: a shareholders meeting; and at least one director. See following chart for the selections available under the Company Law (other than a shareholders meeting). Public Corporation (a joint stock corporation without restriction on transfer of at least one class of shares) required to have a board of directors Transfer-restricted Corporation (a joint stock corporation with restriction on transfer of any class of shares) Large Corporation ( stated capital amount is 500 million or more, or total liability amount is 20 billion or more; see ) required to have an accounting auditor + a board of statutory auditors + three committees, etc a director Non-large Corporation + a board of statutory auditors + a board of statutory auditors + three committees, etc a director a director CCH Japan Limited

In Japan, the assets to be securitised are most commonly receivables and

17 Securitisation in Japan Hirokazu Ina Jones Day In Japan, the assets to be securitised are most commonly receivables and real estate; therefore, this chapter focuses principally on the securitisation