Succession of Equity Interests of Entity Partners

Succession of Equity Interests of Entity Partners

One of the matters that must be taken care of in the long-term operation of a Godo-Kaisha (limited liability company) is the inheritance or general succession of equity interests due to the death or merger of a partner.

As a general rule under the law, in the event of inheritance or general succession of partners, their equities (status as partners) are not succeeded by their heirs, and the partners naturally leave the company*.
*The right to claim for refund held by the partners will be succeeded to the heirs.

If all partners leave the company, the Godo-Kaisha is naturally dissolved. Also, if the Articles of Incorporation do not stipulate for a liquidator, the heirs shall file petition the court for the appointment of a liquidator and then go through the dissolution procedures, which can make the process longer and more complicated.

In order to prevent such a situation, it is recommended to add a provision to the Articles of Incorporation stating that in the event of inheritance or general succession of a partner, the equity interests of such partners shall be succeeded.

In principle, the Articles of Incorporation can be amended with the consent of all partners.

Example of Articles of Incorporation:

Procedures of Admission as Partners (Legal Entity)

In the normal procedure of admission of partners (by capital contribution/ by transfer of equity interests), the procedure of amending the Articles of Incorporation with the consent of all partners and/or the consent of other partners for the transfer of their equity are required.

On the other hand, in the case of succession of an equity interest, the Articles of Incorporation regarding the succession shall be deemed to have been amended on the date of such succession. Also, the consent of the other partners is not required (since it is assumed that the partners have agreed in advance to such articles of succession).

Therefore, in the above example, when DEF Inc. succeeds to the equities of ABC Inc., DEF Inc. naturally joins the Godo-Kaisha as a partner as on April 1.

Status as an Executive and a Representative Partner

It is important to note that although a successor can become a partner of a Godo-Kaisha in accordance with the said provisions of the Articles of Incorporation, he/she/it cannot naturally inherit the positions as an executive or a representative partner.

Therefore, if the Articles of Incorporation stipulate the executive and representative partners, a separate procedure is required to change the relevant Articles of Incorporation provisions. In the above example, as of April 1, DEF Inc., as a new partner, shall consent to amend the Articles of Incorporation of the executive and representative partner.

On the other hand, if the Articles of Incorporation do not provide for an executive and a representative partner, all partners naturally become such officers in accordance with the statutory provisions. Still, this does not mean that they have succeeded to the  ABC Inc’s position as officers.

Application for Registration

In the case of a change in executive and a representative partners due to a merger of the sole corporate partner, as in the above case, an application for registration must be filed within two weeks from the effective date of the change (= Date of a merger), in principle.

Required Documents

Following documents are required for the registration in general

1. Articles of Incorporation: Articles of Incorporation that stipulate that the company’s equity interest is succeeded through general succession
2. Notarized “Affidavit” with Japanese translation: (Examples of contents: a statement to the effect that the company was succeeded by absorption-type merger, the address and name, etc. of the merger and extinguish companies, the effective date of the merger, the address, name, date of birth, etc. of the newly elected executive manager, and the signature of the representative director of merger company).
3. Acceptance letter of the newly elected executive manager
4. Letter of consent of all partners : Regarding the amendment of Articles of Incorporation
5. Re-registration Form of Corporate Seal
6. Letter of assurance: regarding the seal registration by executive managers (signed by the representative director of legal entity)

MK@ 09/11/2022