MK @ Legal Biz Leaf Abuse of Rights by Representative Directors
A Representative Director has an authority to conclude contracts with third parties by exercising his/her power of representation on behalf of the company, and also to grant the authorities of representation to officers/ employees inside the company.
Under Japanese law, the only shareholders can appoint Directors, who has qualification to be the Representative Director, and this is how the controls of shareholders extends to the entire operation of the company. Hence, the Representative Director has a statutory duty of loyalty to perform his duties for the benefit of the company. On the other hand, the expectations of shareholders are sometimes betrayed, and things often do not go as planned by the law.
This article explains about the specific risks that might can happen by the abusing of the representative authorities.
When a foreign corporation establishes a subsidiary in Japan, it is advisable to avoid relying too much on the local directors or keeping a nominee representative director (who was elected for sole the reason of establishing the company) in such position for a long time.
*The risks explained below are indicative of trends in past cases; yet not all cases will follow these trends. If you would like to discuss about specific case, please consult with a Japanese lawyer who is familiar with Japanese corporate law.
(Financial Services Agency website: List of Japanese bilingual attorneys)
Abuse of Rights by Representative Directors
There is a risk when a Representative Director might exercise his/her authority to conclude the contract with others for the benefit of himself/herself or a third party and causes damage to the company. In such cases, it is not always possible for the company to deny the effects of the contracts. If those acts in question is objectively judged as ” “the acts taken within the scope of representation,” it might be considered as a valid contract between the counterparty and the company.
1. “A Kabushiki Kaisha” whose business purpose is registered as “Sales of real estate”
2. Representative Director B sold a real estate to “C Kabushiki Kaisha” without a resolution of the company with the intention of embezzling the proceeds of the sale.
3. The contract was sealed with the Corporate Seal with the name of “A Kabushiki Kaisha, Representative Director B”
In this case, it can be objectively said that the act performed by Mr. B was an act performed as a representative director of the company (= the contract was not concluded personally between Mr. B and C Kabushiki Kaisha). Therefore, when C Kabushiki Kaisha demands A Kabushiki Kaisha to vacate the real estate, A Kabushiki Kaisha might have to take responsibility to respond to the demand. *
* In above case, A Kabushiki-Kaisha might be able to make a claim for compensation for damages against Representative Director B. * A Kabushiki-Kaisha might be released from the responsibility if C Kabushiki-Kaisha knew in advance that Representative Director B sold the real estate for his own goods and without gaining permission from the company.
Apparent Representative Director
I am often asked by my clients from overseas about the difference between “representative director” and “president (shacho)”. To explain simply, “representative director” is a legal term under the law, while “president(shacho)” is a name of the internal title within the company and is not a legal term. Therefore, it is not always true when a person with the title “president (shacho) ” has the same authority as a representative director*.
If a company gives the title of “president (shacho) ” to a person who does not have the authority to represent the company, and when he/she conducts transactions on behalf of the company without their permission, such transactions will be considered valid in most cases. Unless the counterparty knew or could have known that the “president (shacho) ” did not have the authority to do so.
Therefore, if a foreign corporation has a Japanese subsidiary, it is recommended not to give such titles to local employees or officers unless there is a specific need to do so.
*There are several reasons why theses internal titles are used in Japanese companies.
1) When a company has multiple Directors or Representative Directors, it is effective to name the position of each and divide the duties within them according to the positions.
Title often used:
Representative Directors: “President (shacho) “, “Vice President (fuku-shacho)”
Directors: “Senior Managing Director (senmu)” “Managing Director (jo-mu)”, etc.
2) The title “Chairman (Kaicho)” may be given to a retired founder (who may no longer be a representative director nor director) to pay respect to him/her.
3) Sometimes, even a regular employee may be given a title such as “Chief Executive Officer of (sales, secretaries, etc.) ” in order to gain the trust of business partners.
MK@ 05/15/2022
