MK @ Legal Biz Leaf Separation of Ownership and Management
One of the major characteristics of a stock company is the “separation of ownership and management”. This means that the shareholders, who are the owners of Kabushiki-Kaisha, do not necessarily have to be the managers (directors, auditor, etc.) of the Company.
Most of the shareholders incline to purchase shares for earning income or capital gains, plus most of them are not interested in the management of the Company, or do not have the ability to do so. Therefore, the Japanese Companies Act allows shareholders to appoint and leave the actual management of the Company to directors, auditors, and other professionals.
Design of a Organs of the Company
The design of a company’s organization can be decided relatively freely In Japan.
On the other hand, there are some regulations as well; depending on the size of the company, it may be required to have a Board of Directors, or, if it chooses to have one body, it may be required to have another body as well.
It is not necessary to understand all of these structures, but it is advisable to understand the basic rules.
Required Organizations for All Kabushiki-Kaisha in Japan
There are only the following three organizations that are mandatory for all stock companies in Japan.
(1) General meeting of shareholders
(2) Directors
(3) Representative directors
As for other organizations (such as auditors), companies are free to choose whether or not to establish them, in principle.
Authorities of General Meeting of Shareholders
The general meeting of shareholders is an institution that all companies are required to establish.
I am often asked by my clients, “What can shareholders resolve at the shareholders meeting and what are their scope of authorities?” However, the answer to this enquiry varies depending on whether or not the company has a ” Board of Directors”
A company WITHOUT a Board of Directors: In this case, shareholders can make decisions on matters stipulated in the Companies Act, as well as on the organization, operation, management, and all other matters related to the Company.
In other words, in principle, anything that can be decided by the directors can “also” be decided by the general meeting of shareholders. Therefore, if you wish to “limit” the authority to decide certain matters to the general meeting of shareholders (For example, if the 100% parent company in an overseas does not want to give all decision-making authority to the local directors of the Japanese subsidiary), it is advisable to devise a way by establishing internal regulations to that effect or by directly stipulating such authorities in the Articles of Incorporation.
However, it is not recommended to appoint such untrustworthy person as a director who cannot be given any authority in the first place, and therefore, measures should be taken from other angles, such as dispatching a director from the overseas headquarters.
A company WITH a Board of Directors: In this case, a general meeting of shareholders can only pass resolutions on matters stipulated in the Companies Act and in the Articles of Incorporation. Therefore, for example, in the case of a company without a Board of Directors, a resolution for the election of a representative director can be passed at a general shareholders meeting, but in the case of a company with a Board of Directors, the election will be made at a board meeting in principle, unless the Articles of Incorporation stipulate that the election shall be made at a general shareholders meeting.
In order words, a company with a Board of Directors has a narrower scope of authority of the general meeting of shareholders than a company without a Board of Directors. On the other hand, by giving more decision-making authorities to the Board of Directors, the company can reduce the cost and time required to hold a general meeting of shareholders.
Whether or not a board of directors should be established
In principle, a company is free to choose whether or not to establish a Board of Directors.
Establishing a Wholly Owned Subsidiary of a Foreign Company in Japan
Many companies from overseas considering about the establishment of a subsidiary in Japan are single shareholders (wholly owning parent company) and often start with a single director and representative director as the initial organ to be established. In this case, it is not possible to establish a Board of Directors in the first place. This is because the establishment of a Board of Directors requires at least three directors and one auditor.
In addition, there would be little merit in establishing a Board of Directors for such companies.
It does not take much time or cost to hold a shareholders’ meeting (or passing resolution with the consent of all shareholders) for a single shareholder, and more importantly, not having a Board of Directors would allow the parent company to make any decisions on the subsidiary’s business management. Which means, the parent company can retain maximum authority as a shareholder by not setting up a Board of Directors.
For other similar reasons, not many domestic companies as well establish a Board of Directors at the initial stage of incorporation. It is advisable to start as a company without a Board of Directors, and then reconsider the necessity of a Board of Directors as the size of the company and the number of shareholders increase after its establishment.
Conclusion
- Shareholders do not have to be the manager of a company, but they can appoint the manager who can govern the company on their behalf
- The mandatory organs of a Japanese Kabushiki-Kaisha are as follows:
1. General Meeting of Shareholders
2. Director
3. Representative Director
Other bodies can be established relatively freely. - The scope of authority of the shareholders’ meeting differs depending on whether or not a Board of Directors is established.
A company without a Board of Directors: Shareholders have full authority.
A company with a Board of Directors: Shareholders’ authorities are reduced to those stipulated in the Companies Act or in the Articles of Incorporation.
MK@ 05/03/2022
