MK @ Legal Biz Leaf Defect in the Resolution of Shareholders meeting
Shareholders’ meetings must be carefully conducted in accordance with the provisions of the law. This is because if there is any defect in the resolution of the shareholders’ meeting, the resolution may be invalid or revoked.
*If your company has already been sued by a shareholder or other party, or if you are planning to sue the company, it is advisable to consult with Japanese lawyer (not a judicial scrivener). They would give you some advice on how much impact will the Company might get when they lose the lawsuit, (the rescind of one resolution may lead to other resolutions to be rescinded), and how much cost and time will be required for the lawsuit.
Resolution of a General Shareholders Meeting to be Rescinded
A revocation of a resolution of a general shareholders meeting can be done by filing an action and obtaining a final and binding judgment.
Plaintiff: Shareholder, director, auditor, liquidator, etc.
* Even if there is no defect in the meeting procedure directly against you, if there is a defect in the meeting procedure of other shareholders, you can file a lawsuit against the company yourself.
If convocation notice of a meeting was not sent to Shareholder A, Shareholder B may still sue the corporation for it, even though Shareholder B was given notice of the meeting without an issue.
Defendant: the Company
Jurisdictional Court: Location of the company’s head office
* It is an exclusive jurisdiction and cannot be changed. So those of who live in overseas need to be careful.
Deadline for Filing Suit (IMPORTANT)
Within 3 months from the date of the resolution of the shareholders’ meeting.
Such a short period of deadline for filing a lawsuit has been set in order to achieve an early resolution because the effect of the resolution of the shareholders’ meeting not being finalized may have a great impact on the public.
It is not possible to add a claim for another reason for revocation after three months have passed with respect to the same general shareholders’ meeting.
(This is because the cause of the defective is remain unchanged, so the court can still hold a hearing only to determine whether or not there was a breach of duty of explanation)
Effect of the Judgment
The effect of the resolution is negated by the finality of the judgment (i.e., retroactively it never happened).
The effect of the judgment is not limited to the shareholders who filed the lawsuit, but extends to all shareholders (regardless of the fact whether they voted for or against the resolution) and third parties as well.
On the other hand, a judgment of “dismissal with prejudice on the merits” （請求棄却）or “dismissal without prejudice” (却下) does not have any effect on third parties.
For Example
Shareholder A sues the company for the election of directors and the case was dismissed for failure to appear in court. Shareholder B can still sue the Company for the same resolution (as long as it is still within the time limit for filing suit).
Effect on Third Parties
If the resolution of the election of a representative director is revoked, there will be a huge impact on third parties who had made the transactions with him/ her during his/her term of office will be affected. In this case, there is still room for the transactions to be considered valid if the third parties were (for example) unaware of the fact that he/she was not qualified to be a representative directors.
The Conditions and Scope of Filing
(1) The resolution to be rescinded need to have been “passed”
The ultimate goal of this judgment is to “rescind” a resolution. Therefore, there is no need to file an action if the resolution was rejected in the first place. （i.e., Even if a resolution is rescinded, it neither mean that the resolution was passed.
(2) The resolution to be rescinded need to be closely related to the violation.
When the notice of convocation is late in the deadline → all resolution may be rescinded
When Resolution to elect directors was passed by disregarded a shareholder’s proposal of reducing the maximum number of directors.→ Only the resolution of electing directors might be rescinded and other irrelevant agenda items will be out of the scope.
(3) There must be an interest in rescinding the resolution.
The interest of the lawsuit will be lost when a motion to rescind the resolution to elect directors has been filed and when all of those directors concerned resigned during the pendency of the lawsuit.
However, the interest of the lawsuit may survive if such resigned directors hold a general meeting of shareholders to appoint the next directors before their resignation.
This is because if the first resolution to appoint directors is revoked, it is deemed that those directors were not at their position from the beginning, which means that they had not had any authority to decide and convene a general meeting of shareholders.
*In such a case, it is important to file an action for the revocation of both the first and second resolutions of the election.
If a resolution to approve an absorption-type merger is subsequently passed with respect to an action to rescind a resolution to acquire class shares subject to wholly call, and the deadline for filing the latter action has expired, the former action loses its merit.
For Example
1) Shareholder A’s shares ( class shares subjected to wholly call) were acquired by the Company; yet, he/she sued against the Company on the grounds that there was a problem with the consideration.
2) During the pendency of the lawsuit, the Company merged with another Company and the resolution has been passed and the 6 months* has been passed from the effective date of merger.
In this situation, even if shareholder A rescinded the resolution of above 1, there is no way to change the fact that the Company ceased to exist as a result of the merger, and shareholder A will not receive any consideration anyway. Therefore, the interest in rescinding the first resolution will be lost.
* The period for filing an appeal against the resolution for approval of absorption-type merger is 6 months.
Types of Defection of the Shareholder Meeting
A shareholders meeting may be revoked when there were a violation of resolving procedures, violation of Articles of Incorporation and a extreme unfairness in the content of the resolutions. However, it is more important to know about the actual cases which had been rescinded by the courts than to differentiate each type of defectiveness.
Violation of convocation procedures
An agenda item that was not included in the notice of convocation was resolved at the general meeting of shareholders
Violation of Articles of Incorporation
13 candidates were elected as directors when the number of directors were stipulated as no more than 10 directors in the Articles of Incorporation.
*In this case, the revocation occurs with respect to all 13 directors.
Resolution with extremely unfair content
The family of the deceased director exercised their voting rights as a shareholder and passed a resolution to provide condolence money with unfair contents.
*The exercise of voting rights by a person who is an interested party does not always mean that he/she cannot exercise voting rights, but it only becomes an issue when the exercise of such interests has a significantly unjust influence to the resolution.
For Example, a director him/herself is allowed to exercise the voting rights as a shareholder in a resolution of election, but not in a resolution of dismissal.
Discretionary Dismissal by the Court
There is a possibility that the court may decide that it does not extend to revocation of the resolution, even if there is a defect on the procedures. This is because a redo of a shareholders’ meeting is costly and has a strong public impact.
There are three main requirements for the court to discretionary dismiss the action
(1) Only when the violation is related to the “procedure”
If the content of the resolution violates the law or the Articles of Incorporation, the discretionary dismissal will not be made.
Violation of the Articles of Incorporation in content of the resolution:
The Articles of Incorporation stipulate that the number of directors shall be 10 or less, but the company passed a resolution to elect 13 directors.
→The resolution will not be dismissed.
Violation of the Articles of Incorporation in procedure of the resolution:
The Articles of Incorporation stipulate that proxies must be shareholders, but the company mistakenly allowed an unqualified proxy to participate in the resolution, but the proxy did not make any particular statement during the meeting.
→The resolution may be discretionary dismissed.
(2) Only when the fact of violation is not material.
If the violation is serious, the discretionary dismissal will not be made.
Serious violation: A general meeting of shareholders is held without a resolution of the Board of Directors, and the notice of convocation is late.
→The resolution will not be dismissed. No material violation: The company forgot to send a notice of convocation to some shareholders, but those shareholders participated in the resolution.
→The resolution may be discretionary dismissed.
(3) Only when the defect does not affect the outcome of the resolution
If the existence of a defect would change the conclusion of the resolution, discretionary dismissal will not be made.
*Note: No change in the result of the resolution does not mean that there was not a serious violation.
When there was a mistake in counting the affirmative votes:
The result would have been reversed if there weren’t any mistake
→ discretionary dismissal will not be made.
The result remains the same, even if the mistake has not been made
→ The resolution may be discretionary dismissed.
Action for Declaratory Judgment of Absence or Invalidation of a Resolution at a Shareholders Meeting
If a general shareholders’ meeting was not actually held but was made to appear to have been held, an action for declaratory judgement of absence of a resolution at the general shareholders’ meeting can be filed.
If a general meeting of shareholders is held but in such a way that it cannot be said to have been legally concluded, an action for declaratory judgement of invalidity of a resolution at the general meeting of shareholders can be filed.
Sample Case B: When only some shareholders gathered by themselves and passed a resolution
Sample Case C: When a common director convenes a general shareholders’ meeting without a resolution of the Board of Directors
Sample Case D: When a resolution is passed by notifying only to a specific shareholders of the convocation of a general meeting of shareholders
Persons entitled to sue: There are no special provisions. Not only shareholders, but also anyone related to the company can be plaintiff as long as they have the interest to sue.
Deadline for Filing Suit: There is no specific time limit.
However, filing a lawsuit too late may be considered an abuse of rights.
In a case where the transferor, who handed over the management rights without obtaining an approval resolution for the transfer of equity, challenged the non-existence of the approval resolution three years after the transfer, the case was dismissed on the grounds that it was an abuse of rights for the transferor to file an action for confirmation of non-existence now (despite the fact that it was easy to prompt the transferor to obtain an approval resolution at that time).
Difference from an Action for Rescission of a Resolution
The “ rescission of a resolution ” means that such resolution is treated as “valid” once, and when the judgment becomes final, it is deemed to have never existed retroactively up to the resolution stage.
On the other hand, the “ absence of a resolution ” means that the resolution does not become “valid” even temporarily.
Conclusion ( ;∀;)
- If a resolution of a general shareholders meeting is not made in accordance with laws and regulations, there is a risk of the following lawsuits being filed.
- If the resolution of the shareholders’ meeting is defective in any way, the resolution can be rescinded by filing a lawsuit.
- The time limit for filing such an action is three months from the date of the resolution.
- If the resolution of the shareholders’ meeting was not passed or cannot be said to have been legally passed, an action for invalidation or confirmation of non-existence of the resolution can be filed. There is no limitation on the period for filing such an action, nor is there any limitation on the person who has the right to file such an action.
MK@ 05/01/2022
