Revision of the Japanese Companies Act in 2019 and some changes in legal rules
regarding corporate governance.
A partial amendment act to the Japanese Companies Act 2005 was promulgated on 11th December 2019 and has come into force on 1st March 2021, except the provisions to make it possible for a company to deliver the materials regarding the shareholder meeting electronically without consent of individual shareholder.
This amendment act （hereinafter referred to as “the Companies Amendment Act 2019”） has （i） reformed shareholder’s proposal right,
（ii） introduced the electronic delivery of certain materials on shareholder meeting to all shareholder, （iii） strengthened corporate governance regime by imposing the duty to appoint at least one outside director on the large-sized public companies with both the board of directors and the board of management auditors, improved the rules on officers’ remuneration, and （iv） introduced new rules on the indemnification of officers’ liabilities and the conclusion of D&O insurance contract, in order to develop statutory rules on corporate governance.
It has also made improvement to the legal framework for corporate bond and introduced a new M&A method, i.e., Kabushiki-Kouhu, whereby a company limited by shares issues its shares to the shareholders in another company limited by shares in exchange for their shares to be transferred in order to make the latter company a partially owned subsidiary of the former.
This article is to focus on the core law reforms brought about by the Companies Amendment Act 2019 regarding corporate governance issues of increasing importance and to overview them from the theoretical viewpoint as well as the practical approach.
2 Reform of shareholder’s proposal right
（1） Shareholder’s proposal right under the Companies Act before the 2019 amendment.
Under Japanese law, shareholder having consecutively for the preceding six months or more not less than three hundredths （3/100） of the voting rights of all shareholders has been able to demand the directors, by showing the matters to be the purpose of the shareholders meeting and the reason of the calling, to call the shareholder meeting, since long before. This is the shareholder’s right to demand calling of the shareholder meeting and one way whereby the shareholder can lay such matters as he/she wishes before shareholder meeting.
However, the requirements to exercise this right have not only been relatively heavy for individual shareholders, but also this demanding right has been thought to be inefficient in that an extraordinary shareholder meeting should be called by either the directors or the demanding shareholder just for the purpose of dealing with those matters.
In 1981, for the purpose of solving these problems and making it easier and more efficient for shareholder to lay such matters as he/she would like to propose before shareholder meeting, the partial amendment act to the Japanese Commercial Code introduced a shareholder proposal right based on US corporate law. The Companies Act of Japan maintains same proposal right of shareholder.
First, according to Section 303 subsection 2 of the Act, in case of public company limited by shares, only shareholder holding consecutively for the preceding six months or more not less than either one hundredth （1/100）
of the voting rights of all shareholders or three hundred voting rights may demand the directors that the directors include such matters as the shareholder concerned proposes in the agenda of the shareholders meeting. In case of private company limited by shares setting up the board of directors voluntarily, only shareholder holding not less than either one hundredth （1/100） of the voting rights of all shareholders or three hundred voting rights may use the same proposal right （Section 303 Subsection 3）. In such cases, that demand shall be submitted no later than eight weeks prior to the day of the shareholders meeting.
Meanwhile, in case of a private company limited by shares without the
board, every shareholder who is able to exercise voting right at shareholder meeting may demand the directors at the meeting that the matters which the shareholder proposes shall be laid before the meeting （Section 303 Subsection 1）.
Secondly, according to Section 305, same shareholder as above mentioned in a public company, private company having the board of directors or private company without the board, as the case may be, may demand the directors no later than eight weeks prior to the day of the shareholders meeting that shareholders be notified of the summary of the proposals which such demanding shareholder intend to submit with respect to the matters that are the agenda of the shareholders meeting.
This proposal right is referred to a right to demand notification of shareholder proposals.
These rights have made it possible for eligible shareholder to add the desired matters to the agenda of shareholder meeting called by the directors and let the other shareholders know them in the company’s expense.
Recently, the proposal rights have been put to increasingly active use especially by institutional shareholders, which has had a substantial influence on corporate governance of Japanese listed companies. The number of use of proposal rights has continuously increased in number.
However, in terms of these shareholder’s proposal rights, the Companies Act did not either restrict the number of proposals which eligible shareholder could submit or provide that the directors could reject such shareholder’s proposal that was defamatory of any person, or frivolous or vexatious. As a result, in case of HOYA corporation, twenty proposals were put forward by a certain eligible shareholder who was hostile against the then management at the annual shareholder meeting held in June 2011. It is said that an eligible shareholder made one hundred proposals to an annual general meeting in another listed company1.
These events raised the issue of whether to put a cap on the number of shareholder’s proposals and it was considered at the company law committee of the Legislative Council of the Ministry of Justice.
1 Toshikazu Takebayashi, Q&A on the Amendment Act 2019 to the Companies Act, Shojihomu, 2020, p.51.
（2） Reforms in shareholder’s proposal rights under the Companies Amendment Act 2019.
Under these circumstances, the Companies Amendment Act 2019 has imposed the restriction on the number of matters to be notified by the company to the other shareholders by way of the right to demand notification of shareholder proposals, for the first time since the introduction of shareholder’s proposal right in 1981. The number is limited up to 10, according to Section 305 Subsection 4 newly provided for. It also prescribes the way to count the number of proposals by providing for example that proposals to appoint or remove officers be regarded as one proposal.
Anyway, this is thought to solve one of the issues before mentioned, but another issue has remained. Because the proposed amendment to restrict any defamatory, frivolous, or vexatious proposals was dropped in course of deliberation before the National Diet due to existing necessity to consider the compatibility with the general rule against abuse of rights2. That is why this issue is left to the construction of the law.
In addition, both the dynamic change in share ownership structure by increase in number of shareholdings by active institutional investors, especially foreign institutional shareholders and the investors’ growing attentions turning to SDGs and the climate change risk have let more shareholders make more active use of proposal rights in Japan as well and have encouraged some constructive dialogue between proposing shareholders and the management. That is why the Act should not restrict the availability of them more than necessary. Taking it into account, the reform in shareholder’s proposal right of this time should be reviewed carefully for a mid or long term.
3 Electronic delivery of materials on shareholder meeting to shareholders
（1） Background of the introduction of the electronic delivery of materials regarding shareholder meeting
The Companies Act requires the directors of a company limited by shares to deliver written materials regarding shareholders meeting with the notice of shareholder meeting to all the shareholders having voting
2 Toshikazu Takebayashi, ibid, p. 49.
rights, such as reference documents, postal voting form, accounts and annual report, consolidated accounts if any, when they call the shareholder meeting, so that it cannot help spending an enormous amount of time and money for printing those materials and sending them to shareholders.
Electronic delivery would be useful in reducing such cost, but it needs an explicit consent by individual shareholders. In fact, a listed company with many shareholders would not be able to use an electronic delivery to all the shareholders of materials regarding shareholder meeting, because obtaining individual consent of every shareholder is not actually possible.
That is why the Companies Amendment Act 2019 introduces a new system whereby shareholder meeting materials are uploaded onto a website and shareholders are notified of the website address, if the articles of association contains the provision to that effect.
（2） Electronic delivery of shareholder meeting materials
According to Section 325-2, a company is allowed to deliver the shareholders meeting materials electronically to all shareholders without getting their individual consent by uploading them onto a website of the company, if its articles of association provides that the directors take a measure of electronic delivery, in calling a shareholder meeting. This reform enables a company adopting the measure to omit individual provision of shareholder meeting materials, although the directors are still required to send the notice to convene （Section 325-4, Subsection 4）.
Overviewing the new system, first, a company must provide in the articles of association that the directors shall provide certain shareholder meeting materials in electronic format by uploading them onto a relevant website, in convening a shareholder meeting. According to Section 325-2, adopting this system is voluntary, but a listed company is obliged to set the provision to that effect in its articles of association （Section 159-2, Subsection 1 of the revised Act of 2019 to the Act on Book Entry of Corporate Bond and Shares）.
Secondly, in the case where the articles of association of a company limited by shares provide for the electronic delivery of the shareholder meeting materials, the directors of the company must upload them in electronic form onto the relevant website by three weeks prior to the day of a shareholders meeting or the day of dispatching the notice of the
meeting （Section 325-2, Subsection 1 of the Companies Amendment Act 2019）. The shareholder meeting materials include the reference documents for use of postal or electronic voting, postal voting form, summary of shareholder’s proposal （if any）, accounts and annual report, and consolidated accounts （if any）3. Then the directors must send the notice of the meeting containing the website address and other necessary information to the shareholders no later than two weeks prior to the day of the meeting in calling it4.
Thus, as far as the shareholder meeting materials are concerned, they do not need to be sent individually either in paper-based format or electronic format, which would lead to cutting cost of the company for sending them.
However, considering a digital divide still existing in individual shareholders, the Companies Amendment Act 2019 provides that a shareholder may request the delivery of the materials in paper-based format if desired5.
4 Mandatory appointment of an outside director for a large-sized public listed company with the board of directors and the board of management auditors.
（1） Corporate Governance structure of large-sized public listed company under the Japanese Companies Act
Undre the Japanese Companies Act 2005, the companies limited by shares are divided into public company and private company.
A private company limited by shares is a company whose articles of association provide that the transfer of shares in it must be approved by the company. In contrast, A public company is a company which is not a private company6.
Also, the companies limited by shares are classified into a large-sized company ant the others. Large-sized company is either a company the amount of whose stated capital is in the balance sheet as of the end of its
3 Section 325-3, Subsection 1 of the Companies Amendment Act 2019.
4 Section 325-4, Subsection 1 of the Companies Amendment Act 2019.
5 Section 325-5, Subsection 1 of the Companies Amendment Act 2019.
6 Section 2, Paragraph 5 of The Companies Act 2005.
most recent business year is five hundred million yen or a company the amount of whose liabilities section of the balance sheet as of the end of its most recent business year is twenty billion yen or more7.
The Japanese Companies Act requires a large-sized and public company in principle to have not only the board of directors composed of three directors or more but also the board of management auditors, Kansayaku-kai, made up of three management auditors and a certified auditor8. A management auditor is called Kansayaku, in Japanese, and has a duty to check the management by the directors mainly from the viewpoint of lawfulness and report on that to the shareholders, so that a management auditor is prohibited from holding the position of director9. In addition, half or more of the members of the board of management auditors must be outside management auditors, for the purpose of strengthening their independence against the board of directors and thus enhancing the monitoring function of the board of management auditors.
However, an appointment of outside director was not required in case of large-sized public company with the board of directors and the board of management auditors under the Companies Act before the 2019 revision to it. Because such a company has been obliged to appoint at least two outside management auditors. Problem is that the board of management auditors is not given the power to remove executives, because it is the board of directors that shall appoint and remove executives and any management auditor is not given voting right at the board of directors.
7 Section 2, Paragraph 6 of The Companies Act 2005.
8 Section 327, Subsection 1, Paragraph 1 and Section 328, Subsection 1 of the Companies Act 2005.
9 Section 335, Subsection 2 of the Companies Act 2005.
That is why the Companies Act provides for two other types of corporate governance structure relying on outside directors to supervise the management by the executives. One is a company with the nomination, remuneration and audit committees which shall be composed of three or more directors under the board of directors. More than half of the members of each committee must be outside directors. This is a company with three committees. It is the two-tier board system introduced in 2002 following US corporate governance regime. In case of a company with three committees, company management is entrusted to executive officers who do not always need to be directors.
Another type is a company having the supervisory committee of three or more supervising directors more than half of whom must be outside directors aside from the board of directors, company with the supervisory committee of supervising directors. It has been introduced by 2014 revision 1） Companies with the Board of directors and the Board of Management
Auditor CPA or Accounting Firm
Board of Directors
Board of Management Auditors
monitor Chief Executive Director
Other Executive Directors
2） Companies with Three Committees
audit Shareholdersʼ Meeting
Nomination Committee Remuneration Committee Audit Committee
Auditor CPA or Accounting Firm
Board of Directors
Supervise Chief Executive Director Other Executive Directors
to the Companies Act. Supervising directors have duties of monitoring the management by executive directors and so cannot hold position of executive director. This is different from a company with three committees in that it does not have statutory committees of nomination and remuneration and that the supervisory committee is given also similar functions as these committees, besides its own monitoring role.
Thus, large-sized public company may choose a company with three committees or a company with supervisory committee of supervising directors instead of setting the board of management auditors.
Looking at the realities, many listed companies in Japan have adopted a corporate governance structure with the board of directors and the board of management auditors. According to the TSE-Listed Companies White Paper on Corporate Governance 2021 of Tokyo Stock Exchange, the numbers of listed companies there and the listed companies with the board of directors and the board of management auditors was 3677 and 2495 （67.9％） respectively as of 14th August 2020.
However, listed companies with this governance regime have been requested to appoint at least two independent outside directors by the Corporate Governance Code of Japan, soft law, since 1st June 2015 and thus have borne burden of appointing two outside independent directors or more under the soft law of Corporate Governance Code as well as two outside management auditors under the statute.
In contrast, listed companies with the other types of corporate governance structures have only to appoint at least two outside directors and thus bear less burden in the requirement to appoint outside officers than listed companies with the board of directors and the board of 3） Companies with the Supervisory Committee of Supervising Directors
Auditor CPA or Accounting Firm
Board of Directors Executive Director
Supervisory Committee of Supervising Directors
Chief Executive Director Other Executive Directors
management auditors. As a result, remarkable shift from the governance regime of a company with the board of directors and the board of management auditors to that of supervisory committee of supervising directors has been seen. According to the TSE-Listed Companies White Paper on Corporate Governance 2021, the number of listed companies with the latter structure was 1106 （30.1％） as of 14th August 2020, most of which have been converted from the former corporate governance regime10.
It means that the number of companies with the supervisory committee of supervising directors has surprisingly exceeded one thousand only in seven years. For reference, the number of listed companies with three committees as of the same date was 76 （2.1％）11 and this type of corporate governance structure has not been popular.
（2） Mandatory appointment of an outside director for a large-sized public listed company with the board of directors and the board of management auditors.
As mentioned above, large-sized public listed companies with the board of directors and the board of management auditors need only to appoint two outside management auditors under the Companies Act 2005 and thus the appointment of outside directors are voluntary in the sense that they are exempt from the appointment of outside directors by explaining the reason for that on comply or explain rule of the soft law of Corporate Governance Code. However, the system of the board of management auditors has not been thought to be effective in monitoring the management and so has needed improvement as a matter of statutory corporate governance structure.
Also, as a matter of fact, the most of listed companies with the board of directors and the board of management auditors have appointed outside directors by complying with the Corporate Governance Code. According to the TSE-Listed Companies White Paper on Corporate Governance 202112,
10 Tokyo Stock Exchange Ltd., TSE-Listed Companies White Paper on Corporate Governance 2021, June 2021, pp.78, 79.
11 Tokyo Stock Exchange Ltd., TSE-Listed Companies White Paper on Corporate Governance 2021, June 2021, p.78.
12 Tokyo Stock Exchange Ltd., TSE-Listed Companies White Paper on Corporate Governance 2021, June 2021, Chart 81 at p.94.
98.3％ of listed companies with these boards have appointed outside director（s）.
Under the circumstances, the Companies Amendment Act 2019 makes the appointment of outside director in certain large-sized public companies with the board of directors and the board of management auditors mandatory. According to 327-2 of the Act, among the large-sized public companies with the board of directors and the board of management auditors, those companies which are also obliged to submit the Annual Securities Report to the Prime Minister under the Financial Instruments and Exchange Act must appoint one outside director or more. As a result, they are equipped with double monitoring function by outside director（s）
on the board of directors on one hand and the board of management auditors, especially outside management auditors on the other and can be said to be improved in monitoring system.
However, some issues remain. First, under the Companies Act, individual outside director is not given investigating rights regarding the affairs of a company and needs to rely on a management auditor who has such rights individually to gather necessary information for monitoring.
Secondly, increased burden of appointing outside director（s） as well as outside management auditors on those companies above mentioned is still inescapable and continues. Also, Tokyo Stock Exchange proceeds with the restructuring of the listing markets in 2022 to the Prime Market, the Standard Market and the Growth Market and will require listed companies on the Prime Market to appoint at least one-third of the directors as outside independent directors that shall have sufficient qualities to fulfill their roles and responsibilities with the aim of contributing to sustainable growth of companies and increasing corporate value over the mid- to long- term under the revised Corporate Governance Code, i.e., Japan’s Corporate Governance Code 202113.
As a result, listed companies on the Prime Market with the board of directors and the board of management auditors will bear more burden.
Some of them try to lighten such burden by reducing the total number of directors and decreasing the number of outside directors to be appointed14.
13 Principle 4-8 of the Corporate Governance Code 2021.
14 Nikkei, 25th May 2021, p.19.
That is a problem of mistaking the means for the end. Anyway, the significant shift to the corporate governance regime of supervisory committee of supervising directors is expected to take please in near future.
5 Improving the regulations on officers’ remuneration.
（1） Outline of the regulations on officers’ remuneration under the Companies Act
Under the current Companies Act of Japan, in case of companies other than companies with three committees on the one hand, first, directors’
remuneration must be determined by either the articles of association or the ordinary resolution of the shareholders meeting depending on types of it. For remuneration in a fixed amount, that amount shall be fixed. For variable remuneration amount of which is not fixed, the specific method for calculating that amount shall be determined. For non-monetary remuneration, the specific contents thereof shall be settled15. The reason for the regulations is as follows; if the directors’ remuneration were able to be determined by the directors themselves, there would be a huge risk that an excessive amount of remuneration would be given to them and so they could obtain personal profit at the expense of the shareholders. That is why the current Companies Act of Japan regulates directors’ remuneration by letting the shareholders decide that.
Secondly, the directors who submitted to a shareholders meeting a proposal to prescribe the specific method for calculating the amount of fixed remuneration or the specific contents of variable remuneration or non-monetary compensation of directors respectively or a proposal to amend these matters shall explain the reasons why such matters are reasonable at the shareholders meeting16.
On the other hand, in case of companies with three committees, it is the remuneration committee that shall prescribe the remuneration policy for decisions on the contents of the remunerations for individual directors and executive officers and then fix individual remuneration of directors and executive officers according to the policy separately17. The remuneration
15 Section 361, Subsection 1 of the Companies Act 2005.
16 Section 361, Subsection 2 of the Companies Act 2005.
17 Section 409, Subsections 1 and 2 of the Companies Act 2005.
committee is composed of three directors or more majority of whom must be outside directors shall perform the responsibility in the best interest of the shareholders.
（2） Issues regarding the operation of regulations on directors’
As mentioned above, as far as companies other than companies with three committees are concerned, the Companies Act of Japan places cap set by the shareholders on the directors’ remuneration, but some issues regarding that exist.
First, looking at the practice of fixing the remuneration of the directors in the companies with the board of directors and the board of management auditors, it is usual that the remuneration of the directors is determined by the resolution of the shareholders meeting, not by the articles of association. Also, common practice is that the upper limit of aggregate of remuneration to be paid to total number of directors is fixed by the shareholders meeting and then fixing amount of remuneration of each director is delegated to the board of directors within such upper limit18. Additionally, in many cases the determination power is redelegated to the chief executive director by the board19. In this way, practice regarding fixing directors’ remuneration is not transparent in Japan.
Secondly, the upper limit of aggregate of remuneration to be paid to all the directors is usually fixed by an ordinary resolution of the shareholders meeting, as mentioned above. Problem is that the resolution dose not need to be passed every year but has only to be carried in case where the upper limit is changed20. As a result, in some companies the last resolutions of directors’ remuneration were submitted at the shareholders’ meeting more than ten years ago. In addition, the Companies Act has not required the contents of that resolution to be disclosed in the business report to the
18 Decision of the Supreme Court, 26th March 1985, Hanrei Jiho, Number 1159, p.150.
19 Judicial System Department of the Ministry of Justice, Outline of Act Partially Amending the Companies Act, http://www.japaneselawtranslation.go.jp/
20 Decision of Osaka District Court, 26th September 1927, Houritsu Shinbun, Number 2762, p.6.
shareholders before the 2019 revision, so that shareholders could not find out the upper limit of directors’ remuneration then.
Thirdly, directors’ remuneration, especially executive remuneration may function as an incentive for directors to conduct their responsibilities appropriately in the best interest of their company to increase its value21. In fact, because of such function, directors’ remuneration has been transformed recently in listed companies in Japan, and the proportion of fixed-monetary remuneration has been decreased, while that of variable remuneration such as restricted stock, performance share unit, phantom stocks, stock appreciation rights, stock options has been increased. For example, the restricted stock is a kind of variable share-based executive remuneration whereby a company using it issues restricted stock to eligible directors at the beginning of the performance evaluation period, e.g., three years, and they cannot transfer it until they satisfy the performance requirements set by the company in that period. If they do not satisfy the requirements by the end of the period, the stock should be forfeited by the company. In contrast, performance share unit is a type of performance- related remuneration whereby a company using it will allot relevant shares to eligible directors only if performance evaluation period has passed and then they have satisfied the performance requirement.
According to the Nikkei22, more than half of Tokyo Stock Exchange listed companies have introduced several types of share-based remuneration in 2021 and among them the increase in restricted shares as executive remuneration is remarkable. Nikkei also forecasts that the number of listed companies using performance share unit would increase in future, because performance share unit is better incentive than restricted stock in terms of the remuneration structure23.
Considering the motivating function of variable remuneration based on
21 Judicial System Department of the Ministry of Justice, supra note 19. Japanese Government has promoted the appropriate use of incentive remuneration and the Tokyo Stock Exchange prescribes in Principle 4-2 and Supporting Principle 4-2① that the remuneration of the management should include incentives such that it reflects mid- to long-term business results and potential risks, as well as promotes healthy entrepreneurship.
22 Nikkei, 6th June 2021, p.2.
performance, the process of determining such remuneration of each director needs to be more transparent and more accountable to make it sure that such kind of directors’ remuneration will play a desired role.
However, under the Companies Act before the 2019 revision, companies excluding those with three committees have not been required to set remuneration policy for determining individual remuneration of the directors.
Additionally, under the Companies Act before the 2019 revision, directors have been required to make a contribute of money or other property to their company to obtain share-based remuneration including stock options, so that they could not receive it as a compensation without contribution. That is why a statutory permission of share-based remuneration without contribution has been sought.
（3） Improving the regulations on officers’ remuneration
The Companies Amendment Act 2019 has taken following steps to solve these issues above mentioned. First, the Act enhances the disclosure of information regarding directors’ remuneration by requiring a public company to disclose the contents of the resolution of shareholders meeting fixing the upper limit of the aggregate amount of directors’ remuneration to be paid, the date of the resolution and the number of directors in the annual business report provided to the shareholders every year24. This will enable them to find out the upper limit fixed by the resolution of shareholders meeting long ago.
Secondly, the Companies Amendment Act 2019 requires both the large-sized public companies with the board of directors and the board of management auditors which are also obliged to submit the Annual Securities Report to the Prime Minister under the Financial Instruments and Exchange Act and the companies with the supervisory committee of supervising directors to set the remuneration policy for determining individual remuneration of each director by the resolution of the board of directors, if they do not fix individual remuneration by the articles of
24 Section 121, Paragraph 5-4 of the Revised Ordinance for Enforcement of the Companies Act of 2020.
25 Judicial System Department of the Ministry of Justice, supra note 19, Section 361, Subsection 7 of the Companies Amendment Act 2019.
association or the resolution of shareholders meeting25. It will enhance transparency and accountability on the determination process of directors’
Thirdly, in terms of share-based remuneration, the Companies Amendment Act 2019 improves the statutory provisions of directors’
remuneration by providing specifically share-based remuneration and stock option as types of remuneration and adding the upper limit to the number of shares and stock option as a matter to be resolved at the shareholder meeting26. Also, the Act allows listed companies to provide shares or stock options to their directors as a remuneration without contribution of money or other property by them for the shares or stock options27. This will accelerate the use of share-based remuneration and contribute to further increase in company values.
However, the Companies Amendment Act 2019 has not improved the controversial practice that a CEO determines the individual remuneration of the directors including outside directors. It would also undermine the independence of outside directors and make corporate governance ineffective28. Therefore, with view to enhancing transparency and effective governance, both companies with the board of directors and the board of management auditors and companies with the supervisory committee of supervising directors would need to set voluntary remuneration committee to make the process of determining remuneration transparent29.
6 Establishment of new rules on Company Indemnification and D&O insurance
（1） Background of reform
Under the Companies Act, directors and other officers of a company will be liable for damages not only to the company but also to the third
26 Section 361, Subsection 1, Paragraphs 3 to 5, Section 409, Subsection 3, Paragraphs 3 to 5 of the Companies Amendment Act 2019.
27 Judicial System Department of the Ministry of Justice, supra note 19, Section 202-2, Section 236, Subsections 3 and 4, Section 361, Subsection 1, and Section 409, Subsection 3 of the Companies Amendment Act 2019.
28 Nobuo Nakamura, Japan: Listed companies’ corporate governance, Andreas M.
Fleckner and Klaus J. Hopt, ed., Comparative Corporate Governance, Cambridge University Press, 2013, pp. 269-270.
29 See Principle 4-10 of the Corporate Governance Code of Japan.
party30 and they will also be liable for damages to investors under the Financial Instruments and Exchange Act or to other persons under the Civil Code31. Additionally, they will be liable for fine for breach of the Financial Instrumants and Exchange Act, the Antimonopoly Act etc. The following chart shows rise or fall in the number of cases where sharehodlers brought actions for damages to their companies against directors from 1996 to 2015. It lets us know that directors are always facing litigation risk in course of managing the affairs of their companies.
In litigations for those reasons, directors as defendants bear various economic burdens of paying damages or money paid to compromise the dispute as well as the costs of the lawsuit including attorney fees if they lose the case. Even if they win, they cannot help paying the costs of regarding litigation. These costs are not low. Therefore, such litigation risk that directors face would be highly likely to discourage directors from taking reasonable business risk and chance to increase company’s value and also to deter talented persons from taking office as director. That is
120 Number of Shareholdersʼ Derivative Actions against Directors
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
new cases pending cases
This chart is made by the Author using data shown on Siryoban Shoujihomu Nunber 334, p. 72 （2012） and Shoujihomu Number 2102, p. 49 （2016）.
30 Section 423, Subsection 1 and Section 429 of the Companies Act.
31 Sections 22, 24-4 and 24-4-6 of the Financial Instruments and Exchange Act, Section 709 of the Civil Code.
why litigation risk against directors needs to be reduced reasonably.
（2） Establishment of new provisions on Company Indemnification and D&O insurance
Under the circumstances above mentioned, the Companies Amendment Act 2019 makes new provisions on Company Indemnification and D&O insurance. Company Indemnification is defined as follows; when lawsuit for damages or fine is brought against a directors or officers of a company, the company may indemnify costs of the lawsuit which they bear or loss which they incur by paying damages （excluding damages to the company itself）
based on the indemnity agreement between the company and them32. D&O insurance is a kind of liability insurance contract whereby directors or officers may be compensated for those costs and loss （including damages to the company） by the insurer which enters D&O insurance contract with the company33.
Both Company Indemnification and D&O insurance contract have been possible to be used under the Companies Act prior to the 2019 revision, but the company and the directors and officers concerned could not avoid the application of strict rules34 on self-dealing of directors and officers. It was likely to obstruct them from using these measures to reduce litigation risk and costs, on the one hand. That is why the Companies Amendment Act 2019 establishes new provisions on Company Indemnification and D&O insurance contract35. On the other hand, allowing them to make use of Company Indemnification and D&O insurance without any legal regulation would discourage proper performance of duties of directors and officers36. That is why the Companies Amendment Act 2019 introduces new rules to regulate Company Indemnification and D&O insurance contract in reasonable way.
First, to overview the regulation on Company Indemnification, the Companies Amendment Act 2019 provides for procedures for company to
32 Section 430-2, Subsection 1 of the Companies Amendment Act 2019.
33 Section 430-3, Subsection 1 of the Companies Amendment Act 2019.
34 Section 356, Subsection 1, Paragraphs 2 and 3, Section 365, Section 419, Subsection 2, Section 423, Subsection 3 and Sectio 428 of the Companies Act.
35 Toshikazu Takebayashi, supra note 1, at pp.102-103.
36 Toshikazu Takebayashi, ibid, p.102.
enter into indemnification contract with its directors or other officers and to indemnify costs and loss incurred by them, and also prescribes its scope37.
In terms of procedures, according to Section 430-2, Subsection 1 of the Act, a company limited by shares needs the approval of the shareholders meeting in case of private company without setting the board of directors or the board of directors in case of private company setting the board of directors and public company, when the company concerned is to decide the contents of the indemnification contract with its directors and other officers.
In terms of the scope of Company Indemnification, it covers, on the one hand, the costs of lawsuits incurred by them in not only lawsuits which the third parties bring as plaintiffs, but also legal action which the company itself or a shareholder takes as plaintiff.
On the other, the Company Indemnification covers only the damages and compromise money paid to the third parties by them, but dose not cover the damages and compromise money paid to the company by them38, due to the conflict of interests and the infringement on Section 424 of the Companies Act which provides that an exemption from liability of directors and other officers to their company under Section 423, Subsection 1 may not be given without the consent of all shareholders.
In addition, the company may not indemnify the costs exceeding the usually needed costs of lawsuit, or the damages to the third parties which directors and other officers are liable for due to knowing or gross negligence in performing their duties39.
37 Judicial System Department of the Ministry of Justice, supra note 19.
38 Section 430-2, Subsection 1, Paragraphs 1 and 2 of the Companies Amendment Act 2019.
39 Section 430-2, Subsection 2 of the Companies Amendment Act 2019.
When a company comes to know that it indemnified the costs of lawsuit incurred by directors or other officers who have performed their duties with the purpose of earning unlawful profits or suffering damage to their company, the company may demand restoration of the amount of indemnification paid by the company from them40. Because allowing Company Indemification in such cases would impair the appropriate performance of duties of directors or other officers.
Secondly, to have a brief look at the regulations on D&O insurance contract under the Companies Amendment Act 2019, they apply to the liability insurance contract which is entered between the company and the insurer and in which directors and officers of it are insured with main purpose of covering loss incurred by them in course of performing their duties41.
In terms of procedures to decide on the contents of D&O insurance contract, the almost same procedures as Company Indemnification are provided for by the Companies Amendment Act 201942. However, in terms of scope, D&O insurance contract can cover even the damages to the company paid by the insured directors and officers. In this point, D&O insurance contract is different from Company Indemnification43.
Company Indemnification Contract
Civil Action Prosecution Public Prosecutor Financial Services Authority
Directors Other Officers Indemnifying the costs of lawsuit and the damages
or compromise money to the third party.
Payment of damages, etc.
40 Section 430-2, Subsection 3 of the Companies Amendment Act 2019.
41 Section 430-3, Subsection 1 of the Companies Amendment Act 2019, Section 115-2 of the Revised Ordinance for Enforcement of the Companies Act of 2020.
42 Section 430-3, Subsections 2 and 3 of the Companies Amendment Act 2019.
43 Nobuo Nakamura, Company Indemnification and D&O insurance, Hogaku Kyoshitsu, Number 485, 2021, p.31. For company indemnification under US law,
Thirdly, in case of public companies, relevant information about Company Indemnification and D&O insurance must be disclosed in their annual business report respectively44 to ensure transparency.
The 2019 revision to the Companies Act of Japan has resolved successfully some of the controversial issues regarding corporate governance, by providing mandatory appointment of outside director in the large-sized public companies with the board of directors and the board of management auditors which must submit the Annual Securities Report, improving regulations on directors’ remuneration, establishing reasonable rules on Company Indemnification and D&O insurance contract. In this way, the 2019 revision could be given relatively high evaluation.
However, there are still remaining issues. One of them is that the Companies Amendment Act 2019 dose not deal with the controversial practice of CEO determining individual remuneration of all the directors including him/her and outside directors. As noted above, this corporate practice in Japan is highly likely to cause decline in transparency of determination process of directors’ remuneration and to impair the D&O Insurance
Payment of premium for D&O insurance
D&O Liability Insurance Contract Compensating the costs of lawsuit and
the damages or compromise money Third Party
Civil Action Prosecution Public Prosecutor Financial Services Authority
Directors Other Officers
Payment of damages, etc.
see Munehisa Wada, Company Law Reform and the appropriate Company Indemnification and D&O Insurance, Accounting, Vol. 69, Number 10, 2017, p.
44 Section 121, Paragraphs 3-2 to 3-4, Section 119, Paragraph 2-2, and Section 121-2 of the Revised Ordinance for Enforcement of the Companies Act of 2020.
independence of outside directors, which will lead to ineffective corporate governance. Thus, this issue needs to be solved as quickly as possible.
Additionally, the Companies Amendment Act 2019 dose not require discloser of individual remuneration of each director. The disclosure of directors’ remuneration also needs to be improved.
In terms of shareholder right, we have to review carefully the effect of statutory limit on the number of shareholders’ proposal introduced by the Companies Amendment Act 2019, because shareholder proposal rights are getting more important in the context of developments in SDGs and ESG investment. Important thing is that the Companies Act should prevent abuse of proposal rights by shareholder and at the same time encourage sound and constructive use of shareholder proposal rights, irrespective of the numbers of proposals.
Finally, the Companies Amendment Act 2019 has not provided for the virtual only shareholders meeting, but the special act to the Companies Act, an Act on Strengthening Industrial Competitiveness has been reformed to make it possible for listed companies which satisfy relevant requirements set by the Act to hold virtual only shareholder meeting, provided they have a provision to that effect in their articles of association.