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How to elect and dismiss a director.
1. Introduction – incorporation & company structure –
When a foreign company starts doing a business in Japan, there are mainly two schemes: 1) by incorporating a new company under Japanese Company Act (e.g. “Kabushiki Kaisha”); or 2) by establishing a branch office in Japan.
There are some Advantages and Disadvantages with each schemes, but to the best of my knowledge, they tend to choose a former business form (incorporating a new Japanese company or joint venture company, or acquiring shares in an existing Japanese company).
Under Japanese law (Companies Act), a shareholders’ meeting and director (s) are required as minimum company structure when you choose a stock company (“Kabushiki Kaisha”), especially private company and medium or small sized company.
The relationship between a Stock Company and its director(s) is governed by the provisions on mandate (Companies Act Article 330), and there are some descriptions regarding mandate in Civil Code (“Minpō”) from Article 643 to 656.
We, therefore, should see not only Companies Act but also such Civil Code Articles when we consider the director’s duty.
Furthermore, in general, when a foreign company appoints a local director (Japanese) as a director of a Japanese company (a subsidiary company), it tends to enter into agreement, like managing director agreement, regarding mandate with the local director in order to make a good balance between its authority, responsibility and so on.
In any case, a local director in Japan would play a crucial role for a company to establish and manage a business in Japan, so we should understand how to elect and dismiss director(s). There are related articles in Companies Act.
2. How to elect a director.
Officers including directors are elected by a resolution at a shareholders meeting (Companies Act Article 329(1) ). This resolution is a ordinary one which means that the resolution at a shareholders meeting is passed by a majority of the votes of the shareholders present at the meeting where the shareholders holding a majority of the votes of the shareholders who are entitled to vote are present (Companies Act Article 309(1) ).
Furthermore, notwithstanding the provisions of Article 309(1), the resolutions for the election of officers shall be made by the majority of the votes of the shareholders present at the meeting where the shareholders holding the majority of the votes of the shareholders entitled to exercise their votes are present (Companies Act Article 341).
You can change these details regarding the resolutions by prescribing in the articles of incorporation, for example, resolutions for the election of director(s) shall be made by a portion of two-thirds or more (not majority) of the votes, which is prescribed in the article of incorporation.
However, in case of the resolution at shareholders meeting for election of officers, there is a limitation to lessen the number of shareholders present at the meeting (a quorum) (Companies Act Article 341), so you cannot change to abolish a quorum.
Furthermore, a company cannot change the organ to elect director(s) from shareholders’ meeting to anyone (anything), for example, the board of directors.
3. How to dismiss a director.
Officers including director(s) may be dismissed at any time by resolution of a shareholders meeting (Companies Act Article 339 (1)).
The resolution is same with the resolution regarding how to elect director(s) as we mentioned in “2. How to elect a director” (Companies Act Article 309 (1) and 341).
In case where a director is dismissed pursuant to the Article 339 (1), he/she is entitled to demand damages arising from the dismissal from the Stock Company, except in cases where there are justifiable grounds for such dismissal (Companies Act Article 339 (2)).
In regard to this “justifiable grounds for such dismissal”, there are some relative judicial precedents, therefore, you need to pay attention to such judgements when you dismiss a director.
If there is no justifiable grounds for particular case regarding dismissal, a company shall pay compensation for the director’s damages arising from the dismissal.
In principle, this damages would be in the amount equivalent to the director’s remuneration for the remaining terms of office.
Directors’ terms of office continue until the conclusion of the annual shareholders meeting for the last business year which ends within two years from the time of their election (Companies Act Article 332 (1)), and the provision shall not preclude a Stock Company which is not a Public Company (excluding a Company with Committees) from extending, by the articles of incorporation, the term of office under that paragraph until the conclusion of the annual shareholders meeting for the last business year which ends within ten years from the time of the election.
A long-term of office would be better way for a company to run business stably, but it has risks concerning compensation from a company to a director in accordance with Companies Act Article 339 (2) and relative judicial precedents.
We will continue to share some knowledge regarding business law in Japan with you on this column.
Lawyer Ken Takahashi
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