MODERNISING JAPANESE CORPORATE LAW: ONGOING CORPORATE LAW REFORM IN JAPAN

• Date: 01 December 2004
• Published date: 01 December 2004
• Author: Tomotaka FUJITA LLB (University of Tokyo); Professor of Law, Graduate Schools for Law and Politics, University of Tokyo.
• Citation: (2004) 16 SAcLJ 321

Japanese corporate law has undergone significant changes in the last decade and this paper traces the recent developments in Japanese corporate law reform with particular focus on four major aspects, namely, reform on corporate forms, reform on corporate governance, reform on corporate finance, and reform on corporate restructuring.

I. Introduction

1 Future historians may remember it as the turning point for recovery, or as the beginning of the end. The Japanese corporate law regime is changing rapidly. The Legislative Council of the Ministry of Justice (“the Council”) has been working on a project called “Modernising Corporate Law” (“the Modernising Project”) since September 2002, and it is now finalising the Draft Summary of the Modernising Corporate Law Regime (“the Draft Summary”),1 which will propose various amendments to the existing corporate law regime. The reform bill, as based on the Draft Summary, is scheduled to be submitted by the Government to the Diet in the spring of 2005. The Draft Summary will propose to remove all provisions for corporations from the Commercial Code, and other corporate-related statutes,2 and integrate them into a new and separate “Corporate Code”. What is important, however, is not the form of the Code but its contents.

2 The Japanese Corporate law regime was established by the

Commercial Code of 1899,3 which was originally highly influenced by German Law. When it was revised in 1950 during the occupation period, many elements of American corporate law were incorporated.4 The Japanese Corporate Code became a peculiar mixture of European tradition and the American system and despite its occasional revisions, this basic framework has not changed.

3 It was in the mid-1990s that Japanese corporate law entered an active reform phase. The Commercial Code was revised in 1993, 1994 and 1997, and has been revised every year (or multiple times a year) since then5 (see Table 1). The frequency of revision is unprecedented in Japanese legislative history, and the magnitude is comparable to the 1950 Revision. The Modernising Project is regarded as the final stage of the reforming process.

Table 1: List of recent revisions to corporate law

Year	Main Issues	Remarks
1993	• Corporate governance (limiting the litigation fee for derivative actions) • Corporate governance (introduction of a board of auditors in a large company) • Corporate governance (relaxing the requirement for shareholders to exercise their right to inspect the books of the company)	Government-sponsored Bill
1994	• Deregulation on stock repurchase (lifting the prohibition for purposes of an employee’s stock plan or cancellation of the stock)	Government-sponsored Bill

1997(1)	• Introduction of the stock option system • Deregulation of stock repurchases (lifting the prohibition for purposes of a stock option plan) • Deregulation of stock repurchases (simplifying the procedure by which public corporations can repurchase shares from the market, or by way of a tender offer also known as a TOB)	Bill submitted by an individual politician
1997(2)	• Corporate restructuring (merger procedures)	Government-sponsored Bill
1997(3)	• Increasing penalty against the company’s payment to corporate racketeers (“sokaiya”)	Government-sponsored Bill
1998	• Deregulation of stock repurchases (expanding the available funds for a simplified procedure for a public corporation)	Bill submitted by an individual politician
1999	• Corporate restructuring: introduction of Share-to-Share Exchange and Share-Transfer	Government-sponsored Bill
2000	• Corporate restructuring: introduction of the “demerger”	Government-sponsored Bill
2001(1)	• Deregulation of stock repurchases (completely abolishing the prohibition, and lifting the ban on “treasury stock”) • Deregulation of the minimum size of shares • Simplifying the procedure relating to the reduction of statutory reserve fund	Bill submitted by an individual politician
2001(2)	• Authorising the electronic documentation of corporate information • Corporate finance (authorising the company to issue call options for its shares) • Simplifying the procedure for stock options • Corporate finance (deregulation of the issuance of various kinds of shares)	Government-sponsored Bill

2001(3)	• Corporate governance (authorising the limitation of a director’s liability) • Corporate governance (improving the procedure for derivative actions)	Bill submitted by an individual politician
2002	• Corporate governance (creation of “Company with Committees” which is modelled on the American corporate governance system) • Corporate governance (creation of “Important Asset Committee”) • Corporate governance (relaxing the requirement for super majority voting at the shareholders’ meeting) • Corporate governance/corporate finance (introduction of class voting for the election of management) • Introduction of the registration system for lost securities • Simplifying the procedure for “In-kind Capital Contributions” • Simplifying the reduction procedure for legal capital and the mandatory statutory reserve fund • Deregulation of foreign companies	Government-sponsored Bill
2003	• Deregulation of stock repurchases (simplified procedure for public corporations to repurchase shares from the market, or by way of a tender offer often referred to as a TOB)	Bill submitted by an individual politician
2004	• Dematerialisation of corporate securities • Electronic public notice system	Government-sponsored Bill

4 Why does Japan undertake reform of its corporate law now? Different people will answer this question in different ways. One might say that it is the whole Japanese legal system, not just corporate law, that

is changing.6 This is partially true but is not the whole story. The active reform process began in corporate law earlier than in other areas of law — in fact, changes to the corporate law regime commenced about a decade ago. Apparently, this pattern of reform is peculiar to corporate law. One might also observe that corporate law reform is taking place on a global scale7 as many states now see corporate law as an essential infrastructure for the national economy, and states are now trying to enhance their economic competitiveness through corporate law reform.8 This is certainly true as a description of the phenomena, but does not explain why certain states including Japan have only now become aware of the importance of the corporate law regime.

5 Two specific circumstances are worth noting in relation to recent corporate law reforms in Japan. First, after a serious recession that lasted for a decade, people are looking more eagerly for reallocations of assets and for an efficient structure of corporations or corporate groups. Japanese corporate law might arguably have been potentially inefficient, but few cared while the Japanese economy was expanding.9 Due to the prolonged downturn of the Japanese economy, excessive regulations imposed by corporate law — which had previously been harmless — became a considerable burden for companies who were trying to find a way to survive. This explains why most of the reforms during the last decade are of an “enabling” nature. The strict prohibition of stock repurchase, for example, was not regarded as an unreasonable constraint that barred efficient distributions to shareholders when the

economy was expanding, and there were virtually unlimited investment opportunities. It was fairly recently that regulation created unbearable costs, because of the excessive “free cash flow” problems found among Japanese corporations.10

6 Second, a significant change of political economy occurred in corporate law reform process in the late 1990s.11 Traditionally, the reform of the basic Codes, including corporate law (Commercial Code), was proposed to the Diet by a Government-sponsored bill that was prepared through detailed and lengthy discussion with the Council.12 In other words, the legislative process was monopolised by the Council — which consisted mainly of bureaucrats and corporate law scholars — and the industry had to go to the Council to propose any reform of the corporate law. The tradition was first broken in 1997, when a bill submitted by an individual politician (who was then the Chairman of the Liberal Democratic Party’s Subcommittee on the Commercial Law Commercial Code) was backed up by the strong voice of the industry and successfully passed by the Diet.13 Since then, the industry can go to any individual politician who is more “understanding” whenever the Council turns a deaf ear to industry’s demand for reform. In fact, there have been several amendments made through this route since 1997 (see Table 1). This has also affected the reform process in the Council in that the length of time given to discussion in the Council has been dramatically reduced, and the Council members from the industry are now able to participate more effectively in the deliberations on any proposed law reform to corporate law.14 One may say that the corporate law reform process, once monopolised, became more competitive, and

as a result of the competitive pressure, corporate law reform is taking place at an accelerated speed.15

7 Another new element in the corporate legislation process is the active and unique involvement of the Ministry of Economy, Trade and Industry (“METI”). The oft-repeated legislative pattern is that METI first tries a small-scale “experiment” by amending the law of which it is in charge, and then the Council or the individual politician proceed with an amendment of the Commercial Code to incorporate the “experiment” as a general rule. These “experiments” were usually market-oriented and of a flexibility-enhancing nature...