By Yoshinori Sada[*]
In 2013 the government of Japan set a target to double the number of inbound foreign direct investment, effectively setting the balance of JPY 17.8 trillion in 2012 to JPY 35 trillion by 2020. As of the end of 2017, the balance is JPY 28.5 trillion, an increase by more than JPY 10 trillion from 2012. The statistics show a strong and stable growth of inbound foreign direct investments. This trend is most likely to continue at least for the next decade if not longer.
This paper explores basics of the Japanese corporate law that foreign investors face when acquiring equity in Japanese companies. Topics include: (1) types of corporate forms available in Japan; (2) how to verify the existence and good standing of a target company; and (3) how to identify shareholders/members of the target company. These topics are supplemented by guidance on the ordinary process of equity acquisition in practice.
Types of Corporation Available in Japan
A stock company (Kabushiki Kaisha / KK) and a limited liability company (Godo Kaisha / GK) are the most common forms of corporation in Japan. Both KK and GK are available under the Companies Act (Act No. 86 of 2005) and enjoy separate legal personalities from their members who in turn enjoy limited liability up to the amount of their respective equity contributions. The Companies Act also provides for other types of corporations, namely a general partnership company (Gomei Kaisha) and a limited partnership company (Goshi Kaisha). Since all or part of the members of Gomei Kaisha and Goshi Kaisha assume unlimited liability for the company’s obligations, these are not common choices for investors.
Apart from these types of corporations, which have independent legal personalities of its members under the Companies Act, a limited liability partnership (LLP) may also be formed under the Limited Liability Partnership Act (Act No. 40 of 2005). However, due to the lack of its independent legal personality, the LLP is far less common than the KK and GK. As an investment vehicle, the Limited Partnership Act for Investment (Act No. 90 of 1998) also provides for an Investment LPS. An Investment LPS has more than one general partner who operates and manages the partnership and assumes unlimited liability as well as more than one limited partner who assumes limited liability only.
The 2017 statistics show that there are just above one million corporations registered as KK and some sixty-three thousand as GK. It is apparent from these figures that KK is the most popular, recognized and well-rooted type of corporation. GK is a relatively new type of corporation, introduced through the 2005 amendment. GK was an unfamiliar and foreign concept among Japanese businesses until fairly recently, making it less attractive compared to the KK. However, GK has now become more recognized and an increasing number of businesses, especially foreign invested businesses (e.g., Amazon, Apple, Google, Kellogg’s, P&G, Universal Music, Walmart and Warner Brothers) opted for GK rather than KK. GK was modeled on the Limited Liability Company (LLC) in the United States. However, unlike its U.S. LLC counterpart, the GK itself is taxed directly. Pass-though is not available for GK in Japan.
In general, GK offers more flexibility than KK in designing its corporate governance through its articles of association. For example, KK is required by law to hold shareholders meetings within a certain period of time after the conclusion of every fiscal year and to keep the minutes of such meetings whereas GK is free to decide if and when members gather to meet or to hold no meeting at all. Another example is the tenure of the management. A director of the KK remains in place until the end of the second annual shareholders meeting after he/she took the office whereas an executive officer of the GK has no limit on his/her tenure. From a practical point of view, the most important difference between KK and GK is whether the company is required to publicly disclose its financial statements. KK is required to make its financial statements public without delay after every annual shareholders meeting. In contrast, GK can keep its financial statements private.
Corporate Registry System in Japan / How to Verify Existence & Good Standing of Company
In Japan, every corporation is registered, be it KK, GK, Gomei Kaisha or Goshi Kaisha. Corporate forms other than corporation, such as LLP and Investment LPS, are also registered. The Legal Affairs Bureau of the Ministry of Justice is responsible for the corporate registry.
The corporate registry is open for inspection by anyone. Anyone can also request an official copy of the registration (a certificate of registered matters, “toki-bo”). In the case of a KK and a GK, the toki-bo includes information regarding: (a) identification number; (b) name; (c) registered address; (d) method of public notice; (e) date of incorporation; (f) objectives; (g) amount of capital; and (h) directors/officers.
The incorporation process is completed upon the filing of the registration in the registry kept at the Legal Affairs Bureau. In the absence of such registration, the incorporation process is incomplete and there is no recognized corporation which can act as a separate legal entity from its members. The Toki-bo also shows the status of a company if it goes into liquidation, bankruptcy, or becomes subject to any other similar court procedures. Thus, investors are able to verify the legal existence and good standing of a target company by inspecting its latest toki-bo. In other words, the toki-bo is the only official document available to verify its existence and good standing of a company.
How to Identify Shareholders & Members
KK: To Identify Shareholders
Unlike other common law jurisdictions in Asia (e.g. Hong Kong and Singapore), information regarding the shareholders of a KK does not appear on its registration, toki-bo. Therefore, the identification process of shareholders requires a substantive investigation of materials not available to the public.
In the case of a KK, shareholders can be identified by inspecting the shareholder registry, which each KK is obliged to keep under the Companies Act. The shareholder registry is required to contain: (a) shareholder’s name and address; (b) number of shares held; (c) date of acquisition of such shares; and (d) if the KK issues share certificates, the identification number of each issued share certificate. An entry in the shareholder registry is not prima facie evidence of ownership, however. Thus, a careful investor should further verify the shareholder status by examining supporting documents, including receipts of payments for the share subscription or share transfer and/or the agreements associated with each such subscription or transfer.
The KK has a choice to issue share certificates or not. Prior to the 2005 amendment, the KK was obliged to issue share certificate unless otherwise provided for in its articles of association. After the 2005 amendment, however, the expectation is that the KK will not issue share certificates. In practice, most KKs do not issue share certificates unless the articles of association require otherwise. When a target company issues share certificates, the share transfer will not take effect until the corresponding share certificate has been delivered. Information regarding the target company’s issuance of share certificates is available in the corporate registry, toki-bo.
In a private KK, a share transfer requires approval, usually by the company’s board of directors. Without such approval, a request for an entry of share transfer in the corporate registry can be rejected by the company, preventing the purchaser from exercising its rights as a shareholder in the company.
Share Transfer Process - KK
* The share purchase agreement itself is not subject to stamp duty.
* There is no “secretary” or similar concept under the Companies Act.
GK: To Identify Members
Unlike the KK, the articles of association for the GK includes information regarding its members. Such information includes: (a) name; (b) address; and (c) amount of capital contribution. As such, it is fairly easy to identify and verify the members of a GK through a simple inspection of its articles of incorporation. Nonetheless, it would be prudent for the investor to further investigate supporting documents in the same way as they would for a KK. Since the members are identified in the company’s articles of association, a GK is not required to maintain a members’ registry.
GK is a type of corporation where the tie and the relationship among its members are tight and strong. Therefore, the transfer of member’s interest requires the approval of other members. Also, since information regarding its members is a necessary part of its articles of association of GK, member interest transfer requires an amendment thereof, which requires the unanimous approval of its members.
Interest Transfer Process - GK
* An interest transfer agreement itself is not subject to a stamp duty.
* There is no “secretary” or similar concept under the Companies Act.
The most common types of corporation forms in Japan is the stock company, Kabushiki Kaisha (KK) and the limited liability company, Godo Kaisha (GK). Traditionally KK is more prevalent than GK. However, GK is becoming more popular, especially among foreign investors. The most significant reason to choose GK over KK is that GK is not subject to the yearly disclosure of its financial statements whereas a KK is required to make public disclosure of its financials on an annual basis. With respect to a corporate registry system, Japan has a unique yet sound and reliable system which allows investors to obtain basic information on a target company. However, such information does not include who the shareholders/members are. Therefore, investors need to verify these matters by requesting internally kept materials such as the company’s shareholder registry and articles of association.
 Before the 2005 amendment the Japanese corporate law was a part of the Commercial Code. Through the 2005 amendment, the Companies Act was enacted as an independent law of the Commercial Code whereby replacing the corporate law provisions thereof.
 In a privately held KK where the transfer of shares are subject to the approval of the KK, the tenure of the director can be extended until the end of the 10th annual shareholders meeting.