Structuring foreign subsidiaries in Japan

In both the formation of a new subsidiary in Japan and the acquisition of an existing Japanese subsidiary by a Chinese company, the internal organizational structure of a Japanese company needs to be determined. It is therefore crucial to understand the provisions of the Companies Act of Japan governing organizational structure.

Under the Companies Act of Japan, a company may be in the form of a stock company, a general partnership company, a limited partnership company or a limited liability company. Of these, the stock company is the most common. A stock company must have shareholders’ general meetings and directors. It may choose to have a board of directors, supervisors, a supervisory committee, an accounting auditor, an accounting advisor, ad hoc committees and other bodies.

In terms of the amount of registered capital, share transfer restrictions and other requirements, the Companies Act of Japan imposes different requirements in terms of establishment and organizational structure on companies of different natures. The organizational structure of a company must be specified in its articles of association. Any changes to the organizational structure must be approved at a shareholders’ general meeting by way of a special resolution on the modification of the articles of association.

Shareholders’ general meeting

Various statutory matters can be decided at a shareholders’ general meeting, such as amendments to the articles of association, reduction in capital, dissolution, merger, exchange of shares, approval of final accounts, requirements for the issuance of new shares (restricted to public companies) and the appointment and dismissal of directors, supervisors and accounting auditor. Further rights may be granted to a shareholders’ general meeting under the articles of association. A resolution made at a shareholders’ general meeting must, in principle, be approved by a majority in number of the shareholders present at the meeting, who hold a majority of the voting shares (in the case of ordinary resolutions). However, major matters, such as amendments to the articles of association and structural reorganization, or matters which are likely to generate profits for certain shareholders such as controlling shareholders, must be approved by more than two-thirds of the voting rights held by shareholders present at a meeting (in the case of special resolutions).

Board of directors

The board of directors is not a requisite body of a company (except public companies). A board of directors can decide on various statutory resolutions such as disposition or acquisition of major assets, appointment of key employees, establishment of branch offices, changes and cancellation, approval of transfer of shares with transfer restrictions, appointment and dismissal of the chairman and interim profit distribution. The quorum for a board meeting is the majority of directors with voting rights. To pass a resolution, it is necessary for that resolution to be approved by a majority of directors present at a board meeting. A board can pass a resolution in written form only when all directors and supervisors agree to do so. The chairman of a board must report at least once every three months to the board on the execution of his job duties.

Directors can be foreigners and can reside abroad. Their term of office is two years in principle.

Chairman of a board of directors

The chairman of the board of directors of a Chinese company is the company’s legal representative, while the chairman of a Japanese company has the right to represent the company and to conduct business based on the decisions of the board. A company with a board of directors must have a chairman. The board may appoint one or a number of chairmen. It is common for the subsidiaries of foreign companies to appoint a number of chairmen because the Companies Act of Japan requires that a subsidiary must have at least one chairman, among other chairmen, who is a Japanese resident (he must have residential registration in Japan, but he need not be a Japanese citizen).

Foreign companies often appoint the staff of their headquarters and the staff stationed in Japan as chairmen. Various titles like “president” or “general manager” are often used in Japanese companies. This may cause confusion, as these titles neither reflect a legal concept nor necessarily refer to the chairman of a company.

Supervisors

Public companies and companies with accounting auditors must, in principle, have supervisors, while other companies are permitted to have no supervisors. With a term of office of four years, a supervisor is responsible for overseeing the performance of the directors’ duties. In principle, large companies must have a supervisory committee. The duties of a supervisor include the compilation of audit reports and investigation of the company’s accounts and businesses.

Accounting auditor

Large companies must appoint an accounting auditor with a term of office of one year. The accounting auditor must be a certified public accountant or an accounting firm whose supervisory duty is limited only to accounting and auditing, and does not cover business audit.

Establishing a subsidiary

Most Japanese subsidiaries of foreign companies are private. The typical organizational structure of a small private company comprises a board of directors consisting of three members, of whom one or two act as chairmen of the board (one of them is a Japanese resident), and one supervisor. No accounting auditor is appointed in order to save costs. A large private company generally has a board of directors comprising more than three members, of whom one or two serve as chairmen (one of them is a Japanese resident). It has a supervisory committee comprising three supervisors, and must appoint an accounting auditor.

In order for a foreign company to exercise control over its Japanese subsidiary, the foreign company should appoint staff from its headquarters to key positions and to serve as a majority of the members of the board. In addition, it is also essential to define the approval authority of the chairman who resides in Japan.

Hiroshige Nakagawa is a partner at Anderson Mori and Tomotsune and chief representative of its Beijing Office