Shareholders' Rights & Shareholder Activism 2020

Last Updated September 30, 2020

Japan

Law and Practice

Author



Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms, with more than 550 lawyers, including more than 100 foreign lawyers. The firm’s corporate and governance practice team consists of approximately 50 partners and counsels and 100 associates. The majority of the team of lawyers is based in the main office in Tokyo, with the others working in branch offices in Osaka, Nagoya, Fukuoka and Takamatsu and international branch offices in Singapore, Shanghai, Beijing, Bangkok (Chandler MHM Limited), Yangon (Myanmar Legal MHM Limited) and Ho Chi Minh City. The firm advises on a wide range of corporate-related matters, including corporate governance, operations of boards of directors, shareholders' meetings, shareholder activism, takeover defence, shareholder proposals, proxy fights, communications with institutional investors, management compensation and corporate litigation. While the firm has a long history of supporting corporate matters for a large number of Japanese-listed companies, the firm’s clients also include Japanese private companies, foreign companies and domestic and foreign investors.

The Companies Act provides four kinds of company: stock company (kabushiki kaisha), general partnership company (gomei kaisha), limited partnership company (goshi kaisha) and limited liability company (godo kaisha). The most popular form of company is the stock company (a substantial majority of companies are stock companies) and the second most popular form of company is the limited liability company. A public company is defined as a stock company in which the transfer of all or part of its shares is not restricted in its articles of incorporation. Shares in 3,771 stock companies are listed on the stock exchanges in Japan as of July 2020. Unless otherwise specified, reference to a "company" means a "stock company".

As a general rule, there are no qualification criteria that restrict the shareholders who can invest in Japanese companies. The Foreign Exchange and Foreign Trade Act (the FEFTA) provides that a foreign investor is required to file prior notification with the Minister of Finance and the competent minister for the business of the target company and wait for a specified period if:

  • the foreign investor intends to acquire any shares of a private company (except in the case of an acquisition of shares of a private company from another foreign investor unless the acquisition may have a potential risk of harming Japan’s national security) or 1% or more of the shares or voting rights (including through proxies) of a listed company; and
  • the target company engages in certain restricted businesses identified in the FEFTA, including a business related to national security, public order, public security or smooth management of Japan's economy.

As for the prior notification requirements, the FEFTA provides exemptions for investments that satisfy certain requirements to be considered to be passive investments. The FEFTA also provides a post-acquisition notification requirement for foreign investors.

Additionally, there are some restrictions on the holding of shares by a foreign investor in a company engaging in certain types of business, such as airlines and the broadcasting business, under laws regulating those specific business sectors.

Companies can issue different classes of shares with differing rights by setting out this ability in their articles of incorporation with respect to the specific rights and matters that can be differentiated among the different classes, such as rights to receive dividends, residual assets or voting rights, as provided for in the Companies Act.

The most common class of shares is preferred shares with preferential rights for dividends and residual assets. These are often accompanied with rights to convert preferred shares to ordinary shares. While preferred shares are often issued by any type of company (including listed companies), especially for financing purposes, preferred shares are frequently used by start-up companies.

The primary source of law relevant to shareholders’ rights is the Companies Act, on which all shareholders’ rights are based. For listed companies, the Act on Book-Entry Transfer of Corporate Bonds and Shares provides certain procedures which shareholders must follow to exercise their shareholders' rights. In addition, proxy solicitations, with regard to voting rights at general shareholders' meetings of listed companies, are regulated by the Financial Instruments and Exchange Act (the FIEA).

Shareholders of a company have a variety of shareholders' rights. The shareholder rights that are most common to all shareholders in a company are, among other things, a right to receive dividends and voting rights.

As discussed in 1.2 Type or Class of Shares, a company may issue classes of shares with differing rights. A private company may also provide in its articles of incorporation to the effect that each shareholder shall be treated differently with respect to rights to receive dividends, residual assets or voting rights. Other than the foregoing, as a general rule, shareholder rights cannot be diminished by setting forth provisions for this in the articles of incorporation, except as explicitly permitted in the Companies Act.

As discussed in 1.6 Rights Dependent Upon Percentage of Shares, a company can change the requirements for shareholders to exercise some of their shareholder rights by setting forth such a change in requirements in the company’s articles of incorporation. While the articles of incorporation of a company are not generally available to the public (shareholders of a company have the right to access the articles of incorporation), the articles of incorporation of listed companies are available on the website of Japan Exchange Group, Inc.

As discussed in 1.5 Shareholders' Agreements/Joint-Venture Agreements, a shareholders' agreement executed among shareholders can, in principle, restrict certain shareholder rights of some shareholders unless the restriction violates purposes of the law or public policy. The agreement is generally enforceable against the shareholders who are parties to the shareholders' agreement. While shareholders' agreements are generally not available to the public, certain agreements among shareholders, with respect to a listed company, need to be disclosed in a large-scale shareholding report.

When a shareholder intends to engage in a joint venture with other persons, a shareholder commonly enters into a shareholders' agreement or joint-venture agreement with other shareholders. The joint-venture company is usually a private company. Typical provisions in shareholders' agreements regarding private companies include the following:

  • agreements on governance (process of general shareholders' meeting, board composition, designation of representative directors, process of the board, shareholders/board reserved matters, veto rights, deadlock process, composition of statutory auditors, designation of an accounting auditor and information rights);
  • agreements on shares (transfer restriction, anti-dilution (pre-emptive right), right of first refusal/offer, put/call option, tag-along, and drag-along); and
  • other agreements (non-competition, non-solicitation, dividend policy, dissolution/liquidation, and termination).

As for a public or listed company, shareholders sometimes enter into a shareholders' agreement with some other shareholders. As discussed in 1.14 Disclosure of Shareholders' Interests in the Company, if shareholders of a listed company enter into certain agreements regarding share transfer or exercise of voting rights or other shareholder rights, their shareholding ratios must be aggregated in light of the requirement to file a large-scale shareholding report. If their aggregated shareholding ratios exceed 5%, they are required to file a large-scale shareholding report as joint holders. In a large-scale shareholding report, shareholders need to state certain material agreements with respect to the shares held by them.

The validity or enforceability of shareholders' agreements depends on the types of provisions in question. Voting agreements, such as an agreement to exercise voting at a general shareholders' meeting to establish an agreed board composition and veto rights with regard to certain material matters, are generally considered valid unless they violate purposes of the law or public policy, and they would generally be enforceable to some extent between the shareholders who are parties to the shareholders' agreement. However, if a shareholder exercises its voting rights in violation of a voting agreement entered into between some (and not all) shareholders of the company, the voting agreement would not generally be binding on the company, and a resolution made based on that exercise of voting rights would not generally be subject to revocation. In contrast, if all shareholders of the company are a party to the voting agreement, the resolution made through such a process might be revocable.

The validity and enforceability of agreements regarding share transfer is discussed in 1.15 Shareholders' Rights to Grant Security over/Dispose of Shares.

The Companies Act sets requirements for shareholders to exercise some of their rights in order to prevent shareholders from exercising their rights abusively and, in turn, harming the interests of the company and other shareholders. There are two kinds of requirements:

  • the percentage or number of shares or voting rights held by the shareholder exercising a particular shareholder right; and
  • the period in which a shareholder holds shares or voting rights.

Specific requirements vary depending on the type of shareholders' rights or type of company (eg, public or private). Companies can relax certain requirements set forth in the Companies Act regarding shareholders’ exercise of shareholder rights by setting forth any variance in the company’s articles of incorporation. Companies cannot make such requirements stricter.

If multiple shareholders jointly exercise their shareholders' rights, the percentage or number of shares or voting rights held by shareholders can be aggregated in relation to the exercise requirements.

Shareholders have rights to request a company to provide access for them to inspect or copy certain documents of the company. The following describes the major rights regarding such access to documents:

  • shareholder registry - a shareholder has the right to make a request for the inspection or copying of the shareholder registry. There are certain exceptions, including requests (i) for purposes other than to conduct research to secure or exercise the shareholder’s rights, or (ii) for purposes of interfering with the execution of the operations of the company or prejudicing the common interest of the shareholders (Article 125 of the Companies Act);
  • minutes - shareholders have the right to make a request for the inspection or copying of minutes of general shareholders' meetings (Article 318 of the Companies Act), board of directors' meetings (Article 371 of the Companies Act) and board of statutory auditors' meetings (Article 394 of the Companies Act). In companies with a statutory auditor, three committees or an audit and supervisory committee, shareholders need to obtain permission of the court to access the minutes of meetings of the board of directors. Shareholders are also required to obtain permission of the court to access the minutes of meetings of the board of statutory auditors;
  • financial documents - shareholders have the right to make a request for the inspection or copying of financial statements (Article 442 of the Companies Act). In addition, a shareholder with 3% or more of the votes of all shareholders or with 3% or more of outstanding shares has the right to make a request for the inspection or copying of account books or any materials related to them. Exceptions include cases where the shareholder operates or engages in a business which is, in substance, in competition with the business of the company (Article 433 of the Companies Act). The exceptions described above regarding access rights to the shareholder registry also apply to access rights to account books;
  • voting cards/proxies - shareholders have the right to make a request for the inspection or copying of voting cards (Article 311 of the Companies Act) and proxies (Article 310 of the Companies Act) with respect to voting rights at a general shareholders' meeting.

In a company that does not have a board of directors, any matter regarding a company can be resolved at a general shareholders' meeting of the company. By contrast, in a company that has a board of directors, a general shareholders' meeting can only resolve matters that are stipulated in the Companies Act and in the company’s articles of incorporation, as the execution of operations of the company is generally delegated to the board of directors.

As a general rule, matters material to the company or its shareholders require shareholder approval to be obtained pursuant to the procedures set out in the Companies Act. Generally, shareholder approval for agenda items must be obtained by calling a general shareholders' meeting; if all shareholders of the company give consents in writing to agenda items to be resolved at a general shareholders' meeting, a resolution is deemed to be obtained.

In a company with multiple classes of shares, an approval of a general meeting of shareholders of a certain class of shares may also be required for matters that are stipulated in the Companies Act and in the company's articles of incorporation, such as (unless otherwise provided for in the articles of incorporation) those which are likely to cause detriment to the shareholders of that class of shares.

A shareholder of a public company who owns at least 3% of the voting rights of all shareholders in the company, consecutively for the preceding six months or more, may demand that the directors call a general shareholders' meeting regarding any matter that the shareholder calling the meeting is entitled to vote on, unless otherwise provided for in the articles of incorporation (Article 297 of the Companies Act). The holding period requirement does not apply to shareholders of a private company.

If the calling procedure for a general shareholders' meeting is not effected without delay after the demand by the shareholder, or if the notice calling the general shareholders' meeting to be held within eight weeks of the date of demand is not dispatched, the shareholder who made the demand may call the general shareholders' meeting with the permission of the court. In this case, the shareholder can prepare and send the convocation notice to all shareholders on behalf of the company.

Under the Companies Act, although general shareholders’ meetings of Japanese companies cannot be held only by virtual means (ie, some sort of physical meeting must take place), companies can allow their shareholders to participate or attend through the internet.

Voting Requirements/Quorum

The Companies Act provides that an ordinary resolution at a general shareholders' meeting is made by a majority of votes of shareholders present at the meeting where the quorum is the presence of shareholders holding the majority of votes of the shareholders entitled to vote, unless otherwise provided for in the articles of incorporation.

Certain important matters, such as amendments to the articles of incorporation, issuance of new shares (excluding those which may be carried out by a resolution at a board of directors' meeting), merger, share exchange, company split, share transfer or material business transfer (excluding those to which a short-form or small-sized exception is applied), must be resolved by an extraordinary resolution made by a majority of two thirds of the votes of shareholders present at a general shareholders' meeting, the required quorum being shareholders holding a majority of the votes of the shareholders entitled to vote being present, unless otherwise provided for in the articles of incorporation. The Companies Act also provides stricter requirements for resolutions for certain limited matters.

Many listed companies have eliminated the quorum requirements for ordinary resolutions and decreased the quorum for extraordinary resolutions from a majority to one third of the votes of the shareholders entitled to vote, setting forth such provisions in their articles of incorporation.

Shareholder Proposal

Unless otherwise provided for in the articles of incorporation, a shareholder of a public company with a board of directors who own, consecutively for the preceding six months or more, at least 1% of the voting rights of all shareholders in the company or at least 300 votes in the company may, by submitting a demand to the directors no later than eight weeks prior to the day of a general shareholders' meeting:

  • demand that directors of the company present proposals submitted by the shareholder as an agenda at the general shareholders' meeting (Article 303 of the Companies Act); and
  • demand that the directors describe the summary of the proposals in convocation notices of the general shareholders' meeting (Article 305 of the Companies Act).

The requirement of a holding period does not apply to shareholders of a private company.

In addition, shareholders attending a general shareholders' meeting may submit proposals at the general shareholders' meeting with respect to the matters that are within the purpose of that general shareholders' meeting (Article 304 of the Companies Act).

Under the current Companies Act, the number of proposals an eligible shareholder can submit is not limited. In response to recent cases of abusive exercises by shareholders of that shareholder-proposal right, an amendment to the Companies Act to limit to ten the number of proposals that each shareholder can demand the directors to provide summaries of in the convocation notice of the shareholders’ meeting was approved by the Diet in 2019. The amendment is expected to become effective in early 2021.

To obtain support from other shareholders in the company, a shareholder submitting shareholder proposals sometimes engages in proxy solicitation. As a general rule, any person who intends to solicit a proxy with respect to shares in a listed company must comply with the proxy regulations under the FIEA, such as delivering a proxy form and reference documents, containing the information specified in the Cabinet Office Ordinance, to the person solicited and submitting a copy of these documents to the relevant local finance bureau.

The principle of "separation of ownership and management" is applied to stock companies, and directors or a board of directors shall, in principle, decide and execute the operations of the company. However, as discussed in 1.8 Shareholder Approval, certain material matters provided in the Companies Act or the articles of incorporation of the company need to be resolved at a general shareholders' meeting. Other than the foregoing, as a general rule, shareholders do not have a right to participate in the management of a company or sit on the board of directors. In practice, a shareholder sometimes has its director or employee attend the board of directors of the company as an observer, pursuant to a provision of a shareholders' agreement or another agreement between a shareholder and the company.

Right to Appoint or Remove Directors

Shareholders who are eligible to submit shareholder proposals may submit, to directors of a company, a shareholder proposal to appoint a person as a director or to remove an incumbent director. If this proposal is approved at a general shareholders' meeting, the person will be appointed as a director or the incumbent director will be removed.

The voting requirement for the appointment or dismissal of directors is, in principle, the same as the requirement of an ordinary resolution, provided that a company cannot decrease the quorum of a general shareholders' meeting to the presence of less than one third of the shareholders entitled to vote. In a company with an audit and supervisory committee, however, the dismissal of a director who is an audit and supervisory committee member must be resolved by an extraordinary resolution.

A company may increase the voting requirement for the appointment or dismissal of directors from a majority of votes of shareholders present at a general shareholders' meeting with a quorum by setting forth such increased requirements in the company’s articles of incorporation, although an increase of this kind of dismissal is often strongly criticised by shareholders, especially institutional investors. A director who is dismissed is entitled to claim from the company damages arising from the dismissal, except in cases where there are justifiable grounds for dismissal.

If, notwithstanding the presence of misconduct or material facts showing violation of laws and regulations or the articles of incorporation in connection with the execution of the duties of a director, a proposal to dismiss that director is rejected at a general shareholders' meeting, a shareholder holding 3% or more of the votes of all shareholders or 3% or more of the outstanding shares for at least the preceding six months may demand dismissal of that director by filing an action with the court within 30 days from the general shareholders' meeting (Article 854 of the Companies Act); this holding period requirement does not apply to shareholders of a private company.

Right to Challenge Directors

Shareholders who are dissatisfied with a decision or action taken by directors or the board of directors may take action to remove the relevant directors, pursuant to the procedures described above. As discussed in 3.3 Legal Remedies Against the Company's Directors, a shareholder who meets certain requirements may file to enjoin a director's illegal actions, bring a derivative action to recover damages and liabilities caused by the company’s directors due to a violation of their duty of care and loyalty to the company, and directly claim damages arising out of actions conducted in bad faith or with gross negligence in the performance of directors' duties.

In addition, if there are sufficient grounds to suspect misconduct or material facts regarding violation of laws and regulations or the articles of incorporation in connection with the execution of the operations of the company, a shareholder with 3% or more of the votes of all shareholders or with 3% or more of outstanding shares may file a petition for the appointment of an inspector with the court in order to have the inspector investigate the status of the operations and the financial status of the company (Article 358 of the Companies Act).

As with an appointment or removal of directors, shareholders who are eligible to submit shareholder proposals may submit a shareholder proposal to appoint a person as a statutory auditor or remove an incumbent statutory auditor. The voting requirement for the appointment of a statutory auditor is the same as for the appointment of a director and the voting requirement for the dismissal of a statutory auditor is the same as the requirement for an extraordinary resolution. The action for dismissal described in 1.12 Shareholders’ Rights to Appoint/Remove/Challenge Directors is also available for dismissal of a statutory auditor.

Certain large companies appoint accounting auditors that are usually external accounting firms. Shareholders who are eligible to submit shareholder proposals may submit a shareholder proposal to appoint a person as an accounting auditor or remove an incumbent accounting auditor. The voting requirement for the appointment or dismissal of an accounting auditor is the same as the requirement for an ordinary resolution.

A statutory auditor or an accounting auditor who is dismissed is entitled to claim from the company damages arising from the dismissal, except where there are justifiable grounds for that dismissal.

A shareholder of a listed company must file a large-scale shareholding report with the relevant local finance bureau (which is available to and accessible by the public through the internet) within five business days of the shareholder’s shareholding ratio in the company exceeding 5% (Articles 27-23 of the FIEA). The shareholding ratio shall be calculated by aggregating shares held by the shareholder with any other shareholders with whom the shareholder has agreed to acquire or transfer shares in the company jointly, or to exercise the voting or other rights jointly as shareholders of the company.

If the shareholding ratio increases or decreases by 1% or more after filing the large-scale shareholding report, the shareholder must file an amendment to the report within five business days from the date of the increase or decrease. However, certain financial institutions are required to file the large-scale shareholding report only twice a month, even if their shareholding ratios and changes in shareholding ratios meet the foregoing criteria if they satisfy certain requirements under the FIEA, such as not having the intention to take actions to influence materially the business activities of the company.

Activist shareholders often use derivatives to build their stakes in target companies. Rights to request delivery of shares under a sales-and-purchase contract and options to purchase shares and borrow shares are subject to the large-scale shareholding reporting obligations under the FIEA. However, the holding of equity derivatives that are cash-settled and that do not involve the transfer of the right to acquire shares would likely not trigger any such reporting obligations.

The guidelines released by the Financial Services Agency (the FSA) provide that derivatives that transfer only economic profit and loss in relation to target shares, such as total return swaps, are generally not subject to the disclosure obligations, provided that holding cash-settled equity derivatives may trigger these obligations if a holder purchases long positions on the assumption that a dealer will acquire and hold matched shares to hedge the dealer’s exposure.

Grant Security over Shares

Shareholders may establish pledges over their shares. Procedures to establish and perfect the pledges vary, depending on the types of pledges and on whether the company is one that issues share certificates or whether shares of the company are listed (these shares are book-entry transfer shares).

Disposal of Shares

As a general rule, shareholders may transfer their shares to a third party. However, in many non-listed companies, their articles of incorporation provide that any transfer of shares requires approval of the company (by approval of the board of directors, a general shareholders' meeting or the representative director, which is determined in accordance with the type of company and the law or the articles of incorporation). The shareholder may request the company to purchase the shares, or to procure a person designated by the company to purchase the shares, if the company does not approve the transfer. The purchase price of this transfer will be determined by an agreement between the shareholder and the purchaser. If they cannot reach an agreement, the court will determine the price upon a petition by the shareholder or purchaser.

Shareholders may also transfer their shares to the company. Buy-back of shares by the company is subject to the distributable amount of the company. A buy-back of shares from a specific shareholder based on an agreement between the shareholder and the company must be approved by an extraordinary resolution at a general shareholders' meeting, whereas a buy-back of shares by companies with the board of directors through the market or a tender offer may be carried out by a board resolution, if permitted by the articles of incorporation of the company.

Shareholders often agree to certain restrictions on the transfer of shares of the company in shareholders' agreements. A shareholders' agreement is legally binding on, and enforceable against, the shareholders who are parties to the shareholders' agreement unless the agreement violates public policy. However, the effect of a transfer of shares conducted in violation of the agreement would not generally be void in relation to the company or third parties. By contrast, agreements on a restriction on the transfer of shares between shareholders and the company might be void because it might be used for the control of the company by the management.

Liquidation

A company may be dissolved by an extraordinary resolution at its general shareholders' meeting and go into liquidation. Some companies engaged in regulated businesses may be required to obtain approval from the competent administrator of those businesses to be dissolved. Shareholders of a company in liquidation have a right to receive residual assets of the company after the company performs its obligations. Liquidation is eventually concluded upon the approval of the settlement of accounts by an extraordinary resolution at a general shareholders' meeting.

Unless otherwise provided for in the articles of incorporation, a shareholder with no less than one tenth of the voting rights of all shareholders of the company or no less than one tenth of the outstanding shares (excluding treasury shares) of the company may file an action to dissolve the company if either of the following events occurs and there are unavoidable circumstances (Article 833 of the Companies Act):

  • the company faces extreme difficulty in executing its business and the company suffers or is likely to suffer irreparable harm; or
  • the management or disposition of the property of the company is conducted in an extremely unreasonable manner and puts the existence of the company at risk.

Such action for dissolution is considered to be the last resort for minority shareholders in a private company who cannot sell their shares to prevent them from incurring losses.

Shareholders of a liquidating company may file a petition for the commencement of special liquidation, which is a liquidation procedure carried out under supervision of the court in cases where circumstances prejudicial to the implementation of the liquidation exist or there are suspicious reasons or factors for the insolvency of the company (Article 511 of the Companies Act).

Insolvency

A shareholder with one tenth or more of the voting rights of all shareholders of the company has the right to file a petition for the commencement of corporate re-organisation proceedings against the company if there is a risk that grounds for commencement of bankruptcy proceedings may occur pursuant to the Corporate Re-organisation Act; however, shareholders do not have a right to file a petition for commencement of bankruptcy proceedings or civil rehabilitation proceedings (Bankruptcy Act and Civil Rehabilitation Act).

While shareholders are not allowed to be involved in bankruptcy proceedings, shareholders have some rights with respect to, or can participate in, civil rehabilitation proceedings and corporate re-organisation proceedings, to some extent. This is because these are restructuring proceedings the results of which might be unjustly disadvantageous to shareholders. However, if the company has debts exceeding assets, the shareholders cannot participate in or object to these proceedings.

The main regulatory provisions that govern shareholder activism are in the Companies Act because, as previously discussed, it provides shareholder rights. The FIEA also relates to shareholder activism, as it sets forth, among other things, disclosure rules for large shareholdings, tender offer regulations, proxy regulations, insider trading rules and fair disclosure rules. Listed companies must also comply with the rules of the stock exchange with respect to disclosure of the companies’ engagement with shareholder activists.

Tokyo Stock Exchange Inc. issued Japan’s Corporate Governance Code (the CGC) on 1 June 2015 (amended on 1 June 2018) and the Expert Committee of the FSA issued the Japan’s Stewardship Code (the SC) on 26 February 2014 (amended on 29 May 2017 and 24 March 2019). The CGC and the SC have worked as "the two wheels of a cart" to promote and achieve effective corporate governance from the perspective of listed companies and institutional investors.

The CGC and the SC do not adopt a rule-based approach; rather, they adopt a principle-based approach that is not legally binding on companies or institutional investors with a "comply or explain" approach (ie, either comply with a principle or, if not, explain the reasons for non-compliance). The soft laws, including those promulgated by the CGC and the SC, also affect shareholder activism.

Shareholder activism has become common in Japan in recent years. The environment surrounding the corporate governance of listed companies has significantly changed since the CGC was issued in 2015 and the SC was issued in 2014, as one of the policies of the cabinet led by Prime Minister Shinzo Abe (known as Abenomics). Consequently, management members of listed companies are increasingly managing their companies by taking into account capital efficiency and by improving the corporate governance of their companies.

Historically, shareholders did not have much influence on the management of companies in Japan because many listed companies had stable shareholders who always supported the management through cross-shareholding. However, the CGC expressly provides that companies should disclose their policies regarding the reduction of cross-shareholdings and that the board should evaluate annually each individual cross-shareholding to determine if it should continue, specifically examining whether the purpose of each cross-shareholding is appropriate and whether the benefits and risks of each cross-shareholding covers the company’s cost of capital. As a result of this, the number of cross-shareholdings in the Japanese market has been gradually decreasing.

As the Japanese market is seeing greater numbers of foreign investors, and the SC provides that institutional investors should conduct constructive engagement with investee companies and disclose voting records for each of its investee companies on an individual agenda item basis from the perspective of their stewardship responsibilities, the demands and voting behaviour of institutional investors have become stricter and more demanding. Furthermore, in the past few years, institutional investors that have not been recognised as activist shareholders have tended to become more assertive in making demands on the management of companies that are similar to the demands typically seen from activist shareholders.

There are some prominent recent examples of shareholder activism in Japan. In response to the demands of shareholder activists, many Japanese companies have conducted share buy-backs. For example, the US-based activist fund Elliott Management pushed SoftBank Group Corp. to buy back its shares in 2020; and, after that push, SoftBank Group Corp. announced a plan for the repurchase of up to JPY2 trillion of its shares.

In the 2019 proxy season, there were a number of cases of companies accepting the elections of directors recommended by activist shareholders. For example, Olympus Corporation nominated a partner of ValueAct, the US-based activist fund, as a director, and Kawasaki Kisen Kaisha Ltd nominated a director of Effissimo Capital Management, a Singapore-based activist fund, as a director.

The number of cases of shareholder activism relating to M&A activities has also increased in the past few years. For example, Oasis Management, a Hong Kong-based activist fund, waged a public campaign in 2016-17 against the acquisition by Panasonic Corporation of its listed subsidiary, PanaHome Corporation, and in 2017-18 against the integration of a business through a share exchange in which Alps Electric Co, Ltd. would acquire all the shares in its listed subsidiary, Alpine Electronics Inc.

Most activist shareholders initiate their actions by sending a private letter to the management of listed companies stating their demands to, or requesting to hold a meeting with, the management. At a later and more aggressive stage, activist shareholders may engage in public campaigns in various ways, such as issuing press releases, posting white papers or relevant information on websites prepared by the activist shareholders for the campaigns, placing web advertisements, disseminating letters to shareholders, providing information through the media and holding sessions for other shareholders.

Activist shareholders acquire shares in a target company to have influence on the management of the target company; however, building a large stake in the target company is not necessarily required, as the activist shareholders may have influence on the management, even with a small stake, by asking other shareholders to support their demands. Activist shareholders may also submit shareholder proposals and engage in proxy solicitations with respect to general shareholders' meetings. Furthermore, some aggressive activist shareholders use the court processes, including the enjoinment of directors’ illegal acts or derivative actions (see 3.3 Legal Remedies Against the Company's Directors).

Agenda items commonly demanded by activist shareholders included:

  • improving capital efficiency, including the buy-back of shares, increasing dividends and divesture of non-core businesses and assets;
  • business strategies, such as the conduct of M&A transactions;
  • replacement or nomination of directors;
  • improving corporate governance; and
  • the inappropriate nature of terms and conditions of announced M&A transactions.

It is not easy to predict the impact of COVID-19 on shareholder activism in Japan. Some critics contend that, since many companies are facing performance difficulties in their businesses, it might become difficult for activist shareholders to gain support from other shareholders, including the mid- to long-term institutional investors for the activist shareholders’ positions to increase shareholder returns, such as buy-back of shares or increasing dividends. However, thus far in 2020, the level of shareholder activism in Japan seems not to have declined.

There are no particular industries or sectors which have been particularly targeted by activist shareholders in Japan. Small-cap or mid-cap companies (ie, companies whose market capitalisation is under JPY100 billion) are more frequently targeted by activist shareholders because it is easier for them to have stronger influence over these companies by building larger stakes in such companies. However, some large-cap companies whose market capitalisation is more than JPY1 trillion have also been targeted by activist shareholders, as more shareholders have become supportive of activist shareholders and, as a result, activist shareholders may gain the ability to influence the target companies when in possession of a small shareholding.

Hedge funds are the most active shareholder activists in Japan. Both Japan-based hedge funds and foreign-based hedge funds (such as those from the US, the UK, Hong Kong and Singapore) actively engage in shareholder activism. In addition, as discussed in 2.2 Level of Shareholder Activism, domestic and foreign institutional investors have recently become more aligned with activist shareholders in their actions.

The number of cases in which shareholder activist demands were met in full or in part has increased in the past few years, although such activist demands would historically not have obtained support from other shareholders in Japan.

In 2017, a shareholder proposal submitted to Kuroda Electric Co Ltd by Reno Inc (which is considered to have some connection with the well-known Japanese activist fund Murakami Fund) to elect an outside director was approved at the annual general shareholders meeting of Kuroda Electric Co Ltd. In 2020, Oasis Management submitted shareholder proposals to Suncorporation to dismiss its executive directors and to elect directors designated by Oasis Management. The shareholder proposals were approved at an extraordinary general shareholders' meeting with approximately 70% of shareholders providing affirmative votes. These cases suggest that shareholders in Japan are becoming more comfortable with, and supportive of, shareholder activism. In addition, as discussed in 2.2 Level of Shareholder Activism, in 2019, a greater number of persons nominated as candidates for directors were recommended by shareholder activists at general shareholders' meetings.

Furthermore, as discussed in 2.2 Level of Shareholder Activism, in the recent several years, several companies increased the amount of their dividends or conducted buy-back of their shares  through the market or a tender offer in response to activist demands.

As discussed in 2.2 Level of Shareholder Activism, the number of cases of shareholder activism relating to M&A transactions has also increased. Activist shareholders push to increase the purchase price through acquisition of large stakes (eg, 10% or more of outstanding shares) in target companies (to influence the terms of the transactions) or engage in public campaigns after these transactions are publicly disclosed.

In some M&A transactions, the involvement of activist shareholders in the transactions may have caused purchasers to increase the purchase prices in such transactions or the failure of the related tender offer.

The most important strategy for the management of a listed company when addressing shareholder activism is to review proactively the company’s financial condition, capital efficiency and share price, as well as the composition of the company’s shareholders and their wishes or demands, before shareholder activists invest in the company. Throughout this review, management should endeavour to address or improve matters that may cause the company to be susceptible to the interests or manoeuvres of shareholder activists. It is also important for management to engage regularly in dialogue with the company’s large shareholders, including institutional investors, to understand what they want management to do and to build good relationships with them.

After shareholder activists emerge, management should respond to the shareholder activists in a reasonable manner, keeping in mind the perspective of financial investors. Most importantly, management should seek to clarify or explain its position to garner the support of the other shareholders (including institutional investors) for the management’s position. Although it has not been a common strategy in Japan, management can consider entering into a settlement agreement with shareholder activists to avoid a costly public campaign which may harm the company’s image.

Unlike a partnership, a stock company has a separate legal personality that is distinct from the company’s shareholders. Shareholders of a stock company are indirectly responsible for the company’s liabilities only to the extent of their investments in the company.

Shareholders have some rights against a company to remedy actions carried out by its directors or others. The following remedies are typical remedies against a company.

Revocation of a Resolution of a General Shareholders' Meeting

A shareholder may file for a revocation of a resolution of a general shareholders' meeting by filing an action with the court within three months from the date of that resolution, in the event of any of the following (Article 831 of the Companies Act):

  • where the calling procedures or the methods of a resolution at the general shareholders' meeting violate laws and regulations or the articles of incorporation or are conducted in a grossly improper manner;
  • the contents of the resolution at the general shareholders' meeting violate the articles of incorporation; or
  • a grossly improper resolution is passed as a result of a person with a special interest in the resolution at the general shareholders' meeting exercising a voting right.

Even if the calling procedures or the method of resolution of the general shareholders' meeting are in violation of the applicable laws and regulations or the articles of incorporation, the court may dismiss the claim if it finds that the violations are not serious and will not affect the resolution.

Invalidation of Material Corporate Actions

A shareholder in place from the effective date of a material corporate action, such as a merger, company split, share exchange or share transfer, may assert an invalidation of the corporate action due to material defects of the process by filing an action with the court within six months from the effective date (Article 828 of the Companies Act). A shareholder may also file an action with the court asserting an invalidation of a demand for a share cash-out (squeeze-out right) within six months (for a private company, one year) from the effective date of that share cash-out (Article 846-2 of the Companies Act).

For example, in 2019 Oasis Management filed a suit in court after the completion of the acquisition of Alpine Electronics Inc by Alps Electric Co Ltd through the share exchange (as discussed in 2.2 Level of Shareholder Activism), asserting that the share exchange is invalid. The suit remains pending in court.

Enjoinment of Material Corporate Actions

A shareholder has a right to enjoin an issuance of shares or stock acquisition rights, if either of the following events occurs and the shareholder is likely to suffer a disadvantage as a result of that issuance (Articles 210 and 247 of the Companies Act):

  • the issuance of shares or stock acquisition rights violates laws and regulations or the articles of incorporation; or
  • the issuance of shares or stock acquisition rights is affected through an extremely unfair method.

Other than the foregoing cases for enjoinment, as a general rule, enjoinment by shareholders of certain material corporate actions provided for under the Companies Act, such as a merger, company split, share exchange or share transfer, may be permitted only if that corporate action violates laws and regulations or the articles of incorporation (and shareholders are likely to suffer disadvantages); violations of duties of care and loyalty by directors are not deemed to constitute violations of laws in the context of enjoinment by shareholders.

However, in the case of a short-form merger, company split or share exchange or demand for a share cash-out (squeeze-out right), if the conditions of that corporate action (eg, merger ratio) are extremely improper in light of the financial status of the parties thereto and shareholders of the controlled company are likely to suffer disadvantages, the shareholders may enjoin the corporate action.

Appraisal Rights

With respect to mergers or other corporate restructuring, certain shareholders have appraisal rights. For instance, shareholders who objected to a merger at the general shareholders' meeting may demand that the company purchase their shares in the company at a fair price. If dissenting shareholders and the company cannot reach agreement on the price of the shares within a certain period, either the dissenting shareholders or the company may file a petition to the court for a determination of the fair price. Shareholder activists frequently exercise their appraisal rights, asserting that the purchase price in a merger or other corporate restructuring is lower than the fair price that should be determined by the court.

Monetary Claim

A company shall be liable for damages caused to third parties by the company’s representative directors or other representatives during the course of performance of their duties (Article 350 of the Companies Act). A shareholder may also make claims for damages against the company, based on tort claims.

Enjoinment of Acts of Directors

If a director of a public company with a statutory auditor, an audit and supervisory committee or three committees engages, or is likely to engage, in any act in violation of laws and regulations, including a director's duties of care and loyalty under the Companies Act, or the articles of incorporation, and if such an act is likely to cause irreparable damage to the company (substantial detriment is required for types of companies other than those listed in the foregoing), a shareholder (having owned shares consecutively for the preceding six months or more) may enjoin that directors' act, usually by obtaining an order of provisional disposition from the court unless otherwise provided for in the articles of incorporation (Article 360 of the Companies Act). The holding-period requirement does not apply to shareholders of a private company.

As an example of a shareholder activist filing for a provisional injunction with the court to enjoin a directors' act, Oasis Management filed a provisional injunction against the directors of Toshiba Plant Systems & Services Corporation, a listed subsidiary of Toshiba Corporation, with the Yokohama District Court in March 2017 to prevent the directors from depositing funds with Toshiba Corporation. As a result, Toshiba Plant Systems & Services Corporation withdrew the deposit amount, which was approximately JPY88 billion.

Derivative Actions

Unless otherwise provided for in the articles of incorporation, a shareholder of a public company, having owned shares in the company consecutively for the preceding six months or more, may demand that the company file an action to enforce the liability of directors of the company due to negligence in the performance of their duties. If the company does not file an action against the directors within 60 days from the date of the demand, the shareholder may file a derivative action against the directors on behalf of the company (Articles 423 and 847 of the Companies Act). The holding-period requirement does not apply to shareholders of a private company.

As an example of a shareholder activist filing a derivative action, Effissimo Capital Management brought a derivative action to recover damages caused by the directors of Nissan Shatai Co Ltd, a listed subsidiary of Nissan Motor Co Ltd, on the grounds that the directors violated their duties of care and loyalty because Nissan Shatai Co Ltd deposited a large amount of cash in a subsidiary of Nissan Motor Co Ltd by participating in the cash-management system (CMS) of the Nissan Motor group without reasonable reasons, and the directors did not manage its cash efficiently. Yokohama District Court eventually dismissed the case in favour of the directors in February 2012.

Direct Claims

Under the Companies Act, if directors have acted in bad faith or with gross negligence in the performance of their duties, those directors are jointly and severally liable to a third party for damages arising as a result thereof (Article 429 of the Companies Act). Shareholders may also be eligible to claim damages directly from the directors pursuant to this provision. While there are arguments that the remedy for shareholders suffering indirect damages due to the directors’ bad faith or gross negligence should be addressed through derivative actions, there may be cases where a shareholder can make claims for indirect damages against the directors.

If directors make false statements with respect to important matters in certain corporate documents, including financial statements and business reports, those directors are jointly and severally liable to a third party for damages unless the directors prove that they did not fail to exercise due care with respect to the performance of their duties.

Furthermore, a shareholder may make claims for damages against directors, based on tort claims.

In Japan, the Companies Act and court precedents have not adopted the concept that a controlling shareholder of a company owes a fiduciary duty to the company or other shareholders. Therefore, except in respect to a tort claim, a shareholder of the company is not liable to other shareholders of the company.

As with derivative actions against directors, eligible shareholders may file a derivative action against statutory auditors and accounting auditors with respect to those statutory auditors’ or accounting auditors’ negligence in the performance of their duties (Articles 423 and 847 of the Companies Act).

Shareholders may also claim for damages directly against statutory auditors and accounting auditors who have acted in bad faith or with gross negligence in the performance of their duties (Article 429 of the Companies Act). Furthermore, if statutory auditors make false statements with respect to important matters in audit reports, or if an accounting auditor does so in financial audit reports, they are liable to a third party for damages unless they prove that they did not fail to exercise due care with respect to the performance of their duties.

As discussed in 3.3 Legal Remedies Against the Company's Directors and 3.5 Legal Remedies Against Auditors, eligible shareholders may file derivative actions against directors, statutory auditors and an accounting auditor on behalf of the company, in accordance with the procedures provided in the Companies Act.

Generally, there is an information asymmetry between a company or its management and its shareholders, and shareholders frequently face difficulty in shareholder litigations to prove or show relevant facts with limited information or evidence. Therefore, to obtain necessary information or evidence, shareholders should consider using their inspection rights effectively, as provided for in the Companies Act, and as discussed in 1.7 Access to Documents and Information, as well as petitioning the court for an order to the company to submit certain relevant documents to the court, as provided under Article 221 of the Code of Civil Procedure.

Mori Hamada & Matsumoto

Marunouchi Park Building
2-6-1 Marunouchi
Chiyoda-ku
Tokyo 100-8222
Japan

+81 3 6266 8553

+81 3 6266 8453

akira.matsushita@mhm-global.com www.mhmjapan.com
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Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms, with more than 550 lawyers, including more than 100 foreign lawyers. The firm’s corporate and governance practice team consists of approximately 50 partners and counsels and 100 associates. The majority of the team of lawyers is based in the main office in Tokyo, with the others working in branch offices in Osaka, Nagoya, Fukuoka and Takamatsu and international branch offices in Singapore, Shanghai, Beijing, Bangkok (Chandler MHM Limited), Yangon (Myanmar Legal MHM Limited) and Ho Chi Minh City. The firm advises on a wide range of corporate-related matters, including corporate governance, operations of boards of directors, shareholders' meetings, shareholder activism, takeover defence, shareholder proposals, proxy fights, communications with institutional investors, management compensation and corporate litigation. While the firm has a long history of supporting corporate matters for a large number of Japanese-listed companies, the firm’s clients also include Japanese private companies, foreign companies and domestic and foreign investors.

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