Can You Sue to Cancel a "No" Vote? Japanese Supreme Court Says Generally Not for Shareholder Resolutions

Japanese Attorney at Law - Bengoshi L.L.

• 6 min read
Can You Sue to Cancel a "No" Vote? Japanese Supreme Court Says Generally Not for Shareholder Resolutions

Judgment Date: March 4, 2016
Case: Action for Cancellation of Shareholders' Meeting Resolution (Supreme Court of Japan, Second Petty Bench)

This 2016 Japanese Supreme Court decision addressed a novel question in corporate litigation: Is it legally permissible for a shareholder to file a lawsuit under Article 831 of the Company Law to cancel a shareholders' meeting resolution that rejected a proposed agenda item (a "rejection resolution" or 否決決議 - hiketsu ketsugi)? The Court concluded that such lawsuits are generally impermissible.

Factual Background: A Rejected Dismissal and a Subsequent Challenge

The case involved Y Company, a company without a board of directors, and its three shareholders, X, X2 (the plaintiffs, collectively "X et al."), and A, all of whom were also directors of the company.

  1. The Rejection Resolution: On May 26, 2014, an extraordinary shareholders' meeting of Y Company was held. At this meeting, a proposal to dismiss X et al. from their positions as directors was put to a vote and was rejected (voted down).
  2. Related Legal Action: Following this rejection, shareholder A initiated a separate lawsuit under Article 854(1) of the Company Law. This article allows a shareholder to petition a court to dismiss a director if, among other conditions, a proposal to dismiss that director has failed to pass at a shareholders' meeting.
  3. The Current Lawsuit: In response, or as part of the ongoing dispute, X et al. filed the present lawsuit. They alleged that the convocation procedure for the May 26, 2014, shareholders' meeting had been defective. Based on this alleged procedural flaw, X et al. sought the cancellation of the resolution that had rejected their dismissal as directors (the "Rejection Resolution").
  4. Lower Court Rulings:
    • The Fukuoka District Court (first instance) ruled in favor of X et al., accepting their claim to cancel the Rejection Resolution. The court found that X et al. had a legal interest in seeking the cancellation because the Rejection Resolution was a prerequisite for A's lawsuit to dismiss them under Article 854(1).
    • The Fukuoka High Court (appellate instance), however, overturned the first instance decision and dismissed X et al.'s claim. The High Court reasoned that a suit to cancel a rejection resolution was impermissible. X et al. then appealed to the Supreme Court.

The Supreme Court's Judgment: Lawsuit to Cancel a Rejection Resolution is Impermissible

The Supreme Court dismissed the appeal by X et al., thereby upholding the High Court's decision that the lawsuit to cancel the Rejection Resolution was impermissible.

The Court's core reasoning was as follows:

  • The Japanese Company Law (Article 828 et seq.) provides a specific set of rules for lawsuits concerning corporate organization, including lawsuits to cancel flawed shareholders' meeting resolutions (Article 831). These provisions, which include a strict three-month time limit for filing such cancellation suits and define procedural aspects like the proper defendant and the scope of the judgment's effect (Articles 834-839), are fundamentally premised on the idea that a shareholders' meeting resolution results in the creation of new legal relationships.
  • Generally, a resolution by shareholders to reject a proposed agenda item does not create any new legal relationships. The status quo simply continues. Correspondingly, a court order cancelling such a rejection resolution would also not, in itself, create any new legal relationships.
  • Therefore, the Supreme Court concluded that a lawsuit seeking to cancel a shareholders' meeting resolution that merely rejected a proposed agenda item is, as a rule, impermissible (not legally sound or improper - 不適法 - futekiho).
  • This principle applies even if the rejected agenda item concerned the dismissal of directors.

Justice Chiba's Supplementary Opinion

Justice Chiba provided a supplementary opinion that further elaborated on the rationale:

  • Shareholders' meeting resolutions are collective, organizational decisions that can create new legal situations and have a broad, "worldly" effect (taiseiteki koryoku), often impacting third parties. The Company Law's special rules for challenging these resolutions (cancellation, nullity, non-existence) are designed to handle these unique, legally formative acts, displacing general civil law principles about voiding acts.
  • When a proposal is rejected at a shareholders' meeting, no new legal relationship is formed by that rejection; the existing state of affairs continues. Consequently, the special rules and time limits for challenging formative resolutions (like those in Article 831) are unnecessary and do not apply to mere rejection resolutions. A suit to "cancel" a rejection resolution is not something contemplated by the Company Law's framework.
  • Even if a rejection resolution serves as a factual prerequisite for some other legal consequence (e.g., under Article 854(1) for a court-ordered director dismissal, or Article 304 restricting the re-proposal of a failed shareholder initiative), this does not mean the rejection itself creates that legal consequence. If the rejection resolution was passed through a procedurally flawed process, the proper way to address this is to argue in the other legal proceeding (e.g., in defense against the director dismissal suit) that the prerequisite "rejection" should not be considered to have validly occurred due to the procedural flaws. For instance, if a shareholder proposal is rejected via a meeting with serious procedural defects, one could argue that the three-year restriction on re-proposing that item (under Art. 304 proviso) does not apply because a valid "rejection" did not actually happen. This approach avoids the need to try and "cancel" the rejection itself.

Analysis and Implications: Navigating Flawed "No" Votes

This Supreme Court decision was the first from Japan's highest court to directly address the permissibility of lawsuits aimed at cancelling "rejection resolutions."

  • Shift in Judicial Trend: Previously, lower court decisions and academic opinions on this issue were divided. Some older lower court cases had allowed such suits, often reasoning that if a flawed rejection were cancelled, the company would be obligated to reconsider the matter fairly, thereby giving the plaintiff a legal interest. However, more recent lower court decisions had increasingly leaned towards finding such suits impermissible, although their specific legal rationales varied (e.g., no new legal relationship formed, a "rejection" not being a "resolution" in the sense of Art. 831, or rejections not having third-party effects). This Supreme Court ruling solidified the impermissibility stance.
  • Rationale Centered on "No New Legal Relations": The Supreme Court’s reasoning focused on the foundational premise that the Company Law's special regime for challenging resolutions (Article 831 et seq., with its short statute of limitations) is designed for resolutions that affirmatively create new legal relationships. Since rejection resolutions typically maintain the status quo and do not establish new legal states, they fall outside the intended scope of these special cancellation suits. The Court appears to accept that a "rejection" is a form of "resolution," but not one that triggers the cancellation mechanism of Article 831.
  • Alternative Avenues for Relief: The ruling that an Article 831 suit is impermissible for rejection resolutions does not necessarily mean that a procedurally flawed rejection has no legal consequences or cannot be challenged. Instead, it implies that the special restrictions and procedures of Article 831 (like the three-month filing deadline) do not apply. Shareholders who believe they have been harmed by a flawed rejection resolution might need to assert the invalidity or ineffectiveness of that rejection in other legal contexts—for example, as a defense in a related lawsuit, or by arguing that a statutory precondition (like the "rejection" needed for an Article 854(1) suit) has not been met due to the flaws. This could, as some commentators suggest, potentially broaden the avenues or timeframes for seeking relief compared to the restrictive Article 831 framework.
  • Impact on Specific Statutory Provisions:
    • Director Dismissal Suits (Art. 854(1)): If a resolution to dismiss a director is rejected, but that rejection vote was procedurally flawed, the affected director (or other interested parties) might argue in the subsequent Article 854(1) court action that the prerequisite "rejection by shareholders' meeting" was not validly established.
    • Restrictions on Re-Proposing Shareholder Initiatives (Art. 304): Similarly, if a shareholder proposal is rejected due to a flawed voting process, the shareholder might argue that the three-year ban on re-proposing the same item (if it failed to get 1/10th support) does not apply because a legitimate "rejection" did not occur.
  • Scope of the Ruling: The judgment's reasoning appears to apply generally to resolutions rejecting any type of agenda item, not just director dismissals. Furthermore, by referring to "shareholders' meeting, etc." (kabunushi sokai tou), its principles likely extend to other corporate decision-making bodies like class shareholders' meetings, organizational meetings for incorporation, etc. The ruling's applicability to suits seeking a declaration of non-existence or nullity (under Company Law Art. 830) of a rejection resolution, rather than cancellation, remains less clear, though some commentators suggest a general declaratory action might still be possible if a distinct "legal interest in confirmation" can be demonstrated. Advisory resolutions by shareholders, which also do not create new legal relations, would similarly fall outside the scope of Article 831 cancellation suits based on this logic.

The 2016 Supreme Court decision brings significant clarity to an area of Japanese corporate litigation by establishing that a lawsuit to cancel a shareholders' meeting resolution which rejects a proposed agenda item is generally impermissible under Company Law Article 831. The rationale is that such rejection resolutions do not typically create new legal relationships, which is the underlying assumption for the special, time-limited cancellation suit regime. While this closes the door on one specific type of legal challenge, it implies that the validity and effect of procedurally flawed rejection resolutions may still be contested through other legal avenues or as part of related proceedings, potentially under less restrictive general principles of law.