Dividends (Distribution of Surplus) in Japanese K.K.s: Decision-Making Procedures and Payment Methods

For shareholders of a Japanese Kabushiki Kaisha (K.K., or joint-stock company), receiving dividends – a share of the company's profits – is one of the most tangible returns on their investment. The Japanese Companies Act (Kaisha-hō) refers to this process more broadly as "Distribution of Surplus" (jōyokin no bumpai), and specifically the payment of what are commonly understood as dividends as jōyokin no haitō (剰余金の配当). The Act sets forth specific rules regarding how decisions to pay dividends are made, the types of property that can be distributed, and the methods of payment, all while strictly adhering to the "source regulations" (distributable amount rules) discussed in a previous article to protect creditors. This article delves into the decision-making procedures and payment methods for dividends in a Japanese K.K.

Dividends as a Form of "Distribution of Surplus"

Under the Companies Act, dividends are a principal form of "Distribution of Surplus." This means that, like other distributions such as share buybacks for consideration, the payment of dividends is subject to the fundamental rule that it cannot exceed the company's "Distributable Amount" (bumpai kanō gaku) (Article 461, paragraph 1, item 2). This ensures that dividend payments do not unlawfully erode the company's capital, thereby safeguarding the interests of creditors.

What Can Be Distributed as Dividends? (Article 453)

While cash is the most common form of dividend, the Companies Act allows for dividends to be paid in property other than cash, known as "dividends in kind" (genbutsu haitō), provided this is authorized by a resolution of the shareholders' meeting (or the board of directors, if applicable for interim dividends) (Article 454, paragraph 1, item 1).

• Cash Dividends: The vast majority of dividends are paid in cash.
• Dividends in Kind: If dividends in kind are to be paid, the resolution must specify the type and book value of the non-cash property to be distributed. This could include, for example, shares of a subsidiary company or other marketable securities held by the distributing company.
  • Shareholder's Right to Demand Cash (Article 454, paragraph 4): Unless the distributed property consists solely of shares or share options of a wholly-owned subsidiary of the distributing company, or the distribution is made to all shareholders proportionally in shares or share options of any company (including the distributing company itself), shareholders have the right to demand payment of the dividend in cash instead of the non-cash property. The cash amount would be equivalent to the fair market value of the non-cash property they would have otherwise received. This provision protects shareholders who may not want or be able to conveniently manage non-cash assets.

Decision-Making Procedures for Dividend Payments (Article 454)

The authority and procedure for deciding on dividend payments depend on whether it is a year-end dividend or an interim dividend, and on the company's governance structure and articles of incorporation.

1. Year-End Dividends (Ordinary Dividends)

Year-end dividends are typically decided upon after the finalization of the company's annual financial statements.

• Decision-Making Body (General Rule): Shareholders' Meeting (Article 454, paragraph 1):
  As a general rule, the decision to pay year-end dividends, including the amount per share and other details, is made by an ordinary resolution of the annual general shareholders' meeting. This is based on the financial results of the concluded business year.
  The resolution must specify:
  1. The kind and aggregate book value of the dividend property.
  2. The method of allotting the dividend property to shareholders (e.g., JPY X per share).
  3. The effective date of the dividend distribution.
• Board Approval Sufficient under Specific Conditions (Article 459, paragraph 1, item 4, applying Article 439):
  There's an exception to requiring shareholders' meeting approval for year-end financial results (including dividends based on them). If a company:
  1. Has an external accounting auditor (kaikei kansanin);
  2. The external accounting auditor issues an unqualified opinion on the financial statements;
  3. The statutory auditors (or Audit & Supervisory Committee/Audit Committee) also do not find any issues with the financial statements or the external auditor's opinion; and
  4. The articles of incorporation provide that such financial statements can be approved by a board of directors resolution if these conditions are met;
     then the board of directors can approve the financial statements. If the financial statements are approved this way, any proposed dividend based on these financials (which would have been outlined in the board's proposal for the shareholders' meeting) is also effectively determined by the board, though the dividend payment itself would still technically flow from the allocation of surplus based on these board-approved accounts. The shareholders are reported to on these matters. However, the decision to distribute specific dividends still generally requires a separate shareholders' resolution under Article 454 unless it's an interim dividend. The practical link is that the approved accounts form the basis for calculating the distributable amount.

2. Interim Dividends (Chūkan Haitō) (Article 454, paragraph 5)

The Companies Act allows certain companies to make one dividend distribution during a business year (an "interim dividend") by a resolution of the board of directors, without waiting for the annual shareholders' meeting.

• Eligibility for Board-Decided Interim Dividends: A company can make interim dividends by a board resolution if:
  1. It is a company with an external accounting auditor; AND
  2. Its articles of incorporation stipulate that the term of office for its directors is one year (or it is a Company with an Audit and Supervisory Committee, where director terms are often shorter, or a Company with Nominating Committee, etc.); AND
  3. Its articles of incorporation explicitly authorize the board of directors to decide on interim dividend payments.
• Limitations: Only one such board-decided interim dividend is permitted per business year. The decision must be made by the board based on the financial situation as of a specific record date set within that business year. The source regulations (distributable amount) still strictly apply.
• Rationale: This provision allows companies with robust auditing and shorter director accountability cycles to provide shareholders with returns more frequently and with greater agility, without needing to convene an extraordinary shareholders' meeting.

Record Date for Dividend Entitlement (Article 124)

To determine which shareholders are entitled to receive a dividend, companies typically set a "record date" (kijunbi). Shareholders who are registered in the shareholder registry as of this record date are eligible for the dividend payment. Public notice of the record date is required. For year-end dividends, the record date is often the last day of the business year. For interim dividends, the board will set a specific record date.

Payment Methods for Dividends

Once a dividend is declared and the record date has passed, the company proceeds with payment.

1. Cash Dividends

• Payment to Registered Shareholders: Cash dividends are paid to the shareholders listed in the shareholder registry as of the record date.
• Methods of Payment:
  • Bank Transfer (Kōza Furikomi): This is the most common method today. Shareholders provide their bank account details to the company (or its shareholder registry administrator/transfer agent), and dividends are directly deposited.
  • Dividend Receipt Vouchers (Haitōkin Ryōshūshō): Historically, companies would mail out dividend receipt vouchers, which shareholders would then take to a designated financial institution (usually a post office or bank) to exchange for cash. This method is becoming less common but may still be used by some companies or for shareholders who have not designated a bank account.
  • Other Methods: In some cases, particularly for foreign shareholders, payment might be made via international wire transfer or through custodian arrangements.

2. Dividends in Kind (Genbutsu Haitō)

If a company declares a dividend in kind:

• Delivery of Property: The company must arrange for the delivery of the specified non-cash property to the entitled shareholders. This can be complex depending on the nature of the property (e.g., shares of another company, physical goods).
• Shareholder's Right to Demand Cash: As mentioned earlier, unless specific exceptions apply (e.g., distribution of wholly-owned subsidiary shares), shareholders generally have the right to demand payment in cash instead of the non-cash property (Article 454, paragraph 4). The company must establish procedures for shareholders to exercise this right and for determining the cash equivalent based on fair market value. This process needs to be communicated clearly to shareholders.

Unclaimed Dividends

Dividends that are declared but not claimed by shareholders (e.g., due to outdated address information or uncashed vouchers) generally remain an obligation of the company. However, under general principles of civil law, claims for payment (including dividends) can become statute-barred after a certain period (typically 5 years for commercial claims if not exercised, or 10 years if no specific shorter period applies, though the company's articles might specify a shorter period for unclaimed dividends after due notice). Companies usually make efforts to locate shareholders with unclaimed dividends, but eventually, these may revert to the company or be treated according to its articles or internal policies.

Legal Effects and Shareholder Rights

• Entitlement to Dividends: Once a dividend is properly declared by the shareholders' meeting or the board (for interim dividends), shareholders entitled as of the record date acquire a definitive legal right to receive the dividend payment from the company.
• Shareholder Equality: Dividends must be paid proportionally to the number of shares of the same class held by each shareholder (Article 109, paragraph 1 – Principle of Shareholder Equality).
• Treasury Stock: The company itself does not receive dividends on any treasury stock it holds (Article 453, proviso).

Practical Considerations for Companies

• Calculating Distributable Amount: This is the most critical step. Companies must ensure they have a robust process, often involving their accounting department, statutory auditors, and external auditors, to accurately calculate the distributable amount before any dividend decision.
• Communication with Shareholders: Clear communication regarding dividend policies, record dates, payment dates, and payment methods is essential.
• Managing Dividends in Kind: If considering dividends in kind, companies need to carefully plan the logistics of distribution, valuation of the property, and the process for shareholders wishing to receive cash instead.
• Compliance with Stock Exchange Rules (for listed companies): Listed companies must also comply with stock exchange rules regarding the timely disclosure of dividend decisions.

Conclusion

The payment of dividends (as a form of "Distribution of Surplus") is a key mechanism by which Japanese K.K.s return value to their shareholders. The Japanese Companies Act provides a structured framework for these distributions, emphasizing shareholder approval (or board approval under specific conditions for interim dividends) and strict adherence to source regulations to protect creditors. While cash dividends are the norm, the possibility of dividends in kind exists, albeit with additional procedural complexities, including the shareholder's right to opt for cash. For both companies and investors, a clear understanding of the decision-making processes, the calculation of distributable amounts, and the methods of dividend payment is crucial for navigating this fundamental aspect of Japanese corporate finance and shareholder relations.