How Can Shareholders Exercise Their Proposal Rights at Japanese Company Meetings?

Shareholder proposal rights are a fundamental component of shareholder democracy and corporate governance, enabling shareholders, including minority stakeholders, to actively participate in shaping a company's direction and holding its management accountable. In Japan, the Companies Act (会社法 - Kaishahō) provides a statutory framework for shareholders to propose matters for consideration and resolution at shareholders' meetings. Understanding these rights—their scope, eligibility requirements, and limitations—is crucial for both shareholders seeking to make their voices heard and for companies navigating these shareholder initiatives.

The Statutory Framework for Shareholder Proposals in Japan

The Japanese Companies Act grants shareholders several distinct but related rights concerning proposals at shareholders' meetings:

1. Right to Propose Agenda Items (議題提案権 - Gidai Teianken) - Article 303

This right allows eligible shareholders to demand that the company include specific matters as subjects for discussion and formal resolution on the agenda of an upcoming shareholders' meeting. For example, a shareholder could propose that "the amendment of Article X of the Articles of Incorporation" be an agenda item.

2. Right to Submit Specific Motions/Proposals on Agenda Items (議案提出権 - Gian Teianken) - Article 304

At the shareholders' meeting itself, any shareholder generally has the right to submit a specific motion (a concrete proposal for resolution) with respect to any matter that is validly on the meeting's agenda. This right is broader in terms of shareholder eligibility (no specific holding threshold or period is required by Article 304 itself for shareholders attending the meeting) but is exercised during the meeting concerning items already on the agenda.

3. Right to Demand Inclusion of Proposal Summary in Convocation Notice (議案通知請求権 - Gian Tsūchi Seikyūken) - Article 305

This is a particularly powerful right for eligible shareholders. It allows them to demand that the company include a summary of their specific proposals (motions) in the official notice of the shareholders' meeting (招集通知 - shōshū tsūchi) that is sent out to all shareholders. This ensures that all shareholders are aware of the shareholder's proposal(s) in advance of the meeting and can consider them when deciding how to vote or whether to grant a proxy.

Eligibility Requirements for Exercising Proposal Rights

To exercise the rights under Article 303 (proposing agenda items) and Article 305 (demanding inclusion of proposal summaries in the notice), shareholders must meet certain eligibility criteria, primarily concerning their shareholding and the timing of their request:

• Shareholding Thresholds (Article 303(2), Article 305(1) proviso):
  • For public companies (公開会社 - kōkai kaisha): A shareholder, or a group of shareholders acting in concert, must generally hold either:
    • One-hundredth (1/100) or more of the total voting rights of all shareholders; OR
    • Three hundred (300) or more voting rights. If the company has a unit share system (単元株制度 - tangenkabu seido), this typically means holding 300 units that confer voting rights.
  • For non-public companies (公開会社でない会社 - kōkai kaisha de nai kaisha - i.e., companies whose shares have transfer restrictions): The Companies Act does not impose specific shareholding thresholds for shareholders to propose agenda items under Article 303(1) or submit motions under Article 304 at the meeting itself. However, if shareholders of a non-public company wish to have their proposal summaries included in the convocation notice under Article 305, the same thresholds as for public companies (1% or 300 voting rights) apply.
• Continuous Holding Period (Article 303(2), Article 305(1) proviso):
  • For public companies, the shareholder(s) must have continuously held the requisite number of shares for at least six months prior to the relevant date (typically the record date for the shareholders' meeting). This period can be shortened or eliminated by the company's articles of incorporation. This requirement does not apply to shareholders of non-public companies.
• Timing of Submission (Article 303(2), Article 305(1)):
  • The request to include an agenda item (under Article 303) or the demand to include a summary of a proposal in the convocation notice (under Article 305) must be submitted to the company's directors at least eight weeks before the day of the shareholders' meeting. This lead time allows the company to consider the proposal, prepare materials, and include it in the meeting notice if it's valid.

Limitations on Shareholder Proposals

While shareholder proposal rights are robust, they are not unlimited. The Companies Act imposes certain restrictions:

1. Limit on the Number of Proposals (Article 305, Paragraph 4 – as amended in 2019)

A significant development from the 2019 amendments to the Companies Act was the introduction of a limit on the number of proposals a single shareholder (or a group of shareholders deemed to be acting in concert) can demand to be included in the meeting notice under Article 305. Generally, a shareholder may submit no more than ten proposals.

• Special Counting for Director/Auditor Nominations: There are specific rules for counting proposals related to the election of officers. For instance, all nominations for director positions submitted by a single shareholder are often treated as constituting one proposal for the purpose of this ten-proposal cap (Article 305(4) proviso, item 1). The case study in the PDF's Problem 26, where shareholder X submitted nine director/auditor nominations (which were accepted) plus one other proposal, reflects a scenario where this numerical limit and counting rule would be relevant.

2. Grounds on Which a Company Can Refuse to Include Shareholder Proposals

The Companies Act provides specific grounds upon which a company's directors can legitimately refuse a shareholder's demand to include an agenda item (under Article 303) or a proposal summary in the meeting notice (under Article 305). These grounds include:

1. Proposal is Unlawful or Violates the Articles of Incorporation (法令又は定款に違反する場合 - Hōrei mata wa Teikan ni ihan suru baai) (Article 303(3), Article 304 proviso, Article 305(2)):
   If the proposal itself, were it to be adopted, would result in an illegal act by the company or a violation of applicable laws or the company's own articles of incorporation, the company is not obliged to include it. (This does not apply if the proposal is precisely to amend the articles of incorporation to permit the action).
2. Substantially Identical Prior Proposal Recently Defeated (三年内否決同一議案 - Sannen-nai hiketsu dōitsu gian) (Article 305(2) incorporating the gist of Article 304 proviso):
   If a proposal that is substantially identical to the one currently being submitted was put to a vote at a shareholders' meeting within the preceding three years and failed to receive a certain level of support (typically, at least one-tenth (1/10) of the votes cast), the company can refuse to include it again, unless there has been a material change in circumstances since the prior vote.
3. Proposal Relates to Matters Outside the Powers of the Shareholders' Meeting (株主総会で決議する事項でない場合 - Kabunushi sōkai de ketsugi suru jikō de nai baai):
   This is a critical and often contentious basis for refusal. In a company with a board of directors, the shareholders' meeting has limited powers; it can only pass resolutions on matters stipulated in the Companies Act or in the company's articles of incorporation (Article 295, Paragraph 2). If a shareholder proposes a resolution on a matter that falls within the exclusive domain of the board of directors for business judgment and execution (e.g., ordinary business operations, specific day-to-day management decisions not requiring shareholder approval by law or the articles), the company can refuse to include it as a formal agenda item for resolution.
   This was precisely the ground Y社 used in the PDF's Problem 26 to refuse X's tenth proposal concerning an article amendment about engaging and remunerating a specific lawyer, arguing it improperly sought to give the shareholders' meeting decision-making authority over matters of business execution reserved for the board. The PDF's commentary for Problem 26 references a Tokyo High Court judgment from September 27, 2011 (Heisei 23), which likely touched upon the relatedness of proposals and when a company can refuse them on such grounds. The core issue is whether the subject matter of the proposed resolution is one on which shareholders can legally make a binding decision.
4. Proposal Exceeds the Numerical Limit (Article 305(4)): If a shareholder submits more than the permitted number of proposals (generally ten), the company can refuse the excess ones.

Consequences of Improper Refusal by the Company

If a company improperly refuses to include a valid shareholder proposal in the meeting agenda or convocation notice when it was legally obliged to do so, this constitutes a violation of law concerning the convocation procedures of the shareholders' meeting.

Such a procedural defect can be a ground for an aggrieved shareholder to file a lawsuit to rescind (cancel) resolutions passed at that shareholders' meeting (株主総会決議取消しの訴え - Kabunushi Sōkai Ketsugi Torikeshi no Uttae) under Article 831, Paragraph 1, Item 1 of the Companies Act.

For such a suit to succeed, the shareholder would need to demonstrate that:

• Their proposal was valid and met all eligibility requirements.
• The company improperly refused to include it.
• This refusal constituted a significant procedural flaw that potentially affected the overall fairness or outcome of the meeting or the specific resolutions being challenged.

The Tokyo High Court judgment of September 27, 2011, referenced in the Problem 26 commentary, is relevant here. It suggests that even if one shareholder proposal was improperly excluded, this might not automatically lead to the rescission of other unrelated resolutions passed at the same meeting, unless a close connection between the excluded proposal and the passed resolutions, or a broader unfairness in the meeting's conduct due to the exclusion, can be demonstrated.

Illustrative Analysis (Based on Problem 26)

Problem 26 describes shareholder X of Y社 (a listed company) submitting ten proposals. Nine are nominations for director and auditor positions (which Y社 accepts for the agenda). The tenth proposal (本件定款変更提案 - honken teikan henkō teian) is for an amendment to the articles of incorporation to stipulate: "The approval of engaging a legal advisor and the determination of their remuneration shall be made by a resolution of the shareholders' meeting." Y社 refuses to put this tenth proposal on the agenda, arguing that decisions about engaging specific lawyers and their fees are matters of business execution reserved for the board of directors, and therefore, a proposal to give this power to shareholders is improper. X wants to challenge the resolutions passed at the meeting (where X's director/auditor slate was likely defeated and management's slate elected) based on this refusal.

• X's Potential Claim: X would argue that Y社's refusal to include the tenth proposal (an article amendment proposal) was an unlawful defect in the meeting's convocation or procedure, thereby tainting all resolutions passed at that meeting.
• Y社's Defense: Y社 contends that the substance of the proposed article amendment—giving shareholders direct control over engaging specific legal counsel and setting their fees—impermissibly encroaches on the board's fundamental powers of business execution. Therefore, a proposal to enact such an article amendment is itself improper and excludable.
• Analysis:
  • Nature of X's Proposal: Crucially, X's proposal is to amend the articles of incorporation. The amendment of the articles is unequivocally a matter within the power of the shareholders' meeting (Article 466) and requires a special resolution.
  • The Core Issue: The dispute centers on whether the content of the proposed article amendment is itself legally permissible. Can the articles validly grant shareholders such specific powers over what would otherwise be considered a detailed operational or procurement decision by the board?
  • As discussed in the context of "Powers of a Shareholders' Meeting" (Problem 22), Article 295(2) allows articles to grant shareholders power beyond statutory minimums, but not to the extent of rendering the board's management role meaningless. The question here is whether requiring shareholder approval for specific lawyer engagement and fees crosses that line. While day-to-day legal counsel decisions might be operational, setting a framework or approving particularly significant legal engagements via the articles might be arguable. If the proposed article amendment is itself found to be a legally impermissible encroachment on the board's core non-delegable functions, then Y社 might have grounds to refuse the proposal to make such an amendment. However, if the amendment is deemed a permissible way to structure corporate governance regarding significant legal expenditures or appointments, then Y社's refusal would be improper. This is a nuanced line-drawing exercise.

Brief Comparison with U.S. Shareholder Proposal Rules (SEC Rule 14a-8)

The U.S. system for shareholder proposals in public companies, primarily governed by SEC Rule 14a-8, has both similarities and differences compared to Japan:

• Similarities: Both systems have eligibility criteria (e.g., ownership thresholds, holding periods), deadlines for submission, and specific grounds upon which companies can exclude proposals. Both aim to provide shareholders a voice.
• Differences:
  • Subject Matter Exclusions: U.S. Rule 14a-8 contains a more extensive list of specific substantive grounds for exclusion, such as proposals relating to "ordinary business operations," proposals that conflict with a company proposal to be submitted at the same meeting, proposals relating to specific amounts of cash or stock dividends, or proposals that have been substantially implemented. Japan's statutory grounds for refusal are somewhat more general (e.g., "unlawful," "violates articles," "not a matter for shareholder resolution").
  • SEC No-Action Process: A key feature of the U.S. system is the availability of an SEC staff "no-action letter" process. Companies intending to exclude a shareholder proposal typically seek a no-action letter from the SEC staff, indicating the staff will not recommend enforcement action if the proposal is omitted. This provides an informal, preliminary review mechanism. Japan does not have a direct administrative equivalent; disputes over exclusion often proceed directly to court if the shareholder wishes to challenge the company's decision.
  • Precatory vs. Binding Nature: Many shareholder proposals in the U.S., particularly those on social or environmental policy, are "precatory" (non-binding recommendations to the board). In Japan, proposals submitted under Articles 303-305, if they concern matters within the shareholders' meeting's competence, generally aim for legally binding resolutions.

Conclusion

Shareholder proposal rights under the Japanese Companies Act offer a significant avenue for shareholders to engage in corporate governance, influence company policy, and ensure management accountability. These rights include proposing agenda items, submitting specific motions, and having proposal summaries included in the official meeting notice. However, these rights are balanced by clear eligibility criteria regarding shareholding, holding periods, and submission deadlines, as well as a limit on the number of proposals. Companies also have specific statutory grounds to refuse proposals, most notably if they are unlawful, violate the articles of incorporation, or pertain to matters outside the legitimate decision-making sphere of the shareholders' meeting. Improper refusal by a company can lead to the rescission of resolutions passed at the affected meeting, highlighting the importance for corporate management to handle shareholder proposals in good faith and in accordance with the law.