The inheritance of shares in a Japanese company, particularly when it results in co-ownership, presents a unique set of legal and practical challenges. For international businesses with Japanese subsidiaries, joint venture partners, or investments, understanding this landscape is crucial for smooth transitions, corporate governance, and dispute avoidance. This article explores the intricacies of share co-ownership (known in Japanese as 株式の準共有 - kabushiki no jun-kyōyū) under Japanese law, focusing on how rights are managed and the potential implications for stakeholders.

The Legal Foundation: Civil Code and Companies Act

When a shareholder in a Japanese company passes away, their shares become part of their estate and are typically transferred to their heirs. If there are multiple heirs, these shares are, until a formal division of the estate (遺産分割 - isan bunkatsu) is completed, held in co-ownership by the heirs in proportion to their statutory inheritance shares. This situation is governed by provisions in both the Japanese Civil Code (民法 - Minpō) concerning general co-ownership and specific rules within the Companies Act (会社法 - Kaishahō) addressing shares.

The Civil Code lays down the general principles for co-owned property. For instance, acts of preservation can be done by any co-owner, while acts of management typically require a majority based on the value of the co-owners' respective shares (Civil Code, Article 252). More significant changes or disposition of the co-owned property generally require the consent of all co-owners (Civil Code, Article 251).

However, the Companies Act introduces a critical provision, Article 106, specifically for the exercise of rights related to co-owned shares. This article aims to simplify the company's dealings with co-owning shareholders by preventing the company from having to engage with each co-owner individually for every shareholder matter.

Exercising Rights of Co-Owned Shares: The "Rights-Exerciser" System

Article 106, Paragraph 1 of the Companies Act stipulates: "Where shares are co-owned by two or more persons, if the co-owners do not designate one person from among themselves to exercise the rights relating to said shares and notify the stock company of the name of such person, they may not exercise the rights relating to said shares. Provided, however, that this shall not apply where the stock company consents to the exercise of such rights."

This provision establishes the "rights-exerciser" (権利行使者 - kenri kōshisha) system. The key takeaways are:

1. Designation and Notification: Co-owners must jointly select one individual (who is usually one of the co-owners) to act as the single point of contact for exercising shareholder rights (e.g., voting at shareholder meetings, receiving dividends, making shareholder proposals). They must then formally notify the company of this designated person.
2. Consequence of Non-Compliance: Failure to designate and notify means the co-owners, as a group, cannot exercise their shareholder rights. This is a significant point of leverage for companies to ensure orderly communication.
3. Company's Consent Exception: The company can, at its discretion, agree to allow the exercise of rights even if a rights-exerciser has not been formally designated and notified. However, this is an exception, and companies are generally not obliged to do so. A Supreme Court judgment on February 19, 2015 (Heisei 27), clarified that even if a company consents, the exercise of rights is not considered lawful if it does not comply with the Civil Code's provisions on co-ownership (e.g., if a single co-owner attempts to exercise rights without proper internal agreement among co-owners).

Internal Decision-Making Among Co-Owners

While Article 106 deals with how co-owned shares are represented to the company, the internal decision-making process among the co-owners themselves regarding how those rights should be exercised (i.e., how the rights-exerciser should vote or act) is primarily governed by the general co-ownership rules of the Civil Code.

• Designating the Rights-Exerciser: The Supreme Court, in a judgment dated January 28, 1997 (Heisei 9), held that the designation of the rights-exerciser can be determined by a majority of the co-owners based on the value of their respective shares in the co-owned stock. This means unanimous agreement is not necessarily required simply to appoint the representative.
• Instructing the Rights-Exerciser: Once appointed, the rights-exerciser is generally expected to act according to the instructions decided by the co-owners. For ordinary matters related to the management of the co-owned shares (such as how to vote on routine resolutions), decisions are typically made by a majority based on the value of their shares (Civil Code, Article 252). For actions that would fundamentally change or dispose of the shares (e.g., agreeing to a sale of all the co-owned shares), unanimous consent of all co-owners would generally be necessary (Civil Code, Article 251).

The rights-exerciser, in principle, acts as an agent for the entire group of co-owners. If this person acts beyond their authority or against the decisions of the co-owners, it can lead to internal disputes, though the company, if it has received proper notification of the rights-exerciser, can generally rely on that person's actions unless it is aware of the lack of authority or internal dispute. A Supreme Court case from April 14, 1978 (Showa 53), indicated that the rights-exerciser, in principle, exercises rights based on their own judgment, even if there's internal disagreement among co-owners, but this interpretation has been subject to further academic discussion emphasizing the representative nature of the role.

The Impact of the 2021 Civil Code Revisions on Co-Ownership

The Japanese Civil Code underwent significant revisions related to co-ownership, which came into effect on April 1, 2023 (though the law itself was promulgated in Reiwa 3, which is 2021). While these changes were broadly aimed at resolving issues with unidentified or unresponsive co-owners of real estate, some aspects can have implications for the management of co-owned property in general, including shares.

One notable change is the clarification regarding compensation when a co-owner uses the co-owned property in a manner exceeding their share (newly articulated in Civil Code Article 249, Paragraph 2). In the context of shares, if a majority faction of co-owners consistently makes decisions about the exercise of voting rights that benefit them while potentially disadvantaging a minority co-owner, or if the benefit derived from the shares (e.g., control premium in a sale scenario) is not equitably distributed, these revised Civil Code principles might provide clearer grounds for minority co-owners to seek recourse or compensation.

Furthermore, the revisions include new rules for managing co-owned property when a co-owner is unknown or their location cannot be ascertained, or when a co-owner fails to respond to calls for consultation. While these are more directly applicable to real estate, the underlying principle of facilitating better management of co-owned assets could influence how courts view prolonged deadlocks or obstructive behavior in the context of co-owned shares, potentially making it easier for remaining co-owners to take necessary managerial actions. The PDF article from Hogaku Kyoshitsu (September 2023) on "Inheritance of Shares—Focusing on Co-ownership of Shares" notes that these Civil Code revisions are relevant and their influence is a subject of current legal discussion.

Key Issues and Practical Challenges

Co-ownership of shares through inheritance can lead to several practical difficulties and potential disputes:

• Deadlocks and Disputes: If co-heirs have conflicting interests or cannot agree on how to exercise their rights (e.g., voting for directors, approving major transactions, or selling the shares), it can lead to a deadlock. This is particularly problematic if the co-owned block of shares is significant enough to influence company decisions. Resolving such deadlocks can be time-consuming and may require court intervention.
• Company's Administrative Burden: Even with a designated rights-exerciser, dealing with co-owned shares can be administratively more complex for the company than dealing with a single shareholder. Keeping track of underlying beneficial owners and managing communications can be cumbersome.
• Valuation Complexities: Determining the fair value of shares for inheritance tax purposes and for any subsequent division or sale among co-heirs can be challenging, especially for non-listed companies where market prices are unavailable.
• Business Succession in Family Companies: In family-owned businesses, the death of a founder or major shareholder can lead to shares being dispersed among multiple heirs. If these heirs have different visions for the company or lack business acumen, co-ownership can jeopardize the company's stability and continuity. The smooth transfer of management and control becomes a critical concern.
• Difficulty in Disposing of Shares: A single co-owner cannot unilaterally sell their individual interest in the co-owned shares without the consent of other co-owners if it amounts to a disposition of the co-owned property itself (as distinct from their share of the co-ownership). They might be able to sell their equitable interest in the co-ownership, but finding a buyer for such an interest can be difficult, and it doesn't resolve the co-ownership of the actual shares vis-à-vis the company. To sell the shares themselves, agreement is typically needed.
• Registration (Perfection) Issues: Upon inheritance, heirs should ideally update the shareholder registry (株主名簿 - kabunushi meibo) to reflect their ownership. While registration on the shareholder registry is the means by
  which a shareholder asserts their rights against the company (Companies Act Article 130), the process can be delayed if there are disputes among heirs about the division of the estate. Until the estate is formally divided and shares are registered in individual names, the shares remain in co-ownership. The 2018 Civil Code revisions (effective April 1, 2019) introduced Article 899-2, clarifying that statutory inheritance shares can be asserted against third parties without registration, but any division of inherited property that deviates from statutory shares must be registered to be asserted against third parties. For shares, this interplay with the shareholder registry and the concept of co-ownership pending division remains an important practical step.

Special Considerations for Non-Public and Closely-Held Companies

The challenges of share co-ownership are often magnified in non-public (unlisted) and closely-held companies, including many family businesses.

• Restrictions on Transfer: The articles of incorporation (定款 - teikan) of most non-public Japanese companies contain restrictions on the transfer of shares, requiring board or shareholder approval. While inheritance itself is not a "transfer" that requires such approval, any subsequent attempt by an heir (or a group of co-owning heirs) to sell the inherited shares to a third party would trigger these approval mechanisms.
• Company's Right to Demand Sale (for Non-Public Companies): The Companies Act (Articles 174-177) provides a mechanism for non-public companies whose shares are subject to transfer restrictions. If such shares are acquired by heirs through inheritance, the company can, if its articles of incorporation allow, demand that the heirs sell those shares back to the company or to a purchaser designated by the company. This is a tool that can be used to prevent unwanted outsiders from becoming shareholders or to consolidate ownership if shareholdings become too fragmented due to inheritance. However, it requires the company to have the financial resources to purchase the shares and for the articles to specifically provide for this.
• Shareholder Agreements: Proactive planning through shareholder agreements can sometimes mitigate co-ownership problems by, for example, including buy-sell provisions that are triggered upon the death of a shareholder, or by stipulating how shares should be voted if they become co-owned.
• Impact on Governance and Control: In small companies, even a minority block of co-owned shares can significantly impact governance if the co-owners are uncooperative or if their combined vote is needed for special resolutions.

Implications for Foreign Investors and Companies

For US and other foreign entities involved with Japanese companies, the potential for share co-ownership arising from inheritance has several implications:

• Due Diligence: When acquiring or investing in a Japanese company, particularly a non-public or family-owned one, due diligence should include an assessment of the current shareholding structure, the age and estate plans (if discernible) of key individual shareholders, and the company's articles of incorporation regarding share transfers and inheritance. The risk of future co-ownership and potential governance instability should be evaluated.
• Joint Ventures: In joint ventures with Japanese individual partners or family companies, the death of a key individual shareholder on the Japanese side can lead to their shares being co-owned by heirs. This can affect decision-making within the joint venture and potentially alter the relationship dynamics. Joint venture agreements should ideally anticipate such scenarios, perhaps including rights of first refusal or buyout options.
• Subsidiary Management: If a US company has Japanese individuals as minority shareholders in its Japanese subsidiary, understanding these rules is important for managing shareholder relations and anticipating potential complexities if those individuals pass away.
• Dispute Resolution: Be aware that disputes among co-owning heirs over shares can spill over and affect the company's operations or stability. Having clear dispute resolution mechanisms within shareholder agreements or the company's foundational documents can be beneficial.

Conclusion

The co-ownership of shares resulting from inheritance is a multifaceted issue in Japanese corporate law, blending principles from the Civil Code and the Companies Act. The system of appointing a rights-exerciser is designed to streamline the company's interactions with co-owners, but internal decision-making among those co-owners can still be fraught with challenges, especially in the context of family businesses or disputed estates. Recent Civil Code revisions may offer some new avenues for managing co-owned property, but their full impact on share co-ownership remains to be seen through evolving practice and jurisprudence.

For US corporate legal professionals and business people engaged with Japan, a proactive understanding of these rules is essential. It informs due diligence, structuring of investments and joint ventures, and overall risk management when dealing with Japanese companies where individual shareholdings are significant. Seeking specialized legal advice is paramount when navigating the complexities of share inheritance and co-ownership in the Japanese legal environment.