Public vs. Private Companies in Japan: What are the Key Regulatory Differences U.S. Businesses Need to Know?

Japanese Attorney at Law - Bengoshi L.L.

28 May 2025 • 9 min read

Japan's Companies Act (会社法 - Kaisha-hō) establishes a sophisticated framework for corporate regulation, a key feature of which is the differentiated treatment of companies based on their characteristics. Among these, the distinction between "public companies" (公開会社 - kōkai kaisha) and "non-public companies" (非公開会社 - hikōkai kaisha) is fundamental, carrying significant implications for corporate governance, share transferability, and capital-raising activities. Understanding these differences is crucial for any U.S. business contemplating operations in Japan, whether through establishing a subsidiary, entering into a joint venture, or acquiring a Japanese entity.

Historical Context and Evolution of Differential Regulation in Japan

The approach of applying different sets of rules to different types of companies, known as "differential regulation" (区分規制 - kubun kisei), has evolved over time in Japan. Historically, Japanese corporate law featured a dual system with the Commercial Code governing kabushiki kaisha (stock companies, often larger and publicly traded) and a separate Limited Liability Company Act (有限会社法 - Yūgen Kaisha Hō, enacted in 1938) catering to smaller, closely-held businesses.

However, after World War II, many businesses, even small ones, opted for the kabushiki kaisha structure, partly due to perceived social standing and tax advantages, leading to a large number of small, closed stock companies operating under rules primarily designed for large, listed enterprises. To address this mismatch, amendments to the Commercial Code, particularly from 1974 onwards, began to introduce more internal differentiations within the kabushiki kaisha framework, creating specific provisions for smaller, non-public companies that gradually resembled those in the Limited Liability Company Act.

This convergence culminated in the enactment of the Companies Act in 2005 (effective 2006). This landmark legislation abolished the Limited Liability Company Act, integrating yūgen kaisha into the kabushiki kaisha framework as a special type of stock company (特例有限会社 - tokurei yūgen kaisha) subject to transitional rules, while significantly strengthening the system of differential regulation within the kabushiki kaisha structure itself. The primary axes for this differentiation today are whether a company is "public" or "non-public," and whether it qualifies as a "large company."

Defining "Public Company" (公開会社) and "Non-Public Company" (非公開会社)

Under the Companies Act, the classification of a company as "public" or "non-public" hinges entirely on the transferability of its shares as stipulated in its articles of incorporation (定款 - teikan).

A "public company" (公開会社 - kōkai kaisha) is defined as a stock company that has not stipulated in its articles of incorporation that the acquisition of all or part of its shares by transfer requires the approval of the company (Article 2, item 5 of the Companies Act). Essentially, if a company issues even one class of shares that can be freely transferred without company approval (though it might have other classes with restrictions), it is a public company. It's a common misconception to equate "public company" directly with "listed company" (上場会社 - jōjō kaisha). While all listed companies are indeed public companies because stock exchange rules prohibit transfer restrictions on listed shares, not all public companies are listed. There are unlisted public companies, such as those preparing for an IPO or older companies that have not adopted transfer restrictions for all their shares.

Conversely, a "non-public company" (非公開会社 - hikōkai kaisha), sometimes referred to as a "private company" or a "closely-held company," is a stock company where the articles of incorporation stipulate that the acquisition of all its shares by transfer requires the approval of the company. This is often referred to as a "company with restrictions on the transfer of all shares" (全株式譲渡制限会社 - zen kabushiki jōto seigen kaisha). Such companies are typical examples of what legal scholarship terms "closed companies" (閉鎖会社 - heisa kaisha), where shareholders wish to prevent outsiders from easily joining and influencing management. These companies often exhibit characteristics such as:

Shareholders, or many of them, are involved in management.
A relationship of trust often exists among shareholders.
A small number of shareholders.
Shares are rarely traded.

This fundamental distinction in share transferability is the starting point for a cascade of regulatory differences.

Key Regulatory Differences

The classification as a public or non-public company profoundly impacts several key areas of corporate operation and governance:

1. Corporate Governance Structures (機関設計 - Kikan Sekkei)

The Companies Act mandates or allows for different corporate governance structures depending on whether a company is public or non-public.

Public Companies:
The regulatory framework for public companies is designed with the understanding that there is often a separation of ownership and management, potentially leading to a need for stronger shareholder protection and oversight mechanisms against managerial self-interest.

Board of Directors (取締役会 - torishimariyaku-kai): Public companies are generally required to have a board of directors (Article 327, paragraph 1, item 1).
Statutory Auditors/Committees: In addition to a board, public companies (unless they are small and meet certain other conditions) must typically establish either:
- An Audit & Supervisory Board (監査役会 - kansayaku-kai) (consisting of statutory auditors (監査役 - kansayaku) elected by shareholders).
- A Nominating Committee, etc. (指名委員会等 - shimei iinkai tō) (comprising nominating, audit, and compensation committees, with a majority of each committee being outside directors).
- An Audit and Supervisory Committee (監査等委員会 - kansa tō iinkai) (a committee of the board, a majority of whose members must be outside directors, that handles audit functions).
  The rationale is that in public companies, particularly listed ones with dispersed shareholdings, individual shareholders may lack the incentive or information to effectively monitor management (the "rational apathy" problem). Thus, these structures aim to provide institutionalized oversight.
Shareholders' Meeting Powers: The powers of the shareholders' meeting in public companies with a board of directors are, by default, limited to matters stipulated in the Companies Act or the articles of incorporation (Article 295, paragraph 2). Day-to-day business decisions and many strategic ones fall to the board.

Non-Public Companies:
Non-public companies, often characterized by a closer alignment of ownership and management, are afforded greater flexibility in their governance structures.

Board of Directors: The establishment of a board of directors is optional for non-public companies (unless they are "companies with company auditors" that are not "large companies" and meet other specific criteria). They can operate with just directors and a shareholders' meeting.
Institutional Design Flexibility: Non-public companies have considerable freedom in designing their internal organization. The mandatory requirement for an audit and supervisory board or committees seen in public companies does not generally apply.
Shareholders' Meeting Powers: If a non-public company does not establish a board of directors, its shareholders' meeting can, by default, resolve any matter concerning the company (Article 295, paragraph 1). Even if a board is established, the shareholders' meeting may retain broader powers than in a typical public company if the articles of incorporation so provide. This reflects the reality that shareholders in such companies are often directly involved in or very close to management.

This is the definitional criterion and a core difference:

Public Companies:
By definition, public companies do not have restrictions requiring company approval for the transfer of all their shares. This promotes liquidity and facilitates broader investment. While a public company can have certain classes of shares with transfer restrictions, at least one class must be freely transferable. For listed companies, free transferability is a stock exchange requirement.

Non-Public Companies:
All shares issued by a non-public company are subject to transfer restrictions requiring the company's approval (typically by the board of directors or, if no board exists, by a shareholders' meeting, as specified in the articles of incorporation). This mechanism allows existing shareholders to control who becomes a fellow shareholder, preserving the "closed" nature of the company and preventing unwelcome third parties from gaining influence. The process for seeking approval for a share transfer in a non-public company is detailed in Articles 136-145 of the Companies Act. If the company denies approval, it or a designated purchaser must buy the shares.

The procedures for raising capital through the issuance of new shares also differ significantly. (This area is more fully explored in Chapters 11 and 12 of the source material but is relevant here in the context of differential regulation.)

Public Companies:
Public companies generally enjoy greater flexibility in issuing new shares. Within the "authorized capital" (発行可能株式総数 - hakkō kanō kabushiki sōsū) limit stated in their articles of incorporation, the board of directors can typically decide to issue new shares (Article 201, paragraph 1). This allows for swift responses to market opportunities and funding needs. However, shareholder protection is provided through:

Restrictions on "Especially Advantageous Issuance" (有利発行規制 - yūri hakkō kisei): If shares are to be issued at a price that is "especially advantageous" to subscribers (i.e., significantly below fair market value), a special resolution of a shareholders' meeting is required, along with an explanation from the directors of the necessity for such an issuance (Article 199, paragraphs 2 and 3; Article 201, paragraph 1; Article 309, paragraph 2, item 5).
Limits on Increasing Authorized Capital: While the board can issue shares within the existing authorized limit, increasing that limit requires amending the articles of incorporation by a special shareholder resolution. Furthermore, the authorized capital cannot exceed four times the total number of issued shares (Article 113, paragraph 3, item 1).
Recent Regulations for Change of Control: The 2014 amendments introduced additional procedures if a share issuance would result in a subscriber (and its subsidiaries) holding a majority of the voting rights, requiring shareholder notification and potentially a shareholder vote if a significant minority objects (Article 206-2).

Non-Public Companies:
Reflecting the importance of maintaining existing shareholders' control and economic interests, share issuances in non-public companies are subject to stricter rules:

Shareholder Resolution Generally Required: As a general rule, the issuance of new shares (determining subscription requirements) requires a special resolution of a shareholders' meeting (Article 199, paragraph 2; Article 309, paragraph 2, item 5). This applies even if the issuance is not at an "especially advantageous" price, as any issuance to third parties can dilute the control and economic stake of existing shareholders.
Shareholder Allotment (株主割当て - kabunushi wariate) Exception: If new shares are offered to existing shareholders in proportion to their current holdings, the approval requirements can be somewhat relaxed. The articles of incorporation can even delegate the decision for such allotments to the directors (or the board) (Article 202, paragraph 3, items 1 and 2). However, even in shareholder allotments, a shareholder resolution is still generally the default.
The rationale here is that in non-public companies, the identity of shareholders and their relative stakes are paramount. Shares are often not liquid, making it difficult for shareholders to adjust their holdings or exit easily if they disagree with a new share issuance.

The "Large Company" (大会社 - Dai-Kaisha) Distinction: Another Layer of Regulation

Independent of the public/non-public classification, the Companies Act also categorizes companies as "large companies" or "non-large companies," imposing additional obligations on the former.

A "large company" (大会社 - dai-kaisha) is defined as a stock company that meets either of the following criteria based on its most recent annual balance sheet (Article 2, item 6):

Its stated capital (資本金 - shihonkin) is ¥500 million or more.
Its total liabilities (負債 - fusai) are ¥20 billion or more.

The primary implications of being classified as a large company relate to financial reporting and auditing:

Mandatory External Audit: Large companies are required to appoint an independent accounting auditor (会計監査人 - kaikei kansanin), which must be a certified public accountant or an audit firm (Article 328, paragraphs 1 and 2).
Associated Governance Requirements: This requirement for an external auditor also triggers further obligations regarding internal governance structures. For example, a large company must typically have an Audit & Supervisory Board, or be a company with an Audit and Supervisory Committee, or a company with a Nominating Committee, etc. (Article 327, paragraphs 3 and 5).

The rationale behind these stricter rules for large companies is the protection of their numerous stakeholders (including creditors and employees) who rely on the accuracy and reliability of financial information. Given their scale and complexity, the financial statements of large companies are deemed to require the scrutiny of accounting professionals, and the cost of such audits is considered a reasonable burden for entities of that size.

Practical Implications for U.S. Businesses

For U.S. corporate legal professionals and business executives, understanding these distinctions is vital when engaging with the Japanese market:

Establishing a Subsidiary: When setting up a Japanese subsidiary, the choice between structuring it as a non-public company (initially more common for wholly-owned subsidiaries) or a public company will determine its governance flexibility, share transferability, and future capital-raising options. Non-public status offers more control and simpler governance but can be less attractive if future IPOs or third-party investment is envisioned without ceding too much shareholder-level control over share issuances.
Joint Ventures: In joint ventures with Japanese partners, the classification of the JV entity will be a critical point of negotiation, affecting how control is shared, how additional funding is raised, and how exits might be structured. Share transfer restrictions in a non-public JV, for instance, would require careful drafting of shareholder agreements.
Mergers and Acquisitions: When acquiring a Japanese company, its status as public or non-public (and large or non-large) will dictate the due diligence focus concerning its governance setup and compliance. For example, acquiring a non-public company involves understanding its share transfer approval mechanisms and the rights of its existing shareholders regarding new share issuances.
Understanding Counterparties: Even when not directly investing, U.S. businesses dealing with Japanese companies can benefit from understanding their corporate structure. A non-public company's decisions, especially regarding significant investments or changes in control, may be heavily influenced by a small group of shareholders, potentially impacting long-term business relationships. The governance structure of a public company, particularly a large one with mandatory external audits, may offer a different level of transparency and perceived stability.

Conclusion

The Japanese Companies Act's system of differential regulation, particularly the distinction between public and non-public companies, as well as large and non-large companies, aims to tailor legal requirements to the diverse realities of business entities. While this creates a complex regulatory landscape, it is rooted in a logic that considers factors such as the separation of ownership and management, the number of stakeholders, the need for liquidity in shares, and the importance of managerial oversight. For U.S. businesses interacting with or operating within this framework, a clear grasp of these classifications and their consequences is an indispensable element of effective legal and strategic planning. Due to the intricacies involved, seeking specialized legal counsel is always recommended when navigating these corporate structures in Japan.