Roles and Responsibilities of Directors and the Board of Directors in Japan: What U.S. Companies Should Note in Subsidiary Management

In any Japanese Kabushiki Kaisha (K.K., or joint-stock company), directors (torishimariyaku) and, where established, the board of directors (torishimariyaku-kai) form the core of corporate management and oversight. Their roles, powers, duties, and liabilities are meticulously defined by the Japanese Companies Act (Kaisha-hō). For U.S. companies operating subsidiaries in Japan, a precise understanding of this legal framework is not merely advisable but essential for effective governance, risk mitigation, and ensuring the subsidiary operates in compliance with local laws. This article provides an in-depth exploration of the appointment, authority, duties, and responsibilities of directors and the board of directors in a Japanese K.K., highlighting key considerations for U.S. parent companies.

Directors (Torishimariyaku) in a Japanese K.K.

Directors are the primary individuals entrusted with the execution of the company's business. Their relationship with the company is generally governed by the rules of mandate (Article 330 of the Companies Act), akin to a principal-agent relationship.

Qualifications, Number, and Term of Office

1. Qualifications (Article 331, etc.):
   • Disqualification Grounds: Certain individuals are disqualified from serving as directors, such as corporations (as directorship is a personal role), individuals convicted of certain crimes, or those subject to bankruptcy proceedings who have not had their rights restored. Revisions to the Companies Act (effective from a date to be set by cabinet order up to June 11, 2024, related to the 2019 amendments) have changed the treatment of individuals under adult guardianship or curatorship, generally allowing them to serve as directors under specific conditions involving the consent or actions of their guardians/curators.
   • Prohibition on Concurrent Posts: Directors cannot concurrently serve as statutory auditors, accounting advisors, or accounting auditors of the same company due to inherent conflicts in their respective roles. However, a director can also be an employee of the company (an "employee-兼務-director" - shiyōnin-kenmu-torishimariyaku).
   • Restrictions by Articles of Incorporation: While companies can set additional qualifications in their articles of incorporation, public companies (kōkai kaisha) cannot restrict directorship to shareholders only (Article 331, paragraph 2).
   • Outside Directors (Shagai Torishimariyaku): The concept of "outside directors" is crucial, particularly for public companies and certain governance models. These are directors who meet specific independence criteria, not having been involved in the company's or its affiliates' executive management for a certain period. Recent amendments have made the appointment of at least one outside director mandatory for certain listed companies operating under a traditional board with statutory auditors structure.
   • Number of Directors: A K.K. must have at least one director. If a company has a board of directors, it must have three or more directors (Article 331, paragraph 5).
2. Term of Office (Article 332):
   • The standard term for directors is two years, more precisely, until the conclusion of the annual general shareholders' meeting for the last business year ending within two years from their appointment.
   • For non-public companies, the articles of incorporation can extend this term up to a maximum of ten years. This flexibility is not available to public companies, where shorter, more frequent shareholder re-approval is deemed necessary.
   • The term can also be shortened by the articles of incorporation or a resolution of the shareholders' meeting.

Appointment and Dismissal

1. Appointment (Articles 329, 341):
   • Directors are appointed by a resolution of the shareholders' meeting. Typically, an ordinary resolution suffices, but Article 341 imposes a special requirement for the quorum: the articles of incorporation cannot lower the quorum for electing directors to less than one-third of the total voting rights (this is often called a "modified ordinary resolution").
   • The cumulative voting system (Article 342), which can help minority shareholders elect a director when multiple directors are being elected simultaneously, is available by default unless excluded by the articles of incorporation (which is common practice).
   • Appointment is effected by the shareholders' resolution and the appointee's acceptance, forming a mandate agreement with the company.
2. Dismissal (Articles 339, 854):
   • Directors can be dismissed at any time by a resolution of the shareholders' meeting (Article 339, paragraph 1). The resolution required is generally an ordinary one (or a modified ordinary one per Article 341), though a special resolution is needed to dismiss a director elected by cumulative voting.
   • No Cause Required, but Compensation for Dismissal Without Justifiable Grounds: While "cause" is not legally required for dismissal by shareholders, if a director is dismissed before the expiration of their term without "justifiable grounds" (seitō na riyū), the director is entitled to claim damages from the company, typically equivalent to the remuneration they would have received for the remainder of their term (Article 339, paragraph 2). "Justifiable grounds" generally include misconduct, serious breach of duties, or incapacity (e.g., Supreme Court judgment, January 21, 1982).
   • Dismissal by Lawsuit (Article 854): If a director has engaged in misconduct or a serious violation of laws or the articles of incorporation, but a shareholders' meeting fails to dismiss them, shareholders holding a certain percentage of shares can file a lawsuit seeking the director's removal.
3. Vacancies and Interim Measures:
   If a director's position becomes vacant (e.g., due to resignation, death, or expiry of term) and the number of directors falls below the statutory minimum or the number prescribed in the articles, measures must be taken.
   • A director whose term has expired or who has resigned continues to have the rights and duties of a director until a successor is appointed, if necessary (Article 346, paragraph 1).
   • A court may appoint a temporary director (ichiji torishimariyaku) upon application by an interested party if deemed necessary (Article 346, paragraph 2).
   • The company can also appoint alternate directors (hoketsu torishimariyaku) at a shareholders' meeting to fill future vacancies (Article 329, paragraph 3).
   • In cases of disputes over a director's status (e.g., a lawsuit challenging their election or seeking their removal), a court can issue a provisional order suspending the director from their duties and appoint an acting director (shokumu daikōsha) under the Civil Provisional Remedies Act.

Authority of Directors (in Companies Without a Board)

In a K.K. that does not have a board of directors, directors are directly responsible for executing the company's business (Article 348, paragraph 1).

• If there is only one director, that director makes all business decisions and represents the company.
• If there are multiple directors, business decisions are generally made by a majority vote of the directors, unless the articles of incorporation provide otherwise (Article 348, paragraph 2). Each director generally has representative authority (daihyōken), though a specific representative director can be designated.
• Certain important matters, such as the appointment/dismissal of managers (shihainin) or the establishment of internal control systems, cannot be delegated to individual directors and require a collective decision (Article 348, paragraph 3).

The Board of Directors (Torishimariyaku-kai) in a Japanese K.K.

For companies that have a board of directors (mandatory for public companies, optional for non-public ones), the board becomes the central institution for management decision-making and oversight.

Nature and Composition

The board of directors is a collective body composed of all directors of the company. As noted, it must consist of at least three directors.

Powers and Responsibilities (Article 362)

1. Decision-making on Important Business Matters: The board has the authority to make decisions on the execution of the company's business, except for matters reserved for the shareholders' meeting by law or the articles of incorporation. In practice, many day-to-day operational decisions are delegated to representative directors or other executive directors.
   • Non-delegable Matters (Article 362, paragraph 4): The Companies Act specifies certain "important business execution" matters that cannot be delegated by the board to individual directors and must be decided by the board itself. These include:
     • Disposition and acquisition of important property.
     • Borrowing of substantial amounts of money.
     • Appointment and dismissal of important employees, such as managers (shihainin).
     • Establishment, alteration, or abolition of important organizational units, such as branches.
     • Matters concerning the issuance of corporate bonds.
     • Establishment of an internal control system (naibu tōsei shisutemu).
     • Partial exemption of director liability based on a provision in the articles of incorporation.
       The determination of what constitutes "important" or "substantial" often requires a comprehensive assessment considering factors like the value of the asset/loan in relation to the company's total assets, the nature of the transaction, and the company's past practices (e.g., Supreme Court judgment, January 20, 1994, Minshu Vol. 48, No. 1, p. 1).
2. Supervision of Directors' Execution of Duties: A core function of the board is to supervise the performance of duties by individual directors, particularly the representative director(s) and any other directors involved in business execution. Directors executing business must report to the board on the status of their duties at least once every three months (Article 363, paragraph 2). This supervision covers not only the legality but also the appropriateness of their actions.
3. Appointment and Dismissal of Representative Directors: The board has the exclusive authority to appoint from among its members, and to dismiss, the Representative Director(s) who will have the authority to represent the company externally (Article 362, paragraph 2, item 3 and paragraph 3).

Operation of the Board of Directors

• Convocation (Articles 366, 368):
  • Any director can, in principle, convene a board meeting, although it's common for the articles or a board resolution to designate a specific convener (often the Representative Director). A director not so designated can request the designated convener to call a meeting.
  • Notice of a board meeting must generally be given at least one week before the meeting (this can be shortened by the articles). Unlike shareholders' meetings, the notice need not be in writing or state the agenda.
  • If statutory auditors are in place, they must also be notified and are entitled (and often obligated) to attend and state their opinions.
  • The convocation procedure can be omitted with the unanimous consent of all directors and statutory auditors (if any).
• Resolutions (Article 369):
  • Each director has one vote. Proxy voting is not permitted, as directors are expected to participate and deliberate personally.
  • Quorum: A majority of directors entitled to participate in the vote must be present.
  • Majority: Resolutions are passed by a majority vote of the directors present.
  • Directors with a Special Interest: A director who has a "special interest" (tokubetsu no rigai kankei) in a particular resolution cannot participate in the vote on that matter (Article 369, paragraph 2). Such a director is also excluded from the count for quorum purposes for that resolution. This rule aims to prevent conflicts of interest from tainting board decisions (e.g., a director voting on a transaction between the company and themselves). Whether a "special interest" exists in specific scenarios, such as the dismissal of a representative director, has been a subject of case law (e.g., Supreme Court judgment, March 28, 1969, Minshu Vol. 23, No. 3, p. 645, found a special interest in the case of a representative director's dismissal).
• Special Directors System (Article 373): For certain large companies (6+ directors, including at least one outside director), the board can delegate decisions on (i) the disposition/acquisition of important property and (ii) substantial borrowings to a pre-selected committee of three or more "special directors." This is designed to allow for more agile decision-making on these specific matters.
• Omission of Resolutions (Written Resolutions - Article 370): If permitted by the articles of incorporation, a board resolution can be deemed to have been passed if all directors eligible to vote on a proposal express their consent in writing or by electronic means, and if the statutory auditors (if any) do not raise an objection. Similarly, reporting obligations to the board can be satisfied by notifying all directors and auditors, except for the mandatory periodic reports on business execution by representative directors (Article 372).
• Minutes (Article 369, paragraph 3; Article 371): Minutes of board meetings must be prepared, and attending directors and statutory auditors must sign or affix their names and seals (or apply electronic signatures). A director who does not record an objection in the minutes is presumed to have assented to the resolution (Article 369, paragraph 5). The minutes must be kept at the head office for ten years and are subject to inspection by shareholders (with court permission for companies with statutory auditors whose scope is not limited to accounting), creditors (with court permission), and parent company shareholders (with court permission).

Representative Director (Daihyō Torishimariyaku) in Companies with a Board (Articles 362(3), 363)

• Appointment and Role: The board of directors must appoint one or more Representative Directors from among the directors. The Representative Director has the authority to represent the company externally in all judicial and extra-judicial matters related to its business and to execute the board's decisions internally (Article 349, paragraph 4).
• Internal Limitations on Authority: While the Representative Director's authority is comprehensive, the company may internally impose limitations (e.g., requiring board approval for transactions above a certain value). However, such internal limitations generally cannot be asserted against a third party acting in good faith (i.e., without knowledge of the limitation) (Article 349, paragraph 5).
• Abuse of Representative Authority: If a Representative Director acts ostensibly within their authority but for their own personal benefit or that of a third party, to the detriment of the company, the transaction's validity with respect to the third party depends on the third party's knowledge (or ability to know) of the director's improper purpose (Supreme Court judgment, September 5, 1963, Minshu Vol. 17, No. 8, p. 909). The Civil Code (Article 107 concerning abuse of agency power) may also be relevant.
• Apparent Representative Directors (Hyōken Daihyō Torishimariyaku) (Article 354): If a company allows a director who does not have representative authority to use a title such as "President" or "Vice-President" which suggests representative authority, the company may be estopped from denying that director's authority against a third party who relied on that title in good faith. The relationship between this doctrine and the public notice effect of company registration (which lists actual representative directors) has been a point of legal discussion, with courts often prioritizing the protection of third parties who relied on the apparent authority.

Liability for Actions Taken Without Proper Board Resolution

If a Representative Director undertakes a significant transaction that legally requires board approval (e.g., disposition of important assets) without obtaining such approval, the validity of the transaction with the third party can be contentious. Case law has taken different approaches depending on the nature of the transaction and the third party's awareness:

• For disposition of important assets without board approval, the Supreme Court (judgment, September 22, 1965, Minshu Vol. 19, No. 6, p. 1656) held the transaction is generally valid unless the third party knew or should have known of the lack of board approval.
• For transactions explicitly requiring shareholder approval (like the transfer of the entire business), actions taken without it are often deemed void irrespective of the third party's knowledge.
• For self-dealing transactions requiring board approval, the transaction is voidable by the company unless the third party was unaware of the lack of approval and not grossly negligent.

Duties and Liabilities of Directors

Directors owe significant duties to the company, and breaches can lead to substantial personal liability.

Duty of Care (Zenkan Chūi Gimu) and Duty of Loyalty (Chūjitsu Gimu) (Articles 330, 355; Civil Code Article 644)

1. Duty of Care (Good Manager's Care): Directors must manage the company's affairs with the care of a good manager, which is generally interpreted as the level of attention and prudence that an ordinarily skillful and diligent person would exercise in a similar position under similar circumstances.
2. Duty of Loyalty: Directors must comply with laws, the articles of incorporation, and resolutions of shareholders' meetings, and perform their duties faithfully for the benefit of the company (Article 355). The Supreme Court has stated that this duty of loyalty is essentially an elaboration of the duty of care, not a separate, higher standard (judgment, June 24, 1970, Minshu Vol. 24, No. 6, p. 625).
3. Supervisory Duty: Directors, particularly those on the board, have a duty to supervise the conduct of other directors and employees. This includes establishing and overseeing adequate internal control systems (mandatory for Large Companies under Articles 348(3)(iv) and 362(4)(vi)).
4. Business Judgment Rule (Keiei Handan Gensoku): Japanese courts generally afford directors broad discretion in their business judgments. A director will not be held liable for mere errors in judgment if a decision was made in good faith, with due care (i.e., after reasonable investigation and deliberation), and with a rational basis. Liability typically arises only if the decision-making process or the substance of the decision was "grossly unreasonable" (e.g., Supreme Court judgment, July 15, 2010, Hanrei Jihō No. 2091, p. 90).

Regulations on Conflicts of Interest

To prevent directors from prioritizing their personal interests over the company's, the Companies Act imposes specific approval requirements for:

1. Competing Transactions (Kyōgyō Torihiki) (Articles 356(1)(i), 365(1)): A director wishing to engage in a transaction for their own account or for a third party that falls within the scope of the company's business must obtain prior approval from the shareholders' meeting (if no board) or the board of directors (if there is a board). The director must disclose all material facts about the transaction. If an unapproved competing transaction causes damage to the company, the profit earned by the director or third party is presumed to be the amount of the company's damages (Article 423, paragraph 2).
2. Self-Dealing Transactions (Rieki Sōhan Torihiki) (Articles 356(1)(ii)-(iii), 365(1)): Transactions between a director and the company (direct self-dealing), or transactions between the company and a third party where the director has a conflicting interest (indirect self-dealing, e.g., the company guaranteeing a director's personal debt), also require prior approval from the shareholders' meeting or board. The interested director cannot vote on the approval. An unapproved self-dealing transaction is generally voidable by the company, but the company may not be able to assert its invalidity against a third party who was unaware of the lack of approval and not grossly negligent. A director engaging in an approved self-dealing transaction is presumed to have breached their duty of care if the company suffers damages, unless they prove otherwise (Article 423, paragraph 3). For direct self-dealing transactions for the director's own account, the director can be held liable without proof of negligence (Article 428).

Regulation of Director Remuneration (Article 361, etc.)

To prevent directors from setting excessive compensation for themselves ("self-dealing" in remuneration), director remuneration (including salary, bonuses, retirement allowances, stock options, and other proprietary benefits received in consideration of the execution of duties) must be fixed by the articles of incorporation or by a resolution of the shareholders' meeting.

• It is common practice for the shareholders' meeting to approve an aggregate upper limit for all directors' remuneration, with the specific allocation among individual directors delegated to the board of directors (or a compensation committee in certain governance models).
• Recent amendments (from the 2019 reform) require certain listed companies to establish and disclose a policy regarding the determination of individual directors' remuneration. Specific rules also now apply to the granting of stock options or shares as remuneration, aiming for greater transparency.
• Disclosure of remuneration is required in shareholders' meeting reference documents, annual business reports, and, for listed companies, in securities reports under the Financial Instruments and Exchange Act.

Liability of Directors

1. Liability to the Company (Article 423): Directors are liable to compensate the company for any damages it suffers as a result of their neglect of duties (ninmu ketai). This includes breaches of the duty of care, duty of loyalty, or specific statutory obligations. Multiple directors can be held jointly and severally liable.
2. Liability to Third Parties (Article 429): Directors can also be held liable to third parties (e.g., creditors, transaction counterparties, other shareholders who suffer direct damage) for damages caused by their willful misconduct or gross negligence in the performance of their duties. This statutory third-party liability is distinct from general tort liability. It has been applied to various situations, including misleading financial disclosures or reckless management leading to insolvency. The liability of "nominal directors," directors merely registered as such, or "de facto directors" has also been a subject of extensive case law.

Shareholder Derivative Suits and Indemnification/D&O Insurance

1. Shareholder Derivative Suits (Kabunushi Daihyō Soshō) (Article 847 et seq.): If the company fails to pursue claims against its directors for breach of duty, shareholders (meeting certain criteria, such as a six-month holding period for public company shares) can bring a derivative lawsuit on behalf of the company. This is a key mechanism for holding directors accountable. The procedure involves first demanding that the company file suit.
2. Exemption and Limitation of Directors' Liability (Articles 424-427):
   • Liability can be exempted entirely with the unanimous consent of all shareholders.
   • Partial exemption down to a statutory minimum liability amount (calculated based on remuneration) is possible by a special resolution of the shareholders' meeting, or by board resolution (or majority director consent if no board) if authorized by the articles of incorporation (with consent from statutory auditors).
   • Companies can also enter into liability limitation agreements with non-executive directors, statutory auditors, and accounting auditors, limiting their liability for damages caused by negligence to a pre-agreed amount (not less than the statutory minimum), if authorized by the articles of incorporation.
3. Company Indemnification (Kaisha Hoshō) (Article 430-2, 2019 Amendment): The Companies Act now explicitly regulates indemnification agreements between a company and its directors. These agreements can cover expenses incurred by directors in defending against claims related to their duties (defense costs) and compensation or settlement amounts paid to third parties. Such agreements require approval from the shareholders' meeting or board and are subject to certain limitations (e.g., indemnification for losses arising from willful misconduct or gross negligence in causing damage to the company itself is generally not permitted for the damage portion, though defense costs might be covered differently).
4. Directors and Officers (D&O) Liability Insurance (Yakuin-tō Baishō Sekinin Hoken) (Article 430-3, 2019 Amendment): The Act also now provides a framework for companies to enter into D&O liability insurance contracts for their directors. The decision to enter into such a contract and the specifics of the insurance policy generally require approval from the shareholders' meeting or board. Disclosure of certain aspects of the D&O insurance policy is also required in the annual business report for public companies.

Conclusion

The roles, powers, duties, and responsibilities of directors and the board of directors are central to the functioning and governance of any Japanese Kabushiki Kaisha. The legal framework is designed to grant management the necessary authority to run the business efficiently while simultaneously imposing duties and potential liabilities to ensure accountability to the company and its shareholders. For U.S. companies with Japanese subsidiaries, navigating this framework effectively requires a deep understanding of these rules, from the appointment process and board operations to the intricacies of director duties, conflict-of-interest regulations, and the mechanisms for liability and its mitigation. Proper structuring of subsidiary governance, diligent oversight, and awareness of these Japanese legal norms are critical for success and compliance in the Japanese market.