Setting Up or Dealing With a Company in Japan: Which Country's Corporate Law Applies?

When businesses expand globally or engage in cross-border transactions, a fundamental question often arises: which country's laws will govern the existence, capacity, and internal affairs of a corporate entity involved? This is particularly pertinent when setting up a subsidiary, branch, or joint venture in Japan, or when contracting with a Japanese or foreign company that has Japanese operations. Japanese private international law provides a framework for determining the "personal law" or governing law of a corporation, which has significant implications for its legal status and operations.

This article delves into how Japanese law approaches this issue, focusing on the determination of a corporation's governing law and the regulations applicable to foreign corporations active in Japan.

Determining the "Personal Law" of a Corporation in Japanese Private International Law

In Japanese private international law, the law that governs the fundamental aspects of a corporation's existence and internal organization is often referred to as its jūzoku-hō (従属法), or "governing law." This is analogous to the "personal law" of a natural person. The jūzoku-hō dictates matters such as the valid incorporation of the company, its legal personality, its internal structure (e.g., powers of directors, rights of shareholders), and its dissolution.

Unlike some other areas of private international law, Japan's Act on General Rules for Application of Laws (AGRAL) does not contain an explicit provision specifying how the jūzoku-hō of a corporation is determined. This has been left to scholarly interpretation and judicial practice.

The Prevailing Principle: Lex Incorporationis (Law of the Place of Incorporation)

Two main doctrines compete internationally for determining a corporation's personal law:

1. Lex Incorporationis (設立準拠法主義 - setsuritsu junkyo-hō shugi): The law of the state or jurisdiction under whose laws the company was incorporated.
2. Siège Réel or Real Seat Doctrine (本拠地法主義 - honkyo-chi-hō shugi): The law of the state where the company has its actual head office or principal place of administration.

In Japan, the prevailing view among scholars and in practice strongly favors the lex incorporationis. This approach offers several advantages:

• Certainty and Predictability: The place of incorporation is usually a clear and easily ascertainable fact, providing legal certainty for the corporation itself and for third parties dealing with it.
• Party Autonomy: It allows founders of a company a degree of freedom in choosing the legal system under which they wish to incorporate, enabling them to select a corporate law regime that best suits their business needs.
• Consistency with Domestic Legislation: Japan's Companies Act (Kaisha-hō, 会社法) aligns with this approach. For instance, Article 2, item 2 of the Companies Act defines a "foreign company" as "a juridical person established in accordance with the laws and regulations of a foreign state or any other foreign organization." Furthermore, when a foreign company registers to do business in Japan, it must specify "the law of the foreign state under which it was established" (Companies Act, Article 933, paragraph 2, item 1).

While the siège réel doctrine aims to connect a company to the jurisdiction where its actual business is managed, thus potentially preventing the evasion of stricter local laws, it can lead to uncertainty if the administrative center moves or is difficult to pinpoint. The lex incorporationis approach, while potentially allowing for incorporation in jurisdictions with laxer regulations (a "race to the bottom" concern), is generally seen in Japan as providing a more stable and predictable basis for international corporate activity. The regulation of the substantive activities of foreign companies within Japan is then addressed through separate domestic regulations, as discussed later.

Scope of Application of the Governing Law (Jūzoku-hō)

Once the jūzoku-hō (determined by the lex incorporationis) is identified, it governs a wide range of issues concerning the corporation:

1. Establishment, Existence, and Dissolution: Whether the company was validly formed, its continued legal existence, the requirements for its formation, and the procedures for its dissolution and liquidation are all determined by its jūzoku-hō.
2. Internal Affairs: This includes the structure of corporate organs (e.g., board of directors, general shareholders' meetings), their respective powers and duties, the rights and obligations of shareholders vis-à-vis the company and each other, and matters related to share capital. For example, whether a director was validly appointed or has the authority to bind the company in a particular transaction is primarily a question for the jūzoku-hō.
3. Legal Capacity (Scope of Corporate Personality - Kenri Nōryoku, 権利能力): The extent of the company's legal personality – what rights it can hold and what obligations it can incur – is fundamentally determined by its jūzoku-hō. If the jūzoku-hō restricts the company's capacity (e.g., by limiting its objects clause strictly), that restriction generally applies. There is some academic debate on whether, for the protection of third parties in transactions, a foreign company might be deemed to have the capacity of a similar Japanese company if the transaction occurs in Japan (an analogy to AGRAL Article 4(2) for natural persons). However, a strong view suggests that the jūzoku-hō should govern, considering the interests of shareholders and creditors of the foreign company who rely on its constitutive law.
4. Capacity to Act (Representative Authority of Corporate Organs - Kōi Nōryoku, 行為能力): The authority of individuals (e.g., directors, officers) to act on behalf of and bind the corporation is also, in principle, governed by the jūzoku-hō. However, when a representative of a foreign company engages in a transaction in Japan, and the extent of their authority is disputed by a third party, strict application of the jūzoku-hō could undermine transactional security. Thus, a prominent view, supported by legal scholarship, suggests that the rules on the scope and limitations of representative authority may be subject to the law of the place of the transaction (lex loci actus, i.e., Japanese law if the act occurs in Japan), by analogy to AGRAL Article 4(2) which protects transactions with natural persons. This aims to protect third parties who reasonably rely on the apparent authority of the representative under local law.
5. Tortious Capacity of a Corporation: Whether a corporation can be held liable for torts committed by its representatives or employees is not determined by its jūzoku-hō. Instead, such issues fall under the scope of the law applicable to torts, as determined by AGRAL Articles 17 to 22 (e.g., generally the law of the place where the harmful result occurred).
6. Piercing the Corporate Veil (Hōjinkaku Hinin, 法人格否認): The doctrine of piercing the corporate veil, where the separate legal personality of a company is disregarded to hold shareholders or directors liable, is not uniformly governed by the jūzoku-hō. Japanese law tends to approach this on a case-by-case basis. If the issue arises in the context of a contract, the law applicable to that contract might be relevant for determining if the veil can be pierced in relation to that specific contractual obligation. For example, the Tokyo District Court judgment of September 30, 2010 (Hanrei Jihō No. 2097, p. 77) considered the law applicable to the underlying contract in a veil-piercing scenario.
7. Corporate Reorganizations (Mergers, etc.): The validity and procedures for corporate reorganizations such as mergers, demergers, or share exchanges are primarily governed by the jūzoku-hō of the companies involved. Cross-border mergers involving a Japanese company and a foreign company present complexities, as Japanese company law historically did not explicitly provide for direct mergers with foreign companies. However, mechanisms like triangular mergers, where a Japanese subsidiary of a foreign parent merges with another Japanese company, with shares of the foreign parent being delivered as consideration, have provided avenues for international reorganizations.

Regulation of Foreign Corporations in Japan (Substantive Domestic Law)

Even if a foreign company is validly established under its jūzoku-hō, its activities within Japan are subject to Japanese substantive laws. This is a matter of domestic public policy and regulation, distinct from the private international law question of determining the jūzoku-hō.

1. Distinction between Domestic and Foreign Corporations: Japanese law, for regulatory purposes, distinguishes between domestic and foreign corporations primarily based on their lex incorporationis. As noted, the Companies Act, Article 2, item 2, defines a foreign company by reference to its establishment under foreign law. The Civil Code, Article 35, paragraph 1, also adopts this criterion.
2. Recognition (Ninkyo, 認許) of Foreign Corporations: A foreign corporation does not automatically have the right to operate as a legal entity in Japan merely by being validly formed abroad. Japanese law requires certain foreign entities to be "recognized" to conduct ongoing business or enjoy full legal personality in Japan. Article 35, paragraph 1 of the Civil Code grants recognition to foreign states, their administrative divisions, and foreign trading companies (gaikoku kaisha, 外国会社 – generally, for-profit corporations). Treaties can also provide for recognition. If a foreign entity is not recognized (e.g., certain types of non-profit organizations), it may not be able to operate in Japan as a full legal person but might be treated as an "unincorporated association or foundation with no legal personality" (kenri nōryoku naki shadan/zaidan, 権利能力なき社団・財団), with limited capacity to hold rights and obligations.
3. Scope of Rights Enjoyed by Recognized Foreign Corporations: Recognized foreign corporations, in principle, enjoy the same private rights as comparable Japanese corporations, within the scope of their corporate personality as defined by their jūzoku-hō (Civil Code, Article 35, paragraph 2). This reflects the principle of national treatment. However, they cannot enjoy rights that Japanese law does not grant to similar domestic entities, nor rights that their own jūzoku-hō denies them.
4. Supervision of Foreign Corporations (Registration Requirements): To protect domestic transaction security and ensure transparency, foreign companies intending to engage in transactions continuously in Japan must appoint a representative in Japan and register certain particulars (Companies Act, Article 817, paragraph 1; Article 933, paragraph 1). These particulars include the law of incorporation (Article 933, paragraph 2, item 1). Non-profit foreign corporations establishing an office in Japan also face registration requirements (Civil Code, Article 37, paragraph 1).
5. Special Rules for "Pseudo-Foreign Corporations" (Giji Gaikoku Kaisha, 疑似外国会社): A "pseudo-foreign corporation" is one that, while incorporated under foreign law, has its main place of business in Japan or is formed primarily for the purpose of carrying on business in Japan. To prevent evasion of Japanese company law regulations, Article 821, paragraph 1 of the Companies Act prohibits such a company from engaging in transactions continuously in Japan. If it does so, any person who engaged in such transactions on behalf of the company is jointly and severally liable with the company for any obligations arising from those transactions (Article 821, paragraph 2). This provision aims to ensure that entities effectively operating as Japanese businesses are subject to Japanese corporate governance and disclosure standards.

Analyzing Scenarios

Let's consider how these principles apply in practice, using adapted scenarios from the reference material's Case 30, No. 4.

Scenario 1: Contract by a Company During its Formation

• Facts: Company C is being established under the laws of Country A. Its representative, D, while in Japan, concludes a contract with Company J (a Japanese company) on behalf of the yet-to-be-fully-formed Company C. Company J later questions the validity of the contract, arguing Company C did not exist at the time of contracting.
• Analysis:
  • Company C's establishment and legal status during formation: These issues are governed by its lex incorporationis, which is the law of Country A. Whether a company can enter into contracts during its formation period, and the effects of such contracts, would be determined by Country A's company law.
  • D's authority and whether D's acts bind Company C: D's authority to act for Company C (even in formation) is primarily determined by the law of Country A (as the prospective jūzoku-hō or a related law governing pre-incorporation acts). However, since the contract was concluded in Japan with a Japanese company, if Country A law limits D's authority but Japanese law would uphold the transaction based on principles of apparent authority (by analogy to AGRAL Article 4(2)), Japanese courts might lean towards protecting the third party, Company J. The Supreme Court of Japan, in a judgment on July 15, 1975 (Minshū Vol. 29, No. 6, p. 1061), applied the company's jūzoku-hō to the liability of promoters of a company in formation.

Scenario 2: Foreign Subsidiary with Japanese Operations

• Facts: Company F is a subsidiary of Japanese Company E, incorporated under the laws of Country A. G, a director of Company E, is registered as a representative of Company F in Japan. G, on behalf of Company F, concludes a product sales contract with Company H (from Country B) at Company F's Japanese office. However, in Country A, Company F's registration shows G as a joint representative with another individual, J, meaning G might not have sole authority. This joint representation is not reflected in any Japanese registration for G concerning Company F.
• Analysis:
  • Whether G's acts bind Company F: The internal authority of G to represent Company F is, in principle, governed by Company F's jūzoku-hō, i.e., the law of Country A. If Country A law requires joint representation by G and J for such a contract, G acting alone might not have had actual authority.
  • However, the transaction occurred in Japan. If Japanese law, under principles of apparent authority or protection of good-faith third parties dealing with a registered representative, would hold Company F bound by G's actions (especially if G is registered as a representative in Japan without limitation, or if Company H reasonably relied on G's authority), Japanese courts might uphold the contract's validity against Company F, by analogy to AGRAL Art 4(2).
  • If Company F operates primarily for business in Japan (pseudo-foreign company): If Company F, despite being incorporated in Country A, conducts its main business in Japan, it could be deemed a "pseudo-foreign corporation." In such a case, under Article 821 of the Japanese Companies Act, Company F should not be continuously transacting business in Japan. If it does, G (as the person transacting) and Company F could be jointly and severally liable to Company H.
  • If Company F is not a legal person under Country A law but akin to a Japanese partnership: If Company F lacks legal personality under its lex incorporationis (Country A law) but its structure resembles, for example, a Japanese limited partnership (gōshi-gaisha), Japanese law would assess its status. If it is deemed a "foreign company" under the Companies Act definition (Article 2, item 2, which includes "other foreign organizations"), then rules like Article 821 concerning pseudo-foreign companies might still apply if its primary operations are in Japan. Otherwise, it might be treated as an unincorporated association.

Key Takeaways for International Businesses

• Governing Law is Usually Place of Incorporation: For entities dealing with Japanese PIL, the law of the place of incorporation will generally determine the company's internal affairs and fundamental capacities.
• Transactional Protection in Japan: When a foreign company's representative acts in Japan, Japanese law may offer protection to third parties regarding the representative's authority, even if the company's own governing law would limit it.
• Japanese Regulations for Foreign Companies: Foreign companies operating continuously in Japan are subject to Japanese registration and potentially other regulatory requirements, including those for "pseudo-foreign companies."
• Due Diligence: Understanding the jūzoku-hō of a corporate counterparty is essential. For significant transactions, verifying incorporation status and representative authority under that law is advisable, alongside considering the impact of the lex loci actus if the transaction occurs in Japan.

Conclusion

The legal framework governing corporations in Japanese private international law centers on the lex incorporationis to define a company's personal law and core attributes. However, this is balanced by protective measures for transactions occurring in Japan and a distinct set of domestic regulations for foreign companies actively participating in the Japanese market. For international businesses, a clear understanding of both the conflict of laws principles determining the jūzoku-hō and the substantive Japanese laws regulating foreign corporate activity is vital for compliant and secure operations and dealings connected to Japan.