Shareholder Access to Corporate Records in Japan: Responding to Accounting Book Inspection Requests

Shareholder rights to access corporate information are a fundamental aspect of corporate governance globally, designed to ensure transparency and enable shareholders to monitor management. In Japan, Article 433 of the Companies Act (会社法 - Kaishaho) grants eligible shareholders a potent tool: the right to inspect and copy a company's accounting books and related materials. While this right is vital for shareholder oversight, it also presents challenges for companies concerned about protecting sensitive business information. This article delves into the intricacies of this shareholder right in Japan, outlining who can make such requests, the necessary procedures, valid grounds for refusal, and how companies should navigate these demands, including potential litigation.

1. The Right to Inspect Accounting Books: Beyond Standard Financial Disclosures

It's important to distinguish the right under Article 433 from a shareholder's general entitlement to receive and review the company's annual financial statements (計算書類 - kessan shorui) and business reports. These year-end documents are statutorily required to be presented at the ordinary general shareholders' meeting (Article 438) and made available for inspection for a certain period (Article 442, Paragraph 3).

The right to inspect accounting books and related materials (kaikei chobo matawa koreni kansuru shiryo), however, goes deeper. It allows access to the underlying records and supporting documentation that form the basis of these financial statements—information not typically disclosed externally. This can include general ledgers, journals, subsidiary ledgers, invoices, contracts, bank statements, and other primary records that provide a detailed view of the company's financial transactions and condition.

Who is Eligible?
This right is not available to all shareholders. To make a request under Article 433, Paragraph 1, a shareholder (or a group of shareholders acting together) must hold:

• Three-hundredths (3%) or more of the total voting rights of all shareholders; OR
• Three-hundredths (3%) or more of the total number of issued shares.

The company's Articles of Incorporation (Teikan) may stipulate a lower threshold than this statutory 3%. The inspection and copying must be permitted during the company's business hours. For electronic records, the company must provide them in a human-readable format.

The underlying purpose of this right is to empower shareholders to effectively investigate the company's operational and financial status, thereby enabling them to monitor the conduct of directors and take corrective action if necessary.

2. The Crucial Prerequisite: Stating a Legitimate Reason for the Request

A shareholder cannot demand access to accounting books on a whim. Article 433, Paragraph 1 explicitly requires the requesting shareholder to clearly state the reason(s) for their request.

• Purpose of the Reason Requirement: This serves multiple functions:
  • It allows the company to identify the specific accounting books and materials that are relevant to the shareholder's stated concern.
  • It enables the company to assess whether any of the statutory grounds for refusal (discussed below) might apply.
  • It acts as a safeguard against overly broad, speculative, or abusive "fishing expeditions" that could unduly burden the company or risk the unwarranted disclosure of sensitive competitive information.
• Required Level of Specificity: The reason provided must be sufficiently concrete. The Supreme Court, in a decision on November 8, 1990, indicated that the stated reason should be specific enough for the company to understand the shareholder's objective, determine the relevant scope of documents, and evaluate whether any grounds for refusal are met. Vague or overly general reasons may be deemed insufficient. For example, a stated purpose of determining the fair value of shares for a potential sale has been judicially recognized as a legitimate exercise of shareholder rights (Supreme Court, July 1, 2004).

3. Scope of "Accounting Books and Related Materials"

The precise scope of "accounting books or materials related thereto" can sometimes be a point of contention. While legal debate exists on whether this should be interpreted broadly (encompassing almost any financial document) or more narrowly (limited to core accounting ledgers and their direct supporting documentation), in practice, the focus is often on materials that directly evidence the company's financial transactions and accounting entries.

It's generally understood that documents prepared from accounting books for other purposes, such as corporate tax returns, might not necessarily fall within the primary scope of "accounting books" themselves, though they are derived from them. Companies might argue that such derivative documents are not what Article 433 primarily targets, which are the foundational records.

4. Legitimate Grounds for Company Refusal (Companies Act Article 433, Paragraph 2)

A company is not obligated to grant every inspection request. Article 433, Paragraph 2 provides an exhaustive list of grounds upon which a company can legitimately refuse access. These grounds cannot be expanded by provisions in the company's Articles of Incorporation. The burden of proving that one of these grounds applies falls on the company.

The statutory grounds for refusal are:

1. Request Made for an Improper Purpose: The request is made for a purpose other than to investigate matters relevant to the protection or exercise of the shareholder's legitimate rights as a shareholder. For example, if the shareholder's true aim is to gather information for a personal lawsuit against the company unrelated to their shareholding (e.g., an employment dispute or a separate contractual claim), the request can be refused.
2. Request Detrimental to Company or Common Shareholder Interests: The request is made with the intent to hinder the proper conduct of the company's business operations or to substantially harm the common interests of all shareholders. This could include requests made purely for harassment, to disrupt management, or as part of a personal vendetta against directors.
3. Shareholder is a Competitor: The requesting shareholder is, in substance, engaged in a business that is genuinely and substantially competitive with the company's business. This aims to prevent competitors from gaining unfair access to sensitive operational or financial data.
4. Intent to Profit from Disclosing Information: The shareholder is making the request with the intention of disclosing the information obtained through the inspection to a third party for their own financial gain (e.g., selling the information).
5. Past Misuse of Inspected Information for Profit: The shareholder has, within the two years prior to the request, disclosed information obtained from a previous inspection of any company's accounting books to a third party for financial profit.

5. Requests Made Through a Proxy (e.g., Lawyer or Accountant)

Shareholders are permitted to exercise their inspection rights through a duly appointed proxy. This is common practice, especially when specialized financial or legal knowledge is required to effectively analyze the records.

However, the company's right to refuse inspection can extend to the proxy if the proxy themselves falls under certain disqualifying conditions. Specifically, if the chosen proxy is engaged in a substantially competitive business with the company, or if they have a history of profiting from the unauthorized disclosure of inspected information (as per grounds 3, 4, or 5 above), the company may refuse inspection by that particular proxy, even if the shareholder making the request is otherwise eligible.

6. Enforcing the Right: Litigation and Provisional Dispositions (Karishobun)

If a company refuses an inspection request without, in the shareholder's view, legitimate grounds, the shareholder can take legal action to enforce their right.

• Lawsuit or Provisional Disposition: The shareholder may file a formal lawsuit to compel inspection. More commonly, due to the time-sensitive nature of such requests, shareholders often apply for a provisional disposition (仮処分 - karishobun), which is an expedited form of injunctive relief.
• No Mandatory Prior Out-of-Court Demand: While it's typical for a shareholder to first make a formal request to the company, being refused is not a strict legal prerequisite to initiating court proceedings.
• Standing in Litigation:
  • Multiple shareholders can aggregate their shareholdings to meet the 3% threshold for making a request or filing suit.
  • If a company attempts to thwart an inspection right by issuing new shares after a request or lawsuit has been initiated, thereby diluting the requesting shareholder's holding below the statutory threshold, courts generally do not allow this to defeat the shareholder's standing, especially if the share issuance appears to be primarily aimed at frustrating the inspection right. However, if the new share issuance was for legitimate, pressing business reasons unrelated to the inspection request, the legal analysis could be more complex.
• Specificity and Proof in Court: In legal proceedings, the shareholder must clearly identify the specific accounting books or materials they seek and demonstrate the relevance of these documents to the stated purpose of their request. While exact internal document titles might not be known to the shareholder, a reasonably specific description of the information sought is necessary. If the company denies the existence of certain requested documents, the burden may shift to the shareholder to provide some evidence suggesting their existence.
• The "Necessity for Preservation" (Hozen no Hitsuyosei) in Provisional Dispositions: Obtaining a provisional disposition for accounting book inspection is often challenging due to the high standard of "necessity for preservation." Granting inspection through a provisional order effectively gives the shareholder the ultimate relief they seek before a full trial on the merits. If the main lawsuit later determines the shareholder was not entitled to inspection, the company would have already suffered the irreversible disclosure of potentially sensitive information.
  Courts, therefore, conduct a careful balancing act: weighing the potential irreparable harm to the shareholder if access is delayed against the potential irreparable harm to the company if sensitive information is prematurely disclosed. A provisional order is typically granted only if there is an urgent and compelling need for the shareholder to access the information immediately to prevent such harm, even when considering the risks to the company. The Tokyo District Court decision of June 15, 2007 (often referred to as the Rakuten v. TBS case), highlighted this cautious approach, emphasizing that such orders should be granted only in cases of clear necessity.

7. Responding to Inspection Requests: Company Best Practices

When faced with a request under Article 433, companies should:

1. Acknowledge Promptly: Acknowledge receipt of the request in a timely manner.
2. Verify Shareholder Eligibility: Confirm that the requesting shareholder meets the statutory or Article-defined shareholding threshold.
3. Carefully Review the Stated Reason: Assess the legitimacy and specificity of the reason provided. Does it align with the protection or exercise of shareholder rights? Is it sufficiently clear to identify the scope of relevant documents?
4. Evaluate Grounds for Refusal: Systematically check if any of the five statutory grounds for refusal under Article 433, Paragraph 2 apply. Document the basis for any such determination.
5. Consider the Scope: If the request is very broad, assess whether it can be narrowed to documents directly relevant to the stated legitimate purpose.
6. Internal Consultation: Involve legal counsel and relevant internal departments (e.g., accounting, legal) in reviewing the request and formulating a response.
7. Formal Response: Provide a clear, written response within a reasonable timeframe. If refusing, specify which statutory ground(s) are being invoked and provide a brief explanation. Avoid vague or unsubstantiated denials.
8. Partial Access: If some parts of the request are legitimate and others are not (or if some documents are clearly within scope and others are questionable), consider granting partial access where appropriate, rather than an outright blanket refusal.
9. Maintain Records: Keep thorough records of the request, the internal review process, and all communications with the shareholder.

Conclusion

The shareholder's right to inspect accounting books and related materials is a cornerstone of corporate accountability in Japan. It provides a mechanism for shareholders to delve deeper than standard financial reports to understand a company's financial health and operational integrity. For companies, responding to such requests requires a careful understanding of the legal framework—the eligibility of the requesting shareholder, the necessity of a clearly stated and legitimate reason, and the specific, limited grounds upon which a request can be refused. A reasoned, legally compliant, and timely response is crucial, not only to meet statutory obligations but also to manage shareholder relations and mitigate the risk of potentially costly and disruptive litigation.