The Articles of Incorporation in Japanese Companies: Key Points for Drafting, Amending, and Required Clauses

The Articles of Incorporation, known as teikan (定款) in Japanese, serve as the foundational constitutional document for any company established in Japan. They are not merely a formality but a critical legal instrument that defines the company's fundamental structure, operational framework, and internal governance. For U.S. corporate legal professionals and business executives involved in establishing or managing Japanese entities, a thorough understanding of the teikan—its creation, essential components, and amendment process—is paramount for ensuring legal compliance and effective corporate administration. This article delves into the significance of the Articles of Incorporation under the Japanese Companies Act (Kaisha-hō), exploring key clauses, drafting and notarization procedures, amendment processes, and the concept of corporate autonomy through the teikan.

The Significance and Nature of the Articles of Incorporation (Teikan)

The teikan is more than just a set of rules; it is the bedrock of a Japanese company's legal existence and operational authority.

• Fundamental Corporate Charter: In its substantive sense, the teikan embodies the core principles governing the company's organization, operation, and management. In its formal sense, it refers to the physical document or electronic record that contains these provisions. It dictates how the company is structured, how its organs function, and how fundamental decisions are made.
• Binding Effect: Once properly established, the Articles of Incorporation are legally binding on the company itself, its shareholders, directors, and other corporate organs. They provide the internal legal framework within which the company must operate.
• Public Document and Accessibility: The Companies Act mandates that a company must keep its Articles of Incorporation at its head office and any branch offices (Article 31 of the Companies Act). Shareholders and creditors of the company are entitled to inspect and request copies of the teikan during business hours. This transparency ensures that those with a legitimate interest can understand the company's basic operational rules.

Key Clauses in the Articles of Incorporation

The content of the Articles of Incorporation can be categorized based on the legal necessity and effect of including certain provisions. These are broadly classified into absolute mandatory clauses, relative mandatory clauses, and voluntary clauses.

1. Absolute Mandatory Clauses (Zettaiteki Kisai Jikō)

These are provisions that must be included in the Articles of Incorporation for the teikan itself to be valid. The absence or defect of any of these clauses will render the entire Articles of Incorporation, and thus the company's establishment, invalid. Key absolute mandatory clauses, primarily stipulated in Article 27 of the Companies Act, include:

• Company's Purposes (Mokuteki): A clear description of the business activities the company intends to undertake. This defines the scope of the company's legal capacity, as discussed in a previous article.
• Trade Name (Shōgō): The official registered name of the company. Specific rules apply, such as the requirement for a Kabushiki Kaisha to include "株式会社" (Kabushiki Kaisha) in its name.
• Location of the Head Office (Honten Shozaichi): The registered address of the company's main office. Only the city/ward level is required in the teikan; the specific street address can be determined by a resolution of the incorporators or directors.
• Value of Assets to be Contributed upon Incorporation or its Minimum Amount: This specifies the initial capitalization of the company.
• Name and Address of Incorporator(s) (Hokkinin): The individuals or entities initiating the company's formation.
• Total Number of Authorized Shares (Hakkō Kanō Kabushiki Sōsū): This is also an absolute mandatory clause (Article 37 of the Companies Act), setting the upper limit on the number of shares the company can issue. However, unlike the items in Article 27, this can be determined by the incorporators after the notarization of the initial teikan but before the company's registration if not included at the notarization stage.

The inclusion of these items is non-negotiable for the valid establishment of the company. Their clarity and accuracy are paramount.

2. Relative Mandatory Clauses (Sōtaiteki Kisai Jikō)

These are provisions that are not essential for the validity of the Articles of Incorporation itself, but if the company wishes for a particular legal effect or to adopt a specific corporate mechanism provided for by the Companies Act, these matters must be stipulated in the teikan (see Article 29 of the Companies Act). If not included, the company simply cannot avail itself of that particular rule or system, or the intended legal effect will not arise.

Examples of relative mandatory clauses are numerous and found throughout the Companies Act. They include:

• Special Provisions Regarding Share Content: Such as restrictions on the transfer of shares (making them "transfer-restricted shares"), provisions for shares with put options (shutoku seikyūken-tsuki kabushiki), or shares with call options (shutoku jōkō-tsuki kabushiki) (Articles 107 and 108).
• Issuance of Different Classes of Shares (Shurui Kabushiki): If a company intends to issue shares with varying rights (e.g., regarding dividends or voting), the details of these classes must be in the teikan.
• Establishment of a Board of Directors (for Non-Public Companies): While mandatory for public companies, non-public companies can choose to establish a board of directors, which requires a teikan provision.
• Limitation of the Scope of Audit by Statutory Auditors (for certain Non-Public Companies): To limit the audit scope of statutory auditors to accounting matters only.
• Many other provisions where the Companies Act explicitly states that a certain rule applies "if so provided in the articles of incorporation."

The decision to include these clauses depends on the company's specific needs and strategic choices.

3. Voluntary Clauses (Nin-iteki Kisai Jikō)

These are provisions that can be included in the Articles of Incorporation but are not legally required to be there for either the teikan's validity or to achieve a specific legal effect that mandates teikan stipulation. Such matters could alternatively be decided by shareholder resolutions or board regulations. However, including them in the teikan gives them a higher degree of permanence, as amending the teikan typically requires a special resolution of the shareholders' meeting.

Examples of voluntary clauses include:

• Number and Term of Directors (within statutory limits): While directors are mandatory, their exact number (above the minimum) or specific term (if shorter than the statutory maximum for non-public companies) can be detailed.
• Detailed Rules for Shareholders' Meetings or Board of Directors' Meetings: Procedures beyond the minimum statutory requirements.
• Matters Concerning Director Remuneration: While Article 361 requires remuneration to be fixed by the teikan or a shareholders' resolution, if the company chooses the teikan route for specifying amounts or calculation methods, these become voluntary clauses in this context.

Any provision can be included as a voluntary clause as long as it does not contravene mandatory provisions of the Companies Act or other laws, and is not contrary to public policy.

Drafting, Notarization, and Amendment of the Articles of Incorporation

The creation and modification of this foundational document involve specific legal procedures.

Initial Drafting and Notarization (at Incorporation)

When a company is first established, the incorporators (hokkinin) are responsible for drafting the initial Articles of Incorporation. All incorporators must sign or affix their names and seals to this document (or apply electronic signatures if it's an electronic record) (Article 26).

Crucially, for the Articles of Incorporation to take effect, they must be notarized by a notary public (kōshōnin) (Article 30, paragraph 1). Notaries in Japan are public officials, typically with legal backgrounds, appointed by the Minister of Justice. The notarization process serves several purposes:

• Verification of Identity: The notary verifies the identities of the incorporators.
• Confirmation of Legality: The notary checks if the teikan contains the absolute mandatory clauses and does not blatantly violate the law.
• Prevention of Disputes: By creating an official record, notarization helps prevent future disputes regarding the original content of the teikan.
• Evidentiary Value: A notarized teikan has strong evidentiary value.

There are costs associated with notarization, including a notarization fee (typically JPY 50,000) and stamp duty for the original copy retained by the notary (typically JPY 40,000).

Once notarized, the initial Articles of Incorporation generally cannot be altered by the incorporators during the pre-incorporation phase, with very limited exceptions (e.g., regarding the total number of authorized shares, or changes to "promoters' special benefits" or "property to be contributed in kind" if modified by a court-appointed inspector).

Amendment of the Articles of Incorporation (Post-Incorporation)

After a company is established, its Articles of Incorporation can be amended. This allows the company to adapt its structure and rules to changing circumstances or strategic needs.

The general procedure for amending the teikan is through a special resolution of the shareholders' meeting (Article 466; Article 309, paragraph 2, item 11). A special resolution typically requires:

1. The attendance of shareholders holding a majority of the voting rights.
2. The approval of at least two-thirds of the voting rights present at the meeting.
   (The articles of incorporation can stipulate higher thresholds).

However, for certain significant amendments, the Companies Act imposes even stricter requirements:

• Introducing Transfer Restrictions on All Shares (to become a Non-Public Company): Requires a "special-er" resolution (e.g., approval by a majority of shareholders by head_count who hold at least two-thirds of the voting rights) (Article 309, paragraph 3, item 1). Dissenting shareholders also have appraisal rights.
• Introducing or Modifying Certain Provisions Detrimental to a Class of Shareholders: May require the approval of a meeting of that class of shareholders in addition to the general shareholders' meeting.
• Introducing a Call Option on All Shares of a Certain Class: Requires the unanimous consent of all shareholders of that class if done after issuance.

"Teikan Jichi" – Autonomy via the Articles of Incorporation

While many provisions of the Companies Act are mandatory (kyōkō hōki), meaning they apply irrespective of any agreement to the contrary, the Act also recognizes a sphere of "corporate autonomy" that can be exercised through the Articles of Incorporation. This is known as teikan jichi (定款自治).

Concept of Teikan Jichi

Teikan jichi refers to the ability of a company, within certain limits, to establish its own internal rules and governance structures by including specific provisions in its teikan, even if these rules differ from or supplement the default provisions of the Companies Act. This reflects the principle that companies, as private associations, should have a degree of freedom to tailor their internal organization to their specific circumstances and needs.

The rationale for mandatory provisions in company law often lies in protecting stakeholders (shareholders, creditors, etc.) who may not be in a position to negotiate terms, ensuring a degree of uniformity for transactional efficiency, or safeguarding broader public interests. However, a purely rigid system would stifle innovation and prevent companies from adopting governance models best suited to their unique situations. Teikan jichi provides this necessary flexibility.

Scope and Limitations

The autonomy granted through the teikan is not boundless. It must operate within the framework of the Companies Act and other applicable laws, and cannot contravene public policy.

• Article 29 of the Companies Act states that the teikan may contain, in addition to absolute and relative mandatory clauses, "other matters, provided that they do not violate the provisions of this Act." The interpretation of "not violating the provisions of this Act" is key to defining the scope of teikan jichi.
• It clearly allows for stipulating matters not covered by the Companies Act.
• More significantly, it can, in certain instances, allow for provisions that differ from the default rules set out in the Companies Act, provided the statutory provision in question is not deemed mandatory and unalterable. The Supreme Court has, for instance, upheld teikan provisions in non-public companies that allow the shareholders' meeting, rather than the board of directors, to appoint the representative director (Supreme Court Decision, February 21, 2017, Minshu Vol. 71, No. 2, p. 195), which deviates from the default rule for companies with a board.
• The assessment of whether a teikan provision is valid often involves balancing the company's need for flexibility against the policy objectives underlying the relevant statutory rules and the potential impact on stakeholder protection.
• Generally, public companies and large companies, due to their broader stakeholder base and societal impact, tend to have a narrower scope for teikan jichi compared to non-public, smaller companies where internal consensus among a limited number of shareholders can more easily be achieved and direct oversight is more feasible.

Practical examples where teikan jichi is commonly exercised include setting specific quorums or voting requirements for shareholder or board meetings (above statutory minimums), defining specific powers or limitations for directors or representative directors, or establishing particular procedures for share transfers (within the bounds of allowing transfer restrictions).

Conclusion

The Articles of Incorporation are far more than a mere registration document in Japanese corporate law; they are the living constitution of a company. Their careful drafting, appropriate notarization, and considered amendment are fundamental to establishing a sound legal basis for corporate operations and governance. For U.S. companies engaging in Japan, whether through establishing subsidiaries, entering joint ventures, or acquiring existing entities, a deep understanding of the role and content of the teikan, including the scope of teikan jichi, is essential. It allows for the creation of a corporate structure that is not only compliant with Japanese law but also strategically aligned with the company's business objectives and governance philosophy in the Japanese context.