What Are the Powers of a Shareholders' Meeting in a Japanese Company with a Board of Directors?

In the architecture of Japanese corporate governance for a kabushiki kaisha (stock company) that has established a board of directors (取締役会設置会社 - torishimariyakukai setchi kaisha), a fundamental principle is the division of powers and responsibilities between the shareholders' meeting (株主総会 - kabunushi sōkai) and the board of directors (取締役会 - torishimariyakai). While shareholders are the ultimate owners of the company, the legal framework generally entrusts the day-to-day management and strategic business decisions to the board. This article explores the specific powers retained by, or potentially granted to, the shareholders' meeting in such companies.

The General Principle: Limited Powers for Shareholders' Meetings in Board-Managed Companies

The default rule for a Japanese company with a board of directors is clearly set out in Article 295, Paragraph 2 of the Companies Act (会社法 - Kaishahō):
"In a company with a board of directors, the shareholders meeting may only pass resolutions on:
(i) matters provided for in this Act as subjects for a resolution of a shareholders meeting; and
(ii) matters provided for in the articles of incorporation."

This provision signifies a crucial distinction from companies without a board of directors, where the shareholders' meeting generally has the authority to decide on all matters concerning the company (Article 295, Paragraph 1). The rationale for limiting the powers of the shareholders' meeting in board-managed companies stems from considerations of efficiency, expertise, and the need for agile decision-making in managing the company's business. The board, composed of directors elected by the shareholders, is expected to possess the necessary skills and information to oversee and direct the company's operations effectively.

Matters Mandated by the Companies Act for Shareholder Resolution

Despite the general delegation of management to the board, the Companies Act reserves a number of fundamental corporate matters exclusively for resolution by the shareholders' meeting. These are matters considered so critical to the company's structure, ownership, and existence that direct shareholder approval is deemed essential. Key examples include:

• Amendment of the Articles of Incorporation (定款の変更 - Teikan no Henkō): Any changes to the company's foundational document require a special resolution of the shareholders (Article 466, Article 309, Paragraph 2, Item 11).
• Appointment and Removal of Directors and Statutory Auditors (取締役・監査役の選任・解任 - Torishimariyaku・Kansayaku no Sennin・Kainin): Shareholders have the power to elect those who will manage and oversee the company and to remove them if necessary (Articles 329, 339). Removal typically requires an ordinary resolution, but removal of an auditor without cause may require a special resolution or specific grounds.
• Approval of Financial Statements (計算書類の承認 - Keisan Shorui no Shōnin): While the board prepares financial statements, their final approval, particularly in certain types of companies or when specified by the articles, may require a shareholder resolution (Article 438).
• Decisions on Appropriation of Surplus (Dividends) (剰余金の配当 - Jōyo-kin no Haitō): The declaration and payment of dividends from distributable profits generally require shareholder approval (Article 454), though articles can allow the board to make such decisions under certain conditions.
• Fundamental Corporate Changes (Major Reorganizations - 組織再編 Soshiki Saihen): Actions such as mergers (合併 - gappei), company splits (会社分割 - kaisha bunkatsu), share exchanges (株式交換 - kabushiki kōkan), and share transfers (株式移転 - kabushiki iten) require special shareholder resolutions in the involved companies (various articles in Part V of the Companies Act).
• Dissolution of the Company (会社の解散 - Kaisha no Kaisan): A decision to voluntarily dissolve the company typically needs a special shareholder resolution (Article 471, Paragraph 3; Article 309, Paragraph 2, Item 12).
• Reduction of Stated Capital or Reserves (資本金・準備金の減少 - Shihonkin・Junbikin no Genshō): These actions also generally require special shareholder resolutions (Articles 447, 448; Article 309, Paragraph 2, Item 9).
• Director and Statutory Auditor Remuneration (役員報酬 - Yakuin Hōshū): The total amount or calculation method for remuneration for directors and statutory auditors must be determined by the articles of incorporation or by a resolution of the shareholders' meeting, unless specific rules for delegation are followed (Articles 361, 387).
• Approval of Certain Conflict-of-Interest or Competitive Transactions by Directors: While board approval is the primary mechanism (Article 365), the articles of incorporation could potentially require shareholder approval for such transactions, or certain severe cases might trigger broader shareholder concern.

Expanding Shareholders' Meeting Powers Through the Articles of Incorporation (定款)

Article 295, Paragraph 2 explicitly allows a company's articles of incorporation (teikan) to grant the shareholders' meeting decision-making power over matters that are not statutorily mandated for shareholder resolution. This provides a degree of flexibility for companies to tailor their governance structures.

However, there are limits to this expansion:

• Cannot Usurp Essential Board Functions: The articles cannot be used to strip the board of directors of its core, legally mandated functions, such as the general duty to manage the company's business (Article 362, Paragraph 1) or its duty to supervise the execution of duties by directors (Article 362, Paragraph 2, Item 2). A complete transfer of all management decisions to shareholders would effectively negate the purpose of having a board.
• The Case of Representative Director Selection/Removal: A particularly debated area has been whether the power to appoint and remove the Representative Director (代表取締役 - daihyō torishimariyaku), which is statutorily vested in the board of directors (Article 362, Paragraph 2, Item 3 and Paragraph 3), can be reserved for or shared with the shareholders' meeting via the articles.The Supreme Court of Japan addressed this in a significant provisional disposition judgment on February 21, 2017 (Heisei 29). The case involved a non-public company with a board of directors. Its articles of incorporation stipulated that "the representative director shall be appointed or removed by a resolution of the board of directors, and, if necessary, also by a resolution of the shareholders' meeting." The Supreme Court upheld the validity of this provision. Its reasoning included:This judgment suggests that, at least for non-public companies with a board, or where the articles grant concurrent rather than exclusive superseding power to shareholders for such matters, there is a degree of flexibility. The applicability of this reasoning to public companies, or to provisions that might attempt to completely usurp core board functions, could be viewed differently and remains a subject of legal discussion.
  1. The article did not entirely divest the board of its statutory power to appoint/remove the representative director; rather, it provided an additional, potentially supplementary or alternative, mechanism for the shareholders' meeting.
  2. This concurrent power did not, in the context of that specific non-public company and the phrasing used, unacceptably impair the board's overall ability to supervise the representative director or manage the company.

Application to Problem 22(1) from the PDF:
The scenario in Problem 22 involves Y社, a non-public company with a board. Its articles contain a provision identical to the one in the 2017 Supreme Court case, allowing the shareholders' meeting to appoint or remove the representative director "if necessary." Shareholders Cら (C and others) wish to use this provision to convene an extraordinary shareholders' meeting to (i) remove the current representative director, X, and (ii) appoint A as the new representative director. Based on the 2017 Supreme Court precedent, this provision in Y社's articles is likely valid. Consequently, the shareholders' meeting of Y社 could, in principle, pass resolutions to change the representative director, provided the meeting is properly convened and the resolutions are passed by the required majority.

Resolutions on Matters of Business Execution: "Advisory" or "Recommendatory" Resolutions (勧告的決議)

A complex issue arises when shareholders wish to express their views or make decisions on matters that typically fall within the board's purview for business execution—for example, setting specific operational targets or approving particular business strategies. If such matters are not statutorily reserved for shareholders and are not designated as shareholder resolution matters in the articles of incorporation, can the shareholders' meeting still pass resolutions on them?

• Legal Status and Binding Effect: Given Article 295, Paragraph 2, any resolution passed by a shareholders' meeting in a board-managed company on a matter not authorized by the Act or the articles would generally not be legally binding on the board of directors. The board would retain the ultimate authority to make the business decision.
• "Advisory" or "Recommendatory" Nature: Such resolutions are often termed "advisory" or "recommendatory" resolutions (勧告的決議 - kankokuteki ketsugi). While not legally compelling the board to act, they can serve as a powerful expression of shareholder sentiment and exert significant informal pressure on management.
• Shareholder Proposal Rights and Advisory Resolutions: Can a shareholder use their statutory proposal rights (Articles 303-305) to force a vote on such a non-binding, advisory matter? This is a debated point. The PDF commentary for Problem 22(2) refers to a Tokyo High Court provisional disposition of May 27, 2019 (Reiwa Gan), which reportedly held that the subject matter of shareholder proposals (i.e., matters for which shareholders can demand a resolution) is limited to those matters upon which the shareholders' meeting has the legal power to make a binding decision under Article 295(2).

Application to Problem 22(2) from the PDF:
Shareholder D in Y社 wants to propose a resolution at the regular shareholders' meeting stating: "Regarding asset management, the goal shall be to achieve a 5% return." This concerns a specific business operational target, a matter typically determined by the board or management.

• If Y社's articles do not grant the shareholders' meeting specific power over asset management targets, any resolution passed on D's proposal would, at best, be advisory and not legally binding on Y社's board.
• Following the reasoning of the Tokyo High Court (May 27, 2019), Y社 might be able to legitimately refuse to put D's proposal on the formal agenda for a resolution if it deems the matter outside the shareholders' meeting's competence to make a binding decision. However, this would not necessarily prevent D from raising the issue for discussion during the meeting, if permitted by the meeting's conduct rules.

Comparison with the U.S. Corporate Governance Model

The Japanese model for allocating powers between shareholders and the board differs in some respects from the typical U.S. model (e.g., under Delaware law):

• Board Primacy in the U.S.: In U.S. corporations, the board of directors generally has very broad and often exclusive authority over the management of the corporation's business and affairs. Shareholder voting is typically confined to electing directors, approving fundamental corporate changes (mergers, sale of substantially all assets, dissolution, charter amendments), and other matters specifically requiring a shareholder vote by statute or the company's charter (e.g., certain equity compensation plans).
• Shareholder Proposals in the U.S.: U.S. public company shareholders, under SEC Rule 14a-8, can make non-binding "precatory" proposals on a wide range of corporate policy and governance issues, which must be included in the company's proxy materials if certain conditions are met. However, the idea of the articles of incorporation routinely granting shareholders direct, binding decision-making power over matters like the appointment/removal of the CEO (akin to the representative director) or specific operational strategies is less common than the potential flexibility seen in Japanese law for certain types of companies or via specific charter provisions as validated by the 2017 Supreme Court case.

Conclusion

In Japanese companies equipped with a board of directors, the authority of the shareholders' meeting is, by default, circumscribed. It is primarily focused on fundamental corporate decisions as stipulated by the Companies Act, along with any additional matters specifically assigned to it by the company's articles of incorporation. While there is some latitude to expand shareholder power via the articles, particularly in non-public companies (as exemplified by the Supreme Court's 2017 decision regarding the representative director), this cannot extend to completely divesting the board of its essential managerial and supervisory roles. Resolutions on day-to-day business execution or specific operational strategies, if not authorized by law or the articles for shareholder decision, are generally considered advisory at best, and the ability of shareholders to compel a formal vote on such non-binding matters through shareholder proposals is subject to the legal competence of the shareholders' meeting. This framework seeks to balance shareholder oversight with the board's need for operational authority and expertise.