What is the Japanese Companies Act? Key Principles U.S. Companies Should Know

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

The Japanese Companies Act (Kaisha-hō) serves as the fundamental legal framework governing the incorporation, organization, operation, and dissolution of companies in Japan. As international business activities and transactions with Japanese enterprises continue to expand, a foundational understanding of this Act's core principles is indispensable for managing legal risks and formulating effective business strategies. This article will delve into the scope, purpose, and types of companies regulated by the Japanese Companies Act, as well as the essential concepts of corporate legal personality and legal capacity.

The Scope and Purpose of the Japanese Companies Act

When discussing "company law" in Japan, it's helpful to distinguish between the Companies Act in its formal sense—the codified statute itself—and company law in a substantive sense. The latter encompasses a broader range of related laws and regulations that collectively shape the legal environment for companies. Key among these are the Companies Act Enforcement Rules (Kaisha-hō Shikō Kisoku), the Corporate Calculation Rules (Kaisha Keisan Kisoku), the Act on Book-Entry Transfer of Company Bonds, Shares, etc. (Shasai, Kabushiki-tō no Furikae ni Kansuru Hōritsu), and the Financial Instruments and Exchange Act (Kin-yū Shōhin Torihiki-hō). These instruments interact to regulate various aspects of corporate affairs, from internal governance to capital market activities.

A central theme of the Japanese Companies Act is the adjustment of interests among various stakeholders. However, the Act primarily focuses on the relationship between the company, its investors (such as shareholders), and its creditors. While other stakeholders like employees, consumers, and local communities are undoubtedly affected by corporate activities, their protection is generally addressed by other specialized fields of law, such as labor law and consumer protection law. This division of legal labor is based on the premise that such relationships are not unique to incorporated companies (e.g., individual merchants also employ people and transact with consumers) and that dedicated legal frameworks can provide more nuanced and tailored protection.

The underlying objectives of the Companies Act have evolved. Traditionally, its purpose was seen as adjusting the interests of shareholders and creditors. More recently, a prevailing view is that the Act aims to facilitate the maximization of shareholder profit, which, in turn, is expected to contribute to the efficient increase of societal wealth. This objective informs the design of various corporate systems and regulations within the Act, striving to create an environment conducive to efficient and sound corporate management.

Types of Companies under the Japanese Companies Act

The Companies Act defines four distinct types of companies:

  1. Kabushiki Kaisha (K.K.): Joint-stock companies, which are by far the most common and economically significant form.
  2. Gōmei Kaisha: General partnership companies, where all partners have unlimited liability.
  3. Gōshi Kaisha: Limited partnership companies, comprising partners with unlimited liability and partners with limited liability.
  4. Gōdō Kaisha (G.K.): Limited liability companies, a newer form introduced in 2006, similar in some respects to LLCs in the United States, where all members have limited liability.

The latter three types (Gōmei Kaisha, Gōshi Kaisha, and Gōdō Kaisha) are collectively referred to as "Mochibun Kaisha" (membership companies). While the Kabushiki Kaisha will be the subject of more detailed future discussions due to its prevalence, understanding the common characteristics shared by all four types is crucial.

All four company types under the Companies Act share two fundamental characteristics: they are "Eiri Shadan Hojin" (profit-seeking incorporated associations) and they possess "Hojinkaku" (legal personality).

1. "Eiri Shadan Hojin" (Profit-Seeking Incorporated Association)

This term encapsulates two core aspects: "Eirisei" (profit-seeking nature) and "Shadansei" (associational nature).

  • Shadansei (Associational Nature): A shadan hojin is conceived as an "association of persons united for a common purpose." The ultimate control over the organization's structure, operation, and management is vested in its members (shain). This contrasts with a zaidan hojin (foundational juridical person), which is an aggregation of assets dedicated to a specific purpose, where the founder's initial intent heavily dictates its governance, and fundamental changes are generally restricted. Even a company with a single shareholder (a hitori kaisha or one-person company) is considered to possess shadansei under Japanese law. This is often rationalized by the potential for future increases in membership or by focusing on the locus of control rights, which can theoretically be held even by a single member.
  • Eirisei (Profit-Seeking Nature): This means the company is designed with the objective of acquiring profits through its business activities and distributing those profits to its members. For a Kabushiki Kaisha, Article 105 of the Companies Act, which guarantees shareholders the right to receive dividends from surplus and the right to distribution of residual assets upon dissolution, is a clear manifestation of this profit-seeking nature. This is a key differentiator from non-profit incorporated associations (ippan shadan hojin) or foundations, which are prohibited from distributing surplus to their members. It's important to note that the "profit-seeking nature" refers to the institutional design and purpose, not necessarily the company's day-to-day operational focus; a company could, for instance, engage in charitable activities while still being legally classified as a profit-seeking entity.

2. Legal Personality (Hojinkaku)

Article 3 of the Companies Act explicitly states that companies are juridical persons. This grants them legal personality, meaning the company itself, as an entity distinct from its members, can hold rights and incur obligations in its own name.

The significance of legal personality is multifaceted:

  • Simplification of Legal Relations: It allows for a clear and consistent attribution of rights and obligations. For example, if a company acquires land, the ownership remains with the company regardless of changes in its shareholding or membership. This simplifies property management compared to, for instance, a civil law partnership (kumiai), where assets are co-owned by the partners, leading to complexities with numerous or changing partners.
  • Facilitation of Transactions and Registration: A company with legal personality can register real estate in its own name, whereas a partnership cannot (Supreme Court judgment, June 2, 1972, Minshu Vol. 26, No. 5, p. 957). This avoids the complications of registering assets in the names of all members or a nominee, which can lead to issues like commingling of assets or unauthorized dispositions.
  • Tax Considerations: In Japan, corporate income is subject to corporate income tax, while personal business income is subject to personal income tax. Due to differences in tax rates and structures (e.g., corporate tax is generally a flat rate, while personal income tax is progressive), establishing a corporate entity can sometimes be advantageous for tax purposes, a practice known as "hōjin nari" (incorporation for tax benefits).
  • Social Credibility and Regulatory Requirements: Operating as an incorporated entity, particularly a Kabushiki Kaisha, can enhance business credibility. Furthermore, certain business activities may be legally required to be conducted through a specific corporate form.

While legal personality grants a company the status of a legal subject, the scope of its legal capacity—the range of rights it can possess and obligations it can incur—is subject to certain limitations in Japanese law.

Limitations by the Articles of Incorporation (Teikan)

Article 34 of the Civil Code of Japan stipulates that "A juridical person shall have rights and assume duties... within the scope of its purposes as provided for in its articles of incorporation or other fundamental charter." For companies, the "purposes" are those business activities listed in their articles of incorporation, which is a mandatory component of the articles (Article 27, item 1 of the Companies Act).

The prevailing judicial interpretation, as established in landmark cases like the Supreme Court judgment of June 24, 1970 (Minshu Vol. 24, No. 6, p. 625), is that this provision restricts the legal capacity of a juridical person to the scope of its stated purposes. Consequently, acts undertaken by a company that fall outside these defined purposes (mokuteki-gai kōi, or ultra vires acts) are generally considered null and void, meaning the company cannot acquire rights or incur obligations from such acts.

Judicial Interpretation of the "Scope of Purpose"

Despite the seemingly strict wording of Article 34 of the Civil Code, Japanese courts have, in practice, adopted a broad interpretation of what constitutes an act "within the scope of purpose." This approach aims to balance the protection of the company and its members from unauthorized actions with the need to ensure the security of transactions for third parties who deal with the company.

The courts generally employ two key interpretive techniques:

  1. Acts Necessary for the Pursuit of Purposes: Even if an act is not explicitly listed as a purpose in the articles of incorporation, it can be deemed within the scope of legal capacity if it is considered necessary for the pursuit of the stated purposes.
  2. Abstract Assessment of Necessity: Whether an act is "necessary" is not judged by its actual necessity in the specific circumstances, but rather by whether such an act could abstractly be considered necessary for achieving the company's objectives. For example, the acquisition of real estate, even if not directly related to a company's primary business of manufacturing confectionery, could be deemed within its scope of purpose because it might be necessary for establishing a factory or retail outlet.

Furthermore, it is a common practice in Japan for companies to include a broad, catch-all clause in their articles of incorporation, such as "all business incidental or related to the foregoing purposes." This further reduces the likelihood of an act being deemed ultra vires. As a result of these interpretive tendencies and drafting practices, instances where a company's act is invalidated due to being outside its scope of purpose are relatively rare in modern Japanese corporate law.

Scholarly Debates on Civil Code Article 34

It is worth noting that the interpretation of Article 34 of the Civil Code has been a subject of considerable academic debate. While the courts adhere to the "legal capacity restriction theory," alternative views exist:

  • Capacity to Act Restriction Theory / Representative Authority Restriction Theory: Some scholars argue that Article 34 does not limit the fundamental legal capacity of a juridical person (which is seen as generally coextensive with that of a natural person, excluding inherently personal rights and duties). Instead, they propose that the article restricts either the company's capacity to act or the representative authority of its directors. Under this view, an ultra vires act would be treated similarly to an act exceeding an agent's authority, potentially allowing for the application of principles like apparent authority (hyōken dairi) to protect bona fide third parties.
  • Inapplicability to Companies Theory: Historically, some argued that the provision corresponding to the current Article 34 (formerly Article 43 of the pre-2005 Civil Code) was located in the section concerning public interest juridical persons and thus did not apply to profit-seeking companies. However, the 2005 revisions to the Civil Code, which reorganized provisions on juridical persons, have made this theory less tenable, as Article 34 now appears in the general provisions applicable to all juridical persons.

Despite these academic discussions, the judicial precedent of interpreting Article 34 as a limitation on legal capacity, albeit a broadly construed one, remains the dominant approach in practice.

Conclusion

The Japanese Companies Act establishes a comprehensive yet nuanced legal regime for corporate entities in Japan. Its core principles, including the distinct types of companies it recognizes, the concept of corporate legal personality as profit-seeking incorporated associations, and the framework for corporate legal capacity, are fundamental to understanding how businesses operate within the Japanese legal landscape. While the Act primarily aims to balance the interests of investors and creditors, its broader implications extend to the overall efficiency and fairness of the corporate sector. A grasp of these foundational elements is a crucial starting point for any foreign enterprise engaging with or operating in Japan. Subsequent discussions will delve into the specifics of the most prevalent corporate form, the Kabushiki Kaisha, exploring its establishment, share structures, governance mechanisms, and operational rules in greater detail.