What is the Scope of Directors' Duty to Explain at Shareholders' Meetings in Japan?

Shareholders' meetings in Japan serve as a critical forum for shareholders to exercise their rights, make fundamental decisions about the company, and hold management accountable. A key component facilitating this accountability and informed decision-making is the statutory duty imposed on directors and other officers to provide explanations to shareholders on matters raised during these meetings. This "duty to explain" (説明義務 - setsumei gimu) is a significant feature of Japanese corporate governance, ensuring a degree of transparency and responsiveness from company leadership.

The Statutory Basis: Article 314 of the Companies Act

The primary legal foundation for this obligation is Article 314 of the Companies Act (会社法 - Kaishahō). It stipulates:

"Directors, accounting advisors (会計参与 - kaikei san'yo), statutory auditors (監査役 - kansayaku) and executive officers (執行役 - shikkōyaku) must provide necessary explanations with respect to matters requested by shareholders at a shareholders meeting; provided, however, that this shall not apply to cases where the matter requested by the shareholder is not relevant to the subject matter of the shareholders meeting, cases where the explanation requires investigation, cases where such explanation would prejudice the common interests of shareholders, or in other cases where there are justifiable grounds for not providing such explanation as prescribed by the applicable Ordinance of the Ministry of Justice."

Purpose of the Duty to Explain

This duty serves multiple important purposes within the Japanese corporate governance framework:

1. Informed Shareholder Decision-Making: It aims to ensure that shareholders have sufficient information to understand the proposals and agenda items being presented at the meeting, enabling them to make rational and informed judgments when exercising their voting rights.
2. Facilitating Shareholder Oversight: By allowing shareholders to ask questions and receive explanations on company affairs, particularly those related to agenda items, the duty facilitates their role in overseeing the performance and conduct of management.
3. Promoting Transparency and Accountability: The obligation to explain encourages company leadership to be transparent about their actions and decisions, fostering a greater sense of accountability towards shareholders.
4. Enhancing Dialogue: It provides a structured opportunity for dialogue between management and shareholders, which can contribute to better understanding and potentially more constructive relationships.

Key Aspects of the Duty to Explain

Understanding the practical application of Article 314 requires examining several key aspects:

Who Owes the Duty?

The duty is imposed on directors, accounting advisors (if the company has appointed them), statutory auditors, and executive officers (in companies that have adopted the "company with committees" governance structure). In practice, at a shareholders' meeting, it is typically the directors present, particularly the representative director or those responsible for the specific area being questioned, who are expected to provide the explanations. Statutory auditors also have a duty to explain matters related to their audit reports if questioned.

When is the Duty Triggered?

The duty arises when a shareholder, at a shareholders' meeting, requests an explanation regarding a "specific matter" (特定の事項 - tokutei no jikō). The request should be clear enough for the directors to understand what information is being sought.

What Constitutes a "Necessary Explanation" (必要な説明 - Hitsuyō na Setsumei)?

This is a central interpretive question. The law does not require directors to answer every conceivable question in exhaustive detail, nor does it mandate disclosure of all information the company possesses. The standard is one of "necessity."

• Objective Standard for an "Average Shareholder": Case law, such as a Tokyo High Court judgment on February 19, 1986 (Showa 61), and a Tokyo District Court judgment on May 13, 2004 (Heisei 16), has indicated that a "necessary explanation" is one that is objectively necessary for an "average shareholder" (平均的な株主 - heikinteki na kabunushi) to understand the matter in question sufficiently to make a rational judgment or assessment, particularly concerning an agenda item up for vote. The explanation should not be tailored to the most sophisticated financial analyst or, conversely, to someone with no business understanding, but rather to a shareholder with ordinary prudence and understanding.
• Sufficiency and Clarity: The explanation should be clear, directly address the substance of the shareholder's query, and be sufficiently detailed for its purpose. Vague, evasive, or overly technical responses that obscure rather than clarify may not meet the standard.
• Relationship to Agenda Items: While the duty is most clearly applicable to questions directly related to items on the meeting's agenda, questions about broader aspects of the company's business performance, financial condition, or governance practices might be considered relevant if they reasonably inform a shareholder's decision on an agenda item like the approval of financial statements, the appropriation of surplus (dividends), or the election/re-election of directors and auditors.

Grounds for Refusing to Provide an Explanation

Article 314 itself, along with Article 71 of the Ordinance for Enforcement of the Companies Act (会社法施行規則 - Kaishahō Shikō Kisoku), outlines specific circumstances under which directors are not obligated to provide an explanation, even if requested. These exceptions are crucial for balancing shareholder information rights with legitimate company and third-party interests:

1. Matter Not Relevant to the Subject Matter of the Shareholders' Meeting (株主総会の目的である事項に関しないものである場合): Questions must have a reasonable connection to the official agenda items of the meeting. Directors are not required to engage in wide-ranging discussions on topics wholly unrelated to the matters for which the meeting was convened.
2. Explanation Would Materially Prejudice the Common Interests of Shareholders (説明をすることにより株主共同の利益を著しく害する場合): This is a significant exception designed to protect sensitive company information. It typically covers:
   • Trade secrets or proprietary technology.
   • Confidential business strategies, ongoing negotiations, or information that, if disclosed publicly, could give competitors an unfair advantage or otherwise harm the company's market position.
   • Information related to pending litigation where disclosure could compromise the company's legal strategy.
3. Explanation Requires Investigation (説明をするために調査を要する場合):
   • This applies if the information sought is not readily available to the directors at the meeting and would necessitate a special investigation, data compilation, or analysis that cannot reasonably be performed during the meeting.
   • However, this ground for refusal is itself subject to limitations (Ordinance Article 71, Item 1(b)):
     • It cannot be invoked if the shareholder submitted the question a "considerable period of time" before the meeting, giving the company adequate opportunity to prepare.
     • It cannot be used if the lack of readiness to answer is due to the directors' or company's gross negligence.
     • It cannot be used if the information could have been easily investigated (e.g., readily available from company records).
       Directors are generally expected to anticipate reasonable questions on key agenda items and come prepared.
4. Explanation Would Infringe the Rights of the Company or a Third Party (Other than the Requesting Shareholder) (説明をすることにより株式会社その他の者（当該株主を除く。）の権利を侵害することとなる場合):
   • This exception protects legally recognized rights, including:
     • The privacy of individuals (e.g., personal information about employees, customers, or even other directors concerning non-public, personal matters). This is particularly relevant to the case study in Problem 25 concerning individual director bonuses.
     • Contractual confidentiality obligations owed by the company to third parties.
     • Intellectual property rights of others.
       A Nara District Court judgment on March 29, 2000 (Heisei 12), for instance, dealt with a company's refusal to provide details on individual director retirement bonuses, citing privacy concerns. Courts often engage in a balancing act here, weighing the shareholder's legitimate need for information against the individual's privacy interests, especially when the information pertains to the use of company funds for executive compensation.
5. Shareholder Repeatedly Seeks Substantially the Same Explanation (株主が実質的に同一の事項について繰り返して説明を求める場合): This is to prevent abuse of the Q&A process, ensure the orderly conduct of the meeting, and allow other shareholders an opportunity to ask questions. Once a matter has been adequately explained, directors are not obliged to repeat the explanation for the same shareholder.
6. Other Justifiable Grounds (その他説明をしないことにつき正当な理由がある場合): This is a residual, catch-all provision. It is interpreted narrowly and would cover situations where, for example, a question is clearly abusive, defamatory, intended solely to harass management, or where answering would compel the company to violate another overriding legal duty.

The Manner of Explanation and Refusal

Even when relying on a legitimate ground for refusal, the manner in which directors respond is important. A curt dismissal or an evasive answer without citing a proper legal basis can itself be problematic. Ideally, if an explanation is refused, the director or chairperson should clearly state the specific legal ground under Article 314 or the Ordinance upon which the refusal is based. The chairperson of the shareholders' meeting also plays a crucial role in managing the Q&A session, ensuring fairness to all shareholders while maintaining the meeting's order and focus (Article 315).

Consequences of Breaching the Duty to Explain

If directors or other officers improperly refuse to provide a "necessary explanation" when required, or if the explanation they provide is grossly inadequate, misleading, or false, this can constitute a procedural defect in the shareholders' meeting.

The primary remedy available to an aggrieved shareholder is to file a lawsuit to rescind (cancel) a resolution passed at that meeting (株主総会決議取消しの訴え - kabunushi sōkai ketsugi torikeshi no uttae) under Article 831, Paragraph 1, Item 1 of the Companies Act. This provision allows for rescission if there was a violation of laws, regulations, or the articles of incorporation concerning the "procedure for convocation of the shareholders meeting or the method of resolution." A significant breach of the duty to explain can be deemed such a procedural violation, particularly if it is shown that the lack of proper explanation could have reasonably influenced shareholders' votes on the resolution in question.

The court, when considering a rescission claim based on a breach of the duty to explain, will typically assess:

• Whether a "necessary explanation" was indeed improperly withheld.
• Whether the information sought was material to the shareholders' decision on the specific resolution being challenged.
• Whether the failure to explain likely affected the outcome of the vote on that resolution.
  A minor or inconsequential failure to explain a trivial point is unlikely to lead to the rescission of a major corporate resolution.

Illustrative Analysis: Retirement Bonuses and Evasive Answers (Problem 25)

The PDF's Problem 25 presents a scenario: Y社, a listed food company, recently experienced a product scandal and its performance declined. At its annual general meeting (AGM), a resolution was proposed to grant retirement bonuses (退職慰労金 - taishoku irōkin) to three departing directors (A, B, and C) "in accordance with the Company's prescribed standards and within a reasonable range," with the specific amounts, timing, and method of payment to be delegated to the board. Shareholder X, concerned about these payments given the company's situation, asked for the amounts of the bonuses. The representative director, D, chairing the meeting, refused to disclose individual amounts, citing (i) it was a "personal matter concerning individuals" (個人に関わる問題) and (ii) there was "no precedent" (慣例がない) for such disclosure. When X pressed for the legal basis for refusal, D cut off further questions stating, "Time is up. I believe this [refusal] is lawful (時間でございます。私は適法と考えております)." X believes this was a breach of Article 314 and wants to challenge the bonus resolution.

• X's Potential Claim: X could argue that D's refusal to provide meaningful information about the retirement bonus amounts (or at least the total proposed sum, or the "prescribed standards" for their calculation if a clear formula existed) was a breach of the duty to explain under Article 314. This procedural flaw, X would argue, tainted the subsequent vote approving the bonuses, making that resolution rescindable.
• Analysis of D's Refusal:
  • Relevance of the Question: Information about the quantum of retirement bonuses being paid from company funds to departing directors is highly relevant for shareholders asked to approve such payments, especially when the company has faced recent difficulties.
  • "Personal Matters" (Privacy) as a Ground: This points to Ordinance Article 71, Item 2 (infringement of third-party rights). While individual remuneration details can be sensitive, Japanese company law (Article 361) explicitly requires shareholder involvement in determining director remuneration generally. For significant payments like retirement bonuses, particularly when they are subject to shareholder approval (even if it's approval of a framework or delegation), a complete stonewall on any quantitative information might be difficult to sustain purely on privacy grounds if, for instance, the "prescribed standards" were not themselves transparent or easily assessable by shareholders. A balance must be struck. The Nara District Court judgment of March 29, 2000 (Heisei 12) addressed a similar issue.
  • "Lack of Precedent": This is not a recognized legal ground for refusing an explanation under Article 314 or the Ordinance. Past practice does not negate a current statutory duty.
  • "Time is up. I believe this is lawful": This is an inadequate and dismissive response. It fails to provide a substantive explanation for the bonuses or a valid legal reason for withholding information on their scale. It also improperly curtails the shareholder's right to seek clarification.
• Likely Judicial View: A court might well find that D's responses were insufficient. Failing to provide any meaningful information about the scale of the proposed bonuses (e.g., the total amount, the range per director, or the concrete "prescribed standards" if they lead to a determinable figure) could be viewed as a breach of the duty to provide a "necessary explanation." If this failure could have reasonably influenced the shareholders' vote on the bonus resolution (e.g., had they known the amounts were very large, they might have voted against), the resolution approving the bonuses could be subject to rescission.

Comparison with U.S. Practices

In the United States, particularly for publicly traded companies, detailed information on executive and director compensation, including retirement benefits, is typically provided in comprehensive proxy statements circulated to shareholders well in advance of annual meetings, as required by SEC regulations. The annual meeting itself often includes a Q&A session where shareholders can ask questions. However, there isn't a statutory duty as broadly and specifically defined as Japan's Article 314, obligating directors to answer, during the meeting itself, any specific question on any agenda item, with specific statutory grounds for refusal. Shareholder questions in U.S. meetings are generally managed by the chairperson under the company's rules of conduct for the meeting. Challenges regarding inadequate information or misleading statements related to proposals (like compensation) would more typically be framed as violations of securities laws concerning proxy disclosures (e.g., SEC Rule 14a-9) rather than a breach of a general "duty to explain" at the meeting regarding matters already detailed (or omitted) in proxy filings.

Conclusion

The duty of directors and other officers to provide necessary explanations at shareholders' meetings under Article 314 of the Japanese Companies Act is a cornerstone of shareholder rights and corporate transparency in Japan. It empowers shareholders to seek pertinent information, enabling them to make informed decisions on matters put to their vote and to effectively exercise their oversight functions. While this duty is not absolute, and directors have legitimate grounds to refuse explanations in certain circumstances (such as protecting trade secrets or individual privacy), any refusal must be properly justified under the legally prescribed exceptions. A significant failure by management to fulfill this duty can constitute a procedural flaw in the shareholders' meeting, potentially leading to the rescission of resolutions passed, thereby underscoring the importance for company leadership to engage with shareholders in a transparent, substantive, and legally compliant manner during these critical corporate forums.