Who Can Legally Bind Your Japanese Subsidiary? Understanding Corporate Representation

When engaging in business transactions with a Japanese company, or when your own Japanese subsidiary is entering into agreements, a critical question arises: who has the legal authority to act on behalf of the company and make its commitments binding? In Japan, like in many other jurisdictions, juridical persons (hōjin - 法人), including corporations, operate through natural persons – their designated representatives. Understanding the principles governing the authority of these representatives is essential for ensuring the validity and enforceability of contracts and other legal acts. This article delves into the framework of corporate representation under Japanese law, focusing on the scope of a representative's authority, common limitations, and the protections afforded to third parties.

The Foundation: Representatives as Agents of the Juridical Person

A juridical person, being an artificial legal entity, cannot act on its own. It requires individuals to carry out its functions, make decisions, and interact with the outside world. For the purpose of performing juridical acts (actions intended to create, alter, or extinguish legal rights and obligations), these individuals, typically directors or specifically designated representative directors, function as agents of the juridical person.

When a duly authorized representative acts on behalf of the juridical person and indicates that they are doing so (a principle known as kenmei - 顕名, or manifestation of agency), their actions directly bind the juridical person. The resulting rights and obligations accrue to the entity itself, not to the individual representative acting in their official capacity. In a sense, the acts of these key representatives are often seen as the acts of the juridical person itself, sometimes referred to as "representative acts" (daihyō kōi - 代表行為).

The Principle of Comprehensive Authority

A fundamental starting point in Japanese law is that certain designated representatives of a juridical person, such as a Representative Director (Daihyō Torishimariyaku - 代表取締役) of a Kabushiki Kaisha (joint-stock company), are generally considered to possess comprehensive agency authority (hōkatsu dairi no gensoku - 包括代理の原則). This means they are, in principle, empowered to perform all juridical acts relating to the business and affairs of that entity, unless their authority is specifically restricted.

Limitations on Representative Authority: Internal vs. Statutory

While the starting point is comprehensive authority for key representatives, this authority is not absolute and can be subject to various limitations. These limitations can broadly be categorized into:

1. Internal Limitations: Restrictions imposed by the juridical person's own internal rules, such as its Articles of Incorporation (teikan - 定款), resolutions passed at general meetings of shareholders or members, or decisions made by its board of directors.
2. Statutory Limitations: Restrictions imposed directly by provisions of law, which may include general principles of agency under the Civil Code or specific rules within the statutes governing particular types of juridical persons (e.g., the Companies Act, the General Incorporated Associations and Foundations Act).

The legal effect of an act performed by a representative in contravention of such limitations, particularly its impact on third parties, depends significantly on the nature of the limitation.

1. Internal Limitations on Representative Authority

Juridical persons, exercising their autonomy, can establish internal rules that restrict the authority of their representatives. For example, a company's Articles of Incorporation or a board resolution might stipulate that transactions exceeding a certain monetary value, or the disposal of significant assets, require prior approval from the board of directors or a general meeting of shareholders.

If a representative performs an act that violates such an internal limitation, that act is, in principle, an act of unauthorized agency (muken dairi - 無権代理) from the perspective of the juridical person's internal governance. Consequently, the juridical person would ideally not be bound by it.

Protection of Third Parties in Good Faith

However, a critical issue arises concerning third parties who deal with the representative. These third parties are often unaware of such internal limitations, which are not always publicly accessible or easily ascertainable. To protect the security of transactions and the reasonable expectations of those who deal with corporate representatives, Japanese law provides significant safeguards for third parties acting in good faith.

For many common types of juridical persons, including Kabushiki Kaisha (under the Companies Act, Article 349, Paragraph 5) and General Incorporated Associations/Foundations (under the Act governing them, Article 77, Paragraph 5, and Article 197 which applies Article 77(5) mutatis mutandis), the rule is that internal limitations on the authority of a duly appointed representative (such as a Representative Director) cannot be asserted against a third party who is in good faith (zen'i no daisan-sha - 善意の第三者).

• Rationale: Third parties are entitled to rely on the general comprehensive authority typically vested in a high-level corporate representative. Requiring them to investigate the internal approval processes for every transaction would be impractical and would severely hamper the speed and efficiency of commerce.
• "Good Faith" Standard: In this context, "good faith" generally means that the third party was actually unaware of the internal limitation on the representative's authority. Crucially, under these specific statutory provisions, the third party is typically not required to prove that they were also "without negligence" (mukashitsu - 無過失) in being unaware. This provides a broader protection to third parties compared to some general apparent agency rules under the Civil Code (like Article 110, which requires a "justifiable reason" often interpreted as good faith and no negligence). This stronger protection for third parties when dealing with formally appointed representatives is based on the representative's inherent comprehensive authority.
• Non-Registered Limitations: For these types of entities (KKs, General Incorporated Associations/Foundations), internal limitations on a representative director's authority are not typically matters for public commercial registration. Therefore, the principle that registered matters can be asserted against all third parties (and conversely, unregistered matters cannot be asserted against good-faith third parties) does not directly resolve the issue of these non-registrable internal limitations; specific statutory provisions like those mentioned above provide the basis for protecting good-faith third parties. (This contrasts with some other entity types, like NPOs, where limitations on a director's representative authority can be registered and thus asserted against third parties).

Example: If the Articles of Incorporation of Company A (a KK) require board approval for any contract exceeding ¥100 million, but its Representative Director B signs a ¥150 million contract with Company C without obtaining such approval, Company C, if unaware of this internal requirement, can generally enforce the contract against Company A.

What if the Third Party Knew of the General Limitation but Believed Specific Approval Was Given?

A more nuanced situation arises if a third party is aware of a general internal restriction (e.g., that board approval is needed for certain types of transactions) but is then led to believe by the representative that specific approval was obtained for the particular transaction at hand. For instance, the representative might present what appears to be a valid (though perhaps actually forged or improperly obtained) board resolution approving the specific deal.

In such cases, while the specific statutory protections for good-faith ignorance of internal limitations (like Companies Act Art. 349(5)) might not directly apply (as the third party knew of the general limitation rule), the third party might still be protected under the general Civil Code principles of apparent agency, specifically Article 110 (apparent authority for acts exceeding authority). If the third party had a "justifiable reason" to believe that the specific approval was indeed granted (making the representative appear authorized for this instance), the juridical person could be bound. The Supreme Court (judgment of November 29, 1985, Minshu Vol. 39, No. 7, p. 1760) has applied Article 110 by "analogy" in situations where a representative acted beyond an internal restriction known to the third party, but the third party relied on a specific (albeit false) representation that the necessary internal approval had been obtained for that transaction.

2. Limitations on Representative Authority Imposed by Law

Beyond internal rules, a representative's authority can also be restricted by direct provisions of law.

A. Restrictions on the Power to Delegate (Inin Kengen no Seigen)

While representatives generally have comprehensive authority, their ability to delegate their core representational functions to others (i.e., appoint sub-agents for the juridical person) can be limited by statute, particularly for certain types of non-profit entities. For example, Article 17-2 of the NPO Act stipulates that NPO directors can only delegate authority for specific acts if not prohibited by the articles of association or a general meeting resolution.

For commercial companies like KKs and GKs, and for General Incorporated Associations/Foundations, there are fewer explicit statutory prohibitions on the power of a representative director to delegate tasks. They generally can appoint others to carry out specific functions. However, an overly broad or imprudent delegation of core managerial or representational responsibilities might still constitute a breach of the representative's fiduciary duty of care (zenkan chūi gimu - 善管注意義務) owed to the juridical person itself, potentially leading to internal liability for the representative.

B. Prohibition of Conflict-of-Interest Transactions (Rieki Sōhan Torihiki)

A crucial set of statutory limitations concerns "conflict-of-interest transactions" (rieki sōhan torihiki - 利益相反取引). Representatives are generally restricted from acting on behalf of the juridical person in transactions where their personal interests (or the interests of another party they might also be representing) conflict with the interests of the juridical person. Common examples include:

1. Self-Dealing: Transactions where the representative, in their personal capacity, is the other party to a contract with the juridical person they represent (e.g., a director selling their personal property to the company).
2. Indirect Conflicts: Transactions between the juridical person and a third party, where the transaction also benefits the representative personally in a way that could compromise their loyalty to the juridical person (e.g., the juridical person guaranteeing the representative's personal debt).
3. Dual Agency (in some contexts): Representing both parties to a transaction.

The specific rules and procedures for handling such conflicts vary by entity type:

• NPOs and similar entities: Often require the appointment of a special representative by a supervisory authority or other mechanism to act for the juridical person in the conflict-of-interest transaction (e.g., NPO Act Article 17-4). An act by the regular representative in violation of such rules is typically an act of unauthorized agency.
• Companies (KK, GK) and General Incorporated Associations/Foundations: For these entities, conflict-of-interest transactions by a representative (e.g., a director of a KK engaging in a self-dealing transaction) typically require prior approval from an appropriate corporate body, such as the board of directors or a general meeting of shareholders/members (e.g., Companies Act Article 356; General Incorporated Associations Act Article 84).
  • If such required approval is not obtained, the act is generally considered unauthorized vis-à-vis the juridical person. The effect on third parties can be complex. Historically, for companies, the Supreme Court initially treated such unapproved acts as unauthorized agency but later moved to a position where the transaction is void as between the company and the director, but this voidness cannot be asserted against a good-faith third party, with the burden of proving the third party's bad faith falling on the company (Supreme Court, October 13, 1971, Minshu Vol. 25, No. 7, p. 900).

C. Other Statutory Limitations on Authority

Specific statutes may impose other direct limitations on a representative's authority based on the nature of the juridical person or the transaction. For example, laws governing local public entities might stipulate that only a specific official (e.g., an accounting manager, not the mayor) has the authority to receive or disburse municipal funds.

If a representative acts in violation of such clear statutory limitations on who is empowered to perform an act for the entity, their act is generally one of unauthorized agency. Third-party protection in such cases often hinges on the applicability of apparent agency doctrines, typically Civil Code Article 110 (acts exceeding authority). However, establishing a "justifiable reason" for the third party to believe authority existed can be very difficult if the limitation is clearly set out in a public law, as "ignorance of the law is generally not an excuse" (hōrei no fuchi wa yurusarezu - 法令の不知は許さず).

A complex area involves situations where a representative's act requires the approval or resolution of another corporate organ (e.g., a board of directors' resolution for significant asset disposals by a representative director of a KK, as per Companies Act Article 362, Paragraph 4). Case law for companies has often treated the lack of such internal board approval as an internal procedural matter that does not necessarily invalidate the representative director's act with respect to third parties, especially if the third party was unaware of the lack of approval (e.g., Supreme Court, September 22, 1965, Minshu Vol. 19, No. 6, p. 1656; Supreme Court, April 17, 2009, Minshu Vol. 63, No. 4, p. 535). This approach prioritizes transactional security in dealings with high-level corporate representatives. However, for other types of juridical persons, such as school corporations under older laws, similar internal approval requirements in their articles of association were sometimes treated as limitations on representative authority, with third-party protection hinging on their good faith. The specific statutory framework for each entity type is crucial.

Practical Implications for Due Diligence

• Verifying Representative Status: For significant transactions, it is standard practice and prudent due diligence in Japan to verify the status and identity of the individual purporting to represent a Japanese company. This is commonly done by obtaining a current copy of the company's Commercial Registration Certificate (tōkibo tōhon - 登記簿謄本 or gendai jikō zenbu shōmeisho - 現在事項全部証明書), which lists the currently appointed Representative Director(s).
• Assessing Transactional Authority: While internal limitations are often not assertable against good-faith third parties when dealing with a Representative Director of a company, awareness of common situations that might statutorily require higher-level corporate approval (e.g., significant asset disposals, transactions outside the company's usual business lines, clear conflict-of-interest scenarios) is beneficial.
• The Role of Corporate Seals: In Japanese business practice, corporate seals (hanko or in鑑 - いんかん), particularly the registered company seal (jitsuin - 実印) often accompanied by a Seal Certificate (inkan shōmeisho - 印鑑証明書), play a significant role in authenticating documents and evidencing authority, although they are not always conclusive proof of authority for a specific transaction.

Conclusion: Ensuring Binding Commitments with Japanese Entities

The authority of corporate representatives to bind their juridical persons in Japan is a cornerstone of commercial activity. While key representatives like Representative Directors are generally endowed with comprehensive authority, this power is subject to both internal governance mechanisms and direct statutory limitations. Japanese law strives to balance the juridical person's control over its representatives with the critical need to protect third parties who deal with these representatives in good faith, thereby fostering trust and security in transactions. For foreign businesses, understanding this legal framework—recognizing who has the presumptive authority to act, the types of limitations that might exist, and the circumstances under which a third party's reliance will be upheld—is vital for ensuring that agreements entered into with or by their Japanese counterparts or subsidiaries are legally sound and enforceable.