Reforms Under the New Company Law 1. Passage of the New Law 2
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Current News (C)JETRO Japan Economic Monthly, Aug 2005 Reforms under the New Company Law Will It Be a Catalyst for Business and Industrial Revitalization? Japanese Economy Division Summary The enactment of the new Company Law in June 2005 was the culmination of recent efforts by Japan to reconstruct its corporate legislative framework. The underlying goal was to reform the law in line with the contemporary business environment not only by introducing new deregulations and the principle of autonomy in corporate governance, but also by introducing stricter regulations as required in specific areas of corporate governance and legal compliance. The revised law facilitates corporate establishment, operation, reorganization and rehabilitation, aiming at a revitalization of Japanese businesses. 1. Passage of the New Law The Company Law (Kaisha Ho) was enacted with its passage by the House of Councillors on June 29, 2005. The revised law comprehensively covers corporations (joint-stock companies [kabushiki-gaisha], traditional limited-liability companies [yugen-gaisha], limited partnerships [goshi-gaisha] and unlimited partnerships [gomei-gaisha]) that formerly had been subjected to a diverse range of legislation, including the Commercial Code, Limited Liability Company Law and Audit Special Exceptions Law. Other substantive changes in the old law were made and the language was modernized. The following is an introduction to the new Company Law, focusing on changes and deregulations concerning corporate establishment, operation and reorganization. 2. Background (1) Previous revisions of Commercial Code Through the first part of the 1990s, the Commercial Code was generally revised once every four or five years, but in the latter part of that decade it came to be revised just about every year in response to rapid changes in the economic environment and requests from the business world. Major revisions made from the mid-1990s include relaxation of treasury stock acquisitions (1994), an introduction of a stock option system (1997), introduction of the “company with committees” system, simplification of merger procedures in 1997, introduction of equity swap and equity transfer systems in 1999 and introduction of a corporate divestiture system in 2000. But with so many revisions in such a short period, the need arose for overall consistency, so it was decided to consolidate, redefine and substantively revise corporate legislation as a whole. Also, in order to make the legislation more accessible, the relevant provisions of the Commercial Code enacted in 1899 were converted from classical literary Japanese to modern Japanese. Current News (C)JETRO Japan Economic Monthly, Aug 2005 Fig. 1 Revisions of Commercial Code and Related Laws Year Revision 1994 Relaxation of the prohibition of treasury stock acquisitions Simplification of merger procedures (e.g., elimination of requirement for a general 1994 shareholder's meeting) Introduction of stock option system 1998 Lifting of ban on using capital reserves to retire treasury stock 1999 Introduction of equity swap and transfer systems 2000 Introduction of corporate divestiture system 2001 Lifting of ban on treasury stock Switch to a more flexible system of setting minimum trading lots for stocks Simplification of procedures for reduction of legal reserves Relaxation of rules on stock options, expansion of scope of classified stock Expansion of types of classified stocks, introduction of definition of new-issue subscription rights (joint definition of warrant bonds and convertible bonds) 2002 Introduction of "company with committees" system Introduction of consolidated accounting Relaxation of rules on acquiring treasury stock (board of directors may decide, if so 2003 authorized under articles of incorporation) Creation of electronic (online) public announcement and paperless (no certificate) stock 2004 system 2005 Creation of limited-liability partnership system 2006 Implementation of Company Law • Elimination of minimum capital requirement • Creation of limited-liability companies • Flexibility in corporate governance frameworks 2007 Enforcement of Company Law provisions for determining merger value (2) Implementation The new Company Law is to be implemented no more than 18 months from the date of its promulgation, so officials are aiming for implementation by around May 2006. The provisions concerning the determination of merger values will be implemented a year later than the main body of the law. (3) Changes under the new law The new Company Law includes many important deregulations, partly in response to requests from the business world. Greater conveniences under the new law include: • Less time and money required to set up a new company. • New forms of corporations for increased options when starting a business. • More flexible corporate governance in line with company scale and type (listed or unlisted) for reduced operating costs and more efficient management. • More flexible and more simplified corporate reorganization. • Easier corporate rehabilitation and second chances for entrepreneurs . At the same time, stronger regulations were introduced in connection with legal and regulatory compliance, for example, compulsory internal control systems for big companies. Current News (C)JETRO Japan Economic Monthly, Aug 2005 3. Greater Leeway in Establishing Companies The new law will enable joint-stock companies to be set up with less cost and in less time than at present, thanks to the abolition of minimum-capital requirements and the simplification of procedures. It is hoped that this will promote greater entrepreneurship. (1) Elimination of minimum-capital requirement Under existing legislation, joint-stock companies and limited-liability companies were required to have capital funds of at least 10 million yen and 3 million yen, respectively. Under the new law, these companies can start with capital of even just one yen.1 Companies with net assets of less than three million yen, however, may not pay out dividends from their capital surpluses. (2) Relaxation of investment in kind Under the present Commercial Code, investment in kind (investments made with securities, real estate, movable property or other nonmonetary assets) must be examined by a court-appointed inspector, unless the investment is less than one-fifth of the initial capital and does not exceed five million yen. Under the new Company Law, only the latter is still applied. (3) Simplified establishment procedures The existing legislation requires a capital custody certificate issued by a bank or other financial institution to prove that the invested assets are on deposit at the time of establishment of a new company. This requirement has been relaxed under the new law: In the case of establishment without any outside offering of shares, the proof may be provided in any reasonable form, such as a certificate of deposit balance. Banks have been cautious about issuing capital custody certificates, and the investigations conducted for this purpose are liable to be time-consuming (in contrast to the issue of certificates of deposit balance, which is usually routine and quick). The relaxed requirement promises to shorten the amount of time required for establishing a new company. 4. Greater Flexibility and Speedier Decision-Making (1) Freedom to organize governance Under existing legislation, the governance framework that a joint-stock company must establish is determined by the size of its capital fund or liabilities, with separate provisions for a limited-liability company. The new law combines limited-liability companies in one category and 1 This results in a major reduction in the minimum cost of establishing a joint-stock company. Up to now it has taken at least 10.3 million yen or so, but under the new law it will only take about 240,000 yen: initial capital (one yen), notary’s certification fee (50,000 yen), stamp duty on original copy of articles of incorporation kept by notary (40,000), and registration and license taxes (150,000 yen if the capital fund is one yen). (See Aizawa 2005, p. 33.) Current News (C)JETRO Japan Economic Monthly, Aug 2005 distinguishes among joint-stock companies by size and whether or not there are restrictions on the transfer of shares; a company’s governance framework is determined by these distinctions. Greater flexibility is the result. First, under the existing Commercial Code, the rules for governance are based on company size, meaning that even if a company is a wholly owned subsidiary of another, if it is large, it is subject to the same strict requirements as those applied to a company whose shares are publicly traded, which presents problems. Secondly, smaller companies are not allowed, even at their own discretion, to set up the same sort of internal governance framework as larger companies. Figure 2 presents the main features of the requirements for governance organs under the existing legislation and the new Company Law. Fig. 2 Types of Companies and Governance Organs Current legislation New Company Law Freely No. of Term of Type of Governance No. of Term of Type of company Governance framework transferable directors directors company framework directors directors shares Board of directors, board Board of auditors Large (at least Auditors of auditors, and no 2 years Large (at least or committees 500 million accounting 500 million yen yen in capital auditor ⇒ in capital or 20 or 20 billion Board of billion yen in Above plus (board yen in directors, three 2 years, liabilities) of)