Japanese Law and Government/Commercial Law

The Commercial Code or Shoho (商法) [1] is one of the Six Codes of Japan, and deals with the creation and operation of businesses. This chapter covers the 2005 revisions to the Commercial Code, including the New Company Law (新会社法 Shin-Kaisha-ho) [2], most of which are effective May 1, 2006. All citations are to the Commercial Code unless indicated otherwise.

Scope

The Commercial Code principally applies to the operations of merchants (商人 shonin) and to commercial acts (商行為 shokoi) (Article 1).

Merchants

Merchants are defined in two classes: inherent merchants (固有の商人 koyu no shonin) and quasi-merchants (擬制商人 gisei shonin) (Article 4).

An inherent merchant must meet three criteria:

1. A person; either a natural person or company.
2. Engaging in commercial acts (defined below).
3. Operating under their own name. This means that a company is a merchant, but directors and employees are not.

The "quasi-merchant" category is generally applied to farmers who sell their own produce, and to mining companies. Some other companies engaged in activities not strictly considered to be "commercial acts" may also become quasi-merchants by virtue of being organized as for-profit corporations.

Merchants are required to register various information with a local Legal Affairs Bureau (法務局 homukyoku) of the Ministry of Justice. Every business, for instance, must register its trade name, as well as the name and address of its owner and its manager. These registrations form a public record of the business called a tokibo (登記簿). Both individuals and companies must make registrations, although there are additional requirements for companies, detailed below.

Merchants have fairly broad leeway to choose their trade name (商号 shogo), with two major restrictions: companies must denote their legal classification in their trade name, and the trade name may not be identical to or closely resemble the trade name of another person.

Commercial acts

Commercial acts are defined as absolute commercial acts (絶対的商行為 zettaiteki shokoi), business commercial acts (営業的商行為 eigyoteki shokoi) or ancillary commercial acts (付属的商行為 fuzokuteki shokoi).

An absolute commercial act is one that is construed as a commercial act no matter who the actor(s) happen to be. There are four basic types (Article 501):

1. Buying and selling
2. Entering a contract for sale
3. Exchanging at a market
4. Acts related to instruments (commercial paper, invoices, etc.)

Business commercial acts are only commercial acts when they are engaged in continuously by a merchant. There are twelve basic types (Article 502):

1. Renting of personal and real property
2. Manufacturing and production
3. Providing of electricity and gas
4. Transportation
5. Contracting for projects or labor
6. Publishing, printing, and photography
7. Operation of an inn, restaurant, or amusement facility
8. Currency exchange and other banking transactions
9. Insurance
10. Accepting deposits
11. Brokerage
12. Acting as an agent in a commercial act

Any act a merchant undertakes in the course of business is construed as an ancillary commercial act (Article 503).

Special rules for commercial acts

Agency

Agency may be contractual agency (締約代理商), where the agent enters a contract on the principal's behalf, or intermediary agency (媒介代理商), where the principal enters a contract with a party introduced by the agent.

The basic duties of an agent are:

• to notify the principal of each transaction entered into on the principal's behalf (Article 27)
• to refrain from engaging in the same line of business as the principal (Article 28.1)

Brokerage

Brokers (仲立人 nakadachi-nin) are defined as persons who engage as intermediaries for multiple merchants (Article 543). Brokers differ from intermediary agents in that they do not have a single principal; rather, they introduce two parties with whom they may have no formal contract at all, and then receive a commission on the final contract entered between the parties.

The basic duties of a broker are:

• to keep custody of specimen copies used in the intermediating process (Article 545)
• to prepare and provide to the parties a closing document (結約書 ketsuyakusho) containing the name and address of each party (Article 546)
• to keep a record book containing the names and addresses of parties to each brokered transaction (Article 547)

Transportation

Transport by land and inland waterway is governed by commercial act provisions of the Commercial Code. The shipper (運送人 unsonin) must provide a bill of lading (貨物引換証 kabutsu hikikaesho) to the consignor (荷送人 niokurinin) at the consignor's request (Article 571). The bill of lading may be transferred to a third party by endorsement; the holder of the bill may accept the shipment or demand that shipment be stopped or that the shipped item be returned to sender (Article 578).

A separate chapter is dedicated to maritime transport (海商 kaisho). The Commercial Code has no special rules governing air transport.

Partnerships

Under the Commercial Code, there are four types of companies: gomei kaisha (合名会社), goshi kaisha (合資会社), godo kaisha (合同会社) and kabushiki kaisha (株式会社). All four are considered to be juridicial persons. [Until 2006, many businesses were set up as yugen kaisha (有限会社), a form of limited company modeled after the German GmbH; these businesses are now designated as special yugen kaisha (特例有限会社 tokurei yugen kaisha) and generally treated as kabushiki kaisha.]

The first three, discussed further in this section, are variants on the general concept of a partnership (組合 kumiai). The partners (社員 shain) form the company by contract and provide its capital.

A gomei kaisha is similar to a general partnership in English-speaking countries. If the company is unable to fulfill its debts, the partners are each individually responsible for satisfying those debts.

A goshi kaisha is similar to a limited partnership in English-speaking countries. In a goshi kaisha, at least one of the partners is a limited partner (有限責任社員 yugen sekinin shain). The limited partner(s) are not individually liable for the company's debts: they are only liable for the amount they invest.

A godo kaisha is similar to an American limited liability company. Each of the partners is a limited partner, only liable for the amount they invest. This is an important distinction between godo kaisha and other partnerships: creditors can only count on receiving the amount of capital paid into the company.

Small businesses are the most likely to be organized as partnerships; larger businesses are more likely to incorporate themselves as kabushiki kaisha.

Corporations (kabushiki kaisha)

The predominant form of company in Japan is the kabushiki kaisha, officially translated in English as "business corporation." Kabushiki kaisha are governed by the Company Law (会社法 Kaisha-ho) of 2005, which supersedes many Commercial Code provisions that previously applied to kabushiki kaisha. All citations in this section are to the Company Law.

Formation

Forming a kabushiki kaisha requires the services of at least one promoter (発起人 hokkinin). The general steps are as follows:

1. The promoter prepares articles of incorporation (定款 teikan) and has them notarized.
2. The company receives capital contributions. Usually, these are paid in cash to a bank or a trust company (Article 34.2). Property may also be given to the company in exchange for shares, but this generally requires a court-appointed appraiser to determine the fair value of the contribution (Article 33). As a general rule, at least one-fourth of the issuable shares must be issued at this time (Article 37.3) and the promoter must take at least one share. There are two separate procedures for issuing shares:
   • In an establishment by promoter (発起設立 hokki setsuritsu), the promoter receives all shares in exchange for their investment, and then appoints directors of the company directly (often in the text of the articles of incorporation).
   • In an establishment by offering (募集設立 boshu setsuritsu), the promoter receives at least one share, and offers remaining shares to third parties. The initial shareholders then hold an organizational meeting (創立総会 soritsu sokai ) to elect directors. If the promoter is to be the only shareholder, the promoter may do this individually (Article 25.1.1).
3. The directors hold a board meeting and elect a representative director.
4. The formation of the company is registered at the Legal Affairs Bureau, at which point the company is deemed to be legally formed (Article 49).

Articles of incorporation

Articles of incorporation must contain five elements (Article 27):

1. The purpose of the company
2. The trade name of the company
3. The address of the head office
4. The amount of capital initially paid into the company
5. The promoter's name and address

Under the pre-2006 law, the number of issuable shares, number of shares to be issued, and method of public notice were also required in the articles of incorporation.

Structure

The basic actors in a kabushiki kaisha are:

• Shareholders (株主 kabunushi) - elect directors and statutory auditors, and approve major transactions
• Directors (取締役 torishimariyaku) - make decisions regarding company operations; elect representative directors
• Representative directors (代表取締役 daihyo torishimariyaku) - represent the company and make executive decisions; most companies have one to three, but the number is theoretically unlimited
• Statutory auditors (監査役 kansayaku) - monitor the actions of the directors

The number of directors and statutory auditors depends on the nature of the company.

Type	Description	Directors	Statutory auditors
Special yugen kaisha	Companies which existed as yugen kaisha before May 2006	One	Auditor optional
Large companies	More than ¥500 million in capital or ¥2 billion in liabilities	At least three	At least three or a committee system. An external accounting auditor is also necessary.
Closed companies	Companies with restrictions on the transfer of all classes of shares, except large companies	At least one	No requirement; may have statutory auditor(s) or a committee system
Small companies	All other companies	At least three	At least one

Japanese companies do not usually have separate officers; the president (社長 shacho) is generally a representative director who supervises a number of department chiefs (部長 bucho).

Shareholders

Shareholder meetings

A shareholder meeting may be convened by:

1. the representative director, with two weeks' prior notice to shareholders
2. one or more shareholders who own three percent or more of the total number of shares outstanding, by demanding that the representative director call a meeting; if the director does not comply, a court can order a meeting (Article 297)
3. all shareholders (Article 300)

Sokaiya

Some individuals, known as sokaiya (総会屋), purchase minor holdings in companies, and then extort money from the management by threatening to disrupt shareholder meetings with accusations of lewd behavior, questioning business judgment, etc.

Sokaiya activities have been criminalized under the Company Law. The maximum penalties are (Article 970):

• 5 years in prison and/or ¥5,000,000 fine for sokaiya
• 3 years in prison or ¥3,000,000 fine for executives or employees who pay a sokaiya

Sokaiya must also return any extorted amounts to the company (Article 120).

Share certificates

If a company issues share certificates, any transfer of shares prior to the issuance of the corresponding certificate(s) cannot be asserted against the company (Article 128.2).