Kabushiki kaisha

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Kabushiki kaisha or kabushiki gaisha (株式会社? lit. "stock companies") are a type of business corporation (会社 kaisha?) defined under Japanese law.

Contents

[edit] Usage in language

Both kabushiki kaisha and the rendaku form kabushiki gaisha are used. The "K" spelling is much more common in the names of companies and in English-language legal literature, whereas the "G" pronunciation is more common in Japanese.

In Japanese, "kabushiki kaisha" can be used as a prefix (e.g. 株式会社電通 Kabushiki kaisha Dentsū) or as a suffix (e.g. トヨタ自動車株式会社 Toyota Jidōsha Kabushiki kaisha). It is often abbreviated as "(株)," its first character.

Many Japanese companies translate the phrase "kabushiki kaisha" as "Co. Ltd." while others use the more Americanized translations Corporation or Incorporated. English texts often refer to kabushiki kaisha as "joint stock companies"; while this is close to a literal translation of the term, the two are not the same. The Japanese government previously endorsed "business corporation" as an official translation[1] but now uses the literal translation "stock company."[2]

[edit] History

The first kabushiki kaisha was the First National Bank of Japan, incorporated in 1873.

Rules regarding kabushiki kaisha were set out in the Civil Code of Japan. During the American occupation following World War II, the occupation authorities introduced revisions to the Commercial Code based on the Illinois Business Corporation Act of 1933, giving kabushiki kaisha many traits of American corporations.[3]

Over time, Japanese and U.S. corporate law diverged, and K.K. assumed many characteristics not found in U.S. corporations. For instance, a K.K. could not buy back its own stock (a restriction which still stands), issue stock for a price of less than ¥50,000 per share (effective 1982), or operate with paid-in capital of less than ¥10 million (effective 1991).[4]

On June 29, 2005, the Diet of Japan passed a new Corporation Code (会社法 kaisha-hō?), which took effect on May 1, 2006.[5] The new law greatly affected the formation and function of K.K.'s and other Japanese business organizations, bringing them closer to their contemporary counterparts in the U.S.

A complete translation into English of the new corporations law and summary analysis is available at www.japanlaw.info

[edit] Formation

A kabushiki kaisha may be started with capital as low as ¥1, making the total cost of a K.K. incorporation approximately ¥240,000 (about US$2,000) in taxes and notarization fees. Under the old Commercial Code, a K.K. required starting capital of ¥10 million (about US$87,000); a lower capital requirement was later instituted, but corporations with under ¥3 million in assets were barred from issuing dividends, and companies were required to increase their capital to ¥10 million within five years of formation.[6]

The main steps in incorporation are the following:

  1. Preparation and notarization of articles of incorporation
  2. Receipt of capital, either directly or through an offering

The incorporation of a K.K. is carried out by one or more incorporators (発起人 hokkinin?, sometimes referred to as "promoters"). Although seven incorporators were required as recently as the 1980s, a K.K. now only needs one incorporator, which may be an individual or a corporation. If there are multiple incorporators they must sign a partnership agreement before incorporating the company.

[edit] Articles of incorporation

The articles of incorporation of a K.K. must include, at a minimum:

  1. The name of the company
  2. The purposes of the company
  3. The location of its head office
  4. The value or minimum amount of assets received in exchange for the initial issuance of shares
  5. The name and address of the incorporator(s)

The purpose statement requires some specialized knowledge, as Japan follows a strict ultra vires doctrine and does not allow a K.K. to be formed "for any purpose," as is legal in most of the English-speaking world. Judicial or administrative scriveners are often hired to draft the purposes of a new company.

Additionally, the articles of incorporation must contain the following if applicable:

  1. Any non-cash assets contributed as capital to the company, the name of the contributor and the number of shares issued for such assets
  2. Any assets promised to be purchased after the incorporation of the company and the name of the provider
  3. Any compensation to be paid to the incorporator(s)
  4. Non-routine incorporation expenses which will be borne by the company

Other matters may also be included, such as limits on the number of directors and auditors. The Corporation Code allows a K.K. to be formed as a close corporation (非公開株式会社 hikōkai kabushiki kaisha?), in which case the board of directors must approve any transfer of shares between shareholders; this designation must be made in the articles of incorporation.

The articles must be sealed by the incorporator(s) and notarized by a notary public, then filed with the Legal Affairs Bureau in the jurisdiction where the company will have its head office.

[edit] Receipt of capital

In a direct incorporation, each incorporator receives a specified amount of stock as designated in the articles of incorporation. Each incorporator must then promptly pay their share of the starting capital of the company, and if no directors have been designated in the articles of incorporation, meet to determine the initial directors and other officers.

The other method is an "incorporation by offering," in which each incorporator becomes the underwriter of a specified number of shares (at least one each), and the other shares are offered to other investors. As in a direct incorporation, the incorporators must then hold an organizational meeting to appoint the initial directors and other officers. Any person wishing to receive shares must provide an application to the incorporator, and then make payment for their shares by a date specified by the incorporator(s).

Capital must be received in a commercial bank account designated by the incorporator(s), and the bank must provide certification that payment has been made. Once the capital has been received and certified, the incorporation may be registered at the Legal Affairs Bureau.

[edit] Structure

[edit] Board of directors

Under present law, a K.K. must have a board of directors (取締役会 torishimariyaku kai?) consisting of at least three individuals. Directors have a statutory term of office of two years, and auditors have a term of four years. Close companies can exist with only one director, with no statutory term of office.

At least one director is designated as a representative director (代表取締役 daihyō torishimariyaku?), holds the corporate seal and is empowered to represent the company in transactions. The representative director must "report" to the board of directors every three months; the exact meaning of this statutory provision is unclear, but some legal scholars interpret it to mean that the board must meet every three months. At least one director and one representative director must be a resident of Japan.[5]

Directors are mandatories (agents) of the shareholders, and the representative director is a mandatory of the board. Any action outside of these mandates is considered a breach of mandatory duty.[7]

[edit] Auditing and reporting

Every K.K. with multiple directors must have at least one statutory auditor (監査役 kansayaku?). Statutory auditors report to the shareholders, and are empowered to demand financial and operational reports from the directors.

K.K.s with capital of over ¥500m, liabilities of over ¥2bn and/or publicly traded securities are required to have three statutory auditors, and must also have an annual audit performed by an outside CPA. Public K.K.s must also file securities law reports with the Ministry of Finance.

Under the new Company Law, public and other non-close K.K.s may either have a statutory auditor, or a nominating committee (指名委員会 shimei iinkai?), auditing committee (監査委員会 kansa iinkai?) and compensation committee (報酬委員会 hōshū iinkai?) structure similar to that of American public corporations.

Close K.K.s may also have a single person serving as director and statutory auditor, regardless of capital or liabilities.

A statutory auditor may be any person who is not an employee or director of the company. In practice, the position is often filled by a very senior employee close to retirement, or by an outside attorney or accountant.

[edit] Officers

Japanese law does not designate any corporate officer positions. Most Japanese-owned kabushiki kaisha do not have "officers" per se, but are directly managed by the directors, one of whom generally has the title of president (社長 shachō?). The Japanese equivalent of a corporate vice president is a department chief (部長 buchō?). Traditionally, under the lifetime employment system, directors and department chiefs begin their careers as line employees of the company and work their way up the management hierarchy over time. This is not the case in most foreign-owned companies in Japan, and some native companies have also abandoned this system in recent years in favour of encouraging more lateral movement in management.

[edit] Other legal issues

[edit] Taxation

Kabushiki kaisha are subject to double taxation of profits and dividends, as are corporations in most countries. In contrast to many other countries, however, Japan also levies double taxes on close corporations (yugen kaisha and godo kaisha). This makes taxation a minor issue when deciding how to structure a business in Japan. As all publicly traded companies follow the K.K. structure, smaller businesses often choose to incorporate as a K.K. simply to appear more prestigious.

In addition to income taxes, K.K.s must also pay registration taxes to the national government, and may be subject to local taxes.

[edit] Derivative litigation

Generally, the power to bring actions against the directors on the corporation's behalf is granted to the statutory auditor.

Historically, derivative suits by shareholders were rare in Japan. Shareholders have been permitted to sue on the corporation's behalf since the postwar Americanization of the Commercial Code; however, this power was severely limited by the nature of court costs in Japan. Because the cost to file a civil action is proportional to the amount of damages being claimed, shareholders rarely had motivation to sue on the company's behalf.

In 1993, the Commercial Code was amended to reduce the filing fee for all shareholder derivative suits to ¥8,200 per claim. This led to a rise in the number of derivative suits heard by Japanese courts, from 31 pending cases in 1992 to 286 in 1999, and to a number of very high-profile shareholder actions, such as those against Daiwa Bank and Nomura Securities[8]

[edit] See also

[edit] Footnotes

  1. ^ "法令用語「日英対訳辞書」まとまる　政府検討委," Asahi Shimbun, March 18, 2006. (summary)
  2. ^ Standard Bilingual Dictionary of Legal Terminology.
  3. ^ Ramseyer, Mark, and Minoru Nakazato, Japanese Law: An Economic Approach (Chicago: University of Chicago Press, 1999), p. 111.
  4. ^ Ramseyer, op. cit., p. 123.
  5. ^ a b Japan External Trade Organization, "Investing in Japan: Incorporating Your Business[dead link – history]."
  6. ^ Terrie Lloyd, "One Yen Companies – Part Two," Work in Japan.com.
  7. ^ Yamazaki Bakery K.K. v. Iijima, 1015 Hanrei Jiho 27 (Tokyo Dist. Ct., March 26, 1981).
  8. ^ West, Mark D. "Why Shareholders Sue: The Evidence from Japan," Journal of Legal Studies 30:351 (2001).