This column explains key legal rules and business practices in Japan that foreign investors should understand when investing in Japanese start-ups.

Chapter 1: Overview of the Japanese Companies Act

Most Japanese start-ups with venture capital (VC) investors adopt the legal form of a joint stock corporation (Kabushiki Kaisha or “KK”).

This chapter provides an overview of the main rules under the Japanese Companies Act applicable to such corporations.

(1) Overview

A joint stock corporation issues shares, which represent ownership interests in the company. These shares typically grant rights such as dividends, distributions of residual assets upon liquidation, and voting rights at shareholders’ meetings (and, where applicable, class shareholders’ meetings).

Most joint stock corporations issue only a single class of shares (i.e., ordinary shares). However, Japanese law permits the issuance of multiple classes of shares. In practice, start-ups with VC investment often adopt a multi-class structure, consisting of:

– ordinary shares held by founders, friends, and angel investors; and
– one or more classes of preferred shares held by VC investors.

In principle, shareholders are free to transfer their shares. However, under the Japanese Companies Act, a company may include transfer restrictions in its Articles of Incorporation. In such cases, a share transfer requires approval (typically by the shareholder meeting or board of directors), and the transferee will not be recognized as a shareholder unless the required procedures are completed. In Japan, most private companies—including VC-backed start-ups—adopt such transfer restrictions.

Generally, each share carries one voting right. Companies may, however, issue shares with limited or no voting rights. Even in such cases, holders of those shares may have voting rights in class shareholders’ meetings for certain matters. Japanese law does not permit shares with multiple voting rights. As a result, it is difficult to implement “as-converted” or “fully diluted” voting structures commonly seen in Silicon Valley start-up investments.

A joint stock corporation must have at least one director. Most small companies in Japan have only one or a few directors. A company may establish a board of directors. If it does so, it must appoint at least three directors, and certain important matters must be resolved at board meetings. Board meetings are required to be held at least once every three months, although in practice many companies hold them monthly. In VC-backed start-ups, it is common to establish a board of directors at or around the Series A stage, often at the request of investors. A lead VC investor typically appoints one director to oversee the company. If a company establishes a board of directors, it must also appoint at least one statutory auditor (kansayaku). The statutory auditor’s primary role is to audit the directors’ execution of duties from the viewpoint of compliance with applicable laws and Articles of Incorporation. It should be noted that statutory auditors are different from independent accounting auditors, which are required only for certain large or listed companies. Statutory auditors generally attend board meetings unless their scope is limited to accounting matters.

(2) Shareholding Ratios and Voting Rights at Shareholders’ Meetings

Under the Japanese Companies Act, different types of shareholder resolutions are required depending on the nature of the matter. For purposes of this section, we assume a typical VC-backed start-up structure in Japan:
– a company with a board of directors and a statutory auditor; and
– transfer restrictions on all shares under the Articles of Incorporation.
Note that the Articles of Incorporation may modify certain requirements, so investors should always review them carefully.

(i) Ordinary Resolution

Matters requiring an ordinary resolution (i.e., approval by a majority of the voting rights present at the meeting) include, for example:
– Appointment and removal of directors; appointment of statutory auditors (Articles 329 and 339)
– Approval of financial statements (Article 438)
– Declaration of dividends (Article 454)

The quorum is generally a majority of total voting rights, although this requirement may be relaxed in the Articles of Incorporation. However, for the appointment and removal of directors and statutory auditors, the quorum cannot be reduced below one-third of the voting rights.

(ii) Special Resolution

Matters requiring a special resolution (i.e., approval by at least two-thirds of the voting rights present at the meeting) include, for example:

– Share repurchases (Article 160)

– Reverse share splits (Article 180)

– Certain matters concenrning issuances of shares and stock acquisition rights (e.g., stock options) (Articles 199, 205, 238, 244 etc.)

– Removal of statutory auditors (Article 339)

– Reduction of capital (in principle) (Article 447)

– Amendments to the Articles of Incorporation (Article 466)

– Certain M&A transactions, including business transfers (Article 467) and corporate reorganizations (e.g., mergers, company splits, share exchanges, share transfers, and share deliveries), subject to exceptions for minor transactions

The quorum is generally a majority of voting rights but may be reduced to one-third in the Articles of Incorporation.

(iii) Matters Requiring Higher Thresholds

Certain matters—such as amendments to the Articles of Incorporation introducing share transfer restrictions—are subject to even stricter voting requirements.

Proceed to the next chapter ((2) Methods of Equity Finance)

Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.