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

Chapter 3: Corporate Governance Matters

1. Key Features of Corporate Governance in VC-backed Japanese Startups

Japanese founders tend to prefer retaining majority voting rights at both the shareholders’ meeting and the board of directors. As a result, removal of a CEO by the board of directors is relatively uncommon in Japanese startups.

Typically, the number of venture capital (VC)-appointed directors is limited. However, a broader range of investors is often granted the right to appoint an observer, who does not have voting rights but may attend board meetings and, in some cases, express opinions.

As a majority of voting rights are often held by the founders, it is essential for investors to secure governance rights through shareholders’ agreements. As explained in Chapter 2, veto rights are not typically embedded in class shares but are instead stipulated in shareholders’ agreements.

In principle, enforcement of such contractual rights is relatively weak, because a failure to follow agreed procedures does not invalidate the relevant corporate action; instead, only damages may be claimed, which are often difficult to prove in practice.

However, Japanese startup shareholders’ agreements commonly provide investors with a put option, allowing them to require the founders and/or the company to repurchase their shares at a price at least equal to the issue price in the event of a material breach. For this reason, investors may still retain effective leverage over the startup, even where the founders hold majority control at the shareholders’ meeting and board levels.

2. Roles of the Shareholders’ Meeting, Board of Directors, and Representative Directors

In a joint-stock company (Kabushiki Kaisha) with a board of directors and a statutory auditor—which is the most common structure for VC-backed Japanese startups—the roles of each organ are as follows:

(i) Shareholders’ Meeting

The shareholders’ meeting appoints and removes directors and statutory auditors. It also approves annual financial statements and determines the remuneration of directors and statutory auditors. In addition, matters such as the issuance of new shares and stock acquisition rights (e.g., stock options), capital reductions, and certain M&A transactions and corporate reorganizations require shareholders’ approval.

(ii) Board of Directors

The board of directors appoints and removes the representative director(s), who represent the company and typically serve as the CEO.

The board must meet at least once every three months, although in practice it is often held monthly. Directors, including the representative director, report on the execution of their duties to the board.

In addition to its monitoring function, Article 362 of the Companies Act of Japan requires that certain important business decisions be approved by the board. These include the acquisition and disposal of important assets, large borrowings, appointment and removal of key employees, and the establishment, amendment, or abolition of important organizational structures.

In practice, Japanese companies often adopt internal regulations specifying matters requiring board approval, including monetary thresholds where applicable.

3. Right to Appoint a Director or an Observer under Shareholders’ Agreements

A lead investor in each funding round is often granted the right to appoint a director. While investors seek such rights to monitor the company and access information, directors owe statutory duties to the company. Under Japanese law, these duties are generally understood as the duty of care of a prudent manager and the duty of loyalty. Accordingly, a director cannot prioritize the interests of the appointing investor over those of the company.

In situations where investor interests conflict with those of the company, the appointed director may face practical difficulties. In such cases, the director must carefully consider how to act, including whether to speak at board meetings, abstain from voting, or recuse themselves entirely. Depending on the circumstances, resignation may also need to be considered (although resignation may not be effective if it would cause the number of directors to fall below the minimum number set forth in the Company Act or Articles of Incorporation).

Directors should also note that information obtained in their capacity as directors constitutes confidential company information and, in principle, may not be disclosed to investors without the company’s consent (although, in practice, such disclosure is often expected and permitted).

In contrast, the right to appoint an observer is often granted to a broader range of investors (for example, those holding 5% or more of the shares), as it does not affect corporate control. Observers are primarily intended to obtain information and do not owe statutory duties to the company. Therefore, it is important for the company to impose express confidentiality obligations on observers.

4. Pre-Approval Rights, Rights of Prior Consultation and Ex-Post Reporting

Shareholders’ agreements typically include certain matters requiring prior investor approval. These rights are particularly important in Japan, where founders often retain majority voting control, creating a risk that the company may otherwise operate beyond investor oversight.

However, if too many matters are subject to prior approval, there is a risk of deadlock arising from disagreements among investors. To mitigate this risk, it is often preferable—particularly from the company’s perspective—to grant approval rights to a group of investors (e.g., a majority of investors) rather than to individual investors.

Excessive pre-approval requirements may also slow down decision-making, which can be detrimental to both the company and its investors. Matters that do not require formal approval but should still be shared with investors are typically categorized as prior consultation matters or ex-post reporting matters.

Go back to the previous chapter (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.