Japan: Outside Board Members Encouraged - Corporate Auditors Can Be Eliminated Depending on the Case

A revision of the Commercial Law passed the Diet on May 22, 2002. What should be most noted under the revision is that for joint-stock companies (kabushiki-kaisha) outside board members are encouraged to be appointed, and, if certain requirements are met for their appointment, corporate auditors can be unnecessary.

These new rules apply to companies that have a certain size: (a) the outstanding capital should be 500,000,000 Yen or more, or (b) the total liabilities should be 20 billion Yen. This means that the revised law can be applied to a large company (hereinafter, a "Company").

Under the revised law, a Company can provide in the board of directors three committees, each consisting of at least three board members:

(1) Nomination committee --- determines candidates for board members.

(2) Remuneration committee --- determines the remuneration of individual board members and executive officers.

(3) Auditing committee --- carries out auditing activities regarding board members.

The three committees should be comprised of board members of which at least a majority must be outside board members.

The Company can appoint executive officers to carry out routine corporate work.

If these conditions are met, the Company can abolish the system of auditing by auditors.

Under the new system, the term of a board member will be reduced from the two years under the previous system to one year. The board of directors can delegate a wide range of its power to executive officers.

Under the new system, the responsibilities of the board members to parties aggrieved by the acts of the Company can be limited to certain sums, subject to a resolution of the stockholders' meeting or the board of directors meeting, and subject to the consent of the auditors: in the case of the chief executive officer, an amount comparable to six years' remuneration, in the case of the other executive officers, an amount comparable to four years' remuneration, and in the case of outside board members, an amount comparable to two years' remuneration.

A Company that does not adopt the new system of corporate governance is obligated to increase outside auditors within three years from the present requirement of "at least one" to "one half or more of the total number of auditors provided that there must be at least two."

A Company which does not adopt the new system can still employ a new system under which, if at least one outside board member is appointed, a group of at least three board members can decide on important corporate matters, such as the transfer of a major factory or the loan of a substantial sum of money, without any approval of the board of directors.

Apart from the above, in the case of a Company, the quorum of a special resolution required for important corporate decisions such as the change of the Articles of Incorporation and a merger with a third party can be reduced from the present quorum of a majority to one third of the vote. This change is to respond to the substantial increase of stockholders resulting from the decrease of the minimum unit of shares for the dealings in stock (typically from 1,000 shares to 100 shares).