Tobita & Partners provides high quality legal advice and assistance to Japanese, foreign and foreign-based corporations and individuals.

In a case where the owner of a certain company (major shareholder who owns at least a majority of the company’s stocks) invited a CEO (representative director) from the outside, but afterwards does not like them and tries to dismiss them, what should the owner consider?

You might think that in this case, since the owner holds a majority of the shares, is it only a matter of holding a general shareholders meeting and dismissing the CEO. Certainly the owner could hold a general shareholders meeting and dismiss the CEO, but in fact, there is some serious work after a dismissal.

Paragraph 1 of article 339 of the Companies Act stipulates that “Officers [Note: Directors are also officers. See Article 329 paragraph 1 of the Companies Act] and financial auditors may be dismissed at any time by resolution of a shareholders meeting.” But on the other hand, paragraph 2 of that article stipulates that “A person dismissed pursuant to the preceding paragraph shall be entitled to demand damages arising from the dismissal from the Stock Company, except in case where there are justifiable demands for such dismissal."

In other words, the dismissed director can claim damages against the company, arguing that there was no justifiable reason for dismissal. This article can be further explained in these terms: "While securing the freedom of dismissal to shareholders, it prescribes a kind of statutory liability with the aim of protecting expectations for the term of office of directors and harmonizing the interests of both parties." With this purpose in mind, the conclusion is often that "the extent of damage to be compensated is the amount of profits obtained during the term of office that the dismissed director served within."

In short, the owner may have concluded that it is possible to dismiss the CEO, but if it is found that there is no justifiable reason for dismissal, he has to pay compensation for the remaining terms as damages.

Moreover, judgement regarding justifiable dismissal also is strict on the owner side. There is no doubt that violation of laws and the Articles of Incorporation, failure of mind and body, and significant inappropriateness to the duties are included in the justification, but it is not clear whether or not failure of management judgment is also included in justifiable.

Moreover, judgment regarding justifiable dismissal also falls on the owner's side. Certainly, whether there was a violation of laws and the Articles of Incorporation, a failure of mind and body, and significant inappropriate behavior when executing duties are considered when examining justifiable dismissal. But, there is also examination as to whether or not failure of management lead to a situation where dismissal occurred.

Therefore, because disliking someone is not a justifiable reason, and a failure of management such as poor business performance is not necessarily a justifiable reason, we have to say that there is a certain legal risk in dismissal. After all, I think that it is appropriate that before hiring a CEO the owner should make a contract that stipulates in which situations the owner can dismiss the CEO and how much the owner will compensate for damages in that case.

Recently, a famous legal topic in Japan wasthe case of a petition for preliminary disposition of injunction concerningIdemitsu Kosan Co., Ltd.

The outline of this case is as follows:

 

1. Idemitsu Kosan Co., Ltd.("Idemitsu") and Showa Shell Sekiyu KK ("Showa Shell") areboth large, listed oil companies in Japan.

 

2. In December 2016, Idemitsu, as apreparation for merging with Showa Shell, acquired 117,761,200 shares of ShowaShell (31.3% voting rights ratio) from a subsidiary of Royal Dutch Shell.

 

3. In March 2017, the founder families(“Founders”) having approximately 33.92% of Idemitsu Kosan shares announcedthat they opposed the merger between Idemitsu and Showa Shell. In addition,they invited to oppose the reassignment of the current management team at theannual general shareholders' meeting held in June 2017.

 

4. Idemitsu was unable to merge with ShowaShell if the Founders maintained their shareholding ratio. To initiate themerger, they needed to get a special resolution of the general meeting ofshareholders, but unless they lowered the Founders’ shareholding ratio, therewas no hope to get it.

 

5. Therefore, in July 2017, the board ofdirectors of Showa Shell decided to issue 48 million shares of stock by way ofpublic offering. When this new stock issue would be realized, the shareholdingratio of the Founders would be reduced from approximately 31.3% to 26.09%, soit would be possible to acquire the special resolution of the generalshareholders meeting.

 

6. The Founders alleged to the TokyoDistrict Court that Idemitsu's issue of new shares should be temporarilysuspended because it was "carried out in an extremely unfair way"according to Article 210, Item 2 of the Companies Act.

 

(For your reference)

Companies Act

Article 210           Inthe following cases, if shareholders are likely to suffer disadvantage,shareholders may demand that the Stock Company cease a share issue ordisposition of Treasury Shares relating to solicitation under Article 199(1):

(ii)          Incase where such share issue or disposition of Treasury Shares is effected byusing a method which is extremely unfair.

 

 

The Tokyo District Court rejected thepetition of the Founders on July 18, 2017, stating as follows:

 

(1) Issuance of Shares solicited under the"Extremely Unfair Method" prescribed in Article 210, Item 2 of theCompanies Act refers to a case where the issue of shares is used as a means ofachieving an unfair purpose, and when there is a dispute over the company'scontrol and if the current management team issues new shares for the mainpurpose of lowering the shareholding ratio of a specific shareholder contendingfor control and maintaining and securing control over it, it is a case done asa means to achieve an unfair purpose.

 

(2) In this case, the current managementteam and the Founders are in a relationship of virtually competing for thecontrol of Idemitsu, and the issuance of new shares in this case is beneficialto the present management team by lowering the shareholding ratio of the Founders.Therefore, it is reasonable to once suppose that the current management teamhas a purpose to place themselves in a good position.

 

(3)
(i) However, since the issue of new shares in this case will be conducted bythe public offering method, shareholders who are opposed to the currentmanagement team may also be allocated shares and, compared to third-partyallotment, the certainty of attenuating the Founder-side control ofshareholders is weak.

 

(ii) There is no evidence to suggest that ageneral shareholders meeting will be held immediately after the issue of thesenew shares, and that a merger with Showa Shell will be an agenda item at themeeting.

 

(iii) In addition, although there is doubtabout the necessity and reasonableness of funding in most cases that wereinsisted by Idemitsu, the necessity to prepare repayment funds for purchasing ShowaShell stocks is objectively apparent.

 

Therefore, there is no sufficient evidenceto assert that the main purpose of the issue of the new shares is not tofinance funds but to put the current management team in an advantageousposition in the substantial battle over company control.

 

(4) Therefore, it cannot be said that thisissue was made by the "extremely unfair method," so there is noreason for the Founders’ petition.

 

(My comment)
The judgment of the court requires that the unfair purpose of the managementside is the main one and even if management has an unfair purpose, if thenecessity of financing is recognized elsewhere, an unfair purpose is not a"major" thing, and it does not fall under the "extremely unfairmethod".

However, there are always some fundingdemands in the company, so there is almost no room for the suppression of newshares as an "extremely unfair method". Indeed, from our lawyer’sview, it is easy to advise the company about planning the issuance of newshares that does not fall under the "extremely unfair way," but thisresult is not considered justice.

I think that it should be interpreted thatif there is an unfair purpose on the manager's side, issuance of new sharesshould not be permitted even if there are other funding demands. I wonder ifthe interpretation of the precedents will change like that.

Recently, in Japan, adultery allegations against a young congresswoman were widely reported.
The woman in question used to be a member of the very popular pop group, “Speed”, but is now a single mother of a son with a hearing disorder, and a member of the House of Councilors.
Last month, one magazine reported suspicions of a love affair between her and a man in Kobe City Council.

In the magazine, there was a picture of her holding hands with the male city councilor while sleeping on the Shinkansen (Japanese bullet train), and according to the magazine, they spent two nights together at her mansion and a hotel.

She admitted her 2-night stay with him, but she emphasized that as he was now in the process of a divorce mediation procedure against his wife, she did not cross a line. "Not crossing a line" indicates that there is no sexual relationship between them so far.

Why did she say "I have not crossed the line?"
Is there any legal significance here?
I do not know the truth (only the two people involved would know this), but let me consider this from a lawyer's point of view.

According to reports, the city councilor has been married and has two children. However, according to him, his marital relationship broke down 5 to 6 years ago, and they began to live separately since the summer of last year, and (as already mentioned) are currently following divorce proceedings.

Under Japanese family law, a husband and wife can divorce by mutual agreement, but if the agreement does not hold, the court can order a divorce only due to the following:

1) An act of adultery.
2) If one party was abandoned by the other in bad faith.
3) If it is not clear whether a spouse is dead or alive after at least three years.
4) In the event of severe mental illness.
5) In the event of a grave cause that deems continuation of the marriage difficult.

Additionally, according to the judgment of the Supreme Court, a divorce claim from the party who caused the failure of the marriage by an act such as adultery, is rejected.
In other words, for example, if a couple has already been separated for a long period of time due to the husband's adultery and it is determined that there is a grave cause that makes the marriage difficult, the husband's divorce claim will be dismissed. This is known as “the theory of the spouse who caused the break up”. Because of this, I guess the councilors couldn’t admit a sexual relationship.

Of course, in this case, because the man has already began to live separately from his wife and insists that the marital relationship has already broken down, there is a possibility that any current case of adultery did not cause the collapse of the marital relationship. However, according to the report, the wife claims that their marital relationship has not yet broken down and argues that he only unilaterally began separation. Therefore, his assertion that the relationship with the congresswoman started after the collapse of the marital relationship might be denied. Considering this risk, maybe they could not admit to a sexual relationship.

By the way, since they were holding hands while sleeping on the Shinkansen and spent two nights together, it would be normal to assume that a physical relationship exists. If so, does claiming that "a line has not been crossed" become disparaging to their honesty?

My guess is as follows:

First of all, we have to know that Japanese judges tend not to recognize the fact of adultery unless there is direct evidence. This is because Japanese judges know well that the theory of the spouse who caused the break up is often actually unreasonable. In general, many cases to which the theory is applicable have continued for a long time, and the marital relationship completely collapses. Therefore, if the judges do not intervene, only an unproductive, negative relationship remains. Thus, the Supreme Court has decided to make an exception to the theory. They stated that:

If the claim is from a spouse who caused the break up, but the separation period is comparable to their age and their cohabitation period, with no children involved, as long as the judge does not recognize any special problems that would result in unfair events due to divorce, such as one party suffering mental, social or financial hardship, the judge cannot deny the claim because it is from the spouse who caused the break up.

However, since the hurdles required by this court judge are high, the theory continues to bring disagreeable results. Therefore, my guess is that judges do not want to get too involved with, or admit too much about the fact of adultery.

Currently, a review of family law is also being discussed in our country. One idea is that if a household exists separately for a certain period of time, regardless of the cause of separation, divorce is granted.

In my opinion, such thought is more appropriate than the theory of a spouse who caused the break up.

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