カテゴリ:TOPICS >   Corporation law

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.

1   If your honor is damaged on the net, thefirst thing to come up to my mind is to make a request to delete the defamationpage directly to its administrator. However, some malicious administrators donot meet this.

2.   Then, next, we will consider whether wecan request deletion by using court procedures such as provisional dispositionand litigation. However, for example, if the location of the administrator isnot described on the website (including WHOIS information), or even in the caseof being described, when it is a paper company such as Argentina or USA orNevada state, there are some problems.

First of all, when you do not know theaddress of the administrator, you cannot use temporarily disposition orlitigate because the court does not come to know the delivery address in thefirst place. In addition, in the case of a foreign paper company, provisionaldisposition and litigation can be brought under certain requirements, but evenif you win, because they are located outside Japan, there is no way to forceprovisional disposition decision or judgment except that the foreign countryallows forced enforcement by using Japanese judgment and so on. After all, as ajudgment of the court came out, there is no other choice than to"ask" to delete it arbitrarily. In other words, you cannot delete ona website that does not listen to "your wish".

3.   Now is it possible to delete theslanderous article and not to display it on the search engine? This is a way todelete search results, which has been drawing attention recently.

Currently, when we browse web pages, weoften search the desired page with a search engine such as Google. Therefore,unless it is displayed as a search result in the search engine, it becomespractically difficult to access the page (unless you know the URL in advance).This will result in an effect similar to page deletion. Regarding deletion ofthis search result, the Tokyo District Court decided on October 9, 2014, and itbecame a topic because it approved it for the first time.

Such deletion of search results can be aneffective solution against defamation on the net, but it should be noted thatthe Supreme Court of Japan does not have any examples yet recognized. Also inthe judgment of the Supreme Court issued on January 31 this year, deletion hasbeen denied in conclusion.

Also note that as a lower court's tendency,it is said that defamation must be contained in the search result title orsnippet (excerpt of the page itself) itself. Even if the site which is caughtin the search itself has a terrible libelous expression, even if the title orexcerpt displayed as the search result does not contain a libelous expression,currently it seems difficult to delete the search result.

In addition, depending on the judgment ofthe lower court, there is a strict judgment that the deletion is not permittedunless it is obvious from the expression itself that it is non-truthful.According to this judgment, if the honor is damaged by a false statement, it iseasy to prove that it is false, but if it is not known from the defamationexpression itself that it is false, the deletion will not be permitted.

In this way, cases of deletion for searchresults are also limited.

4.   Then, for example, among defamation onthe net,

A foreign paper company is anadministrator
The administrator did not accept any deletion
Title displayed on search result itself and snippet does not includedefamatory expression
In such cases, it is very difficult to take a legal action.

Apart from legal responses, there are alsoso-called SEO countermeasures and anti-SEO countermeasures. These aretechnically an attempt to lower the search ranking of libelous pages, but theinformation of defamation will not disappear.

     More than anything, despite the occurrenceof an illegal event, there is no legal way to respond, which is a very problem. 
As Japan is a legal nation, it is necessaryto block such loopholes. There should not be such thing that a law - abidingcountry does nothing to solve the problem of such slanderous sites. I hope wewill respond promptly by legislation or justice (in some cases, establishing aninternational cooperation system on deletion of articles).

022
The revised Corporate Law in 2014 requires Listed Companies to appoint at least one independent director.
In addition, Tokyo Stock Exchange (hereinafter, “TSE”) has formulated the “Japan’s Corporate Governance Code” which requires Companies listed on the First Section or the Second Section of the TSE to appoint at least two independent directors who should fulfill their roles and responsibilities with the aim of contributing to sustainable growth of companies and increasing corporate value over the mid- to long-term. 
This Code has just entered into force from June 1, 2015. 
More precisely, the appointment of independent directors is not obligatory, but if Listed Companies do not appoint independent directors, they should explain sufficient reason.

Overseas investors seem to evaluate the companies highly which have independent directors so most Listed Companies have decided to appoint independent directors.
Many of Japanese Listed Companies hold an ordinary general meeting of shareholders in June, so they are now finding candidates for an independent director. 
In many cases, candidates for independent director are former managers, lawyers or accountants. 
I have been working as an independent director since this June.

It is expected that the system of an independent director shall be more effective and this system will contribute to further development and success of companies, investors and the Japanese economy.

061
It was decided that a listed company is effectively forced to have an outside director as a member of the Board of Directors along with the revision to Corporate Law executed on June 20,2014.
It is not regulated by the Law as the financial circles have reacted against it. However, if a corporation decides not to have an outside director, it has to explain and inform the following items:
1. Explain the reason why it is inappropriate to have an outside director
2. Report the reason why it is inappropriate to have an outside director in the Business Report
3. Report the reason why it is inappropriate to have an outside director in the Reference Documents for Shareholders Meeting when it offers agenda for electing directors excluding outside directors.
Moreover, the Rule of Stock Exchange has provided that a listed company must make efforts to have more than one outside/independent officer.

It might be striking in waves as if it was not enough already by those who would like to introduce the outside director system.
I think that if they make such many regulations, it might be simple and better to make the outside director system obligatory in Corporate Law.

By the way, I expect that almost all corporations would have outside directors in the following year. I say that because the Japanese society tends to be across-the-board. If a corporation does not follow the regulation and decides not to have an outside director, it has to explain the reason why it is inappropriate to have an outside director. The Stock Exchange would also keep an eye on the corporation.
Though 62.2% of corporations in Japan had outside directors in 2013, nearly 100% of those corporations are expected to have outside directors in the following year.

Conversely, if some corporations do not have outside directors under such a system, those corporations must have their own policies.
I wish some corporations with strong performance and well organized compliance would appear and declare as follows:
"Our corporation has a reliable Board of Company Auditors and excellent accounting auditors, so our compliance is well organized and functions effectively. We think that outside directors who do not know about our corporation would do more harm than good, so we will never have outside directors. We do not think the outside director system is useful or helpful because there are many corporations with outside directors having caused scandals in the past. Our current directors are the best members."

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