The Companies Act of Japan — Overview

Introduction

The Companies Act (Kaisha Hō, Act No. 86 of 2005, effective 1 May 2006) is Japan’s primary corporate statute. It consolidated and modernised the corporate provisions formerly contained in Book II of the Commercial Code (Shōhō, 1899) and introduced a comprehensive framework for the organisation, governance, finance, and restructuring of Japanese corporations. The Act was the product of a reform process that began in the late 1990s, driven by the need to revitalise Japanese corporate finance, to improve corporate governance in the wake of the financial crisis, and to align Japanese company law with international standards.

The Companies Act has been amended on multiple occasions, most notably in 2014 (governance reforms for large listed companies, squeeze-out mergers), 2019 (simplification of M&A procedures, electronic share certificates), and 2021 (modernisation of shareholder communication, IT measures).

Structure

The Companies Act is divided into seven parts:

• Part I — General Provisions (Articles 1–5): scope, definitions, the principle of corporate capacity.
• Part II — Stock Companies (Kabushiki Kaisha): formation, shares, shareholders, governance, accounts, dissolution.
• Part III — Limited Liability Companies (Gōdō Kaisha): the LLC form.
• Part IV — Limited Partnerships (Gōshi Kaisha): the limited partnership.
• Part V — Unlimited Partnerships (Gōmei Kaisha): the general partnership.
• Part VI — Corporate Reorganisation: mergers, demergers, share exchanges, share transfers.
• Part VII — Penal Provisions: criminal sanctions for corporate misconduct.

Corporate Forms

The Act provides for four corporate forms. The Kabushiki Kaisha (KK) is the dominant form, analogous to the public limited company in Europe or the corporation in the United States. The KK is a limited-liability entity with transferable shares. It may be publicly listed (jōjō kaisha) or closely held. The Gōdō Kaisha (GK) is a limited-liability company with flexible governance, modelled partly on the US LLC and the German GmbH. The Gōshi Kaisha (limited partnership) and the Gōmei Kaisha (general partnership) are residual forms from the Commercial Code and are rarely used.

Corporate Governance

The Companies Act offers three distinct governance structures for KKs:

Company with Statutory Auditors (Kansayaku Kai Secchi Kaisha). This is the traditional structure, in which the board of directors appoints one or more statutory auditors (kansayaku) to oversee the directors’ performance. The statutory auditor has the power to attend board meetings, demand reports, and investigate the company’s affairs. Large KKs must have a board of at least three directors and at least two statutory auditors, of whom one must be an outside auditor.

Company with Audit Committee (Kansa Iin Kai Secchi Kaisha). In this structure, the board of directors establishes an audit committee composed of directors (at least a majority of whom are outside directors). The audit committee supervises the directors and has the powers of a statutory auditor. This structure does not require a separate statutory auditor.

Company with Three Committees (Iin Kai Secchi Kaisha). This is the most fully disaggregated structure, comprising a nomination committee, an audit committee, and a compensation committee, each of which must have a majority of outside directors. This structure is mandatory for large listed companies under the Corporate Governance Code and the Tokyo Stock Exchange listing rules.

The Corporate Governance Code (2015, revised 2018 and 2021) applies to all listed companies on a “comply-or-explain” basis. The Code requires at least two independent outside directors, a transparent board appointment process, and the establishment of a nomination and compensation committee.

Directors and Officers

Directors (Torishimariyaku) are elected by the shareholders at the general meeting. They serve for terms of one year (large KKs) or up to ten years (small KKs). The board of directors has the power to determine the company’s strategy and to supervise the directors’ performance.

Representative Directors (Shachō or Daihyō Torishimariyaku) are selected by the board to represent the company vis-à-vis third parties. The representative director is typically the chief executive officer.

Executive Officers (Shikkō Yaku) may be appointed by the board under the three-committee structure to manage the company’s day-to-day business.

Duties. Directors owe fiduciary duties of care (chūi gimu) and loyalty (chūjitsu gimu). The duty of loyalty is codified in Article 355 of the Companies Act and requires a director to act in the best interests of the company. The business judgment rule (keiei handan gensoku) protects directors from liability for decisions made in good faith, with reasonable care, and in the best interests of the company.

Shareholders

Shareholders’ Meeting (Kabunushi Sōkai). The annual general meeting must be held within three months of the end of the fiscal year. Extraordinary meetings may be convened by the board or by shareholders holding at least 3% of the voting rights. Resolutions require a simple majority (ordinary resolutions) or a two-thirds majority (special resolutions — for amendments to the articles of incorporation, mergers, and other fundamental transactions).

Shareholder Rights. Shareholders have the right to vote, to receive dividends, to participate in the distribution of surplus on liquidation, and to exercise appraisal rights in certain fundamental transactions. Shareholders holding 1% of the voting rights (or 300 or more voting rights) may exercise inspection rights, including the right to inspect the company’s books and records (Article 433).

Derivative Actions. A shareholder who has held shares for at least six months may sue a director on behalf of the company for breach of duty (Article 847). Derivative actions are common in Japan and have been used to challenge directors’ decisions in mergers, investments, and compliance failures.

Finance

Shares (Kabushiki). A KK may issue multiple classes of shares (shurui kabushiki), including common shares, preferred shares, tracking stock, and shares with veto rights. The Act permits the issue of shares without par value.

Stock Acquisition Rights (Shin-Kabu Yoyaku-Ken). The Act introduced a comprehensive framework for stock acquisition rights, which are widely used for employee stock options and equity-linked financing. The rights may be issued to a third party without a pre-emptive offer to existing shareholders if the board so resolves.

Bonds (Shasai). A KK may issue bonds, including convertible bonds and bonds with stock acquisition rights. The issuance of bonds is governed by the Companies Act and the Financial Instruments and Exchange Act.

Capital. The minimum stated capital (shihon) is ¥1. The maintenance-of-capital rules restrict the distribution of dividends and the repurchase of shares. A company may reduce its capital by a special resolution of the shareholders.

Mergers and Acquisitions

The Companies Act provides flexible mechanisms for corporate restructuring:

Absorption Merger (Kyūshū Gappei). The surviving company acquires all the assets and liabilities of the disappearing company. The disappearing company’s shareholders receive shares in the surviving company or cash.

Consolidation Merger (Shinsetsu Gappei). Two or more companies merge into a newly formed company.

Demerger (Kaisha Bunkatsu). A company transfers a part of its business to a newly formed or existing company.

Share Exchange (Kabushiki Kōkan). A company becomes a wholly owned subsidiary of another company.

Share Transfer (Kabushiki Iten). A newly formed holding company acquires all the shares of one or more existing companies.

The 2014 amendment introduced a squeeze-out procedure enabling a 90% shareholder to acquire the remaining minority shares at a fair price. The 2019 amendment simplified the procedure for short-form mergers and cash-out mergers.

Relationship with Other Legislation

Listed companies are subject to the Financial Instruments and Exchange Act (Kinyū Shōhin Torihiki Hō), which requires the filing of securities reports, regulates insider trading, and imposes disclosure obligations. The Corporate Governance Code and the Japan’s Stewardship Code (for institutional investors) provide the normative framework for corporate governance and responsible investment.

The Companies Act is a product of the Japanese legislative tradition, balancing flexibility with creditor protection, and the interests of controlling shareholders with those of minority investors. Its 2005 enactment marked a decisive break from the Commercial Code era and established a modern, competitive corporate law that has facilitated Japan’s integration into the global economy.