Legal Framework for Share Transfers under Japanese Corporate Law

Stock transfers under Japanese Corporate Law are a fundamental element of corporate management and investment activities. In joint-stock companies, the transfer of shares is recognized as a primary means for shareholders to recover their invested capital. While Japanese Corporate Law generally guarantees the free transfer of shares, certain types of shares may be subject to transfer restrictions. For foreign investors investing in Japanese companies, a precise understanding of these legal rules regarding share transfers is crucial. In particular, the approval procedures for restricted shares, proper management of the shareholder registry, and the notification obligations under the Japanese Foreign Exchange and Foreign Trade Act (FEFTA) specific to foreign investors are essential knowledge to avoid unforeseen legal risks. This detailed guide has been created to help English speakers learning Japanese clearly understand the complex aspects of share transfers under Japanese Corporate Law. From the basic principles of share transfers in the Japanese legal system to the specific procedures for restricted shares, the role of the shareholder registry, and the unique regulations faced by foreign investors, we explain everything in an easy-to-understand manner, citing specific legal provisions.

The Basic Principles and Requirements for Stock Transfer Under Japanese Corporate Law

The Principle of Free Transferability of Shares

Japanese Corporate Law generally allows for the free transfer of shares in a joint-stock company. This principle is crucial in ensuring that shareholders have the opportunity to recover their investments and to promote equity investment. The principle of free transferability is explicitly stated in Article 127 of the Japanese Corporate Law.

Article 127 of the Japanese Corporate Law succinctly states that “shares may be transferred,” indicating that the transfer of shares is, in principle, free. This provision serves as the foundation for shareholders to flexibly manage their investments and ensures the liquidity of shares in the market.

Not only does the principle of free transferability protect the rights of shareholders, but it also serves as an essential legal foundation for the healthy functioning of the capital markets and the sustainable growth of companies. The guarantee of free transferability allows shareholders to easily sell their shares and recover funds when necessary. This is an attractive feature for investors and a critical criterion for investment decisions. An environment where investors can invest with confidence is advantageous for companies seeking to raise funds. Highly liquid shares attract more investors, making it easier for companies to secure the capital necessary for growth. Thus, the principle of free transferability plays an indispensable role in ensuring investment liquidity and, consequently, promoting corporate growth.

The Significance of Requirements for Opposing Stock Transfers

While the transfer of shares takes effect through the agreement between the transferor and the transferee, certain requirements must be met to assert this transfer against the company and other third parties. These are known as “requirements for opposition.” Although the Japanese Corporate Law has direct provisions regarding the requirements for opposing stock transfers, they are grounded in the concept of requirements for opposing the transfer of claims under Japanese Civil Law.

Article 467 of the Japanese Civil Law stipulates that without notification to the debtor by the transferor or consent from the debtor, the transfer of claims cannot be opposed to the debtor or other third parties. Furthermore, to oppose third parties other than the debtor, notification or consent with a “certified date” is required.

In the case of stock transfers as well, the requirement for opposition to the company is the registration of the transfer in the shareholder registry. This procedure is essential for the company to clearly identify who should be treated as a shareholder. For companies that do not issue share certificates, the entry in the shareholder registry becomes the requirement for opposition. The shareholder registry is the only official record that clarifies whom the company recognizes as shareholders and to whom it should grant voting rights and dividends. Unless a name change is registered, the company will not recognize the transferee as a shareholder. This system prevents disputes such as double transfers of shares and brings clarity and stability to the legal relationships between the company, shareholders, and third parties. The information listed in the registry, being officially recognized, ensures the safety of transactions. Therefore, the shareholder registry is not merely a record but also functions as a “means of public notice” that establishes the legal effect of stock transfers against the company and third parties, playing an extremely important role in maintaining legal stability in corporate governance and capital transactions.

The System and Approval Procedures for Restricted Stock in Japan

Definition and Articles of Incorporation Provisions for Restricted Stock Transfers in Japan

In Japan, a corporation can specify in its articles of incorporation that the transfer of all or certain types of its issued shares requires the company’s approval. Such shares are referred to as “restricted transfer shares.” In Japanese non-listed companies, it is common to include transfer restrictions in the articles of incorporation to stabilize shareholder composition and prevent unwanted third-party entry.  

Article 107 of the Japanese Companies Act allows a company to set transfer restrictions on all of its issued shares. Furthermore, Article 108 of the Japanese Companies Act stipulates that in the case of issuing different types of shares, transfer restrictions can be applied to specific types. The articles of incorporation must specifically state that transfer approval is required and that in certain cases, approval is deemed to have been given.  

Restricted transfer shares are established in the articles of incorporation based on Articles 107 and 108 of the Japanese Companies Act. The prevalence of transfer restrictions in Japanese non-listed companies is particularly significant. Transfer restrictions limit the free sale of shares by shareholders, thereby maintaining the stability of the shareholder composition. This enables management to effectively prevent hostile takeovers from external parties and the entry of undesirable shareholders. Especially in private companies, where management and shareholders often have a close relationship, continuity of management and the speed of decision-making are prioritized. Transfer restrictions serve as a strategic tool to achieve these governance goals. Therefore, restricted transfer shares are not merely a means to limit the liquidity of shares but are also an integral part of the governance strategy for private companies to ensure management stability, maintain a specific shareholder composition, and eliminate unwanted external influences.  

Methods for Requesting Transfer Approval

Shareholders wishing to transfer restricted shares must request approval from the company. This request should clearly specify the type and number of shares to be transferred, as well as the name or designation of the recipient . The request for transfer approval can also indicate that, should the company not approve the transfer, the company or a purchaser designated by the company is requested to buy the shares. This declaration of intent to request a buyout is extremely important for both the transferor and the transferee .  

Article 138 of the Japanese Companies Act specifies the method for requesting approval for transfers and the like. This provision demands clarity on the same matters for both the person requesting transfer approval (based on Article 136 of the Japanese Companies Act) and the person who has already acquired the shares and is requesting approval (based on Article 137, Paragraph 1 of the Japanese Companies Act) .  

Decision and Notification of Approval

Upon receiving a request for transfer approval, a company must decide whether to grant such approval. This decision is generally made by the board of directors in companies with such a structure, and by the shareholders’ meeting in other companies. Following the decision, the company must notify the requester of the transfer approval.  

Article 139 of the Japanese Companies Act specifies the decision-making body for transfer approvals and mandates the obligation to notify after a decision has been made. However, it is also possible to stipulate different provisions in the company’s articles of incorporation. Failure to provide this notification can lead to the risk of ‘deemed approval.’  

Repurchase by the Company or a Designated Purchaser

If a company decides not to approve a transfer and the transfer approval requester demands a repurchase, the company is obligated to buy back the shares . When the company buys back shares, a special resolution of the shareholders’ meeting is required for such a decision . Instead of repurchasing the shares itself, the company may designate a ‘Designated Purchaser’ to buy all or part of the target shares. This designation is generally made by a resolution of the shareholders’ meeting or the board of directors .  

When a company decides to repurchase shares, it must deposit the repurchase price equivalent in cash at a depositary office and provide the transfer approval requester with a document certifying the deposit .  

Article 140 of the Japanese Companies Act stipulates the obligations for repurchase when a company does not approve a transfer, as well as provisions regarding the designation of a Designated Purchaser . Article 141 of the Japanese Companies Act details the procedures for notification when a company repurchases shares, the deposit of the repurchase price, and the deposit of share certificates .  

The Deemed Approval System Under Japanese Corporate Law

If a company fails to take appropriate action within a specified period after receiving a request for transfer approval, the transfer is deemed to have been approved. This is referred to as “deemed approval” in Japan.  

Article 145 of the Japanese Companies Act specifies the concrete conditions under which deemed approval is established. For instance, if a company does not notify of disapproval within two weeks from the date of the transfer approval request (or within a shorter period if stipulated in the articles of incorporation), or if, after notifying of disapproval, the company or a designated purchaser fails to issue a notice of purchase or provide a document proving deposit within the specified period, these situations would meet the criteria. The calculation of this period is subject to the principle of Article 97, Paragraph 1 of the Japanese Civil Code, which is based on the doctrine of receipt.  

Article 145 of the Japanese Companies Act stipulates the deemed approval system, which considers a transfer approved if a company does not notify or proceed with the purchase within a specific period (e.g., two weeks, 40 days/10 days). This imposes a strict obligation on the company to adhere to the timeframe. Failure to comply can result in the company unintentionally approving a share transfer, which can significantly impact shareholder composition and management. If a company cannot adhere to this period, it is not merely a procedural delay; it also raises the risk of breaching the management’s duty of care and loyalty. This is particularly problematic for private companies that have set transfer restrictions to prevent unwanted shareholders from entering, as deemed approval can lead to serious governance issues. The deemed approval system underscores the need for companies to exercise a high level of caution and prompt response in managing restricted transfer shares. It highlights a deeper legal responsibility that goes beyond merely completing procedures; strict time management during the process directly affects the company’s legal stability and the realization of its management strategy.

The Role and Management of Shareholder Registries Under Japanese Corporate Law

Details Required in the Shareholder Registry Under Japanese Corporate Law

In Japan, corporations are obligated to create and maintain a “shareholder registry” to record essential information about their shareholders. This registry serves as the foundation for identifying shareholders and recognizing their rights to exercise shareholder privileges. Article 121 of the Japanese Companies Act specifies the details that must be included in the shareholder registry.

According to Article 121 of the Japanese Companies Act, the shareholder registry must contain or record the following details:

1. The shareholder’s name or corporate name and address. For individual shareholders, this includes their name and address, while for corporate shareholders, it includes the corporate name and the location of the head office.
2. The number of shares held by the shareholder. In the case of companies issuing class shares, the type of shares and the number of each type must also be recorded.
3. The date on which the shareholder acquired the shares. This refers to the effective date of the share transfer or the date on which the company received a request for a change of registration.
4. If the corporation issues share certificates, the number of the share certificate related to the shares. Additionally, matters related to pledges (as per Article 148 of the Japanese Companies Act) and indications of trust property (as per Article 154-2 of the Japanese Companies Act) are also recorded. In the case of transferable shares issued by listed companies, the provisions of the Japanese Law on Transfer of Bonds, Shares, etc., apply, and the shareholder registry is recorded within the transfer system. Resident foreigners are registered in Kanji or Katakana, while non-resident foreigners are registered in Roman letters and numbers as a general rule.

The shareholder registry must include the shareholder’s name, corporate name, and address as mandatory details. In the case of transferable shares, resident foreigners are registered in Kanji or Katakana, and non-resident foreigners are registered in Roman letters and numbers. For foreign shareholders, it is not enough to simply record their name and address; the notation must be adjusted to fit the Japanese system. In particular, non-resident foreigners are not required to register in Japanese, but accurate registration in Roman letters and numbers is crucial. This difference suggests practical challenges that may arise due to discrepancies in notation or errors in registration information, which could affect foreign shareholders when verifying their shareholder information or receiving notifications from the company. For example, if a change of address notification is not properly conducted, shareholders may suffer the disadvantage of not receiving important notices. Therefore, when foreign shareholders acquire shares in Japan, it is essential not only to acquire the shares but also to understand the unique Japanese practices related to registration in the shareholder registry and the importance of information management that comes with it, ensuring appropriate measures are taken.

The Role of Shareholder Registry Administrators in Japan

In companies with a large number of shareholders, such as publicly listed companies in Japan, there is a wide range of administrative tasks that arise, including the creation and management of shareholder registries, shareholder meeting-related affairs, and dividend payments. These tasks require specialized knowledge and large-scale systems. Therefore, companies can delegate these administrative duties to a professional service provider known as a “shareholder registry administrator” as stipulated in their articles of incorporation.

In Japanese practice, trust banks such as Mitsubishi UFJ Trust and Banking Corporation, Sumitomo Mitsui Trust Bank, and Mizuho Trust & Banking, as well as dedicated securities transfer service providers like Japan Securities Agents, Tokyo Securities Transfer Agent, and IR Japan, perform the duties of shareholder registry administrators.

The management of shareholder registries encompasses a wide range of tasks, and particularly in large companies, a vast amount of administrative processing occurs. Article 123 of the Japanese Companies Act allows these tasks to be entrusted to a professional shareholder registry administrator. By delegating to a specialist, companies are relieved from the complex administrative burden associated with shareholder management. This enables companies to focus on their core business and allocate management resources more efficiently. Professional shareholder registry administrators operate based on stringent legal requirements and advanced information processing systems. This ensures the accuracy and reliability of the shareholder registry, enhancing the transparency and efficiency of the entire stock market. Investors gain peace of mind knowing that their rights are being properly managed. Thus, the system of shareholder registry administrators serves not merely as an administrative delegation but as a vital infrastructure that enables Japanese companies to achieve efficient management while simultaneously enhancing the reliability and functionality of the capital market.

Maintenance and Inspection/Copying Rights of the Shareholder Registry Under Japanese Corporate Law

In Japan, a joint-stock company (Kabushiki Kaisha) is required to maintain its shareholder registry at its head office. If there is a shareholder registry administrator, the registry must be kept at their place of business. Shareholders and creditors have the right to inspect or request copies of the shareholder registry during the company’s business hours at any time.

Article 125 of the Japanese Companies Act stipulates the obligation to maintain the shareholder registry and the rights of shareholders and creditors to inspect and request copies. However, the company may refuse such requests if it determines that the requester is seeking information for purposes other than securing or exercising rights, if the request could impede the company’s operations, harm the common interests of the shareholders, or if the requester intends to use the information obtained from the inspection or copying of the shareholder registry for profit by disclosing it to third parties under certain circumstances.

Legal Considerations for Foreign Investors Acquiring Stocks in Japan

Scope of Application of the Foreign Exchange and Foreign Trade Act (FEFTA) in Japan

When foreign investors acquire shares in Japanese companies, it is necessary to consider not only the Japanese Companies Act but also the application of Japan’s Foreign Exchange and Foreign Trade Act (FEFTA). The FEFTA mandates prior notification or post-investment reporting to examine whether investments by foreign investors in Japanese enterprises (referred to as “inward direct investment, etc.”) pose a threat to Japan’s national security.

In cases where foreign investors acquire shares in Japan, they are subject to the Japanese Companies Act as well as the Japanese Foreign Exchange and Foreign Trade Act (FEFTA). This means that multiple different laws apply to a single act of share transfer. While the Companies Act governs the validity and procedures of the share transfer itself, the FEFTA imposes additional notification and reporting obligations with the aim of monitoring the impact of the investment on national security. Foreign investors must simultaneously meet the requirements of their own country’s laws, the Japanese Companies Act, and the Japanese FEFTA. This increases the complexity of compliance, making it difficult to complete the appropriate procedures without specialized legal advice. For foreign investors, acquiring shares in Japan is not a single legal issue but a complex cross-border transaction involving multiple laws, and a comprehensive understanding and adherence to the requirements of each legal domain is key to success.

Overview of Inward Direct Investment and Specific Acquisitions Under Japanese Law

In the context of the Foreign Exchange and Foreign Trade Act (FEFTA), a “foreign investor” refers to individuals who are non-residents, foreign corporations, companies in which foreign corporations hold more than 50% of voting rights, partnerships engaged in investment activities, and organizations where the majority of officers are non-residents.

• Inward Direct Investment: Inward direct investment in Japan includes acquiring shares or voting rights in domestic listed companies (when the investment ratio or voting rights ratio becomes 1% or more), acquiring shares or equity in domestic unlisted companies (excluding transfers from other foreign investors), consenting to substantial changes in the business purposes of domestic corporations, and establishing branches within Japan.
• Specific Acquisitions: Specific acquisitions refer to a foreign investor acquiring shares or equity in a domestic unlisted company from “another foreign investor.” This is a distinct category from inward direct investment.

The procedures under the FEFTA are categorized as follows:

• Prior Notification: Required when the nationality or location of the foreign investor is neither Japan nor a listed country, or when the business in which the investment is made includes designated industries.
• Subsequent Reporting: Required in all other cases, that is, when the nationality or location of the foreign investor is Japan or a listed country, or when the business in which the investment is made does not include designated industries. Subsequent reporting is also necessary when utilizing the prior notification exemption system.
• Prior Notification Exemption System: A system where prior notification is not necessary, provided certain standards are met, and subsequent reporting suffices. This system is available to a limited number of foreign investors, such as specific foreign financial institutions and Sovereign Wealth Funds (SWFs). Violating the exemption criteria may subject the investor to administrative orders.

Procedures for Prior Notification and Post-Transaction Reporting in Japan

When prior notification is required, foreign investors must submit a notification form to the Minister of Finance and the competent minister in charge of the business through the Bank of Japan at least six months before the planned transaction date. After the notification is accepted, there is a ‘prohibition period’ of 30 days during which transactions cannot be conducted; however, this period may be shortened if it is determined that there are no issues concerning national security. Nonetheless, if the review process takes time, the prohibition period may be extended up to a maximum of four months.

Transactions subject to post-transaction reporting must have a report submitted within 45 days of completion. The obligation to provide prior notification lies with the foreign investors, and, in principle, the recipient companies are not required to notify.

Risks and Penalties for Violating the Foreign Exchange and Foreign Trade Act in Japan

Foreign investors who fail to comply with the notification obligations under the Foreign Exchange and Foreign Trade Act (FEFTA) may face severe penalties. For instance, if a prior notification is required but is falsely submitted, a fine of over 100 million yen may be imposed. Additionally, carrying out investments without notification or failing to comply with administrative orders can lead to criminal charges or orders from the Minister of Finance and the competent ministers to sell shares. These violations are dealt with strictly as they relate to national interests in economic security, including the prevention of technology outflows.

The obligation to notify under the FEFTA lies with foreign investors, and violations can result in heavy penalties such as substantial fines or orders to sell shares. When Japanese companies accept investments from foreign investors, there is no direct notification obligation on the part of the company, which can create a situation where it is difficult for the company to be aware if a foreign investor neglects FEFTA procedures. However, if a foreign investor violates the FEFTA, the investment itself becomes illegal, and ultimately, it may affect the invested company, including orders to sell shares. This can become an unexpected management risk for the invested company. Even if the invested company does not have a direct notification obligation under the FEFTA, ensuring that foreign investors comply with the FEFTA is crucial for the legal stability and business continuity of the invested company. Foreign investors should be aware that their compliance directly affects the stability of the invested company, and it is essential for invested companies to form and verify clear agreements with foreign investors regarding compliance with the FEFTA to avoid potential risks.

Summary

The rules for stock transfers under Japanese Corporate Law are based on the principle of free transferability but are also governed by a multi-layered legal framework that includes procedures for approving restricted stock transfers, managing shareholder registries, and regulations under the Foreign Exchange and Foreign Trade Act for foreign investors. Understanding these complex rules accurately and conducting the appropriate procedures are essential for realizing smooth stock transfers and avoiding unforeseen legal risks. Monolith Law Office possesses extensive experience and specialized knowledge in corporate legal affairs, mergers and acquisitions (M&A), and international transactions for a wide range of clients, from listed companies to startups within Japan. In particular, we have several English-speaking attorneys with qualifications from jurisdictions such as California, who deeply understand both the Japanese legal system and foreign business practices. This enables us to provide precise support from multiple perspectives for the complex legal challenges faced by foreign investors. For consultations regarding stock transfers in Japan, please entrust Monolith Law Office with your needs.