Protection of Minority Shareholder Rights in Japanese Corporate Law and Minority Shareholder Rights

The Japanese Companies Act clearly defines the rights of shareholders in a stock company, placing particular emphasis on the protection of minority shareholders. This is to provide an essential mechanism for shareholders, who are a minority force, to protect their interests from unfair management decisions and misconduct under the principle of majority rule at shareholders’ meetings. In public companies, shareholders can express their dissatisfaction by selling their shares, exercising the ‘Wall Street Rule,’ but in private companies or under certain circumstances, selling shares may not be easy. In such cases, the minority shareholder rights established by the Companies Act become an indispensable means for shareholders to protect their investments and monitor the healthy operation of the company.

The Japanese Companies Act of 2005 (Heisei 17 [2005], Law No. 86) introduced new company forms such as the Limited Liability Company (LLC) and enhanced the framework for minority shareholder protection, including strengthening the ‘right to exit.’ This indicates that legislators recognize the importance of protecting shareholder interests not only through market mechanisms but also through legal means. This article provides a detailed explanation of key minority shareholder rights, such as injunction requests, director dismissal requests, and demands for inspection of accounting books, which are particularly important for foreign investors and business professionals investing in Japanese companies. Understanding these rights is crucial for grasping the corporate governance environment in Japan and formulating investment strategies.

The Complete Picture of Minority Shareholder Rights Under Japanese Corporate Law

Minority shareholder rights refer to the rights that can only be exercised by shareholders who hold a certain percentage or number of shares in a joint-stock company. These rights are granted to allow minority shareholders to monitor and supervise the company’s business execution under the principle of majority rule at the shareholders’ meeting, and to protect their interests from unfair decisions. The ultimate goal is to ensure the transparency of management, uncover any misconduct or legal violations by directors, and protect the interests of all shareholders, thereby promoting the sustainable development of the company.

Japanese Corporate Law sets forth various minority shareholder rights according to the number of shares held or the percentage of voting rights. These requirements are designed to prevent the abuse of rights while enabling effective monitoring and supervision. In the case of public companies, a continuous holding period of at least six months is often required. Shareholders need to understand that the level of influence and protection they have over the company varies according to the percentage of shares they hold. For instance, by holding 3% of the voting rights, a shareholder can exercise significant supervisory powers, such as requesting to inspect accounting books or filing a lawsuit to dismiss an officer. This serves as a guideline for investors to strategically acquire shares to exercise specific rights. The requirement of a continuous holding period also encourages long-term engagement as a shareholder, rather than short-term speculative purposes.

Below is a summary of the main minority shareholder rights under Japanese Corporate Law and their exercise requirements.

Injunction Requests Under Japanese Corporate Law

An injunction request is the right of shareholders to ask the court to stop actions by company directors or executives that violate laws or the articles of incorporation and could potentially cause irreparable harm to the company. This right is based on Article 360, Paragraph 1 of the Japanese Companies Act and functions as an important preventive measure to ensure the legality of corporate operations in advance.

Particularly, the request to stop the issuance of new shares is one of the injunction requests that frequently arises from the perspective of protecting minority shareholders. This right allows shareholders to request the company to stop the issuance of new shares (additional stock) when the corporation issues them in violation of laws or the articles of incorporation, or by significantly unfair methods, which could disadvantage shareholders, as stipulated under Article 210 of the Japanese Companies Act.

To have this request granted, two requirements must be met: first, the issuance of new shares must be “in violation of laws or the articles of incorporation, or by significantly unfair methods,” and second, there must be a “possibility of disadvantage to shareholders.”

In determining “significantly unfair methods,” the “primary purpose rule” serves as an important criterion. This refers to cases where the main purpose of issuing new shares is not legitimate capital raising but rather for the existing management to maintain control of the company. Under Japanese corporate law, it is the shareholders’ meeting that appoints directors, and for directors themselves to manipulate shareholder composition to maintain their positions is considered contrary to the spirit of the law regarding the distribution of institutional authority. However, if there are legitimate purposes such as the necessity for fundraising or the rationality of the business plan, even if there is an intention to maintain control, it may not be judged as “significantly unfair.”

There is a wealth of case law on this matter:

• Tokyo District Court, July 25, 1989 Decision (Inageya-Tadamiya Case): This judgment determined that the issuance of a large number of new shares to a third party with the primary purpose of lowering the shareholding ratio of certain shareholders and maintaining the current management’s control, in a situation where there is a struggle for control of the company, constitutes an unfair issuance.
• Tokyo High Court, August 4, 2004 Decision: In this decision, although the intention of the current management to maintain control was suspected, the necessity for fundraising for the business plan and the rationality of the business plan were recognized. Therefore, even if there was an intention to maintain control, it was not considered to be an issuance by significantly unfair methods as it did not override the legitimate intention of the company’s development.
• Tokyo High Court, March 23, 2005 Decision: This decision stated that the issuance of new share options with the primary purpose of maintaining and securing management control generally constitutes a “significantly unfair method.” However, exceptionally, if there are special circumstances that justify the “protection of the interests of all shareholders,” such as a greenmailer who aims to exploit the company, scorched-earth management that damages the value of the company, the purpose of misappropriating the company’s assets, or the intention to sell shares at an unfairly high price, it should not be considered an unfair issuance.
• Supreme Court, August 7, 2007 Decision: This decision stated that the principle of shareholder equality is to protect the interests of individual shareholders. However, if the existence or development of the company is hindered and there is a risk of damage to corporate value, discriminatory treatment of certain shareholders does not immediately contravene the principle, as long as it does not lack appropriateness and does not contravene the principles of equity. It was indicated that whether the corporate value is damaged should ultimately be judged by the shareholders’ meeting, and as long as there are no significant flaws in that judgment, it should be respected.
• Tokyo District Court, June 23, 2008 Decision: This decision stated that the issuance of new shares through third-party allotment in a public company is recognized as an exercise of management judgment, and even if the shareholding ratio of existing shareholders decreases, it is not immediately disadvantageous. However, if there is a dispute over the control of the company and a significant number of new shares are issued that affect the shareholding ratio of existing shareholders and the main purpose is to maintain control, it is judged that there is a disadvantage.
• Tokyo High Court, October 16, 2024 Decision: This is a case where an application for a provisional injunction against a stock exchange was dismissed, suggesting trends in the court’s judgment on the scope and requirements of injunction requests.

These case laws clarify that the request to stop the issuance of new shares is judged not only on formal violations of the law but also by considering the substantive purpose and the impact on shareholders. Particularly in the context of control disputes, courts tend to conduct strict scrutiny from the perspective of protecting the interests of all shareholders while respecting the discretion of management judgment.

Shareholder-Requested Dismissal of Directors Under Japanese Corporate Law

In Japan, a director of a joint-stock company can be dismissed “at any time” by an ordinary resolution at a shareholders’ meeting, as stipulated in Article 339, Paragraph 1 of the Japanese Companies Act. However, even if a majority vote cannot be obtained at the shareholders’ meeting, the Japanese Companies Act grants minority shareholders the right to file a lawsuit for the dismissal of directors. This right can be exercised by shareholders who have continuously held at least 3% of the voting rights for six months prior.  

For such a lawsuit to be granted, there must be “acts of misconduct in the execution of duties or significant facts that violate laws or the articles of incorporation” concerning the director whose dismissal is sought. The interpretation of “significant facts” can vary depending on the individual case, as determined by the court.  

Specific court cases include the following:

• Tokyo District Court, April 22, 2021: In this judgment, a minority shareholder’s request to dismiss a director, who had been convicted of breach of trust under Korean criminal law in relation to the execution of business at a related company in Korea, was rejected. The court pointed out that the director’s involvement in the criminal act was subordinate and passive, and that the financial damage had been restored through compensation, thus not constituting “significant facts” in violation of the law. This judgment provides an important implication that a director’s conviction for a criminal act in the course of duty does not immediately warrant a dismissal request. The court showed an attitude of carefully examining the individual circumstances, particularly the extent of the director’s involvement and the status of damage recovery, and cautiously assessing the “significance” of the impact on company management.  
• Takamatsu High Court, May 28, 1953: This judgment dealt with a case where a director, who was also the chairman, did not address his own dismissal as an agenda item and did not hold a vote, ruling that it did not meet the requirements for rejecting a dismissal proposal.  
• Tokyo District Court, December 24, 2013: A case where a director’s dismissal request was granted based on fictitious billing to the company.  
• Tokyo District Court, November 26, 2013: A case where a director’s dismissal request was granted based on window-dressing financial statements.  
• Tokyo District Court, May 14, 2012: A case where a director’s dismissal request was granted based on the personal use of company assets.  
• Tokyo District Court, April 24, 2014: A case where the dismissal of a nominal auditor was deemed to have “just cause.”  
• Tokyo District Court, June 26, 2024 (Gregorian calendar year): A case that recognized a director’s breach of the duty to avoid competition and ruled on the claim for director’s remuneration after the expiration of the term, when the director still held a position with rights and obligations.  

These cases demonstrate that the lawsuit for the dismissal of directors is a system that forcibly removes directors from their duties through court judgment, especially when dismissal is difficult to achieve through a majority vote at a shareholders’ meeting. At the same time, it is evident that the courts not only assess formal violations but also substantively evaluate the “significance” of the act and its impact on the company, making careful judgments to prevent abuse of rights.

The Right to Inspect Accounting Books Under Japanese Corporate Law

The right to inspect accounting books is one of the most fundamental rights for minority shareholders to monitor the management status of a company and check for any misconduct. Under Japanese Corporate Law, this right allows shareholders to request to inspect or copy the company’s accounting books or related documents at any time during business hours, provided they clarify the reason for their request. This right is stipulated in Article 433 of the Japanese Companies Act.

Shareholders who can exercise this right are those holding at least one-third of the total voting rights of all shareholders or at least one-third of the number of issued shares (excluding treasury shares). Additionally, shareholders of a parent company of a joint-stock company can also make a similar request, provided they obtain court permission when necessary to exercise their rights.

However, a company may refuse this request if it falls under specific grounds for refusal as set forth in Article 433, Paragraph 2 of the Japanese Companies Act. The main grounds for refusal include the following:

• When the requester has made the request with the intention of informing a third party for profit about facts learned through the inspection or copying of the accounting books, or if they have done so within the past two years.
• When the requester is engaged in a business that substantially competes with the company’s business. This is because the accounting books may contain important corporate secrets such as product costs, raw material suppliers, and sales channels, and access by competitors could significantly harm the company’s interests.
• When the request is aimed at obstructing the company’s operations.
• When the requester has previously abused this right.

Shareholder Derivative Actions in Japan

A shareholder derivative action is a lawsuit in which a shareholder pursues liability on behalf of the company against directors, auditors, executive officers, or accounting auditors (hereinafter referred to as “executives, etc.”) who have breached their duties and caused damage to the company, yet the company itself has not initiated legal action against these executives, etc. This system is stipulated under Article 847 of the Japanese Companies Act and plays an extremely important role in strengthening the oversight function against management misconduct or negligence and protecting the interests of the company.

To initiate a shareholder derivative action, several requirements must be met. First, the shareholder who files the lawsuit must have continuously held shares for at least six months in the case of a public company. Next, the shareholder must first demand in writing that the company pursue legal action against the executives, etc. The company is then given a period of 30 days to decide whether to initiate a lawsuit upon receiving this demand. However, this requirement for a preliminary demand can be waived if waiting for the 30-day period could result in irreparable harm to the company.

Regarding the scope of “director’s liability” that can be targeted in a shareholder derivative action, there have been two main opposing theories historically: the “all debts theory” and the “limited debts theory.” The all debts theory argues that all debts owed by directors to the company are subject to shareholder derivative actions, with the main rationale being that the possibility of the company neglecting to pursue executives’ liability exists regardless of the cause of the debt’s occurrence. On the other hand, the limited debts theory contends that the pursuit of liability should be confined to a certain range, such as responsibilities that are difficult or impossible to exempt, respecting the company’s discretion in management decisions.

The use of shareholder derivative actions dramatically increased after the 1993 amendment to the Commercial Code, which significantly reduced the filing fee for such lawsuits to a flat rate of 8,200 yen (at that time), regardless of the claim amount. This has made it a powerful deterrent against managerial misconduct. However, lawsuits filed with unjust purposes or intended to harm the company can be dismissed under the proviso of Article 847, Paragraph 1 of the Japanese Companies Act. This system is an important means for shareholders, as owners of the company, to supervise the actions of the management and actively protect the interests of the company, playing a central role in Japanese corporate governance.

Shareholder Proposal Rights in Japan

Shareholder proposal rights allow shareholders to propose specific items for discussion at the general shareholders’ meeting and request the company to include these proposals in the meeting notice. Introduced into Japanese corporate law in 1981 (Showa 56), this system aims to prevent the formalization of shareholder meetings, strengthen shareholder rights, and promote constructive communication between shareholders and the company.

To exercise this right, several conditions must be met. In the case of public companies, the proposing shareholder must have continuously held at least 1% of the total voting rights or at least 300 voting rights for six months prior. For private companies with a board of directors, the six-month continuous holding period is not required. Additionally, shareholder proposals must be submitted to the company at least eight weeks before the relevant shareholder meeting. The number of proposals a shareholder can make is limited to ten per shareholder, as stipulated by Article 305, Paragraph 4 of the Japanese Companies Act.

The company can reject shareholder proposals for specific reasons, such as:

• If the proposed item violates laws or the company’s articles of incorporation (Japanese Companies Act, Article 304 proviso, Article 305, Paragraph 4).
• If a substantially identical item has been rejected at a shareholder meeting within the past three years without receiving the approval of at least one-tenth of the total shareholder voting rights.
• If the reason for the proposal is clearly false or is deemed to be solely for the purpose of defaming or insulting someone (Companies Act Enforcement Regulations, Article 93, Paragraph 1, Item 3).
• If the exercise of shareholder proposal rights is recognized as an ‘abuse of rights’.

In recent years, the number of shareholder proposals at Japanese shareholder meetings has significantly increased. This is partly due to the easing of the requirements for exercising shareholder proposal rights, following the 2018 change in the unit share system (from 1,000 shares to 100 shares) and the increase in stock splits due to the Tokyo Stock Exchange’s call for a reduction in the minimum investment amount. This increase suggests that there is a rise in constructive dialogue and proposals from individual investors, which is seen as promoting the evolution of corporate governance in Japan.

Other Minority Shareholder Rights Under Japanese Corporate Law

In addition to the rights detailed above, Japanese Corporate Law establishes various rights to protect minority shareholders.

• Right to Request an Extraordinary General Meeting: Shareholders who have continuously held at least 3% of the total voting rights for six months can request the company to convene an extraordinary general meeting to discuss important matters concerning the company’s business or assets. This right ensures that shareholders have the opportunity to express their opinions directly on management when the board does not convene a general meeting.
• Right to Object to the Reduction of Directors’ Liability: Shareholders holding at least 3% of the total voting rights can object to a board resolution that exempts officers from their liability to the company. If an objection is raised, the board resolution to exempt liability cannot proceed. This serves as an important supervisory authority to prevent management from unfairly escaping their responsibilities and to protect the interests of shareholders.
• Right to Sue for Company Dissolution: Shareholders holding more than 10% of the total voting rights can request the dissolution of the company through litigation if the company faces significant difficulties in executing its business, risks incurring irreparable damage, or if there is ‘no alternative’ due to grossly inappropriate management and disposal of the company’s assets that endangers the company’s existence. This is a final remedy available to shareholders when the company’s continuation becomes detrimental to them.
• Right to Initiate a Derivative Lawsuit: Article 847-3 of the Japanese Corporate Law grants minority shareholders of the ultimate parent company the right to file a lawsuit against its wholly-owned subsidiaries under certain conditions to pursue the responsibility of officers. This enables shareholders of the parent company to directly address misconduct by officers of the subsidiary, playing a role in strengthening corporate governance across the entire group.

These rights constitute a multilayered protection mechanism that allows minority shareholders to exercise influence over the management of the company and correct inappropriate actions.

Summary

Protection of minority shareholder rights under Japanese Corporate Law is an essential element for foreign investors investing in Japanese companies. A wide range of rights, including injunction requests, director dismissal lawsuits, accounting book inspection requests, shareholder derivative actions, and the right to make shareholder proposals, provide shareholders with powerful legal tools to monitor corporate management and protect their interests from unfair practices. These rights are not only stipulated in statutes but have also been enriched in their interpretation through numerous court precedents, establishing their practical application. In particular, concepts such as the requirements for exercising rights, grounds for refusal, and the notion of ‘abuse of rights’ have been given concrete meaning by court decisions, enhancing predictability for both shareholders and companies.

Monolith Law Office boasts a wealth of experience in a wide range of legal services related to minority shareholder rights under Japanese Corporate Law. Our firm includes several attorneys who are native English speakers with foreign legal qualifications, enabling us to explain Japan’s complex legal system to our foreign clients in an understandable way and provide effective legal support.