Legal Commentary on the Appointment, Resignation, and Dismissal of Executive Members and Representative Members in a Limited Liability Company

The Godo Kaisha (GK), a business structure introduced by the Japanese Companies Act in 2006, has become an attractive option for many enterprises due to its operational flexibility. This company form is often compared to the American LLC (Limited Liability Company), and indeed, prominent international corporations such as Google Godo Kaisha, Apple Japan Godo Kaisha, and Amazon Japan Godo Kaisha have adopted it for their business expansion in Japan. The most significant feature of a Godo Kaisha, unlike a Kabushiki Kaisha (KK), is that ownership (investment) and management are, in principle, unified. This structure enables swift decision-making and simplified governance; however, the rules surrounding the positions of executive members and representative members, who are central to management, are detailed under Japanese corporate law. Without a proper understanding of the legal procedures for the appointment, resignation, and dismissal of these positions, there is a risk of internal conflicts or legally invalid decisions. This article comprehensively and expertly explains the procedures for appointing, resigning, and dismissing executive and representative members of a Godo Kaisha, referencing specific articles and case law under Japanese corporate law. The aim is to assist business managers and legal professionals in achieving stable and law-abiding organizational operations.

The Fundamentals of Executive Members and Representative Members in Japanese LLCs

Understanding the governance of a Japanese Limited Liability Company (LLC) is essential, and it begins with grasping the basic roles of executive members and representative members. Japanese Corporate Law provides both fundamental rules and the flexibility for customization through the articles of incorporation.

The principle set by Japanese Corporate Law is “management by all members.” If the articles of incorporation, which are the basic rules of the company, do not specify otherwise, all members who have invested in the company have the authority to execute the company’s business as “executive members” (Article 590, Paragraph 1 of the Japanese Corporate Law). Furthermore, executive members also have the authority to represent the company externally as “representative members” (Article 599, Paragraph 1 of the Japanese Corporate Law). In this default state, all members have both the powers of company management and representation.

However, in many companies, there are members who invest but do not directly participate in management, and those who actively take on the management role. To accommodate such realities, Japanese Corporate Law allows for a flexible design of the governance structure through the articles of incorporation. By designating specific members as executive members in the articles of incorporation, it is possible to concentrate management authority in certain individuals (Article 590, Paragraph 1 of the Japanese Corporate Law). In this case, members who are not designated as executive members in the articles of incorporation will not have management authority.

From this, it is clear that there is a distinct hierarchical relationship between executive members and representative members. Representative members must always be selected from among the executive members (Article 599, Paragraph 3 of the Japanese Corporate Law). It is legally impossible to appoint a member who does not have executive authority as a representative member. In other words, a representative member is a position that is endowed with more powerful external representation rights, built upon the status of being an executive member. Company founders must make the important strategic decision of establishing the most suitable governance model for their company in the articles of incorporation, with an understanding of these principles.

Appointment of Executive Officers and Representative Directors in Japan

The appointment procedures for executive officers and representative directors are the first steps in materializing a company’s governance structure. These procedures largely depend on the provisions of the company’s articles of incorporation.

Executive officers are appointed by directly specifying their names in the articles of incorporation. Those whose names are listed as executive officers assume their positions, while those not listed are excluded from management.

On the other hand, there are mainly two methods for appointing representative directors based on Article 599, Paragraph 3 of the Japanese Companies Act.

The first method is direct designation in the articles of incorporation. This involves specifying the name of a particular individual as the representative director, such as “The representative director of this company shall be XX.” This method is suitable when clarity about who the representative is desired and a stable management structure is sought.

The second method is mutual election by the executive officers, based on the provisions of the articles of incorporation. In this case, the articles would state, “The representative director of this company shall be determined by mutual election of the executive officers.” Based on this provision, the executive officers elect the representative director through discussion or voting. The results of this mutual election are recorded in a document such as the “Election Record.” This method allows for more flexible operations, as it avoids the cumbersome procedure of amending the articles of incorporation when changing the representative director.

One important procedural point to note is the necessity of a consent letter for appointment. When a representative director is chosen by mutual election, a “Consent to Appointment” document proving their acceptance of the position is required for registration procedures. Conversely, when directly named in the articles of incorporation, the individual is deemed to have consented to the appointment as a representative director at the time of agreeing to the articles, so a separate consent letter is generally not required.

There is also the special case where the executive officer is a legal entity. Since a legal entity cannot physically execute duties like a natural person, it must appoint a “Duty-Executing Officer,” who is a natural person to perform the actual duties, and notify other members of their name and address (Article 598, Paragraph 1 of the Japanese Companies Act). If this legal entity is also a representative director, the name and address of the Duty-Executing Officer must be recorded in the company’s registry and made public.

The methods of appointment carry significance beyond mere procedural differences. In particular, the decision to choose direct designation or mutual election for the appointment of a representative director directly affects the difficulty of future dismissals. Dismissing a directly designated representative director requires an amendment to the articles of incorporation, as will be discussed later, and this hurdle is quite high. On the other hand, a representative director chosen by mutual election can be dismissed through more flexible procedures. Therefore, founders must carefully consider the future dynamics of the company and decide which method is most suitable for their company.

Resignation of Executive Officers and Representative Directors in Japan

When executive officers or representative directors step down from their positions, it is crucial to accurately distinguish between the two different legal concepts of ‘resignation’ and ‘withdrawal’ under Japanese law.

‘Resignation’ refers to leaving an executive or representative role, while maintaining one’s status as a shareholder. This means that while you lose managerial authority or representation rights, you continue to hold your stake as an owner of the company.

On the other hand, ‘withdrawal’ means completely leaving the status of a shareholder. By doing so, you relinquish your ownership stake in the company and, as a result, automatically lose any executive or representative positions you held. A withdrawing shareholder is generally entitled to a refund of their capital contribution.

If an executive officer specifically appointed in the articles of incorporation decides to resign, the process is not simple. Article 591, Paragraph 4 of the Japanese Companies Act stipulates that a ‘just cause’ is required for an executive officer to resign. This provision is designed to prevent key figures responsible for managing the company from easily abandoning their duties and causing disruptions to the company’s operations.

Regarding the complete departure from a company, ‘withdrawal,’ the Japanese Companies Act outlines several methods. One is ‘voluntary withdrawal,’ where a shareholder can notify the company six months before the end of the fiscal year and withdraw at the end of that fiscal year (Japanese Companies Act Article 606, Paragraph 1). Another is in cases of ‘unavoidable circumstances.’ In such cases, a shareholder can withdraw at any time (Japanese Companies Act Article 606, Paragraph 3). ‘Unavoidable circumstances’ refer to situations where it is objectively difficult to remain as a shareholder, such as serious illness or a fundamental change in the company’s business objectives, and does not include mere differences of opinion.

The resignation procedure for a representative director varies depending on the method of appointment. If a representative director directly named in the articles of incorporation resigns, it is necessary to remove their name from the articles, requiring an amendment to the articles of incorporation. This amendment generally requires the consent of all shareholders and the procedure is very strict. Conversely, for a representative director chosen by mutual election among executive officers, the position is based on the consensus of the shareholders, allowing for a more straightforward resignation through a declaration of intent to the company.

To clarify these differences, the following table compares ‘resignation’ and ‘withdrawal.’

Removal of Executive Officers and Representative Directors Under Japanese Corporate Law

The removal of executive officers and representative directors against their will, known as “dismissal,” is subject to very strict requirements under Japanese Corporate Law to protect the stability of the company.

To dismiss an executive officer appointed in the articles of incorporation, two conditions must be met simultaneously. First, there must be a “just cause,” and second, there must be the unanimous consent of “all other members” excluding the person to be dismissed (Article 591, Paragraph 5 of the Japanese Corporate Law). These dual requirements prevent the easy exclusion of minorities by majorities and strongly protect the status of executive officers. However, Article 591, Paragraph 6 of the Japanese Corporate Law allows the articles of incorporation to stipulate different provisions (for example, provisions that relax the requirements for dismissal).

The procedure for dismissing a representative director depends on the method of their appointment, similar to the case of resignation. To dismiss a representative director who is directly appointed in the articles of incorporation, an amendment to the articles is necessary. Since the consent of all members is required for an amendment to the articles, unilateral dismissal is practically impossible unless the person to be dismissed also agrees. On the other hand, representative directors elected by mutual election can be dismissed by the same method as their appointment, such as a resolution by a majority of the executive officers, which is a more realistic procedure.

As for the specific content of “just cause,” there is no clear definition in the Japanese Corporate Law. Moreover, there are not many court precedents regarding the dismissal of executive officers of a Limited Liability Company. In such cases, courts tend to make judgments by referring to similar provisions. Precedents regarding “just cause” for the dismissal of directors of a stock company (Article 339, Paragraph 2 of the Japanese Corporate Law) become important guidelines.

According to precedents for stock companies, “just cause” is recognized only in cases where it is objectively difficult to continue entrusting the duties of an officer, such as serious violations of laws or the articles of incorporation, acts of betrayal that cause damage to the company, inability to perform duties due to long-term illness, or a significant lack of management ability. For example, the Hiroshima District Court decision on November 29, 1994, ruled that substantial losses to the company caused by speculative transactions conducted unilaterally by a representative director constituted a just cause for dismissal. On the other hand, subjective reasons such as mere disagreements over management policies or deterioration of relationships with other officers are generally not considered “just cause”. The Tokyo District Court decision on December 23, 1982, is a representative example where it was judged that poor relations with the representative alone do not constitute a just cause for dismissal.

Furthermore, in cases where the misconduct of an executive officer is extremely malicious and causes significant damage to the company, there is a final measure called “expulsion.” This is a system where, based on a resolution by a majority of the members, a lawsuit is filed with the court to forcibly expel the said member from the company (Article 859 of the Japanese Corporate Law). Expulsion is the last resort when it is not possible to resolve the issue through discussions among members and requires a judicial decision by the court, making it an extremely powerful measure. The dismissal system of a Limited Liability Company, designed with an emphasis on consensus-building and stability rather than easy expulsion by majority vote, reflects the philosophy of basing on a partnership-like relationship of trust.

Conclusion

As detailed in this article, the rules concerning the status of executive members and representative members of a Japanese Limited Liability Company (LLC) are strictly defined by Japanese Corporate Law, reflecting the flexible organizational structure of such entities. The significance of the articles of incorporation, which form the backbone of governance, the strategic impact that the method of appointing representative members (whether by direct designation or mutual election) has on future dismissal procedures, and the legal differences between “resignation” and “leaving the company,” as well as the high thresholds required for dismissal, such as “just cause” or “unanimous consent of all members,” are all critical points that must be understood in the operation of an LLC in Japan. To properly manage these complex legal requirements and prevent future disputes, specialized legal knowledge is indispensable. Monolith Law Office boasts a wealth of experience in corporate governance matters such as the establishment of LLCs, drafting articles of incorporation, and the appointment and change of officers, serving not only clients within Japan but also many international clients. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to provide meticulous legal support with a deep understanding of the international business context. Utilize our expertise to ensure that your company’s governance structure is compliant with legal regulations and aligned with your business strategy.