Transfer and Succession of Interests in a Japanese LLC: Procedures and Legal Requirements Explained

One of the company structures in Japan, the Limited Liability Company (LLC), is widely utilized across various businesses due to its flexible organizational design and high degree of operational freedom. However, at its core lies a philosophy distinct from that of a joint-stock company (corporation): the principle of “personal trust relationships.” Unlike corporations, which emphasize the aggregation of capital, LLCs are founded on the personal connections and trust among members. This fundamental ideological difference is directly reflected in the rules governing the transfer and succession of “interests,” which correspond to ownership rights in the company. Transferring interests in an LLC is not as freely conducted as trading shares in a corporation. Under Japanese Corporate Law, there are strict principles prioritizing the stability of the existing membership structure. Therefore, when transferring interests in an LLC or planning for future business succession, it is essential to accurately understand the legal procedures, the requirements for these procedures to take effect, and the conditions for asserting rights against third parties. This article provides a detailed explanation from a professional perspective on the legal system concerning the transfer and succession of LLC members’ interests under Japanese Corporate Law, focusing on the specific procedures and legal effects.

Basic Principles of Interest Transfer in Japanese LLCs

Unlike stock transfers in joint-stock companies, the transfer of interests in a Japanese Limited Liability Company (LLC) is generally subject to strict restrictions. At the heart of these restrictions is the philosophy that an LLC is a “personal company,” with the business foundation built on personal trust among members.

Principle: Consent of All Members

The basic rule for the transfer of interests set by the Japanese Companies Act is very clear. Article 585, Paragraph 1 of the Japanese Companies Act stipulates, “A member cannot transfer all or part of their interest to another person without the consent of all other members” (2023). This represents a very strict requirement of unanimous consent, meaning that if any member objects, the transfer of interests cannot be completed. This provision is not an arbitrary restriction but a legal embodiment of the essence of an LLC. The law assumes that the individuality of each member is extremely important to all other members, and therefore grants each member the right to refuse the acceptance of a new partner, i.e., a veto right. This protects the trust and personal bonds that form the foundation of the company. The high hurdle of unanimous consent suggests that the law prioritizes the maintenance of existing members’ unity over the free recovery of individual members’ investments.

Exception: Non-Executive Members with Limited Liability

There is an important exception to this strict principle. Article 585, Paragraph 2 of the Japanese Companies Act states, “A non-executive member with limited liability may transfer all or part of their interest to another person with the consent of all executive members” (2023). This provision relaxes the requirements for the transfer of interests by members who do not directly participate in the management of the company, essentially those in an investor-like position. In this case, consent from other non-executive members with limited liability is not required, and the transfer can be made with the consent of all executive members only. This exception demonstrates that the law recognizes the different roles within an LLC. The transfer of interests by non-executive members is considered to have a relatively small impact on the company’s day-to-day operations, allowing for a simpler procedure. This provision opens the way for using LLCs as more flexible vehicles for investment. By clearly defining investors as “non-executive members with limited liability” in the articles of incorporation, their exit strategies can be designed to be more convenient.

Separate Provisions in the Articles of Incorporation

The Japanese Companies Act respects the autonomy of the parties involved and is no exception when it comes to the rules of interest transfer. Article 585, Paragraph 4 of the Japanese Companies Act states, “The foregoing consent requirements shall not preclude the articles of incorporation from providing otherwise” (2023). This means that an LLC can establish its own transfer rules that differ from the legal principles through its articles of incorporation. For example, the articles of incorporation may include provisions such as “Transfer of interests requires the consent of the representative member” or “Transfer of interests shall be made with the consent of the majority of the executive members.” This authority to change through the articles of incorporation is extremely important in the governance design of an LLC. The strictness of the unanimous consent principle is not an insurmountable obstacle but merely a default setting. Therefore, the creation or amendment of the articles of incorporation is not just a formal procedure but a highly strategic activity that defines the flexibility of the company, the possibility of future M&A or business succession, and the value of each member’s interest itself.

Specific Procedures for the Transfer of Equity Interests in Japan

When transferring equity interests in a Japanese LLC, the parties involved must accurately follow a series of legal procedures. These procedures are interrelated, and missing even one step can result in the transfer not being fully effective.

First, a transfer agreement is concluded between the transferor (the member transferring the equity interest) and the transferee (the party acquiring the equity interest). This agreement serves as proof of the parties’ mutual consent, but it alone does not create any effect in relation to the company.

Next, as the most crucial step, it is necessary to fulfill the consent requirements stipulated by the Japanese Companies Act or the company’s articles of incorporation. In principle, the consent of all other members is required, and it is advisable to clearly record this consent in writing, typically in a “Consent Document.”

Subsequently, the procedure for amending the articles of incorporation is carried out. Under Japanese corporate law, it is necessary to include the names and addresses of the members in the articles of incorporation (Companies Act, Article 576, Paragraph 1). When the transferee becomes a new member, it is common practice to clarify their membership status externally by amending the articles of incorporation with the consent of all members (Companies Act, Article 585, etc.). It is particularly important that when a non-member receives an equity interest and joins as a new member, the transferee acquires the official status of a member only when the amendment to the articles of incorporation is made. The amendment itself also generally requires the consent of all members under Japanese corporate law (Companies Act, Article 637). In practice, the approval of the equity transfer and the amendment of the articles are commonly made simultaneously by a single resolution.

Finally, the possibility of applying for a change in commercial registration is considered. However, not all equity transfers necessitate a change in registration. Registration is required only when the transfer of equity interests results in changes to registered items such as “executive members” or “representative members.” For example, if a non-executive member transfers their equity interest to an external third party who will also be a non-executive member, or if there is only a change in the equity ratio among existing members, no change in the registered items occurs, and therefore, no registration application is needed.

Requirements for the Effectiveness and Opposition of Share Transfer in Japan

To legally establish the effectiveness of a share transfer and assert those rights against the company and third parties, it is necessary to understand the “requirements for effectiveness” and “opposition requirements.” In the case of a joint-stock company, the opposition requirement is consolidated into a single clear requirement: the entry in the shareholder registry. However, for a limited liability company (LLC), a more multifaceted understanding is required depending on the situation.

First, within the internal relationship with the company and other members, the effectiveness of the transfer occurs at the moment the transfer agreement is concluded and the necessary consent requirements are met. However, the transferee establishes their complete status as a member with all rights when the articles of incorporation are amended. Therefore, in the internal company relationship, the amended articles of incorporation serve as decisive evidence of a member’s status.

Next, in relation to external third parties, that is, the “third-party opposition requirements,” what needs to be relied upon varies depending on what one wishes to assert. Understanding this dual structure is extremely important.

Firstly, when asserting the company’s representation rights or authority to execute business to a third party. For example, when financial institutions or business partners need to verify who has the authority to conclude a contract, they refer to the commercial registry (registration). Therefore, the requirement to oppose a change in the status of an executive member or representative member to third parties is the registration of such change. Even if the articles of incorporation impose restrictions on the authority of the representative member, those restrictions cannot be asserted against a third party who is unaware of them in good faith. This is stipulated in Article 599, Paragraph 5 of the Japanese Companies Act.

Secondly, when asserting one’s status as a member to a third party. Consider a scenario where a creditor of a new member attempts to seize the member’s share as an asset. In this case, since non-executive members are not listed in the commercial registry, registration does not serve as a means of proving membership status. The requirement to oppose one’s status as a member in this situation is the articles of incorporation that have been lawfully amended.

Thus, the opposition requirements for share transfers in a limited liability company cannot be answered by a simple binary choice between “registration” or “articles of incorporation.” Registration is the requirement for opposing “authority,” while the articles of incorporation are the requirement for opposing “status as a member.” This analytical understanding is crucial for managing legal risks.

Case Study Introduction: Decisions on Share Transfer Under Japanese Corporate Law

An important precedent that illustrates the court’s approach to the consent requirements for share transfers exists in Japan. The Supreme Court of Japan’s decision on March 27, 1997 (Heisei 9) (1997), reported in Volume 51, Issue 3, Page 1628 of the Minshū (the official report of Supreme Court decisions), concerns a case involving an old Yūgen Kaisha (limited company), which has legal personalityistics similar to those of the current Gōdō Kaisha (limited liability company). The judgment remains insightful even today.

In this case, a member of a Yūgen Kaisha transferred their shares to a third party who was not a member of the company. The transfer did not go through the formal approval resolution of the shareholders’ meeting required by law. However, it was proven that all members other than the transferor had substantively consented to the transfer.

The Supreme Court ruled that as long as there was substantive consent from all members, the share transfer was valid, even in the absence of a formal approval resolution. This validity was recognized not only between the parties involved in the transfer but also in relation to third parties. This precedent clearly demonstrates that Japanese courts prioritize the true intentions of all parties involved—known as the “principle of substance over form”—over strict adherence to formal procedures in such cases. The purpose of the consent requirement is to protect the interests of the other members. If those members who should be protected give their consent, thereby waiving that protection, it is no longer permissible to dispute the validity of the transfer on the grounds of formal procedural deficiencies. This approach provides legal stability to transactions based on the genuine intentions of all parties involved, but it does not change the fact that following formal procedures is always the safest practice.

Share Transfer: Inheritance and Mergers Under Japanese Law

The death of a member or the dissolution of a corporation due to a merger triggers a significant issue of share transfer. In this respect, the rules for a Japanese LLC (Godo Kaisha) differ greatly from those of a stock company (Kabushiki Kaisha).

The Principle: Withdrawal upon Death

The principle regarding inheritance set by the Japanese Companies Act may come as a surprise to many business owners. According to Article 607, Paragraph 1, Item 3 of the Japanese Companies Act, when a member dies, they are treated as having ‘withdrawn’ from the company. This means that the member’s position (shares) is not automatically inherited by the heirs. Instead of becoming members, the heirs are entitled to demand payment from the company equivalent to the value of the deceased member’s shares.

Exception: Provisions for Transfer in the Articles of Incorporation

There is a very important exception to this principle to enable business succession. Article 608, Paragraph 1 of the Japanese Companies Act allows an LLC to stipulate in its articles of incorporation that “in the event of a member’s death or the company’s dissolution due to a merger, the member’s heirs or other general successors may inherit the member’s shares.” It is only by including this clause in the articles of incorporation that heirs can inherit shares and become new members. The articles of incorporation can be flexible in how they define the transfer, allowing for automatic inheritance by stating “heirs shall inherit the shares,” or conditional inheritance requiring “the consent of all other members.”

The rules regarding inheritance operate on an ‘opt-in’ basis, meaning they do not apply unless action is taken. Without any action, the principle of withdrawal applies. This poses a critical risk, especially for LLCs with only one member. If the sole member dies without having set a succession provision in the articles of incorporation, the company will be left without any members, leading to dissolution under Article 641, Paragraph 4 of the Japanese Companies Act, which states that a company must dissolve if it lacks members. Therefore, for family-owned businesses or companies operated by closely related parties, incorporating a succession provision based on Article 608 of the Japanese Companies Act into the articles of incorporation is one of the most critical tasks to ensure business continuity.

Summary

As explained in this article, the transfer and succession of interests in a Japanese LLC (Godo Kaisha) are governed by rules deeply rooted in the nature of the company, which is based on personal trust among its members. The transfer of interests generally requires the consent of all members, and changing the articles of incorporation is essential to the procedure. The requirements for opposing third parties vary depending on the rights being claimed, necessitating the use of commercial registration and the articles of incorporation accordingly, which is more complex than the system for stock companies. Furthermore, business succession through inheritance will not be realized without proactive measures, such as setting clear succession provisions in the articles of incorporation. The flexibility of an LLC can also be a source of complexity. To ensure the stability of the company and facilitate smooth future transactions and business succession, expert legal planning, especially during the drafting stage of the articles of incorporation, is not just recommended but essential.

Monolith Law Office has a wealth of experience advising a diverse range of domestic and international clients on matters related to Japanese Corporate Law, particularly the transfer and succession of interests in LLCs. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to navigate even complex legal systems accurately. From drafting and amending articles of incorporation to structuring M&A transactions and formulating reliable business succession plans, we provide comprehensive support. We assist at every stage, ensuring compliance with Japanese law and protecting our clients’ interests.