Dissolution of Companies under Japanese Corporate Law: An Explanation of its Significance and Procedures

In the lifecycle of a company, “dissolution” is positioned as one of the final stages. This process signifies the initiation of legal proceedings to formally end the company’s business activities and extinguish its corporate entity. However, the term “dissolution” is often confused with “bankruptcy.” Clearly distinguishing these two concepts is crucial for understanding Japanese Corporate Law and making appropriate management decisions. While bankruptcy primarily refers to a state of financial insolvency, such as excessive debts, dissolution encompasses a broader range of reasons. For instance, a financially sound company may strategically choose to dissolve upon achieving its business objectives, due to the absence of a successor, or as part of an organizational restructuring. Therefore, dissolution does not necessarily signify managerial failure and can be part of a planned corporate strategy. When a company dissolves, it loses the ability to conduct regular business activities and transitions into the “liquidation” phase. The liquidation process involves a series of steps to monetize the company’s assets, settle debts, and distribute any remaining property to shareholders. This article focuses on the dissolution of companies under Japanese Corporate Law, exploring its legal significance, the reasons for dissolution as defined by law, the special system of “deemed dissolution” applied to companies with no long-term activity, and the process of “continuation of the company” to restore a once-dissolved company to a state where it can resume business activities, all explained in detail based on specific statutes and case law.

What Does Company Dissolution Mean Under Japanese Corporate Law?

In the context of Japanese Corporate Law, the term ‘dissolution’ of a company refers to the legal fact that triggers a stock company to cease its profit-seeking activities and enter into liquidation procedures to settle its legal affairs. A crucial point to understand is that dissolution does not immediately extinguish the company’s corporate status. Instead, upon dissolution, the company becomes a ‘liquidating stock company’ and continues to exist only within the scope necessary for liquidation. This signifies a transition from the company’s status as a ‘going concern’—an entity actively engaged in business—to a special form that exists solely to carry out legal winding-up procedures.

This transition brings about fundamental changes in the responsibilities and duties of the company’s management, particularly its directors. Directors of an active business are obligated to grow the business with the aim of maximizing shareholder value. However, once a company dissolves and enters the liquidation phase, their primary duty shifts to fairly managing the company’s assets, equitably settling debts with all creditors, and then distributing any remaining assets to shareholders. Understanding this shift in duty is essential for managing legal risks after dissolution. Article 475 of the Japanese Corporate Law explicitly states that, except in cases of dissolution due to merger or ongoing bankruptcy proceedings, a company must initiate liquidation procedures upon dissolution. Therefore, dissolution should be seen not merely as an ‘off switch’ that halts company activities but as a ‘mode switch’ that fundamentally alters the company’s legal standing and the duties of its management.

Grounds for Dissolution Under Japanese Corporate Law

Japanese Corporate Law specifies limited and concrete grounds upon which a joint-stock company may be dissolved. According to Article 471 of the Japanese Corporate Law, a joint-stock company shall be dissolved for the following reasons:

• Expiration of the duration of the company as stipulated in the articles of incorporation
• Occurrence of a cause for dissolution as stipulated in the articles of incorporation
• Resolution of the shareholders’ meeting
• Mergers (limited to cases where the said joint-stock company ceases to exist)
• Commencement of bankruptcy proceedings
• Court-ordered dissolution

These grounds can be broadly divided into those that are voluntary, based on the company’s will, and those that are compulsory, due to external factors or judicial decisions. Stipulating the duration of the company’s existence and specific causes for dissolution in the articles of incorporation is particularly utilized by companies aiming to carry out projects.

In practice, the most commonly used method of dissolution is through a “resolution of the shareholders’ meeting.” This procedure allows the shareholders, who are the owners of the company, to decide to end the company’s business activities of their own volition. As the dissolution of a company is an extremely important decision regarding its continuation, Article 309, Paragraph 2, Item 11 of the Japanese Corporate Law requires a more stringent “special resolution” than ordinary resolutions. To establish a special resolution, in principle, shareholders with a majority of the voting rights must be present, and at least two-thirds of the voting rights of the attending shareholders must approve.

The requirement of “more than two-thirds” holds significant strategic importance in terms of management strategy. This means that a shareholder who owns more than one-third of the shares can prevent a dissolution resolution if they oppose it. In other words, even minority shareholders can effectively exercise a veto right (blocking right) against the dissolution of the company by securing more than one-third of the shares. This point is a strategic element that should be carefully considered, especially in the establishment of joint ventures and capital policy of companies with multiple major shareholders.

Understanding Dissolution Requests Through Japanese Case Law

Among the grounds for the dissolution of a company in Japan, there is a unique procedure where shareholders can petition the court to dissolve the company. Article 833 of the Japanese Companies Act stipulates that shareholders holding at least one-tenth of the total voting rights can file a lawsuit for the company’s dissolution when there are “unavoidable reasons,” such as when the execution of the company’s business becomes significantly difficult and there is a risk of irreparable damage to the company. However, a court-ordered dissolution of a company, which forcibly extinguishes the company’s legal personality, is a very powerful measure and is therefore made with extreme caution.

An important case in this regard is the judgment of the Tokyo District Court on February 1, 2016 (2016). The case involved a family-owned company where two shareholders, each holding 50% of the shares, were in complete opposition, and the company’s decision-making had come to a complete halt due to the inability to appoint directors. One of the shareholders filed a lawsuit seeking the dissolution of the company to break the deadlock.

The court recognized the fact that the conflict between shareholders was severe and that the shareholders’ meeting and the board of directors were dysfunctional. It concluded that the situation had deteriorated to the point where it was pointless to continue the company’s existence, and that it was impossible to resolve the situation through other means, such as transferring shares. As a result, the court acknowledged the existence of “significantly difficult circumstances in the execution of business” and “unavoidable reasons,” and ordered the dissolution of the company.

The important point demonstrated by this judgment is that a court-ordered dissolution is not granted on the basis of mere disagreements between shareholders or conflicts over management policies. The court positions dissolution as a “last resort,” activating this powerful measure only in cases where the company’s continued existence is deemed impossible due to a serious and permanent state of dysfunction. Furthermore, the court may also examine whether the request for dissolution constitutes an abuse of rights intended to unduly pressure the opposing shareholders. Therefore, dissolution lawsuits should be understood not as an initial strategy for resolving management conflicts but as a final remedy after all other negotiation methods have been exhausted.

The Deemed Dissolution System for Dormant Companies in Japan

In Japanese corporate law, there exists a unique system known as “deemed dissolution of dormant companies.” This system legally treats companies that have shown no signs of business activity over a long period and have not made any registration changes as dissolved. Article 472, Paragraph 1 of the Japanese Companies Act defines “dormant companies” as stock companies that have not had any registration changes for 12 years since the last registration date.

The system serves two purposes. First, it maintains the reliability of the commercial registry. If companies without actual business operations continue to be listed in the registry, it could compromise the safety of commercial transactions. Second, it prevents dormant companies from being acquired by criminal organizations and used for fraudulent activities such as scams. The Ministry of Justice regularly carries out the cleanup of dormant companies to address these issues.

The procedure is administratively driven and proceeds automatically. For example, the cleanup for the fiscal year 2024 was carried out according to the following schedule:

1. First, on October 10, 2024, the Minister of Justice made a public announcement in the Official Gazette.
2. At the same time, the relevant Legal Affairs Bureau sent notifications to the registered head office addresses of the dormant companies. However, even if these notifications did not reach their destination, the procedure did not halt.
3. Companies that received the notification had to declare within a two-month period, by December 10, 2024, that they had not yet ceased business operations or apply for necessary registration changes such as officer appointments.
4. Companies that did not respond within this deadline were deemed dissolved as of December 11, 2024, and the registrar made the dissolution registration ex officio.

This system carries the risk of inadvertently losing valuable companies. Consider, for example, a foreign parent company that owns a subsidiary in Japan and has temporarily suspended its operations. Even if the subsidiary holds valuable assets such as real estate or intellectual property rights, if it neglects to make the required registration changes for officer terms (up to 10 years) as required by Japanese corporate law, and 12 years elapse, it will automatically become subject to deemed dissolution. Notifications are sent to the registered address, so if that address is outdated or unmanaged, the parent company may remain unaware of the subsidiary’s dissolution risk until the procedure is complete. This demonstrates how simple administrative negligence can lead to an irreversible outcome, becoming an “administrative trap,” and underscores the importance of maintaining basic legal compliance for all corporations, regardless of their activity status.

Continuation of a Company After Dissolution in Japan

Even if a company has once been dissolved, under certain conditions, it is possible to reverse that decision and return to a state where business activities can resume. This procedure is known as “continuation of a company.” Article 473 of the Japanese Companies Act stipulates the provisions for the continuation of a company.

The possibility of continuing a company depends on the reasons for its dissolution. Continuation is possible in cases where the dissolution was due to voluntary reasons such as: (1) the expiration of the company’s term as provided in its articles of incorporation, (2) the occurrence of a cause for dissolution as provided in its articles of incorporation, or (3) a resolution of the shareholders’ meeting. Additionally, companies deemed dissolved due to being dormant can also be continued. In these cases, as long as the liquidation is not completed, it is possible to continue the company by a special resolution of the shareholders’ meeting (Article 309, Paragraph 2, Item 11 of the Japanese Companies Act).

On the other hand, there are cases where the continuation of a company is not permitted. Specifically, a company cannot be continued if it has been dissolved due to a merger, a decision to commence bankruptcy proceedings, or an order of dissolution by a court. These reasons for dissolution are interpreted as final, either beyond the company’s control or based on judicial decisions.

Particularly important is the time limitation in the case of deemed dissolution. A company deemed dissolved can only be continued within three years from the date it was deemed dissolved. This three-year period acts as a sort of “statute of limitations” to correct administrative oversights. If the fact of deemed dissolution goes unnoticed for more than three years, the opportunity to revive the company is lost forever, and the only option remaining is to complete the liquidation process. While the continuation of a company is a powerful tool that allows for flexible management decisions, it is essential to understand that its use comes with clear conditions and time constraints.

Summary

Under Japanese Corporate Law, bankruptcy and dissolution are clearly distinguished as detailed in this article. Bankruptcy primarily refers to a financial failure, such as insolvency, whereas dissolution can occur for reasons such as the achievement of business objectives, voluntary cessation of business due to the absence of a successor, or as part of an organizational restructuring. Understanding this distinction is crucial for comprehending the life cycle of companies under the Japanese legal system.

Monolith Law Office has a proven track record of providing a wide range of legal services related to the life cycle of companies, including the dissolution of companies as explained in this article, to numerous clients within Japan. Our firm boasts a team of professionals, including English-speaking experts with both Japanese attorney qualifications and foreign legal credentials, enabling us to provide top-tier legal support without language barriers, even in international cases.