Corporate Bonds in Japanese Company Law: A Comprehensive Explanation of Issuance, Redemption, and Bondholders' Meetings

Corporate bonds under Japanese Company Law are a vital means for businesses to raise operational funds. These bonds are debt securities issued by a company, granting investors a monetary claim against the company. Japanese Company Law provides detailed provisions regarding the issuance, management, redemption, and protection of bondholders’ rights. This system is designed to facilitate smooth fundraising for corporations while emphasizing investor protection. This article comprehensively explains the basics of corporate bonds under Japanese Company Law, covering their types, issuance procedures, redemption, the role of bond administrators, and the function of bondholders’ meetings. We will explain these concepts using clear and understandable language based on Japanese legal statutes, particularly for foreign readers to gain a deep understanding of the Japanese legal system.

Japanese Company Law stipulates various fundraising methods that form the foundation of corporate activities. Among these, corporate bonds are a major direct financing tool, used by many companies alongside stock issuance. Companies issuing bonds borrow funds from investors, with the obligation to pay interest periodically and ultimately redeem the principal. This mechanism is highly effective in securing a stable source of funds for companies and offers investors a relatively stable return on investment.

Japanese Company Law clearly defines corporate bonds. According to Article 2, Paragraph 23 of the Japanese Company Law, “Corporate bonds are monetary claims against a company that arise from allocations made in accordance with this law, to be redeemed in accordance with the provisions set forth in each item of Article 676” . This definition emphasizes that corporate bonds are not merely monetary claims but are special allocations based on the provisions of Japanese Company Law and subject to specific redemption conditions .  

The corporate bond system aims to efficiently handle contractual relationships with numerous investors and enable collective rights enforcement when raising funds broadly, balancing transaction efficiency and investor protection. For example, the bondholders’ meeting system is a crucial mechanism for unifying the intentions of many bondholders and acting for their common benefit. Additionally, the obligation to appoint a bond administrator functions to professionally protect the interests of bondholders.

This article delves into these legal frameworks in detail, revealing the overall picture of the corporate bond system in Japan. In particular, we will explain the practical aspects of issuance procedures and specific methods of redemption, as well as the circumstances under which bondholders’ meetings function, referencing the articles of Japanese Company Law. We will also introduce related Japanese case law to demonstrate how actual disputes have been resolved, thereby deepening practical understanding.

Corporate Bonds Defined: Under Japanese Corporate Law

Corporate bonds, under Japanese Corporate Law, are a vital means for companies to raise funds. They are debt securities issued by a company, granting investors a monetary claim against the company.

Definition of Corporate Bonds Under Japanese Corporate Law

Article 2, Paragraph 23 of the Japanese Corporate Law defines corporate bonds as “monetary claims against a company, arising from allocations made by the company in accordance with the provisions of this law, which are to be redeemed in accordance with the provisions set forth in each item of Article 676” . This definition clarifies that corporate bonds are issued within the framework of Japanese Corporate Law, aiming to protect investors and ensure clarity in transactions .  

However, there are academic views suggesting that this definition does not necessarily serve to protect the investing public or clarify legal relations . This indicates that the law’s strict formal definition may not fully align with the diverse functions of corporate bonds in the market or the practical needs of investor protection. It may imply the difficulty for the law to keep pace with evolving economic activities or suggest a need for revision towards a more functional definition.  

Main Types of Corporate Bonds in Japan: Straight Bonds and Subordinated Bonds

There are various types of corporate bonds, each with its own personalityistics, which companies and investors choose according to their needs.

Straight Bonds

The most common type of corporate bond is the straight bond, which has the same repayment priority as other debts.

Subordinated Bonds

Subordinated bonds are bonds that, in the event of the issuing company’s bankruptcy, have a lower payment priority for principal and interest than general debts such as straight bonds. This subordination is typically specified in the bond indenture as a “subordination clause.” Due to the higher risk of default, subordinated bonds generally offer a higher yield. The existence of subordinated bonds suggests that a company is pursuing diversity in fundraising and adjusting the balance between risk and return. Subordinated bonds, with their lower repayment priority compared to ordinary debts, carry a higher risk for investors. This higher risk is precisely why a higher yield is set to attract investors. From the company’s perspective, this means a higher cost of capital, but at the same time, it allows for greater flexibility in the capital structure by positioning the ultimate risk between equity and general debt in the event of bankruptcy. The fact that financial institutions can sometimes count subordinated bonds as capital for regulatory capital ratio purposes indicates that subordinated bonds serve not merely as a means of fundraising but also as an important tool in a company’s financial strategy, particularly for meeting regulatory capital requirements. This goes beyond the superficial understanding that ‘high risk equals high yield,’ showing the strategic reasons why companies choose subordinated bonds for specific purposes.

Main Types of Corporate Bonds in Japan: Secured and Unsecured Bonds

Corporate bonds in Japan are broadly classified into “secured corporate bonds” and “unsecured corporate bonds” based on the presence or absence of collateral.

Unsecured Corporate Bonds

These are bonds that do not have specific collateral attached, and their repayment safety depends on the issuing company’s creditworthiness. Generally, they carry a higher risk, which often results in a higher yield. Most ordinary corporate bonds in Japan are unsecured.

Secured Corporate Bonds

Secured corporate bonds are those where specific assets of the issuing company (such as real estate) are set as collateral. This gives bondholders the right to exercise the collateral and receive priority repayment if the issuing company defaults. Secured corporate bonds are subject to the Japanese Secured Corporate Bonds Trust Act (Law No. 52 of 1905). This law establishes a system where the management and execution of collateral rights for numerous bondholders are entrusted to a trustee company, such as a trust bank, aiming to protect the bondholders’ interests.

Secured corporate bonds are further divided into “general secured corporate bonds” and “specific collateral secured corporate bonds.”

• Specific Collateral Secured Bonds: Bonds that have specific in rem collateral, such as particular real estate properties.
• General Secured Corporate Bonds: Bonds that are not tied to specific assets but grant the right to receive priority repayment from the issuing company’s total assets over other creditors. This differs from conventional mortgage rights or pledges and is established by the effect of law in cases where there are provisions in specific special laws, such as Japan’s Electric Utility Law. Examples include electric power bonds, NTT bonds, and JT bonds. The existence of the Japanese Secured Corporate Bonds Trust Act (Law No. 52 of 1905) demonstrates that Japan’s legal system provides a sophisticated mechanism for the efficient and collective protection of numerous creditors’ interests. Secured corporate bonds face practical challenges, as it would be highly cumbersome for individual investors to exercise collateral rights. The Japanese Secured Corporate Bonds Trust Act was established to address this challenge, creating a system where a trustee company manages and executes the collateral for the benefit of all bondholders. This spares individual bondholders the trouble of setting and exercising collateral rights on their own, ensuring the efficient protection of the rights of numerous bondholders. This reflects a broader implication that Japan’s legal system deeply recognizes the necessity of collective rights protection in large-scale financing and provides a concrete legal framework for it. It’s not just about the presence or absence of collateral; it’s also about the underlying philosophy of collective protection and the use of the legal technique of trust to realize it.

Bonds with Warrants in Japan

Bonds with warrants in Japan are a type of security that includes the right to subscribe for new shares. Article 248 of the Japanese Companies Act specifies that the issuance procedures for bonds with warrants are exempt from the regulations concerning bonds (as stipulated in Part IV of the Japanese Companies Act) and instead, the provisions concerning the issuance of warrants (as set forth in Article 238 and subsequent articles of the Japanese Companies Act) are applied. For a detailed explanation of bonds with warrants, please refer to another article on this website.

Comparing Secured and Unsecured Corporate Bonds in Japan

The choice of corporate bonds depends on the issuing company’s situation and the investor’s risk tolerance. Below is a comparison of the main differences between secured and unsecured corporate bonds.

Procedures for Issuing Corporate Bonds in Japan

For a company to issue corporate bonds and raise funds from the market, it is necessary to follow the strict procedures set forth in the Japanese Companies Act.

Determination of Solicitation Items

When soliciting underwriters for corporate bonds, a company must determine the following solicitation items based on Article 676 of the Japanese Companies Act:

• Total amount of corporate bonds to be solicited
• Amount of each bond
• Interest rate of the bonds
• Method and deadline for redemption of the bonds
• Method of interest payment
• If bond certificates are to be issued, provisions to that effect (unnecessary if no bond certificates are issued)
• If a bond administrator is appointed, their name and address, as well as the content of the trust agreement
• Other matters prescribed by the Ministry of Justice ordinance (Article 165 of the Enforcement Regulations of the Japanese Companies Act)

The detailed regulations of solicitation items are designed to ensure investor protection and transparency in transactions. Article 676 of the Japanese Companies Act specifies these items in detail because corporate bonds are a means of raising funds from a large number of unspecified investors, and it is essential that investors have sufficient information to make investment decisions. Not only economic conditions such as redemption methods, deadlines, and interest rates are specified, but also information about the bond administrator, to provide investors with information to prepare for future risks (e.g., the issuing company’s bankruptcy) and to clarify the framework for collective rights enforcement, thereby strengthening investor protection. This suggests that the regulation goes beyond mere contractual freedom and has a strong aspect of public law regulation to maintain the health of the market.

Overview of Bond Issuance Procedures

The bond issuance process begins with the determination of solicitation items and is completed through the following steps:

1. Board of Directors Resolution: The determination of solicitation items generally requires a resolution by the board of directors. In private companies, it is also possible to determine solicitation items by a special resolution at the shareholders’ meeting.
2. Notification and Disclosure of Solicitation Items: The solicitation items are notified or disclosed to those who wish to apply for the underwriting of the corporate bonds. In the case of listed companies, timely disclosure is required.
3. Application and Allocation: Investors submit applications, and the company decides on the allocation.
4. Payment: Investors pay the company the amount of the bonds allocated to them.
5. Creation of the Bond Ledger: The company must create a bond ledger without delay after the date of bond issuance and keep it at the head office (Article 684, Paragraph 1 of the Japanese Companies Act). Bondholders and others can request to view the bond ledger (Article 684, Paragraph 2 of the Japanese Companies Act).
6. Issuance of Bond Certificates (if applicable): If there are provisions for the issuance of bond certificates, the company must issue them without delay after the date of bond issuance (Article 696 of the Japanese Companies Act).

The special provisions for private placement bonds to a small number of people demonstrate a flexible system design to support the fundraising of small and medium-sized enterprises and startups. While general bond issuance may require the submission of a securities notification form (based on the Japanese Financial Instruments and Exchange Act), private placement bonds (with conditions such as having fewer than 50 bondholders and no qualified institutional investors) are exempt from this notification. This exemption is intended for fundraising from a smaller scale and specific related parties, different from large-scale public offerings. This suggests that the Japanese legal system adjusts the strictness of regulations according to the size of the company and the nature of the fundraising, indicating flexibility in simplifying procedures and reducing the fundraising burden on companies when investor protection needs are relatively low (assuming a small number of investors who are not professionals but have a relationship of acquaintance).

Redemption of Corporate Bonds Under Japanese Law

The redemption of corporate bonds refers to the process by which a company repays the principal amount of the bonds to the bondholders. This redemption is carried out in accordance with the terms and conditions set at the time the bonds were issued in Japan.

Methods of Redeeming Corporate Bonds Under Japanese Corporate Law

There are various methods for redeeming corporate bonds, but the main ones include the following:

• Bullet Redemption: This method involves repaying the entire principal amount at once on the maturity date of the corporate bonds. It is the most common method.
• Scheduled Redemption (a type of intermediate redemption): At the time of issuance, the grace period, intermediate redemption amount, and redemption dates are determined, and redemption is carried out according to these conditions.
• Optional Redemption (Call Redemption): The issuing company may redeem all or part of the corporate bonds before the due date at its discretion. To compensate for the disadvantage to investors, a “redemption premium” may be paid.
• Repurchase Redemption (Repurchase Extinction): The issuing company repurchases its own corporate bonds on the open market or through private transactions before redemption and extinguishes them. This is not mandatory and is left to the discretion of the bondholders.
• Discount Bonds: These are bonds that do not carry interest (coupons) but are purchased at an issue price lower than the redemption value, earning a redemption profit.

In connection with the redemption of corporate bonds, it is necessary to pay attention to the following legal considerations:

• The right to demand redemption of corporate bonds will be extinguished by the statute of limitations if not exercised within 10 years from the time it becomes exercisable (Article 701, Paragraph 1 of the Japanese Companies Act).
• The right to demand interest on corporate bonds will be extinguished by the statute of limitations if not exercised within 5 years from the time it becomes exercisable (Article 701, Paragraph 2 of the Japanese Companies Act).
• In the event of the issuing company’s bankruptcy, corporate bonds generally have a high priority for debt repayment, but the priority differs between secured bonds, unsecured bonds, and subordinated bonds. However, depending on the circumstances, the principal may not be paid and could become a non-performing loan.

Case Law on the Extension of Corporate Bond Redemption Deadlines in Japan

The extension of redemption deadlines for corporate bonds is a significant matter for bondholders and requires procedures under Japanese Corporate Law. However, in practice, extensions based on mutual agreement between parties can also become contentious.

The Tokyo District Court’s decision on April 11, 2016 (Heisei 28), involved a plaintiff who was a bondholder demanding payment of the principal and delayed damages from the defendant, a bond-issuing company, on the grounds that the redemption period had expired. The defendant argued that the redemption deadline had been extended by mutual agreement and that the plaintiff’s claim was a violation of the principle of good faith or an abuse of rights.

The court did not recognize the establishment of an agreement to extend the redemption deadline between the parties and upheld the plaintiff’s claim for bond redemption. The decision applied the principles of contract law under the Japanese Civil Code while considering factors such as the substantial amount of the bond in question, which was 1.5 billion yen, the recognized necessity for documentation due to tax authorities and accounting practices, and the fact that the issuance procedures had also been conducted in writing. The court ruled that a mere oral agreement could not be considered legally binding.

This case law suggests that even if there is a relationship of trust between the parties, the importance of formal procedures and documentation based on Japanese Corporate Law is extremely high for significant matters such as the extension of corporate bond redemption deadlines. The court denied the validity of a verbal agreement between the parties regarding the extension. This indicates that changes to the conditions of a monetary obligation with legal personalityistics, such as a corporate bond, require not only the general principles of contract under Japanese Civil Law but also strict procedures defined by Japanese Corporate Law and, at the very least, a clear agreement in writing. Particularly in situations like this case, where ambiguous agreements are often made against a backdrop of trust in family-run businesses, the court emphasized the importance of adhering to formal legal requirements (documentation, procedures under Japanese Corporate Law). This highlights a broader principle in Japanese legal practice that proper procedures in accordance with laws are essential to ensure legal stability and clarity, even in internal transactions. Furthermore, the case law touches upon the point that corporate bonds, being distinct from mere loan agreements, hold a special status under Japanese Corporate Law, and therefore, changes to their conditions inherently require procedures under Japanese Corporate Law (such as resolutions at bondholders’ meetings), suggesting that the failure to perform these procedures under Japanese Corporate Law was a background factor in denying the effectiveness of the oral agreement.

Bond Administrator

A Bond Administrator is a specialized institution that protects the interests of numerous bondholders and manages the bonds.

The Role and Obligation to Appoint a Bond Administrator

• The Bond Administrator is a company that has all the necessary authority to receive repayment of debts on behalf of bondholders and to preserve the realization of claims.
• Article 702 of the Japanese Companies Act stipulates that when a company issues bonds, it must, in principle, appoint a Bond Administrator to entrust the receipt of repayments, the preservation of claims, and other bond management activities on behalf of the bondholders.
• However, there are exceptions to this requirement, such as when the amount of each bond is 100 million yen or more. In recent years, there has been an increase in cases where companies do not appoint a Bond Administrator but instead establish a financial agent to handle administrative tasks such as principal and interest payments.

The obligation to appoint a Bond Administrator and its exceptions demonstrate that the Japanese Companies Act considers the balance between investor protection and the practical burden on companies. The Japanese Companies Act generally mandates the appointment of a Bond Administrator to eliminate the inefficiency of numerous bondholders exercising their rights individually and to protect collective interests professionally. However, under certain conditions, such as when each bond’s amount is 100 million yen or more, the appointment may be exempted. This may seem contradictory, but it suggests that in large-scale bond issuances, investors are often professional institutional investors who have relatively less need for individual protection, or the issuing company itself has sufficient creditworthiness, making the intervention of an administrator unnecessary. Furthermore, the trend of increasing use of financial agents indicates that the market is seeking more efficient management methods and that the legal system is allowing for flexible operation to accommodate this. This shows that the law is not just imposing rigid rules but is also trying to respond to the needs of practice and the evolution of the market.

The Authority and Duties of a Bond Administrator

• The Bond Administrator has the authority to perform all judicial and extrajudicial acts necessary to receive repayment of the bond-related claims and to preserve their realization on behalf of the bondholders (Article 705, Paragraph 1 of the Japanese Companies Act).
• The Bond Administrator must manage the bonds fairly and faithfully on behalf of the bondholders (Article 704, Paragraph 1 of the Japanese Companies Act) and is obligated to manage the bonds with the care of a good manager (Article 704, Paragraph 2 of the Japanese Companies Act).
• If the Bond Administrator receives repayment, the bondholders can claim the redemption amount and interest payments from the Bond Administrator (Article 705, Paragraph 2 of the Japanese Companies Act).
• Without a resolution from the bondholders’ meeting, the Bond Administrator must not perform acts such as deferring the payment of the entire bonds, exempting from liability due to non-performance, or making settlements (Article 706, Paragraph 1 of the Japanese Companies Act).

The Liability and Resignation of a Bond Administrator

• If the Bond Administrator acts in violation of the Japanese Companies Act or the resolution of the bondholders’ meeting, they are jointly liable to compensate the bondholders for any damages incurred (Article 710, Paragraph 1 of the Japanese Companies Act).
• The Bond Administrator may resign with the consent of the bond-issuing company and the bondholders’ meeting (Article 711, Paragraph 1 of the Japanese Companies Act).

Bondholders’ Meeting in Japan

The bondholders’ meeting is a forum where the intentions of numerous bondholders are unified to make resolutions on important matters for their common benefit under Japanese corporate finance law.

Convening a Bondholders’ Meeting Under Japanese Corporate Law

• A bondholders’ meeting can be convened at any time when necessary, as stipulated in Article 717, Paragraph 1 of the Japanese Companies Act.
• It is a general rule that the bond-issuing company or the bond administrator convenes the meeting, according to Article 717, Paragraph 2 of the Japanese Companies Act.
• Bondholders holding at least one-tenth of the total amount of a certain type of bond can request the bond-issuing company, bond administrator, or bond administration assistant to convene a bondholders’ meeting by indicating the purpose of the meeting and the reasons for the convening, as per Article 718, Paragraph 1 of the Japanese Companies Act.
• If the convening procedures are not carried out promptly after the request, or if a notice of convening is not issued within eight weeks, the requesting bondholder may convene the meeting with the permission of the court, as provided in Article 718, Paragraph 3 of the Japanese Companies Act.
• The convener must specify the date, time, place, and matters to be discussed when convening a bondholders’ meeting, in accordance with Article 719 of the Japanese Companies Act.

The right of bondholders to request the convening of a bondholders’ meeting is an important safety net that enables the protection of minority rights and the realization of collective interests. While it is standard for the bond-issuing company or bond administrator to convene the meeting, bondholders holding at least one-tenth of the total bond amount can request the convening of a meeting if they deem the company’s actions inappropriate. Furthermore, if the company fails to respond, they can convene the meeting themselves with the court’s permission. This demonstrates that under Japanese Corporate Law, individual bondholders are not left isolated but are instead provided with a powerful legal means to exercise their rights collectively and protect their interests when the bond-issuing company or bond administrator takes actions that may harm the bondholders’ interests. This legal provision also serves to enhance market credibility by granting minority bondholders a certain level of influence and the ability to take action, thereby protecting investor interests.

Operation and Resolutions of Bondholders’ Meetings Under Japanese Corporate Law

• To pass resolutions on matters at a bondholders’ meeting, the consent of holders representing more than half of the total voting rights of the attendees is required (Article 724, Paragraph 1 of the Japanese Companies Act).  
• However, for matters that significantly affect the interests of bondholders, such as deferral of all bond payments or debt forgiveness, the consent of holders representing at least one-fifth of the total voting rights and more than two-thirds of the voting rights of the attendees may be necessary (Article 724, Paragraph 2 of the Japanese Companies Act).  
• Bondholders’ meetings cannot resolve matters other than those specified as the purpose of the meeting at the time of the convocation (Article 719, Item 2 and Article 724, Paragraph 3 of the Japanese Companies Act). This is similar in intent to the prohibition of emergency motions at Japanese shareholders’ meetings.  
• If a resolution is made at a bondholders’ meeting, the convener must apply to the court for approval of the resolution within one week from the date of the resolution (Article 732 of the Japanese Companies Act). Without the court’s approval, the resolution will not take effect.  

The varying requirements for resolutions at bondholders’ meetings depending on the matter reflect the ingenuity of the Japanese legal system in balancing the protection of rights with practical efficiency. General resolutions (for example, the appointment of a bond administrator) suffice with a simple majority of the voting rights present, but matters that could directly disadvantage bondholders, such as payment deferrals or debt forgiveness, are subject to stricter special resolution requirements (at least one-fifth of the total voting rights and more than two-thirds of the voting rights present). This demonstrates the Japanese Companies Act’s consideration in protecting the interests of all bondholders while demanding broader consensus for decisions with significant impact, to prevent the interests of a minority of bondholders from being unfairly infringed upon. Furthermore, the requirement for court approval of resolutions indicates that a dual protection mechanism is in place, ensuring the legality and fairness of bondholders’ meeting decisions by a third-party institution, the court, due to the significant impact such decisions can have on individual bondholders’ rights. This reflects the system of collective rights exercise that prioritizes legal stability and fairness over mere majority rule.  

The Possibility of Online Meetings Under Japanese Corporate Law

Article 719 of the Japanese Companies Act stipulates that when convening a bondholders’ meeting, a “place of the meeting” must be designated, indicating that an amendment to Japanese corporate law would be necessary to hold a virtual-only (completely online) meeting. While there is room for interpretation regarding hybrid attendance (combining physical venue and online participation), participating online may legally be considered as observation rather than attendance.

Conclusion

In this article, we have provided a detailed explanation of corporate bonds under Japanese Company Law, covering aspects such as their definition, types, issuance procedures, redemption, bond administrators, and bondholders’ meetings. Corporate bonds are a vital means for companies to raise substantial funds, and their issuance and redemption are strictly regulated by Japanese Company Law. The systems of bond administrators and bondholders’ meetings, in particular, demonstrate how the Japanese legal framework places a high emphasis on investor protection and the integrity of the market.

While the issuance of corporate bonds is an essential element of a company’s growth strategy, the procedures involved are complex and require a deep understanding of Japanese Company Law and related regulations. From deciding on the terms of the offering to creating the bond ledger, selecting redemption methods, and managing relationships with bond administrators and the operation of bondholders’ meetings, managing legal risks at each stage is crucial for the sustainable development of a company. As court cases regarding the extension of redemption deadlines illustrate, even when there is a relationship of trust between parties, formal procedures and documentation in accordance with Japanese Company Law are extremely important for significant legal agreements.

Monolith Law Office has a wealth of experience in providing legal services related to corporate bonds within Japan. We support the legal needs of a wide range of companies, from listed corporations to startups, and have accumulated deep insights and practical experience in fundraising. Our firm includes several attorneys who are native English speakers and hold foreign legal qualifications, enabling us to provide smooth and accurate legal support in both Japanese and English for clients operating in international business environments. If you need consultation on corporate bonds under Japanese Company Law or other corporate legal services, please contact Monolith Law Office. We are here to help build a strong legal foundation for your business to succeed in Japan.