Withdrawal of Members and Repayment of Contributions in a Japanese LLC under the Companies Act

The Godo Kaisha (LLC) is an incredibly popular corporate structure for conducting business in Japan, favored for its straightforward establishment procedures and the extensive autonomy granted by its articles of incorporation. It is frequently chosen by foreign companies establishing a Japanese entity, alongside the joint-stock company (Kabushiki Kaisha). However, the flexible nature of the Godo Kaisha raises unique legal issues concerning the admission and withdrawal of members (equivalent to shareholders in a joint-stock company). A member’s withdrawal is a critical event that directly affects the company’s continuity, relationships with other members, and the distribution of financial value. Therefore, it is essential for managers and legal professionals of a Godo Kaisha to have an accurate understanding of the provisions under Japanese Corporate Law regarding member withdrawal.

This article provides a comprehensive and detailed explanation of the withdrawal (‘taisha’) system for members of a Godo Kaisha under Japanese Corporate Law. Withdrawals are broadly categorized into ‘voluntary withdrawal,’ based on the member’s own will, and ‘statutory withdrawal,’ triggered by specific circumstances as defined by law. These systems are designed to balance the freedom of members to recover their invested capital with the protection of the company’s continuity and the interests of creditors. We will clarify the requirements and procedures for each withdrawal system, based on specific legal provisions, and delve deeply into the calculation methods and legal procedures for the most significant right associated with withdrawal: the ‘repayment of contributions.’ By incorporating Japanese case law, we will shed light on the practical aspects of this complex legal system.

Voluntary Resignation Based on Employee’s Will in Japan

Voluntary resignation is a system where employees can leave a limited liability company based on their own decision-making, and its basic rules are established in Article 606 of the Japanese Companies Act. This is an important provision that recognizes the freedom of employees to leave the company in a limited liability company, which is based on personal trust relationships among members.

Article 606, Paragraph 1 of the Japanese Companies Act sets out the principal rule. If the articles of incorporation do not specify the duration of the company’s existence, or if it is stipulated that the company will exist for the lifetime of a certain member, then each member may resign at the end of the fiscal year. However, to exercise this right, a member wishing to resign must give notice of resignation to the company at least six months in advance. This six-month notice period is intended to provide the company with a grace period to prevent management disruption due to unexpected member departures and to take necessary measures such as selecting a successor or preparing funds for the return of contributions.

However, a limited liability company is an organizational form that widely recognizes autonomy by articles of incorporation. Article 606, Paragraph 2 of the Japanese Companies Act applies this principle to the rules of voluntary resignation, allowing the company to make separate provisions in its articles of incorporation. For example, by setting a provision in the articles of incorporation such as “Members may resign at the end of the fiscal year by giving notice to the company three months in advance,” it is possible to set a shorter notice period than the legal principle. In this way, by strategically designing the articles of incorporation, flexible resignation rules that suit the actual situation of each company can be constructed.

Furthermore, the Japanese Companies Act also provides relief measures for members who find themselves in unexpected situations. Article 606, Paragraph 3 of the Japanese Companies Act stipulates that “when there are unavoidable circumstances,” a member may resign at any time, regardless of the provisions of the articles of incorporation or the notice period. The phrase “notwithstanding the provisions of the preceding two paragraphs” in this article indicates that this right is a mandatory provision that cannot be restricted by the articles of incorporation. This serves as a safety net to prevent members from being perpetually bound to the management of the company. Specific examples of “unavoidable circumstances” include cases where a member becomes ill and requires long-term medical treatment or when a member relocates to a remote area that makes it difficult to execute company business. This provision legally balances the restrictions imposed by the articles of incorporation to ensure the company’s stability and the significant personal circumstances of individual members.

Mandatory Withdrawal from a Company Under Japanese Corporate Law Provisions

Mandatory withdrawal is a system under Japanese Corporate Law (Article 607, Paragraph 1) where an employee automatically leaves the company due to specific reasons listed in the law, regardless of the employee’s personal intentions. This system aims to reorganize the company’s structure and ensure stable operations when significant changes occur in an employee’s status or when the foundation of trust among employees is lost.

The reasons for mandatory withdrawal stipulated in Article 607, Paragraph 1 of the Japanese Corporate Law are diverse. The main reasons include:

• Occurrence of reasons specified in the articles of incorporation
• Consent of all members
• Death of a member
• Dissolution of a member corporation due to a merger
• A member receiving a bankruptcy commencement order
• Dissolution of a member corporation
• A member being subjected to the commencement of guardianship
• Expulsion

These reasons apply depending on whether the member is an individual or a corporation. For example, “death” applies to individual members, while “dissolution due to merger” and “dissolution” typically apply to corporate members.

Here, the principle of autonomy in the articles of incorporation of a Limited Liability Company (LLC) in Japan plays a certain role. Article 607, Paragraph 2 of the Japanese Corporate Law allows a company to exclude certain reasons for mandatory withdrawal by stipulating them in its articles of incorporation. Specifically, the articles can state that members will not withdraw even if “a bankruptcy commencement order,” “dissolution,” or “commencement of guardianship” occurs. This provision is strategically important, especially when LLCs are used as joint ventures between corporations. For instance, it allows for the design of continuity in business operations, even if a partner company faces financial difficulties (bankruptcy) or organizational restructuring (dissolution). Thus, the articles of incorporation are not merely formal documents but can serve as strategic tools for managing potential future risks.

In addition to these, Article 609 of the Japanese Corporate Law separately grants creditors who have seized a member’s share the right to make that member withdraw at the end of the fiscal year. This is a special withdrawal system established as a means for creditors to recover their invested capital.

Forced Departure of an Employee by Other Members’ Will: Expulsion Under Japanese Corporate Law

Among the statutory grounds for departure, expulsion is one of the most serious and contentious. Expulsion is a system where, if an employee commits a serious misconduct, other members can forcibly remove that employee from the company. As this measure strips an employee of their position against their will, Japanese Corporate Law stipulates strict procedures and substantive requirements.

The procedure for expulsion is provided for in Article 859 of the Japanese Companies Act. To carry out an expulsion, a resolution by a majority of the members, excluding the member to be expelled, is required. Furthermore, the company must initiate a lawsuit against the employee, requesting their expulsion from the court. Expulsion cannot be done by agreement among members alone; judicial judgment is always necessary.

The same article lists the following as legal grounds (reasons for expulsion):

• Failure to perform the obligation to contribute
• Violation of the non-competition obligation
• Committing an act of dishonesty in executing the company’s business
• Failure to fulfill other significant obligations

However, Japanese courts do not easily approve expulsion merely because an act formally fits these grounds. Case law holds that to justify expulsion, the employee’s actions must have irreparably destroyed the trust between members, and retaining the employee in the company must pose a significant impediment to the company’s survival and the continuation of its business.

This judicial framework is clearly demonstrated by two contrasting court cases. One is the Tokyo District Court decision on November 29, 2021, which approved an expulsion. In this case, the representative of a corporate member had illicitly diverted funds of a limited liability company for personal gain. The court recognized this act as “committing an act of dishonesty in executing the company’s business” under Article 859, Paragraph 3 of the Japanese Companies Act. The court ruled that such a grave breach of trust destroyed the relationship with other members and made the company’s normal operation impossible, thus justifying the expulsion. In this case, the expulsion of the employee was deemed necessary for the company’s survival.

The other is the Tokyo District Court decision on September 26, 2019, which did not approve an expulsion. In this case, a member was accused of inappropriate conduct, including tax evasion. However, the court focused on the fact that this member was a central figure in the company’s business, generating almost all of the company’s profits alone. Consequently, even if the member had misconduct, expelling them would make the continuation of the company’s business impossible, and the company itself would cease to function. The court concluded that expulsion in this situation, which would undermine the very purpose of the company’s survival, could not be approved.

What can be derived from these cases is the fact that Japanese courts view expulsion not as a punishment for the employee’s problematic behavior but as a last resort to preserve the company. The central issue in the trials is whether the removal of the employee is truly essential for the continuation of the company’s business, weighing the benefits from a managerial perspective. Therefore, companies considering expulsion must not only prove the employee’s significant breach of duty but also present a concrete plan showing that the company can continue its business after the employee’s departure, which is crucial for a favorable outcome in the lawsuit.

Redemption of Equity Interest Upon Resignation in Japan

When an employee voluntarily resigns or is legally required to leave a company in Japan, they have the right to demand the redemption of their equity interest from the company. This is a fundamental property right of resigning employees, as stipulated in Article 611, Paragraph 1 of the Japanese Companies Act.

The calculation of the redemption amount must be conducted “according to the state of the company’s assets at the time of resignation,” based on Article 611, Paragraph 2 of the Japanese Companies Act. In practice, this means calculating the company’s net asset value at the time of resignation and multiplying it by the resigning employee’s equity share. Redemption can be made in cash, regardless of whether the original contribution was in cash or in kind, as per Paragraph 3 of the same article.

There have been significant judicial decisions regarding the timing and objectivity of this equity valuation. In a tax litigation case (judgment by the Nagoya District Court), the valuation of the right to claim redemption of equity interest upon the death of an employee (one of the causes for statutory resignation) was contested. The court ruled that the value of the redemption claim should be objectively determined based on the net asset value of the company at the time of the employee’s death. Furthermore, the court concluded that a posthumous agreement between the remaining employees and the heirs to set the redemption amount to zero does not affect the objective value of the right that was established at the time of resignation. This judgment clearly indicates that the redemption amount should be calculated based on objective facts about the company’s financial situation at the time of resignation, not on arbitrary agreements between the parties.

To protect the company’s creditors, strict procedures are in place for the redemption of equity, as it involves the outflow of company assets. If the redemption amount exceeds the company’s surplus funds, the company must undergo creditor protection procedures. If capital reduction is necessary for redemption, the procedures of Article 627 of the Japanese Companies Act (such as official gazette announcements and individual solicitations) are required. Even if capital is not reduced, if the redemption amount exceeds the surplus funds, creditor objection procedures based on Article 635 of the Japanese Companies Act are necessary. These procedures provide creditors with the opportunity to object and obligate the company to make payments or provide security as necessary.

If an improper redemption is carried out in violation of these regulations, the executing employee may be liable to compensate the company for the redemption amount, as per Article 636 of the Japanese Companies Act. This demonstrates that the law extends its discipline to ensure that internal events such as an employee’s resignation do not harm the interests of external stakeholders, namely the creditors.

Comparing Voluntary and Statutory Resignation in Japan

While both voluntary resignation and statutory resignation involve an employee’s departure from a company, they fundamentally differ in their causes and legal nature. Voluntary resignation is an active process initiated by the employee’s own willful decision, whereas statutory resignation is a passive process that occurs due to objective reasons stipulated by law or the company’s articles of incorporation. The articles of incorporation play different roles in each type of resignation: they may adjust procedural aspects such as changing the notice period for voluntary resignations, and they may modify substantive aspects by excluding certain reasons from being grounds for statutory resignation. Understanding these differences is essential for properly managing the governance of a limited liability company.

Legal Implications of Departure from a Company in Japan

The departure of an employee from a company brings about several legal effects beyond the repayment of their equity stake.

Firstly, when an employee leaves a company, any references to that employee in the articles of incorporation (such as name and address) are automatically considered nullified without the need for a separate resolution to amend the articles. This is stipulated in Article 610 of the Japanese Companies Act and serves to simplify procedures.

Next, there are provisions regarding the liability of departed employees. According to Article 612 of the Japanese Companies Act, an employee who has left a company remains liable for the debts incurred by the company before their departure is registered. This liability expires two years after the registration of their departure. This provision is designed to protect creditors who have engaged in transactions with the company.

Finally, as the most significant impact, there is the risk of the company’s dissolution. If the departure of an employee results in a limited liability company having no members left, the company will automatically dissolve under the provisions of Article 641, Paragraph 4 of the Japanese Companies Act. To ensure the company’s continuity, it is essential to avoid a situation where there are no remaining members.

Summary

The departure of a member from a Japanese LLC (Limited Liability Company) is not merely a matter of personnel change; it is a complex legal process that affects the organization, assets, and very existence of the company. Under Japanese Corporate Law, there are two frameworks for member withdrawal: ‘voluntary withdrawal,’ which respects the member’s intention, and ‘statutory withdrawal,’ based on objective reasons, each with its detailed rules. In particular, the ‘expulsion’ of other members and the ‘redemption of interest’ associated with withdrawal are subject to strict legal requirements and procedures, demanding careful handling. Underlying these systems is the legal intent to balance multiple values: the rights of the members, the continuity of the company, and the protection of creditors’ interests. Therefore, the most effective risk management involves strategically designing the articles of incorporation at the time of company establishment, anticipating various future scenarios and tailoring them to the company’s actual situation.

Monolith Law Office possesses extensive expertise and practical experience in Japanese Corporate Law and has provided legal services related to the establishment, operation, and member withdrawal of LLCs to numerous domestic and international clients. Our firm includes attorneys who are native English speakers and hold foreign legal qualifications, deeply understanding the unique challenges and needs of the international business environment. From drafting articles of incorporation to executing complex withdrawal procedures and resolving related disputes, we can offer comprehensive legal support optimized for your company’s situation. If you have any inquiries regarding this theme, please do not hesitate to contact our office.