Recommendations Concerning Commercial Law Reform

Introduction

Japan's economic environment is being transformed by a range of factors, including economic globalization, the information technology revolution, changes in the industrial structure, and the expansion of capital markets.
To enhance the international competitiveness of Japanese industry, it will be necessary to restructure and improve commercial law flexibly to reflect these social and economic changes.
European nations are already reforming their commercial laws to improve their international competitiveness. Japan, too, needs to take urgent action to reform its company-related laws and create world-class standards.
The Commercial Law Subcommittee of the Legislative Council of the Ministry of Justice has undertaken a major review of company law. It will carry out studies with a view to the submission of a bill during the ordinary session of the Diet in 2002.
In view of the rapid environmental changes that are occurring in Japan and overseas, Keidanren hopes that the legislative schedule for urgent aspects of reform will be brought forward so that policies can be implemented speedily.
It will also be necessary to develop a legislative system suitable for this new era, including the reform of the Legislative Council.

Basic Aims of Commercial Law Reform

Commercial law reform should focus on the following five goals:

1. Easing of mandatory legal requirements and establishment of a market-oriented legal framework
2. Development of a legal framework to facilitate operational and structural reorganization.
3. Diversification of financing methods and improvement of efficiency
4. Fostering of venture businesses
5. Promotion of IT use

Both ruling and opposition Diet members are considering drafting legislation relating to the reform of commercial law as it affects corporate governance. The aims of the proposed legislation are the reinforcement of the auditor system and the rationalization of the shareholders' derivative suit system, including the easing of the responsibilities of directors under company articles and other statutes, company participation in lawsuits through support for and subsidization of accused directors, and a review of a plaintiff's standing (the principle of contemporaneous ownership). The framework for a reform bill has already been developed, and Diet members have initiated efforts to prepare legislation for submission to the ordinary session of the Diet next year. As a representative of the business community, Keidanren strongly supports this move and is working to ensure the speedy enactment of the bill.

Items Requiring Urgent Legislation

There are five areas in which legislation should be implemented without delay. It should be possible to take action in these areas relatively independently from the fundamental reform of commercial law. Items (1) through (3) are especially urgent because of their potential to enhance the effectiveness of the legal framework relating to the corporate restructuring that has occurred in recent years. In addition, the new legal framework for company breakups that was enacted in May 2000 should be managed in such a way that it can be implemented no later than the start of the new fiscal year in April 2001 and so that company break-ups can be carried out with suspensory conditions.

Improving the stock option system

The following changes should be made to facilitate the use of the stock option system:

• It should be possible to apply stock option systems to the directors and employees of subsidiaries and associated companies.
• The approval procedures for recipients of stock options should be simplified; it should be sufficient just to disclose the number and a breakdown of eligible persons at general meetings of shareholders.
• At present, new stock rights require a special resolution of the general meeting of shareholders. An ordinary resolution should be sufficient, as is the case with the treasury stock method.
• Stock options are currently limited to one-tenth of total outstanding shares. This ceiling should be removed.

Abolition of net asset requirement for stock splits

The net asset per share requirement for stock splits should be abolished, especially with regard to no-par stocks. In addition, the authorized capital requirement, which is an obstacle to large-scale stock splits, should be eased.

Review of inspector examinations

Inspector examinations are required for investment in kind, subsequent establishment, and transfers of property. A system should be introduced whereby an attorney or certified public accountant appointed by the directors or founders of the company can carry out such examinations of property in place of court-appointed inspectors. Also, if it can be proved that the total current value of all investment in a company or all property transferred to it is greater than its book value, there should be no requirement for an asset examination.

Introduction of a fully paperless electronic registration system for commercial papers

A fully paperless electronic registration system should be introduced for commercial papers at all levels from issuance through to secondary markets and redemption. This system should be designed to take advantage of flexible issuing.

Adapting commercial law to the IT era

Japan should adapt to the information technology revolution by aggressively introducing a legal framework that can cope with IT. For example, e-mail notification of shareholders' general meetings and electronic voting should be allowed. Specific steps that are needed are an easing of the requirement for notices of meetings and attached documents to be provided in paper form, the establishment of a regulation stating that notification will be deemed to have occurred if a message is sent to a shareholder's e-mail address as shown in the register of shareholders, and the abolition of the requirement that seals be affixed to documents.
In addition, user costs should be reduced by permitting electronic notification.

Specific Measures to Be Implemented Steadily

Easing of mandatory legal requirements and establishment of a market-oriented legal framework:

1. Review of quorum requirements, etc., for general meetings of shareholders
2. Transfer of resolutions of general meetings of shareholders to boards of directors
3. Permanent adoption of special provisions concerning the cancellation of a company's own stock through capital reserves, and extension of the system to unlisted stock
4. Coordination of disclosure regulations under commercial law with those under the Securities and Exchange Law

Development of a legal framework to facilitate operational and structural organization

1. Introduction of limited liability organizations (provisional names: "LLC," "LLP")
2. Approval for acquisition and ownership of treasury stock
3. Improvement of the stock option system (see above)
4. Introduction of a compulsory stock purchase system and cash-out mergers
5. Creation of a diversified and more flexible range of share types
   - Establishment of tracking stocks and stocks with different types of voting rights
6. Review of inspector examinations (see above)
7. Provision for increased flexibility with regard to the interpretation of the goals specified in company articles

Diversification of financing methods and improvement of efficiency

1. Introduction of a fully paperless system for electronic registration of CP (see above)
2. Creation of a diversified and more flexible range of share types (see above)

Fostering of venture businesses

1. Improvement of the stock option system (see above)
2. Abolition of net asset requirements for stock splits (see above)
3. Creation of a diversified and more flexible range of share types (see above)
4. Introduction of a limited liability organization system (provisional names: "LLC", "LLP") (see above)

Promotion of IT use

1. Introduction of e-mail notification of meetings and electronic voting
2. Electronic notification