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Appraisal Rights in Japanese Company Law – Can They Be Used as Modern Weapons for Minority Shareholders?

Published online by Cambridge University Press:  17 February 2009

Masaru Hayakawa
Masaru Hayakawa
Affiliation:
Doshisha University, Kyoto
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Extract

Our honoree, Professor Mestmäcker, in applying Albert 0. Hirschmann's formularization of “exit” and “voice” to company law, places “exit” as a compensation claim under such law (Anspruch auf Abfindung), and clearly points out the difference between the function of public and close companies. Although Japanese company law does not expressly state as much, “exit” means the repayment of one's holdings. As such, in principle, it is impermissible from the standpoint of protecting company creditors. However, in certain circumstances, small shareholders opposing a majority decision may require the company, for their protection, to buy back its shares so they can leave that company (appraisal rights).

Type
Research Article
Information
European Business Organization Law Review (EBOR) , Volume 2 , Issue 3-4 , September 2001 , pp. 611 - 623
Copyright
Copyright © T.M.C. Asser Press and the Authors 2001

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References

1 Hirschmann, Albert O., Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, Mass: Harvard 1970).Google Scholar

2 Mestmäcker, , “Organisationen in spontanen Ordnungen”, Recht in der offenen Gesellschaft (Baden-Baden: Nomos 1993) 81.Google Scholar

3 Under the 1981 Company Law amendment, when establishing a new company, the minimum par value of shares and the minimum issue price of no-par-value shares is set at 50,000 yen. However, since the system was not imposed upon existing companies, the unit share system was established only temporarily. For example, in a company with 50 yen par-value shares, and with 1,000 shares forming one unit, it was planned to combine the shares for each unit in the future. Until then, the unit share system would serve as a measure. Under this system, one can exercise one's rights only with one unit of shares, placing the holder of 999 shares at a disadvantage. Therefore, a shareholder who only owns shares of less than one unit may ask the company to repurchase its shares. Recently, the number of companies reducing the unit of shares is growing, making it possible for people to invest more easily.

4 In accordance with minority shareholder wishes, the 1990 Company Law revision gave fractional shareholders certain rights besides voting rights (a share which represents less than one share and a fraction corresponding to an integral multiple of 1 percent of one share is called a fractional share, and the fractional shareholder). The company makes a fractional share ledger corresponding to the register of shareholders. However, the company is not required to issue certificates for fractional shares nor is it required to record on the ledger share splits, consolidations or new share allotments to a third party. A company may state in its Articles of Incorporation, or comparable document, that it does not issue fractional share certificates. Therewith, a fractional shareholder may ask the company to repurchase its fractional shares against cash.

5 For fractional shares, when the shareholder's declaration of intent to demand a stock repurchase has reached the company, the demand has the same legal implications as a sales contract. If the share is listed, the repurchase price coincides with the Stock Exchange's final share price on the day the repurchase request is made. For non-listed companies, the method used corresponds to that used for shares with transfer restrictions. If the repurchase price is not agreed upon within 20 days of the repurchase request, the courts will be asked to determine the price by calculating the company's net assets, based on the latest balance sheet, divided by the number of issued shares. Fractional share prices are determined in the same manner approximately.

6 In 1986, the Bureau of Civil Affairs of the Ministry of Justice announced its “Tentative Plans for the Commercial Code and Limited Liability Company Law.” The Bureau asked for opinions whether it should approve appraisal rights in cases where minority shareholders of non-listed companies are grossly discriminated against. Very few supported such an approval. However, according to detailed scholarly research of actual situations, an unconditional appraisal right is appropriate to resolve an internal dispute within a close company, and this is a reasonable assessment. Hamada, , “A Shareholder's Unconditional Appraisal Right (parts 1, 2, and 3): A Proposal for Close Company Legislation”, 982 Commercial Law Review (1983) 59Google Scholar; 983Commercial Law Review (1983) 12Google Scholar; 984Commercial Law Review (1983) 24Google Scholar. See also Mori, , “The Maintenance of Power in a Closed Company and the Withdrawal of Invested Capital”, 56 (11) Horitsu Jihou (1954) 26.Google Scholar

7 Kawamoto, , “Die Praxis der Aktionärsklage im Japan”, in: Festschrift Grossfeld (Heidelberg: Recht und Wirtschaft 1999) 525Google Scholar; Hayakawa, , “Die Aktionärsklage im Japanischen Gesellschaftsrecht”, in: Festschrift Mesetmäcker (Baden-Baden: Nomos 1996) 891.Google Scholar

8 In Japan, the appraisal right is not the only way to get relief because in decisions regarding the changes to a company's basic structure, like merger, one can argue the decision's invalidity (Commercial Code Article 415). This is therefore a Japanese characteristic. Tatsuta, , “Fairness in Corporate Mergers”, 82 Hogakuronso (Kyoto Law Review) (1968) 262, at p. 278.Google Scholar

9 Kanda, , “Conflicts of Interest in Shareholder Voting”, 98 Hogaku Kyokai Zassi (1982) 761, at p. 811.Google Scholar

10 When the appraisal right was initially introduced, of equal importance was the protection of minority shareholders and the ability of companies and major shareholders to freely undertake measures such as merger. Osumi, / Omori, , Commentary on the Amended Corporate Law, Article by Article (Tokyo: Yuhikaku 1951) 221.Google Scholar

11 Hasegawa, , Annotation of Corporate Law, Vol. 4, Commercial Code Article 245-2 (Tokyo: Yuhikaku 1968) 156Google Scholar; Shisido, , New Edition Annotation of Corporate Law, Vol. 5, Commercial Code Article 245-2 (Tokyo: Yuhikaku 1986) 283 et seq.Google Scholar

12 This has been criticized on the account that it upsets the balance because a change in a company's objectives is a matter of a special decision which has a strong connection with the shareholders' interests: Kitazawa, , Corporation Law, 6th ed. (Tokyo: Seirin Shoin 2001) 332Google Scholar. There are other comments approving this from a legal perspective: Hasegawa, supra n. 11, at p. 156.

13 However, there are no appraisal rights if a dissolution decision is made at the same time as the decision to transfer business operations (Commercial Code Article 245-2).

14 Commercial Code Article 349 (1966).

15 Limited Liability Company Law Article 64-2 (1990).

16 Commercial Code Article 355 (1999).

17 Commercial Code Article 371 (1999).

18 Commercial Code Article 374-3; Limited Liability Company Law Article 63-2 (2000).

19 Commercial Code Article 374-31, Section 5; Limited Liability Company Law Article 63-9, Section 3 (2000).

20 According to the 1997 amendments of the Commercial Code (Ministry of Justice [ed.] 1998) 85 et seq. this situation is metaphorically described as similar to a situation when a whale swallows a killifish: Maeda, , Introduction to Company Law, 6th ed. (Tokyo: Yuhikaku 1999) 665Google Scholar. This is not allowed for limited liability companies. As for the merging and disappearing companies, an approval decision is necessary.

21 According to Commercial Code Article 413-3, Section 1, when companies merge, the total number of new shares issued by the company devising the merger can not exceed five percent of the total number of issued shares. Regarding the merged company, the total amount of money paid to it by the surviving company can not exceed two percent of the surviving company's pre-merger net assets. In addition, a merged company is required to obtain shareholder approval. If one-sixth of the shareholders disapprove, a simple merger is not allowed.

22 1999 amendment. When the scale of a company, that has become a holding company merely by share exchange, is considerably larger than that of the company which has become its wholly-owned subsidiary, the effect on the interests of the holding company's stockholders is minimal. Therefore, the parent company may forego an approval decision: Commercial Code Article 358. Dissenting shareholders are entitled to appraisal rights under the same conditions and procedures of a simple merger. However, rejecting the assertion that the parent company shareholders need protection, there are some that question the necessity of the current law that provides dissenting parent company shareholders appraisal rights. Yet, the law is necessary to protect the profit of shareholders of the company that is now the subsidiary: Morimoto, , Lecture on Company Law (Tokyo: Yushindo 2001) 255.Google Scholar

23 2000 amendment. When the quid pro quo of the whole takeover operation does not exceed an assets standard of 5 percent of the net assets based on the final balance sheet, an approval decision is not necessary: Commercial Code 245-5, Section 1. Shareholders opposing the action may exercise their appraisal rights under the same conditions as a simple merger: Commercial Code Article 245-5, Sections 3 and 4.

24 Commercial Code Article 245- 5, Section 3; Article 358, Section 5; Article 374-23, Section 5; Article 413-3, Section 5. 2000 amendment. When the total number of shares issued by a company succeeding division and the amount of money that the company pays for a divided company or its shareholders is small, as in the case of simple mergers, the succeeding company is not required to have an approval decision: Commercial Code Article 374-23, Section 1). Shareholders opposing the division are entitled to exercise appraisal rights: Commercial Code Article 374-23, Section 5. Conversely, if the divided company receives a quota of shares issued by the succeeding company and the value of the taken-over property does not exceed the five percent assets standard, a divided company general meeting decision is not necessary. However, because the action does not directly influence the percentage of shares held by shareholders and also not permitted in cases involving the alienation of a part of an unimportant operation (Harda, (ed.), Legal System of Spin-offs and Split-outs (Tokyo: Shojihomkenkyukai 2000) 98Google Scholar et seq., or the value company takes over is relatively small: Kitazawa, supra n. 12, at p. 738, the divided company's shareholders have no appraisal rights: Commercial Code Article 374-22, Section 3.

25 Commercial Code Article 413-3, Sections 5 and 6.

26 Regarding regulation of company law see Hayakawa, , “Zum Gegenwarigen Stand des Konzernrechts in Japan”, in: Mestmäcker, / Behrens, (eds.), Das Gesselschaftsrecht der Konzerne im internationalen Vergleich (Baden-Baden: Nomos 1991) 391.Google Scholar

27 For example, to speed up the procedure, the company is obliged to propose a purchase price: Hukami, , “The System of Appraisal Rights in American Company Law”, 64(5) Hogakuronso (Kyoto Law Review) (1958) 73Google Scholar; Waza, , Valuing Shares under Appraisal Statutes in American Law, Law and Economics (Kanazawa University, No. 5 1958) 167Google Scholar et seq.; Shimamoto, , “Appraisal Statutes”, 83 Doshisha Law Review (1964) 1, at pp. 15 et seq.Google Scholar

28 Commercial Code Article 245-2; Article 349, Section 1; Article 408-3, Section 1.

29 Commercial Code Article 239, Section 2.

30 Stock companies with a capital amount of 500 million yen or more, or having a total liability of 20 billion yen or more, and 1,000 shareholders or more.

31 Law for Special Exceptions to the Commercial Code Concerning Audits, etc. of Stock Companies (kabusikikaisha no kansa to ni kansuru shoho no tokureini ni kansuru horitsu) Article 21-3, Section 1.

32 Kimita, , “The Modern Significance of Appraisal Rights and the Protection of Minority Shareholders”, 143 (2) Hogakuronso (Kyoto Law Review) (1989) 81Google Scholar, at pp. 89 et seq., claims that exercising the right to vote is needed because the protection of minority shareholders and prevention of abuse of appraisal rights can only be achieved by linking appraisal rights and a special shareholders' approval decision.

33 These shareholders are able to demand share repurchase at any time. When the shareholder's declaration of intent to ask the company to buy back its shares has reached the company, it has the same legal implications as a sales contract.

34 Commercial Code Article 245-2; Article 349, Section 1; Article 408-3, Section 1; Non-Contentious Procedure Law (hishojiken tetsuzuki ho) Article 126, Section 1 and Article 132-6.

35 Supreme Court Decision, 1 March 1973, 27(2) Law Reports of the Supreme Court 161.Google Scholar

36 This is one of the methods of assessment provided in Fundamental Rulings of the National Tax Administration for assessment of an inheritance for imposition of inheritance tax (No. 179, 180). The Osaka District Court Sakai Branch Decision, 26 September 1986, 19 (9, 10) Law Reports of the Inferior Court 568; the Tokyo High Court Decision, 19 January 1972, 22 (1, 2) Law Reports of the Inferior Court 9; the Yokohama District Court Decision, 21 January 1969, 669 Hanreijiho 91; the Takamatsu High Court Decision, 31 March 1975, 787 Hanreijiho 109; the Tokyo District Court Decision, 30 August 1977, 533 Kinyusyojihanrei 22; and the Nagoya High Court Decision, 4 October 1979, 949 Hanareijiho 121. One problem of this assessment method is the difficulty in finding a sample company that would serve as the basis for comparison. See Egashira, , Assessment of Stocks, System of Judicial Practice, Vol. 3: Company Action and Corporate Reorganization (Tokyo: Seirin Shoin 1986) 86 et seq.Google Scholar

37 There are a few examples of cases using other ways to decide the sale price of transfer-restricted shares. For details, see Shishido, , “Ways to Achieve Financial Fairness in Coping with Internal Dissension of the Closely-Held Corporation”, 101(11) Hogaku Kyokai Zasshi (1984) 1758, at pp. 1760 et seq.Google Scholar

38 The system of appraisal rights is not an elixir, as the Tatsuta essay pointed out. See supra n. 8, at pp. 290 et seq.

39 Egashira, supra n. 36, at p. 88 et seq. In this case, the influence on the stock price caused by unusual speculation could be negated by calculating the average of the market prices of the concerned stocks during a certain period of time. The Tokyo District Court Decision, 10 February 1983, 1068 Hanreijiho 110.

40 Some cases employ a comparative method to assess listed stocks. The Tokyo District Court Decision, 19 April 1971,22 (3,4) Law Reports of the Inferior Court 446; the Kobe District Court Decision, 18 June 1976, 27 (5-8) Law Reports of the Inferior Court 378.

41 As an opinion emphasizing the appropriateness of a method setting a standard of net assets of a company, there is a case of transfer of transfer-restricted stock: Shisido, supra n.l 1, at pp. 1829 et seq.

42 Supplementary Provisions of the 1981 Revision of the Commercial Code (kaisei shoho husoku) Article 19, Sections 4 and 5; Commercial Code Article 204-4, Section 2; Non-Contentious Procedure Law Article 132-7.

43 believe that the most appropriate method to decide the sale price of transfer-restricted stock is to consider the nature of the issue in cases for which appraisal rights are sought to protect minority shareholders. The Commercial Code originally permitted clauses prohibiting the transfer of shares in a company's Articles of Incorporation, but under the 1950 Amendment Law, restrictions on the transfer of shares were prohibited in principle. Due to capital liberalization, the 1966 amendment made it possible to write in the Articles a restriction on the transfer of shares that requires the approval of the Board of Directors (Commercial Code Article 204) to prevent foreign capital from taking over domestic companies. Changes in the Articles to restrict transfers have more conditions than those necessary for ordinary changes (Commercial Code Article 343). It is also possible to make such restriction changes by a vote of the majority of the total number of shareholders, or by the majority of more than two thirds of the total amount of issued shares (Commercial Code Article 348). Again, dissenting shareholders have appraisal rights (Commercial Code Article 349). In a closed company, shares transferred in this way by a shareholder may remain in the company and the price is decided as follows: first, shareholder A informs the company in writing that it would like to transfer its shares to a company-designated buyer, or to B, who can request the company's approval for such transfer (Commercial Code Article 204-3). If the company rejects B as a buyer, it must designate an alternate. In order to demonstrate its solvency, a company-designated buyer must deposit funds equivalent to the book value of the shares with a depository. The parties then discuss the price. If no agreement is reached, the sale is concluded at the deposit value (Commercial Code Article 204-4, Section 3). If a court determines the price, the court considers the company's financial situation and all other relevant circumstances, to decide the price. If the company is unable to find a buyer within a designated period of time, the Board of Directors may nominate the company itself as the buyer. The purchase of shares is determined by a special decision of the general meeting, and funds equivalent to the book value of the shares to be transferred are deposited. A is then required to sell the shares back to the company (Commercial Code Article 204-3, Section 2). When, after failed negotiations, a court sets a price exceeding the limit of the company's financial resources and the numbers specified by law, the company can not buy shares of A (Commercial Code Article 204-3-2, Sections 5 and 7). A is then permitted to transfer his shares to B as per his initial request (Commercial Code Article 204-4, Subsections 6 and 7).

44 It resulted from the necessity to respond to social economic changes including more competition among companies, the diffusion of computer networks, technological innovations or so-called IT revolution, the change from indirect to direct financing, and the increased demand for new company financing.

45 Specifically, it examined this matter from four perspectives, i.e., how to secure effective corporate governance, how to respond to the advanced information society, how to improve enterprise fund-raising, and how to respond to the internationalization of corporate activities. Every area is under consideration in this overall reform.

46 Regarding the exchange of stock, see Hayakawa, , “Erleichterung der Konzernierung durch Aktientausch und Aktieniibertragung”, 5 ZjapanR (1999) 5.Google Scholar

47 According to a 1997 Ministry of Justice commercial registration survey, at that time there were 19,411 general partnerships, 78,697 limited partnerships, 1,613,886 limited liability companies and 1,225,923 joint-stock companies. Small sized closed companies comprise the majority. Only 36,798 companies held capital of more than a hundred million yen. Kawamoto, / Kishida, / Morita, / Kawaguchi, , Japanese Company Law, 4th ed. (Tokyo: Shojihomukenkyukai 2001) 17 et seqGoogle Scholar. These statistics underscore the need for special close company regulation.

48 The stock trading law is directly aimed at protecting investors in the stock market. Baurn, , “Der Markt für Unternehmen und die Regelung von öffentlichen Übernahmeangeboten im Japan, Aktiengeselhchaft [1996] 399Google Scholar, correctly notes that Japanese securities law does not offer enough protection for minority shareholders, especially in takeover bids.

49 There are no studies, documentary records or accurate statistics on the extent of the use of appraisal rights: Takenaka, , “Claims for Purchase Upon Merger and Determining the Price”, 705 Juristo (1979) 66Google Scholar; Kawamoto, , Modern Company Law, 8th ed. (Tokyo: Shojihomukenkyukai 1999) 548Google Scholar, footnote 1. Although, compared to America, the system is rarely used in closed companies (Shishido, supra n. 11, at pp. 811 et seq.), it has been pointed out that the use of appraisal right is expected to propagate with the increase in joint enterprises: Kanda, supra n. 9, at pp. 811 et seq. Conversely, because appraisal rights serve as a safety valve for complaints, there is strong opinion emphasizing the need for the system to exist mainly on paper, as it is desirable that shareholders will not use it regardless of whether or not it is easy to use”: Takeuchi, , Mergers and Spin-offs of Enterprises, Course for Modern Corporation Law (Tokyo: Iwanami Shoten 1985) vol. 3, p. 432.Google Scholar