Business law essay

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BUSL377 Japanese Trade Law Week 6: Doing Business in/with Japan

Dr Kay-Wah Chan E4A 241

Tel: 9850 7088

Email: [email protected]

(2017)

2017 1

Note:

 If there is any discrepancy between the Textbook and these slides/lecture notes, follow these slides/lecture notes.

22017

Japanese business practice/etiquette

 Introduction letter or introduction

 Introducer - person/organisation respected and trusted by the concerned parties  as introducer and mediator in future disputes

 Aisatsu (greeting; formal introduction)

 Exchange of business cards (meishi)

 Status/rank-consciousness

 Socializing

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Japanese business practice/etiquette

 Building long term business relationship  Relative power relationship (seller / buyer)  Harmony-maintenance  Tatemae and honne  Group decision-making (ringi)

 Bottom-up decision-making process as compared with top-down practice in many Western companies

 nemawashi

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Setting up business in Japan - Types of operation / business forms

Art.821, the Companies Act

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Quasi-foreign companies / Pseudo-foreign companies

擬似外国会社

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Art.821, Companies Act: “(1) A foreign company that has its head office in Japan or

whose main purpose is to conduct business in Japan cannot carry out transactions continuously in Japan.

(2) A person who has carried out transactions in violation of the provisions of the preceding paragraph shall be liable, jointly and severally with the foreign company, to perform obligations that have arisen from such transactions to the counterparty.”

Art.2 Companies Act: “foreign company” = “any juridical person incorporated under the

law of a foreign country or such other foreign organization that is of the same kind as the Company or is similar to a Company”

"Company" = any Stock Company, General Partnership Company, Limited Partnership Company or Limited Liability Company

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Setting up business in Japan - Types of operation / business forms

1. Representative office

2. Branch office

3. Subsidiary company

4. Limited liability partnership (LLP)

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Setting up business in Japan - Types of operation / business forms

1. Representative office  No registration requirements

 Cannot carry on marketing or sales activities

 Mainly for public relations reasons and/or preparatory functions

 Therefore, to have business operations in Japan, need to use any of the other three modes of operation: branch office, subsidiary company or limited liability partnership

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Setting up business in Japan - Types of operation / business forms

2. Branch office  Registration and notification needed

 Not a separate legal entity from the foreign company

 Foreign company fully responsible for the debts and liabilities out of the activities of the branch office

 Need at least one representative in Japan

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Setting up business in Japan - Types of operation / business forms

3. Subsidiary company  To incorporate a subsidiary company in Japan

under the laws of Japan

 The subsidiary is a separate legal entity from the parent foreign company

 Registration required

 Different types of companies under the laws in Japan

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Types of companies

1. Joint-stock / stock company (Kabushiki-Kaisha 株式 会社)

2. General/Unlimited/Full partnership company (Gômei- Kaisha 合名会社)

3. Limited partnership company (Gôshi-Kaisha 合資会 社)

4. Limited liability company (LLC) (Gôdô-Kaisha 合同会 社)

Depending on its type, a company must use in its trade name the words: Kabushiki-Kaisha, Gômei-Kaisha, Gôshi-Kaisha or Gôdô-Kaisha (Art.6 paras 2 and 3 Companies Act) (see Week 7’s Lecture Notes)

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Types of companies

1. Joint-stock / stock company (Kabushiki-Kaisha 株 式会社) (more detailed study in Week 8)

2. General/Unlimited/Full partnership company (Gômei-Kaisha 合名会社)

3. Limited partnership company (Gôshi-Kaisha 合資 会社)

4. Limited liability company (LLC) (Gôdô-Kaisha 合同 会社)

2, 3 and 4 are collectively called “Membership Companies or Companies without shares 持分会 社” in the Companies Act, mainly covered by Part III of the Companies Act (Arts. 575 - 675)

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General/Unlimited/Full partnership company (Gômei-Kaisha) 合名会社

 N.B. despite the nomenclature of “partnership”, it is a separate legal entity from its members/investors (not a partnership as meant under common law)

 Number of members: one or more  All members/partners are jointly and severally liable

for obligations of the company (i.e. all are unlimited partners/members 無限責任社員) (Art.580 para 1 Companies Act)

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Limited partnership company (Gôshi-Kaisha) 合資会社

 Similar to Gômei-Kaisha, but have both: a) Member(s)/partner(s) with limited liability; and

b) Member(s)/partner(s) with unlimited liability

for the obligations of the company

 Limited liability partners - liable for the performance of the obligations of the Membership Company to the extent of the value of their investment (excluding the value of the contributions already performed to the Membership Company) (Art.580 para 2 Companies Act)

 Articles of incorporation will provide for the liability status of the members

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Limited partnership company (Gôshi-Kaisha) 合資会社

 But, if a limited member/partner engages in an act that causes such limited member/partner to be mistaken as an unlimited member/partner, such limited member/partner shall assume the same liability as that assumed by an unlimited member/partner in relation to persons who transact with the Limited Partnership Company based on such mistaken belief. (Art.588 para 1 Companies Act)

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Limited partnership company (Gôshi-Kaisha) 合資会社

 If a limited member/partner engages in an act that causes mistake as to the extent of the limited member’s/partner's liability (excluding that in the Art.588 para 1 Companies Act), such limited partner shall assume the liability to perform the obligations of such Limited Partnership Company in relation to persons who transact with the Limited Partnership Company on the bases of such mistaken belief, to the extent of the liability so mistaken. (Art.588 para 2 Companies Act)

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Limited liability company (LLC) (Gôdô-Kaisha) 合同会社

 Number of members: one or more

 Member’s liability: limited - to the extent of the value of their investment (excluding the value of the contributions already performed to the Membership Company) (Art.580 para 2 Companies Act)

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Limited liability company (LLC) (Gôdô-Kaisha) 合同会社

 If a member/partner engages in an act that causes mistake as to the extent of that member’s /partner's liability, such partner shall assume the liability to perform the obligations of such Limited Liability Company in relation to persons who transact with the Limited Liability Company on the bases of such mistaken belief, to the extent of the liability so mistaken. (Art.588 para 2 Companies Act)

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General Partnership Company 合名会社

→ Limited Partnership Company 合資会社

 Change in articles of incorporation to admit limited partner(s)/member(s) (Art.638 para 1(i) Companies Act)

 Change in articles of incorporation to convert one or some (but not all) partner(s)/member(s) into limited partners/members (Art.638 para 1(ii) Companies Act)

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General Partnership Company 合名会社

→ Limited Liability Company 合同会社

 Change in articles of incorporation to convert all partners/members into limited partners/members (Art.638 para 1(iii) Companies Act)

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Limited Partnership Company 合資会社

→ General Partnership Company 合名会社

 Change in articles of incorporation to convert all partners/members into unlimited partners/members (Art.638 para 2(i) Companies Act)

 Due to withdrawal of limited members/partners, only unlimited members/partners remain (deemed to have effected changes in the articles of incorporation to become a General Partnership Company) (Art.639 para 1 Companies Act)

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Limited Partnership Company 合資会社

→ Limited Liability Company 合同会社

 Change in articles of incorporation to convert all partners/members into limited partners/members (Art.638 para 2(ii) Companies Act)

 Due to withdrawal of unlimited partners/members, only limited members/partners remain (deemed to have effected a change in the articles of incorporation) (Art.639 para 2 Companies Act)

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Limited Liability Company 合同会社

→ Limited Partnership Company 合資会社

 Change in articles of incorporation to admit unlimited partner(s)/member(s) (Art.638 para 3(ii) Companies Act)

 Change in articles of incorporation to convert one or some (but not all) partners/members into unlimited partners/members (Art.638 para 3(iii) Companies Act)

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Limited Liability Company 合同会社

→ General Partnership Company 合名会社

 Change in articles of incorporation to convert all partners/members into unlimited partners/members (Art.638 para 3(i) Companies Act)

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Membership Companies or Companies without shares 持分会社

Assignments of Equity Interests Unless otherwise provided in the articles, all members’/partners’ consent needed for transfer of a member’s/partner’s “equity interests” in the company or part thereof (Art.585 paras 1 & 4 Companies Act) But, unless otherwise provided in the articles of incorporation, for limited liability members not executing the business of the company, they can transfer all or part of their “equity interests” if there is consent from all members who execute the business of the company (Art.585 paras 2 & 4 Companies Act)

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 A partner having assigned all of his/her equity interests to others is liable for the obligations of the Membership Company that arose before the registration (of such assignment), to the extent of his/her pre- existing liability (Art.586 para 1 Companies Act) (N.B. limitation period under Art.586 para 2 Companies Act)

 No member’s equity interests in a company can be assigned to the company itself (Art.587 para 1 Companies Act)

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Membership Companies or Companies without shares 持分会社

Admission of Partners/Members Admission of a new partner – effective upon change of the articles of incorporation (Art.604 para 2 Companies Act) but (for limited liability company) if the new partner fails to complete full payment or delivery of contribution, admission only effective upon completion of such payment or delivery (Art.604 para 3 Companies Act) A newly admitted partner/member is also liable for the obligations of the company that arose before the admission (Art.605 Companies Act)

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Membership Companies or Companies without shares 持分会社 Withdrawal of Partners/Members

- Voluntary Withdrawal

Subject to provisions in the articles of incorporation, a partner/member can withdraw at the end of a business year by not less than 6 months’ advance notice if the articles have not provided a duration for the company or the articles provide that the company shall exist for the life of a particular partner (Art.606 paras 1 & 2 Companies Act) In any case, a partner/member can withdraw at any time if there are any unavoidable grounds (Art.606 para 3 Companies Act)

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Membership Companies or Companies without shares 持分会社 Withdrawal of Partners/Members

- Statutory Withdrawal (Art.607 Companies Act)

1.Grounds as provided in the articles of incorporation; 2.All partners’/members’ consent; 3.Death 4.(for juridical person partner/member only) liquidation due to merger; 5.Subject to ruling to commence bankruptcy procedures; 6.Dissolution (not due to 4 or 5 above); 7.Etc.

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Membership Companies or Companies without shares 持分会社

Withdrawal of Partners/Members

A partner that has withdrawn shall be liable for the obligations of the Membership Company that arose before the registration of the withdrawal to the extent of the partner's pre-existing liability (Art.612 para 1, Companies Act) (N.B. Art.612 para 2, Companies Act)

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Membership Companies or Companies without shares 持分会社

Distribution of Profits

As per the Articles of Incorporation (Art.621 para 2 Companies Act) If no provision in the articles of incorporation, proportional to each partner’s/member’s contribution (Art.622 para 1 Companies Act) Formula in the articles of incorporation for distribution of either just profits or loss applies to both (Art.622 para 2 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – execution of business  Unless otherwise provided in the articles of

incorporation, all members/partners have right and duty to execute the business of the company (Art.590 para 1 Companies Act)

 Articles of incorporation can provide for one or more members/partners to execute the business of the company  If more than 2 members/partners are so designated,

determination is by majority of such members/partners, unless otherwise provided in the articles of incorporation (Art.591 para 1 Companies Act)

 But, appointment and dismissal of managers need majority decision of all partners/members, unless otherwise provided in the articles of incorporation (Art.591 para 2 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – execution of business  Articles of incorporation can provide for one or more

members/partners to execute the business of the company  unless otherwise provided in the articles of incorporation,

such members/partners cannot resign without justifiable grounds (Art.591 paras 4 & 6 Companies Act)

 unless otherwise provided in the articles of incorporation, such members/partners can be dismissed by unanimous consent of the other partners when there are justifiable grounds (Art.591 paras 5 & 6 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – execution of business  If the member/partner executing business is a juridical

person (legal person), it must appoint person(s) to perform such duty and have to notify other partners/members about such person’s/persons’ name(s) and address(es) (Art.598 para 1 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – execution of business Art.593 Companies Act: Duties of members/partners who execute the business of the company:

 perform such duty with due care of a prudent manager;  perform duties in a loyal manner, and in compliance with

laws, regulations and the articles of incorporation;  (unless otherwise provided in the articles of

incorporation) report the status of the execution of their duties upon requests by the Membership Company or other partners/members

 (unless otherwise provided in the articles of incorporation) report the progress and outcome of their duties without delay after those duties terminates

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Membership Companies or Companies without shares 持分会社 Administration – execution of business

Failure in performance of duties by partners/members who execute the business → such partners jointly and severally liable to the company for loss caused (Art.596 Companies Act)

If limited partner(s)/member(s) who execute the business caused loss to a third party due to his/her/their intentional act or gross negligence in the discharge of his/her/their duties, such limited partners shall be jointly and severally liable to compensate the third party for the loss (Art.597 Companies Act)

Articles 593-597 apply to person(s) appointed by juridical person members/partners to perform the duty of executing the business (Art.598 para 2 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – Representatives Unless otherwise designated, partner(s)/member(s) who execute the business represent the membership company (individually) (Art.599 paras 1 & 2 Companies Act)

“A Membership Company may appoint partners who represent the Membership Company from among the partners who execute the business pursuant to the articles of incorporation, or through the appointment by the partners themselves pursuant to the provisions of the articles of incorporation.” (Art.599 para 3 Companies Act)

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Membership Companies or Companies without shares 持分会社

Administration – Representatives

“Partners who represent the Membership Company shall have authority to do all judicial and non-judicial acts in connection with the operations of the Membership Company.” (Art.599 para 4 Companies Act)

Limitation on such authority will not affect third parties without knowledge (Art.599 para 5 Companies Act)

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Stock / Joint-stock company (Kabushiki-Kaisha) 株式会社

 Number of members: one or more

 Shareholders: can be individuals or incorporated bodies

 A shareholder's liability - limited to the amount of the subscription price of the shares held (Art.104 Companies Act)

 More detailed study on joint-stock company in Weeks 7 and 8.

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Setting up business in Japan - Types of operation / business forms

4. Limited liability partnership (LLP)  有限責任事業組合 (yûgen seki’nin jigyô kumiai)  Limited Liability Partnership Act (Law/Act No.40 of 2005)

(passed on 27 April 2005, promulgated on 6 May 2005 and effective from 1 August 2005)

 A partnership formed under a limited liability partnership agreement as set out in Art.3 para 1 of the Limited Liability Partnership Act

 Art.3 para 1 – “A limited liability partnership agreement takes effect when it is agreed that an individual or a juridical person will make a capital contribution and each of the parties will jointly conduct profit-oriented business activities in which its maximum liability is limited to its capital contribution amount, and when each of the parties fully makes payment or delivery in relation to its own capital contribution”

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Setting up business in Japan - Types of operation / business forms

4. Limited liability partnership (LLP)

No legal corporation status It is a contractual organisation Must be of two or more partners A partner will have limited liability (liable for the partnership's obligations “only to the extent of his/her/its capital contribution amount”) (Art.15)

BUT: partnership agreement cannot be “abused for the purpose of unjustly escaping from obligations” (Art.3 para 3)

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Setting up business in Japan - Types of operation / business forms

4. Limited liability partnership (LLP)

Registration Necessary to include in its name the phrase “Limited Liability Partnership” (Art.9 para 1) A partner's capital contribution to the partnership must be made only in the form of cash or other properties (Art.11) Withdrawal of partner(s): - no withdrawal except:

a. Unavoidable circumstances unless otherwise provided in the partnership agreement (Art.25);

b. (Art.26) Statutory withdrawal, such as:  Death  Bankruptcy  Guardianship

Taxes (on each partner) 2017

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Other method of investment in Japan:

Acquisition of shares in a Japanese company (and taking control)

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Reference List

Anderson Mōri & Tomotsune, Introduction to Japanese Business Law & Practice 2nd edition, Tokyo: LexisNexis 2014.

Companies Act 2005 (as amended in 2014).

Limited Liability Partnership Act 2005

Hiroshi Oda, Japanese Law 3rd Edition, Oxford: Oxford University Press, 2009.

Hamabe, Yoichiro. 『平成26年改正対応 図解新会社法のしくみ 第3版』, Tokyo: Toyo Keizai Inc., 2015.

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