This content is from: Local Insights


Corporate divisionsKomatsu, Koma & Nishikawa, Tokyo

The Japanese government has made clear its intention to revitalize its corporate laws with the partial amendment of the Commercial Code on May 31 2000. The amendment establishes a new system of corporate divisions which aims primarily to expedite the restructuring of company organization, in order to enhance its competitive power in the world market. The amendment will take effect through a government ordinance within one year of its proclamation. It will also form part of legal systems such as the rationalized merger system (1997 Commercial Code amendment) and the system of stock exchange, in order to create a wholly-owned company (1999 Commercial Code amendment).

Notably, the amendment allows a company (Kabushiki Kaisha or Yugen Kaisha) to create two kinds of corporate divisions, namely, Shinsetsu Bunkatsu and Kyusyu Bunkatsu. The former means that a newly established company will replace the whole, or a part of, the business of an existing company. On the other hand, Kyusyu Bunkatsu means that an existing company will succeed the whole, or a part of, the business of another existing company.

Both types will likewise be made by Butteki Bunkatsu and Jinteki Bunkatsu, either alternatively or accumulatively. In the case of Butteki Bunkatsu, the stocks to be newly issued by the company succeeding the business will be allotted to the company transferring its business. In the latter, the stocks to be newly issued will be allotted to the shareholders of the company transferring its business.

Even before this amendment, a company could divide itself by Butteki Bunkatsu. However, the law generally mandated two requirements. First, the company would have to accept the court-appointed inspector who investigated the properties to be transferred. Second, the company would have to get consent from its creditors concerning the transfer of its debts to another company.

The amendment helps companies who wish to execute corporate divisions by Butteki Bunkatsu, since they will not have to undergo the inspector's investigation nor gain the consent of the creditors. Also, this amendment introduces Jinteki Bunkatsu, an entirely new system of corporate divisions.

The new system of corporate divisions is categorized into an organizational law such as merger. As such, it has these salient features. All the rights and duties relating to the business to be taken over by another company, are succeeded by that company by operation of law. The employment agreements for employees who have mainly been working for the business to be succeeded, can be transferred to the new company without the employees' consent.

Although the amendment provides an easy way for a company to divide a corporation, it also protects the shareholders, creditors and employees of the companies concerned. For example, a company should obtain the special resolution of the shareholders' meeting to conduct a corporate division (except in simple corporate divisions prescribed by the amended Commercial Code). Likewise, it should give public notice to its creditors, and a separate peremptory notice to each of the known creditors of the company. In the notices, the creditors are requested to state their objections to the corporate divisions. Companies should discuss the corporate divisions with their employees in advance.

In addition, the draft amendment of the Corporate Tax Law, which is beneficial for companies involved in corporate divisions, will be submitted to the Diet early next year for deliberation.

These changes, and the package of structural reforms, have emphasized the Japanese government's positive measures implemented to compete in the world market.

Fumio Koma and Hiroto Imai

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