This content is from: Local Insights


Japanese corporate governance is in the process of undergoing major reform. As part of this, amendments in the areas of directors` liability, derivative actions and corporate auditing will take effect on May 1 2002.

Director liability

Changes to the Commercial Code will allow directors' liability to be limited with respect to violations of the law or a company's articles of incorporation where directors do not knowingly misperform their duties and where such misperformance is not grossly negligent. If permitted by a company's articles of incorporation and only where certain conditions are satisfied, a company may set a limit on the amount of damages that its directors will be required to pay. In order to limit directors` liability in this instance, a board of directors` resolution approving and establishing the limit is required. Notwithstanding a company's articles of incorporation, this same limitation of liability may also be effected by a special resolution of shareholders. The amount of damages payable by an outside director may also be limited by agreement between the company and the outside director so long as the articles of incorporation permit such an agreement. An outside director is someone who has neither been a director in charge of conducting the company's business nor an employee of the company or any of its subsidiaries. Any agreement limiting the liability of outside directors must be made in advance. Generally, the Commercial Code sets the following minimum limits:

representative director:
six times the director's annual remuneration

outside director:
twice the director's annual remuneration

other director:
four times the director's annual remuneration

Derivative actions

These amendments have also developed and clarified derivative actions. Once a derivative action has begun, public notice or a notice to all shareholders must be provided in order to ensure that each shareholder has an opportunity to participate in the proceeding. Court settlement procedures and a mechanism which permits the company to participate in the defence of it directors in the action are also set out in the Commercial Code.

Corporate auditor

The purpose of the amendments is to provide corporate auditors with a more meaningful role in a company's corporate governance. Corporate auditors are specifically required to participate in and, where necessary, to make statements to the board of directors during board meetings. The term of corporate auditors increases from three years to four years. The amendments also provide that corporate auditors may limit their liability in much the same manner as directors (see above). Beginning in 2005, in the case of certain large companies, a majority of the corporate auditors must be "outside corporate auditors", who have neither been a director nor employee of the company or any of its subsidiaries.

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