Abstract
This paper reviews a set of 230 judicial decisions collected by the author which Japanese courts rendered in disputes over claims of corporate directors to their pay between 1953 and 2018 in order to investigate what role litigation in the courts has played in relation to Japan's executive compensation practices. These all centered around either Article 361 of the Companies Act or its predecessor Article 269 of the Commercial Code, the main rule governing director compensation. The paper makes four findings which shed light on this question. The first insight is that Japanese courts, and particularly the Tokyo District Court, deal with director compensation disputes quite frequently. This has particularly been the case since the turn of the century, with decisions appearing at a rate of roughly ten per year since 2000. The second insight is that the nature of these litigated disputes differs drastically from the shareholder derivative action narrative developed in the American literature. Article 361 could be loosely described as a type of “Say on Pay” rule, which requires the pay of the board of directors be set either in the articles of incorporation or by a resolution of the shareholders meeting. This procedural requirement has lent itself to a fairly diverse set of uses in the Courts. Broadly speaking these fall into one of two categories. On the one hand, in keeping with its purpose, the rule has been used by both shareholders and corporations themselves to challenge director entitlements to pay. On the opposite side it has been used with even greater frequency in lawsuits initiated by directors claiming remuneration from corporations. A third insight which follows from the second is that in Japan with respect to director pay litigation in the Courts could more accurately be described as a mechanism for directors rather than shareholders. The vast majority of cases which this study uncovered are in fact lawsuits initiated by directors seeking to enforce claims for remuneration against the corporation, with shareholder lawsuits being far less common. The reason for this lies primarily in the fourth and final insight, which is the important role the courts have played in developing the rule itself. Taking a provision that consisted of a single line which left an enormous number of issued unanswered the Courts developed a fairly extensive set of rules governing how it, and by extension how decisions on director pay, operated. In particular the cumulative effect of these has been to give boards of directors, and particularly the representative directors who exercise control over them, a great deal of independent power to set the pay of individual directors. This in turn has put the pay of individual directors, and particularly those who run afoul of the representative directors, at some risk which has led many to turn to the courts to try to enforce their claims.
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