Legally "Strong" Shareholders of Japan

Abstract

Foreign investors often criticize Japanese corporations for not paying enough attention to the interests of their shareholders. It might surprise these critics, then, to learn that shareholders’ legal rights under the Japanese Companies Act are actually quite strong. Indeed, many of the rights that shareholders’ rights advocates often support, including shareholders’ power to alter a corporate charter without board consent, shareholders’ power to control dividend payments, majority voting for board elections, shareholders’ power to replace the board of directors, and shareholder access to a corporate ballot—all of which are strongly debated elsewhere— are already effective in Japan. Moreover, derivative suits are easily initiated and maintained. Shareholders of Japanese corporations are, therefore, in an arguably stronger position than those in, for example, the United States. Still, notwithstanding these Japanese statutory rights, foreign investors’ criticisms persist. Two questions arise from this debate. First, why are shareholders of Japanese corporations unable to leverage their strong rights to force corporate management to prioritize shareholders’ interests? Alternatively, why are shareholder activists inactive in Japan? Second, if the existing shareholders’ rights are not actually used for activism, are they completely meaningless? Or, do they have alternative effects, whether positive or negative? This article answers these questions by summarizing and categorizing the rights of shareholders of Japanese corporations into two characteristics. First, shareholders of Japanese corporations have strong class-based rights with respect to decision-making on a wide range of matters related to the corporation and ample opportunity to take an initiative. These rights might, in fact, be too strong, inducing managers to insulate themselves by engaging in so-called “cross-shareholding” (kabushiki mochiai) relationship, which in turn likely weakens the rights of other shareholders in practice. The lack of support provided to activist shareholders by other shareholders, especially those in these cross-shareholding relationships, is the primary cause of activist ineffectiveness in Japan. When cross-shareholdings are unwound, however, these shareholder rights function as a latent threat on managers, disciplining them. The keys to ensuring that classbased shareholder rights are meaningful are, thus, distribution of share ownership and restraint on management’s attempt to manipulate this distribution. Unfortunately, it is not easy to unwind already-established crossshareholdings through regulatory intervention. Second, shareholders also possess strong individual rights to raise issues with the corporation, either by asserting a shareholder proposal or filing a derivative suit, neither of which would the corporation disrupt for the interest of other shareholders. These rights, again, might be too strong, incentivizing individuals to take advantage of them in pursuit of personal goals, rather than for the good of the corporation. Yet, whether the use of these individual rights amounts to an abuse hinges on an evaluation of the benefits achieved, namely, the supply of diverse views through shareholder proposals and the deterrence effect of derivative suits. Possible future reforms to Japanese law ought to consider how to strike the right balance of power for shareholders of Japanese corporations.