Key Points about Legal Responsibilities for Directors & Managers of Businesses in Japan

March 25, 2018

In this article, we will explain what you need to know about the legal responsibilities of representative directors and managers of businesses in Japan.

It is important for anyone opening a business in Japan to be aware that along with rights, representative directors and managers also take on heavy responsibilities. These include liability for damages. We will now discuss the key points that you should be aware of when establishing your business and planning your business management in Japan.

Director and Manager Liabilities

Under the Companies Act of Japan, directors may be held liable for:
• Neglecting their responsibilities, resulting in damages to the company.
• Illegal director-corporation transactions. In these cases, the amount payable for damages is calculated according to the amount of profit obtained by the director in the illegal transaction.
• Conflicting interest transactions. Where damage is caused to the company, the director can be held liable for neglect of duties.
• Malice in performing duties or gross negligence. In these cases the director liable can be held liable for damages to the third party.

Director Responsibility Regarding Negligence

As management personnel, the representative director, accounting advisor, auditor, company executives, accounting auditor and other executives are obligated to act with due diligence. They must comply with the Company Act, company article of incorporation and decisions made in shareholder meetings, and perform according to the rules. In cases of damages caused by negligence, they should be held responsible for the compensation.

When paying damages external directors (including accounting advisors, external statutory auditors, accounting auditors) are responsible for the minimum total liability or an amount previously set by shareholders in the articles of incorporation, whichever is the highest. It should be stated in the articles of corporation which amount should prevail: that stated in a separate contract with the external director, or that stated in the articles of incorporation.

Approval of Director-Corporation Transactions at Shareholder Meetings

The representative director (or chairman of the board of directors) should disclose all facts and get approval for all director-corporation transactions at the shareholders general meeting. In negligence cases where the director has gained more in profit than the company has lost, they are responsible for paying back the difference.

Responsibilities for Conflicting Interest Transactions

If the company suffers a loss resulting from a conflicting interest transaction with the representative director, the representative director and the chairman of the board of directors who approved the transaction are responsible for compensation. Furthermore, the representative director’s liability for damages is strict liability (they are responsible for the damage and loss caused by their acts and omissions, regardless of culpability.)

Responsibilities of Company Executives to Third Parties

Unless they can prove otherwise, a company executive found to have acted with malice in performing their duties, or gross negligence, will be held responsible for payment of damages to third parties.

Examples include:
• Falsification of facts published by the representative director in applying for subscription shares.
• Falsification of records: financial documents, business reports, attached detailed statements and provisional financial statements.
• False statements.
• False public notices.

Exemption from Paying Restitution

Company executives may only apply for exemption from paying restitution for damages if there is approval from the shareholders.

If the executives were unaware that their action was a breach of responsibilities and they did not act with gross negligence, they may apply for shareholder approval. The “minimum liability amount” should be deducted from liquidated damages.

Where there are two or more representative directors and a board of company auditors, company executives may be given exemption from liability to pay restitution by majority vote. The decision will take into consideration causation, execution of duties, and profit obtained (calculated by subtracting the “minimum liability amount from the amount for which they are liable.)