Legal Services

November 2001

A draft revision to the Commercial Code approved by the three ruling coalition parties and the Democratic Party of Japan would limit the liability of corporate executives as a result of shareholder lawsuits. Outlined by the Democratic Party of Japan and agreed to by the three ruling parties, the draft would set differing maximums on the amount of penalty for which those in various executive posts would be liable. Directors with representative rights would be liable for the equivalent of six years of compensation, while those from in-house would be liable for four years' worth of compensation. The coalition parties had originally proposed an across-the-board maximum equivalent to two-years' compensation for all directors. With the approval by the four parties, there is a good chance that the bill will be passed in the current Diet session. Corporate directors will benefit from the cap if they are working at large companies, which the Commercial Code defines as those capitalized at 500 million Yen or more or those with debts of more than 20 billion Yen. The bill would not offer protection from lawsuits stemming from criminal actions. The reduction in penalties can also be decided at a general shareholders meeting even before a lawsuit is filed. Although the draft included a waiver of directors' liability if agreed to by a simple majority of shareholders, the final draft requires consent by two-thirds or more of shareholders. The ruling parties had also proposed that even if a board of directors meeting decides to do so, opposition from shareholders holding a 5% stake or more would nullify the decision. However, the final draft lowered that threshold to 3%. Meanwhile, the ruling parties had proposed the abolishment of a requirement stipulating that an individual or group must have held stock for six months before being able to file a lawsuit, but the final draft retains the requirement. The need to place caps on financial penalties to be borne by corporate directors has become necessary because the amounts have escalated in recent years. Some business leaders have complained that ever-rising penalties keep corporate executives from taking risks for fear of being hit with huge penalties. (November 23, the Nihon Keizai Shimbun)