Director Duties

This section summarizes the duties of a director of a Japanese company (kabushiki kaisha).
 Related: Director Liabilities; Governance Structures

General

Under the Companies Act of Japan, directors owe a ‘duty of care of a good manager’ and a ‘duty of loyalty’. The specific meaning of these duties is determined by the courts, and there is a body of case law surrounding these concepts.

The assessment of whether a director should be held liable for a breach of duty is highly fact-dependent; therefore, one should not rely on a general statement. However, here are some guiding principles.

Standard of care

A director must exercise the level of care that is typically expected of a director in a given situation. The required level of care may vary based on the director’s role, responsibilities, and expertise.

Acting in the best interests of the company

Directors’ duties are owed to the company, which generally means that they must act in the best interests of all shareholders, rather than favoring a particular shareholder. When determining what is best for the company, directors generally have broad discretion and can consider both long-term and short-term benefits.

Conflict of interests

There are specific provisions in the Companies Act that require directors to obtain the approval of the board of directors before engaging in any business that competes with the company’s business or entering into transactions that conflict with the interests of the company. In addition to these specific provisions, a director owes a general duty to refrain from acting in self-interest to the detriment of the company or its shareholders.

Business judgments

There is a body of case law in Japan that grants directors broad discretion regarding business judgments. Under the case law, directors are generally not deemed to have breached their duties when making a business judgment unless the judgment or the process of arriving at that judgment is deemed significantly unreasonable in the specific context. However, this principle may not hold if a conflict of interest exists between the director and the company.

Compliance obligations

A director must adhere to all applicable laws, as well as the company’s Articles of Incorporation and the resolutions passed by shareholders.

Supervision of others

Directors’ duties include supervising other directors and employees. Consequently, a director may be held liable if he or she fails to detect or rectify a mismanagement or wrongdoing by another director or an employee. However, this does not mean that every director must monitor every activity of all individuals. The scope and depth of required supervision depend on the director’s role and responsibilities.

Internal control

For publicly listed companies, the Companies Act and the Financial Instruments and Exchange Act require the establishment of an internal control system to ensure proper compliance, risk management, and accurate financial and other reporting. Failure to develop and maintain an effective internal control system may be considered a breach of the directors’ duties. However, similar to other business decisions, directors are generally granted considerable discretion in determining what constitutes an appropriate internal control for their company.

Special situations – M&A

There are specific regulations stipulated in the Financial Instruments and Exchange Act, the listing rules of the Tokyo Stock Exchange and the guidelines published by the Ministry of Economy, Trade and Industry (METI) that require or recommend certain procedures when a company is engaged in merger discussions or is facing a takeover. (Key Laws, Regulations and Guidelines)

Case law is also evolving regarding takeover defenses, MBOs (management buyouts), cash-out/freeze-out and other special situations.