Director Liabilities
This section summarizes the liability landscape of a director of a Japanese company (kabushiki kaisha). It also touches upon topics such as limitations of liability, indemnification by the company, and D&O insurance.
Related: Director Duties
Liabilities to the company
Under the Companies Act of Japan, a director is liable to the company if he or she fails to perform the duties as a director, and the company suffers damages as a result of such failure. Director Duties)
Liabilities to third parties
Under the Companies Act, a director is liable to a third party if he or she willfully or with gross negligence fails to perform his or her duties as a director, and the third party suffers damages as a result of such failure. Director Duties)
The Companies Act imposes a stricter liability on directors for false statements made in financial statements, company registrations, and other statutory documents. Directors must prove the absence of negligence to be discharged from their liabilities to third parties for damages caused by such false statements.
Furthermore, regarding false or misleading statements in the disclosure documents that a listed company is required to file under the Financial Instruments and Exchange Act, there are special rules concerning the liabilities of directors, as well as those of the company itself and other responsible parties, such as auditors and underwriters.
Limitations of liability
A director’s liabilities to the company can be discharged or limited under certain conditions.
A full discharge of liabilities requires:
- a unanimous approval of all shareholders (which is practically impossible for a listed company); or
- a court-supervised settlement.
A partial discharge of liabilities exceeding the statutory minimum liability amount (see below) is permissible only if the director acted without gross negligence or willful misconduct, and requires:
- a special resolution of the shareholders (which requires a two-thirds majority); or
- a provision in the Articles of Incorporation that grants the board the authority to do so.
The statutory minimum liability amount is:
- 6x annual remuneration, in the case of Representative Directors or Representative Executive Officers
- 4x annual remuneration, in the case of other executive directors or officers
- 2x annual remuneration, in the case of non-executive directors and corporate auditors
For a non-executive director and corporate auditor, the Companies Act also allows a company to enter into a liability limitation agreement, providing general relief from liabilities. This requires permission under the Articles of Incorporation and relief is only permissible for amounts exceeding the statutory minimum liability amount and only in the absence of gross negligence or willful misconduct. While the Articles can increase the minimum liability amount, they cannot decrease it.
If you are a current or prospective non-executive director or corporate auditor and wish for the company to sign a liability limitation agreement, you should seek legal advice on the specific wording of the agreement.
Indemnification by the company
The Companies Act allows a company to indemnify a director, executive officer, or corporate auditor for certain costs and liabilities incurred in the performance of their duties. In summary, indemnification for reasonable costs and expenses incurred in defending against a claim is allowed. However, indemnification is not permitted for liabilities arising from the director’s willful misconduct or gross negligence, nor for liabilities that would result in a breach of duty to the company.
If you are a current or prospective director, executive officer, or corporate auditor and wish for the company to sign an indemnification agreement, you should seek legal advice on the specific wording of the agreement.
D&O insurance
The Companies Act allows a company to obtain director and officer liability insurance (D&O Insurance). Previously, there was a debate regarding whether a company could pay the insurance premium to cover the liabilities of insured directors arising from breaches of duty. However, a provision was added to the Companies Act in 2019 to clarify that such payments are permissible.