Outline of the case
The founder of X company, the previous generation, passed away, and three family members (group), the eldest son A, the second son B, and the third son C, each inherited one-third of the company’s shares. However, X company had been managed by the eldest son A as the representative director since the death of the predecessor, but until now, the company had never held a general shareholders’ meeting, and the eldest son had made all decisions regarding the company, including the election of directors and officers, at his own discretion. In response, B filed a suit against the company, claiming that no shareholders’ meeting had ever been held at X company and that A should return all the remuneration he had received to the company since he no longer held the position of director.
Dispute over control
This case is typical of control disputes in family-owned companies: A, B, and C all want to keep management rights in their own families, so disputes among family members become very serious.
Absence of Shareholders’ Meeting
A company must hold a shareholders’ meeting within three months of its fiscal year-end to elect directors in accordance with the provisions of its articles of incorporation. However, many small- and medium-sized companies, even though they have never actually held a shareholders’ meeting, prepare only the minutes of the shareholders’ meeting and submit them to the Legal Affairs Bureau because they are required for the registration of the election of directors. A company that is requested to confirm the absence of a shareholders’ meeting may argue that (i) the existence of a shareholders’ meeting should be presumed because of the minutes of the meeting, (ii) all shareholders had approved the resolution because it was the company’s practice to do so, and (iii) since the representative director was delegated by each shareholder to make a resolution for approval, the meeting was valid as a general meeting attended by all shareholders, etc. However, in most cases, these arguments by the company will not be accepted in court, since the shareholders’ meeting was not actually held. Arguments such as that notice of a shareholders’ meeting was not given but should have been discussed when everyone was assembled are also inadmissible. In cases such as the above, it is likely that the absence of a shareholders’ meeting will often be found by the court.
4 Claim for confirmation of absence of director’s position
When there is no resolution at a shareholders’ meeting to elect directors, shareholders often file a lawsuit seeking confirmation of the absence of a resolution at the shareholders’ meeting, but sometimes the lawsuit is filed more directly in the form of “seeking confirmation that director XX is not in the position of director. The reason for this is to cancel the registration of the appointment of the director after obtaining the court’s judgment. If the resolution of the shareholders’ meeting that elected the director does not exist, the director does not hold the position of director. In this case, the issue is ultimately whether a resolution of the shareholders’ meeting existed.
Issues in the Absence of a Resolution for the Election of Directors
If it is determined that there is no resolution for the election of directors, the registration regarding the director is also invalid and will be cancelled. In addition, the remuneration paid to the director will be considered unjust enrichment and must be returned to the company. In addition, a resolution of a board of directors meeting attended by the director may also be invalid as a resolution attended by a person other than the director. Also, a quorum for a meeting of the Board of Directors may be lacking.
Rights and Duties of Directors
The term of office of directors is set forth in the company’s articles of incorporation. In most cases, the term of office for directors is one or two years. If the articles of incorporation do not specify the term of office of directors, the term of office of directors is two years, except for companies with an audit committee, etc. (Article 332, Paragraph 1 of the Companies Act). In a stock company, the election of directors must be held at a general meeting of shareholders each time the term of office of directors expires. The same director can be reappointed, but even in that case, a resolution of the shareholders’ meeting is required, and in the absence of a resolution of the shareholders’ meeting, the director is not reappointed. Therefore, if the term of office of a director has expired but a general shareholders’ meeting to elect a director has not been held, the company will be in a state of director vacancy (no director). As a measure to deal with a vacancy in the position of director, the Companies Act provides that a director who has resigned due to expiration of his/her term of office or resignation still has the rights and obligations as a director until a newly appointed director assumes office (Article 346, Paragraph 1 of the Companies Act). A director in this position is referred to as a director with rights and duties. Therefore, if the most recent election of directors is invalidated, resulting in a lack of the number of directors stipulated in the articles of incorporation, the directors appointed by the previous election resolution (which may be the same as the most recently elected director) become directors with rights and duties. If that earlier appointment resolution is also invalid, the director appointed by a further earlier appointment resolution becomes a director with rights and obligations.
Petition for appointment of temporary directors
If the resolution of the shareholders’ meeting for the election of directors is revoked and the directors with rights and obligations can hold a new shareholders’ meeting to elect directors, the directors will be elected through that procedure. On the other hand, if there is a lack of directors and a general shareholders’ meeting cannot be held, a petition for the appointment of temporary officers (provisional directors) will be filed with the court, and the court will appoint temporary officers (Article 346, Paragraph 2 of the Companies Act). Similarly, in the absence of a representative director, a petition may be filed for the appointment of a temporary representative director (Article 351, Paragraph 2 of the Companies Act). As a general rule, temporary directors are appointed by a court-appointed attorney or other neutral party, which means that a person unknown to the company will become a director. In addition, when filing a petition for the appointment of a temporary officer, the company is ordered to pay a prepayment to secure the temporary officer’s remuneration. Therefore, it is likely that the company will try to avoid appointing temporary directors and will try to appoint directors at the shareholders’ meeting as much as possible.
Petition for the appointment of an acting director
If a director of a company tries to commit an illegal act, the company can file a motion to suspend the director from performing his/her duties or to appoint an acting director (Article 56 of the Civil Provisional Remedies Law). When contesting the validity of the resolution to appoint directors by filing an action for revocation of the resolution of the shareholders meeting, it is likely that the company is dissatisfied with the directors who are currently listed in the company registry, so it is possible that the company will attempt to resolve the situation by delegating management to an acting person (attorney) appointed by the court through a petition for appointment of an acting person for the duties of the company directors.
Appointment by the shareholders’ meeting
Even if the resolution to appoint directors is declared invalid by the confirmation of the absence of a resolution of the shareholders’ meeting, the company must ultimately determine who will manage the company as directors. Therefore, the company will have no choice but to hold a shareholders’ meeting and pass a resolution for the election of directors. If the current directors do not call a shareholders’ meeting, a petition for permission to call a shareholders’ meeting will be filed by the shareholders.