Dismissal and removal of representative directors

What is dismissal of a representative director?

Dismissal of a representative director means to cause the representative director to lose his/her right of representation and to become a lay director (a mere director without external representation). Therefore, a representative director loses the right to represent the company through the dismissal procedure, but does not lose his/her position as a director.

Difference from dismissal

Dismissal refers to a procedure whereby a representative director loses not only his/her right of representation but also his/her position as a director. A company may, by resolution of a general meeting of shareholders, have a Representative Director who has not yet completed his/her term of office forfeit his/her rights of representation and his/her position as a director, regardless of the will of the directors. Please refer to the following column for details on the dismissal procedure.
Reference article： Procedures for Removing a Director

Cases in which a representative director may be dismissed

A representative director may be removed from office at any time for any reason. The contractual relationship between the representative director and the company is stipulated to be subject to the provisions regarding delegation (Article 330 of the Companies Act), and the delegation contract may be terminated by each party at any time (Article 651 of the Civil Code).

Procedures for Terminating a Representative Director

In the case of a company with a board of directors

In a company with a board of directors, the following procedures (1) and (2) must be taken.

(1) Resolution for dismissal of Representative Director at a meeting of the Board of Directors

In the case of a company with a board of directors, a representative director may be removed from office by a resolution of the board of directors (Article 362, Paragraph 2, Item 3 of the Companies Act). Unless otherwise stipulated in the Articles of Incorporation, a resolution of the Board of Directors may be adopted by a majority vote of the directors present at a meeting where a majority of the directors who are eligible to participate in the voting are present (Article 369, Paragraph 1). After a resolution is passed at a meeting of the Board of Directors, minutes of the meeting must be prepared (Article 369, Paragraph 3 of the Companies Act).

The representative director to be removed from office is considered to have a “special interest” (Article 369, Paragraph 2 of the Companies Act) in the resolution to remove him or her from office, and therefore cannot participate in the voting (Article 369, Paragraph 2 of the Companies Act, March 28, 1969). The representative director cannot chair the meeting, nor can he attend the meeting and express his opinion, so he must leave the meeting when requested to do so by other directors. Therefore, the resolution for dismissal must be passed by a director other than the representative director to be dismissed.

The following is a summary of the number of directors required to pass a resolution for dismissal, assuming that there is only one representative director subject to dismissal.

	Total number of directors including the representative director subject to dismissal	Number of directors who may participate in the resolution	Number of directors required for the resolution (A majority is required)
A	3 persons	2 persons	2 persons
B	4 person	3 persons	2 persons
C	5 persons	4 persons	3 persons
D	6 persons	5 persons	3 persons

A majority of the votes of the directors eligible to participate in the voting is required for the resolution to dismiss a representative director. If the number of directors excluding the representative director to be removed from office is an even number (in the case of A and C above), the number of votes in favor and against the removal may be equal. In this case, the number of votes in favor does not exceed half of the total number of votes in favor, and thus the requirements for the resolution are not met. Therefore, in the case of A above, one half of the votes in favor is not sufficient, and the affirmative votes of both members are required.

(2) Resolution to select a new representative director at the board of directors meeting

In the case of a company with a board of directors, one representative director must be selected from among the directors (Article 362, Paragraph 3 of the Companies Act). Therefore, if the representative director to be removed from office is the sole representative director of the company, a resolution to select a new representative director must be adopted in addition to the procedures for removal. Unless otherwise stipulated in the Articles of Incorporation, the resolution for selection may be adopted by a majority of the votes of the directors present at the meeting where a majority of the directors who are entitled to participate in the voting are present. In addition, minutes of the board of directors’ meeting must be prepared for the selection resolution (Article 369, Paragraph 3 of the Companies Act).

In the case of a resolution to select a director, the representative director who has been removed from office and the representative director to be newly selected do not have any “special interest” in the resolution to select the director, and may participate in the voting.

In the case of a company without a board of directors

In the case of a company without a board of directors, the procedure for dismissal or removal of a representative director is the same as the procedure for selection of a representative director (Article 349, Paragraph 3 of the Companies Act). Please note that, depending on the selection method, it may not be possible to dismiss only from a post of representative director (i.e., resign only his/her position as a representative director), but it is necessary to dismiss a representative director from the post of director (i.e., resign his/her position as a director as well).

Cases where the Articles of Incorporation stipulate the election of directors by mutual vote and the Representative Director is selected by mutual vote of the directors

In such a case, the procedure for dismissal of a representative director may be implemented by mutual election of directors (unanimous opinion of a majority of the directors).

When the Articles of Incorporation stipulate the names of Representative Directors

In this case, since the position of representative director and the position of director are integrated, it is not possible to terminate only the position of representative director, but it is necessary to conduct dismissal procedures (procedures to terminate the position of director as well).

Specifically, a special resolution to amend the articles of incorporation must be passed at a general meeting of shareholders. If the shareholders holding a majority of voting rights are present at the shareholders’ meeting, and if two-thirds or more of the voting rights of the shareholders present are in favor of the resolution, the representative director can be dismissed (Article 466 and Article 309, Paragraph 2, Item 11 of the Companies Act). After the shareholders’ meeting, minutes of the meeting must be prepared (Article 318, Paragraph 1).

When a representative director is selected by resolution of the general meeting of shareholders

In this case, it is not possible to resign only the position of representative director, and the dismissal procedure must be followed. Specifically, a representative director can be dismissed at a general shareholders’ meeting if shareholders holding a majority of voting rights are present (Article 341 of the Companies Act) and a majority of the voting rights of the shareholders present are in favor of the dismissal (Article 309, Paragraph 1 of the Companies Act). After the shareholders’ meeting, minutes of the meeting must be prepared (Article 318, Paragraph 1).

Risks associated with the dismissal of representative directors

Majority Maneuvering by Representative Director

A representative director who is about to be removed from office is expected to urge other directors not to vote for the resolution for his/her removal. Therefore, it is necessary for the company to secure the approval of a majority of the directors while being careful not to let the representative director to be dismissed know that the company is about to implement the dismissal procedure.

One concrete measure would be to not include the agenda for the dismissal in the notice of the board of directors meeting, but to pass a resolution for the dismissal as an emergency motion on the day of the board of directors meeting. Unlike a general shareholders’ meeting, it is not necessary to include an agenda item in the notice of a meeting of the Board of Directors. In addition, if an agenda is stated, resolutions other than those on the agenda may also be adopted (Nagoya High Court decision, January 19, 2000).

Dismissal of New Representative Director by Majority Shareholders

It is possible that the removed representative director will approach the shareholders holding a majority of voting rights and attempt to retaliate against the director who conducted the removal proceedings. Specifically, after the dismissal, an extraordinary general meeting of shareholders may be convened to pass a resolution for the dismissal of the director who initiated the dismissal proceedings and a resolution for the appointment of a director who will act in accordance with the director’s own wishes.

If such retaliatory measures are taken, the procedure for dismissal of the representative director will be meaningless. Therefore, it is necessary for the director who conducts the dismissal procedure to take countermeasures to prevent such retaliatory measures from being taken after the dismissal procedure. Specifically, the following countermeasures can be considered.

Countermeasure 1: Securing a proxy regarding the exercise of voting rights (proxy fight)

As a representative director who has been dismissed, it is expected that the company will encourage shareholders to vote in favor of the resolution to dismiss the director who has been subject to the dismissal procedure and collect proxies regarding the exercise of voting rights for a majority of the votes. If the company anticipates that the representative director will attempt such a majority maneuver, a possible countermeasure is to collect proxies for a majority of the voting rights before the representative director does.

Countermeasure 2: Use of Veto Shares (Golden Shares)

Shares with veto rights (golden shares) are shares that require, among the matters to be resolved at a general shareholders meeting, a resolution of a class shareholders meeting whose members are shareholders holding such class shares in addition to such resolution (Article 108, Paragraph 1, Item 8 of the Companies Act). In other words, resolutions on specific matters determined by the company require the approval of shareholders holding shares with veto rights in addition to the ordinary general meeting of shareholders. The company is free to determine the matters to be resolved that require the approval of shareholders holding shares with veto rights. Therefore, the company may decide that only one of the shares held by the new representative director will be vetoed with respect to the election and dismissal of directors, thereby counteracting any retaliatory measures taken by the former representative director.

With regard to shares with veto rights, if the holder of such shares loses the ability to make normal decisions, there is a risk that the veto rights may be exercised in a manner that interferes with the operation of the company. In order to avoid such a situation, it is necessary to stipulate in the class shares that the company may acquire such shares if certain events occur (Article 108, Paragraph 1, Item 6 of the Companies Act).

In order to issue new class shares, a special resolution to amend the articles of incorporation must be passed at a general meeting of shareholders. Specifically, the resolution must be approved by two-thirds or more of the voting rights of the shareholders present at the shareholders’ meeting where shareholders holding a majority of the voting rights are present. In addition, after the resolution of the shareholders’ meeting, the amendment to the articles of incorporation must be registered.

Countermeasure 3: Restriction of voting rights through cross shareholdings

Let us assume that the company considering the removal of the representative director is Company A and the company holding shares in Company A is Company B. If there is a possibility that Company B will support the retaliatory action against the representative director to be removed, Company A may consider it as a countermeasure to prevent Company B from exercising voting rights at the general shareholders meeting of Company A by holding 25% or more of shares in Company B (Article 308, Paragraph 1 of the Companies Act). In such a case, the number of voting rights held by Company B would be counted as 0 when calculating the percentage of voting rights in Company A.

Disputes regarding the validity of resolutions for dismissal

It is possible that a representative director who has been dismissed from his/her position will not acknowledge that he/she has been dismissed and will dispute the validity of the procedures for dismissal and the selection of a new representative director. Specifically, they may file a lawsuit demanding confirmation of the non-existence of the resolution of the board of directors on the grounds that the company failed to give notice of convocation to the representative director to be dismissed and that the dismissed representative director was not included in the selection resolution.

A judicial precedent (the Supreme Court, December 2, 1969) held that, in principle, a resolution of the board of directors’ meeting should be considered invalid if there was an omission of notice of convocation to some directors, and then held that the resolution would be valid if there were special circumstances in which the attendance of those directors was deemed not to have any effect on the resolution. In a court decision (Tokyo District Court, January 7, 2011), it was also determined that a resolution is valid if the representative director to be dismissed was omitted from the convocation notice, on the grounds that he or she is a special interested party who cannot participate in the resolution to dismiss the director. However, as a general rule, a convocation notice must be sent to the Representative Director subject to dismissal, so care must be taken to ensure that no notice is omitted.

In addition, the resolution to select a new representative director is usually considered to be passed following the resolution to terminate the position. If the former representative director was removed from the meeting during the termination proceedings, the former representative director must be recalled before the selection resolution is passed. Please note that if the selection resolution is passed without the participation of the former representative director, the selection resolution may become invalid.

If the former representative director continues to act as a representative even after the resolution for dismissal has been passed and the registration to that effect has been completed, a request for an injunction against illegal acts (Article 360, Paragraph 1 of the Companies Act and Article 385, Paragraph 1 of the same Act) may be made to stop such acts. In addition, if the company has suffered damages as a result of the former representative director’s actions, the company can also demand compensation for damages from the former representative director (Article 423, Paragraph 1 of the Companies Act). To learn more about injunctions and claims for damages for illegal acts against directors, please refer to the following column.
Reference article： How to stop illegal actions by directors

Registration Procedures after Dismissal

When a representative director is dismissed or removed from office, an application for registration of change of officers must be filed within two weeks from the effective date of the dismissal or removal (Article 911, Paragraph 3, Item 14 of the Companies Act; Article 915, Paragraph 1 of the same Act). The following describes the registration application documents required when a representative director is removed from office and a new representative director is selected in each case.

 In the case of a company with a board of directors

The following documents are required for registration: (1) minutes of the board of directors meeting, (2) letter of acceptance of office, and (3) certificate of seal impression of the new representative director.

In the case of a company without a board of directors

When a representative director is removed from office by mutual vote of the directors

The following documents are required to apply for registration: (1) a letter of mutual election of directors (decision), (2) articles of incorporation, (3) a letter of acceptance of office by the new representative director, and (4) a certificate of seal registration of the new representative director (when a person who was not originally a director becomes a representative director).

When the Articles of Incorporation stipulate the name of the representative director

The following documents are required for registration: (1) minutes of the shareholders’ meeting, (2) list of shareholders, (3) letter of acceptance of office by the new representative director, and (4) certificate of seal registration of the new representative director (when a person who was not originally a director becomes a representative director).

Dismissal of representative director by resolution of general shareholders meeting

The following documents are required to apply for registration: (1) minutes of the shareholders’ meeting, (2) list of shareholders, (3) letter of acceptance of office by the new representative director, and (4) certificate of seal registration of the new representative director (when a person who was not originally a director becomes a representative director).

When a terminated representative director does not return the representative director’s seal

After the termination procedure, the terminated representative director may keep the company’s representative seal without handing it over to the company. In such a case, the company will not be able to use the representative seal, and action must be taken.

The specific measures to be taken would be to create a new representative seal, prepare a seal registration form and a certificate of personal seal impression of the new representative director, and submit the form to the Legal Affairs Bureau with jurisdiction over the location of the company’s head office. Since the former representative director has been removed from office, the former representative seal will lose its effect as a representative seal by the above notification, even without submitting a notification of discontinuance of the former representative seal.

Services our firm can provide

Our firm can provide consultation at the pre-termination stage, support for termination procedures, and support for post-termination procedures.

In the pre-termination consultation, we will discuss the background leading up to the termination, the composition of the company’s shareholders, etc., and consider the risk of retaliation from majority shareholders and countermeasures against such risk if the termination is carried out.

In the termination procedure, we provide support for the overall procedure, including support for the procedures for convening a meeting of the Board of Directors, support for the operation of the Board of Directors, preparation of the minutes of the Board of Directors meetings, and preparation of a letter of mutual election of directors.

In the post-appointment process, we provide support for the registration procedures related to the dismissal and the change of the representative’s seal. When applying for registration, if there are any minor deficiencies in the submitted documents, the application will not be accepted. If you have any problems with registration procedures, please contact us.

If you are considering the dismissal or removal of a representative director, please feel free to call us at +81-3-5357-1750 (office hours: 9:00-18:00 (JST)) or contact us by email at info@kslaw.jp.