How to stop illegal actions by directors
Supervision by the Board of Directors
The board of directors is supposed to supervise the execution of duties by directors (Article 362, Paragraph 2, Item 2 of the Companies Act). Therefore, if a director is about to commit an act in violation of a law or the Articles of Incorporation, the board of directors is required to instruct the director not to commit the illegal act. In addition, since corporate auditors are supposed to audit the execution of duties by directors (Article 381, Paragraph 1 of the Companies Act), if a director is about to commit an act that violates laws or regulations, they are obliged to report such an act to the board of directors or the general meeting of shareholders to prevent illegal acts from being committed.
Request for Injunction against Illegal Acts by Corporate Auditors
If a director is about to commit an act in violation of laws, regulations, or the Articles of Incorporation, a statutory auditor may file a lawsuit with a court and demand that the illegal act be enjoined, or in an emergency, may seek a provisional injunction against the illegal act (Article 385 of the Companies Act).
In a public company without restrictions on the transfer of shares, a shareholder who has held shares continuously for six months may demand that a director stop the illegal act if the director is about to commit an act in violation of a law or the articles of incorporation and there is a risk that the company will suffer significant damage (Article 360, Paragraph 1 of the Companies Act). In the case of a privately held company with restrictions on the transfer of shares, there is no requirement to “continue for 6 months prior to the date of the request,” so the request can be made at any time as long as the shareholder remains a shareholder.
A shareholder may file a motion for a provisional injunction with the court if it is necessary to avoid significant damage or imminent danger (Article 23, Paragraph 2 of the Civil Preservation Law).
Claim for Damages by Statutory Auditors
When a company with corporate auditors brings an action against directors, the corporate auditors are considered to represent the company (Article 386, Paragraph 1 of the Companies Act). Therefore, if the company suffers damages due to the illegal acts of the directors, the statutory auditor will file a suit against the directors on behalf of the company (Article 423 of the Companies Act).
