Company Law Proposal: Constraining Self-Interest

The Legal System Advisory Council has been discussing amendment of the Company Law for almost a year now but there have been precious few significant, concrete proposals put forth by the private sector. So, I have recently made one.

Proposal in a Nutshell:  With respect to statutorily defined board decisions with respect to which managers have an inherent conflict or self-interest, all public companies will have a choice:

1) “Appoint (in advance)three independent directors that meet a detailed definition of independence“ subject to “comply or explain” disclosure on an ongoing basis, and use them to compose a special board“ [per a newly drafted Article 373 (2)] that is solely comprised by those directors. In this case, the business judgment rule will operate in the usual fashion: the plaintiff bears the full burden of proof, with the likely result that only rarely is anyone held liable;”


2) “Don‘t appoint any independent directors if you don’t want to, and/or you are extremely confident about your decision-making. In this case, with respect to pre-defined types of board decisions, IF there is damage ostensibly caused by such a board decision and a director who voted for it is sued in a shareholder derivative action, there will be a rebuttable presumption that the director has breached his or her duty of due care. That director can rebut the presumption with a showing of facts and an explanation. (At the same time, note that the plaintiff shareholder will still bear the burden of proving damages and causation. )

The pre-defined types of board decisions would be:

1. Nominations and terminations of board members (including statutory auditors)

2. Determination of the compensation of board members

3. Resolutions that could have an impact on “control” of the company, such as the adoption or triggering of takeover defenses, MBOs and certain M&A transactions.

Because Japan essentially imported the Delaware model for boards whenMETI and the MOJ formallypermitted takeover defenses in 2005, thisproposal is to intended to adopt the key elements of the infrastructure for that CG model which still remain missing: incentives to use independent outside directors so as to ensure that managerial self-interest will be dependably constrained. For background, readers may wish to read Professor Ronald Gilson's prescient 2004 paper, The Poison Pill in Japan: The Missing Infrastructure, available at:

The English Powerpoint presentation outliningmy proposal and is logic is available here:

The full proposal (20+ pages) in Japanese is available here:   (本文)   (日本語のプレゼン資料)

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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