Professor Colin P.A. Jones, Doshisha University Law School
In the legal universe, municipal regulation and corporate governance occupy different solar systems. This may explain why few people orbiting the sun of Japanese corporate governance may have noticed the potential significance of Tokyo’s prefectural Anti-Violent Crime Group ordinance, which was passed on March 18, 2011 and comes into force on October 1.
With this ordinance Tokyo joins all of Japan’s other prefectures in having a similar set of non-statutory local rules intended to hinder the ability of organized crime groups and their affiliates to engage in business, whether legitimate or otherwise. The ordinance deals with a variety of matters relating to organized crime such as preventing young men from getting involved in the mob, making it easier for mobsters to “wash their feet” (leave) and so forth, the details of which will not be discussed here. It also prohibits businesses from knowingly engaging in commercial activity which benefits crime groups, a mandate that is also easy to understand. It is the provisions of Article 18 which may bear some extra attention from a corporate governance perspective.
Article 18 first requires that before executing a contract, all businesses should first be comfortable that the other party is not affiliated with an organized crime group. Fair enough, but businesses are also required to endeavor to include in all of their contract documentation a provision that permits immediate termination if it is subsequently discovered that a contract party is mob-related.
While the intent of the ordinance may be to prevent yakuza groups from openly engaging in day-to-day commercial transactions in their local communities, given Tokyo’s importance as a world business center, its provisions may have a global effect. Unfortunately, it does not appear to have been drafted with any grasp of the potential scope of their significance, even though it applies to every business in Tokyo, corporate or otherwise.
Leaving aside the fact that requiring all businesses in Tokyo to use contracts with a “terminate any time” provision may add an additional layer of complexity to negotiations over big-ticket cross border transactions involving Japanese multi-nationals, the potential corporate governance ramifications of this seemingly benign mandate are not insignificant. Granted, Article 18 is essentially precatory in nature since there are no direct sanctions for non-compliance. Yet even without penalties it raises a number of questions. Do corporate directors now have a duty to ensure that their company use contracts which comply with the ordinance? Does Article 18 compliance come within the ambit of the audit duties of a statutory auditor? Will failure to provide for termination of contracts upon discovery of mob affiliation be considered indicative of inadequate internal controls? Even if the required contracts are used, what are the duties of directors when it comes to exercising the termination rights? The ordinance only provides a very vague definition of “affiliation” to an organized crime group, meaning directors may be called upon to make some very difficult decisions. If a news report contains allegations that a popular entertainer drinks frequently with known mobsters, or is actually the illegitimate child of a Yakuza boss, are directors of a company which uses him in an advertising campaign obligated to terminate his contract? How should directors evaluate the countervailing risk of their company being sued successfully for breach of contract, wrongful termination or abuse of rights? Then again, does failure to terminate the agreement mean the company could be deemed to be knowingly providing benefits to mob affiliates?
The ordinance has other ramifications for corporate governance as well. This is because Article 26 includes rules empowering the prefectural police to enter and inspect any place of business, demand the production of documents and other information and question employees, all apparently without a warrant (comfortingly, the ordinance states that police inquiries of this nature are not to be considered criminal investigations). There are again no penal sanctions for refusing to comply, but under Article 29, the Public Safety Commission may publish the details of non-cooperative businesses. This is a result which not only entails obvious reputational risks, but could lead cautious business partners to conclude that a company subject to this treatment is a mob affiliate, resulting in a chain reaction of unilateral contract terminations. Corporate directors may thus be called upon to make (or ratify) some very difficult decisions on very short notice when confronted by a police demand to provide sensitive information about customers or other aspects of their company’s business.
The Japanese version of the ordinance and other relevant information are available at the Metropolitan Police website: http://www.keishicho.metro.tokyo.jp/sotai/haijo_seitei.htm.