Kigyō Ketsugou Housei no Shōraizou (企業結合法制の将来像), The Future of Corporate Groups Law
Chuokeizaisha, Tokyo, 2008, 312 pages, ISBN978-4-502-96390-2
Review by Manabu Matsunaka
The corporate group law debate has been one of the central, but as yet unsolved, issues in Japanese corporate law. Professor Takahashi has been researching the theme for over 10 years and in this new book he presents concrete and comprehensive proposals for improving Japanese corporate group law. This Japanese language work examines German law on corporate groups including how the German laws have developed, the problem encountered with these types of law and Berlin’s efforts to solve those problems. Based on his examination and the analysis of German law, the author proposes introducing new institutions and rules into Japanese corporate law. In reviewing this timely study, I will first summarize the main part of professor Takahashi’s arguments, namely his reform proposals for Japanese corporate group law (or indeed the framework for establishing them), then discuss the significance of this book and finally highlight some outstanding problems that remain to be solved. In doing so, I will chiefly discuss the topics of public corporations.
The main thrust of his proposals is that although we most certainly need compensation rules for the harm caused by a controlling corporation on a controlled corporation as well as improved means of information dissemination, just solving these issues would currently not be sufficient due to the additional problem of enforcement which is presently far too weak and ineffectual. Therefore, in addition to his envisaged reforms, the author proposes the introduction of regulations on the governance structure of controlled corporations.
One of the proposed reforms on the governance structure of controlled corporations is that at least one of the directors should be on the auditing committee of the controlled corporation and that he/she should never have been an officer, a managing director or an employee of the controlling corporation. Another recommendation is mandating that at least one auditor (kansayaku) should be elected by purely minority shareholders of some type from the controlled corporation.
Although this mandatory minority representation on the auditing board is not required for all types of controlled corporation, the author proposes giving incentives to elect an auditor from minority shareholders by providing that if the minority-representing auditor approves, transactions conducted between the controlled corporation and the controlling corporation will be presumed to be conducted on fair terms and therefore shareholders who challenge the transaction must bear the burden of proof.
Another strand of the author’s proposal is to guarantee the minority shareholders of controlled corporations a so called “exit right”. When a controlling corporation has extreme influence on the management and governance of the controlled corporation or the controlling corporation continuously harms the interests of the controlled corporation so that the systems for protecting minority shareholders cannot function, minority shareholders will have the right to demand that the controlling corporation buy their shares in the controlled corporation.
This type of protection for minority shareholders in controlled corporations would be important especially in those closed corporations where presently minority shareholders cannot exit by selling their shares. Currently, controlling shareholders of a closed corporation can derive profits by excluding the minority shareholders using means other than dividends such as compensation for directors. Of course, it can be significant for listed corporations because minority discounts may impede them from selling their shares.
The book explains that recently designing corporate group law has been perceived not only as important but also as an increasingly urgent issue for Japanese corporate law. The Diet has also recognized the necessity of legislating for a comprehensive corporate group law. Therefore, the concrete proposals in this volume are especially timely and have both a practical as well as theoretical importance.
As previously mentioned, the book’s arguments are built on a detailed study of German law and its application. The author derives implications from these but he does not forget to point out the various problems German law has encountered and is currently confronting. Thus, the author does not simply call for the wholesale importing of German law but recognizes its limitations and inherent shortcomings.
From this perspective, it is worth mentioning that the author pays particular attention to the problem of enforcement of the regulation examining such issues as who will blow the whistle on the parent corporation’s actions and how? Another challenge is providing the liabilities of controlling corporations to controlled corporations (or its minority shareholders) that will confront the rational apathy when the necessary actions are left to the dispersed minority shareholders of controlled corporations. The author’s solution to this is to introduce regulations on governance structures, which are outlined above. In doing so, he connects the regulations on the governance structures (i.e. auditor(s) that is (are) elected by minority shareholders) with the liabilities of a controlling corporation by using the shift in the burden of proof.
This idea is also interesting from a different perspective because it aims for the voluntary introduction of minority representations and it does not necessarily rely upon mandating the election of minority representation. Since there is a no one-size fits all governance structure, mandatory minority representation may place extreme costs on some types of corporations even though there is little danger for exploiting minority shareholders. Japanese corporate law has not adopted mandating one particular governance structure to any type of corporations, but rather, in the 2005 revision it made it more flexible: i.e. the Company Law only provides minimum restrictions on governance structures of large and/or public corporations. So, the author’s argument runs in the same direction, namely that we should be cautious when restricting the options that are available to corporations.
On the other hand, there are some problems to be solved and further questions to be answered. Firstly, apart from the cost of mandating the minority representation, how does the auditor function? The minority elected auditor(s) will arguably suffer information disadvantages. If the law gave strong powers to investigate or collect information to the auditor, wouldn’t it lead to a misuse of information? Imposing a duty of loyalty on minority auditors may be a solution to this problem, but it can also make it easier for controlling shareholders to attack minority auditors.
Furthermore, why haven’t we drafted a comprehensive law regulating the extraction of private benefits by controlling shareholders if the exploitation issue is really a serious problem? Reputation may or may not be sufficient as mentioned it this book, but aren’t there any other mechanisms that can suppress or mitigate the extraction of private benefit? One of the possible answers is that minority shareholders of controlled corporations hold the shares of controlling corporations at the same time and hence the loss in the value of shares in the former may be offset by the gain in the latter. If this could be attained through managing one’s portfolio, then would we need regulations on the actions of controlling shareholders? Of course, we may need one if we think of shareholders who do not or cannot manage their portfolio in this manner or when the cost of doing so is so high as to justify the regulation. And it should be noted that this offset position or mitigation of loss may not justify the lack of regulations on controlling shareholders, certainly not if we consider the fact that many developed countries have some kind or variant of this law. In any case, we must take the type(s) of shareholders into consideration when we discuss this theme.
The types of shareholders are also in some respects linked with the extent of enforcement. Naturally, the incentive offered to lawyers is one of the main factors here. However, the type of shareholder may be another crucial factor in the equation. Compare an individual shareholder who only possesses a very small fraction of the shares of a controlled corporation with that of an institutional shareholder like a fund which may hold several percent or more of the shares. The individual shareholder arguably has no incentive to take action against the controlling corporation. But the institutional investor may have that incentive because it may not be realistic to exit from the corporation without taking considerable time or suffering great loss. If institutional holders increase, the problem of the enforcement of duty for controlling shareholder(s) can be mitigated and therefore placing duties (and liabilities if they breach their duties) on controlling shareholders may become effective.
One final point should be noted. The author examines both German corporate group laws for stock corporations (AG) and limited liability corporations (GmBH). The former is provided in the Aktiengesetz (stock corporation law), which is the statute for the AG (stock corporation) law, while the latter is formed by case law. This fact clearly illustrates that the way of establishing corporate group law is not singular. It also raises the vitally important issue of who writes the rules? The differing routes are not the same in substance or content, further complicating matters. From the perspective of public choice, legislators and courts will have different incentives and approaches in setting the rules. Also, members of the Diet and bureaucrats have different authority and incentives. This brings us back to the tricky question of who should draft the rules? If the legislators (including both bureaucrats and the Diet) do not draft the rules, then naturally the courts would be the default option. However, should we just leave it up to the courts to furnish us with these rules and regulations? This may well be the dilemma we will find ourselves facing next.
Manabu Matsunaka is an Assistant Professor of Law at Osaka University Graduate School of Law & Politics. This review was produced in collaboration with the Journal of Interdisciplinary Economics.