Amendments to the Companies Act in the first year of Reiwa

Kenji Kuroda

Partner, Kuroda Law Offices

The Companies Act was amended in the first year of Reiwa (2019), stipulating the (1) granting of incentives for directors, (2) utilization of outside directors, (3) systems for providing the materials of joint-stock companies electronically, and (4) responses to abusive shareholder proposals.

This amendment will come into effect on March 1, 2021, excluding the electronic provision system for materials for general shareholders meetings. The outline of the revised law is as follows, but here we will briefly explain the regulations for directors who are required to make the necessary resolutions at the board of directors by the date of enactment.

  1. Outline of the Companies Act amended in 2019

Revisions to regulations on directors

  • Granting appropriate incentives to directors
  • Regulations on compensation for directors
  • Regulations on indemnity agreements and liability insurance agreements for officers (D&O insurance agreements)

Utilization of outside directors

  • Outsourcing execution of business to outside directors
  • Obligation to have an outside director

Revisions to regulations on general shareholders meetings

  • Electronic provision system for materials for general shareholders meetings (scheduled to come into effect in 2022)
  • Restrictions on shareholder proposal rights
  • Reasons for refusal to view voting forms
  • Expansion of items described in business reports and reference documents
  • Regulations on compensation for directors

Since it is thought that director compensation has the important function of granting incentives to directors, “a mechanism to make the nature of director compensation appropriate” was provided for director compensation, and it was made to improve the transparency of procedures for determining the nature of director compensation.

Companies with a board of auditors (large public companies and companies that submit annual securities reports) or companies with an auditing committee must establish a policy at the board of directors to decide the compensation of individual directors (excluding auditing committee members) stipulated in the regulations to be enacted (Article 361.7 of the revised Companies Act).

The matters to be defined as the “policy for determining compensation” are as follows (Article 98 (v) of the revised Ordinance for Enforcement of the Companies Act).

  • Policies regarding the determination of the following items among compensation per individual
    • Content/amount of performance indicators or calculation methods for performance-linked compensation
    • Content/amount (number) or calculation methods for non-monetary compensation (share-based payments/stock options)
    • Amount or calculation methods for other compensation (compensation other than (a) and (b))
    • Policies regarding determination of ratio (composition ratio) for (a), (b) and (c)
  • Policies regarding determination of timing and conditions for granting compensation
  • Method of determination when delegating decisions about the content of the compensation to a director or other third-party
  • Other important matters regarding determining the content of individual compensation
  • Regulations on indemnity agreements

Company compensation means that the company bears part of the costs and losses to officers incurred in connection with the execution of their duties in advance or after the fact. Prior to its amendment, the Companies Act did not provide for company compensation, but regulations on indemnity agreements were provided so that companies could appropriately manage company compensation by clarifying the scope and procedures for compensating officers for expenses.

When introducing a system for indemnity agreements, it is necessary to consider the contents of the contract and add them as agenda items in the rules of the Board of Directors.

In addition, if the company concludes an indemnity agreement with an officer, an outline of the content of the indemnity agreement shall be described in the reference documents for the general shareholders meetings for the proposals for electing officers, and (1) the name of the officer, and (2) an outline of the content of the indemnity agreement shall be disclosed in the business report.

  • Regulations on liability insurance agreements for officers (D&O insurance agreements)

Since there were no provisions for D&O insurance agreements in the Companies Act despite the fact that D&O insurance was already widespread, the necessary regulations were provided so that companies could appropriately manage D&O insurance agreements by clarifying the procedures for concluding them.

When enrolling in a D&O insurance agreement, it is necessary to consider the contents of the D&O insurance agreement and add them as agenda items in the rules of the Board of Directors.

In addition, if the company enrolls in a D&O insurance agreement, an outline of the content of the D&O insurance agreement shall be described in the reference documents for the general shareholders meetings for the proposals for electing officers, and (1) the name of the officer, and (2) an outline of the content of the D&O insurance agreement  shall be disclosed in the business report.