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Legal controls of corporate management in Japan : comparisons with common law jurisdictions Oyama, Kuniko 1993

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LEGAL CONTROLS ON CORPORATE MANAGEMENT IN JAPAN:COMPARISONS WITH COMMON LAW JURISDICTIONSBy KUNIKO OYAMALL.B, The Kumamoto UniversityA THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWinTHE FACULTY OF GRADUATE STUDIES(Faculty of Law)We accept this thesis as conformingto the required standard,THE UNIVERSITY OF BRITISH COLUMBIASeptember 1993© Kuniko Oyama, 1993(Signature)LAWIn presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.Department ofThe University of British ColumbiaVancouver, CanadaDate^September 13 1993DE-6 (2/88)11ABSTRACTCorporate management involves various individuals, groups and organizationsinvolved with corporations. Among them, in theory, the shareholders and directorsplay the critical roles in managing the corporations. Shareholders have the ultimatepower in managing a corporation, and directors actually exercise these powers underthe instruction of shareholders. Directors are also conferred with statutory powersto carry on the day-to-day business of their corporations. Between these two mainactors within a corporation, conflicts sometimes arise. Thus, there is a need forcorporate law whose functions include regulating how these powers ought to beexercised by them.This thesis attempts to analyze the legal controls regulating shareholders anddirectors under Japanese corporate law, primarily by focusing on legal rules governingthe general meeting, through which shareholders exercise their powers, and the legalduties of directors. Through the examination of such legal controls on the generalmeeting and directors, it is hoped that the role of corporate law in Japanesecorporate society will be brought to light. To elucidate the Japanese legal systemregulating corporate management, comparison will be made to relevant areas of thelaw in common law jurisdictions, in particular that of Canada.This thesis also tries to shed some light on sociological peculiarities of Japanesesociety which may have influenced the present legal system affecting corporatemanagement in Japan.iiiTABLE OF CONTENTS^Abstract^ iiTable of Contents^ iiiAcknowledgement viINTRODUCTION^ 1Chapter One^Corporations and Corporate Laws in Japan: HistoricalDevelopments^ 61. Prior to the Meiji Restoration (to 1868)^72. The Meiji Restoration to the Enactment of the OldCommercial Code (1868-1890)^ 113. The Enactment of the Old Commercial Code and the NewCommercial Code (1890-1899) 144. Amendments to the New Commercial Code^15^5.^Present Corporations and Corporate Law in Japan^17Chapter Two^Corporate Management in the Japanese ContemporarySociety^ 211. Background: The Japanese Economy^ 212. Corporations v. Corporations 243. Corporations v. Financial Institutions 294. Corporations v. Shareholders^ 335.^Corporations v. Employees 37(1) Lifetime Employment 37(2) Seniority Based Wage Determination System^39(3) Changing Labour Management System in Japan 41Chapter Three Corporate Organs^ 431. Separation of Ownership and Control^ 432. The Present Concept of Corporate Organs under the JapaneseCommercial Code^ 49ivChapter Four^The Historical Transition of SGM and BOD under theCommercial Code^ 541. The 1899 Japanese Commercial Code^ 542. The 1911 Amendment^ 553. The 1938 Amendment 554. The 1950 Amendment 575. The 1955, 1966, 1974 Amendments^ 596. The 1981 Amendment^ 60Chapter Five^Shareholders' General Meeting^ 631. The Power of The Shareholders' General Meeting^632. The Conduct of The Shareholders' General Meeting 682.1^Convening a Shareholders' General Meeting^682.2^Unanimous Shareholders' Resolutions^702.3^One-person Corporations and the Shareholders' GeneralMeeting^ 713.^Present Problems Surrounding Shareholders' General MeetingChapter Six1.2.in JapanDutiesTheDutyof DirectorsStatus of Corporate Directorsof Care and Skill728082852.1 Relationship between Directors and theirCorporations 852.2 Duty of Care and Skill 921) Degree of Care and Skill 942) Attendance at the Board Meetings 1063)^Duty of Observation 1132.3 Business Judgment Rule 1213. Fiduciary Duties 1273.1 Concept of Fiduciary Duties 1273.2 Self-dealing Transactions 1361) Statutory Provisions 1362) Direct and Indirect Transactions 1403) Scope of Self-dealing Transactions 1434) Effect of Self-dealing Transactions 1475) Disclosure, Approval and Fairness 1526) Accountability 161V^3.3^Competition^ 1691) Statutory Provisions^ 1692) Being a Director of More than OneCorporation 1723) Scope of Competition 1844) Disclosure and Approval^1905) Effect of Competing Transactions^1936) Right of Intervention 1933.4^Corporate opportunities 2004.^Conclusion 203Chapter Seven^Conclusion^ 205Bibloigraphy 214viAcknowledgementI wish to show my gratitude to the following persons.My mother, Michi Oyama, and my sisters, Yoko Oyama and Reiko Gunya, withoutwhose support and understanding this work would not have been commenced andcompleted.Professor Stephan M. Salzberg, my primary supervisor, who patiently andconsiderately guided me in the pursuit of my studies. Professor Robert K. Paterson,my secondary supervisor, who always encouraged and inspired me in the pursuit ofmy academic achievement.Mr. Anthony Derrick Baker, my friend, whose comments and proof-reading werepriceless and indispensable.I would also like to thank External Affairs and International Trade Canada for theirfinancial support.There are many others including professors and friends to whom a warm thanks mustbe extended. All of their support and encouragement throughout my LL.M study hasbeen greatly appreciated.1INTRODUCTIONThis thesis will analyze the Japanese corporate management system by lookingat Japanese law, in particular the corporate laws of Japan. One of the primaryobjectives of this thesis will be to analyze how and to what extent the corporate lawsof Japan have controlled or affected the behaviour of corporations and individualsinvolved with corporations in Japan. Some aspects to be looked at in this studyinclude the ways in which the corporate laws have attempted to control the mainactors of the corporations, and actual functioning of the laws and judicial responsesto questions raised before them regarding corporate behaviour.To answer the above questions, certain corporate organs will be looked at.When these areas are looked at in detail they should provide a better understandingto the questions posed. The areas to be looked at include: 1) the shareholders'general meeting (SGM), which is one of the two primary corporate organs andtheoretically ought to have the ultimate power in managing the corporation; 2) theboard of directors (BOD or the board) which is the other primary corporate organthat is conferred with the power to manage the corporation by statute or the SGM;and 3) directors comprising the BOD who, in fact, primarily exercise the powers ofthe corporation on a day to day basis. Among these subjects, this thesis will placeemphasis on the legal rules and the actual functioning of the SGM as well as the legalduties of directors.Through an examination of relevant legislation, cases, and actual practices ofthe above described organs a new dimension in the analysis of the legal controls overthe Japanese corporate management system should be achieved. For a betterunderstanding of Japanese law, comparisons will be drawn to Canadian andsometimes U.S. laws and practices. Through this comparison, similar and differing2attitudes of legislatures, judges, scholars and corporations themselves towardsregulation in these jurisdictions will hopefully be clarified. Finally, based on factualsimilarities and disparities, I shall attempt to search out the factors which have ledto such similarities or disparities in both jurisdictions. These may include cultural,historical, sociological, political or economical factors.In Chapter I, the historical development of corporations and corporate law inJapan is briefly explained. Although Japanese corporations and corporate law haverelatively short histories compared to the common law jurisdictions, it will be ofuseful to explain this historical background so as to better understand the characterof the present Japanese corporation, its management system, and the corporate lawswhich attempt to regulate and control it. Unlike laws in common law jurisdiction,most laws in Japan, including corporate laws, were not originally created by theJapanese themselves. They were in great part adoptions, in whole or in part, of thelaws of the developed nations of the time of their adoption. Furthermore, in thecourse of their transition, Japanese laws have been greatly influenced by the politicaland economic power of its Pacific neighbour - the United States. Therefore, theoccurrence of conflicts between cultural norms may be viewed as a naturalconsequence. These differing norms owe their characters to hundreds of years ofdevelopment in their respective jurisdictions, and in particular, with respect to Japan,to a complete immunity from the influence of foreign laws for centuries. Thishistorical overview of Japanese corporate law will give some clue to theunderstanding of how, why, and from where the uniqueness of Japanese corporatelaw principles have emerged.In Chapter II, how Japanese corporations are being managed in contemporaryJapan will be looked at. Emphasis will be placed on characteristics unique toJapanese corporations in the management of business. The close relationships amongcorporations, the role of financial institutions, and the specifics of the labour3management system, are some of the factors which will be looked at to demonstratethe peculiarities of Japanese corporate culture. Here, I will also examine somepeculiarly Japanese cultural aspects underlying various practices, and some economicand political influences from both inside and outside of Japan which have affectedthese practices. Of particular note-worthiness will be the recent economic situationin Japan, along with the accompanying changes to established practices. Someestimations about future developments will also be attempted.In Chapter III, the role of the two primary corporate organs, the SGM and theBOD, which tend to compete between themselves for controlling power in thecorporation, will be analyzed by focusing on the separation of ownership and control.In Japan, as well as other capitalist countries, the separation of ownership and controlbecame conspicuous after the post-W.W.II period. Hence, directors have gainedmore powers and abuse of these powers have become a more serious concern. Therole of the law in imposing strict duties on directors in the exercise of their powersmay have been derived from the phenomenon of separation of ownership and controlin corporate society.In addition to these two statutory corporate organs, the role of the otherstatutory corporate organ, the auditor, and some customarily recognized groups whichplay a significant role in Japanese corporations, will also be briefly explained in thischapter. The auditor, a statutory required corporate organ, plays a monitoring roleon the BOD. Other individuals or groups are recognized by custom as legitimateactors within the corporation. These groups, with their specific titles and ranks, aregenerally composed of directors. The importance of these groups is that they haveinfluence over other directors. The existence of these groups along with the auditoris one of the main differences in corporate structure between Japanese corporationsand those of Canadian and the American corporations. Although, because of thelimited scope of this thesis no detailed analysis of these organ or groups will be4undertaken, some light will be shed on how these organs or groups have affected thetwo primary corporate organs (the SGM and the BOD) in Japan.In Chapter IV, the history of the SGM and the BOD under Japanesecorporate law will be surveyed to give some background about these two statutorycorporate organs. Through several amendments to Japanese law, the jurisdiction ofthe SGM and the BOD have been greatly altered. These amendments reflected thevarious social, political and economic situations of the time. This background willexplain why these amendments were necessary and why the powers of the SGM andthe BOD are now allocated under corporate law in Japan.In Chapter V, the legal powers of the SGM, the corporate organ which oughtto steer a corporation in its general direction and its actual workings and problems,will be examined. The legal role of the SGM under the Japanese law and itsCanadian counterpart will be the first issue examined. Next, the actual functioningof the legal principles stipulated regarding the SGM in contemporary Japanesecorporate society will be looked at. This chapter will show some startling factorswhich have hindered the realization of shareholder democracy in Japan. Certaingroups of shareholders and directors have abused their role and failed to steer theircorporations in the right direction. The SOkai-ya, who are professional shareholdersthat extort from their corporations in various ways for their own purposes, is a typicalexample of one type of these groups. Although such notorious individuals haveexisted within corporations and interfered with normal corporate management,Japanese corporations have in fact achieved economic success. Questions about thedesirability of their elimination will be discussed.In Chapter VI, some aspects of the legal duties of directors under theJapanese corporate law will be analyzed in detail. Directors' duties of care and skilland fiduciary obligations are the main duties which will be looked at. In this chapter,5some interesting similarities and disparities in the legal principles of these duties asportrayed under the corporate laws of Japan and Canada will be brought to light,along with some judicial attitudes toward these duties.Finally, a conclusion, based on the analysis in the preceding chapters, will bepresented. Whether the Japanese legal system has affected the actual practices ofmanaging a corporation, and what has been and will be the role of the corporate lawsin Japanese business society will be assessed.It is hoped that this thesis will shed light on the mysterious ways of corporatemanagement in Japan and the role of law in the Japanese business society. Anysimilarities and dissimilarities of law and its actual working in Japan and Canada orthe United States are well grounded in the histories of the jurisdictions. A closerexamination of the respective societies and their corresponding cultures would greatlyadd to an understanding of this and many other areas of the law. But this type ofcultural and social analysis is not the main aim of this thesis. Rather, this thesisattempts to analyze the Japanese corporate culture and its underlying social normsby using the inductive method through legal analysis of Japanese corporatemanagement. Hopefully those who look at Japan's economic accomplishments withawe, will gain some enlightenment about this Japanese enigma.6CHAPTER ONECORPORATIONS AND CORPORATE LAWS IN JAPAN:HISTORICAL DEVELOPMENTSThe laws and the corresponding legal system in any jurisdictions is constantlyevolving as the years advance. Through historical developments, these laws havedeveloped into their own present styles. As such, corporate law in Japan has its ownunique course of developments. It is the aim of this thesis to pursue how corporatelaw in Japan has attempted to control and regulate corporations as a whole andgroups having interests in them, particularly shareholders and directors. The firststep to be undertaken in this study is therefore a brief observance of the history ofthis area of Japanese law.The present system of Japanese corporate law, particularly that which isembodied in the Japanese Commercial Code, 1 is a relatively recent phenomenon toJapan. Observing the present corporate system of Japan, especially as laid down bythe Japanese Commercial Code, one may be quick to conclude that it is the same asthat of Western countries, 2 however, this conclusion which may appear quite soundat first glance is quickly shown to be unreliable on closer inspection, especially aninspection which includes a look at the historical background of the Japanese legalsystem and its actual workings. This is the intention of this chapter. The areas to belooked at in this brief historical survey will include the history of Japanese commerceand commercial law to the present, the advent of corporate law in Japan and its** Note: In this thesis, all Japanese terms are written in italics. Titles of Japanese books,journals and articles are followed by brackets, "[ ]", enclosing their English translations.ShOhO [The Commercial Code, Law No.48, March 9, 1899], amended as Law No.64, June 29,1990.2 Norbury, Paul and Bownas, Geoffrey (eds.), Business in Japan (London, The Macmillan PressLtd., 1980), at 155.7development to the present day.1. Prior to the Meiji Restoration (to 1868) 3Japanese law has undergone several stages of historical development. In theeyes of one commentator, Japanese law "early stood under the influence of Chineselaw but had gradually developed a body of indigenous laws and institutions, largelycustomary, prior to her reception of the more developed Occidental rules of law." 4It is therefore not surprising that commercial law has likewise followed a similarhistorical path of transition. Although Japanese corporate law in its modern sensedid not exist until the first enactment of the Commercial Code of Japan in 1890, 5commercial law, including customary law which governed merchants and theircommercial activities, was in existence in Japan prior to that time.Japan emerged from feudalism, which took its most stable form in the Edoperiod," ending its policy of isolation.' Japan's isolation policy, which lasted for overtwo centuries during the Edo Period until the Meiji Restoration, facilitated thedevelopments of a Japanese indigenous legal system which was in most partcustomary, but simultaneously, hindered any foreign influences over the Japaneselegal system. Japanese law took a grand step forward toward modernization with the3 For the history of commerce in Japan prior to the modern system (pre-Meiji era), see Toyoda,Takeshi, A History of Pre-Meiji Commerce in Japan (Tokyo, Kokusai Bunka ShinkOkai, 1969).Takayanagi, Kenzo, "Historical Introduction" in The Commercial Code of Japan, Vold (Tokyo,The Code Translation Committee, 1931), at x.5 Law No.32, 1890. This law is generally referred to as "the Old Commercial Code," and wasabolished in 1899 when the new law was promulgated; infra, see 3.The Enactment of the OldCommercial Code and the New Commercial Code (1890-1899) in this chapter.The Tokugawa Shogunate established "Tokugawa feudalism" during the Edo era (1600-1868); seeNorman, E. Herbert, Japan's Emergence as a Modern State (N.Y., Institute of Pacific Relations, 1940),at 11.In 1640, the Tokugawa Shogunate banned all foreign trades except for trade with the Dutch andthe Chinese which it strictly controlled. Thereafter, Japan kept its doors closed to foreign countriesfor over two centuries; Ibid, at 13.8abolition of the old shogunate 8 social order which was based on feudalism, alongwith the abolition of its isolation policy 9 at the time of the "Meiji Restoration" 1° in1868.Commercial law, like other laws of Japan, grew out of pre-modern"indigenous customary laws in Japan. Among these indigenous customary laws,however, commercial law appears to have been one of the least developed laws ofJapan. This was primarily due to the "Rule-by-Status" 12 concept of the pre-modernera (before the Meiji Restoration). This concept was a basic principle of TokugawaConfucianism (the dominant philosophy influencing Japanese society at the time).According to Tokugawa confucianism, people were clearly distinguished and rankedaccording to their occupational status. Warriors and farmers comprised the dominantelite of the society at the time, while merchants 13 were considered to be theoccupants of the lowest rank. 14 Because of this "Rule-by-Status" system merchantsand their activities had been almost entirely ignored for a long time, 15 and thus notsurprisingly the development of commercial laws remained stagnant.8 Tanaka, Hideo (ed.), The Japanese Legal System (Tokyo, University of Tokyo Press, 1976), at 194.9 The abolition of isolation policy will be discussed shortly; infra note 22 and accompanying text.19 In 1867, the Tokugawa Shogunate, which had controlled Japan both politically and militarilyfor over two hundred years, handed back its powers to the Japanese Emperor. In 1868, the "Meiji"era started. This revolution is called "The Meiji Restoration."; Noda, Yoshiyuki, Introduction toJapanese Law (Angelo Trans, Tokyo, University of Tokyo Press, 1976), at 41 to 42.11 Before the Meiji Restoration in 1868.12 The Four statuses and their ranks from the top were: 1. Shi (warriors); 2. No (farmers); 3.10(artisans); and 4. ShO (merchants); Henderson, Dan Fenno, "Law and Political Modernization inJapan" in Political Development in Modern Japan (New Jersey, Princeton University Press, 1968), at392 to 396.13 "The advent of merchants as a definite social class can be traced back no earlier than theKamakura Period (1185-1333 AD.)"; Takayanagi, supra note 4, at xiii.14 Clark describes "The merchants came last in the scheme of things because they neither governednor produced wealth, but merely traded what other cultivated or made. Their place in society was themeasure of an inferior though necessary role."; Clark, Rodney, The Japanese Company (New Havenand London, Yale University Press, 1979), at 25.15 Takayanagi, supra note 4, at xi.9But the lights were not completely dimmed on this lowly group and merchantsand their commercial activities did develop despite this unfavourable environment inJapan.The family oriented enterprise had been the dominant form of merchantorganization until "corporations" became legally recognized by the law in the late 19thcentury. As merchants' activities blossomed, they became more powerful andinfluential economically as well as politically, and these family enterprises formedgroups to enjoy a monopoly and its privileges.The first trade associations in Japanese history, called "Za," were analogousto the European Guilds of the Middle Ages. They came into existence as early asthe 12th century, and continued to exist throughout the pre-modern era. 16 "Za"consisted of merchants in the same line of business, and were managed by a councilsystem through self-regulations called "Za-1-16 (Rules of Za)".17 A relevant studyshows that in the Tokugawa period (1603-1868), these associations were managed ina manner similar to present day corporations: the members of a "Za" held shares;officers were elected among its members; these officers managed the day to daybusiness of the association; but important matters were decided by a general meetingof the "Za."18 However, since the "Za" were assemblies of merchants, as suchcartel-like organizations, they were not corporation-like organizations in the presentsense of corporation. The "Za" was more like a union of the present day.Another association, called "toiya", which literally means wholesaler, consistedof merchants and carried on multiple businesses. These businesses included dealings16 ^the Tokugawa period, these associations were called "kumi", "kumiai", or "nakama";Takayanagi, supra note 4, at xv.1' Shigematsu, Kazuyoshi, Nihon Haseishi [Japanese Legal History] (Tokyo, Keibund6, 1987), at88 to 90.18 Takayanagi, supra note 4, at xv.10in land and marine transportation, hotel and warehouse businesses. The "toiya"developed since the 12th century throughout the pre-modern period and wasoperated in a monopoly type manner. It is particularly important to note that thetoiya's marine business had greatly contributed to the development of Japanesemaritime laws. 19 Similarly, the advent of financial institutions can be traced backto the 12th century,2° though corporations in a modern sense did not exist beforethe Meiji Restoration, 21 nor did corporate laws exist in the pre-modern period. Thislack of the concept of the corporation or of corporate law in the modern sense waslargely due, not only to the policies based on the feudalism of the pre-modern period,but also to Japan's isolation from all other nations up until the Meiji Restoration.Japan's abolition of its isolation policy was a significant turning point. Itsignalled its stepping into a new and modern era and the emancipation of its people,making fertile the land for the successful cultivation of the beginning of modern andfuture Japanese corporate law. Thus not surprisingly, when the United Statesdemanded that Japan open its doors, 22 Japan suddenly realized that during the19 Maritime laws promulgated in the Edo period appear to be some of the few statutorycommercial laws in Japan. Among them were Kaisen-Shikimoku [Code of 31 Articles relating toNavigation] and Kairo-Sho-Hatto [Regulations Relating to Sea Routs]; Takayanagi, supra note 4, at xxiv.Takayanagi, supra note 4, at xix.21 Tanaka, Seiji, Zentei KaishahO ShOron (JyOkan) [Study in Detail in Company Law, Vold of 2](Tokyo, Keis6 Shob6, 1979), at 7.22 American Commodore Perry with his crews of a worship, the Mississippi, arrived and anchoredat Uraga in Japan on 8th July, 1853 "to induce the Japanese to resume intercourse with the outsideworld" with a letter from the American president, Tyler, to the Japanese Emperor. (Murdoch, James,A history of Japan, Valli The Tokugawa Epoch (London, Kegan Paul, Trench, Trubner & Co., Ltd.,1926), at 573 to 574) Though this negotiation was not quite successful, it has been widely recognizedthat it was the first step in getting Japan to reopen its doors to foreign countries. Perry visited Japanagain the following year and after long negotiation a treaty was successfully drawn and signed by therepresentatives of Japan and the U.S.A. on 31st of March, 1854. The treaty included the following:"I. Peace and friendship between the two countries; II. Shimoda and Hakodate open to Americanships, and necessary provisions to be supplied; III. Relief to shipwrecked people; IV. Americans tobe free as in other countries, but amenable to just laws; V. Americans at Shimoda and Hakodate notto be subject to restrictions; free to go about within definite limits; VI. Careful deliberation intransacting business; VII. Trade in open ports subject to local regulations; VIII. Wood, water, coal,and provisions to be procured through Japanese officers only; IX. Most-favoured Nation clause; X.11period of its isolation it had deteriorated relative to the development of other nations.Japan could have rightly been referred to as the land of the "setting sun" for it hadbecome inferior to western nations in many ways including its technology, military andits economy. Japan also realized that it was impossible to keep its doors closed anylonger, and as soon as Japan opened its doors, the Japanese government facedserious problems due to the flood of new industrial and technological ideas andmaterials which swamped Japan. A new capitalist society was about to begin andJapan had no legal mechanism to deal with it. Thus a new but chaotic eracommenced. This next section will deal with how order was attempted to be derivedout of chaos.2. The Meiji Restoration to the Enactment of the Old Commercial Code (1868-1890)After the collapse of the Tokugawa Shogunate, the ultimate and most urgenttask for the new government was to build Japan up to an equal footing with itswestern counterparts. For example, Japan realized how dangerous and humiliatingit was not to have a sufficient knowledge of western legal systems. This was quiteapparent to the new government and evidenced from the fact that bilateral treatiessuch as the U.S.-Japan Commercial Treaty 23 signed by the Tokugawa Shogunate atthe end of the Tokugawa period, without any western legal study being undertaken,"turned out to be extremely prejudicial to Japan."24 It was also of criticalimportance for the new government to establish a new set of laws as quickly asAmerican ships restricted to Shimoda and Hakodate except when under stress of weather; XI. U.S.consuls or agents permitted to reside at Shimoda; XII. Ratification to be exchanged within eighteenmonths." (Murdoch, ibid, at 605); see Kinoshita, Yataro, The Past and Present of Japanese Commerce(New York, Ph.D paper in the Faculty of Political Science of Columbia University, 1902), at 89 to 99;Murdoch, ibid, at 569 to 662 Chapter XVI. The Reopening of Japan; Kashima, Morinosuke, NihonGailcOshi 1. Balcumatsu Gailcashi [Japanese Diplomatic History I. Diplomatic history in the lateshogunate era] (Japan, Kashima Heiwa Kenkyilsho, 1970), at 3 to 10.23 Ibid.24 Tanaka, Hideo, supra note 8, at 199.12possible which could govern the new capitalist society. 25 The easiest and quickestway for the Japanese government to facilitate this situation was to simply adopt inwhole or in part the laws of advanced capitalist nations such as Britain, France,Germany, and the U.S.A. In the early years of this period, French law had adominant influence on the laws of Japan. 26 As time passed, however, from around1880, German law took predominance. 27 With German law having prominence, orbeing the law of the day, the first Commercial Code was enacted in 1890. 28 Thismarked the commencement of modern day corporate law in the history of Japan.It should be noted however that corporation-like organizations had already began tosurface before this first Commercial Code came in force.After the doors to Japan, due to the constant prying from outsiders fornumerous decades, were finally levered open, foreign trade swept over the tiny islelike water which had finally found relief and taken its natural course. At this point,the Japanese government put its mind to the immediate task of forming corporationswith sufficient capital and organizational powers to match their western tradingpartners. 29 Thus, the Japanese government incorporated several semi-governmentalcompanies which included several TsashO-Kaisha [Trading Companies],30 Kawase-25 Noda, supra note 10, at 42.26 It is said that the common law system was not adopted because at the time "the common lawsystem appears too complicated..", and "France was the country with the most sophisticated andcomplete codification of laws and Code Napoldon, which had a far-reaching impact on European andAmerican nations through the first half of the 19th century."; Tanaka, Hideo, supra note 8, at 200.27 Noda states that "As I see it from the viewpoint of characterology, Japanese people have anaffinity for the German Geist (spirit) which values Gemat (mind or emotion), rather than the Frenchesprit (spirit), which prizes precision (precision)." (translation mine); Noda, supra note 10, at 204.28 Supra note 4.29 Takenaka, Seiichi and Kawakami, Masatomo, Nihon ShOgyO-shi [Japanese Commercial History](TOky6, Minebea Shob6, 1965), at 291.30 8 Trading companies were incorporated in 1869; Tamaki, Hajime, Gendai Nihon SangyOHattatsu-shi XXXIX, Sikon -Jy6- [History of Industrial Developments in Modern Japan: General Remarks-Vol.]-] (Tokyo, Gendai Nihon Sangy6 Hattatsu-shi Kenkytikai, 1967), at 20.13Kaisha [Trust Companies], 31 national banks,32 railway companies, mine companiesand cotton mills. This incorporation process was repeated in a trial and error fashionand, despite some failures, around 1878, Japan experienced the first real corporateboom in its history. The number of national banks peaked to 151 by the end of 1880,while 207 private banks were incorporated by the end of 1883. 33 However, duelargely to the very unstable economic situation and insufficient know-how to managethese corporations, this corporate boom was short lived. The real corporate boomoccurred some years later, between 1886 to 1889, when the Japanese Governmentprivatized its major mining and manufacturing companies. With the gradualpenetration of knowledge about the corporation into the Japanese psyche it wasinevitable that this second corporate boom would be a grand success, as it actuallyturned out to be. 34At this time corporate law was still in its infancy and these corporations wereregulated under ad hoc regulations (specific laws promulgated for licensing of specificcorporations).35 As such, these laws were rather administrative in nature. 36 Thelaw concerning bills of exchange and promissory notes37 was probably the only trueprivate law enacted at the time and not merely administrative like the others.31 These companies were established at the same time as Trading Companies. See ibid.32 Four Notional Banks were founded between 1873 to 1874, but they lasted only about threeyears. See Tamaki, supra nota 30, at 32 to 39.33 Takahashi, Kamekichi, Nihon no Kigy6, Keieisha Hattatsu-shi [History of Developments toJapanese Corporations and Corporate Managements] (Tokyo, T6y6 Keizai Shinp6-sha, 1977), at 28 to29.34 Takayanagi, supra note 4, at 31 to 39.35 Among these laws were, regulations concerning the establishment of national banks[Proclamation No.349 of the 5th year of Meiji (1872) and Proclamation No.106 of the 9th year of Meiji(1878)], regulations concerning the Bank of Japan [Proclamation No.21 of the 15th year of Meiji(1882)], and regulations concerning private railways [Imperial Ordinance No.12 of the 20th year of Meiji(1887)]; Takayanagi, supra note 4, at xxix to xxx (note 13).36 Takayanagi, supra note 4, at xxx.37 Proclamation No.57 of the 15th year of Meiji (1882).143. The Enactment of the Old Commercial Code and the New Commercial Code(1890-1899)The first Japanese Commercial Code, commonly known as the OldCommercial Code, was drafted by a German legal advisor 38 to the Ministry ofJustice in Japan, and promulgated in 1890.39 It is interesting to note that despitethe strong inclination toward favouring German law at the time, this Old CommercialCode was a mixture of the laws of several European states, including France,Germany, and Great Britain. 40The Old Commercial Code, though containing provisions pertaining tocompanies, remained partial to the old rule of licensing for incorporations instead ofadopting a registration system.41 For several reasons,42 this Old Commercial Codewas soon abolished, and in 1899 a so-called New Commercial Code43 waspromulgated. Unlike the Old Commercial Code, this New Commercial Codeundoubtedly reflected the Japanese scholars inclination and admiration towardGerman laws at the time. The New Code almost entirely eliminated any French andEnglish influence which had been felt in the Old Code; this further spurred on the38 Hermann Roesler of Hanover, Germany." Law No.32, 1890. History of the Japanese Commercial Law prior to this first Commercial Code,see Takayanagi, supra note 4, at IV to XXX.40 "The reason why the Old Commercial Code was not patterned exclusively upon the GermanCommercial Code is generally ascribed to the fact that Herr Roester, though a German by nationality,had an antipathy to the policies of the Prussian Government and that he was thoroughly conversantwith the laws of England and France."; Takayanagi, supra note 4, at xxxi (note (17)).41 Tanaka, Seiji, supra note 21, at 8.42 The Old Civil Code and Commercial Code which were copied from foreign laws were stronglycriticized as being incongruous with Japanese custom. Thus, the enforcement of the Old CommercialCode was postponed several times. Although a part of the Code came to the enforcement on July1, 1893, the entire Code came into force only one year prior to the enactment of the New CommercialCode; Takayanagi, supra note 4, at xxxi to xxxiv.43 The Commercial Code, Law No.48, 1899. For English translation, see The Commercial Code ofJapan and the Law Concerning Its Operation translated by L.H.Loenholm (TOkyO, TOkyO Kokubunsha,1906).15German law boom among legal scholars and law students of the day 44This New Commercial Code in 1899 was for the most part based on theGerman Commercial Code of 1861, which in turn became the origin of the presentCommercial Code. The New Commercial Code made it relatively easy for the firsttime for private individuals to form and manage corporations. 45 It regulated, thoughin a different way from the present Code, the fundamental functions and principlesof corporations including regulations regarding incorporation, shares, theshareholders' general meetings, directors and dissolution.4. Amendments to the New Commercial CodeSince the enactment of the New Commercial Code, the Code has beenamended several times to adapt to the changing reality of the Japanese situation.46In 1911, the Commercial Code was amended, 47 however, its substantialnature remained unchanged. Subsequent amendments in 1938 48 to the Codechanged its provisions regarding companies. 49 The amendments were made largelydue to the rapid change in the economic situation which was stimulated by closer tiesto Anglo-American companies.After World War II, due to the American influence in Japan, the JapaneseCommercial Code was altered5° to embody, or one may even say, to epitomize44 The myth that "any law other than German law is not a law" was predominant at this time;Tanaka, Hideo, supra note 8, at 208 to 209.45 Clark, Rodney, supra note 14, at 33.4" A detailed discussion on the amendments of the Code will be made in a later chapter. SeeChapter IV. The Historical Transition of SGM and BOD under the Commercial Code.47 The Commercial Code, amended as Law No.73, May 3, 1911.48 The Commercial Code, amended as Law No.72, April 5, 1938.49 Tanaka, supra note 21, at 16.5° The Commercial Code, amended as Law No.167, May 10, 1950.16Anglo-American commercial law concepts. 51 It is therefore not surprising to findthe present similarities between Japanese corporate law and its Anglo-Americancounter part.52 However, the present Commercial Code is not wholly in line withthe scheme of American corporate law, which evolved from the common lawtradition. It still contains the original framework of corporate law based on the OldGerman Commercial Code. Nevertheless the Code is far from being within theregime of the present German Commercial Code, since the Old German Code, whichhad been the mother law of the original Japanese Commercial Code, was in greatpart altered in 1937 by the German authorities. It would be fair to say that thepresent Japanese Commercial Code has a unique character; its taste being derivedfrom ingredients which are primarily of a mixture of German and Americancorporate commercial laws.As Japanese ties with the U.S.A. have become stronger and much moreintimate than those with any single European country, Japanese corporate laws, alongwith other laws of Japan, have inevitably undergone a metamorphosis to produce aunique creature resembling its American counterparts more closely than any other.51 In 1950, after World War II, the Japanese Commercial Code was amended under the instructionof the SCAP (The Supreme Commander for the Allied Powers); this amendment was the mostsignificant amendment to the Japanese Commercial Code in history. Through this amendment, theJapanese Commercial Code, which up to this point had been based on an European continentalmodel, largely adapted American corporation laws; the Illinois Business Corporations Act of 1947 andother corporate statutes of some states including New York, Massachusetts, Ohio, Michigan andCalifornia were frequently referred to as a guide in the course of drafting of the amendment; Fordetails of this amendment, see Salwin, Lester N, "The New Commercial Code of Japan: Symbol ofGradual Progress Toward Democratic Japan" in The Georgetown Law Journal, Vol.150, 1962), at 478.52 The Anglo-American corporate law was developed over several centuries via a system whichincluded that which is presently known as the Common Law." In England, and in those parts of theworld where the English legal tradition has been received, the characteristic type of law is commonlaw, as contrasted with statute law." Twining, William (ed.), Legal Theory and Common Law (Oxford,Basil Blackwell, 1986), at 8; For a detailed discussion on the history of company law in England wherethe common law originated, see Gower, L.C.B., Gower's Principles of Modern Company Law (5th ed.)(London,Stevens & Sons, 1992), at 3 to 54.175. Present Corporations and Corporate Law in JapanThis metamorphosis marks a specific point in the history of Japanese law. Thelaws controlling corporations have now reached their most sophisticated form.Today, the laws controlling corporations are diversified and include corporate law,economic law, administrative law, tax law, labour law, civil law, and constitutional law.Needless to say, however, the area of law which most directly regulates and controlscorporations is corporate law itself.Presently, the term "corporate laws of Japan" generally refers to two separatelaws whose application depends on the type of corporations which they are to govern.The two laws are Book II of the Commercial Code of Japan 53 and Yagen-Kaisha HO[Private Company Law]. 54These two statutes recognize four types of companies55 : 1) the GOmei-Kaisha 56(Commercial Partnership 57); 2) the GOshi-Kaisha 58(LimitedPartnership59); 3) the Kabushiki-Kaisha 60(Limited Company61); and 4) the53 The Japanese Commercial Code was most recently amended in June 29, 1990, and waspromulgated as The Commercial Code, Law No.48, March 9, 1899, as amended as Law No.64, June29, 1990.: Here in after, "The Japanese Commercial Code" and "articles", unless otherwise indicated,refer to this Law and its articles: For the English translation of The 1990 Japanese Commercial Code,see "The Commercial Code of Japan" in EHS Law Bulletin Series. (Tokyo, Eibun-Horei-Sha Inc., 1970-current): In fact, this is the translation of the 1981 Commercial Code. But, since the articles referredto in this paper were not, unless indicated, amended in 1990, and these articles are the same as thatof the 1981 Commercial Code, this translation can be used as the translation of the 1990 CommercialCode. Unless otherwise indicated, all translations of provisions of the Code in this thesis are citedfrom this EHS translation. Some of this translation leave much to be desired.54 The Private Company Law, Law No.74, April 5, 1938, amended as Law, No.64, June 29, 1990.For English translation of Private Company Law, see "Private Company Law" in EHS Law BulletinSeries (Tokyo, Eibun-Horei-Sha Inc.).55 For the detail concerning the four types of company, see Kitagawa, Zentaro, Doing Business inJapan (New York, Matthew Bender, 1982), Sec.7.03[1].56 The Japanese Commercial Code, Book II Kaisha(Company), II. Gomei-Kaisha.57 Translation by EHS Law Bulletin Series.58 Supra, note 53, III. Goshi-Kaisha.59 Supra, note 54.18Yagen-Kaisha62(Private Company63).The first three types of corporations are regulated under the CommercialCode and the last one is regulated under the Yagen Kaisha HO or the PrivateCompany Law. The Commercial Partnership64 and the Limited Partnership 65 arevery similar to the general partnership 66 and the limited partnership, 67 respectively,of Canadian jurisdictions.The third type of company, the limited company, is a company which is similarto a company incorporated under Canadian company law. 68 It consists ofshareholders whose liability is limited.60 Supra, note 53: IV. Kabushiki-Kaisha.61 Supra, note 54.62 Private Company Law.63 Supra, note 54.64 Under the Japanese Commercial Code, this type of company consists of members with unlimitedliability. (The Japanese Commercial Code, art.80). Each member is jointly and severally liable tocreditors of the company, and may manage and represent the company (The Japanese CommercialCode, art.70, 76). To resolve fundamental matters of the company including transferring shares, theunanimous consent of all the members of the company is required (The Japanese Commercial Code,arts.72, 73, 74). Kitagawa, supra note 55, at Sec.7.03[1][a].65 This type of company consists of two classes of members: members with unlimited liability andmembers with limited liability (The Commercial Code, art.146). Only the former have the power tomanage and represent the company (The Commercial Code, arts.151, 156); to resolve the fundamentalmatters of the company the unanimous consent of members of both classes is required. In short,though this type of company is managed by members with unlimited liability, it is possible for thecompany to collect its capital from individuals with limited liability, whose only purpose is to gainfrom the distribution of the profits made by the company.66 are regulated under the provincial Partnerships Act (for instance, British ColumbiaPartnerships Act, R.S.B.C. 1979, c.312; Ontario Partnerships Act, R.S.O. 1980, c.370). For a detaileddiscussion on partnerships in Canada, see Simonds, R.L. and Mercer, Peter P., An Introduction toBusiness Associations in Canada (Toronto, Carswell, 1984), at 46 to 93; Ziegel, Daniels and Johnston& MacIntosh, Cases and Materials on Partnerships and Canadian Business Corporations (Toronto, TheCarswell Company Ltd., 1989), at 3 to 72.67 Partnerships Act (ibid); Simmonds, supra note 66, at 88 to 92; Hadden, Tom, Forbes, RobertE., and Simmons, Ralph L., Canadian Business Organization Law (Toronto, Butterworth & Co. Ltd.,1984).68 Canadian Business Corporations Act, R.S.C.1985 (CBCA) and provincial company act includingBritish Columbia Company Act, R.S.B.C.1979 (BCCA).19The fourth type of company is called the Yagen-Kaisha, which translates as aprivate company,69 a limited liability company, 7° or a company with limitedresponsibility71 . This type of company, for the most part, is the same as the abovementioned limited company72 but for a few specific differences. The majordifference between the limited company and the private company is that, thestatutory requirements as to the latter are more flexible and less stringent than thatof the former. It can be said that a private company is a limited company inminiature,73 since a private company may only consist of less than fifty memberswho have invested money in the company. 74Though each of these four types of companies has its own distinctivecharacteristics, and each may be successfully utilized to carry on business, the limitedcompany is the dominant form of company in Japan, as it is in most other developedcountries. 75Under the modern capitalist economy, it is generally recognized that thecentralization of capital is the most important factor for the constant and smoothdevelopment of business. 76 To realize this purpose, a company limited by shares,namely a limited company, is the most suitable and sophisticated form of company69 Supra, note 54.7° Translation by Kitagawa, supra note 55.71 Translation by H6mush6 Keijikyoku Gaikokuh6 Kenkyfisho [Research and Training Instituteof Criminal Affairs Bureau, Ministry of Justice] (Tokyo, Commercial Law Centre Inc., 1990).72 Kitagawa, supra note 55, at Sec.7.03[1][d].73 Ibid.74 Private Company Law, art.8.75 Kitazawa, Masayoshi, KaishahO (Shinpan): Gendai Iliiritsu-gaku Zenshii 18 [Company Law (Newedition): Series of Contemporary Jurisprudence Vol.18] , at 29 to 30; Kitagawa, supra note 55, atSec.7.03[1] [d].76 Kawamoto, Ichir6, Gendai KaishahO (Shintei Dai 1 -pan) [Contemporary Company Law (NewEdition -11 (Tokyo, ShOji HOmu Kenkyfikai, 1980).20under Japanese law.77Both the Japanese corporate laws and corporations which did not exist priorto just over one hundred years ago, have now reached an apex in their stage ofmaturity. At this time, as has been seen in the most advanced nations, disparitybetween law and its actual working appears to be expanding. In the next chapter,how Japanese corporations are functioning in contemporary Japan regardless of thegoverning law will be examined, followed by an analysis of legal controls overcorporations and corporate management.77 Kitazawa, KaishahO, supra note 75, at 45.21CHAPTER TWOCORPORATE MANAGEMENT IN JAPANESECONTEMPORARY SOCIETYFor people living in modern capitalist economies, corporations are afundamental factor of their lives. Corporations provide wages directly to theiremployees and indirectly to many others; corporations supply the commodities forconsumers; and Corporations are the instruments to gain investment profits.Individuals who invest in corporations receive a distribution of their profits.Additionally, corporations constitute the financial base of states and areclosely intertwined with their politics. It would not be considered an exaggeration,to say, that corporations control the economy of states and the life of individualswithin them. In other words, to understand corporations and their managementsystem in a particular jurisdiction, it is necessary to carefully observe the economyand other related factors relevant to the corporations in the jurisdiction.Thus, in this chapter we will look at the present situations surroundingcorporations for a better understanding of the legal framework of corporatemanagement in Japan.I. Background - The Japanese EconomyIt has been argued by many economists and other Japanologists that Japanesecapitalism differs greatly from its Western counterparts and in particular, theU.S.A. 78 Heterogeneous Japanese capitalism is typically described as company-Cutts, Robert L, "Capitalism in Japan: Cartels and Keiretsu" in Harvard Business Review, Vol.70,July-August, 1992, at 48.22oriented capitalism as compared to the consumer-oriented capitalism of the West."The following four distinct corporate management practices have been said to beresponsible for the uniqueness of Japanese capitalism: 1) the long-range planningpractices of Japanese corporations; 2) the labour management system; 3) theinterlocking relationship among corporations; and 4) the intimate relationshipbetween corporations and the Japanese govemment. 80There is no doubt that this Japanese style of corporate management hascontributed to Japan's modern economic prosperity. However, as the Japaneseeconomy has matured, Japan has begun to face serious problems both internally andexternally. In the international arena, Japanese economic growth has generatedserious trade friction with its trading partners, and in particular with the U.S.A.Nationally, Japan's rapid economic growth is also believed to have caused thecollapse of the bubble economy. 81 Corporate managers themselves are now awareof the necessity of changing the so-called "Japanese style" management, and have79 Noguchi, Yukio and Shimada, Haruo, "Taidan: Sh6hisha No Shakai o Mezase [Discussion:Pursue the Consumer-Oriented Society] in Shakan TOyei Keizai: Keizai Hakusho Tokusha '92 [TheWeekly Eastern Economy, Special Edition: The White Paper on Economy '92] (Tokyo, T6y6keizaiShinp6sha), at 32.80 Tyson, Laura, "Nihongata Shihonshugi wa Sekai ni Tsily6 Suruka? [Does Japanese stylecapitalism apply to the world?]" in Shetkan Thy 6 Keizai [The Weekly Eastern Economy], SpecialEdition, August 28, 1992, (Tokyo, T6y6keizai Shinp6sha), at 58.81 Apart from the argument of whether Japan has gone into an era of recession, or simply startedrestructuring its economy, one fact remains: the Japanese economy has ceased to sky-rocket. Severalindicators evidencing this fact are clearly apparent. The Nikkei Stock Average, the index of 225 keyissues on the first section of the Tokyo Stock Exchange was once fluctuating below the 15,000 yenlevel(The Nikkei Stock Average on August 17, 1992 was 14309.41 Yen), down more than 8,000 points(a 35 per cent decrease) from the 1991 close (The 1991 close was 22983.77 Yen (December 30, 1991):Japan Economic Almanac: The Nikkei Weekly, 1992 (Tokyo Nihon Keizai Shimbun, Inc.), at 66-67),and down more than 24,000 points (a 60 per cent decrease) from the 1989 close (The 1989 close was38915.87 Yen (December 29, 1989), Ibid, at 15-16); This was one of the highest closing figuresrecorded ever. The Real Domestic Demand of Japan has been declining since 1990 (Country Report:Japan, No.2, 1992 (London, The Economic Intelligence Unit), at 15-16), and the number ofbankruptcies of corporations in Japan have continued to increase (Ibid, at 17; According to a surveyby Tokyo Sh60 Research, the number of bankruptcy in the first six months of 1992 was 6,570. Thisaccounted for a 39.3 per cent increase from the same period of 1991; Nihon Keizai Shimbun [TheJapan Economic News Paper], August 10, 1992).23been predicting forthcoming changes. 82 Furthermore, Japanese individuals, whohave been suppressed by a company oriented society which has recklessly pursuedeconomic growth at their expense, are now becoming aware of the necessity ofintrospection. Now everyone is asking the question: "Has the time come to turnround? What went wrong?"In the midst of the dark clouds of the recent Japanese economic slowdown,the Economic Planning Agency of Japan released the Keizai Hakusho or the WhitePaper on the Economy in August, 1992. 83 In its general remarks, the White Paperidentified five characteristics of the Japanese corporate management system: 1) stableshareholders of corporations; 2) the existence of "main banks"; 3) a specific labourmanagement system, including lifetime employment; 4) the existence of productionand distribution keiretsu; and 5) process innovations. 84The rest of this chapter will briefly explain and examine corporatemanagement practices in contemporary Japan by focusing on some of the abovecharacteristics of the Japanese corporate management system. We will also examinehow recent views regarding Japanese style management have diverged from thetraditional views held by scholars, business people, and politicians.82 According to a survey by the Keidanren or the Federation of Economic Organization during1990 to 1991 cited in Keidanren GeppO [The Federation of Economic Organization Monthly Report](Tokyo, Keizai Dantai Reng6-kai, February 1991 at 29), 84.8% of the corporate managers surveyedresponded to a question, "Do you think the Japanese style management will change?" by saying that"it will in the future."83 This White Paper on Economy is contained in the Ekonomisuto [Economist] Special Edition,August 31, 1992 (Tokyo, Mainichi Shinbun-sha), at 127 to 366.84 "Process innovations" refers to technological innovations which improve quality and efficiencyof products or reduce production costs by inventing a new production process or reforming a pre-existing production process or technology. This term is used in comparison to "product innovations"which invent or develop new products.242. Corporations v. CorporationsOne of the most unique characteristics of the Japanese corporate managementsystem is the "keiretsu" system which is defined as "a group of companies federatedaround a major bank, trading company, or large industrial firm." 85Keiretsu may be divided into three types depending upon the origin and natureof business. 86 The first type of keiretsu is a group which is a descendant of the pre-W.W.II Zaibatsu 87 such as Mitsui, Mitsubishi, and Sumitomo. The second type isa group centred around a bank such as Dai-Ichi Kangin, FuyO, and Sanwa. The lasttype is a group formed around a large manufacturing company, such as Toyota,Nissan, and Hitachi. 88Among the keiretsu, six major keiretsu have extremely strong economic powersin Japan. The total assets of these six keiretsu occupy about thirteen per cent of thegross assets of all listed Japanese corporations. 89 Three of these six keiretsu(Mitsubishi, Mitsui, and Sumitomo) are modern descendants of the pre-W.W.IIZaibatsu90; the other three (Fuyel, Sanwa, and Dai-Ichi Kangin) are thoseestablished by major banks. 9185 Kester, W. Carl, Japanese Takeovers: The Global Contest for Corporate Control (Boston, HarvardBusiness School Press, 1991), at 54; For a detailed discussion on Keiretsu, see Gilson, Ronald J. andRoe, Mark J., "Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance andIndustrial Organization" in The Yale Law Journal, Vol.102, No.4, January, 1992, at 871.86 Okimoto, Daniel I. and Rohlen, Thomas P. (ed.) Inside the Japanese System (California, StanfordUniversity Press, 1988), at 70.87 "Zaibatsu" is a big economic combine which existed and dominated Japanese economy untilW.W.II; Infra, note 175 and accompanying text.ss For the detailed information regarding Japanese major keiretsu, see Tely6 Keizai: Nihon No Kigy6Guriipu, '93 [Eastern Economy, Japanese Corporate Groups, '93] (Tokyo, T6y6keizai Shimp6-sha,January 31, 1992).89 In 1991, the total assets of 6 keiretsu was 12.98% of the total gross assets of all listedcorporations; TOO Keizai, Kigyti Keiretsu SOran,'93 [Eastern Economy, Corporate Groups: Generalremarks, '93] (Tokyo, T6y6keizai Shinp6-sha), at 29; Nihon Keizai Shinbun, August 25, 1992.90 Ibid.91 Ibid.25In addition to these six major keiretsu, there are more than 2,000 companygroups, 92 as of September, 1992 these groups contain more than 25,000corporations.93 It would not be an exaggeration to say that these keiretsu havecontrolled the Japanese economy.What is significant is that corporations in the keiretsu reciprocally hold eachother's shares among themselves as stable and friendly shareholders. This so-calledcross-shareholding has been suggested as being the key factor of Japanese companies'strength by both Japanese and non-Japanese. The merits of cross-shareholding aresaid to include:1. It eliminates the threat of takeover and releases themanagement from excessive pressure from the capital market.Accordingly, it stabilizes the long-term management of acorporation.942. It enhances the long-term and continuous trade relationshipbetween corporations which hold shares reciprocally. These crossshareholdings produce a characteristic hostage-like situation; as suchsecuring the position of the corporation who holds the shares againstthe corporation whose shares are held. 953. An exchange of equity between trading parties connects theireconomic fortunes, which helps to mitigate incentives to actopportunistically. 964. It creates mutual trust and shared expectations. Accordingly92 Parent companies of these groups include all listed, Over-The-Counter, large non-listed, and lifeassurance companies; TeyO Keizai, KigyO Keiretsu, supra note 89, at 27.93 For instance, Hitachi has 799 subsidiaries and affiliate corporations. Sony has 695; TOyo Keizai,Kigy6 Keiretsu, supra note 89, at 61.94 The White Paper on Economy, supra note 83, at 281.95 Ibid.96 Kester, supra note 85, at 67.26this enables companies in a group to pursue unwritten contracts. 975.^"Implicit contracting among individual managers better enablescompanies to make rapid, informal, and highly refined adjustments inthe terms of trade to preserve the spirit and substance of a businesscovenant rather than the letter of a written agreement." 98Strong ties between corporations in keiretsu are further enhanced byinformation sharing within a group. Keiretsu centred on the main banks, majorindustrial companies, and large trading companies form the hub of a vast informationsharing network. 99 Various business interest associations and councils which consistof presidents of companies within a group are said to promote friendship andunderstanding among the presidents of the group.1°° Almost all the major keiretsugroups have their own group councils which meet monthly or at least on some regularbasis.1°1 Hence, corporations within keiretsu may not only stimulate each other'sbusiness performance, but may take necessary measures as quickly as possible againstnew or ongoing problems.Although the keiretsu system has been the key factor which has made Japan'smodern economic success possible, many people who used to sing the praises of thekeiretsu have started to question the system and focus on its demerits, which havefostered a negative fair trade image and practice both inside and outside of Japan.For instance, an American economist argues that Japanese consumer pricesare very high because the distribution keiretsu "attempt to control the flow of97 Ibid, at 62.98 Ibid, at 63." Ibid, at 68.w° Ibid, at 69.101 These councils include KinyO-kai of Mitsubishi, Hakusui-kai of Sumitomo, and Nimoku-kai ofMitsui; ThyOkeizai, KigyO Keiretsu, supra note 89, at 46; Kester, supra note 85, at 69.27products, accessories, services, and their prices from the factory to theconsumer."102 This distribution keiretsu also excludes the participation of outsidersfrom the group to the distribution line. 103 Meanwhile, the manufacturers' keiretsu,a group of "suppliers and component manufacturers, sometimes with hundreds ofcompanies in a single structure" 104 virtually shuts out foreign suppliers. 105 Thiskind of practice is especially intolerable for American business people, since it haslong been prohibited in the U.S.A. under anti-trust laws. 1°6Another detrimental effect of the keiretsu and cross-shareholding is that it hasimpeded normal securities transactions. In other words, because the free-float oftradable shares is much smaller on the Tokyo Stock Exchange, compared to otherstock markets of the world, it has been very "easy for Japanese brokerages or buyingsyndicates to manipulate stocks." 107Recognizing these criticisms, the Japanese Fair Trade Commission (JFTA) hasrecently changed its position toward the keiretsu system from complete praise to asomewhat critical assessment. 1°8 The JFTA's criticisms primarily focuse on102 Smitka, Michael J., "Nihonteki Keiretsu Torihiki no Koko ga Mondai [Problems of JapaneseKeiretsu trade] in TOy'd Keizai: Nihon no Kigyii Gurtipu, supra note 88, at 19.1°3 Ibid.104 Cutts, supra note 78, at 49.105 Cutts points out that "the U.S. auto parts makers, for example, accounted for just 1% of Japan's$120 billion parts market in 1990 - this after years of negotiation keiretsu import barriers."; Did, at50.1°6 In Japan, although unreasonable restrains on trade are prohibited under the Anti-MonopolyLaw (Law Relating to Prohibition of Private Monopoly and Methods Preserving Fair Trade of Japan, LawNo.54, 1947 as amended as No.93, December 4, 1986), generally unilaterally imposed restrains arepermissive under the law; Oda, Hiroshi and Grice, R. Geoffrey, Japanese Banking Securities and Anti-Monopoly Law (London, Butterworth, 1988), at 119.107 Rowley, Anthony, "Stock Questions" in Far Eastern Economic Review, September 12, 1991, at54.108 The White Paper on Economy, supra note 83, at 90.28detrimental effects of the keiretsu system on fair trade and quality of people'slife. 1" This year's White Paper suggests that: 1) due to the long-term, continuoustrade within keiretsu, communication costs raise. 11° Accordingly employees arecompelled to work long hours; 2) the relationship between a parent company whichsits on the top of the pyramid and contractors who occupy the bottom of the pyramidis a vertical one, therefore producing an inequality of bargaining powers betweenthem; and 3) the system eliminates any new participation from outside of thegroup. 111Along with these criticisms, the recent sluggish economy has in fact causedsome alterations to the long time practices of the keiretsu. For instance, an averageof reciprocal trading within a group of the six major keiretsu in 1989 declined to7.2% 112 in terms of their sales, and 8.1% 113 in terms of their purchases. Cross-shareholding has also been declining recently. The average cross-shareholdings withina group was 25.47% in 1981, but it decreased to 23.40 per cent in 1985, to 22.65 percent in 1987, and to 21.64 per cent in 1989. 114Some brave undaunted outsiders have also started a challenge with the intentto break this unfavourable practice. The American corporate raider, T. BoonPickens, was one of these challengers who tried to smash Japan's keiretsu system byacquiring some 26% of the shares of a parts-supplier company controlled by Toyota,109 Ibid.110 To keep a long and good relationship, corporations need to exchange information orcommunicate with each other very frequently, thus communication costs raise; Ibid." 1 The White Paper on Economy, supra note 83.112 Down 3.6 % form a 1981 survey; A survey by the Fair Trade Commission; Asahi News Paper,August 25, 1992.113 Down 3.6 % from a 1981 survey; Ibid.114 The White Paper on Economy, supra note 83.29Koito.115 However, this attempt ultimately failed largely due to a strong supportgiven to Koito from Koito's keiretsu member, Toyota, to defeat Picken's proposal forboard representation. 116 This demonstrates that although the keiretsu has beencriticized and is gradually changing, it is still a strong fortress which at presentappears impregnable to outsiders.It is beyond the scope of this thesis to delve any further into the analysis ofthe changing practices of the keiretsu. However, one thing is certain, despite thecriticisms and challenges to the keiretsu, it will take a long time to change this long-standing Japanese trade practice since the system has contributed so much to Japan'smodern economic success. Moreover, since Japanese corporations belonging to somekeiretsu have never experienced any detrimental effects, what is the impetus for themto give up such a wonderful practice? It is simply too good a thing for them to giveit up.3. Corporations v. Financial InstitutionsAnother major factor peculiar to Japanese corporate management is theintimate relationship between financial institutions and other corporations. Theoutstanding feature of banks in Japan is that they have controlled corporations to theutmost extent, not only financially, but also managerially.Banks have been the main source of corporate financing in Japan. As asurvey has shown, in 1975 (the end of the high-growth period which had started inthe mid-1950s), among sources of external funds, loans had exceeded 80 per cent of115 Rowley, Anthony, "Whistle Blower" in Far Eastern Economic Review, May 23, 1991, at 65; fora detailed discussion concerning Koito case, see Corcoran, M. Evan, "Foreign Investment andCorporate Control in Japan: T. Boone Pickens and Acquiring Control Trough Share Ownership" inLaw and Policy in International Business, Vol.22, No.2, 1991.116 rma at 354 to 35530the total external funds. 117 However, this heavy debt financing had ceased tofunction in the period of slow growth of the Japanese economy and during the oilcrisis. In the 1980s, the liberalization and internationalization of financial marketsand the increase of share prices accelerated the diversion of the financing system ofJapan. In 1989, the debt financing ratio to the total external funds decreased to 52per cent. This ratio was even smaller when only large corporations werecounted. 118 This decrease in debt financing undoubtedly indicates the expansionof equity financing in recent years. 119 However, the debt financing ratio ofJapanese corporations is still relatively large when compared to that of theirAmerican counterparts. 12°Banks, along with other financial institutions in Japan have also played animportant role as stable shareholders. About one-third of Japanese corporations'shares are in the hands of banks and other financial institutions. 121Among financial institutions, "main banks" have the influence to build aspecific relationship with corporations in Japan. Most corporations have their own"main bank" which is defined as "the bank from which a corporation obtains a majorloan continuously for a long term." 122 A typical function of the "main bank" inrelation to the corporate management is summarized as follows:117 These external funds included loans, bonds and shares. The White Paper on Economy, table 3-2-3; supra note 83.118 35. - —;.5.70 Large corporations with the capital of 100 million yen; The White Paper on Economy,Table 3-2-3; supra note 83.119 ^the 1980s, issuance of shares and convertible debentures had increased rapidly. After the1990 stock collapse of the Japanese share market, the common debenture has become a popularfunding of corporations in Japan; The White Paper on Economy, Figure 1-6-8, supra note 83.120 The average ratio of loans from outside of a corporation during 1985-1989 was 32.1% of totalfinancing of corporations in Japan; whereas the ratio was 14.0% in the U.S.A.; The White Paper onEconomy, supra note 83, at 284.121 Kester, supra note 85, at 57 to 59.122 The White Paper on Economy, supra note 83, at 287 (my translation).311. It stabilizes the external finance; 1232. In the case where a corporation encounters financial difficulties, themain bank will become the Saviour for the corporation; 1243. In most cases, the main bank holds a large portion of the shares of agiven corporation and sits on its Board. Thus, the main bank plays animportant role in the management of the corporation as a shareholder and/oran executive; 1254. As a stable shareholder, the main bank releases or reduces the risk ofthe corporation from a threat of takeover. 126In short, the main bank protects its corporation both as a creditor and as ashareholder.The main bank appears to have greatly contributed to the efficiency of theJapanese corporate management system. 127 However, other effects of the mainbank have been noticed in recent years. Banks have given continuous support tomanagers of Japanese corporations freeing them from pressures of the capitalmarket. As such, managers have been able to expand their corporations' marketshares without worrying about profitability. It is accepted that small profits may andmost likely will accompany this expansion of the market shares of the corporation,along with shareholders receiving a smaller return and employees receiving lesser123 Horiuchi, Akiyoshi, "Tenkan Semarareru Nihongata Shihon-shugi [Japanese-style CapitalMarket Being Urged To Be Changed]" in Ekonomisuto [Economist] (Tokyo, Mainichi Shinbun-sha),at 92.124 'mi.125 Ibid; More than 50% of corporations which are within "keiretsu" have executives who are sentby the main bank; The White Paper on Economy, supra note 83, at 288 to 289).126 Horiuchi, supra note 123, at 92.127 It is stated by an author that "in terms of modern organizational economics, the bankingindustrial complex is a governance system shaping the actions of companies and banks.'; Okimoto,supra note 86, at 54.32payment. The sacrifices of the above mentioned persons have encouraged this typeof corporate management. However, in a democratic society, a corporation may notunreasonably suppress or exploit persons for ever who have some legal rights to thecorporation. Shareholders and employees in Japan are no longer as silent andpatient as they were in the past.'The role of the main bank is still an important one and most corporations donot agree with the idea that the role of the main bank will diminish to a great extent.However, the fact remains that as the debt financing decreases, the role of the mainbank as a creditor is on a decrease. In addition, as share value remains low andholding shares become more speculative 129 the role of the main bank as a stableshareholder is also expected to decrease. 13°Japanese life insurance companies have also acted as stable shareholders. Assuch, they have played a similar role to the main banks in Japanese corporations.Such companies hold some 13 per cent of shares of the Tokyo Stock Exchange byvolume or 12 per cent by value. 131 However, as the Japanese economy continuesto be sluggish and the Japanese share market hangs low, these life insurancecompanies are also changing their attitude. They are becoming more income orreturn oriented. In 1990, they "began threatening to start dumping part of their long-128 Changing attitude of shareholders and employees in Japan will be explained in the followingtwo sections in this chapter: 4. Corporations v. Individual shareholders and 5. Corporations v.Employees.129 Rowley, Anthony, "A question of equity" in Far East Economic Review, May 16, 1991, at 63.130 The Dai-Ichi Insurance company's Report on Cross-shareholding dated August 16, 1992 states"Due to the developments of the liberalization of interest rate and the increase of bad credits, banksare compelled to regard the profitability of share investment as important." thus, it is expected thatbanks will not be willing to hold shares of any corporations which are not profitable, even if the bankshave a specific relationship with the corporations.131 Rowley, Anthony, "Stock Questions", supra note 107, at 54.33term holdings if the companies concerned did not raise their dividend-payoutratios."132 In fact, these life insurance companies have started to dump theirholdings even though the volume of their disposed shares is presently very minuscule.In summary, it appears that corporations may not be able to rely on financialinstitutions as stable shareholders any longer. However, it may be too early toconclude that this is so. Even if it were true, at this point it will be fair to say thatthe role of financial institutions is still of too great in importance to ignore. The onlyforeseeable change in the role of financial institutions in Japanese corporate societyis a decrease in the extent of the role of these institutions, not a disappearance oftheir role, yet to what extent this shall be is unknown.4. Corporations v. ShareholdersConsidering the known success of Japanese corporations, one may think thatshareholders of these corporations have been enjoying a great deal of profits asinvestors in these corporations. This thought is a myth; the following facts evidencethat it was never and still is not the case. A survey undertaken in 1988133 revealeda very interesting contrast in the corporate objectives of Japanese and U.S.corporations. Around 80 per cent of corporations in the U.S.A. surveyed respondedthat "return of investment" is important as a corporate objective, compared to only30 per cent of corporations in Japan. More than 60 per cent of corporationssurveyed in the U.S.A. responded that "capital gain for the shareholders of thecorporation" is important as a corporate objective, while less than 5 per cent ofcorporations in Japan responded in this way. More than 50 per cent of U.S.corporations responded that "maintenance and expansion of market share" isimportant, whereas more than 60 per cent of Japanese corporations respondedaffirmatively here. Lastly, only around 10 per cent of corporations in the U.S.A.132 Ibid.'33 The White Paper on Corporation by Keizai Doyukai in 1988 cited in the White Paper onEconomy, supra note 83.34placed great importance on "the expansion of new products, new business", while awopping 60 per cent of Japanese corporations had this as a primary goal. 134This comparison indicates that the principal objective of corporations in Japanis to promulgate their corporate growth through new products and expansions of theirmarket share, even at the expense of investors of the corporations (in a broad sense)including shareholders and employees. The return of profits to their investors isalmost ignored by corporations in Japan (only 5 per cent of corporations in Japanconsider this of importance!). On the other hand, the principal objective forAmerican corporations is the return of investment followed by share price increase.Judging from this survey, it would be fair to say that Japanese corporations placetheir highest interest in the growth of their corporations based on a long rangeplanning strategy, while American corporations value profit maximization over theshort term. This difference of corporate objectives in the two countries is reflectedby difference in the average dividends paid out by the corporations of these countries.The average dividends paid by major Japanese corporations each year during theperiod of 1985 to 1992 was consistently below a return of 1.0 per cent 135 ;comparatively, in the U.S.A., during the same time period corporations paid outbetween 3 to 4 per cent in returns. 136Abegglen states that, "Aggressive pricing, high profit retention in the firm, lowdividends, and aggressive use of debt [to pursue the expansion of the corporation'smarket share] are mechanisms that enable a growing company to grow faster. Thewelfare of the employees, of the management, and of the shareholders is improved134 Ibid.135 A return of an average dividend is calculated as: the average dividends/the average share pricex 100; The White Paper on Economy, supra note 83, at 282.136 Ibid.35with continued strong growth - therefore, growth is the principle goal of allparties."137 It is true that as a company grows its share price increases, andshareholders ought to obtain a great deal of capital gain. However, if a corporationpursues its growth only focusing on capital gain, in the process of its growth thecorporation is most likely to ignore one of the fundamental corporate principles: Themaximization of corporate profits ought to be returned to investors by way ofdistribution of dividends. This normative economic theory that investors are entitledto receive a proper share of the corporate profits in dividend or other distribution ispresently recognized by statutes either directly or indirectly in most jurisdictions. 138In short, the growth of Japanese corporations was made possible at the expense ofprofits to which shareholders had a right to share in more adequately. 139Japanese corporations' lack of regard for individual investors and their rightsmay undoubtedly be ascribed to the unique role played by corporate groups and mainbanks in the corporate arena, and especially the cross-shareholding practice whichthey partake in. Although today's Japanese corporate strength has no doubt beenmade possible by a reckless pursuit of the economic growth, nothing may justify theirignoring of their shareholders' interest, for it is a right of shareholders to obtain anappropriate portion of the profits of their corporation. No company ought to beallowed to demand that its shareholders wait for ten or more years until thecorporation grows and its share price rises before giving them appropriate return.Furthermore, if too much emphasis is put on the capital gain among shareholders,137 Abegglen, James C. and Stalk, George, Jr. Kaisha, The Japanese Corporation (New York, BasicBooks, Inc., 1985), at 176.138 The Commercial Code explicitly recognize the shareholders' right to demand distribution ofprofits (art.293-2, para.1); Kitazawa, supra note 75, at 142; Contrarily, in Canada, although moststatutes do not explicitly state so, it appears to be the general rule that "dividend rights (the right todetermine whether or not dividend should be distributed) rests with the board of directors." (Welling,Bruce, Corporate Law in Canada (Toronto, Butterwarth, 1991), at 640 to 645). However, in theory,since shareholders may always replace directors, the ultimate power to demand distribution of profitsin way of dividend is vested in shareholders.139 Abegglen, supra note 137, at 148.36it tends to cause a fluctuation of share prices. 140 In other words, if shareholdersonly expect to gain profits through capital gain not through dividends, theshareholders would become extremely sensitive about fluctuation of share prices.The consequence would be, as Japan is now experiencing, when the share marketdeclines, investors would lose their interest in investing in the share market since theycan expect neither capital gain nor the distribution of fair amount of dividends.Hence corporations would face difficulties in raising their capital in the share market,and this, along with the decreasing role of financial institutions as external fundsuppliers, would cause another economic slowdown in Japan.The Tokyo Stock Exchange has proposed several measures to increase thenumber of individual shareholders per corporation in an attempt to deal with thedeclining value of stocks. 141 The Keizai Dantai RengOkai (Keidanren) or theFederation of Economic Organization has also proposed several measures to improvethe Japanese management system including reviewing the system of dividenddistributing of corporations. 142 The changing economic situation in Japan is nowforging changes to the Japanese corporate management system.As the ties among corporations, and between corporations and financialinstitutions have weakened, it was inevitable that the role of individual shareholderswould increase. As individual shareholders have gained more powers, they havebecome more aggressive and demanding. Today, corporations in Japan ought notand dare not ignore individual shareholders any longer. The sleeping shareholders140 The White Paper on Economy, supra note 83, at 282 to 283.141 Tokyo Stock Exchange Report titled "Kabushiki T6shisha no Kakudai ni Tsuite - Sh6h6 KaiseitO eno Tai6" [Report concerning the expansion of the class of share investors - Report correspondingto the Amendments of the Japanese Commercial Code etc.], ShOft HOmu [Commercial Law Review],(Tokyo, Tokyo Sh6ji H6mu Kenkyiikai) No.1249, April 5, 1991, at 2.142 Endo, Hiroshi, "Kaisha HOsei No Arikata Ni Tsuiteno Keidanren Kenkai Ni Tsuite"[Concerning the view of the Federation of Economic Organization regarding how the legal systemgoverning corporations ought to be", in ShOji Ilennu, No.1281, April 1992, at 2.37have awakened and are now also ready to enjoy more of the benefits of Japan'seconomic growth and strength.5. Corporations v. EmployeesThe last element which greatly differentiates the management system in Japanfrom that of most western countries is the unique labour management system inJapan. Two typical practices uniquely representative of the Japanese labourmanagement system are life-time employment and seniority-based wagedetermination system.(1) Lifetime EmploymentThe key elements of lifetime employment may be summarized as follows: 1431. A corporation hires its employees from a pool of fresh graduates fromuniversities, colleges, high schools, or other schools upon graduation.2. A company hires employees not for their specific abilities or skillswhich they have already cultivated, but for their general ability to adapt to anyenvironment or any job situation which they will be assigned to.3. At the initiation of the employment, there is a tacit agreement, not anexplicit employment contract, between the corporations and their employeesthat they will remain with the company until their retirement, and that thecorporation will not lay them off in the interim.4. Once the employees are hired, they are transferred from one sectionto another to develop their understanding of the corporation's philosophy andto acquire necessary technical skills.143 For a detailed discussion of lifetime employment see: Clark, Rodney, supra note 14, at 140 to179; Abegglen, supra note 133, at 199 to 203; Sasaki, Naoto, Management and Industrial Structure inJapan, Second edition (Oxford, Pergamon Press, 1990), at 31-40; Mehtabdin, Khalid R, ComparativeManagement: Business Style in Japan and the United State (Lewiston, The Edwin Mellen Press, 1986),at 44 to 49; Mikami, Tatsuki, Management and Productivity Improvement in Japan (Tokyo, JMAConsultants Inc., 1982), at 45 to 50.385. The employees climbs up the ladder to higher positions by competingamong themselves until their retirement.This practice has given corporations the incentive to invest corporate assetsinto human resources; at the same time, this has inspirited employees to committhemselves to their corporations. 144 Nonetheless, there is always an accompanyinggreat risk for both employees and employers. For employers, "a recruiting error isnot easily corrected and has long and expensive consequences." 145 For employees,"his commitment is not for a single, particular job, but for a career." 146Nonetheless, it is true that this system has greatly contributed to the efficiencyof the Japanese labour market. 147 However, this stereotype of lifetime employmentwhich has long been attributed to having contributed to the efficiency of Japaneselabour management appears to be changing.It ought to be noted that although lifetime employment has long existed inJapan, it has not generally been the practice as to workers of small or medium sizecorporations, or applicable to female workers, part-time workers, and seasonalworkers. 148 Furthermore, it should be remembered that lifetime employment is notpeculiar to Japanese corporations. This system has also been practised, to someextent, by a few American corporations. 149144 The White Paper on Economy, supra note 83, at 294 to 295.145 Abegglen, supra note 137, at 199.146 Ibid.147 In 1991, an unemployment rate of Japan was relatively low compared to that of other countries.Japan-2.1%; the U.S.A.-6.6%; England-8.9%; Germany-4.3%; and France-9.4%; The White Paper onEconomy, supra note 83, at 351.148 Abegglen suggests that "some 30 percent of the Japanese labour force is covered by the systemof permanent employment."; Abegglen, supra note 137, at 201.149 Hanaoka,Masao, "Setting Up a Hypothesis of the Characteristics of Personnel Management"in Modern Business And Management: Some Aspects of Japanese Enterprise (Institute of BusinessResearch, Dait6 Bunka University), at 168.39As the Japanese economic situation changes, so also have the recruitingpractices. As businesses have become more diversified and complex, more skilledworkers have been sought after. 15° Companies are becoming aware of the logicalnecessities when recruiting of not limiting themselves primarily to fresh graduateswhose abilities are unknown and untested, but now gladly seek to hire skilled workersfrom a broad labour market. Another factor which appears to be responsible for thetransition in the practice is the fact that the work ethic of Japanese people has beenchanging recently. Japanese people have become more leisure-oriented rather thanincome-oriented. 151 For instance, the proportion of employees who are changingtheir jobs more than once has been on the increase, especially among youngpeople 152; the proportion of corporations which are hiring mid-career workers hasbeen increasing 153 ; the willingness to change jobs has been increasing, particularyamong the young generation. 154(2) Seniority Based Wage Determination SystemA seniority based wage determination system is another characteristic ofJapanese style labour management. In Japan, wage determination is primarily basedon length of service with the corporation. As Abegglen points out, Most societieshave some degree of age-grading, and most personnel systems pay some respect to15° Keidanren Geppe0, supra note 82, at 29.151 The White Paper on Economy, supra note 83, at 299; Summary of Professor Ronald Dore'slecture "When will the Japanese slow down?" at Pacific Region Forum on Business and ManagementCommunication by Simon Fraser University at Harbour Centre on November 22, 1991, at 2.152 In 1990, the proportion of employees who had changed their jobs more than once was morethan 70%. It was 55 to 65% (depending upon the generation) in 1980; see ROO JihO [LabourReport] , August, 1992 (Tokyo The Ministry of Labour), at 28; Nakatani, Iwao, The Japanese Firm inTransition (Tokyo, Asian Productivity Organization, 1988), at 55 to 56.153 A proportion of companies which hired mid-career workers increased from 25% to 45%(depending on a type of industry) in 1986 to 60 to 75% in 1991; ROd 6 Jihe) [Labour Report] (Tokyo,The Ministry of Labour), May, 1992, at 53.154 A proportion of employees who desire to remain with the corporation until their retirementsharply decreased since 1982. In 1991, it was less than 25% compare to some 35% in 1982; ibid, at30.40length of service in their reward system. It is the degree of weighting, thesystematization of the seniority factor ..." which makes the Japanese systempeculiar. 155 The Japanese seniority based wage determination system is closelyrelated to the lifetime employment system. The wage increase generally continuesuntil the employee's retirement age. The system may be rationalized in the followingmanner: The harder an employee works and the better his productivity during hisyoung age, the faster he goes up the corporate promotion ladder. The higher heascends, the more he earns. And in the latter years of his career, the higher the basesalary and the higher his wage increases. Hence, the seniority wage system wouldenhance the incentives of young workers who are generally more productivecompared to older workers. 156 In other words, even though young workers are inmost cases not fairly compensated compared to their productivity, there is incentivefor them to work hard. The dream of advancing in position and future rewards is aneffective motivating stimulus.The seniority system has not received so much praise compared to the lifetimeemployment system. Its disadvantages have become more conspicuous in recentyears to the extent that the system appears to be no longer viable. Japan's agingpopulation 157 is directly reflected in the number of older workers of thecorporations; their high wages due to the seniority wage system are threatening thefinance of corporations. Corporations are now paying more money than ever to alarge number of older workers who are not as productive as their young workers.From the workers' point of view, a large number of middle aged or senior agedworkers are now competing for a smaller number of higher positions, than everbefore. 158 Workers who have failed in their bid to advance due to the high degree155 Abegglen, supra note 137, at 205.156 The White Paper on Economy, supra note 83, at 295; Nakatani, supra note 152, at 58.157 See Nakatani, supra note 152, at 60 to 61.158 Nakatani, supra note 152, at 59.41of competitiveness are now overly frustrated and dissatisfied with their positions andsalaries. Young workers, as their work ethic has changed, also feel that they arebeing treated unfairly or even cheated because they are paid less than the olderworkers who are less productive than they are. 159Changes in the system have already been undertaken. A survey shows a clearshift of Japanese corporations' wage determination system "from seniority system toability oriented system." 16° However, this does not necessarily mean that Japanesecorporations intend to abolish the seniority system entirely. Japanese corporationsare now searching for a balanced wage determination system which is fair to theirworkers and still efficient for the corporations. They are now adopting manymethods to evaluate workers' ability in addition to the seniority system.(3) Changing Labour Management System in JapanThe Japanese style labour management system and other Japanese stylemanagement systems are now changing. Changes in economic situation, work ethic,and the aging population are some of the factors which have been primarilyresponsible for these changes. Japanese corporations have been highly adaptable;they have been taking these changes seriously and adjusting appropriately to dealwith the growth of the aging population. Japanese corporations have been initiatingpertinent measures for some time such as early retirement plans, and promotions tooverseas' subsidiaries, and related corporations. 161 To hire more mid-career skilledworkers, corporations have started to reduce the differences in wages betweenlifetime employees and mid-career employees in the same age group.162 To adjust159 Abegglen, supra note 137, at 204.16° Hanaoka, supra note 149, at 174 to 176; ReklO JihO, August, 1992, supra note 152, at 35.161 Dore, supra note 151, at 2.162 ROdO JihO, August, 1992, supra note 152, at 39.42to the changing work ethic, many corporations are now cutting work hours, 163 andadopting a so-called "flex time." 164 Finally many corporations are now adopting anability based wage determination system. 165Although it is difficult to predict at present how far these changes to thelabour management system will proceed, it is certain that in Japan there will be thedevelopment of another unique form of labour management system which will mostlikely be a hybrid between the conventional and contemporary.In any events, one should bear in mind that any parrticular practice or workingsystem in a society affects the laws of the society of the time in various ways.Although most fundamental principles of corporate laws in most advanced nationsare presently similar, yet different sociological, philosophical and economic historiesand present situations which evolved from these histories have led to conceptualdifferences of principles of law in these jurisdictions.Now this thesis moves into the legal analysis of statutory corporate organswhich play a critical role in managing a corporation. It is hoped that the precedingtwo chapters, historical background of corporations and corporate laws, and presentpractice of corporations, will furnish some light to enable an understanding of thelegislative purposes of relevant provisions of the statutes and the legal reasonings ofthe judiciary regarding presented issues.163 Ibid, at 39.1" "Flex time" is a flexible working time system. Under the system, employees are allowed to startor finish their work at any time within certain time span. For example, if an employee is required towork eight hours a day, he may start at any time, say, between 9:00 to 11:00 a.m., and he may finishhis work once eight hours has elapsed; Ibid.165 Supra, note 160 and accompanying text.43CHAPTER THREECORPORATE ORGANSCorporate management systems differ greatly from one jurisdiction to another.As explained in the preceding chapter, Japanese corporations have developed uniqueand particular ways of conducting the various aspects of their business. However, thebasic legal principles underlying modern corporations are by and large the same inmost jurisdictions.A corporation generally functions with two primary organs, namely "TheShareholders' General Meeting (hereinafter the SGM)" and "The Board of Directors(hereinafter the BOD)." This chapter will examine. 1) how these two principalcorporate organs have functioned in the Japanese jurisdiction by focusing on theseparation of ownership and control; and 2) the present concept of corporate organsunder the Japanese Commercial Code.1. Separation of Ownership and ControlThe present basic concept of the SGM and the BOD in Japan is similar tothat of most western countries, particularly the United States. 166Though these organs are an integral part of a corporation, it is important tonote, their delineation is of great importance and is best explained by an examinationof the concept of separation of ownership and control within a corporation.In theory, a corporation consists of a large number of investors who controlit. These investors have rights which include not only the right to receive a166 This similarity is largely due to the American influence after World War II on the JapaneseCommercial Code; supra note 51 and accompanying text.44distribution of profits from the corporation, but also the right to participate in themanagement and control of the corporation as joint owners. Although this isconsidered a fundamental concept and an inevitable characteristic of the corporationby most, in fact, it is rarely actualized. This is due to the fact that the averageinvestors are neither sufficiently knowledgable of corporate management and control,nor do they have any inclination or intention to take an active role in themanagement and control of the corporation. Moreover, the realization of this idealsituation is virtually impossible. 167 Thus, it is recognized that the separation ofownership and control within a corporation is an inevitable phenomenon. 168The publication by Berle and Means, "The Modern Corporation and PrivateProperty" 169 has been available in Japan since it was first published. 170 Theprinciples within it have been analyzed and supported by a multitude of Japaneselegal scholars.171 Japanese scholars examined the principles stated in the book andadapted them to the Japanese environment. Kitazawa explains the principles of thetheory in the following manner:"... the enormous centralization of capital and business enterprises ischaracteristic of the growth of the capital economy which had started in late19th century. Due to this centralization of capital, corporations grewgigantically, share ownership among the large industrial corporations wasdispersed into the public at large, and corporate management became more167 Ueyanagi, Katsuro, 'Ono, Tsuneo, and Takeuchi, Akio (ed.), Shinpan Claishaku KaishahO (5),(6) [Commentary of Company Law: New edition, Vol. (5), (6)] (Tokyo, Yfihikaku, 1989), at 196.Kitazawa, Masayoshi, Kabushiki KaishahO kenkyti [Study of Limited Company Law] (Tokyo,Yfihikaku Co.Ltd., 1976), at 206.Berle, Adolf A and Means, Gardener C., The Modern Corporation & Private Property (NewYork, MacMillan Company, 1932).170 Takeuchi, Akio and Tatsuta, Setsu (ed.), HOritsugaku KyOzai: KaishahO Dai-2-han [Materialson Jurisprudence: Company Law (2nd. Ed.)] (Tokyo, Tokyo University Press, 1980), at 6 to 12;Kitazawa, Kabushiki KaishahO Kenkya, supra note 163, at 206.171 Ibid.45complex. Shareholders of the large industrial corporations were differentiatedinto two types: 1) a small number of shareholders who had the managerialability and owned shares for the purpose of control of the corporation , and2) a large number of shareholders who owned shares for investment orspeculative purposes, and were indifferent and ignorant about corporatemanagement. Consequently, among these gigantic corporations, separation ofownership and management became more distinct, and separation ofownership and control occurred." 172In "The Modern Corporation and Private Property", the authors postulatedfive types of corporate control: "1) control through almost complete ownership, 2)majority control, 3) control through a legal device without majority ownership, 4)minority control, and 5) management control. Of these, the first three are forms ofcontrol resting on a legal base and revolve about the right to vote a majority of thevoting stock. The last two, minority and management control are extra-legal, restingon a factual rather than a legal base." 173 Berle and Means through their analysisrevealed the fact that "management control" 174 had become dominant in the U.S.A.at the time of their publication. 175Similarly, in Japan, separation of ownership and control has become more andmore conspicuous after the postwar period and management control has shown itsdominance. 176 After World War II, the Zaibatsu(big economic combine) 177,172 Kitazawa, Kabushiki KaishahO Kenkyu, supra note 168, at 206(My translation).173 Berle, Adolf and Means, Gardener C., The Modern Corporation and Private Property (reviseded.), (New York, Harcourt, Brace & World, Inc., 1967), at 67.174 In The Modern Corporation and Private Property, 1967, Berle and Means defines "managementcontrol as: "control in which ownership is so widely distributed that no individual or small group haseven a minority interest large enough to dominate the affairs of the company", ibid, at 78.175 Ibid, at 84 to 111.176 Infra, note 185 and accompanying text.46which had controlled the Japanese economy up to that time, was forced intodissolution; and the immoderate centralization of economic power which wasassociated with the Zaibatsu was eliminated. 178 The resulting dispersion of sharesto the open market was followed by the great growth of the Japanese economy. Thishigh growth of the economy fostered capital centralization, which in turn led to"management control" in Japanese corporations. 179Zaibatsu control was dominant in the Japanese economy prior to World WarII. Between 1945 to 1951, The Holding Company Liquidation Commission(HCLC),which was established by the Japanese Government, with the approval of theSupreme Commander for the Allied Powers(SCAP), and other JapaneseGovernmental agencies had disposed of an extremely large number of the shareswhich had mainly belonged to the Zaibatsu.18° In 1947, The Law relating toProhibition of Private Monopoly and Methods of Preserving Fair Trade 181 modeledafter the Clayton Anti-Trust Act of the U.S.A., was enacted. What followed was anincrease in the number of individual shareholders in the 677 publicly tradedcompanies to 4,190,000; a 94.6 per cent increase of shareholders, with the newshareholders holding 70 per cent of the outstanding shares. 182177 Ando, Nisuke, Surrender, Occupation, and Private Property in International Law (New York,Oxford University Press, 1991), at 18, "Zaibatsu" literally means 'financial clique' in Japanese. Theword has been used to designate a small number of gigantic economic combines controlled by a fewfamilies, which throughout the modern history of Japan, have nearly monopolized the finance,industry, and commerce of the country and, with their economic power, have affected its nationalpolicies."178 Ando, supra note 177, at 18 to 20.179 Infra, note 185 and accompanying text.' Salwin, supra note 51 at 490: In 1946, 164 million shares from ten Zaibatsu families, 158 millionshares from several thousand overseas companies, control associations, banks and other closedinstitution etc., and 36 million shares by 'restricted concerns' comprising the first line subsidiaries ofeighty-three designated holding companies, total of 358 million shares, were taken over by HCLC andthe other Japanese Governmental agencies.; See also Ando, supra note 177, at 19 to 20.181 Law No.54, April 24, 1947.182 Kawamoto, supra note 76, at 12.47Comparatively, in 1980, the number of individual shareholders grew to19,270,515. This number represent 97.4 per cent of the total number of shareholders.However, these shareholders only owned 29.3 per cent of the outstanding shares. 183Seventy and one half per cent of the total shares were owned by financial institutions,such as banks and other corporate entities. 184 This control by financial institutionsand other corporate entities is considered as one form of minority control ormanagement contro1. 185It is clear that in Japanese contemporary society, while more shares aredispersed amongst individual shareholders, substantial ownership by corporate bodieshas been increasing; companies are being controlled by companies. 186 This is oneof the major characteristics of the Japanese economic system.Another example which shows the phenomenon of separation of ownershipand control is best illustrated in a book written by Mr. Masaki in 1965. 187 Mr.Masaki looked at the top 200 of 558,016 Japanese companies. Though these 200companies represented only 0.03 per cent of the total companies, they controlled 34per cent of the aggregate capital. Of the 200 companies, 120 companies or 60 per' ShOjilltimu Kenkyil , No.1249, at 7: In 1990 this proportion further decreased to 23.1 per cent.In the U.S.A., individual shareholders owned 56.0% of all the outstanding shares in the U.S.A. in1990; The White Paper on Economy, supra note 83, at 274 to 275.184 TOky6 H6gaku Kenkyiikai and Inoue H6ritsu S6g6 Kenkyakai, Gendai Shihashiken KOza 5:Kaitei KaishahO [Contemporary Judicial Examination Vol.5: Revised Company Law] (Tokyo, H6s6D6jin, 1991), at 62.185 Kawamoto, supra note 76, at 13.186 lbid, at 12 to 15.187 H. Masaki, Sengo ni okeru kabushiki gaisha no shoyti to shihai :wagakuni saidai shisangaku 200sha(hi-kinyet gaisha) no jittai bunseki [Ownership and Control of Limited Companies in Post War Period:An Analysis of the Actual Circumstance of the Japan's Biggest 200 Companies (excluded financialinstitutions] (Tokyo, D6shisha Sh6gaku No.21-1,1965), at 80, as quoted in Kawamoto, supra note 76,at 12 to 13.48cent of them were management controlled, 188 while the remaining 40 per cent wereowner controlled. 189A quick look at the corresponding Canadian situation reveals a startling andinteresting contrast to the Japanese case.In Canada, ownership and control seems to be more concentrated in largeCanadian corporations.19° This is largely due to the large number of foreignownership among the largest Canadian corporations. 191 According to a 1981Canadian Government publication, 192 among the fifty largest Canadiancorporations, twenty were foreign controlled (in other words twenty per cent or moreof their shares were owned by non-Canadians), while thirty corporations werecontrolled by Canadians. Among these thirty corporations, only nine corporationswere owned by large number of individual shareholders who held less than twenty percent of shares of each corporation. In other words, more tha 80 per cent (41 out of50) of large Canadian corporations were owner controlled.Unless shareholders see themselves as owners who ought to pursue their ownbest interests and therefore keep a watchful eye on the management of theircorporations, management may pursue their own best interest and neglect theinterests of the rightful owners of the corporations. This aspect of separation ofownership and control may inevitably lead to an undesirable influence on theMr. Masaki defined "management control" as "a situation where no shareholders own more than10 per cent of outstanding shares and no group controlling the company can be identified."(mytranslation), as quoted in Kawamoto, supra note 76, at 13.189 Kawamoto, supra note 76, at 13.190 Hadden, supra note 67, at 77 to 82.191 Ibid.192 "Position Paper-Draft and Interim Policy on Restricted Shares and Request forComments"(1984), 7 O.S.C. Bull. 988, at IIIA 8. cited in Hadden, supra note 67, at 78.49corporation in various ways by corporate management. If corporate managementpursues their own interest, they may, jeopardize their corporations' financial bases,harm the corporations' name, or cause other detriment to their corporations.2. The Present Concept of Corporate Organs under the Japanese Commercial CodeReflecting the separation of ownership and control, corporate laws of mostjurisdictions recognize two separate corporate organs: "The Shareholders GeneralMeeting" and "The Board of Directors." In addition, as long as the management andcontrol of the corporation is separated from the ownership, it is necessary to have awatchdog to monitor the corporate management; under the Japanese CommercialCode, this watchdog is the auditor(s).The Japanese Commercial Code, under the section of "The Organs ofComp any", 193 has three sub-sections: 1) "General Meeting of Shareholders" 194 ;2) "Directors and Board of Directors" 195 ; 3) and "Auditors." 196 These threecorporate organs are fundamental statutorily required organs within everycorporation.This concept of three corporate organs is largely the result of the influence ofthe German Commercial Code on the Japanese Commercial Code 197 in its earlystage of development. It was considered to be a reflection of the modern democraticpolitical theory in Europe, namely "the separation of the three powers of state intothe administration, the legislature, and the judicature." 198 In Japan the function of193 The Japanese Commercial Code, Book II KAISHA [Companies], Chapter IV Kabushiki-Kaisha[Limited Companies], Section 3.194 Ibid, Sub-section 1.195 Ibid, Sub-section 2.196 Ibid, Sub-section 3.197 See, supra note 43 and accompanying text.198 Ueyanagi, supra note 167, at 3.50these organs has been changed because of the amendments to the JapaneseCommercial Code. 199 The present form and function of the corporate organs areas follows": The shareholders' general meeting, constituted of shareholders whoare joint owners of the corporation, determines fundamental matters including theselection and appointment of directors and auditors of the corporation 201; TheBoard of Directors composed of directors who are appointed or selected byshareholders at the shareholders general meeting, determines managerial matters andappoints representative directors 202; Representative directors203 are appointedfrom among the directors of the corporation by its Board of Directors, to manage theday-to-day business of the corporation and represent the corporation"; Auditors,who are appointed by the shareholders general meeting, inspect the financialstatements of the corporation and monitor the management of the directors of thecorporation.2051" See, Chapter I. 4. Amendments to the New Commercial Code.200 Kanzaki, Katsuro, Shinpan ShOhO II(Kaisha): Gendai HOritsugaku lama 17 [The CommercialCode II (Companies) New Edition: Study of Contemporary Jurisprudence Vol.17] (Tokyo, Ydhikaku Co.Ltd., 1984), at 199.201 The Commercial Code, art.230-10 to art.252.2°2 The Commercial Code, art.254 to art.272.203 "Representative directors" are statutorily recognized and are considered by some as a sub-corporate organ along with the BOD, the SGM, and the auditors under the Japanese CommercialCode. The BOD is made up of representative directors and ordinary directors. All members of theBOD are elected by the shareholders. Ordinary directors are not representative directors. Thoughthey are members of the BOD, they do not have the power, unless so recognized by the articles of thecorporation, to execute decisions of the BOD and the SGM or to represent the corporation. On theother hand, the representative directors are statutorily recognized and required to: 1) represent thecorporation and execute external affairs of the corporation on behalf of the corporation; 2) executedecisions resolved by the SGM and/or the BOD; and 3) decide and execute the decisions made bythemselves relating to the day-to-day business of the corporation; The Commercial Code, art.261;Ueyanagi, supra note 163, at 132; A significant difference of the representative directors under theJapanese Commercial Code and the Anglo-American or Canadian counterparts who are generally, butnot necessarily, referred to as officers of their corporations, is that the former are statutorily requiredto perform certain duties, while the latter is composed of a group of persons whose powers areconferred upon or delegated to them by their articles or bylaws of the corporation.204 The Commercial Code, arts.261 and 262.2°' The Commercial Code, art.273 to 280.51This Japanese statutory requirements of corporations are similar to those inthe U.S.A. or Canada, but differs largely in respect to the function of auditors2°6 .This difference is, again due to the fact that the Japanese Commercial Code wasgreatly influenced by European law, in its early stages of development 2 07 Unlikethe corresponding Canadian law, the Japanese Commercial Code requires that everycompany have an auditor, regardless of, whether it is a publicly-held company ornot,208 and the auditor has the power to monitor the directors' activities in thecorporation in addition to inspecting books of the corporation 209Another significant difference pertinent to corporate organs between the lawof Japan and that of some common law jurisdictions is that under the JapaneseCommercial Code, officers, such as presidents or secretaries, are not statutorilyrequired executives of the corporation. 21° Executives with such titles exist in Japanas a matter of practice, but these executives have no statutory powers to representthe corporation or manage the corporation. Only the representative directors haveany statutory powers to represent their corporation, execute decisions resolved by theSGM or the BOD or manage the day-to-day business of the corporation. In practice,most Japanese corporations have only one representative director who generallycarries the title "president".On the registration of a corporation, the name(s) of the representative2°6 Takeuchi, supra note 170, at 144.207 Supra, see Chapter 1.3. The Enactment of the Old Commercial Code and the New CommercialCode.208 Under the Canadian laws, companies, other than reporting companies may waive theappointment of an auditor. The CBCA, s.163, The BCCA, s.203.209 Under the Canadian law, auditors' duties are only concerning financial statements of acorporation. The CBCA, s.169(1), The BCCA, s.212; Under the Japanese Commercial Code, auditorsof companies with capital more than 100 million yen are authorized to investigate the managementof directors of the corporation. The Commercial Code, art.273 to 280.210 Under some Canadian laws, such as the BCCA, every company is required to have a presidentand a secretary.(The BCCA, s.157).52director(s) and the other directors of the BOD (ordinary directors or non-representative directors), together with the auditors, must be registered as statutorilyrequired officers.Apart from the statutorily recognized group of directors and auditors, inpractice, within corporations, there are also several customary recognized groups.According to custom, ordinary directors are referred to by different titles dependingupon the level of their positions. The lowest level of directors are simply calledtorishimariyaku or directors; they "might be a department head or the second incommand of a division." 211 The next higher level of directors are called jyOmutorishimariyaku or managing directors; these directors are "usually responsible for twoor three departments or a small division." 212 The next level of directors is calledsenmu torishimariyaku or senior managing directors; they "are in charge of larger unitsof the company. "213 Superior to these directorial groups is the fuku shachO or thevice president and finally above the vice president and all others is the shachO or thepresident. From among these different levels of directors, a corporation generallydelegates its powers to manage the affairs of the corporation by its articles orresolutions of the BOD, to the managing directors and the senior managingdire ctors. 214211 Clark Rodney, supra note 14, at 100.212 Ibid.213214 Most corporations in Japan form executive committees or management committees which meetmore frequently than the BOD. "According to a survey, 87 per cent or 86 per cent of the largecorporations have management committees"; Kono, Toyohiro, Strategy and Structure of JapaneseEnterprises (London, The MacMillan Press Ltd., 1984), at 24; Though these committees are notstatutory recognized, in fact, they play a similar role as to the BOD, and determine affairs of day-to-day business of the corporation. These committees are composed of high ranking directors, such asthe president, the vice-president, senior managing directors, and managing directors; Heftel,Christopher Lee, "Corporate Governance in Japan: The Position of Shareholders in Publicly HeldCorporations" in University of Hawaii Law Review, Vo1.5, No.1, Spring 1983, at 154-155; Tanaka, supranote 21, at 478; Ueyanagi, supra note 167, at 21; Kitazawa, KaishallO, supra note 75, at 350.53The distinction between the statutory and customary categories of directorsshould be clearly kept in mind when considering or dealing with Japanese corporatedirectors.The SGM and the BOD are the primary statutory corporate organs, and thustheir legal positions and powers should be closely examined in the course of any legalanalysis of corporate management. This thesis will therefore head in this direction.However, at the same time, it is also important to recognize that, as demonstratedabove, there exist other legal and extra-legal organs or groups who have been deeplyinvolved in corporate management.54CHAPTER FOURTHE HISTORICAL TRANSITION OF SGM AND BODUNDER THE COMMERCIAL CODEAs the Japanese social, economic and political situation underwent tremendouschange, so the legal positions of the primary corporate organs, in particularly two ofthem (namely the Shareholders' General Meeting (SGM) and the Board of Directors(BOD)) also experienced change to a great extent. In this chapter, these changes willbe briefly examined by looking at the New Japanese Commercial Code in 1899 andits amendments to date, as well as the social, economic, and political backgroundbehind these amendments. The amendments looked at are: 1) 1911 amendment; 2)1938 amendment; 3) 1950 amendment; 4) 1955, 1966, 1974 amendments; and 5) 1981amendment.1. The 1899 Japanese Commercial Code215This first Commercial Code, as described in Chapter I as "the NewCommercial Code," was modeled after the German Commercial Code of the day.The Code "inherited the concept of the corporate law of Europe in the late 19thcentury; though the concept was based on the separation of ownership andmanagement, yet the shareholders general meeting had the ultimate and omnipotentpower over the corporation." 216According to this Commercial Code, the SGM could decide all corporatematters, even those which were not specifically laid down under the provisions of thecharter of the corporation or granted to it by statute. Moreover, the SGM, by215 Supra note 43.316 Kitazawa, Kabushiki KaishahO Kenkya, supra note 168, at 212 (My translation).55resolution, could restrict any activities of the directors of the corporation. 2172. The 1911 Amendment218The main purpose of this amendment was to deal with the flood of bubblecorporations after the Russo-Japanese War. 219 The main point of the amendmentwas to clarify and reinforce directors' liabilities. 220 The relationship between thecorporation and the directors was not clearly stated in the Commercial Code priorto this amendment. At this time the first definition concerning this relationship waswritten into the statute and has been an inherent part of the Code ever since. Itprovides as follows: "The relations between the company and the directors shall begoverned by the provisions relating to mandates." 221 Accordingly, "directors havea duty to conduct the business of the company with the standard of care of a goodmanager. "2223. The 1938 Amendment223After the amendment in 1911, the Japanese economy underwent radicalchange which was attributed to World War I. Post World War I Japan experiencedremarkable economic growth. As companies grew bigger, the separation betweenownership and control also increased. 224 Against this background, the 1938217 Ibid, See also Ueyanagi, supra note 167, at 5; 1899 Commercial Code arts.164, 167, 175, 179,189, 199, 208, 213, 221, 222; This issue will be discussed in Chapter V; see infra, note 286 to 293 andaccompanying text.218 Supra note 47.219 1904-1905.22° Kitazawa, Kabushiki Kaishah6 Kenkyd", supra note 168, at 216.221 1911 Commercial Code art.164, para.2. For the English translation of the Code, see TheCommercial Code of Japan Vol.' and II (Tokyo, The Code Translation Committee; The League ofNations Association of Japan, 1931).222 The Civil Code of Japan (Law No.101, September 26, 1987), art.644; This duty will be explainedin Chapter VI. 2. Duty of Care and Skill.223 Supra note 48.224 Kitazawa, Kabushiki KaishaM Kenkyti, supra note 168, at 217.56amendment was introduced. 225The main discussion leading up to the amendment centred around whether ornot the powers of the SGM ought to be reduced. The resulting amendment followedthe principle of the supremacy of the SGM. Moreover, it expanded the power of theSGM, adding to the matters which should be resolved by the SGM.226 It was nolonger mandatory that directors and auditors of a corporation be shareholders, as wasthe case prior to the amendment. This allowed the corporation to recruit managersfrom outside the corporation more easily. It shall be realized that outside directorsmight not desire to be shareholders of the corporation, or the corporation may notwish to have the outside directors as shareholders.In addition, non-voting shares were first introduced by this amendment. Theintroduction of non-voting shares was in part an outright statutory recognition of theconcept of separation of ownership and control. In other words, it recognized"shareholders who, had no interest in the management of the corporation, andretained their shares exclusively for investment purposes in the corporation. To theseshareholders the existence of the voting rights did not matter. Their main concernwas the quantity of the dividends which they would receive; the non-voting shares,which were required by statute to be preferred shares, were the most suitable toappease these shareholders' concern." 227225 This amendment was made based on the draft amendment of Commercial Code in 1931. SeeThe Code Translation Committee, The Commercial Code of Japan Vol I, supra note 221, at xxxix toxliii.226 Kitazawa, Kabushiki kaishahO Kenkyil, supra note 168, at 217 to 218, Ueyanagi, supra note 167,at 96; 1938 Commercial Code arts.168-1(6), 196, 245, 246,348-3, 375.227 Tanaka, supra note 21, at 442 (My translation).574. The 1950 Amendment228This amendment was the most significant in the history of the JapaneseCommercial Code. Through this amendment, the Japanese Commercial Code, whichup to this point had been based on an European continental model, largely adoptedAmerican corporate laws.229Professor Tanaka points out three reasons for this amendment. 23° The firstwas to facilitate the financing of corporations, through the introduction of non-parvalue shares231 and authorized but unissued capita1. 232The second, was the seeking of American funds for the Japanese market. Itwas thought that the harmonization of the Japanese Commercial Code and itsAmerican statutory counterparts would produce a feeling of security that would enticeAmerican investors to invest their capital in the Japanese market. "Registrationrequirements applicable to foreign companies and a clear guarantee of their equaland nondiscriminatory standing as compared with domestic concerns"233 were alsoadded.The third reason, usually stated as having the greatest significance andrelevance, was the democratization of the shareholders' position within the228 Supra note 50.229 Supra, see Chapter 1.4. Amendments to the New Commercial Code; Kitazawa, KabushikiKaishahO Kenkyii", supra note 168, at 221 to 222; Kitazawa, KaishahO, supra note 75, at 230; TokyoH6gaku Kenkyilkai and Inoue H6ritsu S6g6 Kenkyilkai, supra note 184, at 43; Ueyanagi, supra note167, at 7 to 8; Tanaka, supra note 21, at 99 to 106; Salwin, supra note 51, at 484 to 488.23° Tanaka, supra note 21, at 99 to 101.131 Salwin, supra note 51, at 500; art.199.232 Ibid, at 500; art.166, para.1.233 Ibid, at 487; art.485-2.58corporation, corresponding to the democratization of the Japanese society ingeneral.234 This phenomenon of the shareholders' democracy movement is seen asbeing responsible for the recognition of new rights of shareholders. These rightsincluded: rights of access to corporate books and records 235 ; preemptive rights236 ;cumulative voting rights237; the rights to bring derivative actions238; the right todemand stoppage of parallel directors' actions; and the right to outright stop adirector from doing something which shareholders consider not in the best interestof the corporation.239Along with the democratization of the shareholders' position, anothersignificant change to the Commercial Code was also made. This reduced the powerof the SGM and expanded the power of directors. Because the dissolution of theZaibatsu led to the further separation of ownership and control, it was consideredimportant to reform the corporate management system. For this reason, the powerof the SGM, which to this point had been omnipotent in a corporation, wasextensively curtailed, while the powers of directors were expanded. It is importantto note that prior to this amendment, the statutory recognized organ for managing234 A contrary view is held by Professor Kojima. He argues that this amendment was intended notto democratize shareholders position, but to reorganize monopolistic Japanese capitalism by unitingAmerican monopolistic capitalism under the American occupation. He mentions facts which supportshis view: 1) The Anti-Monopoly Law was amended in 1949. This amendment mitigated the restrictionof share ownership, while mergers and acquisitions of corporations became possible by notifyinginstead of getting approval of Minister of Finance. The restriction on concurrent position as directorswas relieved. Moreover the laws which were designed to dissolve Zaibatsu was actually broken downby the announcement by SCAP to remove most of the companies from the list of companies whichwere to be dissolved. ; 2) By this amendment the power of shareholders general meeting was reduced.See Kojima, Yasuhiro, DaikigyO Shakai no HOchitsujyo [Legal Order in the large corporations' society](Tokyo, Keis(5 ShobO, 1981), at 166 to 171.235 Art.293-6.236 Arts.245-2, 408-3.237 Art.256-3.238 Art.267.239 Art.272 reads "In case a director performs an act which is not within the scope of the objectsof the company, or an act against amy law or ordinance or the articles of incorporation, and therebygives rise to fear of irreparable damage done to the company, any shareholder who has held a sharecontinuously at least for the last six months may demand of the director for the stoppage of such acton behalf of the company."59a corporation was individual directors and directors acting as a group. The conceptof the BOD, as a policy-making organ, did not exist. 24° The introduction of thenotion of the BOD and provisions regulating the BOD into the Code is one of thegreatest influences of American corporate laws on Japanese corporate law. Further,the adoption of this concept has been one of the major fundamental changes inJapanese corporate law.The SGM no longer had the power to decide all corporate matters, but couldonly decide matters which were explicitly stated in the corporate statute or thecharter of the corporation as being within its jurisdiction.241 Further, the matterswhich were provided by the statute as being within the jurisdiction of the SGM toresolve were also decreased by this amendment. 2425. The 1955, 1966, 1974 Amendments243Through these amendments, the power of the SGM was further reduced, whilethe powers of the BOD were increased.244 At the same time, the auditors' powersto monitor the activities of directors were expanded. 245 For instance, prior to the1955 amendment, any restriction of the preemptive rights of shareholders had to beexplicitly stated in the charter of the corporation. By the 1955 amendment,shareholders, in principle, had no preemptive rights, unless they were granted to them24° Tanaka, supra note 21, at 377 to 378.241 Infra,i j , see Chapter V. 1. The Power of Shareholders General Meeting.242 Ibid; Kitazawa, Kaishah8", supra note 75, at 230.243 Law No.28 June 30, 1955; Law No.83 June 14, 1966; Law No.21 Apr 2, 1974; Kitazawa,Kabushiki KaishahO Kenkyli, supra note 168, at 229 to 232; Tokyo filigaku Kenkyfikai, supra note 184,at 45; Ueyanagi, supra note 167, at 8 to 9.244 Kitazawa, KaishahO, supra note 75, at 232.245 Ibid.60by the BOD or the charter of the corporation provided otherwise. 246Some changes were introduced for the purpose of protecting individualshareholders. In case of the issuance of new shares to persons other thanshareholders of the corporation, the provision which had formerly required anordinary resolution of shareholders by way of authorization was amended to requirea special resolution.247 But this provision was further amended in 1966. The Codenow provides that the issuance of new shares with a special favourable issue price topersons other than shareholders must be authorized by a special resolution of theSGM.248The 1974 amendment gave additional power to the BOD and improved themonitoring role of the auditors. The BOD was allowed to issue convertible bonds.Prior to these amendments, a special resolution of the SGM would have beenrequired to issue these bonds. Also pursuant to this amendment, auditors of largecorporations, whose capital exceeded 100 million yen, were authorized to inspect, notonly the financial statements of the corporation, but also the management of thecorporation.2496. The 1981 Amendment25°In 1973, the Judicial Affairs Committee of the House of Representatives and246 Art.280-2, para.1: Kitazawa, KaishallO, supra note 75, at 232: Prior to the amendment, thecompany had to provide in its charter the existence, non-existence, or restriction of pre-emptive rightsof its shareholders. Pre-1955 Code art.166, para.1(5), art.374, para.2.247 Pre-1966 Commercial Code, art.280-2, para.2.248 Art.280-2, para.2.249 For instance, art.274 of the Code prescribes "An auditor shall audit the execution by thedirectors of their functions." Art.275 and 275-2 provide for respectively; the auditor's duty to examinethe proposal prepared by directors which are to be submitted to the SGM, and the auditor's right torequest directors that they stop actions which are not within the scope of the corporation's objectiveor in violation of laws; Prior to the amendment, auditors had power to monitor only the financialstatements of the corporation.'° Law No.74, June 9, 1981; Ueyanagi, supra note 167, at 9 to 13; Takeuchi, supra note 170, at1 to 16; Tokyo 1-16gaku Kenkyilkai, supra note 184, at 46 to 51.61the House of Councillors requested that the Japanese Government immediatelyamend the article of the Commercial Code concerning the social responsibility ofcorporations, the active role of the SGM and the system of the BOD .251 Theserequests arose out of specific social circumstances in Japan at the time.First, "anti-social activities, such as buying up of land, by large corporations,had been criticized since around 1972. 11252 Second, it was pointed out that theSGM had become ineffective. 253 While preparation of the amendment had beenin progress, the Lockheed Scanda1, 254 involving the Japanese Prime Minister, tookplace. The Japanese Government requested its Committee on the Commercial Codeto formulate an amendment for immediate implementation to prevent the occurrenceof any such further scandals. 255Three major headings were established under the tentative plan for amendingthe Commercial Code. These were: 1) shares; 2) corporate organs; and 3)accounts.256 Here, only the second will be explained. The basis of the amendmentdealing with corporate organs was a plan to revitalize the SGM through allowingshareholders' proposals to be considered at the SGM. 257 At the same time, a new' Takeuchi, Akio, Kaisei KaishahO Kaisetsu [A study on Revised Company Law] (Tokyo, YtihikakuCo.Ltd., 1981), at 2: For the covering letter and the questionnaire issued by the Ministry of Justiceto the legal and the commercial community concerning the amendment of Japanese Commercial Codein 1975, see "Comment: Commercial Law Reform in Japan: The Current Debate" in Law in Japan:An Annual Vol.11, 1978, p.102.252 Takeuchi, ibid, at 3.253 Ibid; Tokyo HOgaku Kenkytikai, supra note 184, at 46 to 48.254 See Awanohara, Susumu, "Japan's Underdogs Brought to Heel" in Far Eastern EconomicReview, Aug 6, 1976.255 Ibid, at 3 to 7.256 For the detail, see Foster, Mark Edward, "Analysis of the Newly Amended Commercial Codeof Japan" in Case Western Reserve Journal of International Law, Vol.15, No.3, Summer 1983, at 587to 560; Kanzaki, Katsuro, and Tatsuta, Misao, "Major Statutory Amendments in Japan in 1981" inJournal of Comparative Business and Capital Market Law, Vol.5, No.3, September 1983, at 249 to 266;Takeuchi, supra note 251, at 5.257 Art.232-2; Takeuchi, supra note 251, at 96 to 103.-^ 62provision stating that the directors and auditors should explain matters whenrequested by a shareholder at the shareholders' general meeting to do so wasinserted.258 To improve the functioning of the SGM, it was also important that theso-called "sOkai-ya" (professional shareholders) 259 be eliminated. For the purposeof eliminating the Soki-ya, the provision prohibiting a company from offering any ofits property or assets to shareholders as remuneration for the exercise of their rightsas shareholders was introduced. 260Finally, came the last amendment in 1990 which was mainly concerned withthe procedures of incorporation, shares and accounting standards for corporations.No significant changes were made concerning the SGM or the BOD. 261Through, over a century of historical transition in positions and powers of theSGM and the BOD, demonstrated above, these two organs are now exercising theirpresent powers subject to the relevant provisions of the present Code. Among thesetwo organs, the SGM sits on the top of corporate structure as the ultimate decisionmaker. The SGM is empowered to steer the corporation in its future direction. Thenext chapter examines the legal powers of the SGM under the present Code, and itspresent problems.258 Art.237-3; Takeuchi, supra note 251, at 103 to 108.259 "The 'sOlcai-ya' have been described as professional stockholders in Japan's larger corporationswho either extort funds from management under threat of revealing company errors and misdeeds,or work for the companies by providing information, stifling criticism and intimidating oppositionshareholders.... One who earns his living from general stockholders meetings"; Rostrom, Dean L.,"Corporate Extortion in Japan: Stokai-ya Endure Commercial Code Amendment" in Brigham YoungUniversity Law Review, Vol.1987, No.2, at 699; Kawamoto, Ichiro and Monma, Ittoku, "Japan's Breedof Fixers" in Far Eastern Economic Review, June 25, 1976; For a detail, see infra, Chapter V.3. PresentProblems Surrounding Shareholders General Meeting in Japan.26° Art.294-2; a detailed discussion regarding the sokai-ya will be made in the next chapter; infra,Chapter V. 3. Present Problems Surrounding Shareholders' General Meetings in Japan.261 Law No.64 June 29, 1991; Tokyo flOgaku Kenkyilkai, supra note 184, at 51 to 54; Ishiguro,Toru, "Corporate Law: Recent Developments-III:Japan" in International Business Lawyer, Vol.19 No.5,May 1991, at 265 to 267.63CHAPTER FIVESHAREHOLDERS' GENERAL MEETINGThe Shareholders' General Meeting is the key corporate organ composed ofthe shareholders of the corporation. Its main function is to determine themanagement of the corporation 262The powers of the SGM, as granted by the Commercial Code, have undergonetremendous change. Though the SGM remains the supreme corporate organ, it isno longer the omnipotent body that it was prior to the 1950 amendment.263 In thischapter, the present powers of the SGM, the conduct of the SGM under theCommercial Code and the present problems concerning the SGM in Japan areexamined. Comparison will also be made to the relevant provisions of Canadiancorporate statutes (primarily the British Columbia Company Act (the BCCA)264 andthe Canada Business Corporations Act (the CBCA) 265).1. The Power of Shareholders' General MeetingArticle 230-10 of the Commercial Code 266 provides that resolutions shall beadopted by the general meeting only regarding matters specifically provided for in theCode or in the articles of incorporation. 267 What is the meaning of this article?Does it limit the resolutions which may be adopted by the SGM? Does it exclusivelyallow only certain matters to be resolved by the SGM? What happens if the statute262 Ueyanagi, supra note 167, at 14; Kitazawa, Kabushiki KaishahO Kenkyil, supra note 168, at 275;Tokyo H6gaku Kenkyfikai, supra note 184, at 198; Kitazawa, kaishahei, supra note 75, at 237.263 Supra, Chapter IV. 4. The 1950 amendment.264 R.S.B.C.1979.265 R.S.C.1985.266 Law No.64, June 29, 1990; supra, note 53.267 An.230-10.64grants certain powers elsewhere and if those same powers are granted by the articlesof the corporation to the SGM? In other words, may the SGM by the articles of thecorporation contract out of statute and decide matters which are to be resolved bysomeone else?(a) The matters provided for in this Code"  to be resolved by the SGM include:1) fundamental changes to the corporation268; 2) election and removal of thedirectors and auditors of the corporation 269; 3) approval of the financial statementsof the corporation270; 4) the declaration of share dividends 271 ; 5) the issuance ofnew shares, to those other than shareholders, at an especially favourable issuingprice272; and 6) the remuneration of the directors and auditors273 .274 Thesematters are to be resolved exclusively by the SGM, and the SGM may not delegateany of these powers to any other person(s) or organ(s), even through the articles ofthe corporation or a resolution of the SGM. 275 For example, a contract concludedbetween a representative director and a director of the corporation, providing thatthe latter director shall not be removed within a certain period of time is null andvoid. The SGM may always remove any directors at any time, by a special resolution(two-third or more of the quorum). 27626S^para.1 (Alteration of the article of the corporation); art.245, para.1 (The transfer ofthe whole or of an important part of the business of the corporation; art.408, para.1 (Amalgamation);art.404(2) (Dissolution); art.406 (The continuation of the dissolved corporation;Art.375,para.1(Deduction of stated capital).269 Art.254,para.1; art.257, para.1; art.280, para.1; art.254, para.1; art.375, para.1.270 Art.283, para.1; art.419, para.1; art.427, para.1.271 Art.293-2.272 Art.280-3, para.2.273 Art.269; art.279.274 Ueyanagi, supra note 167, at 21 to 23.275 Ueyanagi, supra note 167, at 23; Tanaka, supra note 21, at 378: This view is ostensibly accepted.276 Tokyo District Court, February 13, 1952, KOminshit 5-9-360; Quorum for a SGM is one-halfof the total number of the issued shares (art.343).65Comparing the statutes of Japan and Canada, there are several interestingdifferences concerning matters which are required to be resolved by the SGM underthe statute.Firstly, although it is presumed that directors are to be elected by shareholdersof their corporation at a general meeting and, in fact, most statutes in Canadaincluding the CBCA277 so provide,278 the BCCA is silent on this point. TheBCCA only provides that the power to elect the directors is a matter for the articlesof the corporation.279 Therefore, it is possible, under the BCCA, for directors tobe elected by specific persons or groups, if the articles of the corporation sostipulate.28°Secondly, with regard to the power to remove directors, the provision in theBCCA appears to be an exceptional one in comparison to those in other Canadianjurisdictions. 281 The provision of the BCCA confers the power to remove directors,at any time, on the SGM regardless of any contracts or provisions in the corporation'sarticles to the contrary.282 In most other jurisdictions (since their statutes do notcontain such a provision and the issue appears not to have been a bone ofcontention), 283 it is not clear whether or not the power to remove directors by theSGM overrides any contracts or the articles of the corporation.277 The CBCA, sec.106(3).278 Hadden, supra note 67, at 198.279 BCCA, sec.134(2).28° Hadden, supra note 67, at 199.281 This probably reflects the greater influence of the English Company Act on BCCA. (commentby Professor Robert K. Paterson of the University of British Columbia, Faculty of Law on August 9,1993).282 The BCCA, sec.154(3).283 A 1960 English case (Shindler v. Northern Raincoat Co. Ltd. [1960] 2 All E.R.239,[1960] 1W.L.R. 1038) stated "no contract between the director and the corporation could circumvent thestatutory power of the shareholders to change the corporate constitution."66Thirdly, it has generally been assumed that under Canadian law the power todeclare dividends is a matter entirely within the discretion of the BOD, whereasin Japan "the shareholders general meeting has the power to approve or negate adecision of the board of directors declaring a dividend." 285 The notion behind thisdistinction appears to be that in Japan the right to receive a distribution of profitsfrom the corporation is considered to be one of the most fundamental right ofshareholders, hence the power to make the final decision to declare a dividend isvested in the SGM. On the other hand, in the U.S.A. or Canada, the power todecide whether profits should be distributed to the shareholders of the corporationis vested in the BOD, because it is deemed to be within the discretion conferred uponthe directors.(b)^"The matters provided for in the articles of the corporation"  286 are also tobe exclusively resolved by the SGM. It is generally accepted by the majority ofscholars and jurists that this provision allows the SGM to resolve matters which areplaced under its jurisdiction by the articles of the corporation, even though they oughtto be resolved by the BOD according to the statute 287 Under these conditions, theshareholders are not considered directors, and are not held responsible as directorsfor their actions.Some scholars object strongly to this point. 288 They present argumentswhich can be illustrated by the following example:284 Although, statutes in Canada do not provide for directors' dividends power, the power todividends is "assumed to emanate from the directors' statutory power to manage corporate affairs";Welling, supra note 138, at 644; Hadden, supra note 67, at 321.285 Kitagawa, supra note 55, at sec.7.06[23].286 Supra, note 262.287 Tokyo HOgaku Kenkyilkai, supra note 184, at 199; Ueyanagi, supra note 167, at 25.' Ueyanagi, supra note 167, at 25.67In the case of the appointment of a representative director, the resolutionshould not be made by the SGM, even though the articles of the corporationprovides so. This is because, if the SGM has the power to appoint arepresentative director, the power to remove him would no longer vest in theBOD. Therefore, the BOD would lose an important element of its monitoringpower over representative directors. 289It is my opinion, in looking at any conflict between the statute and the articlesof the corporation, the interest of the shareholders should be paramount in makinga decision.Comparing the principle supported by the majority of scholars in Japan withthe laws of Canadian jurisdictions, I will examine the relevant sections of the BCCA.According to the BCCA, 29° any articles which are inconsistent with a mandatoryprovision of the Act are null and void as a matter of ordinary interpretation. Thus,it would not be possible for the SGM to resolve matters which ought to be resolvedby the BOD under the statute. The BCCA also clearly states that the managerialpowers of the BOD are subject to the articles of the corporation 2 91 In otherwords, the articles of the corporation may reserve a variety of powers of the BOD,unless it is clearly contrary to the statute. It is clear, according to the statute and alsothe common law,292 that if matters are to be resolved by the BOD according to the289 Even if the shareholders do not have the power granted to them by the articles of thecorporation to elect a representative director, they still hold the power of determining who therepresentative directors will ultimately be. If the directors should chose a representative directorwhom the shareholders do not desire, then the shareholders may request that he step down; if thedirector should fail to step down, the shareholders may call an appropriate meeting and remove himas directors.2" Sec.13.291 The BCCA, sec.141.292 Automatic Self-Cleansing Filter Syndicate Co.Ltd. v. Cuninghame [1906] 2 Ch.34, 75 L.J.Ch.437(C.A).68articles of the corporation, the SGM may not resolve the matter without first alteringthe articles of the corporation. Does this mean that the SGM may resolve anymatters provided that such matters are within its jurisdiction under the articles of thecorporation? Does it mean that the articles of the corporation might reserve avariety of powers for the SGM, and thereby be able to reduce the powers of theBOD of the corporation?It seems to me that the answer to both of these questions is "yes." Further,it would appear that shareholders through the SGM may contract out of statute orcommon law unless the statute explicitly prohibits such contracting out. Though, ifthey should choose to do this, in respect of the duties of directors, they will beconsidered as directors for their actions. 2932. The Conduct of The Shareholders' General MeetingThis section mainly deals with procedural issues of the SGM under the Code.Although these issues are not directly related to the primary purpose of this thesis,they will shed some light on the basic view point of the Code regarding the SGM.2.1 Convening a Shareholders' General MeetingArticles 231 to 237 of the Japanese Commercial Code deal with mattersconcerning the convening of the SGM. The shareholders annual general meeting isrequired to be held at least once in every corporate year.294 The BOD may calla SGM at any time by the passing of a resolution of the BOD.The shareholders by written petition to the BOD may request a SGM. Only293 The BCCA, sec.1 defines "director" as "every person, by whatever name he is designated, whoperforms functions of a director".294 Kitagawa, supra note 55, at sec.7, 06[19]; Kitazawa, Kaishaht 3, supra note 75, at 258 to 261;Kawamoto, supra note 76, at 278 to 279; Ueyanagi, supra note 167, at 92 to 101; Tanaka, supra note21, at 397 to 403.69shareholders who hold shares representing not less than three-hundredths of the totalnumber of the issued shares, continuously at least for the last six months prior to thepetition, may be involved in this petition. In the absence of co-operation by theBOD295 with their petition, the shareholders may convene the SGM with thepermission of the court. 296Under the Canadian law (for instance the BCCA), the same requisitionedmeetings are recognised, but the limitations placed on the shareholders who may callthese meetings are not as stringent. The BCCA only requires that the requestingshareholder hold a minimum of five percent of the total issued shares at the date ofthe deposit of the requisition, and no court approval is needed for the convening ofa SGM by the shareholder in the absence of cooperation from the BOD with the shareholder's original request. 297The requirement that one must hold shares for at least the last six monthsprior to the request for the SGM was inserted in the 1950 amendment to eliminate"Kaisha Arashi"298 ; individuals who, by threatening to convene a SGM for their ownpurposes, would temporarily acquire shares of a corporation for the purpose ofextorting the corporation.299The other procedural requisitions provided for in the Commercial Code arerelatively simple and are omitted here. 30° Two issues related to the procedure ofthe SGM which have been controversial are discussed below: 1) The Validity of295 Art.237, para.1.296 Art.237, paras.1,2.297 The BCCA, sec. 171.298 "Kaisha Arashi" literally means corporate robbers, or corporate damagers.299 Tanaka, supra note 21, at 400; Ueyanagi, supra note 167, at 110.300 Kitagawa, supra note 55, at sec.7.06[19].70unanimous shareholders' resolutions; and 2) Resolutions of one-person corporations.2.2 Unanimous Shareholders' ResolutionsThe SGM, in principle, should be convened by a resolution of the BOD. 3°1Unlike Canadian law,302 there is no provision in the Commercial Code whichclearly provides for the validity of resolutions signed by all the shareholders of acorporation, but not actually held or held through defective procedures. Formerly,the validity of unanimous shareholders resolutions was denied by the court 303, butin 1956 the Tokyo District Court, together with the majority of legal scholars, 304decided otherwisem5 and recognised the validity of unanimous shareholdersresolutions.In a decision rendered in 1956, the Tokyo District Court held "... it has to berecognized that there was a defect on the procedure to convene the meeting, but itis appropriate to understand that this kind of defect does not affect the validity of theresolution. This is because the rationale of the requirement of sending thenotification for convening a SGM to each shareholder by the Commercial Code is,presumably, to protect the shareholders' interest; therefore, in the case where all theshareholders waive their statutory rights and resolve the matter without any objection,there is no reason to render it null and void." 306301 Art.231.302 The CBCA, sec.142 provides that a resolution by all the shareholders is as valid as if it hadbeen passed at a SGM; See Zeigal, supra note 66, at 904 to 908.3°3 The Daishinin Hanketsu, February 12, 1932, Minshu, 11-207; See Tanaka, supra note 21, at 458;The court held that a meeting, which is not convened by the required procedure, even though all theshareholders attended to the meeting, is a mere meeting of shareholders; therefore the resolutionswhich were made by the meeting are null as a resolution of the SGM.3G4 Ueyanagi, supra note 167, at 33 to 35; Kitazawa, Kaishald;I, supra note 75, at 264 to 265;Tanaka, supra note 21, at 458.3°5 The Tokyo District Court, December 22, 1956,  Jurisuto No.128, at 77.306 Ibid (My translation).7123 One-person Corporations and the Shareholders' General MeetingIt is also considered to be valid for one-person corporations, which arecorporations constituted of only one person each, to resolve matters without thestatutorily required procedures of convening a SGM. The reasons are the same asthose referred to in the above section on the unanimous shareholdersresolutions. 307It should to be noted that while one-person corporations are not statutorilyrecognized corporations in Japan, majority academic opinion 308 and case law3°9recognize their existence. The rationale for this recognition is two fold. Firstly, bythe 1938 amendment of the Commercial Code, the provision which provided that acorporation shall be dissolved by the reduction of its shareholders to fewer than sevenpersons,31° was deleted. The purpose of this amendment was seen as condoningone-person corporations. 311 Furthermore, it is now possible to incorporate acorporation with only one subscriber, though this was not the case prior to the 1990amendment.312 This amendment substantiated the legal existence of one personcorporations. Secondly, even if all the shares are presently owned by a soleshareholder, due to their transferability, it is potentially possible for the shares to betransferred to several other persons in the future.For these reasons, although the Commercial Code does not explicitly recognizethe legitimacy of one-person corporations, it is generally recognized that one-personcorporations exist, and that resolving matters without following statutorily required307 Ueyanagi, supra note 167, at 34; Tokyo H6gaku Kenkyilkai, supra note 184, at 7 to 8.308 Ibid.3°9 Ibid; The Supreme Court, June 24, 1971, Minshii, 25-4, at 596.310 Prior-1938 Commercial Code, Art.221, para.3; For the English translation, see The CommercialCode of Japan by the Code Translation Committee.311 ^H6gaku Kenkyilkai, supra note 184, at 8.312 Prior to 1990 amendment, at least seven subscribers were required (art.165).72procedures constitutes a valid SGM.313 In 1971, the Supreme Court held 314 :"as for one-person corporations, the sole shareholder constitutes theshareholders general meeting, and it is not necessary to follow the requiredprocedure under the law". 315Similarly, it has been controversial in Canadian jurisdictions as to whether ornot one-man meetings are legitimate. Although the common law position seemsnegative on this point,316 recent statutes in some jurisdictions recognize thelegitimacy of one-man meetings.3173. Present Problems Surrounding Shareholders' General Meetings in JapanAlthough the Commercial Code recognizes that the SGM is vested withconsiderable powers as the supreme corporate organ, it is the accepted fact that theSGM has been reduced to nominal importance and that, adding insult to injury, itdoes not function as it ought to.The SGM in Japan was traditionally not the place for the exchange ofinformation or holding debates among shareholders or between shareholders andmanagement. 318 "The 1990 White Paper on The Shareholders' GeneralMeeting"319 reported on a survey of 2,089 corporations. Some startling factsemerged from the report. In 78.9 per cent of the corporations, the SGMs were3'3 ^Canada, one-person corporations are recognized by the statutes; The CBCA, sec.139(4),sec.114(8), The BCCA, sec.165.314 Supra, note 309.315 Kitazawa, KaishahO, supra note 74, at 265.316 Welling, supra note 138, at 491 to 492.317 The CBCA, s.139 (4); The BCCA, s.165.318 Foster, supra note 256, at 592.319 Sh6ji HOmu Kenkyil-kai, Kabunushi SOkai Hakusho 1990 [The White Paper on ShareholdersGeneral Meeting 1990] in ShOji HOinu No.1234.73conducted in thirty minutes or less. 32° Only 3.8 per cent of surveyed corporationshad SGMs longer than 60 minutes. 321 At 3.4 per cent of the meetings, motionswere laid on the table, while at only 12.3 per cent of the meetings at least oneshareholder other than a director or executive of the corporation spoke. Obviously,most SGMs in Japan are expedited one-sidedly by corporate management, withoutany objections by the shareholders of the corporation.The expeditiously concluded SGMs in Japan can be attributed not only toindifferent shareholders but also the existence of the "SOkai-ya" or professionalshareholders who "either extort funds from management under threat of revealingcompany errors and misdeeds, or work for the companies by providing information,stifling criticism and intimidating opposition shareholders." 322 Before the 1981amendment to the Commercial Code, the SOkai-ya had a large number of personsassociated with it, and they generally controlled the SGM.Prior to the 1981 amendment, there existed a provision, which still exists in thepresent Commercial Code, concerning "the crime of bribery in connection with votingor bringing action"323 The provision states: "Persons who have, in response tounlawful solicitations, received, demanded or entered into an agreement to receiveor to give any benefit of a proprietary nature ... shall be liable to imprisonment withhard labour ... or to a fine ..." But due to the difficulty in proving, the "unlawfulsolicitation", it was and continues to be an extremely up-hill battle to obtain aconviction under this section. In fact, only a few cases have been reported in32° Ibid, at 78 to 79.321 Ibid.322 Rostrom, supra, note 259.323 Art.494.74connection with this provision. In one 1969 case, 32A the directors of a corporationwho had failed in their attempt to invent a new type of colour television afterinvesting a huge amount of corporate funds in the venture, requested of some SOlcai-ya that they take the initiative at the SGM to control those shareholders who werepredicted to pursue the liabilities of the directors for their misdeeds, and rewardedthem with remuneration for their cooperation. In this case, the Supreme Court heldthat the activity of the directors was "unlawful solicitation" under Article 494 of theCommercial Code. 325 Except for a few cases, a SOkai-ya or officers of corporationswho made use of the Slikai-ya, have rarely been convicted under Article 494.It had been suggested by many scholars that Article 494 was not effective ineliminating the SOkai-ya. These scholars suggested the introduction of a moreeffective provision into the Commercial Code. Consequently, a new provisionprohibiting a corporation from offering any of its property or assets to shareholdersas remuneration for the exercise of their rights as shareholders326 was inserted intothe Commercial Code in 1981. Since the insertion of this provision, the activities andthe number of the Seikai-ya have diminished. The number of SOlcai-ya is nowestimated at one thousand, having decreased from an estimated ten thousand justprior to 1981.327 The amount of money that corporations were offering to theseSOkai-ya prior to 1981 was calculated at 100 billion yen per year or roughly 1 billionCanadian dollars per year. 328 This amount is also presumed to have been reduced324 Supreme Court, I Petty Bench, Oct 16, 1969 (T6y6 Denki case),  Sai-han, Kei-sha, 23-10-1359:Osumi, Kenichiro, Toda, Shuzo, and Kawamoto, Ichiro, Hanrei Konmentaru II-Ge [Comments onprecedents] (Tokyo, Sanseid6, 1977), at 1213.325 Ibid.326 Art.294-2.327 Kubori, Hideaki, "Y6shili Kabunushi Ni Taisuru Kaisha-gawa No Taisaku [Corporations'Counter Measures Toward Shareholders Requiring Attention]" in ShOji HOmu, No.1249, May 5/15,1991, at 86.328 Calculated by exchange rate of 1 Can$ = 100 Japanese Yen.75by a large margin. 329 SOkai-ya still exist and like most parasites have built up animmunity to the methods developed to extinguish them. The members of this grouphave been altering their methods, mode and manner and making use of newtechnology and in most of the known cases they have done so to their advantage.For instance, in the past, the SOkai-ya would extort money from corporations of whichthey were shareholders by simply visiting the offices of these corporations andimplicitly stating their business. Here there would be no direct threats or demandsmade during their visit, but the purpose and the motive of such visits would be clearlyunderstood by the officials of the corporation, who were expected to pay off theseculprits to prevent any unfavourable disruptions of the SGM. This activity was notconsidered illegal since the shareholders had a right to visit the office of theircorporations and the corporations would voluntarily offer them money or some otherconsideration in return for their silence of lack of it.Since the 1981 amendment, offering the SOkai-ya money or other considerationin return for some specific exercise of their rights as shareholders has been prohibitedby law; but these SOkai-ya have resorted to other ways and means which technicallyfall within the law, such as use of publications. For example, they would publish aso-called "magazine" containing information which would not necessarily relate to thecorporation. This magazine would be presented to the corporation which would berequested to purchase it for an exorbitant amount of money. Again there would beno direct threats on which to base criminal action.It should be noted that in a few cases there would be direct extortion. Herethe SOkai-ya might threaten to expose some illicit corporate activity at the SGM. Ina few cases, management of the corporation would hire the SOkai-ya to perform somecoercive function at the meeting which would be to management's benefits. These32° Supra, note 327; no information was obtained for the actual amount.76kinds of activities would be considered illegal under both Article 294-2 introduced bythe 1981 amendment and Article 494.It is also significant that many gangsters are now playing an active part asSOkai-ya though this was formerly not the case. The old SOkai-ya were rarelymembers of gangster organizations, even though they would sometimes utilizegangsters as body guards. 33°Although the SOkai-ya still exist and have become more adroit in extortingpecuniary benefits from corporations, the 1981 amendments have undoubtedlycontributed to the reduction of the SOkai-ya and hopefully their activities to someextent. However, the same amendment ironically contributed to legitimize the powerof the SOkai-ya. The amendment was undertaken with the aim of promoting theconcept of "shareholder democracy", which was thought could be realized not onlyby eliminating the SOkai-ya, but also encouraging shareholders to enthusiasticallyparticipate in the SGM and thus activate the SGM. 331 Thus, the amendmentinserted provisions which gave shareholders the right to request in writing of thedirector six weeks before the meeting to make a certain matter the object ofdiscussion at the general meeting. 332 In other words, shareholders were given thestatutory right to place certain matters on the agenda of a general meeting, providinga request is made from the shareholders to the BOD at least six weeks before theday of the general meeting. The amendments also mandated corporations to explainthe matters requested by the shareholder in the general meeting. 33333° Mid, at 82.331 Rostrom, supra note 259, at 706 to 707.332 Art.232-2; The provision continues as "Provided that, this shall not apply if the matter is notthe one to be resolved in the general meeting.333 Art.237-3; The provision continues as "Provided that, this shall not apply if there are reasonablecause, such as if the matter has no relation with the object of meeting, if the explanation injures thecommon interests of the shareholders, or if the explanation needs investigation. 2. The director andauditor cannot refuse explanation by reason that investigation is needed if the shareholder had before77Hence, the more power shareholders obtained, the more power the SOkai-yaalso obtained. The SOkai-ya started to utilize these newly recognized rights ofshareholders as a weapon to harass corporate management. 334 The problem hereis that it is almost impossible to distinguish the SOkai-ya's harassment from thelegitimate exercise of shareholders rights. If a corporation refuses to fulfil the SOlcai-ya's request to explain matters it may end up facing the wrath of the law in moreways than one which may end up being vary costly to it. The SOkai-ya is sometimesnot only a blackmailer but also a legal expert. Miyata Kogyo335 and Matsumura-Gumi336 were actual cases which the SOlcai-ya sued the corporations alleging that,at the meetings, the corporation ignored their questions which had been legallysubmitted prior to the meetings. Regrettably these cases were withdrawn by theplaintiffs before the courts would express their views towards the Seikai-ya andprotecting shareholders rights. 337 It is interesting, but probably impossible to findout what deals were made between the corporations and the SOkai-ya pertaining tothis matter. One thing appears to be clear, and that is that the corporations learneda lesson from these cases: mistreating the Seikai-ya may cause them an expensive lawsuit. The only way for a corporation to avoid this would be either to pay them offor be prepared to answer any legitimate questions without regard to cost.So far, however, it is apparent that Japanese corporations have not developedthe mind-set which would allow them to engage and remove the SOkai-ya. This isevidenced from the fact that in the ten years since the passing of the amendment,reasonable period noticed in writing the matter requested explanation in the general meeting."Rostrom, supra note 259, at 707.335 The law suit was brought to the Yokohama District Court on February 21, 1985. But the casewas withdrawn on February 5, 1986; Kawamoto, Ichiro et.al. "Saikin no Kabunushi SOkai kankei SoshOo Megutte [Regarding the recent cases involving the shareholders general meeting]" in ShOft IfOtnu,No.1078, June 5, 1986, at 865.336 The law suit was brought to the Osaka District Court on March 12, 1985. But the case waswithdrawn on February 17, 1986; Shiiji HOmu, No.1078, June 5, 1986, at 865.337 ShOft Homu, No.1078, supra note 327, at 865.78only fourteen cases relating to the amended provisions have been reported. 338 Ipostulate these cases represent not the tip of the iceberg but an area occupied by afly on the tip of the iceberg. It is extremely difficult to obtain figures concerningactual activities in this area, yet surveys of shareholders support my postulation.According to "the 1990 White Paper on Shareholders General Meetings", 339 52.7per cent of the persons questioned, who were in charge of the SGM, answeredaffirmatively to the question, "Do you think there exist corporations which latentlyoffer proprietary profit to the Saai-ya?"34° In short, corporate management itselfis in part responsible for the failure to eliminate the SOkai-ya.Japanese corporate management has also induced and enforced thelackadaisical attitude of shareholders. The following facts evidence this view;According to the "the 1990 White Paper on Shareholders GeneralMeeting"341 , seventy per cent of the SGM of some 2,089 reporting companies wereheld on one specific date within one year, which was June 28, 1989. 342 Furtherwithin every month there existed a specific date on which most SGMs were held. 343These arrangements were deliberately made by the corporations. The main reasonsfor these arrangements were: 1) the avoidance of SOkai-ya (45.1 per cent); and 2) theavoidance of a prolonged SGM (26.4 per cent). Among the surveyed corporationsonly 0.6 per cent of them selected a date for their SGM to avoid conflicting withSGMs of other corporations. 344338 ShOft HOmu, No.1249, at 85.339 ShOft 116mu, No.1234, 1990.349 Ibid, at 106.341 Supra, note 319.342 Ibid, Survey between July 1988 and June 1989.343 Ibid, at 106.344 Ibid, at 29.79The only concern of the corporate management is to breeze over the SGMwithout any arguments or objections from the shareholders. It appears to be anarduous task to eliminate the SOkai-ya completely from Japanese society. Nor doesit seem probable that in the near future the SGM will be energized with legitimateshareholder concerns. This is probably due to the attitude of the Japanesecorporations which is extremely resistant to change in this area. Another possibilityis that Japanese corporations may have some skeletons in their closets. Shareholders'democracy appears quite a distance away for the shareholders of Japanesecorporations.In conclusion, in Japan although the SGM is conferred great powers by thestatute as the ultimate corporate organ, in practice, individuals who engage in secretmaneuvers behind the SGM and those who have no interest in exercising their rightsat the SGM are hindering the proper functioning of the SGM. This practiceundoubtedly hampers the normal corporate management which the law aims atpursuing.80CHAPTER SIXDUTIES OF DIRECTORSThe preceding chapter dealt with the Shareholders' General Meeting (SGM).Although the SGM ought to steer the corporation in its general direction, as seenearlier, the power to manage the corporation is in fact vested in the Board ofDirectors (BOD or the board). Directors, as board members, exercise their powersat board meetings by determining and initiating the path their corporation shallfollow. In some instances, some of these powers are delegated to individual directorsor groups of directors to enable them to make decisions to facilitate the day-to-dayoperation of the corporation. Because such great powers are conferred on thesedirectors, it is reasonable to expert that these directors will discharge their dutiesfaithfully and in the utmost interest of their corporations.The legal duties of directors under the Japanese Commercial Code are, ingreat part, similar to those under the common law and statutes applicable in thecommon law jurisdictions, in particular those of the U.S.A. This is largely due to theinflux of concepts and influence of the American corporate laws during the Americanoccupation of Japan after World War II. 345 However, there exist enormousconceptual differences regarding directors' duties under the Commercial Code whencontrasted with American corporate laws, despite the appearance of similarity on thesurface between the Code and its American counterparts.The resulting conceptual differences in the legal duties of directors under theJapanese Commercial Code and its American counterparts appear to be derived fromat least four factors, some of which overlap. These factors are as follows: 1) thedifferences in historical background to the respective legislation; 2) the different of3" Supra note 51.81the social situations; 3) the practice of different management systems; and 4) thedifferent philosophies of the peoples, in general in these two jurisdictions.In this chapter, some aspects of directors' duties in Japan will be examined byanalyzing statutory provisions pertinent to these duties, the actual functioning of therelevant Japanese statutes, and some relevant court cases. In addition, any historicalbackground to the legislation and any factors which appear to be responsible for thelegislation will be looked at. Comparison will be made between the common lawjurisdictions as a whole and the various statutory reforms within the common lawjurisdictions, especially those of Canada346 and the U.S.A.347 and Japan to try toelucidate the character of the Japanese provisions.The duties which will be examined in this chapter are: 1) Chtli-Gimu or theduty of care and skill; and 2) Chiljitsu-Gimu or the fiduciary duty. These two dutieshave been generally considered to be the two primary duties directors owe to theircorporations. These two duties have been discussed in the common law jurisdictionssince corporate statutes were first enacted. Contrastingly, in Japan, up until the 1950amendments of the Japanese Commercial Code when the concept of fiduciary dutywas first introduced, the duty of care and skill had been the only general legal dutywhich directors owed to their corporations, rather than the specific duties providedfor individually in the Commercial Code.Because of this background, the duty of care and skill has a relatively lengthyhistory and has been frequently considered by Japanese courts and legal scholars. Itis also because of this historical background that the concept of fiduciary duty has notbeen fully comprehended by the Japanese legislature or the judiciary. The duty of346 Canadian statutes examined in this chapter are mainly the Canadian Business Corporation Act,R.S.C.1985 (The CBCA) and the British Columbia Company Act, R.S.B.C.1979 (The BCCA).34"7 ^statutes referred to include the Model Business Corporations Act in 1989.82care and skill and the fiduciary duty are still, for some scholars and judges, difficultconcepts to distinguish. Hence, the concept of the duty of care and skill and that ofthe fiduciary duty under the Japanese Commercial Code are different from that ofthe common law and statutes of the common law jurisdictions, though not to a largeextent.It is hoped that this chapter will serve to illuminate the present concepts ofthe duty of care and skill and the fiduciary duty, the historical, social, andphilosophical background behind these concepts, the practical ways of discharging theduty of care and skill and the fiduciary duty by directors, and the prospects for legaland practical changes concerning these duties.Before delving into a detailed discussion of these duties, the status of directorsshall be analyzed, since it is one of the major factors which determines what dutiesdirectors owe to their corporations.1. The Status of Corporate DirectorsThe status of corporate directors (and officers 348) has been analyzed andmodified in the common law jurisdictions for, not merely decades, but centuries. 349Some courts have held, that directors are analogous to trustees of a corporation.35°348 Officers of a corporation are not discussed in this thesis.349 "For more than two hundred years courts have attempted to define the status and character ofcorporate directors and officers in an effort to establish and delineate their responsibilities andliabilities'; McMurray, Marcia M., "An Historical Perspective on the Duty of Care, the Duty ofLoyalty, and the Business Judgment Rule" in Vanderbilt Law Review, Vol.40, No.3, April 1987 at 605.35° Charitable Corp. v. Sutton, 2 Atk. 400 , 26 Eng. Rep. 642 (1742). The analogy of directors totrustees was originally established by the Courts of Equity in England. The trustee analogy used bythe Courts of Equity appears to have stemmed from the fact that "[in] eighteenth and nineteenthcentury England the constitution of an unincorporated partnership often consisted of a deed ofsettlement which named trustees of the funds and other property of the undertaking. Managementwas delegated to a committee of directors but some of the trustee were often directors as well"(Paterson, R.K "Reformulating the Standard of Care of Company Directors" in Victoria University ofWellington Law Review, Vol.8, No.1, August, 1975, at 2). This view was adopted later in the American83However, this analogy of directors to trustees has been criticized by other courts 351and by scholars352. The courts have expressed their reservations to this and similaranalogies on several occasions. In one of many instances, the courts in Re: CityEquitable articulated its view as follows:"It has sometimes been said that directors are trustees. If this meansno more than that directors in the performance of their duties stand ina fiduciary relationship to the company, the statement is true enough.But if the statement is meant to be an indication by way of analogy ofwhat those duties are, it appears to me to be wholly misleading." 353Gower further augmented this criticism with the following elucidation:"In truth, directors are agents of the company rather than trustees ofit or its property. But as agents they stand in a fiduciary relationshipto their principal, the company. The duties of good faith which thisfiduciary relationship imposes are virtually identical with those imposedon trustees, and to this extent the description "trustee" still has validity.It is when we turn to the duties of care and skill that the trusteecourts. See Re German Mining Cp. ex P. Cheppendale (1853) 4 De G. M. & G.19, Smith v. PrattvilleMfg. Co., 29 Ala. 503, 507 (1857); Hun V. Cary, 82 N.Y. 65,70 (1880).351 Contrary to the view of the Courts of Equity and some subsequent American courts (supra note350), "by the end of the nineteenth century ... courts of law treated directors as agents of thecorporation" (McMurray, supra note 349, at 605, n.3), and since then the common law courts haveadopted either view, the trustee or agent analogy, or both. See Sequoia Vacuum Sys. v. Stransky, 229Cal. App. 2d 281, 40 Cal. Rptr. 203 (1964); Dixmoor Golf Club v. Evans, 325 Ill. 612, 156 N.E.785(1927); Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 123 N.E.148 (1919) (cited in McMurray,supra note 349, at 606). However, some courts have explicitly stated that directors were not identicalto trustees or agents in a strict sense. See Spering's Appeal, 71 Pa. 11,20 (1872); accord SequoiaVacuum Sys., 229 Cal. App. 2d at 287, 40 Cal Rptr. at 206; and Re: City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. 407.352 Gower, supra note 52, at 550.353 Re: City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. 407, at 427.84analogy breaks down."354These statements would seem to strongly suggest that the characteristics ofcorporate directors (and officers) is to be determined according to the duties whichthey, the directors, owe to their corporations. Thus, distinction between the duty ofcare and skill of directors and the fiduciary duty of directors 355 has been clearlyestablished in common law jurisdictions.The common law principle advocating two supposedly distinct sets of dutiesof directors is now set forth in the corporate statutes of numerous common lawjurisdictions including the Canadian jurisdictions 356. In the Canadian jurisdictions,these duties may be summarized as follows:"Every director and officer of a corporation in exercising his powersand discharging his duties shall(a) act honestly and in good faith with a view to the best interests ofthe corporation, and(b) exercise the care, diligence and skill that a reasonably prudentperson would exercise in comparable circumstances."357The duty stated in paragraph (a) is the fiduciary duty, while that of (b) is "the354 Gower, supra note 52, at 550.355 The fiduciary duty would be regarded as a duty which is derived from a fiduciary positiondirectors occupy, and this concept of fiduciary relationship was originally established by the Courtsof Equity. See Re Lands Allotment Co [1894] 1Ch.616,631. The fiduciary duty was understood tobe a duty of directors to "exercise their powers in good faith and for the benefit of the company asa whole" by the Courts ofEquity,(Paterson, supra note 350, at 3); while, the duty of care and skill was recognized by thecommon law courts "with an appreciation of commercial reality .. to wear down the higher standardsimposed by the equity courts." (Paterson, ibid, at 3).356 The CBCA, s.122; The OBCA, s.142; The BCCA, s.142; Hadden, supra note 67, at 214.357 Hadden, supra note 67, at 214.85duty of care and skill." How the concept of duty of care and skill, which appears tohave been originally established in the common law jurisdictions, has been interpretedand developed in Japan shall be examined below in terail in the next section followedby the detailed examination of fiduciary duty.2. Duty of Care and Skill2.1 Relationship between Directors and their CorporationThe concept of duty of care and skill was statutorily recognized, though notdirectly, by the 1911 amendments of the Japanese Commercial Code (the Code).The amendment ensued after a long and arduous debate on the pertinent issuespertaining to the relationship between directors and their corporation. 358Prior to these amendments, the Japanese courts had been divided into twodistinct pertinacious camps. One camp was of the view that directors were the legalrepresentatives 359 of their corporation (i.e. they were shareholders, whosedirectorial powers were conferred on them, not by any mutual contract, but byappropriate laws or some other authority) and therefore the relationship betweenthese directors and their corporations was not a contractual one. 36°According to this view, a director obtains his status as a director by aunilateral act of the Shareholders' General Meetings (SGM). By resolution, the SGM358 Ueyanagi, supra note 162, at 17-20.359 A legal representative under the Japanese law is defined as "a representative to whom therepresentative right is conferred, by laws and regulations, the appointment by courts or otherauthorities other than the principal; Kawashima, Takenori, Minpii Sasoku [The General Introductionof the Civil Code] (Tokyo, Yfihikaku, 1980), at 315; The Civil Code, art.99; Legal representativesunder the Civil Code include: 1) a person in parental authority (arts.818, 819, 824); 2) a guardian(arts.839 to 841, 859); and 3) a custodian of property (arts.25,26,28).Ueyanagi, supra note 167, at 18; The Supreme Court, March 14, 1903 (Minroku 9-307); At thetime of these arguments, a director was required to be a shareholder of his/her corporation. Thisqualification of being a shareholder in order to be a director was deleted by the 1938 amendments.86would elect a director,361 and from the time of this election, this director would belocked into all the responsibilities and/or liabilities of a director of the corporation.This view was further sub-divided. This sub-division arose in regard to adirector's right to resign from his directorship. Again, two primary opposing viewssurfaced. Of those cases which managed to make it to court, some courts held, 362that directors ought to have the freedom to resign from their office regardless ofwhether their resignation was accepted by their corporations or not, since, in the firstplace, corporations were given the freedom to elect directors regardless of thesedirectors' intentions to accept their election or not.Conversely, some courts held that the resignations by directors ought not tobe automatically recognized at all, since the relationship between directors and theircorporations was not contractual, and hence, only the SGM had the power to dismissdirectors whom they had elected; thus directors who wished to resign from theiroffice needed to seek their own dismissal from their SGM. 363 In other words, itwas advocated by these courts that to begin with, directors must request theirdismissal from the SGM, but even after this request is made, the SGM had theauthority to refuse to comply with the request.The prevailing view of the other major pertinacious camp, concerning therelationship between directors and their corporations, was that it was contractual 36aHowever, among scholars, there was no consensus concerning the nature of this361 Ibid.362 Nagoya High court, December 4, 1902 (11Oritsu Shinbun 121-8), cited in Ueyanagi, supra note167, at 18.' Tokyo High Court, Date unknown, 1904 (11Oritsu Shinbun 257-20), cited in Ueyanagi, supranote 167, at 18.364 Osaka High Court, November 20, 1907  (11Oritsu Shinbun 465-21), cited in Ueyanagi, supra note167, at 18.87contractual relationship. Several arguments were advanced in an attempt to castsome light on the nature of this contractual relationship. The arguments included:1) the nature of the contract between directors and theircorporations is that of a mandate or quasi-mandate365 ;2) the nature of the contract between directors and theircorporations is of a mixed nature of mandate and employmentcontract366 ; and3)^the nature of the contract between directors and theircorporations is a "nontype contract" 367, not a "type contract"368,such as a mandate or an employment contract, set forth in the CivilCode369 .This third argument is upheld by those courts who are of the opinion that acontract between directors and their corporations is of a nontype contract. In otherwords, the contract between directors and their corporations is a particular type ofcontract which is not provided for in the Civil Code. If a contract is of the typewhich is specifically set forth in the Civil Code the provisions in accordance with the365 The Civil Code of Japan (The Civil Code, Law No.89, April 27, 1896, amended as Law No.101,Sep 26, 1987) provides for mandate and quasi-mandate respectively: "A mandate becomes effectivewhen one of the parties has commissioned the other party to do a juristic act, and the latter hasconsented thereto"(art.643); "The provisions of this section shall apply mutatis mutandis tocommissions of affairs other than juristic acts"(art.656); For English translation of the Civil Code ofJapan, see EHS Law Bulletin Series (Tokyo, Eibun-Horei-Sha).3" Ibid, art.623: "A contract of service becomes effective when one of the parties agrees to renderservices to the other party and the latter agrees to pay the former remuneration therefore."367 Mumei Keiyaku [nontype contract]; "..., under the Civil code, the contract parties are allowedto create other types of contracts differing from those already recognized (under the Civil Code orthe Commercial Code)" This type of contract is called a "nontype contract"; Kitagawa, supra note 55,at II 1-82.368 Tenkei KaYaku [type contract]; "The Civil Code recognizes thirteen "type contracts" (tenkeikeiyaku, Typenvertrag), stating with respect to each, several special provisions which supplement theGeneral Provisions applicable to all contracts"; Kitagawa, supra note 55, at II 1-65.369 See, supra note 367 and 368.88Civil Code, pertaining to this specific type of contract would apply to it. On the otherhand, if a contract is of a particular type which does not fall into any of the categoriesof contracts which are set forth in the Civil Code, it is treated as a nontype contract.And if a contract is a nontype contract, the general principles of Japanese contractlaw apply to it, since there does not exist any specific provisions in accordance withthe Civil Code pertinent to such a contract.According to the first two arguments under the contractual nature view, dueto the mandatory nature37° of the contract, directors were said to be free to resignfrom their office without the consent of their corporation. On the other hand, underthe last argument the approval of the corporation was required in this regard 371due to the general principles of contract. 372At present, it may appear that these arguments are vacuous and serve only toaugment the chaos among the Japanese legal scholars in this and related areas.However, at the time these arguments were being postulated, these arguments werecritical to the parties involved since the relationship between directors and theircorporation, it would appear, was not thoroughly thought out before, or if it was, thenthe changing times caused a shift of the equilibrium of thoughts and ideas pertinentto this relationship and the situations governing it. A firm grasp of this relationshipwas needed since this would be the major factor in determining, among other things,the time of commencement and undertaking of duties of directors and the time of370 The Civil Code, art.651 provides: "A mandate may be rescinded by either party at any time."371 Ueyanagi, supra note 167, at 19-20.372 According to this view, since the contract between directors and their corporations is a nontypecontract, the general principles of contract applies unless otherwise provided. Though there is aprovision concerning dismissal of directors in the Commercial Code, there is no provision concerningresignation of directors. Therefore the general principles of contract apply to the resignations ofdirectors; accordingly, directors' resignations due to their sole intentions and decisions alone, withoutthe consent of the other party, i.e. the corporation, are not permitted; The Civil Code, Section 5, Sub-section 3. Rescission of Contract, art.540 to art.547; Ueyanagi, supra note 167, at 19.89cessation of these duties.Now, it would seem today to be out of the question to argue, as some of thecamps of courts and scholars mentioned above did, that the relationship betweendirectors and their corporation is not contractual and/or directors are not allowed toresign from their office without their company's consent. However, it must beremembered that these arguments occurred as a natural consequence inunderstanding the general principles of the corporate law in Japan at the time373 .At that time, the SGM had the ultimate and omnipotent power in thecorporation, and could make the final decisions concerning all the affairs of itscorporation374 ; therefore it would not have been problematic at all to say that theSGM, and only the SGM should select and dismiss its directors regardless of theirwill. In addition, at the time, directors of a corporation were required to beshareholders of the corporation 375 ; therefore a shareholder who was selected asa director, or dismissed or refused to resign from his/her directorship ought to haveobeyed the resolution of the SGM as a shareholder.However, it is only fair to point out that at the time there were those legalscholars who held a contrary view which saw the relationship between directors andtheir corporation as contractual. 376 These were the scholars with vision, who hadthe best interest of corporations as a whole in mind. They wanted to developcorporations in a way which would be beneficial to all involved in and with the373 The 1899 Commercial Code, supra note 43.374 Kitazawa, Masayoshi, Kabushiki ICaishahO Kenkyii, supra note 168, at 212.375 The 1899 Commercial Code, art.164, para.1; This provision was amended in 1938 and 1950.Presently directors of a corporation do not need to be shareholders of the corporation. Moreover,it is even prohibited for the charter of the corporation to provide that directors shall be shareholdersof the corporation; The present Commercial Code, art.254, para.2.376 Ueyanagi, supra note 167, at 17.90corporations.As stated earlier, if the relationship between directors and their corporationsare not contractual, as soon as persons are elected as directors at the SGM regardlessof whether they are ready, willing and able to do the job, the elected individualswould be locked into all responsibilities and liabilities as directors. 377 At the sametime, freedom of resignation of directors from their office may not be fullyguaranteed.378 In short, if the relationship between directors and their corporationsis not contractual, directors' freedom would be limited. Thus, if the relationshipbetween directors and their corporations is not contractual, there would be fewcompetent and knowledgable people who would be willing to be directors ofcorporations. Without a competent and knowledgeable director, the concept of usingcorporations as a responsible vehicle for investment and/or running a business wouldbe constrained.These various arguments spawned statutory clarification. The Code wasamended in 1911, introducing the following provisions: "The relationship between thecompany and the directors shall be governed by the provisions relating to mandates." 3"The insertion of this article terminated many of the above arguments; accordingly itbecame recognized that the legal relationship between directors and their corporationis based on contract, and the nature of this contract is that of a mandate or quasi-mandate380. In the meantime, it had also become clear that directors owe a dutyto their corporation based on this mandate 381 . This duty was recognized to be, "the377 Supra note 361 and accompanying text.378 Supra note 363 and accompanying text.379 The Civil Code of Japan, art.644 provides: "A mandatary is bound to manage the affairsentrusted to him with the care of a good manager in accordance with the tenor of the mandate."38° Tanaka, supra note 21, at 478; Ueyanagi, supra note 167, at 21; Kitazawa, Kaishahei, supra note75, at 350.381 See, supra note 379.91duty of care and skill." It is a duty which has a specific and unique Japanese flavour,to be examined below.It is noteworthy that the above statutorily defined relationship betweendirectors and their corporations would not apply when a fiduciary duty isconcerned.382 As has been advocated by scholars and courts in the common lawjurisdictions, it has been recognized by many of Japanese scholars and courts that afiduciary duty is not derived from the directors' position as mandatories as set forthin the Commercial Code and the Civil Code. 383 Therefore the principles pertainingto the fiduciary duty concept should be discussed on completely different groundsfrom those of the duty of care and skill.Also worthy of note is that the concept of fiduciary duty, as expressed in thecommon law jurisdictions, did not exist in Japan until the 1950 amendments to theCode. These amendments, as with many other amendments to the laws of Japanafter World War II, were primarily conceived and delivered into existence due to aprocess of forced imposition by the SCAP 384 while Japan was underoccupation. 385The above amendments have been unlike the earlier development of the382 Kawamoto, supra note 76, at 334.383 The issue regarding the realtionship between the duty of care and the fiduciary duty will bediscussed later in the section of fiduciary duty; see infra note 514 to 528 and accopanying text; Inshort, there has been a long debate among scholars and members of judiciary in Japan as to whetherthe fiduciary duty is a different duty from the duty of care and skill. However, the present majorityview is that the fiduciary duty is a different duty from the duty of care and skill. According to thismajority view, a fiduciary duty is not derived from an ordinary relationship of mandate as set forthin the Civil code of Japan; Ueyanagi, supra note 167, at 29; Tanaka, supra note 21, at 540; Namiki,Toshimori, Torishimaiyaku no gimu to sekinin [Directors' Duties and Liabilities], (Tokyo, Chug Keizai-sha), at 46.384 The Supreme Commander for the Allied Powers; "SCAP directives were ordinarily formulatedon the basis of instructions received from the US Government"; Ando, supra note 177, at 29.385 Salwin, supra note 51, at 484-488.92concept of a duty of care and skill in the laws of Japan, which had existed in Japanprior to the post-war amendments incorporating American law. This historicalbackground is greatly responsible for the different notion in the concept of duty ofcare and skill in Japan compared to that of the common law jurisdictions.When one, especially a non Japanese person, looks at the laws of Japan, inparticular those laws which are due to these amendments implemented as a result ofthe occupation after World War II, one may be quick to say, that Japan only pays lipservice to the principles of these laws. But a better understanding may be obtainedby looking at the psyche of children born out of a similar relationship or process asthese laws were.2.2 Duty of Care and SkillAs stated above, it was codified that, " the relationship between the companyand the directors shall be governed by the provisions relating to mandates."386Directors, therefore, owe a duty to their corporations as mandataries. It should bekept in mind at this point that the duty of mandataries set forth in the Civil Code ofJapan is different from those generally understood in the common lawjurisdictions. 387 However, since directors of corporations appear to have never386 The Commercial Code, art.254, para.3,; "mandates" is provided for in the Civil Code, art.643,supra note 365 and art.644, supra note 379.387 Under the Japanese Civil Code, "mandate" and "quasi-mandate" is comprehended as a contractof which one party (a mandator) commissions or mandates the other party (a mandatary) to do ajuristic act or any other affairs with or without payment. (The Civil Code, art.643 and 656, supra note365). Though the Civil Code of Japan was mainly influenced by both the German Civil Code and theFrench Civil Code at the time of the enactment in 1898 (Wagatsuma, Sakae, Shintei MinpO SOsolcu(Minp13 KOgi I) [General Provisions of the Civil code (Lecture on the Civil Code, DJ, (Tokyo, IwanamiShinsho, 1980), at 9-10), the concept of mandate under the Civil Code of Japan is similar to but notthe same as either the German Law or the French Law. (Kurusu, Saburo, KeiyakuhO: HOritsugakuZensha 21 [Contracts: Series of Jurisprudence Vol.211 (Tokyo, Ylihikaku, 1977) Furthermore, theCommon Law concept of mandate is also different from the above Japanese concept; "mandate" underthe Common Law is defined as "A contract by which a lawful business is committed to themanagement of another, and by him undertaken to be performed gratuitously. The mandatary isbound to the exercise of slight diligence, and is responsible for gross neglect", or "a bailment of93been thought of as mandataries in the common law jurisdictions, it would be of littleuse to discuss the different notions of mandataries between Japan and the commonlaw jurisdictions. Directors' duties, as far as the duty of care and skill is concerned,under the Japanese law should be discussed as the duties of mandataries, whereasdirectors' duties in the common law jurisdictions should be discussed as a matter ofduties specific to directors, not as mandataries.Due to the principle which mandates that directors owe a duty to theircorporation due to their position as mandataries, under the Japanese law, "directorshave a duty to conduct the business of the company with the standard of care of agood manager."388 The standard of care of a good manager in this context wouldappear to be similar to the standard of care of a director under the common law 389or the statutory provisions such as those in Canada 39° If this were the case,directors would be expected to exercise a duty of "care, diligence and skill of areasonably prudent person." 391 However, the wording "care of a good manager"property in regard to which the bailee engages to do some act without payment. Agreement toperform services for another without pay."(Black's Law dictionary) In short, mandate, including quasi-mandate, under the Japanese Law is a contract in respect to the commission of affairs regardless ofwhether it is gratuitous or with consideration, while under the Common Law, mandate is a contractwhich generally involves a bailment of property, and one party does some act for the other partygratuitously. Stated from the different point of view, the concept of mandate under the Japanese law(The Civil Code) appears to be similar to the concept of trust or agency under the Common Law.Trust and agency laws are generally categorized as several types depending upon their nature, suchas express trust, constructive trust, resulting trust, implied trust, simple trust, special trust for theformer (Smith, Beverly G., Introduction to the Canadian Trusts, (Toronto, Butterworths, 1979, at 1 to14), and contractual agency and agency resulting from ratification for the latter (Fridman, G.H.L., TheLaw of Agency, London, Butterworths, 1990, at 47-97). The mandate under the Japanese law appearsto be similar to the Common Law "express trust" or contractual agency relationship as far as creationof the relationship between mandator and mandatary is concerned, - beneficiary and trustee, andprincipal and agent - . However, where their duties are of concern, no equivalent category of trustsor agency could be found in the Common Law with respect to mandate.388 Kitagawa, supra note 55, at 7-47; The duty of mandatary is provided for in art.644 of the CivilCode of Japan, supra note 379.389 Re: City Equitable, supra note 353; This case clarifies the Common Law position on thesubject.39° The BCCA, sec.142(1)(b); The CBCA, sec.122(1)(b).391 The BCCA, sec.142(1)(b).94under the Civil Code of Japan, reflects a somewhat different sense from theexpression as used in the Canadian statutes or in other common law jurisdictions.Further analysis of this wording shall be made by contrasting this principle of thecommon law and the statutory reforms in Canada with those which are analogous inJapan.An examination of the different degree of care and skill which is expected tobe discharged by directors under the Japanese statute, the common law and theCanadian statutes will be looked at below; followed by a treatment of more specificinstances in this regard.1) Degree of Care and SkillThe basic position of the common law on the degree of care which directorsare expected to discharge is well illustrated in case Re. City Equitable:"The care that he is bound to take has been described by Neville J. inthe case referred to above as "reasonable care" to be measured by thecare an ordinary man might be expected to take in the circumstanceson his own behalf....A director need not exhibit in the performance ofhis duties a greater degree of skill than may reasonably be expectedfrom a person of his knowledge and experience." 392The above common law position was codified in most Canadian jurisdictions.For instance, the CBCA provides393 :" Every director and officer of a corporation in exercising his powers and392 Supra note 353, at 428.393 The CBCA, sec.122(1)(b); The BCCA equivalent is sec.142(1)(b).95discharging his duties shall ... (b) exercise the care, diligence and skill thata reasonably prudent person  would exercise in comparablecircumstance. "394The Japanese law, however, defines the degree of directors' duty of care andskill in a slightly different manner. As was explained earlier, directors aremandataries395 of their corporations and as such owe to them a duty of care. Theyare obliged to discharge this duty with "the standard of care of a good manager" asprovided for in the Civil Code of Japan396. "The standard of care of a goodmanager", in a general sense under the Civil Code of Japan, is to be determined"depending upon the degree of education and expertise expected for the managementposition, and the abilities and characters of the mandatary in the managementposition, which is known or ought to be known by the mandator." 397 By applyingthis interpretation, directors are said to owe a duty of care and skill to theircorporations as would be generally expected of persons who are in a similar position.However, in questionable circumstances, the abilities or character of the directorsought always to be taken into account. 398 Stated another way, there is an objectivestandard which is to be applied to all directors. However, in addition to this objectivestandard, a subjective standard is also of importance which takes into account theindividual abilities and characters of the directors. Moreover, "the care required isof a higher degree than that which an individual director is expected to execute inhis own business" 399 under the civil law principles of Japan.394 In the U.S.A. the expression "ordinarily prudent person(director) in a like position undersimilar circumstances" is commonly used in the statutes; McMurray, supra note 349, at 608.395 See, supra note 379 and accompanying text.' The Civil Code, art.644, supra note 379.397 Hironaka, Toshio, Saiken Kakuron Rongi (Dai 5 Hen) [Discussion of Particulars of Right inPersonam (5th ed.)] (Tokyo, Yilhikaku, 1980), at 251 (my translation).398 Kitazawa, Kaishahe3, supra note 75, at 350.' This Kitagawa's interpretation appears to be based on the majority view of interpreting art.644of the Civil code: Kitagawa, supra note 55, at 7-47.96In summary, a director is required to exercise the care of a higher degree thanthat which he is expected to execute in his own business. The standard of care of adirector is that degree of care that a reasonably competent manager in his positionor occupation would exercise in the particular circumstances.As far as the actual wording is concerned, it would appear that the degree ofcare under the Japanese law is more stringent than under the Canadian law. In otherwords, the Japanese Code has adopted an objective standard which requires thedegree of care expected of a competent manager, as opposed to the standard of areasonably prudent person, under similar circumstances, which is the case under theCanadian law. However, it would be, in my opinion, inappropriate to conclude so,since there appear to have been no reported cases in Japan so far, which clearlystated whether a higher degree of care, i.e. the professional standard, was expectedto be discharged by directors in fulfilling their duty of care. In fact, at least oneJapanese scholar expresses the opinion that the degree of care "should be interpretedin the same manner as the Model Business Corporations Act ss.8.30 of theU.S.A."40° The relevant wording is that "[a] director shall discharge his duties asa director ... with the care an ordinary prudent person in a like position wouldexercise under similar circumstances ..."Moreover, how the above differences in standards would effect any actualresults appears to be unknown. It is questionable, if in practice, the results due tothe above differences in standards are of any real importance. In reference to thispoint, it should be noted that arguments regarding this principle of standard of carehave been taking place in common law jurisdictions for many years, and at least onecommentator has suggested that the differing standards of an "ordinarily prudent manin his own affairs" and an "ordinarily prudent director" have not resulted in any400 Namiki, supra note 383, at 45.97"significant differences in [the] outcome" of cases."401Apart from any differences in outcome due to the above different standardsof the Japanese and the common law jurisdictions, there also exists a conceptualdifference between the two standards of these jurisdictions. There may be tworeasons why the Japanese statute has adopted a more stringent standard ("thestandard of care of a good manager" as opposed to the lesser standard, "the degreeof care that an ordinarily prudent person in a like position under similarcircumstances would exercise" 4°2).One reason has to do with the purpose for the codification and the dominantlaw which had any effect on the Japanese laws at the time of the codification. Theduty of care was first codified to eliminate the various arguments regarding therelationship between directors and their corporations.At this time the Code was still under the influence of the German law and notthe laws of the U.S.A. Not much study, if any, had been undertaken on the conceptof Duty of Care as practised and philosophized in the common law jurisdictions. Nospecific consideration regarding the fiduciary relationship between directors and theircorporations, which had been on the table of discussion in the common lawjurisdictions for numerous years, had been taken into account. The Japaneselegislature simply adopted the concept of mandate under the Civil Code of Japan incharacterizing the position of directors. By doing thus, they failed to take a closelook at the degree of care to be discharged specifically by directors.It may be argued that the legislature exhibited a lack of prudence or was even401 McMurray, supra note 349, at 607, footnote 13.402 The Model Business Corporations Act (1989), ss.8.30.98negligent in their duty in dealing with this important matter. After all, the legislaturehad at their disposal a battery of advisors both legal and non-legal, to whom they mayhave turned for advice. A much closer look at this and other concepts pertinent tothis discussion, especially those on which they ruled, should have been undertaken.But maybe one should not be too hard on these legislators. They seem to have beenafflicted with the same conditions which many of our past and present-day legislators,the world over, have been suffering from. Though it is debatable whether or not thiscondition is deleterious, symptoms of the affliction include the making of legislationwhich is questionable with respect to their respective electorates. It appears thatlegislators some more than others, in every part of the world, have been makingdecisions, which are not necessarily supported by, or in the best interest of themajority of their electorates.However, regarding this specific issue, the imposition of higher standard ondirectors, the Japanese legislature would have acted in the best interest of themajority of the electorates, if the electorates are to be shareholders. Because thehigher the standard of care of directors, the securer the shareholders' interest. Onthe other hand, this legislative position would be detrimental to corporations wherethe necessity of recruiting outside directors is concerned.In the U.S.A., one commentator in an attempt to shed some illumination inthis area has stated, "... if a higher standard were adopted, qualified persons mightnot accept positions as corporate directors. This argument directly addresses thepossibility of qualified individuals declining to serve as outside directors because ofpotential liability.' ,403 To the contrary, in Japan the above consideration on outsidedirectors appears to have never been taken into account by the Japanese legislature.Presumably this is largely due to the significance of the corporate management system403 McMurray, supra note 349, at 610.99of Japan.In Japan, most directors are inside directors who are also senior employeesof the corporation. 404 This fact is clearly evidenced from several surveys. Onesurvey405indisputably shows, that out of 1522 promotions [to directorship] 80 percent are from within the company, 13 per cent are from the parent company or froma subsidiary, and only 7 per cent from complete outsiders." 406 Another surveyshows that 34 per cent of large corporations, such as Toyota and Canon, do not haveoutside directors at al1. 407 Contrary to this Japanese pattern, for example, in theU.S.A., approximately 40 per cent of the Boards of Directors of similar companiesare occupied by outside directors 408 This is a significant point pertaining toJapanese directors and should be kept in mind when looking at other aspects ofdirectors under the Japanese law.This significant difference in corporate management structure, between Japan,and the U.S.A. and other common law jurisdictions including Canada, appears toarise out of a difference in the systems of corporate monitoring.The following discussion concerning differences in the corporate monitoringsystems of Japan, the United State and Canada is worthy to note here.In Japan, every stock corporation is required to have a monitoring organ, "the"Now the directors of most Japanese companies come from the ranks of the employees, afterhaving worked their way up through management over twenty or thirty years": Clark, Rodney, supranote 14, at 100.4°5 Kono, supra note 214, at 31.4°6 Ibid.407 Ibid, at 23.418 Ibid.100auditors", separate and independent from the BOD. 4" On the other hand, in thecommon law jurisdictions, such as the U.S.A. or Canada, though several proposals orarguments have been addressed by many writers of these jurisdictions to restructurethe corporate laws regarding the supervisory organs, 41° at present there appears tobe no mandatory requirement for an independent supervisory organ411 which isequivalent to "the auditors" in Japan.412In Canada, for example, there are statutory requirements, subject toexceptions, 413 for appointing auditors who must be independent of thecorporation.'" In addition, the majority of members of an audit committee isrequired to be independent of the corporation. 415 At first glance, one may bequick to think that these two bodies have a similar function to the Japanesecorporate organ "the auditors", but this is not the case; there are fundamentaldifferences between the Japanese corporate organ "the auditors" and, "the auditcommittee" and "auditors" of a Canadian corporation. First, the auditors and anaudit committee, under the Canadian laws, are not considered to be a corporate409 The Commercial Code, art.276.410 Bradley, Michael and Schipani, Cindy A., "The Relevance of the Duty of Care Standard inCorporate Governance" in Iowa Law Review, Vol.75, No.1, October 1989, at 21; Meier-Schatz,Christian J., "Corporate Governance and Legal Rules: A Transnational Look at Concept and Problemsof Internal Management Control" in The Journal of Corporate Law, Vol.13, No.2, Winter 1988, at 445to 448.411 In Canada, the appointment of an auditor is mandatory only for reporting companies.(TheCBCA, s.162 and 163; The BCCA, s.202 and 203). In addition to the appointment of auditor, inCanada, every reporting company is required to appoint the audit committee which is composed ofdirectors, "of whom a majority shall not be officers or employees of the company or an affiliate of thecompany."(The BCCA, s.211; The CBCA, equivalent is s.171) However, duties of both auditor andthe audit committee is to inspect financial statements of the corporation, and not to superviseactivities of directors of the corporation.412 ibid.413 Both the CBCA and the BCCA exempt certain corporations, basically closely held corporations,from the requirement of appointing auditors and audit committee.; The CBCA, s.163, s.171(2); TheBCCA, s.203, s.211(1).414 The CBCA, s.161; The BCCA, s.207.41s The CBCA, s.171; The BCCA, s.211.101organ along with the SGM and the BOD. Second, the range of duties,responsibilities and powers of the auditors under the Japanese Commercial Code isbroader than those of the auditors and/or audit committee under the Canadian laws.In Japan, several statutory amendments pertaining to the auditors 416 have left thiscorporate organ with the power not only to inspect and assess the financialstatements of their corporation, but also to monitor and supervise the activities ofdirectors of its corporation.On the other hand, the function of auditors and an audit committee of acorporation under the Canadian laws 417, are strictly limited to the assessment of thefinancial statements of the corporation.In common law jurisdictions, there appears to be the belief that thissupervisory function of the management of a corporation may be realized by havingoutside directors who are disinterested members 418 of the BOD. This beliefappears to be the major reason for the trend in favour of appointing outside directorsin these jurisdictions. In truth, it has been recently elucidated by many commentatorsin the common law jurisdictions that the appointment of outside directors is a healthypractice for corporations since the outside directors are believed to be "unaffiliated416 The auditors' power has been a controversial issue in Japan, and has been modified by severalamendments of the Commercial Code. Originally the auditors had the power not only to inspect thefinancial statements of the corporation but also to supervise activities of directors of the corporation.However, this power was reduced by the 1950 amendments which only allowed the inspection of thefinancial statements of the corporation due to: 1) the assumption that it is impossible to supervisedirectors' activities outside the board; and 2) the supervisory power of the auditors had not beenfunctioning in practice as had been expected. Then, in 1974, the auditors regained the power tosupervise directors' activities again. This was largely due to the frequent occurrence of bankruptcyof big corporations at the time due to the mismanagement of directors of these corporations. It wasthought to be urgent at the time to confer the wider power, more specifically the power to supervisedirectors' activities, to auditors to prevent such disasters; Ueyanagi, supra note 167, at 431 to 434.417 The CBCA, s.170, 171(3); The BCCA, s.212, s.211.418 Bradley, supra note 410, at 21.102with and independent of the corporation," 419 and would be able to play the role ofwatch dog within and for the corporation. 42°Despite the difference between Japan and Canada concerning who isconferred with the statutory power of corporate monitoring or who is expected toplay the monitoring role, both jurisdictions appear to have similar problemsconcerning corporate monitoring. As Professor Eisenberg suggests, in the UnitedStates, although outside directors, in theory, play the role of watch dog in theircorporations (assuming that they are independent from inside directors) most of theseoutside directors are, in reality, under the great influence of executives of theircorporations.421 Thus, it appears that their monitoring role is dysfunctional. Eventhe policy-making role of these outside directors and other non-executives have beenquestioned due to their dependence on the executives. 422 Several factors aresuggested as being responsible for this dependence of outside directors and othernon-executives on executives. Some of these factors include: a non-executive isselected by executives "in part because he can be counted on to go along"423 withthe wishes and policies of the executives and "not to rock the boat" 424; non-executives have limited time to actively participate in corporate management 425 ;and non-executives have limited access to information regarding corporateaffairs.426 The disfunction of non-executives, including outside directors, has been419 Ibid.420 Ibid.421 Eisenberg, Melvin Aron, The Structure of the Corporation (Boston, Little, Brown and Company,1976), at 139 to 148.422 Ibid.423 Ibid, at 147.424 Ibid,ma at 146.Eisenberg suggests that about half of surveyed corporations' boards spent only 18 hours a yearor less for their meetings. Thus, directors' participation in the corporate management through boardmeeting are constrained; Ibid, at 141 to 142.426 Ibid, at 143 to 144.103a great concern in the American corporate sphere. It is assumed that in Canada, asimilar problem has existed as well. To resolve such disfunction of the board,particularly its monitoring role, several suggestions including the following have beenmade. The introduction of a two-tier system which distributes powers (managementand supervisory powers) onto two separate organs, the board of directors and a boardof auditors (a supervisory board) 427, while recruiting a majority of independentdirectors with a strict definition of "independence." 428Similarly, in Japan it has been suggested that the auditors ought to be moreactive and their powers strengthened. 429 Unlike the United States, and presumablyCanada, executive control within the board appears not to have been of greatconcern in the area of corporate monitoring in Japan. But there exist different ranksof directors within the board, and thus it appears that the influential powers of higherranking directors on their subordinate directors has sometimes caused a disfunctionof the BOD in Japan as wel1.430 However, the main issue in Japan has been howto realize the proper functioning of the auditors, rather than the outside directors.One major reason for this may be the fact that most Japanese corporations have onlya few, if any, outside directors, and the auditor who is independent of the board isthe only statutory recognized monitoring organ.In theory, the auditor under the Code is independent from the board. Unlikeoutside directors in Canada and the United States, auditors are elected by the SGM,separately from board members. Auditors are prohibited from being employees oftheir corporation or any entity affiliated with their corporation. 431 In addition, the427 Ibid,ima at 177 to 185.428 Ibid, at 175.429 Kurasawa, Koichiro, "Kansa-yaku Seido Kaisei no HitsuO [Necessity of improving the auditor'ssystem)" in Sh6ji HOMU, No.1311, February 5, 1993, at 5.430 Ibid.431 The Commercial Code, art.276.104auditors are given statutory rights, including the right to demand that directors reporttheir corporate affairs, 432 the right to participate in board meetings, 433 the rightto convene a board meeting, 434 and the right to demand that a director stopengaging in wrong-doing 435Despite these statutory powers and the statutory requirements of theindependence of the auditors, it is quite apparent that the auditors do not functionas they are expected to. In one survey, more than 50 per cent of the surveyedcorporations responded that the present legal system regulating the auditors shouldbe improved. 436 Problems similar to those regarding non-executives in the UnitedStates have arisen in Japan in recent years with regard to the auditors. Even thoughauditors are elected at a SGM, the initial selection of candidates is generally withinthe hands of executives; many auditors are former employees or directors of thecorporation, and as such they hold a close relationship to incumbent directors; andthe auditors' access to the information regarding corporate business is limited. 437Considering these problems, some reforms of the Code governing auditorshave been strongly suggested by both business people and legal scholars.438 Thishas prompted the Hasei Shingi-kai or the Legal Council of Ministry of Justice tocommence reviewing the present regulation regarding auditors.439 One of the mainissues of reform in this area has been how to enhance the independence of auditors.432 The Commercial Code, art.274.433 ^Commercial Code, art.260-3.434 The Commercial Code, art.260-3.435 The Commercial Code, art.275-2.436 A survey by Kobe University, cited in Yanaga, Masao, "Kansa-yaku no Genjy6 to Kadai[Present situation and Problems of Auditors)' in HOritsu Jiho, Vol.64, No.7, at 32.437438 Kurasawa, supra note 429, at 2.439 Ibid.105It is my opinion, that so far as a monitoring role is concerned, auditors underthe Code could play a more independent role compared to outside directors. Thisis simply because auditors are selected by the SGM and act completely independentlyof the BOD or individual shareholders. It appears questionable how much if any amonitoring role outside directors, who generally occupy subordinate positions toinside directors, may play within the board. Although it is assumed that directors inCanada and the United States are becoming more aware of the possibilities of beingsued for their mismanagement, and hence tend to be somewhat more particularabout their responsibilities, their independence still remains questionable. Despitethe issue of independence, the role of outside directors can not be ignored.However, it appears to be preferable to have a monitoring organ completelyindependent from the board, such as auditors under the Code, in addition to theoutside directors. Dual monitoring bodies (outside directors and auditors) wouldgreatly enhance the overall efficiency of corporate monitoring.The problems of auditors, in particular the question of their independenceunder the present Code, may be resolved by introducing stricter regulation. Somepossible changes are: altering the appointment system for auditors (e.g. auditorsshould not be selected by directors, they should be nominated and appointed eitherby a auditors' resolution or by the SGM); imposing more stringent requirements onthe eligibility of auditors (e.g. prohibiting not only present but former employees ordirectors from becoming auditors); and increasing the number of auditors (presentnumber required by statute for large corporations to be expanded from two to atleast three).440The realization of a perfect corporate monitoring system is still far out ofreach not only in Japan, but in Canada and the United States as well. However,440 Similar suggestions are addressed by some scholars; Kurasawa, supra note 429, at 5 to 6.106although some changes should be made to the relevant provisions of the Code, thelegal position of auditors under the Code is worth considering for possible adoptionin Canada and the United States.In conclusion, directors of Japanese corporations appear to be expected todischarge a higher degree of care compared to those of Canadian and Americancorporations. However, it appears that the Japanese courts441 have recentlybecome reluctant to impose liability on directors for their breach of the duty of careand skill, as has been the case in the common law jurisdictions. 442 This is largelydue to the recognition of the so-called Business Judgment Rule, which was introducedfrom the U.S.A. 443 But, some Japanese scholars have strongly opposed theadoption of the principles of the Business Judgment Rule into Japanese corporatelaw. This will be explained in detail later. What is noteworthy here, is that thesearguments relating to the Business Judgment Rule, evidence the fact that Japan isstill struggling to fuse common law concepts introduced to Japan with theconventional and traditional Japanese legal concepts derived from civil law concepts,including those concepts pertinent to directors' duties.Next, I will examine how this high degree of care is to be discharged inpractice, by directors in Japan, as compared to similar situations in the common lawjurisdictions, particularly in the U.S.A. and Canada by focusing on: 1) attendance atthe board meetings; and 2) the duty of observation.2) Attendance at the Board MeetingsSince the Board of Directors (hereinafter the BOD) is the major corporate441 In Tokyo District Court, March 1, 1978  (KinyashOji Hanrei, vol.562, p.40), the Court adoptedthe Business Judgment Rule and rejected the director's liability; see infra, 2.3 Business Judgment Rule.442 Infra, see 2.3 Business Judgment Rule.443 Ibid.107organ which primarily determines or charts the course of affairs of thecorporation444, if the BOD functions properly, directors' breach of duty would beless likely to occur. The ideal situation of managing a corporation would be: theSGM decides the fundamental matters or affairs of the corporation and electscompetent directors, to whom it delegates its powers to manage the day to daybusiness of the corporation.445 This ideal situation may only be actualized if thefollowing two premises are realized. First, the SGM selects directors who woulddischarge their duty faithfully and in the best interest of the corporation. Secondly,the directors who are selected by the shareholders do discharge their duty faithfullyand in the best interest of the corporation as is expected by the shareholders.The shareholders at the SGM, may elect the directors who will form the BODfor the upcoming term of the BOD 446 and, may vote on policy which will steer thecorporation in a general direction. 447 But this steering policy on which they voteand the directors whom they elect are usually first selected by the present BOD, andthen presented to them to be voted on at the SGM. 448 Hopefully the BOD thinkof the best interest of the corporation and the shareholders when they are makingtheir selections. Of course there is the assumption here that these directors can anddo exercise the process of thought involving those interests. The crux of the matteris, that the shareholders merely rubber stamp the decisions of the BOD at these444 The Commercial Code, art.260 provides: "The board of directors shall decide the administrationof affairs of the company, and supervise execution of duties of directors"; Similarly, the BCCA,s.141(1) provides "The directors shall, subject to this Act and the articles of the company, manage orsupervise the management of the affairs and business of the company"; The CBCA equivalent iss.102(1).445 In short, it is clear under the Canadian or American laws that "Shareholders are statutorilyempowered to vote for directors and also in respect to an enumerated set of transactions that areoften referred to as corporate "fundamental changes", Ziegel, supra note 66, at 844 at 843 to 844; Itis the same under the Japanese Commercial Code.446 The Commercial Code, art.254, para.1; The BCCA, s.134; The CBCA, s.106(3).447 The Commercial Code, art.230-10; The BCCA, s.141(1); The CBCA, s.102.448 Ueyanagi, supra note 162, at 11; Ziegel, supra note 66, at 844.108shareholders' meeting. 449 Here we have the typical chicken and egg phenomenon;a proverbial catch 22. To sum up, for the proper functioning of the SGM, the properfunctioning of the BOD has to be realized in the first place. Of course some may saythe reverse, namely that, for the proper functioning of the BOD, the properfunctioning of the SGM has to be realized first.For the proper functioning of board meetings, directors are expected to attendthese board meetings and discharge their duty45° This is the major way ofpreventing any wrongful acts by their fellow directors. But, does this mean thatdirectors' absence from board meetings may constitute a breach of their duty? And,should directors attend all the board meetings to carry out their duty?Unlike the principles spelt out in the common law jurisdictions, both via itscommon law451 and statutes, such as the BCCA, s.151 452, the Commercial Code' Welling, supra note 138, at 43; Tokyo HOgaku Kenkyilkai, supra note 184, at 206.' Directors' duties here include "directors duty of care and skills" and other duties.451 Re: City Equitable, supra note 353.452 The CBCA has provisions which set forth the treatment of directors who were absent fromspecific board meetings. The provisions read: "a director who was not present at a meeting at whicha resolution was passed or action taken is deemed to have consented thereto unless within seven daysafter he becomes aware of the resolution he (a) causes his dissent to be placed with the minutes ofthe meeting; or (b) sends his dissent by registered mail or delivers it to the registered office of thecorporation." (s.123(3)) However, these provisions do not explicitly provide for the liability of theseabsent directors. In addition, though provisions which set forth the liability of absent directors arefound in both the CBCA(s.118) and the BCCA(s.151), these provisions are only concerning directorswho are absent from the meeting at which only specific resolutions are passed. For instance, theBCCA, sec.151(1) and (6) provides respectively:"(1) Directors of a company who vote for, or consentto, a resolution authorizing (a) the purchase, redemption or other acquisition of shares contrary tosection 260; (b) a commission or discount contrary to section 47; (c) a payment of a dividend if (i)the company is insolvent; or (ii) the payment renders the company insolvent; (d) a loan, guaranteeor financial assistance contravening section 126 or 127; (e) a payment of an indemnity referred to insection 152 to a director or former director without the approval of the court required by section 152;or (f) an act contravening section 22 in respect of which the company has paid compensation to anyperson, are jointly and severally liable to the company to make good any loss or damage suffered bythe company as a result; and (6) A director who is not present at a meeting of directors, or of acommittee of directors, at which a resolution referred to in subsection (1) is passed shall be deemedto have consented to it, unless within 7 days after he becomes aware of the resolution he mails hiswritten dissent by registered mail or delivers it to the registered office of the company." Therefore,109does not explicitly provide for the liability of directors who are not present at theboard meeting at which a resolution is passed which turns out to be detrimental totheir corporation. The Code only provides 453 that in the case where directorsattended a meeting but did not express their dissent at the meeting where aresolution was passed leading to directors' liability, the directors are jointly liable 454.As a guide to providing the proper answers to the questions raised above and sinceno explicit provision exists in the Code, some court cases and scholarly opinions shallbe looked at next.Since the fundamental duty of directors is to make decisions at the boardmeetings on matters related to the management of their corporation, there ought tobe no objections to saying that directors are expected to attend these board meetingsunless a sufficient reason exists for their absence. 455 Professor Namiki, one ofJapan's leading scholars in the area of corporate law, states that "... directors shallattend the board meetings ...failure to attend the board meetings establishes a breachof the duty of care .... if the directors work concurrently as employees of theircorporations, their duty as directors shall be preferred (paramount) to their duty asan employee."456liabilities of directors who are absent from a meeting other than the above specific meetings are notclearly set forth in the statute.45 ' The Commercial Code, art.266, para.3 provides: "The directors who have participated in theresolution mentioned in the preceding paragraph and who have not expressed their dissent in theminutes shall be presumed to have assented to such resolution."454 The Canadian statutes have similar provisions. For instance, the BCCA, sec.151(4) provides:"For the purposes of this section, a director of a company who is present at a meeting of directors,or of a committee of directors, shall be deemed to have consented to a resolution referred to insubsection (1) passed at the meeting unless (a) his dissent is entered in the minutes of the meeting;(b) his written dissent is delivered to the secretary of the meeting before its adjournment; or (c) hiswritten dissent is delivered or sent by registered mail to the registered office of the companyimmediately after the adjournment of the meeting.455 Namiki, supra note 383, at 63.456 Namiki, supra note 383, at 63-64.110The first court case to be looked at in this regard is K.K KOjin v.Unknown457 . In this case the majority of legal scholars concurred with the decisionof the Tokyo District court, which held that the directors who were absent at theboard meeting at which a questionable resolution was passed, were also liable for thedamages the company sustained due to that resolution:Summary of the facts of K.K KtYin v. UnknownThis case involved the bankruptcy of one of the largest multiplemanagement corporations in Japan in 1970.An application for an assessment of a claim for damages arisingout of the possible liability of the directors of the corporation wassubmitted to the court by the trustee of the corporation. Seventeenformer directors were alleged to be liable for the damages of some 35billion yen, which was distributed to the shareholders of thecorporation by way of dividends, to the directors as remuneration, andalso as a resulting overpayment of tax, due to a window-dressingsettlement of accounts458 .DecisionThe Tokyo District Court in its decision held: that the directorswho were absent from the meeting where the said window-dressingsettlement was approved were also liable for the wrongful distributionof the assets of the corporation by way of dividends and in any otherways which stem from the said approval. Notwithstanding that, the4$7 Tokyo District Court, July 1, 1977 (Hanrei NM, No.854, p.43-51).458 The directors and auditors of the corporation drew up an untrue balance sheet by diluting theassets and profits of the corporation for three years.111motion for the distribution of the corporate profits was approved bythe SGM, the motion presented to the SGM was based on theresolution by the BOD. Directors of the board had a duty to preventthe resolution from being presented to the SGM.The court decision clearly shows that directors who are absent from a boardmeeting at which a resolution is passed which triggers the wrongdoing of directors arelikely to be deemed to have consented to the resolution. As such, the directors areliable for not preventing the wrongdoing 459 along with the other directors whoattended the meeting and consented to the resolution. In other words, directors whoactually committed the wrongdoing are, of course, liable in the first place.46°Directors who, at the board meeting, assent to a resolution which leads to awrongdoing are also liable since they are deemed to have done the wrongdoing. 461Moreover, directors who were absent from the meeting at which a resolution ispassed are also liable since they are deemed to have consented to the resolution, andaccordingly they are deemed to have done the wrong deed also.Under what circumstances, if any, directors who fail to attend a board meetingat which a detrimental resolution is passed, would be excused from being liable hasnot clearly been established by the Japanese courts. However, by extrapolating fromthe above court decision and scholarly opinions, 462 it appears to be the case thatdirectors should show very sufficient reasons for their absence from a given meetingat which a resolution of concern is passed to convince a court that they did not459 Ueyanagi, supra note 167, at 285.46° The Commercial Code, art.266, para.1 states: "In the following cases, directors who have doneany one of the acts mentioned there shall be jointly and severally liable in effecting performance orin damages to the company, in the case of item ... (5) for the amount of any damages caused to thecompany: ... (5) Where they have done any act which violates any law or ordinance or the articles ofincorporation."461 The Commercial Code, art.266, para.3, supra note 453.462 Supra note 456.112breach their duty as a director. 463The position of the common law in this regard appears to be less strict thanthe Japanese courts. The court, in Re: City Equitable Fire Insurance Co. Ltd.464 ,stated that "A director is not bound to give continuous attention to the affairs of hiscompany. His duties are of an intermittent nature to be performed at periodicalboard meetings, and at meetings of any committee of the board upon which hehappens to be placed. He is not, however, bound to attend all such meetings, thoughhe ought to attend whenever, in the circumstances, he is reasonably able to do so."It was also stated in Francis v. United Jersey Bank 465 that, "Regular attendancedoes not mean that directors must attend every meeting, but that directors shouldattend meetings as a matter of practice. A director of a publicly held corporationmight be expected to attend regular monthly meetings, but a director of a small,family corporation might be asked to attend only an annual meeting. The point isthat one of the responsibilities of a director is to attend meetings of the board ofwhich he or she is a member."The strict position of the Japanese courts compared to those of the commonlaw with regard to the attendance of board meetings appears to be due to the463 Here it might be said that, in theory there is no duty to attend meetings and therefore noliability for the breach of duty to attend meetings per se. The real issue here has to do with directorswho do not dissent to a resolution which turns out to be detrimental to the corporation. Thesedirectors are liable for not dissenting to this resolution being passed. In other words, in narrow sense,liability does not stem from the mere absence from the meeting at which the questionable resolutionis passed. But it might be argued that there is, in fact, a duty to attend meetings, since directors'fundamental duties are to decide the affairs of their corporations at meetings. To discharge this duty,it would appear that attendance at meetings is of utmost importance, regardless of whether aquestionable resolution is passed or not at a concerned meeting. However, as far as liability isconcerned, unless some detrimental result is sustained by either the corporation or their parties,liability of directors would never become the issue. And once liability becomes an issue, the liabilitydoes not stem from the failure to attend the meeting, but rather from the failure to dissent to thequestionable resolution.464 Supra note 353.465 432 A. 2d 814 (N.J.S.C.1981).113characteristic of the Japanese BOD. The BOD in Japan consists mostly of full-timeinside directors, most of whom are senior employees of the corporation.466 Sincemost of these directors are employees of the corporation and work within thecorporation, they ought to be able to give continuous attention to the affairs of theircorporation, compared to outside directors; also inside directors are in a moreconvenient position to attend their board meeting than outside directors: insidedirectors usually work full-time within their corporation, and only for theircorporation. Thus scheduling meeting to ensure their attendance and informing themof these meetings, even emergency meetings, should be quite easy and they ought tobe able to attend their BOD meetings.3) Duty of ObservationNon attendance of board meetings which was explained above is only one ofmany instances where directors are likely to be held liable even when they have notdirectly committed a wrongful act. There are many other instances in which directorsmay be held liable for the wrongful actions of their fellow directors in the Japanesecorporate world. This issue is generally known as the duty of observation over otherdirectors of the corporation. 467The principle that directors have a duty to supervise the activities of otherdirectors has been long recognized in Japan. 468 Furthermore, it had been codifiedthrough amendments to the Commercial Code in 1981. The Commercial Codepresently provides that "The board of directors shall decide the administration ofaffairs of the corporation, and supervise execution of duties of directors."469' Kono, supra note 214, at 29; Clark, Rodney, supra note 14, at 100.' Kitazawa, KaishaltO, supra note 75, at 350-351.' Ueyanagi, supra note 167, at 279.469 Art.260, para.1.114As to the extent of the supervisory duty, the Japanese Supreme Courts'position, since a 1973 Supreme Court decision, 4" has been that directors have aduty of observation not only as to matters brought up at any BOD meetings, but alsoconcerning matters which are not discussed at a BOD meeting. A 1973 SupremeCourt decision reads in part as follows:"Directors shall supervise whether the resolution of the board meetinghas been properly executed by representative directors or managingdirectors471 .Matters which should be supervised by directors are not limited onlyto the matters which were brought up for discussion at the boardmeeting. "472However, the position of the Supreme Court does not necessarily suggest thatdirectors owe an unlimited duty to supervise all of the activities performed by otherdirectors. In fact it has left the matter dangling in the air. Thus far, the SupremeCourt has not elaborated on where, if any, the limits ought to be in this area. But,it has been recognized by some lower courts, that there should be a certain limitationon the extent to which directors must discharge their duty of observation, otherwisethe burden on directors would be far too heavy to bear. In one instance,473 a lowercourt ruled as follows:470 The Supreme Court, May 22, 1973  (Minsha 27-5-655); Prior to this decision, the Japanesecourts had been taking a position that directors owe a duty of observation only to matters which arebrought up at the board meetings. (Tokyo District Court, May 13, 1957  (Kaminsha 8-5-923), etc.).471 Here, the court referred to a directors' duty to supervise only representative directors andmanaging directors, probably because these directors generally manage the affairs of the corporationin practice; see, supra Chapter V.3. The present concept of corporate organs under the JapaneseCommercial Code.472 Supra note 470.473 Sapporo District Court, July 30, 1976 (Hanrei JihO, No.840, p.111).115"To pursue the liability of a director for matters which were notbrought up at a BOD meeting, special circumstances are required, suchas the director having known or ought to have known of the wrongfuldoing [of the representative director] and yet overlooking it." 474An interesting contrast is seen from the above two decisions. As the 1973Supreme Court decision shows, the Japanese Supreme Court generally takes astringent and conservative position in its ruling. On the contrary, lower courts aremore flexible and they sometimes take a more liberal approach in their ruling evenif the ruling is in principle, opposed to the Supreme Court's decision.It could be concluded that, if the matter is brought up to the Supreme Courtof Japan, directors are likely to be held liable even for matters which were notdiscussed at a board meeting, since the above 1973 Supreme Court decision has notbeen overruled by any other Supreme Court decisions. However, if it could beproven that specific circumstances existed which prevented a director from knowingof the wrong doing of another director, the director may be able to convince thecourt, at least a lower court, that he did not breach his duty, and therefore ought tobe excused from liability.475There appears to be another obvious difference between the decisions of the1973 Supreme Court and the lower courts. The Supreme Court does not distinguishduties of directors depending upon their position, whereas lower courts tend toimpose a heavier responsibility on representative directors 476 compared to non474 Ibid.475 Ueyanagi, supra note 167, at 281.476 For differences between representative directors and non-representative directors, see, supraI. The basic concept of corporation.116representative directors. 477A Japanese high court, in a 1978 case478, held that "Even if the area ofactivity under the defendant representative director's charge was "management", heowed a duty of observation over the business activities of the other representativedirector who was in charge of accounting... in this case, the representative directordid not breach his duty with gross negligence 479 because he did not know of theillegal business activities of the other representative director who was in charge ofaccounting, and he had examined the accounting document which did not reveal theunlawful appropriation."480 The defendant representative director in this case washeld not liable since he exercised the appropriate degree of care, i.e. he hadexamined the accounting documents and it was not possible for him to uncover theunlawful appropriation by the director who was in charge of accounting of thecorporation. However, the importance of this case is that the court explicitly statedthat representative directors owe a duty of observation over the business activities ofother (representative) directors, and could not rely on other (representative) directorseven if these other (representative) directors' responsibilities are different from thoseof the representative directors. 481477 Dziubla, Robert W., "Enforcing Corporate Responsibility: Japanese Corporate Directors'Liability to Third Parties for Failure to Supervise", in Law in Japan, Vol.18, 1985, at 55.478 Tokyo High Court, Aug. 4, 1978  (Hanrei Times, 371-153; Hanrei JiM, 900-103).In this case, the defendant director was pursued as to liability for the breach of his duty, bythird parties, not by his corporation. Directors of a corporation are personally liable to third partiesunder the Commercial Code if they have breached their duties regarding corporate affairs withwrongful intent or with gross negligence; In Japan, if a director damages a third party with intentionor negligence, he would be liable to the third party under art.709 of the Civil Code. This is a generaltort liability which applies not only to directors but any individuals. In addition to this civil liability,the Commercial Code imposes specific liability on directors due to their specific position; TheCommercial Code, art.266-3 provides: "If directors have been guilty of wrongful intent or of grossnegligence in respect of the assumption of their duties, they shall be jointly and severally liable indamages to third persons also"; For further information regarding directors' liability to third partiesunder the Civil Code and the Commercial Code, see Namiki, supra note 383, at 209 to 211.48° Supra note 478.481 ibid.1 17The rationale behind the recognition of a heavier duty on representativedirectors is due to the fact that representative directors, as opposed to ordinarydirectors, are generally more intimately involved in the affairs of their corporation;they are more likely to be in a position to find out any inappropriate businessactivities of other directors, and therefore these representative directors are requiredto discharge a higher degree of duty of observation than non representativedirectors. 482It appears to be doubtful, however, whether representative directors ofcorporations with a large number of shareholders, i.e. widely held corporations, areactually in a position to monitor the misconduct of other directors. It would be fairto so hold, since the boards of large corporations in Japan are generally comprisedof a large number of directors from different departments of the corporations 483A survey shows that the average number of directors of large corporations issixteen.484 They are composed of not only "the president and the chief executiveofficer (who are usually representative directors), the senior executive directors andexecutive directors in charge of several departments," 485 but also of "ordinarydirectors who are usually the heads of important departments"486 of thecorporation. It would be almost impossible for the representative directors of suchlarge corporations to control the activities of all these directors. It would be evenmore unreasonable not to expect these representative directors to rely on, or trusttheir fellow directors who ought to be experts in their own specific areas.Switching to the common law, it appears that no clear distinction has been482 Ueyanagi, supra note 167, at 283.483 Kono, supra note 214, at 23.484 ibid.ass Ibid.' Ibid.1 18established between the duty of observation of representative directors and that ofnon-representative directors. Courts of common law jurisdictions have generallyrecognized that directors may rely on or trust other officials of their corporation ifit is reasonable or justifiable to do so; though depending on the circumstances, theymay still be held liable 487. In the City Equitable case,488 the court expresslystated that, "In respect of all duties that, having regard to the exigencies of business,and the articles of association, may properly be left to some other official, a directoris, in the absence of grounds for suspicion, justified in trusting that official to performsuch duties honestly."This principle is also statutorily recognized in Canada489 . The BCCAprovides that a director will not be held liable for consenting to a resolution ... if (1)he proves that he did not know and could not reasonably have known that the actauthorized by the resolution was contrary to the governing statute or, (2) he reliesand acts in good faith upon statements of fact represented to him by an officer of thecompany to be correct, or upon statements contained in a written report of thecompany's auditor.49°In conclusion, the Japanese Code, unlike the Canadian laws, does not explicitlyrecognize the possibility of a director escaping from liability even if certain487 In Francis v. United Jersey Bank (supra note 445), the defendant director was held to be liablefor the losses sustained by the clients of the company. In this case, the company of which thedefendant was a director went bankrupt due to the mismanagement of the company by her sons whowere officers of the company. Although the defendant director was not active in business, thedefendant was alleged to be liable for failing to detect and constrain the wrongful act of her sons. TheCourt held that "she had a duty to deter the depredation of the other insiders, her sons." and"breached that duty and caused plaintiffs to sustain damages."; Revelstoke Credit Union v. Miller,[1984] 2 W.W.R. 297 (B.C.S.C.).488 Supra note 353.489 The CBCA, sec.150(1); The BCCA, sec.151(9).' lacobucci, Frank et. al., Canadian Business Corporations (Ontario, Canada Law Book Limited,1977), at 330.1 19requirements are met, such as relying on other directors or officials. It is explicitlystated in the Code491 that directors are required to positively and continuouslysupervise or observe other directors' business activities. Because of this codification,the Japanese Courts have been hesitant to relax the supervisory duty of directorstoward their fellow directors; and courts tend to recognize that directors have a dutyof observation. In principle, only when a court recognizes that special circumstancesexists which may preclude or excuse the performance of this duty, may directors beexempted from liability for the actions or inactions of their fellow directors.492The above examination shows that being a director of a Japanese corporationappears to be a much more riskier business than being a director of a corporationin the common law jurisdictions such as Canada. Compared to directors ofcorporations in the common law jurisdictions, directors of Japanese corporationsappear to have a higher possibility of being liable for the breach of the duty ofobservation. Directors of Japanese corporations have a duty to discharge acomparably higher degree of care. But this is not the only factor which imperils thedirectorship of Japanese corporations. Directors under the Japanese CommercialCode may be personally liable not only to their corporations, but, if specificrequirements are met, 493 they may also be liable to third parties for any breach oftheir duties. They should be aware that they are expected to discharge their duty ofobservation continuously, and they should also keep in mind that they could be suedby third parties who suffered from losses or damages due to other directors' illegalor wrongful activities related to the affairs of the corporation.491 The Commercial Code, art.260, para.1, supra note 469.492 Ueyanagi, supra note 167, at 283.' The Commercial Code, art.266-3, supra note 479; The Supreme Court, Nov.26, 1969 (Minshil23-11-2150) clarifies two requirements for a director to be liable to third parties: 1) the existence ofwrongful intent or gross negligence; and 2) the existence of a proximate causal relationship betweenthe third parties' damages and the director's wrongful act; For the detail of directors' liability to thirdparties, see Dziubla, supra note 477.120However, one commentator494 suggests that recent court cases show thatthough Japanese Courts have, in theory, long recognized the positive supervisory dutyof directors, the courts have, in practice, tended to reject holding directors liable forthe breach of this supervisory duty, by taking into account the specificcircumstances 495 of each case. It is fair to say that the Japanese courts are intheory very strict by not relaxing directors' duties on the one hand, yet on the otherhand they are quite concerned about being too heavy handed or ruthless toward thedirectors. To resolve this dilemma, some Japanese courts have recently tended tofocus on very practical elements of each case; this course of reasoning has beensuccessfully used to reject claims of directors' liability, without bending the establishedtheory or principles of the law.This attitude of Japanese Courts would appear to be philosophically consistentwith the general attitude of the Japanese people. The Japanese people are generallythought to be very conservative and persistent and very hard to deal with, but in fact,they are quite flexible and progressive. Another way of simply explaining the aboveidea in a manner which is easily understood by non-Japanese would be to use one ofthe Western stereotypes of the Japanese that "the Japanese are typically two-faced."496494 Kanzaki, Katsuro, Torishimariyaku Seidoron [Discussion of the Board of Directors' System] , citedin Ueyanagi, supra note 167, at 283.495 Such as: the defendant directors physical inability to supervise other directors' activities dueto the distance of his residence (Ueyanagi, supra note 167, at 283, case unknown); the director hadnot obtained remuneration from the corporation (Osaka District Court, March 28, 1980,  HanreiNo.963, at 96); or the director was very old (Ueyanagi, supra note 167, at 283, case unknown).49" The Japanese behaviour patterns are typically described in terms of the "Honne" an "Tatemae"dichotomy. "Honne means one's natural, real, or inner and proclivities, whereas tatemae refers to thestandard, principle, or social rule by which one is bound at least outwardly. This cultural pressure forsituational discrimination may also underlie the Japanese recognition of what Ben Dasan (1970) calls"law behind law," "reason behind reason," and "word behind word.% Lebra, Takie Sugiyama, Japanesepatterns of behaviour (Honolulu, University Press of Hawaii, 1976).1212.3 Business Judgment RuleIn connection with the directors' duty of care and skill, the so-called "BusinessJudgment Rule"497 has been used in the American498 and Canadian4"jurisdictions as a device for insulating corporate decision-makers from personalliabilities for the breach of such duty. 5°° The essential principle of this Rule hasbeen stated by the U.S. courts as:"directors are to be insulated from liability for business judgments thatwere made without any presence of fraud, illegality or conflict ofinterest."501The U.S. courts502 gave further enlightenment on this interpretation:"the mere absence of colourable motive will not insulate directorialdecision-making from review for breach of duty unless there is alsoevidence that the director has been reasonably diligent in arriving atthe decision."497 "The business judgment rule is a specific application of the directors' duty of care to thesituation where, after reasonable investigation, the directors adopt a course of action which theyhonestly and reasonably believe will benefit the corporation, but which turns out to have been inerror. Should the directors be sued because of their decision, the court -- at least in theory -- will notsecond-guess the merits of the decision but will examine only the directors' good faith and due care.";Blick & Prussin, The business Judgment Rule and Shareholder Derivative Actions; Viva Zapata?, 37Bus. Law. 27, 32 (1981), cited in Goldwasser, Dan L., Officers' and directors' liability: a review of thebusiness judgment rule, B4-6718 (New York, Practising Law Institute, 1985), at 16.498 The following cases are some of the American cases which adopted the business judgment rule:Kamin v. American Express Co. 383 N.Y.S. 2D 807 (N.Y.S.C. 1976); Smith v. Van Gorkom 488 A.2d 858 (Del. S.C. 1985).499 Haward Smith Ltd. v. Ampol Petroleum Ltd., [1974] A.C. 821.599 Ziegel, supra note 66, at 461-463.501 Ziegel, supra note 66, at 61; Shlensky v. Wrigley, 95 III. App. 2d 173, 237 N.E. 2D 776 (1968).502 Ziegel, supra note 66, at 461; Smith v. Van Gorkom 488 A.2d 858 (Del.S.C.1985); Onecommentator advocates that five elements must be present for a court to adopt the business judgmentrule. The elements are: "1) a business decision; 2) disinterestedness; 3) due care; 4) no abuse ofdiscretion; 5) good faith. Where all of these are present, corporate actions will not be enjoined anddirectors will be held liable"; Arsht, 8 Hofstra Law Review, at 108, 114-30, cited in Goldwasser, supranote 497, at 19.122The principles of the Business Judgment Rule have been introduced to Japanover a period of time through academic exchanges and studies with the jurisdictionswhich embraced this and similar principles. It has been greeted with favourableapproval by many Japanese legal scholars. 503 Since the late 1970's some Japanesecourts have recognized this principle 5°4 in the course of their decisions regardingdirectors' duty of care and ski11.5°5In a 1978 judgment, 5°6 a Japanese court found a director to be not liable byadopting the Business Judgment Rule. The court held that when a company faceda financial difficulty and a director of the corporation borrowed money for thecorporation, if the action was done in the best interest of the corporation and alsoif it is recognized that the director acted reasonably as a director, and furthermore,if the action was not done in an illegal way, it may not be said that the directorbreached his duty of care as a director. The court clearly espoused the BusinessJudgment Rule concept in its rationale of the judgment by stating:"Adventures and risks are, to some extent, inseparable from managinga business. When a director entered into a risky deal to the extentexpected for carrying on the business of his corporation, based on hisreasonable judgment as an experienced and knowledgeable businessperson, and unfortunately its results are unsuccessful, the director maynot be said to have breached his duty to the company and be liablemerely because of the unfortunate result. Such conclusion imposing503 Namiki, supra note 383, at 227-228; Ueyanagi, supra note 167, at 276.504 Osaka District Court, April 20, 1967 (Hanrei IMO, 488-64); Fukuoka High Court, October 8,1980 (Kaminsha 33-4-341), cited in Ueyanagi, supra note 15, at 276-277; Tokyo District Court, March1, 1978 (Kinya ShOji, 562-36), Tokyo District Court, September 30, 1982  (Hanrei Times, 486-169), citedin Namiki, supra note 383, at 228.505 Ibid.506 Tokyo District Court, March 1, 1978  (Kinyei ShOji, 562-36).123liability on the director is to be improper in practical businessmanagement."507It should be carefully noted that basically, though the Business JudgementRule has taken root in Japan, there exists vehement opposition by some to thisprinciple.508 In short, a group seems obstinately persistent in opposing thisprinciple. Their opposition appears to be based on several fears, the chief of whichseems to be that directors of corporations may be able to escape from judicialsupervision too easily. The flames of their fears are further fuelled by the thoughtthat the courts, if the adoption of the Business Judgement Rule is fostered, may holdin extremely high esteem the business decision-making abilities of directors and alsopossibly accept that directors of corporations may make business decisions moreeffectively than they, the judiciary may. Two conceivable rationales which flow fromthese views are:1) the judiciary must maintain their dignity. In other words, although thejudiciary routinely defers to the higher judicial authorities, bureaucrats'expertise, or established scholars in making their judgment, business peopleappear not to be considered the authority they may yield to; and2) it is against the general principles of tort laws509 to give only tothe directors of corporations, an opportunity to escape from liabilitiesresulting from the breach of their duty, by considering the importanceof the pursuit of smooth business activities or economic efficiency onbehalf of corporations by directors. In other words, as far as tortc07 The Judgment cited in Namiki, supra note 383, at 99-100.SOS Ueyanagi, supra note 167, at 276-279.5® It is stated in the Civil Code of Japan that "A person who violates intentionally or negligentlythe right of another is bound to make compensation for damage arising therefrom."(art.709).124liability is concerned, if someone causes damages to someone bybreaching their duty, they generally ought to be bound in makingcompensation for the damages. Therefore, if a director has breachedhis duty and has caused damage to their corporation or to any otherparties, they ought to be liable for the tort due to this general principleof tort liability.Although there exists no concrete evidence for the first rationale, it is mostlikely the result of the heightened consciousness of the Japanese people toward theirjudiciary. The Japanese people as a rule, appear to hold their judges in extremelyhigh esteem; the majority of the people believe, "every judge is just andimpartial,"510 and the legal professionals including judges and scholars for the mostpart maintain and uphold this dignity attributed to the judiciary. It may also be thethought of those who oppose the acceptance of the Business Judgment Rule that itwould be harmful to this dignity of the judiciary to recognize that directors, asbusiness experts, may make better business decisions than the judiciary; or, it may bethought that, even if it is recognized to be true that directors may make betterbusiness decisions than the judiciary, the omnipotent power to determine whetherthese decisions are made properly or appropriately should be entrusted only to thejudiciary.The second rationale also indicates another interesting contrast in thephilosophy of Japanese and people in the West, and the differences in historicalbackground of the development of the concept of a duty of care and skill in Japanand the common law jurisdictions. First of all, it is frequently said that Japanesepeople consider any obligations in their life, including liabilities, to be of paramount51° Ryuzaki, Kisuke, Saiban to Girininjy6 [Justice and Obligation and Humanity] (Tokyo, ChikumaShot* 1988), at 39.125importance, even to the extent of placing them ahead of their own rights andfreedoms. This is certainly true compared to North American people. This tendencyof Japanese people to stress obligations appears to be responsible for their hesitancein relaxing the liabilities of not only directors, but also anyone else who has any dutyto discharge due to their position.Secondly, the concept of the duty of care and skill in Japan is based on therelationship between a corporation and its directors. As was stated earlier, directorsare considered to be mandataries. Their duties, as far as the duty of care and skillis concerned, are derived from their position as mandataries; these duties are setforth in the Civil Code of Japan as duties pertaining to all mandataries. Therefore,to get the full support of Japanese scholars and the judiciary to recognize anexemption in the application of the relevant provisions of the Code, so as to relaxthese duties when dealing with only directors of corporations would necessitate somesort of amendment to the relevant provisions of the Code, since for someconservative scholars and members of the judiciary, special considerations pertinentto the economic efficiency or smooth business activities of a corporation would notbe a sufficient enough reason to make a different interpretation, of the pertinentstatutory provisions, which is contrary to the generally accepted statutoryinterpretation.It should, however, be noted here, that this view of opposing the adoption ofthe Business Judgment Rule, is a strong one, but is not necessarily the prevailing one.Many leading Japanese scholars, especially those who have studied the laws of thecommon law jurisdictions 511 , in particular the American laws, have been supportingthe adoption of the Business Judgment Rule. In addition, though no clear position' 11 Namiki, supra note 383, at 60-61; Kanzaki, Osakadani, etc., cited in Ueyanagi, supra note 167,at 276.126toward the adoption of the Business Judgment Rule appears to have been firmlytaken by the Supreme Court of Japan, since at least some of the lower courts havealready recognized and adopted the principles of the Business Judgment Rule, thereis no doubt in my mind that these principles are spreading their roots successfullyalong the ground and penetrating the rocky terrain deeply. The principles of theBusiness Judgment Rule will continue to be discussed in the Japanese Courts; andwho knows, in time, they may be improved upon and sold back to the common lawjurisdictions for a profit!! It is clear in my opinion that the Japanese upper courtsmay rationalize and implement a change of approach in this area. They need onlyrealize that they would not be impinging upon their judicial expertise by merelydeferring to business people's expertise, since these business people may be placedin the category of "professionals," the same as doctors are. It has been the acceptedpractice of the courts to defer to experts such as doctors and other professionals.To conclude regarding the Business Judgment Rule, if a director has made abusiness decision on behalf of the corporation without any personal interest, with duecare and diligence, and acted in good faith, it would not be reasonable for such adirector to be liable for this business decision. Since, the corporation itself, i.e.shareholders, has, in the first place, elected and conferred the powers to manage thecorporation upon this director512, it would be ludicrous for the corporation to holdthis director liable for mismanagement if he has discharged his duty faithfully and inthe best interest of the corporation. Of course, a court, when it adopts the BusinessJudgment Rule and rejects directors' liability, should be very prudent to judgewhether the director has discharged his duties with sufficient due care, whether thedirector was diligent enough, and whether the director acted faithfully toward theircorporation and in its best interest.512 The Commercial Code, art.254, para.1; art.260 .1273. Fiduciary DutiesOne of two primary duties corporate directors owe to their corporations (somemay extend these duties to others associated with the corporations), the duty of careand skill, has been examined and discussed in the preceding part of this chapter.Hopefully the preceding examination and discussion has shed some light on some ofthe principles governing directors' duties under the Commercial Code. The rest ofthe chapter will examine the other primary duty of directors, namely the fiduciaryduty.3.1 Concept of Fiduciary DutyThe basic equitable principles, regarding corporate directors and their duties,in respect to their corporations are generally regarded as the same as those of otherfiduciaries.513 One of the primary duties corporate directors owe to theircorporations, as fiduciaries, 514 is the so-called "fiduciary duty of loyalty (and goodfaith)". 515The concept of fiduciary duty of loyalty was originally developed by the Courts513 Gower, supra note 52, at 551.514 The status of corporate directors has been a controversial issue, and the discussion of this issueis beyond the scope of this thesis. In sum, corporate directors have been viewed as either trustees oragents, or mixture of both of their corporation. For a detailed discussion, see: Gower, supra note 52,at 550-551; Welling, supra note 138, at 378-380; Paterson, supra note 350, at 2; McMurray, supra note349, at 605-606.In the U.S.A., it has been recommended by the American Bar Association Committee onCorporate Laws (1984 Revision of the Model Business Corporation Act, sec.8.30 (a), at 222, 1984) thatthe term "fiduciary" should not be used.515 Gower, supra note 52, at 551; Ziegel, supra note 66, at 491; however, some authors are of theopinion not to use the term "fiduciary duty of loyalty." For instance, The American Law Institute usesthe term "Duty of Fair Dealings" instead of the term "duty of loyalty" in its Principles of CorporateGovernance: Analysis and Recommendations -Proposed Final Draft-, March 31, 1991. In the book, itis stated that "Courts have traditionally analyzed the obligation of a director or officer who acts witha pecuniary interest in a matter in terms of a "duty of loyalty" to the corporation. However, courtshave also used the term "duty of loyalty" in other contexts where a director or officer may be viewedas having conflicting interests. For clarity of analysis, Part V avoids the use of the term "duty ofloyalty,' when dealing with the obligations of a person who acts with a pecuniary interest in a matter,and instead uses the term "duty of fair dealing." (at 264).128of Equity over two centuries ago, 516 and subsequently courts in numerous commonlaw jurisdictions have since adopted this principle.517 In the course of its adoption,judges in the common law jurisdictions have attempted to unmuddy the waters in thisarea. Several have elucidated on the concept of fiduciary duty. Since no two caseshave ever been identical and each case had specific circumstances to be taken intoconsideration, this area has been a fertile plain of issues for elucidation. The presentstatutory provisions with regard to fiduciary duty in common law jurisdictions 518 areabundantly articulate, at least compared to its Japanese counterpart. Theseprovisions undoubtedly owe their derivation to the historical developments of theconcept by the common law courts. Notwithstanding, the common law still remainsa primary source of law for the treatment of the majority of cases involving directors'fiduciary duty. The following is a brief look at the common law cases which haveestablished some rules in regard to the directors' fiduciary duty.A classic, and probably the most important case pertinent to the area offiduciary duty is the 1854 English case, Aberdeen Railway Co. v. Blaikie Bros.519In this case, Lord Cranworth L.C. illustrated the principle of the fiduciary duty asfollows:"... it is a rule of universal application that no one having such duties todischarge shall be allowed to enter into engagements in which he has or canhave a personal interest conflicting or which possible may conflict with theinterests of those whom he is bound to protect ..."Sixty years later a Canadian court 52° also found directors who deliberately516 Charitable Corp, v. Sutton (1742), 2 Atk. 400, 26 E. R. 642 (Eng., L.C.); Welling, supra note138, at 378; Paterson, supra note 350, at 2.517 McMurray, supra note 349, at 623-624.518 For example, the CBCA, s.122; the OBCA, s. 142; the BCCA, s.142.519 (1854), 2 Eq. Rep. 1281.529 Cook v. Decks [1916] 1 A.C.554, 85 L.J.P.C. 161 (P.C.)129took over a contract which rightfully belonged to their corporation, accountable totheir corporation for the benefit they obtained through the contract.Another English decision, Regal Hastings,521 took the elucidation one stepfurther. Here, although the corporation did not have enough financial resources totake advantage of an opportunity, and thus did not incur any actual harm by thedirectors taking advantage of the opportunity, the court found the director liable tothe company. The primary fact the court emphasized was that the directors' profitaccrued "by reason and only by reason of the fact that they were directors ofRegal...",522 and thus whether or not the corporation actually sustained harm, orwhether the corporation could not take the opportunity itself was irrelevant.The leading Canadian case in this sphere, Canaero,523 has followed RegalHastings, and further augmented another dimension to this area of law. In short, thecase expanded or redefined the scope of directors who ought to owe a fiduciary dutyto the corporation. The court ruled that (senior) officers and former directors (andofficers) also owe a fiduciary duty to their corporation, and if they breached this dutythey are accountable for any profits which they derive from such a breach. 524Although these cases are only some of the landmark cases in this area, andother cases relevant to the area of fiduciary duty should be carefully noted, theyillustrate the underlying principles relevant to fiduciary duty in the common lawjurisdictions.521 Regal Hastings Ltd. v. Gulliver [1942] 1 All E.R.378 (Eng., H.L.).522 Ibid.523 Canadian Aero Services Ltd.  v. O'Malley, Zarzycki et al. [1974] S.C.R. 592, 62 D.L.R. (3d) 635.524 Liability of former directors will be discussed later; see infra not 693 to 714 and accompanyingtext.130Contrary to this long history of the judicial scrutiny and scholarship on theconcept of fiduciary duty in the common law jurisdictions, the concept of fiduciaryduty (of loyalty) has a relatively short history in Japan. The concept of fiduciary dutywas first introduced by the 1950 amendments to the Commercial Code. 525However, despite the non-existence of this concept in the Code prior to theamendment, several duties of corporate directors, which are now considered to bespecific types of fiduciary duty of loyalty, had been regulated by the Code, since itsoriginal enactment in 1899.526 Although these old provisions were based on theprovisions of the German Commercial Code of that time through severalamendments to the relevant provisions of the Code, these provisions have beenchanged largely due to the influence of the laws of common law jurisdictions, inparticular the laws of the U.S.A. after World War II. Hence now, these provisionsclosely resemble those of the U.S. company laws, but are not identical to them.Prior to the 1950 amendments, by which the term "fiduciary duty" and theprovision regulating this duty was introduced to the Code, 527 the duty of care andsill was viewed as an umbrella duty which may regulate any directors' conduct. 528Other specific duties of directors, such as the duty to avoid competition 529 and theduty to avoid self-dealing transactions, 539 were viewed either as specific civil dutieswhich only apply to directors or a specific type of the duty of case and ski11. 531525 Art.254-3.526 For example, art.175 of the 1899 Code provided for the prohibition of directors from competingwith their corporation, and art.176 provided for the prohibition of directors from contracting withtheir own corporation; Loenholm supra note 43.527 Art.254-3.528 Ueyanagi, supra note 167, at 28-34.529 Art.264; a detailed discussion on this duty will be made later in this chapter; infra see 3.3Competition.53° Art.265; a detailed discussion on this duty will be made later in this chapter; infra see 3.2 Self-Dealing Transactions.531 Ueyanagi, supra note 167, at 205 to 205 and 225 to 227.131When the concept of fiduciary duty was introduced to the Code, it appears tohave been very difficult for the Japanese legislature, judiciary and other legal expertsto comprehend the concept and accept that there exists another fundamental dutyof directors.In addition, according to the concept of fiduciary duty in common lawjurisdictions, the duty to avoid competition and the duty to avoid self-dealingtransactions are considered to be within the scope of the fiduciary duty, not the dutyof care and ski11.532 This principle also appears to have been met with difficultiespertaining to its acceptance to the Japanese legal arena. It is evident from the factthat even at present there still exist arguments as to whether or not the fiduciary dutyincluding the duty to avoid competition and the duty to avoid self-dealing transactionsis a different duty from the duty of care and ski11. 533 This confusion and hardshipin understanding the concept of fiduciary duty by Japanese legal experts has led toa somewhat different concept of fiduciary duty in Japan as compared to the conceptin common law jurisdictions.Despite, the difference in the concept of fiduciary duty in Japan and commonlaw jurisdiction, the Code prescribe for the fiduciary in a manner similar to itscommon law counterpart. The following provisions of the Code and the BCCAregulating the fiduciary duty illustrate the similarity of the fiduciary duty regulationsin both jurisdictions.The Commercial Code, Article 254-3 "The directors shall be obliged to obey any law or ordinance and the articlesof incorporation as well as resolutions adopted at a general meeting and to532 Gower, supra note 52, at 559 to 572.533 This issue will be discussed shortly.132perform their duties faithfully on behalf of the company."The BCCA, Section 142(1)(a) "Every director of a company, in exercising his powers and performing hisfunction shall act honestly and in good faith and in the best interest of thecompany."One example which demonstrates the confusion and complexity ofunderstanding the concept of fiduciary duty among Japanese legal scholars and thejudiciary is seen in the argument regarding the interpretation of Article 254-3 of theCode. The majority opinions was and probably still is that the duty provided forin Article 254-3 is, in principle, the same duty as the duty of care, and the provisionmerely clarifies the duty of care. Thus the fiduciary duty is not a duty which requiresa different degree from that of the duty of care535 . The Japanese Supreme Courtalso supported this view in a 1970 decision. The Court stated that "The provision ofArticle 254-3 [fiduciary duty] of the Commercial Code is confined to amplify andclarify the duty of care set forth in Article 254, paragraph 3 of the Code and Article644536 of the Civil Code. The provision [the fiduciary duty] does not prescribe aduty which is separate from or higher than the duty of care which is derived from anordinary relationship of mandate." 537 However, an alternate view has emerged inrecent years.538The new view appears to be derived from a gradual understanding of theoriginal concept of the fiduciary duty in common law jurisdictions. According to this534 Suzuki, Osumi, Ishii, Kawamoto, cited in Namiki, supra note 383, at 46.535 Ueyanagi, supra note 167, at 28-29; Kitazawa, KaishaM, supra note 75, at 351.536 Supra note 369.537 The Supreme Court, June 24, 1970  (Minshu 24-625).538 Ueyanagi, supra note 167, at 29; Tanaka, supra note 21, at 540; Namiki, supra note 383, at 46.133view, the fiduciary duty, in contrast to the duty of care which requires the standardof care of a good manager, is one which requires a higher standard than the standardof duty of care. Scholars in this camp advocate that fiduciary duty is a duty whichrequires directors to act honestly, faithfully and in the best interest of theircorporations; if a conflict arises between the director's interest and the corporation'sinterest, the director shall act in the best interest of the corporation. 539 And it isnot sufficient for a director to merely discharge his duties by satisfying therequirement of acting with a good care as a good manager. This interpretation is,to a large extent, similar to that generally observed in common law jurisdictions.Although it appears that in common law jurisdictions these two duties havebeen recognized to be two distinct duties, in the Japanese legal regime, rationalizingthis view requires that more regard be given to observations of the Code and otherrelevant laws and their historical developments. In conclusion, it is my opinion thatin Japan the fiduciary duty should be treated as a different and distinct duty from theduty of care and skill for the following reasons:(a) As mentioned earlier, the provisions° which sets forth thefiduciary duty was inserted to the Commercial Code due to theexpansion of directors' powers by the 1950 amendments. The insertionof the provision was originally purported to impose a heavier duty ondirectors and to prevent possible abuses of the directors' expandedpower.541 Therefore, it should be recognized that the fiduciary dutyis a duty which is imposed on directors for their activities which maynot be controlled by the duty of care which had existed before theamendments.Ueyanagi, supra note 167, at 29; Namiki, supra note 383, at 47-48; Tanaka, supra note 21, at540-541.540^Commercial Code, art.254 -3; see previous page.541 Tanaka, supra note 21, at 543; Ueyanagi, supra note 167, at 28.134(b) As the business judgment rule542 has become an accepted ruleby some Japanese courts, 543 imposing the duty of care on directorshas become less efficient in preventing directors from abusing theirpowers. Thus, it has been the predominant view among scholars whorecognize the business judgment rule in Japans that the businessjudgment rule should not be applied in the case where directors havebreached their fiduciary duty. On the other hand, if the fiduciary dutyis recognized to be the same duty as the duty of care, the businessjudgment rule may be applied to the fiduciary duty as well. Hence, ifJapanese courts recognize the business judgment rule and rejectdirectors' liability, they should also recognize the concept of fiduciaryduty as being different from that of the duty of care and not beingsheltered by the business judgment rule.(c) If the fiduciary duty is recognized as the same duty as the dutyof care, for a director to be liable, the corporation should bear theonus of proof that the wrong doing was done by intention or withnegligence545 . On the other hand, if the fiduciary duty is recognizedas a duty of a different or higher degree than the duty of care, themere fact that a director puts himself in a situation where his interestconflicts with the interest of the corporation would constitute a breach542 Supra 2.3 Business Judgment Rule."3 Ibid.544 It is also said by an American commentator: "The business judgment rule provides no shelterfor directors and officers who breach the duty of loyalty."; McMurray, supra note 349, at 628.545 Ueyanagi, supra note 167, at 30; It is an established view of the Japanese courts that fordirectors to be liable for a breach of duty of care, the action should have been done with intentionor by negligence.135of this fiduciary duty; intention or negligence would be irrelevant. 546In other words, if a director's activity causes or may cause any conflictof interest between the director and his corporation, he would be liableto the corporation for damages regardless of whether or not the activitywas done by intention or with negligence. To pursue the liability of thedirector, the corporation merely has to prove that his activity conflictswith the interest of the corporation.547In light of the fundamental principles of fiduciary duty, itappears obvious that if a conflict of interests between a corporationand its director is evident, the director ought to be liable for his actionsif they were undertaken and were not in the best interest of hiscorporation, irrelevant of his intention or negligence.Although the view which recognizes that the fiduciary duty is different fromthe duty of care is a quite strong one, at present it appears that the Japanese courtsare still reluctant to distinguish these two duties. 548The argument concerning whether or not fiduciary duty should bedistinguished from the duty of care is one example which illustrates a somewhatdifferent notion of the concept of fiduciary duty in Japan as compared to commonlaw jurisdictions.546 This view has been supported by some scholars(Kitazawa, Kanzaki, cited in Ueyanagi, supra not167, at 30); Some scholars disagree, stating that intention or negligence is not necessary for a breachof fiduciary duty. These scholars argue that the existence of negligence should be determined basedon whether the director knew the fact that his/her action conflicted with the interest of thecorporation. Therefore this school of scholars, as far as the requirement of negligence is concerned,deals with the fiduciary duty more strictly than the duty of care.(See Ueyanagi, supra note 167, at 30).547 Namiki, supra note 383, at 50 to 51; Jurisuto, No.920, at 34-40.548 Most cases which should be dealt with as breach of fiduciary duty cases have been dealt withas breach of duty of care cases or both breach of duty of care and fiduciary duty cases by the Japanesecourts; Re: Nihon Setsubi, Tokyo District Court, March 30, 1988, Hanrei Jiho, No.1272, p.23; Nithoco, Ltd. v. Asakura, Tokyo district Court, July 23, 1970, Hanrei TiM, No.607, at 81 to 84.136The concept of fiduciary duty under the Japanese Commercial Code will befurther illustrated by a detailed analysis of several different situations which mightgive rise to a conflict between directors and their corporations. The rest of thechapter will examine three typical conflict of interest situations. The situations are:1) self-dealing transaction; 2) competing with the corporation; and 3) taking acorporate opportunity.3.2. Self-dealing Transactions1) Statutory ProvisionsWhen directors contract with their corporations, such transactions aregenerally referred to as "self-dealing transactions." 549 During these transactions, aconflict of interest situation is highly likely to occur. When directors enter into acontract with their corporations, either directly or indirectly, in many cases they mayhave a pecuniary self interest in this contract. Consequently they may favour theirself interest and forsake the interest of their corporation which they ought to beprotecting.Since corporate directors occupy positions which give them numerousopportunities to enrich themselves, justly or unjustly, by utilizing valuable informationwhich only few individuals including themselves are privy to and at the same timeallows them to conceal secret profits they may obtain by use of this information, itwould appear that it may be quite a laborious task for them to resist temptations inthis area.Though this may be a general tendency for corporate directors anywhere in549 There are several types of transactions which are usually called "self-dealing transactions." Theyinclude four types of transactions: 1) a transaction between a corporation and its directors; 2) atransaction between a corporation and a third party in which a director of the corporation has asignificant interest; 3) a transaction between two corporations which have interlocking directors; and4) a transaction between a corporation and its subsidiaries. Due to the limited scope of this thesis,the first two types of transactions will be focused on here.137the world, in Japan, corporate directors appear to utilize their positions morefrequently for their own self interest. For instance, they frequently borrow moneyfrom financial institutions or issue bills with their corporation's endorsement. 55° Asa result of this practice, numerous cases regarding self-dealing transactions have beenreported.551No reliable evidence could be obtained pertaining to, whether in fact, morecases have been reported or, more such transactions have been undertaken withoutbeing reported, in Japan, as compared to other jurisdictions such as the U.S.A. orCanada. However, the assumption that corporate directors in Japan have been lessaware of or ignorant of their duties regarding self-dealing transactions would not bemissing the mark. It is a well known fact, to the Japanese any way, that Japanesedirectors have for the longest time rested on their laurels ignoring their shareholderswho are usually quiet and patient, despite the attempts of the law to restrain this andother unbecoming types of directors' behaviour. 552 Most corporate directorsappear not to be conscious of or simply do not care about the fact that they arefiduciaries of their corporations. With this attitude of corporate directors (in Japan),it is most likely that self-dealing transactions have been undertaken more frequentlyby directors of Japanese corporations compared to directors of other jurisdictionssuch as those of the U.S.A. or Canada.ss° Tanaka, supra note 21, at 556.551 Ibid.552 As seen in Chapter V (supra Chapter V. 3. Present Problems Surrounding Shareholders'General Meeting in Japan), in Japan the SGM has been nominal and not functioning in a way as itought to be. It has been said this is largely because corporate management have tended to ignoreshareholders, while shareholders themselves have tended to be disinterested in corporate management.(Sueyoshi, Toshikazu, "Kabunushi &Rai no Genjy6 to Kadai [Present Situation and Problems ofShareholders' General Meetings]" in HOritsu Jiho , Vol.64, No.7, at 24 to 30.) In addition, a smallnumber of law suits against directors including cases involving directors' self-dealing transactions inJapan also evidences Japanese shareholders' unawareness of their own rights and directors' unwantedbehaviours. The issue regarding law suits against directors will be addressed in conclusion (Infra note785 to 787 and accompanying text).138Despite the differences of behaviour of corporate directors in Japan comparedto their American and Canadian counterparts, in all jurisdictions directors are notlegally free to enter into transactions with their corporations. To restrict self-dealingtransactions primarily for the purpose of protecting the interest of a corporation, suchself-dealing transactions are, in principle, prohibited without the approval of thecorporation under both the Japanese Commercial Code 553 and the statutes ofcommon law jurisdictions including those of Canada554 and the U.S.A. 555In Japan, as stated earlier, self-dealing transactions had been under regulationsince the inception of the original Commercial Code 556 along with some otherdirectors activities 557 with regard to fiduciary duty of loyalty. Though the provisionpertaining to self-dealing transactions was originally based on provisions of theGerman Commercial Code of the time, through several amendments of the Code 558the present fundamental principles of restricting self-dealing transactions areanalogous to those of the common law and the statutory provisions of common lawjurisdictions with some exceptions.To commence the rest of this discussion, the relevant provisions of theCommercial Code of Japan (the Code) and those of common law jurisdictions shallbe observed. For simplicity, here the British Columbia Company Act (the BCCA)of Canada will be dealt with as a representative statute of common law jurisdictions.553 Article 265 of the Commercial Code.554 The CBCA, s.120; The BCCA, s.144; The OBCA, s.132.555 The Revised Business Model Corporations Act in 1989 (RMBCA), s.8.31.556 The original Commercial Code (1899 Commercial Code) provided: "A director can do businesswith the company either on his own account or on that of a third person only when he has obtainedthe consent of the inspectors." (art.176); Loenholm, supra note 43, at 49.557 Other directors' activities regulated under the original Commercial Code included competingwith the corporation. (1899 Code, art.175).558 The provision was amended in 1911, 1938, 1950, and 1981. For the detail of the amendments,see Ueyanagi, supra note 167, at 228-229.139Both statutes - the Code and the BCCA - explicitly and minutely regulate self-dealing transactions. The following provisions constitute the major thrust of thestatutes in this area:The Commercial Code of Japan, Article 265, paragraph 1 "When a director intends to acquire the company's products or otherproperties by transfer or to transfer his own products or other properties tothe company or to receive loans from the company or to effect any transactionwith the company on his own behalf or on behalf of a third person, he shallobtain the approval of the board of directors. The same shall apply in thecase where the company guarantees liability of the director or otherwiseeffects with a person other than the director in a transaction in their interestsare contrary between the company and the director." 559The British Columbia Company Act, Section 144, sub-section 1 560"Every director of a company who is, in any way, directly or indirectly,interested in a proposed contract or transaction with the company shalldisclose the nature and extent of his interest at a meeting of the directors."The underlying principles of both provisions may be summarized as follows:When directors contract with their corporations, a conflict of interest situationbetween the directors and their corporations is likely to occur. 561 To protect theinterest of the corporations in such circumstances, the statutes require that interesteddirectors disclose their interest in these transactions to their corporations and/oracquire approval for executing any such transactions from their corporations.5" Note that unsound translation of this section is due to the direct quote from the EHS LawBulletin Series.56° The CBCA equivalent is s.120, ss.(1).561 Ueyanagi, supra note 167, at 225.140To shed light on the regulatory schemes of self-dealing transactions under theCommercial Code, further examinations will be made with regard to: 1) direct andindirect transactions; 2) the scope of self-dealing transactions; 3) effect of self-dealingtransactions; 4) disclosure, approval and fairness relevant to self-dealing transactions;and 5) accountability of directors involved in self-dealing transactions.2. Direct and Indirect TransactionsSelf-dealing transactions which are required to be disclosed under theCommercial Code may be divided into two types: 1) a direct transaction, atransaction between a director and his corporation 562; and 2) an indirecttransaction, a transaction between a corporation and a third party, which causes ormight cause a conflict of interest between the corporation and its directors. 563A direct transaction has been prohibited if disclosure is not made by thedirector and if the board's approval is not granted, under the Commercial Code. SMOn the contrary, due to no explicit reference to indirect transactions in any provisionsof the Code prior to the 1981 amendments, it had been long debated whetherindirect transactions ought to be regarded as being statutorily prohibited self-dealingtransactions if the board's approval was not obtained before their undertaking.Examples of situations which added fuel to this debate included: a transaction madebetween a corporation and a third party, which in reality was made on behalf of adirector of the corporation, such as a guarantee contract between a corporation anda bank when a director of the corporation borrows money from the bank 565; anda transaction made between a corporation and another corporation with interlockingdirectors.562 ^supra note 167, at 244.563 Ibid.5" Namiki, supra note 383, at 161.565 Ueyanagi, supra note 167, at 244.141The original position of the Japanese courts was to exclude this kind ofindirect transactions from self-dealing transactions which required the board'sapproval. In a 1964 case, 566 the Supreme Court of Japan stated that, "a transactionunder the provision referred to is a direct transaction between a corporation and its director(s) which caused a conflict of interest between them." It was based on thepresumption that any transaction which violates Article 265 was null and void. Inother words, if indirect transactions were regarded as self-dealing transactions, theywould be null and void. If it were the case, the safety of bona fide third parties wouldbe imperiled. Thus, it was considered necessary to exclude indirect transactions fromstatutorily restricted self-dealing transactions. Although this interpretation wouldprotect the interest of third parties, it would endanger the interest of the corporation.Corporate directors may easily make a deal with their corporation to obtain secretprofits by simply using a third party's name.Thus, this rigid interpretation of the provision as defined by the above courtdecision was reversed by subsequent courts. In a 1968 decision 567, the SupremeCourt of Japan held that transactions under Article 265 should be interpreted toinclude not only a direct transaction between a corporation and its director(s) butalso a transaction made between a corporation and a third party on a director'sbehalf, if the transaction constitutes a conflict of interest situation between thedirector and the corporation. 568 With this background, the provision of theCommercial Code was amended in 1981 569 in an attempt to make this point asclear as day. Due to this amendment, presently the Code explicitly includes indirecttransactions as part of statutorily restricted self-dealing transactions. 57°566 In the Supreme Court Judgment, March 24, 1964  (Saihanshu 72, p.619); see Kitazawa,KaishahO, supra note 75, at 368-369.567 The Supreme Court, December 25, 1968  (Minsha 22-13, p.3511).568 Ibid.569 The 1981 amendments.570 The Commercial Code, art.265, para.1; supra, note 559 and accompanying text.142Regarding the point explained above, the position of the common law as wellas the Canadian statutes appears to be similar to the present provisions of theJapanese Commercial Code. In Transvaal Lands Co. v. New Belgium Land andDevelop Co.571, the court held that "...Where a director of a company has aninterest as a shareholder in another company or is in a fiduciary position towards andowes a duty to another company which is proposing to enter into engagements withthe company of which he is a director, he is in our opinion within this rule. .... It isimmaterial whether this conflicting interest belongs to him beneficially or as trustee forothers. ..." (emphasis added). This common law position 572 has been codified intomost Canadian statutes. 573Now it appears that both in Japan and in Canada, directors who have a self-interest in a contract with their corporations may not escape from liability byconcealing themselves with any exquisitely carved masks. The only way for interesteddirectors to avoid liability would be, as will be seen later, 574 to follow the statutorilyrequired procedures, and not to resort to petty trickery or deceptive cloakingtechniques.However, even though a transaction may appear to be a self-dealingtransaction (regardless of whether it is a direct or indirect transaction) not alltransactions which involve a corporation and its directors will be within the scope of571 [1914] 2 Ch. 488, 84 L. J. Ch 94 (C.A).572 See also Fern Brand Waxes Ltd.  v. Pearl (1972), 29 D.L.R. (3d) 662 (Ont.C.A.). Here the courtclearly stated that separate identities are not to be used as an instrument of fraud.573 The BCCA, sec.144, para.1 provides: "Every director of a company who is, in any way, directlyor indirectly, interested in a proposed contract or transaction with the company shall disclose thenature and extent of his interest at a meeting of the directors." Sec.120, para.1 of the CBCA isanalogous; The Model Business Corporation Act, sec.8.31 also applies "if a director has an 'indirectinterest' in a transaction"; see D'Ambrosio, Thomas A., "The Duty of Care and the Duty of Loyaltyin the Revised Model Business Corporations Act" in Vanderbilt Law Review, Vol.40, No.3, April, 1987,at 688.S74 Infra, see 5. Disclosure, Approval, and Fairness.143the statutorily restricted transactions. The next section will examine the scope of self-dealing transactions which are subject to the corporate laws of Japan and Canada.3) Scope of Self-dealing TransactionsTransactions which would fall into the scope of statutory restricted self-dealingtransactions were originally interpreted by the Japanese courts to include anytransactions between a corporation and its director(s), including those transactionswhich did not induce any conflict of interest. 575 However, this view was criticizedas being too stringent and impractical, and eventually overturned by the SupremeCourt of Japan in 1963. 576 Since then courts have followed this reversed decision.The basic purpose of the legislation was to prevent the conflict of interest betweencorporations and their directors; therefore transactions which would not causeadverse results to the corporations need not to be treated as self-dealing transactionswhich require board's approval. 577This notion, however, appears to have misled the Japanese courts whendealing with one-man corporations. The Japanese courts have generally beenreluctant to impose liability on the director who is a sole shareholder of thecorporation even if he enters into a contract or transaction with his corporation,575 The Supreme Court, October 21, 1915 (Minroku, 21, 1670).576 The Supreme Court, December 6, 1963  (Minshil 17-12, p.1664); The Supreme Court, August20, 1970 (Minshil 24-9. p.1305); Tokyo High Court, Sep 25, 1979  (Hanrei Times, 401-152).577 Transactions which were excluded from the self-dealing transaction under art.265 by theJapanese courts include:1) performance of obligation: Daishinin Judgment, February 20, 1920 (Minroku 26, p.188);2) offset between the corporation and the director: Daishinin Judgment February 22, 1930(Shohan, p.353);3) donation by the director to the corporation: Daishinin Judgment September 28, 1938(Minshei 17-20), p.1912;4) underwriting of shares, investment in kind: Fukuoka KOhan, October 12, 1955 (Kliminshei,8-7, p.535);5) acquisition of a corporate asset by the director by auction: Tokyo District Court, August 6, 1927 (KOminshii, 9-2, p.76).144under any circumstance. This appears to be based on the presumption that if thedirector is a sole shareholder of the corporation, the interests of the director, the soleshareholder, and the corporation are one and equal. 578 The Supreme Court in a1970 decision579 explicitly stated that at the time of the deal, the director was a soleshareholder, and the corporation had been managed in a similar manner to a privatebusiness, therefore no conflict of interest between the corporation and the directorexisted. The court, then, stated, "no board's approval was required" in this instance.It is quite apparent that in the 1970 decision the Supreme Court pierced thecorporate vei1 580 for purposes completely opposite to those for which this principlewas generally adopted and used in common law jurisdictions. 581 Courts in commonlaw jurisdictions have generally adopted this doctrine, piercing the corporate veil, todisregard the usual immunity of shareholders from liability to third parties despite thefundamental principle of corporate law, that "[a] corporation is a separate legal entityfrom its shareholders."582 However, in this 1970 case, the Japanese Supreme Courtpierced the corporate veil to release the director from liabilities instead of imposingliabilities on him. This court decision is, in my opinion regrettable. The reasons forthis assessment are as follows.583Since a corporation is a separate legal entity from its individual shareholders,578 The Supreme Court, August 20, 1970  (Minshi2 24-9, p.1305); The Tokyo High Court, September25, 1979 (Hanrei-Times, 401-152).579 The Supreme Court, August 20, 1970 (Minsha 24-9, p.1305).580 "Piercing (lifting) the corporate veil" is a metaphor frequently used in common law jurisdictionswhen a court considers necessary to impose shareholder personal liability and disregards the principlethat a corporation is a separate legal entity and the shareholder owes only limited liability; Gower,supra note 52, at 108 to 138; Ziegel, supra note 66, at 120; Hamilton, Robert W., The Law ofCorporation (MN, West Publishing Company, 1990), at 81 to 102.581 Ibid, The veil is lifted more readily by courts in the U.S.A. than any other jurisdictions; Gower,supra note 52, at 108.582 ^supra note 52, at 85.583 Hattori, Hihan MinshO ho Zashi, 64.6, p.769. cited in Ueyanagi, supra note 162, at 231-232.145even in the case where a corporation is owned by a sole shareholder who is also adirector of the corporation, the interest of the corporation and the sole shareholderare not necessarily identical.584 The assumption that the interest between acorporation and its director who is a sole shareholder of the corporation does notconflict, ignores the interest of other stakeholders including creditors of thecorporation to which the corporation owes certain rights and obligations. 585Furthermore, there may exist a situation where a corporation is owned by a soleshareholder, but the board of the corporation contains directors in addition to thesole shareholder. 586 In such a situation, the board's decision may differ from thedecision of the sole shareholder in a given instance. It appears to be an erroneousconclusion that there exists no conflict of interest between a corporation and itsdirector(s) in the case of any one man corporations. Whether or not a transactionis within the scope of a self-dealing transaction should be determined by looking atall the factors surrounding the transaction, and not merely by the fact that thecorporation is a one-man corporation.Though the Japanese courts have recently tended to judge cases in this areaof law by looking closely at the particulars of each individual case instead of simplyadopting a general standard (which used to be the case), as far as one mancorporations are concerned, the 1970 Supreme Court decision remains as theauthority in opposition to the recent trend. It is my opinion that only if the interestsof all possibly affected parties to a transaction are examined, and it is then confirmedthat there is no adverse affect, due to the transaction, on any of the concerned584 Ueyanagi, supra note 167, at 232.585 Ibid.586 The Commercial Code of Japan originally (1899 Commercial Code, art.164, para.1) requiredthat a director be a shareholder of the corporation. This provision was amended in 1938 and 1950.Presently directors of a corporation do not need to be shareholders of the corporation. Moreover,the Code even prohibits in the charter of the corporation from providing that directors shall beshareholders of the corporation. (The present Commercial Code, art.254, para.2).146parties, then and only then it would be fair to exclude the transaction from statutoryrestricted self-dealing transactions.Interestingly, the position of the common law in its early stages ofdevelopment dealing with the scope of self-dealing transactions was similar to theabove very strict original Japanese courts' position which restricted all self-dealingtransactions even if a transaction did not cause any conflict between a corporationand its directors. The original position of the common law courts was that "contractsof a corporation in which one of its directors had a personal interest, whetherpecuniary or non-pecuniary, were voidable at the option of the corporation." 587Apt criticism of this rule was best cited by a one author as follows: "its applicationcould be inequitable since contracts which were fair, reasonable and evenadvantageous to the company were not protected from the vitiating effect of the strictcommon law rules."588 This criticism led to statutory reforms in most of commonlaw jurisdictions including the Canadian jurisdictions. 589 For example, the Canadianstatutes explicitly exclude from the imposition of the disclosure requirement sometransactions which are not considered to conflict with the interest of thecorporation. 599Instances enumerated as being excluded from disclosure obligation in the587 Iacobucci, supra note 490, at 301; North-west Transportation Co. v. Beatty, (1887), 12 App. Cas.589 (P.C.); Aderdeen railway Co. v. Blaikie Bros.  (supra, note 488).588 Iacobucci, supra note 490, at 302.589 Welling, supra note 138, at 426-432.59° The BCCA, sec.144(4) reads as follows: A director of a company shall be deemed not to beinterested or not to have been interested at any time in a proposed contract or transaction by reasononly, (a) where the proposed contract or transaction relates to a loan to the company, that he or aspecified corporation or specified firm in which he has an interest has guaranteed or joined inguaranteeing the repayment of the loan or any part of the loan; (b) where the proposed contract ortransaction has been or will be made with or for the benefit of an affiliated corporation, that he is adirector or officer of that corporation; (c) that the proposed contract or transaction relates to anindemnity under section 152 or to insurance under section 152; or (d) that the proposed contract ortransaction relates to the remuneration of a director in his capacity as a director."147Canadian statutes591 are also likely to be excluded from the disclosure obligationin Japan as well, since the underlying principle for the exclusion is same in bothcountries. The principle is, where no conflict exists, no restrictions on such transactionsare needed.4. Effect of self-dealing transactionsNow it would appear to be clear that any transactions which cause or mightcause a conflict of interest between a corporation and its directors are subject to thestatutory disclosure obligation both in Japan and in Canada. Then when a self-dealing transaction has been executed in violation of the relevant provisions of thelaws of either jurisdiction, i.e. without statutorily required disclosure, 592 how havesuch transactions been treated?Due to the lack of explicit provisions in the Code, the views of the Japanesecourts along with the Japanese scholars regarding the validity of self-dealingtransactions have been evidenced by a division into several camps since the firstenactment of the Japanese Commercial Code. 593 The historical transition of theinterpretation of the effect of self-dealing transactions however is beyond the scopeof this paper; this thesis will only focus on the present dominant interpretation of thisissue.The interpretation which is presently accepted by the courts is that suchtransactions are, in principle, null and void regardless of whether they are direct orindirect transactions, however a corporation may not claim the nullity of suchtransactions to the detriment of third parties unless the corporation can prove some591 Ibid.592 ^statutory disclosure requirement will be discussed in the next section of this chapter; infrasee 5. Disclosure, approval and fairness.593 The 1899 Japanese Commercial Code; supra note 43.148bad faith on the part of the third parties. 594 This decision is in my opinionsomewhat questionable. 595Three points shall be considered when evaluating this view: 1) if a transactioninvolves third parties, the interest of the third parties should be protected at least inthe case where the third party acted in good faith; 2) the interest of a corporationshould be protected, unless doing so is oppressive to bona fide third parties; and 3)if a corporation is compelled to sacrifice its interest to protect third party's interest,then damages the corporation has sustained by the transaction should becompensated by the director who is responsible.In light of the above points, it would be fair to say that: 1) a transactionbetween a corporation and a third party, an indirect transaction, entered into withoutthe board approval, should be valid unless the third party acted in bad faith, for thepurpose of the protection of the interest of the third party; 2) a remedy for thecorporation in such a case would be to pursue the liability of the director on whosebehalf the transaction was made; and 3) where a transaction is made between acorporation and its director(s), a direct transaction, such a transaction should beinvalidated at the option of the corporation for the purpose of the protecting theinterest of the corporation.To say that all self-dealing transactions are, in principle, invalid, which has5" The courts which adopted this view include: The Supreme Court, December 25, 1968 (Minshint,22-13-3511); The Supreme Court, March 12, 1980  (Hanrei JihO, 591-88); The Supreme Court, April23, 1990 (Minshii, 24-4-364).595 In fact, the present views of Japanese scholars are mainly divided into three. The dominantview ("SOtaiteki MuIcO Setsu or relative nullity theory") is advocated by supporters of the 1968 SupremeCourt decision (ibid). Another view ("Yulai Setsu or valid theory") is that such transactions are valid,however a corporation may claim damages from the director who has executed a transaction inviolation of article 265 of the Commercial Code. The third view ("MuIcii Setsu or Nullity theory") isthat such transactions are null and void even with respect to third parties.149been the view of the Japanese courts, 596 would be too stringent or might bedeleterious to corporations. If a direct transaction is recognized to be automaticallynull and void in any event, by no means would the interest of the corporation be bestprotected. In the case where a corporation wishes to maintain the validity of atransaction, and doing so is in its best interest, it would be more appropriate, as faras direct transactions are concerned, to give a corporation an option to determinewhether any such transactions should be invalidated. If a transaction involves bonafide third parties, it is my opinion that if either party, a corporation or the third partyinvolved, seeks to set aside the transaction, the seeking party should have an optionto invalidate the transaction. Finally, in the event of any damages sustained by acorporation due to a self-dealing transaction, the interested director should be liablefor these damages.As opposed to the rigid position of the Japanese courts which denies thevalidity of self-dealing transactions, at least direct transactions, if the transaction doesnot meet the statutory disclosure requirements, the Canadian and American statuteshave adopted a more lenient stance. 597Historically, up to the early twentieth century, the common law courts 598 hadtaken a very rigid position that a transaction between a company and its director(s)was "automatically voidable at the insistence of the corporation or itsshareholders."599596 See cases ibid.597 McMurray, supra note 349, at 624.598 Aberden Railway Co. v. Blaikie Bros. [1843-60] All E.R.Rep. 249, 2 Eq. Rep. 1281 (H.L.);Dancan v. Ponton, 102 S.W. 2d 517,519 (Tex. Civ. App. 1937); See Clark, Robert C., Corporate Law(Boston, Little. Brown and Company, 1986), at 160.599 Melvin Aron, "Self-Interested Transactions in Corporate Law" in The Journal ofCorporate Law, Vol.13, N.4, Summer, 1988, at 997: However, Beveridge, Norwood P. Jr. in his article("The Corporate Director's Fiduciary Duty of Loyalty: Understanding the Self-Interested DirectorTransaction" in Depaul Law Review, Vol.41, N.3, Spring, 1992, at 659) states that this current belief150However, the common law courts have radically changed their standpoint onthe issue;60° now most courts 601 and corporate statutes in most common lawjurisdictions including Canadian 602 and the American603 jurisdictions take theposition that "no transaction is voidable solely because it is a self-dealing transactionif certain requirements 604 are met." One of the rationales for the adoption of thisflexible rule appears to be the practical need of allowing corporations, particularlysmall corporations, to engage in transactions with their directors. Such a transactionmight be advantageous to the corporations. 605In sum, though provisions of the statutes in Canada and the U.S.A. differslightly depending on the jurisdiction, the common underlying principles with regardto self-dealing transactions are: 1) interested director(s) should disclose their interestto the board606; 2) self-dealing transactions should not be automatically invalidatedeven where interested directors fail to meet the required disclosure obligation607 ;toward the common law position is erroneous. He claims that "Interested director contracts were notalways voidable."600 Eisenberg, supra note 599 at 997; Clark, Robert, supra note 598, at 160.6°1 Pepper v. Litton, 308 U.S. 295 (1939); Johnston v. Greene, 35 Del. Ch. 479, 190, 121 A.2d 919,925 (1965); American Timber and Trading Co. v. Niedermeyer, 276 Or. 1135, 1146, 558 P.2d 1211,1218-19 (1976); Phyolite Resources Inc. v. Canquest Resource Corp.  (1990),50 B.L.R. 275 (B.C.S.C.);Bottay v. Siscoe Callahan Mining Corp.,  [1990] B.C.W.L.D. 526 (S.C.).6°2 The BCCA, sec.146.6°3 RMBCA, s.8.31 (a) reads: " ... A conflict of interest transaction is not voidable by thecorporation solely because of the director's interest in the transaction if any one of the following istrue: (1) the material facts of the transaction and the director's interests were disclosed or known tothe board of directors or a committee of the board of directors and the board of directors orcommittee authorized, approved, or ratified the transaction; or (2) the material facts of the transactionand the director's interest were disclosed or known to the shareholders entitled to vote and theyauthorized, approved, or ratified the transaction; or (3) the transaction was fair to the corporation.";Clark, Robert, supra note 598, at 160 to 166.604 Infra, see 5. Disclosure, Approval, and Fairness.6°5 Eisenberg, supra note 599, at 997.6°6 The BCCA, s.144(1); The CBCA, s.120(1).607 The BCCA, s.146 provides that "The circumstance that a director is, in any way, directly orindirectly, interested in a proposed contract or transaction, or a contract or transaction, with thecompany shall not make the contract or transaction invalid, but, if the matters referred to in section1513) interested director(s) are not accountable if they disclose their interest to andobtain approval from the board, or the contract was fair to the corporation and thecontract is approved by shareholders of the corporation after full disclosure 608; and4) if statutory requirements were not fulfilled, the contract may be set aside by acourt by the application of the company or any interested person. 609With regard to the validity of self-dealing transactions, the principles aresummarized as follow: The Canadian and American statutes, in principle, recognizesthe validity of self-dealing transactions regardless of whether the transaction is adirect or indirect transaction. 610 The statutes then provide a remedy for thecorporation or any other persons who has been affected by such transactions. The145(1)(a) to (c) or section 145 (1)(d) and (e) have not occurred, the court may, on the applicationof the company or any interested person, enjoin the company from entering into the proposedcontract or transaction, or set aside the contract or transaction, or make any other order that itconsiders appropriate"; The CBCA, sec.120. para.7 provides; " A material contract between acorporation and one or more of its directors or officers, or between a corporation and another personof which a director or officer of the corporation is a director or officer of in which he has a materialinterest, is neither void nor voidable by reason only of that relationship or by reason only that adirector with an interest in the contract is present at or is counted to determine the presence of aquorum at a meeting of directors or committee of directors that authorized the contract, if thedirector or office disclosed his interest in accordance with subsection (2),(3),(4) or (6), as the case maybe, and the contract was approved by the directors or the shareholders and it was reasonable and fairto the corporation at the time it was approved"; In the U.S.A., the Revised Model BusinessCorporations Act, sec.8.31 is generally interpreted by the courts to be consistent with the common law.In other words, before conflict of interest transactions to be validated, it is required that thetransaction be fair to the corporation; Rivercity v. American Can Co., 600 F. Supp. 908, 919-22(E.D.La.,1984), Affs, 753 F. 2d 1300 (5th Cir.1985); D'Ambrosio, supra note 573, at 663.608 The BCCA, s.145(1); The CBCA, s.120(7); The CBCA does not refer to the accountability.609 The BCCA, s.146; The CBCA, s.120(8); This statutory reform has been confirmed by theCanadian court (Ronbar Hldg. Inc. v. Realcash Services Inc.,[1991]B.C.W.L.D. 1875 (S.C.)). A courtmay set aside the contract where a director fails to meat the disclosure obligation and if a courtconsiders it is equitable to do so.; see Hadden, supra note 67, at 221-224.91" The B.C. Supreme Court affirmed that the noncompliance with the statutory disclosureobligation does not render the agreement invalid. Until such time as a court orders otherwise, anagreement remains valid: Botty v. Siscoe Callahan Mining Group., [1990] B.C.W.L.D. 526 (S.C.); Asopposed to this principle under the BCCA and OBCA, under the CBCA, it appears to be the generalunderstanding that only where disclosure is made, approval is obtained and the contract is reasonableand fair to the corporation at the time of approval, the transaction can be made non-voidable. Inother words, self-dealing transactions are voidable; See Welling, supra note 138, at 448.152remedy is to allow the party involved to recourse to a court for setting aside thetransaction. In contrast, as stated earlier it is an established principle of the Japanesecourts that a self-dealing transaction is in principle null and void if interesteddirectors fail to disclose their interest and obtain board approval; the JapaneseCourts recognize the validity of such transactions only if it is made between acorporation and bona fide third parties.It would appear that the Japanese courts have been more attentive to theprotection of the interest of third parties on the one hand, while they have been lessdiligent about observing the possibilities of a self-dealing transaction beingadvantageous to a corporation on the other. It would appear that the Japanesecourts are still, standing on, or should one say, asleep maintaining, the same positionas the common law courts of nineteenth century. This is also evidenced by the factthat the so-called "fairness test" 611 which is even more lenient than any other testsand has been adopted in many major jurisdictions of the U.S.A. has never beenconsidered at all in Japan. 6125) Disclosure, Approval and FairnessBy the above examination, the consequences stemming from the violation ofthe statutory requirements pertinent to the execution of a self-dealing transactionunder the statutes of Japan and Canada appear to be clear. Then what constitutesa violation of the statutes? When a director intends to enter into a contract with hiscorporation either directly or indirectly, what, if any, are the alternatives for such adirector who does not wish to violate the relevant statutes? How can the directoravoid liabilities, and thereby legitimate the transaction? The case law and thecorporate statutes of the U.S.A. have taken a novel and unique evolution in this area' 1 See infra, 5.(3) Fairness.612 Ibid.153of the law establishing three alternative ways to make a self-dealing transactionlegitimate and effective. Whether these alternatives are available in Japan or inCanadian jurisdictions will be looked at below. Through this examination, thefollowing shall be looked at: how easy or difficult it is for Japanese directors to enterinto such a transaction; how the Japanese statute attempts to control undesirableactivities of corporate management; and the differences in the Japanese statute'sapproach toward regulation of corporate management compared to its Anglo-Canadian counterpart.(1) Disclosure to and Approval by the BoardThe first alternative to make a self-dealing transaction legitimate is to disclosethe material fact of the transaction to the board and obtain its approval before theinterested director executes the transaction. 613 In this instance, the interesteddirector is required to refrain from participating in the associated decision making ofthe board. This alternative is available under both the Canadian 614 and theJapanese615 statues, though some procedural requirements differ slightly. At least,the substantial requirement that interested directors disclose their interest in atransaction appears to be relatively similar. The rationale of regulating self-dealingtransactions in both jurisdictions appears to have been same, that is to give acorporation a fair chance to assess the transaction: whether such a contract will causea conflict of interests situation between the corporation and its directors to the613 This rule (disclosure to the board) was established by the Court in Pervival v. Wright, [1902]Ch.421, at p.426 The rule is based on the view that "directors owe duties to their company, no totheir shareholders." Therefore, if directors are required to disclose their interest, as in the case ofcorporate opportunities and self-interested contracts, disclosure should be made to those who controlthe business of the company, that is to other directors; Hadden, supra note 67, at 224.614 The BCCA, s.144(1), s.145(1), (2); The CBCA, s.120(1), (5).615 The Code, art.265(1), 260-2; The Japanese Commercial Code does not explicitly require thatan interested director "disclose the material fact" of the transaction. The provision simply requiresthat a self-dealing transaction be approved by the board. However, it appears that "to obtain theapproval, the material fact must be disclosed" has been a recognized interpretation in Japan; Namiki,supra note 383, at 452.154detriment of the corporation, or whether it will be inevitable or advantageous to thecorporation.In light of the policy behind the legislation in the different jurisdictions, it isperceived that it is not sufficient for an interested director to disclose his interest ina transaction by simply stating "I am interested in the transaction." Although, theextent of the material facts has not obtained a definite judicial determination in eitherjurisdictions, Japan616 or Canada,617 the director must disclose all the materialfacts that might affect the decision of the corporation on the issue.As to the appropriate time when the disclosure to and the approval by theboard should be made, the Canadian statutes explicitly provides that it should bemade in advance.618 On the contrary, no statutory provision is found in the Coderegarding this point. However most Japanese courts have affirmed619 ex post facto616 In Japan, it has been argued by the courts whether the approval of an inclusive, not anindividual, transaction is admissive (An inclusive approval is the one which gives a director a blanketpermission to enter into any transactions). The courts' view are diverse. Among decisions which heldthe inclusive approval was sufficient are: The Supreme Court, December 23, 1971, Hanrei JihO 656-85;The Tokyo District Court, April 3, 1967.  Mnyil 1-1Ornu, 478-36. The courts which held that theapproval must be obtained to every specific transaction individually include: The Tokyo Hight Court,March 22, 1934, IfOritsu Shinbun, 3697-12.617 The Liquidators of the Imperial Mercantile Credit Association v. Edward John Coleman andJohn Watson Knight [1873] L.R.7E&I.App.189 (H.L.). In the case, Load Chelmsford stated that amere disclosure of a conflict was not sufficient, but the nature of that interest must have beendisclosed. Also in Gray v. New Augarita Porcupine Mines Ltd. [1952] 3 D.L.R.1(P.C.), the court heldthat "The amount of detail required must depend in each case upon the nature of the contract orarrangement proposed and the context in which it arises. It can rarely enough for a director to say"I must remind you that I am interested" and to leave it at that, unless there is some special provisionin a company's articles that makes such a general warning sufficient"; more recently, Morton v. Asper(1988), 55 Man.R.(2d.)61 (Q.B.) at 72; see Eisenberg, supra note 599, at 1000; Welling, supra note138, at 452; Presently, the BCCA, s.144(1), the CBCA, s.120(1) explicitly requires that an interesteddirector disclose the nature and extent of his interest by contract.618 The BCCA, s.144(2); The CBCA, s.12(2).619 The first decision which affirmed the ratification of the board was made in 1931 (The SupremeCourt, November 21, 1931 (HOritsu Shinbun, 3344-11), and has been followed the other JapaneseCourts with a few exceptions. The contrary decisions include Tokyo High Court, March 30, 1959(TOIcOmin JihO 10-3-68).155(after the fact) approval by the board, and it also has been the prevailing view ofJapanese scholars. 62°Supporters of this view advocate that even though such a self-dealingtransaction is approved ex post facto by the board, the director is still liable fordamages, if any, to the corporation. 621 Thus regarding the liability of a director,ex post facto approval does not reduce the director's liability and no actual harm tothe corporation results from the approval. 622 However, this argument overlooksseveral points. Firstly, recognizing ex post facto approval as proper board approvaldoes not reduce the director's liability but gives the director a broader chance toescape from liability; as will be seen later, 623 the proper board approval reducesthe statutory requirements, which allow for relief of an interested director fromliability from unanimous consent of all the shareholders of the corporation to two-thirds of issued shares of the corporation. What does this really mean? If ex postfacto approval is not recognized as proper board approval, the interested directorneeds to obtain the unanimous consent of all the shareholders of the corporation toavoid liability for damages incurred from his action; on the other hand, if it isrecognized that ex post facto approval is proper board approval, if the corporationhas sustained damages as a result of the director's action despite the board approvalthe interested director may be able to escape from liability by obtaining the consentof merely two-thirds of the issued shareholders voting.Secondly, in light of the fundamental principles pertaining to restricting self-dealing transaction, that is "the best interests of the corporation", such ratification by620 Ueyanagi, supra note 167, at 248-249.621 Art.266, para.6 provides that only the special resolution of shareholders can release a directorfrom liability; For detail, see infra, 6. Accountability.622 Ueyanagi, supra note 167, at 248.623 Infra, see 6. Accountability.156the board should not be recognized. One reason is, that it would be quite possiblethat such ratification would be made by members of the board, who possibly thoughnot necessarily were not the members of the board at the time of the transaction.Such board's members may support the concerned director due to the influence ofthe concerned director over them at the time of ratification.  In other words, theconcerned director may manoeuvre so as to get his puppets on the board and havethem to ratify the transaction.The first alternative to make a self-dealing transaction legitimate (obtaininga board approval) is available both in Japan and Canada. However, in Japan, sinceex post facto approval by the board appears to be effective, it is fair to say thatdirectors have an additional alternative within this first alternative.(2) Disclosure to and approval by shareholdersIn the case where the first alternative (approval by the board) is not available,such as the case where there is no disinterested director and/or no legitimateapproval may be obtained by the board, the second alternative for a director tolegitimately enter into a self-dealing transaction is to disclose the material facts aboutthe conflicting transaction to shareholders of the corporation and obtain theirapproval.Basically, the Canadian statutes recognize the validity of a self-dealingtransaction if a majority of the shareholders 624 approve or ratify the transactionafter a full disclosure, provided that the transaction was fair and reasonable to thecorporation 625 at the time it was entered into.626 As for the voting, unlike the624 The CBCA (s.120(7)) requires only a simple majority for the approval, whereas the BCCA(s.145(1)(e)) requires a special resolution.625 The CBCA, s.120(7); The BCCA, s.145(1)(d)(e), s.146.157board approval, there is no statutory requirement for an interested director to abstainfrom voting in the case of shareholders' approval. 627 Allowing an interesteddirector to participate in the voting as a shareholder is consistent with the establishedcommon law rule in North West Transportation Co. Ltd. v. Beatty. 628 In this case,the court explicitly recognized the right of an interested director as a shareholder tovote. The rationale of allowing interested directors as shareholders to vote in thisinstance was based on one of the fundamental principles of corporate democracy,that is "the vote of the majority must prevail, unless the adoption (of the contract)was brought about by unfair or improper means." 629 This rule created by the courtappears to be responsible for the adoption of this second alternative into theCanadian statutes. The core of this alternative, based on the Beatty decision, is thatshareholders' approval will be able to validate the contract only if the contract wasfair and reasonable to the corporation in the first place, regardless of who voted forthe approval.On the contrary, in Japan it appears that the Code requires63° that theapproval be made exclusively by the BOD. However, the Japanese Supreme Courthas ruled to the contrary. In a 1974 decision, 631 the Supreme Court of Japan heldthat since the purpose of the legislation was to protect the interests of a corporation,if the consent of all the shareholders of the corporation was acquired, it could626 The BCCA, s.145(1)(d); However, under the CBCA, the transaction must have been fair andreasonable at the time it was approved. How this difference of the time actually affects the outcomeis not clear at this point.627 Welling, supra note 138, at 446.628 (1887), 12 App. Cas. 589 (ont., J.C.P.C.).629 Ibid.63° The Code, art.265; Ueyanagin, supra note 167, at 248.631 The Supreme Court, September 26, 1974  (Minsidt 28-6, 306).158substitute for the board approval. 632 Here again, there lies an erroneous premise:"a corporation = its shareholders," and "the interest of a corporation = the interestof its shareholders." If so recognized, the interests of other stakeholders of thecorporation other than shareholders are at stake. Grave dangers are latent ifshareholders ratification is simply admitted without requiring the transaction to be fairand reasonable to the corporation as a whole. Another dubious point of the 1974 Supreme Court's decision is that if theunanimity is required for the shareholders' approval or ratification, the shareholders'approval would almost be unobtainable for a widely-held corporation. This meansthat in Japan, an interested director of a widely-held corporation might have no wayof legitimately entering into a self-dealing transaction if the first alternative (approvalby the board by disinterested directors) is not available; this second alternative(approval by shareholders) would be available, though not definitely, only to smallcorporations in which unanimous consent of shareholders can be obtained.In sum, this second alternative for a director to legitimately enter into a self-dealing transaction is definitely available in Canada, but it is questionable if it isavailable in Japan. Even if it were available in Japan because of 1974 SupremeCourt's decision, in practice it would only be available to small corporations.632 The unanimity requirement of the decision would appear to be very stringent compared to theCanadian statutes which require a simple or special resolution of the shareholders. However,surprisingly the decision has been even criticised to be inappropriate by some scholars. This schoolof scholars argue that the approval should be made exclusively by the board. Primary concerns ofthose appear to be that if the shareholders approval is recognized to be sufficient, the interest of otherstakeholders, such as creditors would be neglected. This argument is as follows. The JapaneseCommercial Code (art.266-3), unlike the Canadian statutes, expands the liability of directors in respectof the breach of fiduciary duty to third parties where a director acts in bad faith or with grossnegligence. Therefore, if the approval is made by shareholders, such shareholders are deemed to bedirectors and be liable to the third parties if the approved transaction has caused damages to the thirdparties. If it is so recognized, it would be completely contrary to the fundamental corporate principle,that is shareholders limited liability.159It is my opinion that: first, the Japanese statute should explicitly recognize thatshareholders should be able to play a role in ratification, thus recognize this secondalternative, approval by shareholders, as a valid approval; second, requiring unanimityfor such shareholders' approval, as the Japanese courts have done, appears to be toostringent and impractical. As far as a threshold, if a transaction is fair to thecorporation, the requirement for the shareholders approval ought to be at least aspecial majority.(3) Fairness TestThe last alternative to make a self-dealing transaction legitimate is the so-called "fairness test" in the U.S.A. which was originally adopted by the CaliforniaCorporation Code, Section 820, in 1931. 633 The Revised Model Business CorporationsAct and some other corporate statutes in the U.S.A. 634 now incorporate this test.Under this alternative, even if a transaction has been executed without properdisclosure and approval, if the transaction was fair to the corporation at the time itwas authorized or approved, then the transaction is neither void nor voidable. 635Here, the term "fair" is said to mean "full adequacy of consideration." 636 It appearsto be clear that under this test even though some form of approval of the transactionis required (note the word "proper"), the approval could be made in any manner:either by the board or shareholders; 637 either in advance or after the fact; or eitherby disinterested directors or interested directors. 638633 Ziegel, supra note 66, at 502.634 States which adopted this test include California, Delaware, New Jersey, and New York.635 Cal. Stat. 2322-2323, 1038, s.820.636 Geddess v. Anaconda Copper Mining Co., 254 U.S.590, 599 (1921).637 Clark, Robert, supra note 598, at 168.638 Ibid.160In short, if a transaction is fair to the corporation, it does not really matterhow the transaction was approved. The interested director may control the decisionby participating in the meeting to obtain approval.Nevertheless, there arises a question of burden of proof. Generally, if thetransaction was approved by disinterested directors,  the burden of proof that thetransaction is not fair is said to be on the plaintiff who claims that the transactionought to be set aside. However, the burden of proving the fairness of the transactionwill be shifted to the interested director(s) if the transaction was not approved bydisinterested directors.If the converse is also true, it could be said that even if statutorily requireddisclosure and approval were obtained, and if the transaction were not fair to thecorporation, then the transaction would be void. If this were the case, the first twoalternatives would not be available unless the transaction is fair to the corporationin the first place. This, indeed, appears to be the case at least in the U.S.A. 639 andCanada.64° Even in Japan, it would seem unlikely that the courts would completelydisregard the fairness of a transaction even in the case where the approval waslegitimately obtained. It would be fair to say that the underlying principle which hasalways been considered by courts in dealing with a self-dealing transaction in anyjurisdictions has been fairness; and therefore, this more lenient "fairness test" whichonly regards fairness of the transaction appears to have been evolved.639 Remillard Brick Co. v. Remillard Dandini Co. 241 P.2d 66 (Cal. Ct. App. 1952) In this case,the defendant corporation was owned by the plaintiff corporation's directors who were the majorityshareholders of the plaintiff corporation. The contract entered into by the plaintiff corporation andthe defendant corporation was set aside by the court even though the contract had been approved bythe majority shareholders of the plaintiff corporation. The court emphasized that "directors andofficers shall exercise their power in good faith, and with the view to the interest of the corporation."The court took the position that fairness should not be disregarded even if statutory disclosurerequirements were met. (Beveridge, supra note 59, at 666); As for similar cases, see Fliegler v.Lawrence 361 A.2d 218 (Del. 1976); Scott V. Multi-Amp Corp. 386 F. Supp. 44 (D.N.J. 1974)."" Welling, supra note 138, at 444.161This fairness test appears not to have been completely adopted in Canada.Though the Canadian statutes require fairness in addition to the disclosurerequirements,641 mere fairness does not immunize a transaction from attack, atleast under the statute. No case recognizing the fairness test (mere fairness beingenough to validate the contract regardless of whether the statutory requiredprocedure was followed) appears to have been reported so far in Canada. It is notclear at this point if the Canadian legislature would go that far in near future.Japanese courts and legislature appear to be even further from adopting thefairness test. No reference to the test can be found in the Code, or in any of thecases. Furthermore, unlike the Canadian statutes which require fairness in additionto the disclosure and approval, fairness has been completely absent from the Code.As stated earlier, though it is hard to believe that the Japanese courts wouldcompletely disregard fairness of a transaction, it would be possible that a court wouldoverlook fairness by focusing on the mere compliance with the disclosure obligationunder the Code. Contrary to the recent tendency of the U.S.A., the Japanesejudiciary and legislators appear to have no interest in relaxing the rigid statutoryrequirements in this area.In conclusion, the third alternative (fairness test) appears not to be availableboth in Canada and Japan at this point. However, Canada might be one step closerthan Japan to adopting the test.6) AccountabilityThe final point to be looked at relates to the consequences directors may facefor entering into a self-dealing transaction. In what case are directors accountable?Accountability shall be examined separately relating to two types of situations: 1)641 The BCCA, s.145(1)(d); the CBCA, s.120(7)162where directors enter into self-dealing transactions in violation of the provisions ofthe relevant governing statutes; and 2) where directors enter into self-dealingtransactions in compliance with the provisions of the relevant governing statutes.As stated in the proceeding section, in Japan the Code explicitly recognizesthe board approval as the only legitimate condition for allowing directors to enterinto self-dealing transactions 642; therefore any transactions without the appropriateboard approval are considered to be in violation of the Code.In the first of the above situations, if a director executes a transaction with hiscorporation without the board approval, the action is unquestionably in violation ofthe Code. The consequences are simple. In this case, the director is accountable tohis corporation.643 The only relief from accountability under the Code is to acquirethe unanimous consent of all the shareholders of the corporation as is the case forother breaches of duty. 6446"2 The Board's approval might be substituted for by the unanimous consent of shareholders; see(2) Disclosure to and approval by shareholders.643 Art.266, para.1, (5) provides: "In the following cases, directors who have done any one of theacts mentioned there shall be jointly and severally liable in effecting performance or in damages tothe company, ... or in the case of ... item (5) for the amount of any damage caused to the company:(5)Where they have done any act which violates any law or ordinance or the articles ofincorporation.644 Art.266, para.5 states "The liability of directors mentioned in paragraph 1 cannot be releasedexcept by the unanimous consent of all the shareholders"; Prior to the 1950 amendments of the Code,the relief was made possible by the special resolution of the Shareholders General Meeting. (Pre-1950amendments, art.245, para.1(4); The Commercial Code of Japan (Law No.72, Apr.5, 1938) as amendedby Law No.148, July 12, 1948) in Law, Rules and Regulations concerning the Reconstruction andDemocratization of Japanese Economy, edited by The Holding Company LiquidationCommission(Tokyo, Kaiguchi Publishing Company, 1949), at 363) However, owing the expansion ofthe power of directors by the 1950 amendments, the provision was amended to impose heavierresponsibility on to directors for the protection of shareholders's interest. Another reason for theamendment of the provision was that, because the derivative action was introduced to the Code bythe amendments, the consent to relieve directors from liability should be made by all the shareholderswho have the right of derivative action. Because, consenting to relieve directors from liability wasconsidered to mean the waiver of the right of derivative action; Ueyanagi, supra note 167, at 291-292.163However, it is, in practice, almost impossible for directors of a corporationwith a large number of shareholders to obtain this unanimous consent of theshareholders.645 In other words, under the Code, directors of a corporation with alarge number of shareholders who for some reason failed to fulfil the necessarystatutory requirements and violated the Code, can rarely be relieved from liability byobtaining the necessary unanimous consent of the shareholders.In the second situation, if a director executes a transaction with his corporationin compliance with the Code, i.e. with the board approval, the issue is somewhatmore complex than in the case where a director enters into a self-dealing transactionwithout the board approval. In summary, the general interpretation of the relevantprovision of the Code 646 is that even though a director may have obtained theappropriate board approval as is required by the Code to execute a transaction, if thecorporation sustained damages as a result of the transaction, the director is still liablefor the damages sustained by the corporation. 647 For instance, where a directorhad sold his property to a corporation of which he is a director, with the approval ofthe board, and it was found afterwards that the price he obtained was above the fairmarket value, the director is accountable to the corporation for the profit, i.e. thedifference between the sale price and the fair market value. 648645 Professor Kondo states that this unanimity requirement by some Japanese courts forshareholders consent in fact denies the shareholders' approval for directors of widely-heldcorporations, since its impossible to obtain (Ueyanagi, supra note 167, at 292); There appears to beno reported cases in which the unanimity requirement for shareholders' approval for the relief ofdirectors' liability were disputed. (The Supreme Court, September 26, 1974 (supra note 631) is a casewhich the validity of shareholders' approval itself was argued.)Art.266, para.1, (4) states "In the following cases, directors who have done any one of the actsmentioned there shall be jointly and severally liable in effecting performance or in damages to thecompany, ... or in the case of item (4) for the amount of any damage caused to the company: (4)Where they have effected any transaction mentioned in paragraph 1 of the preceding article [provisionconcerning self-dealing transaction].64 Ueyanagi, supra note 167, at 292 to 293.648 Namiki, supra note 383, at 292.164In Japan, it is a general understanding that the board approval does notrelieve directors from any liabilities arising from violation of the Code. In otherwords, even though directors follow the statutory required procedure and obtain theboard approval for their action, if the directors cause damages to their corporationsthey remain liable. Relief from liability in this type of case may be obtained, as is thecase in other violations of the Code, via the unanimous consent of all theshareholders of the corporation. TM9However, in the case of self-dealing transactions, where a transaction whichwas executed with the board approval has nevertheless caused damages to thecorporation, then the liabilities of interested directors may be relieved by disclosingthe material facts at a Shareholders' Meeting and obtaining an appropriate resolutionof two-thirds of issued shares of the corporation. 65° The reasons that therequirement for the relief from liability is relaxed only in the case of self-dealingtransactions with the board approval appear to include the following: 1) such self-dealing transactions frequently occur regardless of the size or type of corporations incontemporary Japanese society, especially within corporate groups, and in addition,such actions are sometimes done for the interest of the corporate group as a whole;and 2) it is sometime difficult for directors of the board to determine whether thetransaction should be approved. 651The first reason (frequent occurrence of self-dealing transactions withincorporate groups and merits of such transaction for the group) is an interesting one.It is a reflection of the very specific Japanese management structure. As stated inChapter II, it is well-known that many Japanese corporations are very closely related"9 See the 1974 Supreme Court case (supra note 611); Ueyanagi, supra note 167, at 293.650 The Commercial Code, art.166, para.6.6' 1 Ueyanagi, supra note 167, at 293.165to each other within keiretsu or corporate groups,652 and cross-shareholdings653is a common phenomenon among these corporations. As one survey shows 654, "onaverage, about one-third of the Japanese corporations stock is owned by financialinstitutions, primarily banks. ... Another third is generally in the hands of othercorporations."655 According to the picture vividly painted by this survey, directorsof these financial institutions, or other corporations within the group occupy the seatsof the board of other fellow corporations; thus the number of interlocking directorswould appear to be significant and the phenomenon of self-dealing transaction couldnot help but occur very frequently.The Japanese Code appears to be relatively stringent in this area supposedlybecause in theory self-dealing transactions are in the first place not welcome. On theother hand, the Japanese legislators have been aware that in actuality the law maynot prohibit this kind of transaction. This appears to have been the main dilemmain regulating self-dealing transactions in Japan. Consequently, the Code, in the firstplace, imposes strict requirements on directors who intend to execute self-dealingtransactions, but thereafter gives them leeway by relaxing the requirements necessaryfor relief from liability.A question remains: what is the rationale of depriving the rights ofshareholders who objected to a resolution which obtained a two-thirds assent? Ifconsenting to relieve directors from liability means the waiver of the right to suedirectors, then two-thirds of issued shareholders may deprive from the minority ofshareholders a statutory right to sue directors on behalf of the corporation. Directorsowe their fiduciary duties to their corporation as a whole, not to the majority or two-02 Supra, note 85 and accompanying text.653 Supra, note 95 and accompanying text.654^,Tokyo Stock Exchange Fact Book, 1988, cited in Kester, supra note 85, at 60.655 Kester, Supra note 85, at 57-59.166thirds of the shareholders; only the corporation ought to be able to forgive directors'breach of duty.However, as stated, 656 requiring unanimity for shareholders' approval on theissue appears not to be practical. As far as the majority of shareholders of thecorporation agree to relieve the involved director from liability based on the fact thatthe transaction is fair to the corporation, such approval ought to be recognized.Despite the argument addressed above, it appears that directors have rarelyresort shareholders' approval for the relief of their liability accrued from self-dealingtransactions. No reliable evidence which supports this view appears to exist.However, since no case appears to have been reported so far regarding shareholders'approval pertinent to self-dealing transactions, and moreover, since such approval isin practice difficult to obtain for directors of widely-held corporations, this assumptionwould not be missing a mark.In Canada, only the BCCA657 and statutes of a few other jurisdictions 658mention accountability in connection with self-dealing transactions. 659 The BCCAnow clearly replace the common law formula regarding accountability. The BCCAimposes accountability on a director who engages in a self-dealing transaction exceptin the following instances:1. where a director: 1) discloses his interest to the board 66°; 2) getsapproval from the board" 1 ; and 3) abstains from voting 662; or656 Supra note 632 and accompanying text.657 The BCCA, s.145.658 The OBCA, s.132(7)(8)(9); NBBCA, s.77.659 Welling, supra note 138, at 453.66° The BCCA, s.145(1)(a).661 The BCCA, s.145(1)(b).662 The BCCA, s.145(1)(c).1672. where: 1) the contract is reasonable and fair to the corporation at the timeit is entered into 663; and 2) it is approved by special resolution after fulldisclosure about the contract. 6MUnder the BCCA, if a transaction is executed with the proper board approval(the above paragraph 1), it appears that the interested director is no longeraccountable.665 On the other hand, under the Code, as stated earlier, 666 even inthe case where the board approval is properly obtained, the interested director is stillliable for any damages which his corporation suffered as a result of his transaction.For a director to be relieved from this liability, the consent of a two-thirds of theissued shares is required. Under the BCCA, if a director does not fulfil the firstrequirements, the director would not be accountable if and only if in the first placethe transaction was fair and reasonable to the corporation and a special resolutionis obtained after the full disclosure of the material facts of the transaction (the aboveparagraph 2). The Code, on the other hand, requires unanimous consent ofshareholders after the full disclosure of the material facts for the relief fromaccountability, if the board approval is not obtained.In summary, the Japanese Code appears to be more strict in regards toaccountability. The BCCA removes directors liability to account by fulfilling eitherof the above two criteria: 1) disclosure to and approval from the board; or 2)disclosure to and approval from the shareholders and fairness of the transaction. The663 The BCCA, s.145(1)(d).' The BCCA, s.145(1)(e).665 Hadden supra note 67, at 223; Phyolite Resources Inc.  v. CanQuest Resource Corp.,  [1990]B.C.W.L.D. 2004 (S.C.), The court states "in the case of a proposed contract or transaction, aninterested director is absolved from liability, if he or she complies with s.144 ... the clear intention ofthe legislature was to replace the common law."; In other words, noncompliance with the section issufficient to hold a director liable. A company need not prove that the director in fact obtained aprofit.666 Supra, note 649 and accompanying text.168Code, on the other hand, removes directors from liability to account under twocircumstances: 1) proper disclosure to and approval from the board and the consentof two-thirds of the issued shares; or 2) disclosure to and approval from all theshareholders. Again, under the Code, it would be almost impossible for directors ofa widely-held corporation to escape from liability if these interested directors do notobtain the appropriate board approval, because of the unanimity requirement for therelief from accountability. Under the BCCA, it would be much more easier for adirector who failed to obtain the appropriate board approval to successfully waltzaround the situation by fulfilling the above second condition of the provision of theBCCA.In conclusion, the Canadian (and American) statutes are more practicallydesigned, probably because they have evolved from a common law which hasreflected the voice of the business society. On the contrary, the Japanese statute isoverly rigid and unpractical. It seems to ignore the Zen proverb of "Bend like thewillow or snap." This is probably because the Japanese statute was primarily basedon the notion that self-dealing transactions should be prohibited in the first place; thelaw should be strict enough to control deviant individuals.1693.3. CompetitionAnother typical example where a conflict of interest situation may occur is inthe situation where a director competes in business with his corporation directly orindirectly. Some of the various scenarios which fall within this area include: wherea director of a corporation, himself carries on the same line of business as hiscorporation does; where a director associates with another corporation which isengaged in the same line of business as his corporation; or where, after a directorresigns from his corporation he starts his own corporation which carries on the sameline of business as his former employer does. In any of these cases, a conflict ofinterest situation between the director and his corporation, or the former director andhis previous corporation is likely to occur. In this section, how the Japanese courtsand the common law courts, in particular the Canadian courts have looked at anadjudicated such situations and the accompanying conduct shall be looked at. Also,the statutory requirements for prohibiting or allowing such directors' conduct in bothjurisdictions will be briefly examined.1) Statutory ProvisionsThe Commercial Code, in a manner similar to that by which it regulates self-dealing transactions, in principle, prohibits directors from competing with theircorporations, unless they disclose the material facts about the transaction to beentered into and obtain approval to do so from their corporation. 667The general principles of the so-called "duty to avoid competition" under the667 The Commercial Code, art.264:"A director who intends to effect such a transaction that comesunder the class of business carried on by the company on his own behalf or on behalf of a thirdperson shall show all the material fact in connection with the said transaction at a board of directorsand obtain its approval; 2. The director having effected the transaction in the preceding paragraphshall report the important matters as to the transaction to the board of directors without delay; 3. Ifa director has, in contravention of the provisions of paragraph 1, effected a transaction on his ownbehalf, a board of directors may treat such transaction as effected on behalf of the company."170Commercial code are similar to the principles established by the common lawcourts668 and the subsequent codification of these principles into the statutes ofcommon law jurisdictions including those of Canada. However, on a closer perusalof these statutes, it would be noted that the provisions of the Code and statutes ofthe common law jurisdictions differ technically. The Code directly prescribes for thisduty as a distinct and a specific duty (to avoid competition). The Canadianstatutes,669 on the other hand, regulate a duty to avoid conflict of interest including,a duty to avoid competition and a duty not to appropriate opportunities whichrightfully belong to the corporation (corporate opportunity). This statutory differencein these jurisdictions are primarily derived from the different historical developmentsof the principles relating to this duty in these jurisdictions.In Japan, a provision providing for the duty to avoid competition existed in theoriginal Code,670 although it was not identical to the corresponding provision of thepresent Code. Up until the 1950 amendments of the Code by which the common lawconcept of fiduciary duty was first introduced, the duty to avoid competition wascomprehended, not as a specific duty derived from directors' position as fiduciaries,but simply as a civil duty of forbearance.671 Here again, due to the importation ofthe principles and concept of fiduciary duty from the U.S.A. to the JapaneseCommercial Code, arguments were raised on how the duty to avoid competition668 This duty to avoid competition has not been defined as such in the common law, rather it hasbeen treated as one type of fiduciary duty.669 The BCCA, s.147 provides:"(1) Every director of a company who holds any office, or possessesany property, whereby, whether directly or indirectly, a duty or interest might be created in conflictwith his duty or interest as a director of the company, shall declare at a meeting of the directors ofthe company the fact, and the nature and extent of the conflict; (2) The declaration shall be made bya director referred to in subsection (1) at the first meeting of the directors held (a) after he becomesa director; or (b) if he is already a director, after he commenced to hold the office or possess theproperty; The CBCA equivalent is sec.120.670 The Commercial Code of Japan in 1899, art.175 provided: "Without the consent of a generalmeeting of shareholders no director can undertake commercial transactions in the same kind ofbusiness as that of the company, either on his own account or that of a third person, or become apartner with unlimited liability in another company whose object is the same kind of business. ...";Loenholm, supra note 43.671 Ueyanagi, supra note 167, at 205; "forbearance" in this context means "refraining from action."171should be understood.The same arguments as to whether or not the fiduciary duty is different fromthe duty of care raised their head again. 672 The arguments here dealt with whetherthe duty to avoid competition is a specific type of duty of care, or whether it is a dutyderived from directors' position as fiduciaries, namely the fiduciary duty. As was thecase relating to the argument presented before regarding the nature of the fiduciaryduty,673 the dominant view has been that the duty to avoid competition is within thescope of the duty of care. 674 However, it is my opinion that the duty to avoidcompetition should be recognized as one of the fiduciary duties, and not merely asone of or part of the duty of care. My reasoning on this point has been statedearlier, namely fiduciary duty should be recognized as a different duty from the dutyof care. You may wish to briefly recall this reasoning.675 This view has started togain some approval by some scholars who supposedly do not adhere to the traditionalcivil law concepts. 676Another significant statutory change which further elucidated the concept ofthe duty to avoid competition was made by the 1981 amendments of the Code. 677By this amendment, the requirements for granting the approval to a directorwho wishes to execute a competing transaction was relaxed. This relaxation wasachieved by giving jurisdiction to the BOD to grant the necessary approval. 678Prior to this amendment, the granting of this approval was exclusively within the672 Supra note 534 to 548 and accompanying text.673 Supra note 534 and accompanying text.674 Ueyanagi, supra note 167, at 206.678 Supra note 540 to 547 and accompanying text in 3.1 Concept of fiduciary duty.676 Ueyanagi, supra note 167, at 206.677 Kanzaki, supra note 256, at 251.678 Infra, note 737 to 738 and accompanying text.172domain of the SGM. This amendment was made for the purpose of meeting apractical necessity. Up until this amendment, it had been too cumbersome and evenalmost impossible for a director of a corporation with a large number of shareholdersto obtain such approval (the SGM's approval). 679 Yet, since it was a commonpractice for directors to compete with their corporations in various ways in Japan,more lenient and practical requirements enabling directors to legally enter into suchtransactions were strongly suggested. Against this background the amendment wasmade.The present Commercial Code, through the above amendments, now minutelyand practically provides for the directors' duty to avoid competition, but in a slightlydifferent manner from the regulation in common law jurisdictions. In addition,Japanese courts have also shown a different approach toward this duty compared tocourts in common law jurisdictions. The upcoming section will expose the morepragmatic functioning of the Code in this area and the Japanese courts' positiontoward the duty to avoid competition. The following five aspects of the duty to avoidcompetition will be examined: 1) Being a director of more than one corporation; 2)the scope of competition; 3) disclosure and approval; 4) effect of the transaction bya breach of the duty to avoid competition; and 5) right of intervention.2) Being a Director of More Than One CorporationAn issue which arises frequently in practice in relation to the duty to avoidcompetition concerns a director who is concurrently a director of another corporationwhich carries on a line of business similar to his first corporation's business. Whethera transaction made by this director for one corporation is within the scope ofcompetition, or more precisely whether it is allowable to be a director of more thanone corporation carrying on the same line of business is the question to be resolved.679 Takeuchi, supra note 251, at 134 to 135.173The Commercial Code is silent on this point. However, it appears to beclearly implied from the fact, that a provision which had once provided that, "adirector shall not ... become a member with unlimited liability or a director of anyother company having for its object the same kind of business," 680 was deleted bythe 1950 Amendments, 681 that a director, subsequent to this deletion, is nowallowed to be a director of more than one corporation even if some of thesecorporations carry on business of the same kind. The Japanese courts havesupported this view, as in the following case.Nitho Co. Ltd. v. Asakura 682Summary of the facts: The defendant was a representative director of the plaintiffcorporation. When the plaintiff corporation's business went intodifficulties, a creditor(not the concerned party) became a director ofthe plaintiff corporation. After some time, the creditor took realpower over the plaintiff corporation and the defendant's position as arepresentative director became nominal. With the fear of beingcompelled to be a mere employee of the plaintiff corporation, thedefendant proposed to the plaintiff corporation that he, the defendant,be allowed to resign from the plaintiff corporation and establish a newcorporation. He clearly in his request sought not only to establish hisown corporation but to obtain one of the main clients of the plaintiffcorporation with which he, as a representative director of the plaintiffcorporation, had been dealing for a long time. However, the plaintiffcorporation refused to accept his resignation. Thus, the defendantresigned from the plaintiff corporation without the plaintiff680 Pre-1950 Amendments, art.175, cited in Ueyanagi, supra note 167, at 211 to 212.' Tanaka, supra note 21, at 551.682 Tokyo District Court, July 23, 1970 (Hanrei JillO, No.607, at 81-84).corporation's consent. After the defendant director's resignation, thecreditor became a representative director of the plaintiff corporation.Shortly before his resignation, the defendant had established a newcorporation, and after his resignation the defendant on behalf of hisnew corporation commenced dealing with the plaintiff corporation'sclient which he had formerly sought in his resignation.The plaintiff corporation alleged that the defendant deprivedthem of one of their most important clients by utilizing his formerposition as a director of the plaintiff corporation; accordingly such anactivity is a breach of the duty of care and fiduciary duty (duty to avoidcompetition) which he owed to his former corporation; and thereforethe defendant is liable for damages which the plaintiff corporationsuffered.The Court held: 1) The Commercial Code does not prohibit a director from beinga director of another corporation which carries on the same line ofbusiness. Therefore, as to the defendant having become a director ofthe new corporation, there is no breach of the duty of care or thefiduciary duty.2) Although the defendant entered into a transaction which cameunder the same class of business as that which is carried on by theplaintiff corporation, at the time the defendant actually commencedoperating his own business, he was no longer a director of the plaintiffcorporation and did not owe any duties as a director to the plaintiffcorporation.1743)^It is true that the business which was established by the175defendant was the same line of business as that which is carried on bythe plaintiff corporation, and the dealings between the plaintiffcorporation and its client were terminated because of the newrelationship established between the defendant and his corporation,and the client. However, concerning the circumstances under whichthe defendant resigned from the plaintiff corporation, it could be saidthat it is a common practice for the defendant to choose the way tomake his livelihood by utilizing his past experience. It would be tooharsh to blame the defendant for the fact that he competed with theplaintiff corporation as a result of having chosen to utilize his pastexperience, as a way of making his living.Unless there existed a violation of laws, or fair and equitableprinciples, in managing the business of the new corporation, (though,it could be argued that the fact the defendant was a representativedirector of the plaintiff corporation should be taken into considerationwhen determining the existence of violation of fair and equitableprinciples), the defendant is not liable for causing a conflict of interestsbetween the defendant and the plaintiff corporation, which occurred asa result of free competition, and after the resignation of the defendantfrom the plaintiff corporation.This case demonstrates that a director may join a rival concern and be adirector of the rival corporation, and being a director of a rival concern itself doesnot constitute a breach of fiduciary duty. However, it should be noted here, that ifbeing a director of a rival concern falls into the scope of "the event that the effect ofsuch interlocking directorate may be substantial to restraining competition in any176particular field of trade"683 under the laws of Japan concerning anti-monopoly, 684the director may not be a concurrent director of a rival corporation.685•This principle of allowing a director to become a concurrent director of a rivalconcern, has also been a judicial principle of the common law. 686 LoadBlanesburgh L. C., in Bell v. Lever Bros. Ltd. 687 cited Mr. Justice Chitty's judgmentin London and Mashonaland, and stated that "a director may engage in a competingbusiness ... it not appearing from the regulations of the company that a director'sservices must be rendered to that company and to no other company, he was atliberty to become a director even of a rival company,..." 688 This principle has alsobeen recognized by Canadian courts. 689However, this principle is only recognized on the premise that the director actsin the best interest of both corporations. As Professor Gower suggests that, "one whois a director of two rival concerns is walking a tight-rope and at risk if he fails to dealfairly with both." It is very likely that the director will fail to act in total fairness toboth corporations. In other words, although it is not prohibited for a director to joina rival concern, a director would most likely be liable "if he subordinates the interest' Law Relating to Prohibition of Private Monopoly and Methods of Preserving Fair Trade of Japan(Law No.93, Dec.4, 1986), art.13, para.1; for English translation of the law, see EHS Law BulletinSeries (Tokyo, Eibun-Horei-Sha).684 Ibid.685 Art.13, para.1 of the law (note 631) provides:"No officer or employee (referring to a personcontinuously engaging in the business of a company but being other than an officer; hereinafter thesame in this article.) of a company shall hold at the same time a position as an officer in anothercompany or companies in Japan in the event that the effect of such interlocking directorate may besubstantially to restrain competition in any particular field of trade."686 Science Accessories Corp, v. Summagraphics Corp. 425 A. 2d 957(Del. 1980); The Court heldthat "they were free to make reasonable preparations to compete while still employed by SAC andafter quitting SAC's employ, to compete with SAC."' [1932] A.C. 161 (H.L).688 London and Mashonaland Exploration Co.  v. New Mashonaland Exploration Co. [1891]W.N.165.' Waite's Auto Transfer Ltd. v. Waite, [1928] 3 W.W.R. 649 (Man. K.B.).177of the one company to those of the other" 69° under the common law includingAnglo-Canadian laws. 691 It is also doubtful, whether it is possible in practice, fora director to act with complete fairness to both corporations. This is paramount toserving two masters. You most likely end up loving one and despising the other andthus only acting in the best interest of one of them. In conclusion, it would be a veryrisky business for a director to put himself into such a situation except for a few caseswhere the likelihood for a conflict to occur is highly unlikely. 692This is also the position under the Commercial Code. Although the aboveJapanese court held that a director is not prohibited from being a director of rivalconcerns, it does not necessarily suggest that a concurrent director is free tosubordinate the interest of one corporation to those of the other. The director of theabove discussed case was held not liable, because he was not a director of theplaintiff corporation at the time he and his new company started to compete with theplaintiff corporation.Here other questions arise. Do former directors have no fiduciary relationshipwith their former employees? Are former directors free to compete with their formeremployees at will?69° Scotish Co-operative Wholesale Society Ltd. v. Meyer [1959] A.C. 324 (H.L.).691 It is said under the Canadian Law that "a director who joins a rival concern and prefers itsinterests to those of the first company would likely face an application under s.241 of the CBCA, ...or s.224 of the BCCA (oppression remedy), with respect to the conduct of the first company" (Ziegel,supra note 66, at 567); In the American case, Foly v. D'Agostino (21 A.D. 2d 60, 248 N.Y.S 2d 121),the court also held that "Where employees, during the period of their employment, and a corporationformed by them, engage in and carry out a conspiracy to compete with the employer in violation ofthe duties of loyalty owing by the employees, said conduct constitutes actionable unfair competition."692 For instance, a director is unlikely to be liable if he is a director of a parent company and its100% owned subsidiary, and he acts in the best interest of the subsidiary; Ueyanagi, supra note 167,at 213; infra, note 729 and accompanying text.178As was clearly stated by the Japanese court in Nitho,693 former directors aremost likely excluded from the group of directors who are restricted from competingwith their corporations in Japan. However, although the court explicitly rejected inthe said case the former director's liability for a breach of fiduciary duty, and alsorecognized that a director should be allowed to enter freely into competition with hispast business after his resignation from it, it would be misleading to say that Japanesecourts will never hold a former director liable for competing with his formeremployer. It should be remembered that: firstly, in the said case, there existedspecific circumstances which the Court had to take into consideration 6" and thecourt was sympathetic to the defendant director. Secondly, as the court holdingindicates, if a violation of laws or unfair or unequitable conducts by the formerdirector is proven, it would be possible for the former director to be held liable.695Contrary to the above Japanese court's position, the common law courtsappear to have been generally more stringent toward the conduct of former directors.In Industrial Development Consultants Ltd. v. Cooley696 (I.D.C.), a former directorwas held liable for a breach of fiduciary duty by having contracted with a corporationwith which he had been negotiating a contract with in his personal capacity as anarchitect (and not as a director of the plaintiff corporation), when he was still amanaging director of the plaintiff corporation. In the I.D.C. the English court held693 Supra, note 682.6" The court took into account the circumstances under which the defendant director had beencompelled to resign from the corporation, and also the relationship between the defendant directorand the said client.695 In a 1988 case (Re: Nihon Setsubi, Tokyo District Court, March 30, 1988, Hanrei Ji10, No.1272,p.23), the Court held that the director who resigned from his corporation and started his own businessand induced his former colleagues of his former corporation to resign from the corporation and workfor him (in fact, they quit the corporations and joined the defendant director's corporation) was heldliable for a breach of fiduciary duty. However, in this case, the director's own resignation and hisstarting the same line of business was not disputed as a breach of duty to avoid competition orfiduciary duty. Only his conduct of inducing employees of his former employer was recognized to bea breach of fiduciary duty.696 [1972] 2 All E.R. 162.179the former director liable for a breach of duty. The court stated that the liabilityarose primarily because at the time he obtained the information he was under anobligation to pass on the information to the corporation of which he was a directorat the time, since the information "was of concern to the plaintiffs and was relevantfor the plaintiffs to know." 697 The court completely disregarded, whether or notthe said contract was signed after the director left the service of the plaintiffcorporation, how the information was obtained (the director obtained the informationin his personal capacity) 698 or whether or not the corporation could have obtainedprofits if the director did not take the opportunity (the plaintiff corporation had failedto obtain the contract, and the corporation with which the director himselfsuccessfully contracted did not want to deal with the plaintiff corporation at all).Canadian courts have also followed the above English decision. In CanadianAero Services,699 a former director was held liable for a breach of fiduciary duty.Here, the former senior officers were held liable for appropriating a corporateopportunity. Here the court "recognized that accountability could extend beyond thetermination of the employment relationship." 700 In this case, "The issue was howthey (the defendant former senior officers) obtained the opportunity to profit, notwhether they were occupying fiduciary positions when they began exploiting theopportunity. t1701 However, the Canadian court appears to have attempted to showits flexibility against the rigid corporate opportunity doctrine as enunciated by someprior common law courts. The court stated:697 Ibid.698 Prior to this case, the Canadian court (Peso Silver Mines Ltd. v. Cropper, [1966] S.C.R.673,56 W.W.R. 641, 58 D.R.(2d) 1 (B.C.S.C.C.) ruled to the contrary. In this case, the defendant directorwas held not accountable since he took the opportunity in his personal capacity, not in a capacity asa director of his corporation. The decision was criticized to be against the fundamental principleregarding the fiduciary duty.699 Supra note 523.7°° Welling, supra note 138, at 390.701 Ibid, at 393.180"The general standards of loyalty, good faith and avoidance ofa conflict of duty and self-interest to which the conduct of a director orsenior officer must conform, must be tested in each case by manyfactors which it would be reckless to attempt to enumerateexhaustively. Among them are the factor of position or office held, thenature of the corporate opportunity, its ripeness, its specificness andthe director's or managerial officer's relation to it, the amount ofknowledge possessed, the circumstances in which it was obtained andwhether it was special or, indeed, even private, the factor of time in thecontinuation of fiduciary duty where the alleged breach occurs aftertermination of the relationship with the company, and thecircumstances under which the relationship was terminated, that iswhether by retirement or resignation or discharge...' anThis statement, however, does not necessarily suggest that Canadian courtswould consider specific circumstances and the director would possibly escape fromliability, even where there exists an actual conflict of interest between a formerdirector and his former corporation such as in the Nitho case703. The fundamentalprinciple is, in any case, that a director who occupies a fiduciary position is notentitled to take any opportunities derived from his position regardless of whether ornot he utilize the opportunity and gains profits after his resignation. 704American courts, as compared to their Canadian counterparts, have not702 I.D.0 v. Cooley(supra note 648 and 649); Boardman et al. v. Phipps, [1967] 2 A.C. 46, [1966]3 All E.R. 721, [1966] 3 W.L.R. 1009 (H.L.).703 Supra note 682.7414 This principle has been recognized by most Canadian courts: W.J. Christie & Co. Ltd. v. Greeret al. (1981) 14 B.L.R. 146 (Man.C.A.); Roper v. Murdoch (1987), 14 B.C.L.R. (2d) 385 (S.C.); 57134Manitoba Ltd. v. Smith Paper Limited, Palmer and Classic Packaging Corporation (1989) 37B.C.L.R.(2d) 50 (C.A.).181followed the above English decision. American courts have been divided into twocamps. The main views of these camps are: 1) the fiduciary duty terminates upon thedirector's resignation from his office705 ; and 2) a director's "resignation does notterminate the duty because the seed of the opportunity was planted prior to theresignation." 706 However, the former view appears to be predominant. 707It can be concluded that the Japanese courts and the common law courts(including Canadian courts) have taken completely opposite approaches regarding theliability of former directors. Japanese courts stand on the proposition that formerdirectors are, in principle, released from their fiduciary duty to the corporation upontheir resignation from their office. Contrastingly, the common law courts generallyrecognize that the termination of the employment does not terminate any director'sliability to his corporation.It would be interesting to scrutinize the roots of these two distinct notions.From the findings of the Nitho case708 it might be said that Japanese judges favoureconomic freedom, namely freedom of competition, over restraint of trade based ondirectors' fiduciary duty. But this hypothesis is not necessarily plausible. Foralthough Japanese business people are known to have a highly competitive spirit, 709the Japanese judiciary appears to be reluctant to take into consideration business or708 Master Records, Inc. v. Backman, 133 Ariz.494, 497-98, 652 P.2d 1017, 1020-21(1982); Gregg. v. United States Indus.,  715 F.2d 1522, 1541 (11th Cir.1983).7°6 Comedy Collage, Inc.  v. Berk, 145 Il1.App.3d 355,369,395N.E.2d 1006,1011(1986), cited in Chew,at 445; Graham v. Mimms, 111 III. App.3d 751,765,444 N.E.2d 549,558 (1982); Stangenberg v. AlliedDistrib. & Bldg. Serv. Co.,  No.86-12-11 (Tenn. Ct. App. July 9, 1986).707 Chew Patric L., "Competing Interest in the Corporate Opportunity Doctrine" in North CarolinaLaw Review, Vol.67, No.2, January, 1989, at 445.7°8 Supra note 682.7°9 A term, "Economic animal" is some times used to refer to the Japanese people who recklesslypursue their economic growth by fair means or foul.182economic aspects in making their decisions. 71° Rather, particulars of the Japanesecorporate management system and Japanese philosophy, namely the emphasis onhumanity or sympathy (ninjy6) seem responsible for the general attitude of theJapanese judiciary. As explained earlier, most Japanese directors are senioremployees and generally spend many long hard years with their company beforebecoming directors. During these long years they almost entirely devote themselvesto only their work and even after they become directors they tend to continue towork hard for their corporations until their retirement. Hence, if a director resignsfrom his office before his retirement there generally exists some unavoidable reasonfor doing so. Thus in a dispute of the kind being discussed, fuelled by this type ofsituation, the director would probably obtain the sympathy of the courts and others(not the disputing company of course), and it would be thought fair that he deservesto leave his corporation with some of the fruits which he himself had cultivated andnurtured over his years of work.In comparison, in western common law jurisdictions directors, as well asordinary employees, tend to be more free spirited and move with little qualm fromone company to another. Thus more emphasis would be expected to be placed onthe protection of the corporation's interest in such instances. This might, however,be a misconception. One author argues that "... the common law system encouragescompetition in business matters..."711 and "... we have the public policy in favour ofcompetition to limit the extent to which an interpersonal relationship between twopeople can subsequently impede one of them from making his knowledge and skillsavailable to other employers and customers." 712 In fact, some courts have takena different stance from Canaero, and limited (but not denied) the scope of the71° For instance, recall the objection to the adoption of the Business Judgment Rule, supra note488 and accompanying text.711 Welling, supra note 138, at 417.712 Ibid.183fiduciary relationship between former directors and their corporations. 713 However,as far as the I.D.C. case and Canaero continue to remain as authorities, a cleardefinition of the scope of "former director" remains ambiguous, and the common lawcourts will most likely uphold the position that does not allow former directors tocompete with their former corporations. In fact, it appears that the conceptualizationof the fiduciary duty obligation is primarily concerned with warning anyone whooccupies a fiduciary position rather than being a remedy in itself for a corporation;thus in this area stricter regulations are preferable. Another way of saying this is thatfiduciary duty regulation in common law jurisdictions is primarily preventative innature rather than remedial.At any rate, both the views of the Japanese courts and the common law courts(except for some courts which have attempted to limit the scope of fiduciaryrelationship between former directors and their corporations) appear to be extreme.If, as the Japanese court stated, former directors are no longer liable to their formeremployers upon their resignation, directors may very easily utilize their position forfuture appropriation at will. Although the court stated that a director's conductshould not violate equitable principles, it would be difficult to determine whatconstitutes the violation of equitable principles in the Japanese legal arena.Considering the fact that the Japanese court denied that the former director'ssolicitations of his former employee's clients is a violation of equitable principles,which in the common law jurisdictions has been recognized to be the violation ofequitable principles,714 what would constitute the violation of the equitableprinciples appears to be questionable.73 Dialadex Communications Inc. v. Crammond (1987), 57 O.R.(2d) 746 (Ont. H.C.); 57134Manitoba Ltd. v. Palmer, supra note 685.714 W.J.Christie & Co. v. Greer (supra note 657) The court held that "Upon his resignation anddeparture, G(defendant director) was entitled to accept business from clients of his former employer,but direct solicitation of that business was not permissible."184On the other hand, as the English court in the I.D.C. states, if a formerdirector is recognized to be liable solely because he obtained the information whenhe occupied a seat in his former corporation's board, regardless of whether or not thedirector obtained the information in his personal capacity, or the corporation couldhave utilized the opportunity, no director would be allowed to start his own businessunless he abandons any information which he had obtained or any personalrelationship which he had built up when he was a director of his former employer.It may be argued that a director may still have a chance to utilize the information byinforming his former corporation of the intended transaction and getting theirapproval. But, another question arises: how long does the fiduciary relationshipbetween a director and his former employer continue to exist? Does a formerdirector have a life-long obligation to his former employer? It would appear in thevast majority of cases that to answer affirmatively to this latter question would bequite unreasonable. There ought to be some boundaries which a former director maypass to get into the unfettered free competition zone after leaving this corporation.At this point, it appears that the only solution to the problem would be, assome recent common law courts suggest to limit the scope of fiduciary relationshipbetween former directors and their past corporations by scrutinizing each case anddetermining whether or not the directors should be liable based on what is fair, notonly to the corporation, but also to the (former) directors.3) Scope of CompetitionWhether or not a transaction falls within the scope of transactions whichrequires appropriate corporate approval due to the concept of competition isdependent upon several factors. The chief of which include: 1) the nature of thebusiness; and 2) for whom the transaction is made.185(i) Nature of business which falls within the scope of competitionThe Japanese Commercial Code states that a director who intends to effecta transaction, "that comes under the class of business carried on by the company"  715should disclose all material facts relevant to the transaction to his corporation. Then,what is the scope of a transaction that comes under the class of business carried onby the company ?Firstly, a competing transaction is generally recognized as a transaction whichconflicts with the business presently carried on in the market place by thecorporation, or which might cause a conflict between the corporation and thedirector. 716 In other words, it does not include a business, which is stipulated in thearticles of the corporation but is neither actually carried on presently, nor is intendedto be carried on in the future. However, it does include a business which isreasonably expected to be carried on in the future even if the corporation is notpresently carrying on such business.717Secondly, if a transaction is executed by a director for purely private purposes,but not for any business purposes, should this type of transaction be included underthe umbrella of competitive transactions under Article 264 of the CommercialCode718? For instance, take the case of a director of a real estate company whoobtains information that a house is on sale at an absurdly inexpensive price and thenpurchases the house for himself? Is this to be considered a competing transaction?This sort of situation has been discussed in common law jurisdictions as one716 The Commercial Code, art.264, para.1.716 Ueyanagi, supra note 167, at 207; Tanaka, supra note 21, at 552.717 Ueyanagi, supra note 167, at 210.718 Art.264.186of many instances of appropriating a "corporate opportunity." 719 Accordingly, inthe common law jurisdictions, "corporate directors may not take opportunitiesbelonging to the corporation." 72° However, in Japan, as will be discussed later, 721such a "corporate opportunity doctrine" did not exist until recently and no statutoryprovisions regulating the phenomenon exists. It is therefore not surprising that notmuch discussion or study has been conducted in this area of law. The doctrine wasand still remains a completely alien one to Japanese law. As a result, cases such asthe above, which are not quite within the scope of competition, appear not to requiredisclosure to and approval from the board, under the Commercial Code. Moreover,in general, up until recently it appears that no attempts have been made to treat suchcases as falling within the ambit of breach of fiduciary duty. The traditional view, andprobably the prevailing view toward the case scenario presented above, has been thata transaction such as described, not being commercial but purely private in nature,is not to be considered as a competing transaction. Consequently these transactionsare not subject to the disclosure obligation under the Commercial Code. 722 Therationale for this view appears to stem from the reasoning that the provisions whichprescribe the duty to avoid competition aim at restraining directors from entering intobusiness transactions, not private transactions, which conflicts with the business of thecorporations of which they are directors.723 In my opinion, this view is myopic innature. It overlooks the fundamental principle of the concept of fiduciary duty, thatis that directors must act in the best interest of their corporations and the nature orthe purpose of their actions are irrelevant.However, recently some Japanese scholars have attempted to review this719 Infra, see 4. Corporate opportunities.729 Ziegel, supra note 66, at 518.721 Infra, see 4. Corporate opportunities.722 Osumi, cited in Ueyanagi, supra note 167, at 210.7' Ibid.187concept of duty to avoid competition. The views advocated by them have attractedattention and revitalized interest in this area. 724 These views are basically thattransactions which are purely private in nature ought also to be treated under theumbrella of "competition," thus are subject to the area of the Code which makesprovisions prescribing the duty to avoid competition. 725 Hence, directors whointend to enter into such transactions ought to disclose the material facts of theirtransactions to their boards. It should be noted here, however, this is still merely annon-mainstream academic view at this point, and no cases supporting this viewappears to have been reported so far. It, therefore, seems probable that privatetransactions shall continue to remain excluded from the scope of competingtransactions, and thus not subject to the disclosure obligations.Recently there have been other academic attempts to obtain a firm grip ontransactions which are not purely within the scope of the presently accepted conceptof competition, but which clearly fall within the scope of transactions giving rise toa conflict of interest. Flowing from these attempts is the view that if a transactionis not within the scope of competition, but rather within the scope of corporateopportunity (in the common law sense), such a transaction ought to be subject to thegeneral provisions on fiduciary duty. 726 A detailed discussion on this issue will bemade later in the section on "corporate opportunity." But, briefly, the problem is thatsince the provision which sets forth the law dealing with fiduciary duty does notprescribe any disclosure obligations, disclosure may not be demanded as a conditionto be fulfilled to allow a director to enter into the transaction of the type underconsideration, nor may disclosure be a defence for a director wishing to be excused724 Ueyanagi, Katsuro, et al., "Torishimariyaku no Kyogyo ni Kansuru Jirei Kenkyu [8]: Eigy6 noBurui ni Zokusuru Torihiki no Igi [Case study regarding the directors' duty to avoid competitionVol.8: The meaning of "a transaction that comes under the class of business]", in ShOji Heinzu No.1064,Jan 5, 1986, at 74-76.725726 Namiki, supra note 383, at 115.188from liability.In conclusion, the provisions of the Code regulating general fiduciary duty maynot appropriately deal with a transaction which is outside the scope of competition.(ii) For whom the transaction is made.Another case scenario concerns a transaction which may fall into the scope ofcompetition but which is executed not for the benefit of a director himself, but forsomeone else. Is such a transaction subject to the disclosure obligation? TheCommercial Code explicitly provides: "A director should disclose all material facts,if such transaction is done on his own behalf or on behalf of a third person." 727As is the case with self-dealing transactions, it is clear that, since the purposein avoiding such transaction is to protect the interest of the corporation, then torealize this purpose directors should act in the best interest of corporation regardlessof whose name they use or to whom they benefit of a transaction shall pass. Anydirect or indirect transaction which might conflict with the interest of the corporationshould be considered as within the scope of "competition."It ought also to be clear, as described in the section on self-dealing transaction,that even if a transaction was undertaken "on his own behalf or on behalf of a thirdparty", a director may not be liable, if such a transaction did not conflict with theinterests of the corporation. 728Probably the most frequently asked question in relation to the scope of conflictof interest is whether or not a conflict of interest exists between a parent corporation727 The Commercial Code, art.264, para.1; supra note 667.728 Namiki, supra note 383, at 131.189and its subsidiary. Consider the case of a director who is a concurrently a directorof a parent corporation and its wholly owned subsidiary, and both of thesecorporations happen to be carrying on the same line of business. Should the directordisclose the material fact concerning the transaction to the other corporation everytime he enters into a transaction on behalf of one of them? The answer at presentseems to be as follows. If a transaction is made on behalf of the subsidiary, thedirector is not under any obligation to disclose material facts about the transactionto the parent corporation. 729 This is simply because the interest of the subsidiarycorporation generally ought to be identical to the interests of the parent corporation,and therefore no conflict arises. 73°On the other hand, if things are reversed, a director is and ought to be underdisclosure obligations to the subsidiary. The rational for disclosure in this instanceflows from the fact that if he enters into a transaction on behalf of the parentcorporation, the best interest of the subsidiary is not necessarily served. This isbecause what is in the best interest of the parent corporation is not always in the bestinterest of the subsidiary.A similar parent-subsidiary situation was found in Scottish Co-operativeWholesale Society Ltd. v. Meyer. 731 In this case, the directors were held liablesince they put the parent company's interests ahead of the subsidiary company, andthey did nothing to defend the interests of the subsidiary company. They weretherefore found to have "conducted the affairs of the subsidiary in a manner729 Namiki, supra note 383, at 131.73° Osaka District Court, May 11, 1983, Kinyti ShOji Hanrei, No.678, at 39, cited in Ueyanagi,Katsuro, et al., "Torishimariyaku no kyogyo ni kansuru jirei kenkyu [6]: Dai Sansha, EigyO no burui nizokusuru torihiki no igi [Case study regarding the directors' duty to avoid competition Vol.6: The meaningof "a third party and a transaction that comes under the class of business]", ShOji HOmu No.1061,December 5, 1985, at 14.731 [1959]A.C.324, [1958] 3 All E.R.66(H.L).190oppressive to the other shareholders."On the contrary, in the Science Accessories Corp. case732, though not aparent-subsidiary case, the court declined to impose liability on a director on the basisthat the action done by this director did not cause any actual damage to thecorporation. 733In any event, in all jurisdictions, the underlying principle is that where noconflict exists, no disclosure is required because no breach of duty occurs.4) Disclosure and ApprovalAs explained briefly, the Code restricts directors from entering intocompetition by imposing obligations on them to disclose the material facts to theirboards when they intend to enter into a transaction which competes with the businessof their corporation. 734 The only remedy for a director who has entered into suchtransaction without the statutory required approval of the BOD is to obtain theunanimous consent of all the shareholders of the corporation. 735In addition, as in the case of self-dealing transactions, even when suchapproval by the board is obtained, if the corporation sustains damages arising out ofsuch a transaction, the director may still be liable for the damages. 736Prior to the 1981 amendments, the necessary approval mandated by statutewas the consent of two-thirds of the issued shares present and voting at a SGM. A732 Supra note 686."2 Ibid.734 The Commercial Code, art.264, para.1; supra note 667.The Commercial Code, art.266, para.5 provides: "The liability of directors mentioned inparagraph 1 cannot be released except by the unanimous consent of all the shareholders."736 Ueyanagi, supra note 167, at 214; Takeuchi, supra note 251, at 135.191director who entered into a transaction after obtaining this approval was no longerliable for any damages which the corporation sustained, since majority of shareholdersof the corporation had approved the transaction.737 By the 1981 amendments, thisapproval requirement was relaxed. It became possible to obtain the requiredapproval from the board. As a consequence of this change, it is now considered tobe the case that even if a director obtains the statutory required board approval, heremains liable to the corporation if the corporation sustains any damages due to hisactions.738 Furthermore, other directors who consented to the transaction at theboard meeting are also jointly and severely liable for any damages sustained by thecorporation. 739 However, where the board has approved the transaction, the onusis on the corporation to prove that the corporation actually did suffered damagesresulting from the transaction, 740 if director's liability is pursued.Additionally, the Commercial Code further requires that the director havingcarried out the transaction report all the material details of the transaction to theBOD without delay. 741As is the case with self-dealing transactions, "all material facts" to be disclosedare the facts which give the board members enough information to determinewhether or not the corporation should approve the transaction. 742737 Pre-1981 Code, art.264, para.1,2; Takeuchi, supra note 251, at 369.738 See the argument addresses in self-dealing transactions; supra 3.2. 6. Accountability.739 The Commercial Code, art.266, para.2 and para.3 provide respectively:"In cases where any actmentioned in the preceding paragraph has been done in accordance with the resolution of the boardof directors, the directors who have assented to such resolution shall be deemed to have done suchact"; and "The directors who have participated in the resolution mentioned in the preceding paragraphand who have not expressed their dissent in the minutes shall be presumed to have assented to suchresolution."740 Ueyanagi, supra note 167, at 295.741 The Commercial Code, art.264, para.2; supra note 667.742 Kitazawa, Kaishaho, supra note 75, at 355; Namiki, supra note 383, at 135.192Most statutes of Canadian jurisdictions now impose disclosure obligations ondirectors where a conflict of interest situation between a director and his corporationmay arise. 743 However, unlike the explicit provisions pertaining to self-dealingtransaction,744 no reference is made to the board's approval or director'saccountability with regard to conflict of interest situations which may be outside thescope of self-dealing transactions. Thus, various common law cases including casesmentioned in this section must be carefully observed when determining whether ornot, or from whom approval is required to be obtained, and in what instancesdirectors are to be accountable.Further, it appears that the underlying principle of the common law withregard to accountability is that unless an interested director discloses his interest ina transaction to his corporation, and his corporation approves this transaction, thedirector is accountable. 745 Mere compliance with the statutory disclosure obligationto the board appears not to immunize a director from liability. In other words, itappears that for a director to be held unaccountable, he must disclose his interest inthe transaction not only to the board, but also to shareholders of his corporation, andobtain their consent to take an opportunity which rightfully belongs to hiscorporation. However, there are many questions to be answered here. Whatconstitutes consent? Is a simple majority sufficient, or is a special resolutionrequired? Should the concerned director abstain from voting? All these questions areleft to judicial scrutiny in the common law jurisdictions.743 The BCCA, sec.147; The CBCA, sec.120; supra note 669.' The BCCA, s.144, 145, 146; The CBCA, s.120; see supra 3.2 Self-dealing transactions, 5.Disclosure, approval, and fairness.745 Hill v. Hill, 279 Pa. Super, 154, 163, 420 A.2d 1078, 1082 (1980); Aurum GeologicalConsultants Inc. v. Basaba Enterprise Inc. [1991] B.C.W.L.D. 1772 (S.Ct.). The B.C. Supreme Courtstated that "The sale could only stand if the purchaser established the fully informed consent of thedefendant."1935) Effect of Competing TransactionsWhen a transaction has been executed in violation of the duty to avoidcompetition under the Commercial Code, 746 the transaction is deemed to be valideven when the other party acted in bad faith, i.e. knew the fact that the transactionwas in violation of the article of the Code. 747 The same applies to the commonlaw748 and Canadian statutory provisions. 749 Then how would a corporation seeka remedy in such instances? This will be looked at next.6) Right of InterventionA statutory remedy for a corporation in the case where its director hasviolated the Commercial Code and entered into a competing transaction is the "rightof intervention." This right is defined as follows:"If a director has, in contravention of the provisions of paragraph 1 [Article 264],effected a transaction on his own behalf, a board of directors may treat such transaction as effected on behalf of the company." (emphasis added) 75°Under what circumstances this right of intervention may be exercised by thecorporation, and the effects of the right of intervention will now be examined.(i) Circumstances under which the right of intervention may be exercised by thecorporationAs far as the provision 751 which provides for the right of intervention reads,the right of intervention appears to be exercisable when such a transaction has been746 The Commercial Code, art. 264; supra note 667.747 Ibid., Kitazawa, KaishaizO, supra note 75, at 356; Namiki, supra note 383, at 142-143; Ueyanagi,supra note 167, at 220-221.748 See cases, supra note 581.749 The BCCA, sec.146; The CBCA, sec.120(7).75° The Commercial Code, art.264, para.3." 1 Ibid.194made by a director on his own behalf regardless of in whose name the transaction wasmade. Here, at least two questions are raised. Firstly, if a transaction (a competingtransaction) is executed on a director's own behalf, but in a third party's name, canhis corporation exercise the right of intervention, and order the director to transferthe misappropriated rights or goods or any profits which he may have derived to thecorporation? Secondly, if such transaction is made in a director's name, but on a third party's behalf, can a corporation order the director to transfer themisappropriated rights or goods or profits derived therefrom which are actuallypossessed by the third party?The answers to both questions ought to be answered, in my opinion,affirmatively. As for the first question, there would be no reasonable objections,since the name in which the transaction was carried out is irrelevant to the issue ofthe directors' accountability, when he actually misappropriated the rights or goodsrightly belonging to the corporation. 752 With regard to the second question, in lightof the fundamental principle of allowing a corporation to exercise the right ofintervention, even if a director is not a beneficiary, the director ought to be liable forsimply utilizing his position by using his name. However, a majority of scholarspresently disagree with this view. They argue that since the provision explicitly states,"on his own behalf', and fails to state "on a third party's behalf', that noaccountability arises as a matter of strict interpretation of the provision. It appearsthat the legislature wilfully omitted the phrase "on a third parties behalf' for thepurpose of protecting the interest of third parties. If this is the correct interpretationof the intent of the legislation, interpreting the provision to include "on a third parties752 For this point, a strong opposing view has been advocated by some Japanese scholars. Theopposing view is that if a transaction is made in a third party's name, the corporation may not exercisethe right of intervention to the director. Because, even if the director is the actual beneficiary, thethird party might possess legal rights or ownership, and there would be no way for the corporationto demand the third party to transfer such rights or ownership to the corporation. Therefore,exercising the right of intervention to the director in such case is, in fact, useless; Kitazawa, KaishahO,supra note 75, at 357-358.195behalf' would be against the clear purpose of legislature. This is exactly theargument of scholars who oppose the inclusion of "on a third parties behalf." Herelies the general and typical attitude of the Japanese legislature and legal scholars, aswell as that of civilians in general that "written statutes are to be rigidly and faithfullyobserved."What is the rationale of protecting the interests of third parties who knowinglyutilize a director's name to gain personal profits? What is the rationale of excusinga director who used his name to benefit someone other than his corporation? It doesnot make any sense to allow a director to escape from liability if he claims "I did it.But I did it for my son or someone else." This view is also supported by someJapanese courts, 753 and some Japanese scholars. 754As regards the nature of the right of intervention, it is one which can beexercised by a corporation unilaterally by a resolution of the BOD of the corporation.In other words, when a corporation finds that a director breached his duty to avoidcompetition, and if the board decides to exercise the right of intervention, thecorporation has a legal right to order the director to transfer the wrongfullyappropriated rights, goods or benefit derived therefrom, to the corporation withoutneeding to bring suit.753 Tokyo District Court, march 26, 1981  (Hanrei-Jiho, Vol.1015, p.27) In the case, the court heldthe director liable in violation of the duty to avoid competition, even though the transaction was notmade on his own behalf, but on a third party's behalf (the corporation he was in control); The factsof the case were: the defendant who was a representative director of the plaintiff corporationpurchased shares of a corporation which was in the same business as that of the plaintiff corporation.The purchase of the shares was made by borrowing money from the plaintiff corporation. Thoughthe defendant was neither a representative director nor a managing director of the corporation ofwhich he has purchased shares, by having acquiring majority shares of the corporation, the defendantcontrolled the corporation. The defendant, on behalf of the corporation of which he was in control,without disclosing the fact to the plaintiff corporation, started to deal with distributers which used tobe the plaintiff company's distributers. The other representative director of the plaintiff corporationbrought a suit against the defendant alleging that the defendant if liable to the plaintiff corporationfor a breach of the duty to avoid competition.' Kitazawa, Kaishaho, supra note 75, at 357-358.196It would appear that the principle of the right of intervention 755 is similarto that of the constructive trust,756 which has been the most commonly used remedyunder similar circumstances in the common law jurisdictions 757 .Further examination will be undertaken to assess to what extent the right ofintervention under the Japanese Commercial Code may be imposed. This issue willbe discussed below by contrasting the right of intervention to the constructive trust.(ii) Effect of the right of interventionThe fundamental principle of the right of intervention is that once one ormore of a company's directors is involved in a competing transaction, it (by a BODresolution) may order the director(s) involved in the transaction to transfer to thecorporation any goods, services, effects and benefits derived therefrom. 758 Thenature of the right of intervention is clearly illustrated by the following court case:Tokai Mokuzai Kogyo K.K. v. Yamazaki 759Summary of the facts:The articles of the plaintiff corporation specified that one of thebusiness activities of the corporation included, "woodwork andsupplementary business." The defendant was a representative director755 In Japan, generally, properties wrongfully appropriated are not regarded as those which aremerely possessed by the director for the corporation based on his position as a fiduciary. Though theresult of the exercising of the right of intervention and imposition of constructive trust seems similar,the fundamental concept is somewhat different. (Ueyanagi, supra note 167, at 223).756 "Constructive trust" is a creature of equity that operates to prevent unjust enrichment; suchtrust will be imposed when property interest has either been acquired by fraud or where, in theabsence of fraud, it would be inequitable to allow property interest to be retained by person who holdsit." (George D. Coupounas v. Joseph F. Morad et.al . Ala., 380 So.2d 800).757 Popofsky, Jodi L., "Corporate Opportunity and Corporate Competition: A Double BarrelledTheory of Fiduciary Duty" in Hofstra Law Review, Vol.10, No.4, Summer, 1982, at 1214.758 Ueyanagi, supra note 167, at 222.759 The Supreme Court, June 4, 1949  (Minsha Vol.3, No.7, p.235).197of the plaintiff corporation. He had been purchasing wood and lumberfor his son without disclosing this fact to the plaintiff corporation.After the plaintiff corporation became aware of his activity, the plaintiffcorporation exercised its right of intervention under Article 264 of theCommercial Code. The plaintiff corporation brought an action for therecognition of ownership of the wood and lumber which the defendanthad purchased for his son and for the enforcement of delivery of thewood and lumber to the plaintiff corporation.The court held: 1) Regarding the actions of the defendant:It is a violation of the duty to avoid competition.2) Regarding the effect of the right of intervention:It should be proper to interpret the right of interventionas being that "a director is required to transfer anygoods, rights or benefits obtained by the transaction tothe corporation. However, that which was obtained bythe transaction, the ownership or other legal rightsobtained by the transaction are not automaticallytransferred to the corporation by its exercise of the rightof intervention.What is demonstrated in the above ruling is that exercising the right ofintervention confers on a corporation the right to order the director to transfer anygoods or rights or benefits acquired by the director. The effect of exercising the right198of intervention is, to create jus in personam 76° to the corporation against thedirector, and not to create jus in rem761 against the other party of thetransaction. 762 In other words, even after a corporation exercises its right ofintervention, the director still continues to be the party of the transaction. Thedirector has a duty to his corporation to transfer any goods, benefits or rights whichhe obtained by the transaction to the corporation. 763 More precisely, unless thedirector transfers the ownership or rights or goods to the corporation, the corporationdoes not have any enforceable power, as a party to the transaction with the otherparty. Needless to say, the corporation may seek the court's assistance to order thedirector to make the necessary transfer, if he refuses to do so.In addition, it is generally understood that if a corporation exercises the rightof intervention and the director complies, at the same time the corporation owes aduty to the director to discharge him of any obligation which he owed to the otherparty, and also must compensate the director for expenses which the director incurredas part of the transaction. 764It is important to note that even if a corporation exercises its right ofintervention, and the director complies fully by making all necessary transfers, thecorporation may still claim damages against him (if any were sustained by thecorporation). 76576° A right against a person; a right which gives its possessor a power to oblige another person togive or procure, to do or not to do something (Black's Law Dictionary, 6th ed., St.Paul, Minn, WestPublishing Co., 1990, at 860).761 "A right in a thing: a right existing in a person with respect to an article or subject of property,inherent in his relation to it, implying complete ownership with possession, and available against allthe world."(Ibid, at 860).762 Ibid.763 Ibid.764 Ueyanagi, supra note 167, at 223.765 Ueyanagi, supra note 167, at 221; The Commercial Code, art.266, para.1(5); supra note 643.199As stated briefly, when a director takes an opportunity of his corporation (andhere many events in this area overlap into the area of wrongful competition), aremedy for the corporation in the common law jurisdictions has been traditionally toimpose "a constructive trust upon the wrongfully appropriated properties." 766 Theunderlying principle of this "constructive trust" is that "a fiduciary who breaches hisduty and makes a profit must account for the profit ... to the person to whom theduty is owed."767 The accountability in this context is said to mean putting theprofiteering fiduciary and the corporation in a "debtor-creditor relationship."768 Itwould appear that the principle of accountability laid down by the constructive trustunder the common law is similar to that of the right of intervention under theJapanese Commercial Code. Moreover, though not so definite as the JapaneseCommercial Code, the common law courts, for the purpose of redressing competitiveharms, may also impose monetary damages in addition to the constructive trust. 769It may be concluded that the remedies for breach of a director's duty to avoidcompetition in Japan and in the common law jurisdictions are not significantly766 Popofsky, supra note 757, at 1214; Couponas v. Morad.; supra note 756.767 Welling, supra note 138, at 380.768 Ibid at 387; Welling clarifies this point as "There has been a great deal of sloppy analysis, bothjudicial and academic, on this point and the fiduciary is often mistakenly said to hold the profit intrust for the corporation because he has made it in breach of his duty. This is clearly not correct.There is not a cause and effect relationship between breach of fiduciary duty and trust. Trust is aproprietary relationship whereas a debt relationship is inter-personal."; It appears that corporatedirectors are not, in a strict sense, trustees. Therefore the corporation does not have power to forcea third party to return the profit if the profit the director obtained is transferred to a third party. Nordoes the corporation have the automatic right to take over the director's rights or goods which oughtto belong to the corporation.769 This is generally only so in the case where a corporation has sustained harms by competition.This monetary remedy does not generally apply to the usurpation of a corporate opportunity. Thisis because "the corporate opportunity analysis focuses on the acquisition and not the competition, themeasure of damages also is addressed solely to the wrongful acquisition and the harm it caused.";Popofsky, supra note 757, at 1215; In Red Top Cab Co. v. Hanchett et.al . 48 F.2d 236 and Lincoln Stores, Inc. v. Grant 309 Mass. 417, 34 N.E.2d 704 (1941), which involved competition, the courtsaffirmed that the defendants pay damages sustained by the plaintiff corporations in addition to thewrongfully acquired profits.200different. The only difference is that in Japan the right of intervention may beexercised by the corporation, without seeking court assistance (unless the directorrefuses to comply and make the requested transfers to the corporation), whereas incommon law jurisdictions a corporation must seek court assistance to obtain aremedy. Again, this difference appears to be a natural consequence of the differenthistorical background of these two remedies. The right of intervention under theCode is a right conferred on a corporation by the statute, whereas the constructivetrust is a creature of equity and, as such, only the courts have a power to grant theremedy.77°3.4 Corporate OpportunitiesThe "corporate opportunity doctrine" in common law jurisdictions is based ona fundamental rule of equity, which may be stated as being that, "a corporatefiduciary may not appropriate to himself an opportunity that rightfully belongs to hiscorporation."771 This principle has been codified into most Canadian statutes 772by imposing disclosure obligations on corporate directors who intend to enter intotransactions which conflict or may conflict with the interest of their corporations.Based on this principle, corporate opportunity situations sometimes overlap withcompetition situations, but may also include situations which are outside the scopeof the competition principle.As briefly mentioned in the preceding section of this chapter, the corporateopportunity doctrine has not been clearly established in Japanese law. There is noexplicit provision dealing with a director's duty in connection with corporateopportunities or conflicts of interest as a whole. Thus any conflict of interests arisingout of director's conduct, other than by competition, has rarely been questioned in770 Supra note 766.771 Popofsky, supra note 757, at 1193.772 The BCCA, sec.147; supra note 669.201Japanese courts. Also, even if some relevant case law exists, since Japan is a civil lawjurisdiction, such case law will not be necessarily recognized as a valid source oflaw.773 Furthermore, owing to the fact that the concept of corporate opportunityis one of the more recently introduced foreign concepts in this area of law, Japaneseacademic discussion about it is still questionable. Hence, only hypothetical questionsmay be asked at present. For example, if a case occurs which falls within the scopeof the corporate opportunity concept, and not within the scope of competition, it isnot clear how it will be decided. The method most likely to be adopted by Japanesecourts could be to find some preexisting legislation to apply which they considerrelevant.The only relevant provisions in connection with conflict of interest under theJapanese Commercial code are provisions pertaining to: 1) fiduciary duty774 ; 2)duty to avoid competition 775 ; and 3) self-dealing transaction. 776 If a case doesnot fall into the scope of the last two categories, it will be dealt with under the firstprovision (fiduciary duty). A problem of dealing with a corporate opportunity caseas a matter of a breach of fiduciary duty is, as mentioned above, the problem withthe disclosure requirement or lack thereof. A concerned director would be unableto use his compliance with the disclosure obligation as a defence, even if he had773 "Legislation in Japan, as in Roman-Germanic systems, is the most important of the formalsource of law, and a judge is required to apply it to the cases that come before him in preference toall other sources of law. Legislation is not, of course, as the school of exegesis would have it, the solesource of law, and a judge can refer to other source of law in the case of the absence, obscurity, orinadequacy of the legislation, for his function is not so much to apply the preexisting law faithfullyas to give a reasonable solution to the social conflicts that arise, without the parties having to askwhether laws exist to regulate their dispute or not. In the usual run of cases the judge findslegislation to apply, since all the important matters likely to cause legal disputes are now regulatedby legislation. In this sense, and in this sense only, legislation is the primary source of law"; Noda,supra note 10, at 188; Though court decisions, especially the interpretation of a law made by courts,are likely to be followed by other courts in deciding similar cases, "in strict theory no judge is boundby any judicial precedent", Noda, supra note 10, at 226.774 Art.254-3; supra note 534 and accompanying text.773 Art.264, Supra note 667.76 Art.265; supra note 559.202made disclosure, since no disclosure obligation is set forth in the provision.From the corporation's point of view, if such cases are dealt with as breachesof fiduciary duty, the corporation may not be appropriately compensated. The rightiof intervention,777 which is a similar remedy to the constructive trust under thecommon law, is only statutorily recognized in the case of competition. 778 The onlyremedy for a corporation in other cases is to seek damages to compensate for theloss it has sustained.779 Therefore, if a corporation finds that a director hasmisappropriated an opportunity which rightfully belonged to the corporation, thecorporation really has no way to get the opportunity back, or to order the transferof the misappropriated benefits which the director obtained by the transaction.Basically, the only remedy for the corporation in such a case would be to seekdamages from the director by proving that it actually sustained damages.In conclusion, unless the facts are undoubtedly within the scope of thecompetition principle, a director has no way to ensure that he is legitimately enteringinto a transaction and a corporation has no way to recover any benefits the directorobtained which may rightfully belong to it.The real problem is, since no explicit provision exists and no clear concept ofthe corporate opportunity doctrine has yet been established in Japan, that directorsin Japanese corporations are more likely to utilize their positions to partake inopportunities which rightly belong to their corporations without being held liable.The only way to prevent or deal with such undesirable conduct is to introduceappropriate amendments to the present Code."7 Ibid."8 Art.264; supra note 647.779 Art.266; supra note 623.203A simple amendment to the Code might read as follows:"a person employed by a corporation may not take, for his benefit, or for thebenefit of anyone else, any opportunity which rightfully belongs to the corporation."Here, I wilfully use the word "person" which may be defined appropriately toinclude not only directors but senior officers and other customary executive groupsof people within the corporation who are in positions of importance. The use of thisword and others such as "rightfully" gives quite a bit of leeway to a court to look atthe relevant circumstances in each case.4. ConclusionThrough the examination of various duties of directors under the JapaneseCommercial Code and laws of Canadian jurisdictions, it would appear that the Coderegulates director's duties in a different manner from laws in the common lawjurisdictions. In short, Japanese corporate law tends to regulate directors' duties ina stricter manner. This rigidness is well depicted in the attitude of Japanese courts.Japanese courts, when interpreting relevant provisions, tend to adhere to their strictinterpretation. This behaviour of the courts appears to be encouraged by thesupportive attitude of Japanese legal experts who generally foster this type of policy.This has ignored considerations of practical fairness and created disparity betweenwhat the law is and what the law ought to be.However, this strictness and rigidness spoken of above appears to be only truewith regard to legal principles which were derived from civil law concepts. A typicalexample is the regulation of the directors' duty of care and skill. Directors areexpected to discharge higher degree of care compared to their counterparts in theWest, and they are expected to supervise other directors' conducts positively andcontinuously. Principles which have been introduced from common law jurisdictions,primarily the United States, such as the fiduciary duty concept, are not necessarily204regulated in the same way as concepts which have been derived from civil lawconcepts. Such legal principles are not regulated in a coherent manner under theCode. Some provisions regarding some aspects of the fiduciary duty (such asrequirements for approval for entering into a self-dealing transaction and validity ofself-dealing transactions), regulate matters in a relatively strict manner, while otherprovisions do not explicitly regulate other principles of the same duty (such as liabilityof former directors and the scope of competing transactions, whether or not privatetransactions are included). If principles are not explicitly regulated in the Code orother relevant laws, Japanese courts have tended to reject the acceptance of suchprinciples. As a consequence, Japanese directors are sometimes very strictlycontrolled by statute, and other times they are quite free from statutory controls. Itappears that this incoherence and inconsistency in the attitudes of Japaneselegislature and courts are derived from conflicts arising between pre-existing civil lawconcepts and newly imported common law concepts. If a principle hails from thecommon law and is completely alien to the Code, such a principle tends to be ignoredby both the legislature and judiciary of Japan. Contrarily, if the newly adoptedcommon law principle overlaps with some pre-existing civil law concepts, they tendedto be codified in a very strict manner.It can be concluded that this area of Japanese law is for the most part veryrigid and stringent. It has not been changed from its original spirit even after theadoption of foreign concepts. In other words, Japanese law have never substantiallyaltered its original principles. Or view another way, Japan has always altered foreignprinciples into a form which is acceptable to the Japanese legal arena.In any event, the law should not be merely concern with legal principlesregardless of whether they are civil law concepts or common law concepts.Regulation which are either too rigid or too lax generally would not meet the realneeds and expectation of society.205CHAPTER SEVENCONCLUSIONThis thesis has, one hopes, shed some light on the peculiarities of Japanesecorporate law, regarding corporate management, judicial responses to the legalprinciples questioned, and actual practices by various actors inside and outside of thecorporation in Japan.As far as written laws are concerned, Japanese corporate law, at first glance,regulates matters pertinent to corporate management (including the SGM, the BODand individual directors) in a manner similar to that of the corporate laws in theCanadian and American jurisdictions.Although corporate laws in Japan and Canada originated from differentsources, the American influence over the corporate laws of both of these jurisdictionshas guided these different streams of laws into the same estuary. For instance, thetwo corporate organs (the SGM and the BOD) and the duties of directors arepresently regulated in a similar manner in both jurisdictions. Even some conceptswhich formerly had not existed within Japanese law (concepts which includedfiduciary duty of directors, the business judgment rule, and the corporate opportunitydoctrine) were all imported from the U.S.A. and have been discussed amongstJapanese scholars and in judicial decisions in Japan. It may therefore be said thatmost concepts under the Canadian and the U.S. corporate laws are now also familiarwithin Japanese corporate law.Moreover, as stated several times in this thesis, as the Japanese economic andpolitical ties with the U.S.A. have become stronger, Japanese corporate laws havecome to resemble their American counterparts. This general statement is true for206Canadian corporate law as well.However, since the Commercial Code of Japan has its origin in Germancorporate law, it continues to contain some non-North American concepts, one maycall them "civil law concepts", compared to American and Canadian corporate lawswhich have mainly been derived from English common law origins.This is a unique characteristic of the Japanese Commercial Code, along withother laws of Japan. Due to this uniqueness, the Japanese legislature and thejudiciary have faced difficulties in balancing the pre-existing civil law conceptsalongside newly imported concepts, especially those from the common lawjurisdictions. This is typically evident from some arguments mentioned in this thesis,such as those concerning the concept of fiduciary duty.The conflicts between pre-existing legal concepts and new foreign conceptsappear to be a natural consequence. The recent adoption of most foreign conceptsby Japan have been undertaken due to the great political and economic influence andpower of the United States over Japan. Hence, most amendments of the law havebeen technical rather than substantive. More importantly, the importation of foreignlegal concepts has not entirely altered the social norms of the Japanese people.Thus, even after these amendments to corporate statutes, Japanese, society as awhole, individuals' attitude, and corporate culture has, in great part, remainedunchanged. For instance, the 1950 amendments were undertaken under theinstruction of the United States for the purpose of pursuing shareholders' democracy.Since then, the law explicitly stipulates various rights for shareholders, including rightsto bring derivative actions, cumulative voting rights, the right to access to thecorporate documents, and so on. Some forty years after, since legislating these ideas,shareholders' democracy appears still quite a long way off for shareholders ofJapanese corporations. Shareholders rarely attend their SGM, and corporate207directors are still attempting to breeze over their SGMs without any meaningful inputfrom their shareholders.Recklessly adopting a foreign concept into the Japanese legal sphere is, ofcourse, just as dangerous a practice as blindly objecting to its introduction. However,adopting a foreign concept which has been well established through carefulexamination and lengthy consideration by a foreign legislature or judiciary would beadvantageous for Japan. This is providing sufficient studies of the concept areundertaken before its adoption by appropriate Japanese groups and the adaptabilityof the concept to Japanese society is carefully scrutinized. Since the Japanese areknown for their ability at adapting to and adopting what is advantageous to them,they ought to be able to adopt foreign legal concepts in pursuit of an advanced legalsystem. However, one thing that the Japanese legislature should remember whenchoosing to adopt foreign legal concepts is that they should continue to keep a closeeye on whether the adopted principles are actually taking root in their society as theywere intended to. If they are not, they should implement some measures to achievenecessary structural changes in the society, or alter the adopted principles to functionharmoniously in Japanese society. This has been a major problem with theintroduction of legal principles from the United States. The principles as writtenhave met with great opposition due to opposing cultural underpinnings.In addition to the influx of foreign legal principles into Japanese corporatelaw, changing situations and problems in Japanese society at the time have alteredthe corporate law. A typical example is the amendment of the corporate law for thepurpose of prohibiting the illegal activities of Sokai-ya. However, here again, the lawhas failed to control such individuals. The SOkai-ya still exist and function. As thelaw has become more stringent, the SOkai-ya have become more technical and skilfulin their adaption to it.208In any society, although law is a guiding principle for individuals' behaviour,law by itself may not be the sole or ultimate factor in the control of or success ofindividuals and corporations. It may be that the role of law in Japanese corporatesociety is less important for its success than in the West. This is because despite suchfailures of Japanese corporate law to control certain undesirable behaviours,Japanese corporations have flourished, achieving great economic success. Therewould seem, therefore, to be some other factors which led to this success besides law.The cultural, sociological and philosophical peculiarities of Japanese people and theirsociety have played a very important role in this success story. This is evidenced fromseveral examples mentioned in this thesis.One of these examples is the Japanese structure of the BOD of corporations.The real relationship between directors and their corporations in Japan appears tobe more than contractual. The view in the West is that this relationship is strictlycontractual. In Japan most directors are senior employees who have for the mostpart almost entirely devoted their lives to their corporations. As such, they tend toact in the best interest of their corporations. The problem here is that their actions,which may be in the best interest of their corporation, may sometimes be realized atthe expense of individual shareholders. Such directors' activities may also be derivedfrom a philosophical attitude peculiar to the Japanese people in general. It isgenerally said that the Japanese are a group-oriented people °, and "what areimportant (for them) are duty, devotion, and responsibility toward the particularclosed group."781 This phenomenon can be readily observed, especially in thesmallest groups of the Japanese business society, corporations; directors, as well asother employees of these corporations, have been expected to show and give their78° Odaka, Kunio, Japanese Management: A Forward-looking Analysis, (Tokyo, Asian ProductivityOrganization, 1986), at 39.781 Ibid, at 46.209total commitment to their individual corporations.782 It has been demanded ofdirectors that they keep a diligent eye on all events or affairs of their corporations,"to balance the interests of all involved"783 and to prevent any events which mightdestroy so-called "groupism." 784Because of such devotion and commitment of directors to their corporations,directors appear to adopt understanding that their corporations are in fact "theirs."As a result, some undesirable phenomena contrary to the spirit of law have inevitablyoccurred; The frequent occurrence of self-dealing transactions is a typical example.The following fact also typifies the distance between the spirit of the law andfactual scenarios in practice typical of Japan. Directors subject to Japanese law aregenerally expected to discharge their duties in a very positive manner to manage theircorporations. One may think that if such a heavy duty is imposed on directors ofcorporations in Japan, that there must have been numerous cases brought againstdirectors for breaches of duty. However, in reality, this is not the case. In fact, casesin which directors' liability was at issue and pursued by their corporations or byshareholders of their corporations have been very few and far between. 785 Butcases in which directors' liability was pursued by third parties, such as creditors, have782 Nakatani, supra note 152, at 18; However, recently, this peculiarity of business-oriented attitudeof Japanese people, especially men, has been changing toward a family-oriented attitude, along withmany other changes of the traditional Japanese characteristics, Nakatani, supra note 152, at 18 to 19.7" Ibid, at 17.784 The "groupism" is defined by Odaka (supra note 780) as "a "value orientation" in which a groupor organization, in this case usually a corporation, "perceives itself as a close-knit community with ashared destiny" and therefore "place less emphasis on realizing its members' potential and satisfyingtheir individual aspirations than on ensuring continued well-being of the whole and the overall peaceand happiness of the group ...", Nakatani, supra note 152, at 29.785 The exact number of cases brought against directors pertinent to the breach of duty of carecould not be ascertained. However, according to Haim HOritsu Zashi Kiji Sakuin [Index to articlesof Japanese law journals] by the Supreme Court Library, between 1980 to 1989, cases which werecommented upon in the major law journals in Japan (such as Hanrei-Jihij and Shoji-HOmu) has beenjust one or none every year.210been much more numerous. 786 The number of these cases appears to be stillrelatively small at least compared to that of the U.S.A. 787 In other words, in Japan,though directors' statutory duties are relatively stringent, in practice there appears tobe less possibility that directors will be sued for the breach of their duties comparedto in the U.S.A.This may be based on the oft-repeated belief (in the West) that the Japaneseare non-litigious people. 788 However, I rather postulate, it is more the result ofshareholders' lack of awareness of their rights and unrealistic trust of directors. Thisunrealistic trust exhibited by shareholders appears to be based on the notion thatdirectors ought to act in the best interest of their corporation as senior employees,and what is in the corporation's best interest is in their best interest. 789 If Japaneseshareholders ever become aware that directors have been wasting or utilizingcorporate assets for their own purposes, they would not be so quiet. I believe thatif the issue involves purely economic matters, the Japanese people are not so hesitantto seek court assistance as they are believed to be. 799786 According to the same source in the same term, ;faun HOritsu Zashi, ibid note 737, the averagenumber of cases commented in law journals pertinent to directors' liability brought by third partieswere five to six.787 According to the Wyatt Survey of the U.S.A. in 1989, 625 cases has been reported among thesurveyed 1537 corporations between 1980 to 1988; ShOft HOmu, No.1244, March 15, 1991, at 2;However, in Canada, the number of law suits brought against directors and officers of corporationsare quite small. It is stated that "the majority of claims initiated against directors are settled out ofcourts for relatively insignificant sums." (Ziegel, supra note 66, at 486).788 Some of the books which have penetrated this idea to the world are: Kawashima, Takeyoshi,Nihonjin no Ho Ishiki [Japanese Legal Consciousness] (Tokyo, Iwanami, 1967) at 125 to 203;Henderson, Dan F., Conciliation and Japanese Law: Tokugawa and Modern, Vol.2 (University ofWashington Press, 1965), at 191 to 200.789 One commentator suggests that mutual dependence of senior and junior employees exists inJapanese companies. It is said in his book, that senior employees take responsibilities for their junioremployees. Thus senior employees generally depended and trusted by their junior employees; Clark,Rodney, supra note 14, at 126.7" Haley objects to Kawashima's argument (supra note 788) that "Japanese people are non-litigious people." He points out structural barriers which have hindered Japanese people fromlitigating; Haley, John Owen, "The Myth of the Reluctant Litigant" in Journal of Japanese Studies,vol.4, No.2, 1978 (University of Washington), at 359 to 390; Oghigian, Haig(ed.), The Law of211It should be pointed out here that the social and philosophical peculiarities ofJapanese society and its people would seem to have been responsible for possiblymisleading the Japanese legislature and judiciary in some events. For instance, it isconsidered that representative directors are expected to discharge their duty tosupervise other directors' activities continuously and positively since they ought toknow everything concerning the affairs of their corporations and all the activities ofall the directors of the corporation. This however, would seem to be more wishfulthinking than reality. The assumption that representative directors are in a positionof being able to control or grasp all the corporate affairs of their corporation is nomore than a myth in this contemporary business society. The strict accountabilityimposed on directors in the case of conflict of interest likewise shows a somewhatunrealistic expectations of the law toward directors. Rather than placing theunrealistic expectations on directors, the law should adopt some other measures tomonitor directors' activities, including the introduction of mandatory outside directorswho are completely independent from any of the board members and theenhancement of the auditor's powers.Lastly, peculiarities of the Japanese judiciary are noteworthy. Once legalprinciples are introduced which are postulated as a reflection of the voice of theirsociety or sometimes as the dominant views of legal scholars of the time, regardlessof whether or not these adoption are a real reflection of the society or based on fairor equitable principles, the Japanese judiciary tends to adhere to a strictinterpretation of the relevant provisions. The consequences of this could sometimesbe a real detriment to the people or the society which they ought to be taking intoconsideration the most. As demonstrated in the section of self-dealing transactions,Japanese courts tend to look at the board's approval stipulated in the law as the onlylegitimate procedure for directors to enter into such transactions, without regard toCommerce in Japan (N.Y., Prentice Hall, 1993), at xvi.212the fairness of such transactions. I strongly believe that the role of the courts shouldnot be to adhere to strict interpretation of relevant provisions of the law, but to lookmore closely at the spirit of the law and to adjudicate according to what is in the bestinterest of corporation as a whole.On the other hand, if matters are not explicitly prescribed by legislation, theJapanese judiciary has tended to be reluctant to partake in judicial legislation or toadopt or establish new rules in their courts, even if this would be in the best interestof society. This is evident from facts mentioned in this thesis: the strong oppositionto the Business Judgment Rule, no liability having been imposed on directors in thecase of corporate opportunity, and so on. This judicial attitude is disadvantageousto the Japanese people and to their society. It is suggested that insofar as the writtenstatute has a great influence on the judiciary in Japan, these proposed principlesshould be codified into Japanese corporate law.Although it may be the case that written law may not have the greatest powerto influence in Japan, at least in the area of corporate law, law remains a necessarytool to guide people in the appropriate direction that society ought to pursue. In thecorporate society, since there exist several groups of people whose interests mayconflict but who must co-exist, clear guidance from the law for these groups isneeded.However, some of the above conclusions may be viewed as outdated in thenear future. Things are rapidly changing in Japan largely due to the present sluggisheconomy and difficulties of managing corporations. Japanese shareholders and otherparties associated with corporations have started to gain some realization about howto protect their interests; it is a "Directors Beware" situation at present. As aconsequence, the number of law suits against directors has been on the increase, andit appears that this trend will continue. It is also noteworthy that the first insurance213policy for directors' liability791 was approved to be sold and appeared in the marketplace in 1990.792 These facts alone should trigger a change in the attitude ofcorporate actors and might produce changes, yet unknown, to the laws of Japan.Hopefully, these changes will be in the best interests of the corporation as awhole. Shareholders, third parties and the societies in which corporations operateand effect should all benefit positively from these changes.As mentioned before, the obvious similarity between the commercial laws ofJapan and those of the West should be viewed with great caution. The commerciallaws of Japan or the way of doing business in Japan, like many other areas ofJapanese life, which has experienced foreign influence has proven quite resistant toit. On the surface there is a system which includes written statutes which greatlyresembles corresponding systems found in the West. This, however, is as far as thesimilarity goes, for in the implementation of new ideas, traditional Japanese valuesand customs take over. This phenomenon is resistant to the total implementation ofnew and foreign systems into Japan.The imported written codes were and are meant to deal with and regulateparticular aspects of life in Japan; But these particular aspects of life has been andremain more closely influenced by historical and traditional values of various types,which were present before the newly introduced systems and codes. This is one ofthe reasons that many Westerners find it hard to comprehend (business orcommercial) practices in Japan.791 The insurance is called "Directors and Officers Liability and Company Reimbursement Policy"(by Taisho Kaijyo Kasai Insurance Co. Ltd.).792 Shoji HOmu, No.1244, March 15, 1991, at 2.214BIBLIOGRAPHYI. 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Tuttle Co., 1984).Nakatani, Iwao, The Japanese Firm in Transition (Tokyo, Asian ProductivityOrganization, 1988).Noda, Yosiyuki, Introduction to Japanese Law (Angelo trans, Tokyo, University ofTokyo Press, 1976).Norbury, Paul and Bownas, Geoffrey (ed.), Business in Japan (London, TheMacmillan Press Ltd., 1980).Norman, E. Herbert, Japan's Emergence as a Modem State (N.Y., Institute of PacificRelations, 1940).Oda, Hiroshi and Grice, R. Geoffrey, Japanese Banking Securities and Anti-Monopo4;Law (London, Butterworth, 1988).Odaka, Kunio, Japanese Management: A Forward-Looking Analysis (Tokyo, AsianProductivity Organization, 1986).Oghigian, Haig(ed.), The Law of Commerce in Japan (N.Y., Prentice Hall, 1993).Ohara, Keishi and Okata, Tomotsu, Japanese Trade and Industry in the Meiji - TaishoEra (Tokyo, Obunsha, 1957).Okimoto, Daniel I. and Rohlen, Thomas P. (ed), Inside the Japanese System(California, Stanford University Press, 1988).219Oppler, Alfred C., Legal Reform in Occupied Japan (New Jersey, PrincetonUniversity Press, 1976).Patrick Hugh and Rosovsky, Henry, Asia's New Giant: How the Gipons EconomyWorked (Washington, Mrookings Institution, 1976).Rich William V., Corporate Communications: A Comparison of Japanese andAmerican Practices (Westport, Conn., Quorum Books, 1984).Ryan, Christopher L., Company Directors: Liabilities, Rights and Duties, SecondEdition (Oxford, CCH Editions Limited, 1987).Richardson, Bradley M. and Veda, Taizo(ed.), Business and Society in Japan (Ohio,East Asian Studies Program, 1981).Sasaki, Naoto, Management and Industrial Structure in Japan, Second Edition (Oxford,Pergamon Press, 1990).Sato, Kazuo and Hoshino, Yasuo (ed.), The Anatomy of Japanese Business (NewYork, Sharpe, Inc., 1984).Sato,R. and Wachtel, Paul(ed.), Trade Friction and Economic Policy (New York,Cambridge University Press, 1987).Shapiro, Issac, Legal Aspects of Doing Business with Japan 1985 (New York,Practising Law Institute, 1985).Shimizu, Ryuei, Top Management in Japanese Firms (Tokyo, Chikuba Shobo, 1986).Shimizu, Ryuei, The Growth of Firms in Japan (Tokyo, Keio Tsushin Co., 1980).Shinohara, Miyohei, Industrial Growth, Trade and Dynamic Patterns in the JapaneseEconomy (Tokyo, University of Tokyo Press, 1982).Simonds, R.L. and Mercer, Peter P., An Introduction to Business Associations inCanada (Toronto, Carswell, 1984).Smith, Beverly G., Introduction to the Canadian Trusts (Toronto, Butterworths, 1979).Smith, Malcom, The Internationalization of the Gipons Economy: The LegalFramework (Vancouver, S.N., 1985).Tanaka, Hideo(ed.), The Japanese Legal System (Tokyo, University of Tokyo Press,1976).220Tanaka, Hiroshi, Personality in Industry (London, Pinter Publishers, 1988).Taylor von Mehren, Arthur(ed.), Law in Japan: The Legal Order in a ChangingSociety (Cambridge, Masachusetts, Harverd University Press, 1963).Thomas, A.F., and Koyama, Soji, Commercial History of Japan (Tokyo, The YuhodoLtd., 1936).Toyoda, Takashi, A History of Pre-Meiji Commercial in Japan (Tokyo, Kokusai NunkaShinkokai, 1969).Tung, Rosalie L., Key to Japan's Economic Strength: Human Power (Toronto,Lexington Books, D.C.Kealth and Company, 1984).Twining, William (ed.), Legal Them/ and Common Law (Oxford, Basil Blackwell,1986).Upham, Frank K, Law and Social Change in Postwar Japan (Cambridge,Massachusetts, Harverd University Press, 1987).Yanada, Naohiro (ed.), Cracking the Japanese Market: the Experience of 18 ForeignCompanies in Japan (Tokyo, Mainichi Daily News, 1985).Yamamura, Kozo (ed.), Japan's Economic Structure: Should It Change? (Seattle,Society for Japanese Studies, The University of Washington, 1990).Welling, Bruce, Corporate Law in Canada (Toronto, Butterwarths, 1991).Ziegel, Daniels and Johnston & Macintosh, Cases and Materials on Partnerships andCanadian Business Corporations(Toronto, The Carswell Company Ltd., 1989).Zimmerman, Mark, How to do Business with the Japanese (New York, RandomHouse, 1985).II. ARTICLES, COURSE MATERIALS (ENGLISH)Awanohara, Susumu, "Japan's Underdogs Brought to Heel," Far Eastern EconomicReview, August 6, 1976, pp.78-84.Betes, Laurence W., "Japan's New Disclosure Rules and Keiretsu Relationships,"East Asian Executive Reports, June, 1991, pp.7, 11-13.221Beveridge, Norwood P. Jr., "The Corporate Director's Fiduciary duty of Loyalty:Understanding the Self-Interested Director Transaction,"Depual Law Review,Vol.41, No.3, Spring, 1992, pp.655-688.Blakemore and Yazawa, "Japanese Commercial Code Revisions ConcerningCorporations," American Journal of Comparative Law, Vol.1, 1953, pp.12-24.Bradley, Michael and Schipani, Cindy A., "The Relevance of the Duty of CareStandard in Corporate Governance," Iowa Law Review, Vol.75, No.1,October, 1989, pp.1-74.Chew, Patric L, "Competing Interest in the Corporate Opportunity Doctrine," NorthCarolina Law Review, Vol.67, No.2, January, 1989, pp.435-502.Comment, "Commercial Law Reform in Japan: The Current Debate," Law in Japan:An Annual" Vol.11, 1978, pp.102-111.Corcoran, M. Evan, "Foreign Investment and Corporate Control in Japan: T. BoonePickens and acquiring control through share ownership," Law and Policy inInternational Business, Vol.22, No.2, 1991, pp.333-356.Cutts, Robert L., "Capitalism in Japan: Cartels and Keiretsu," Harvard BusinessReview, Vol.70, July-August, 1992, pp.48-55.D'Ambrosio, Thomas A., "The Duty of Care and the Duty of Loyalty in the RevisedModel Business Corporations Act," Vanderbilt Law Review, Vol.40, No.3,April, 1987, pp.663-692.Daniel, Patricia A., "Recent Development Concerning the Duty of Care, the Duty ofLoyalty, and the Business Judgment Rule," Vanderbilt Law Review, Vol.40,No.3, April, 1987, pp.631-662.Dziubla, Robert W., "Enforcing Corporate Responsibility: Japanese CorporateDirectors' Liability to Third Parties for Failure to Supervise," Law in Japan:Annual, Vol.18, 1985, pp.55-75.Dore, Ronald, "When will the Japanese slow down", summary of a Pacific RegionForum on Business and Management Communication held by Simon FraserUniversity at Harbour Centre on November 22, 1991.Eisenberg, Melvin A., "The Duty of Care of Corporate Directors and Officers,"University Pittsberg Law Review, Vol.51, No.4, Summer, 1990, pp.945-972.222Eisenberg, Melvil Aron, "Self-Interested Transactions in Corporate Law," TheJournal of Corporate Law, Vol.13, No.4, Summer, 1988, pp.997-1009.Foster, Mark Edward, "Analysis of the Newly Amended Commercial Code of Japan"in Case Western Reserve Journal of International Law, 1983, pp.587-622.Gilson, Ronald J. and Roe, Mark J., "Understanding the Japanese Keiretsu:Overlaps Between Corporate Governance and Industrial Organization," TheYale Law Journal, Vol.102, No.4, January, 1992, pp.871-906.Hanaoka, Masao, "Setting Up a Hypothesis of the Characteristics of PersonnelManagement," Modern Business And Management: Some Aspects of JapaneseEnterprise (Institute of Business Research, Daito Bunka University), pp.161-183.Heftel, Christopher Lee, "Corporate Governance in Japan: The Position ofShareholders in Publicly Held Corporations," University of Hawaii LawReview, Vol.5, No.1, Spring, 1983, pp.135-205.Henderson, Dan Fenno, "Law and Political Modernization in Japan," PoliticalDevelopment in Modern Japan (New Jersey, Princeton University Press, 1968).Ishiguro, Toru, "Corporate Law: Recent Developments - III: Japan," InternationalBusiness Lawyer, Vol.19, No.5, May, 1991, pp.265-267.Ito, Hiroshi, "How Judges Think in Japan," American Journal of Comparative Law,1970, pp.775-804.Iwakuni, Tersundo, "Law may change but Japanese society does not," InternationalTax and Business Lawyer, September, 1988, pp.300-307.Karjala, Dennis S., "The Closely Held Enterprise Under Japanese Law," BostonUniversity International Law Journal, Vol.7, No.2, Fall, 1989, pp.229-266.Kanzaki, Katsuro and Tatsuta, Misao, "Major Statutory amendments in Japan in1981" in Journal of Comparative Business and Capital Market Law, Vol.5, No.3,September, 1983, pp.249-266.Kanazawa, Yoshio, "The Regulation of Corporate Enterprise: The Law of UnfairCompetition and the Control of Monopoly Power," Law in Japan (Cambridge,Harvard University Press, 1963), pp.480-515.Kawamoto, Ichiro and Monma, Ittoku, "Japan's Breed of Fixers," Far EasternEconomic Review, June 25, 1976, pp.55-58.223Kuebler, Friedrich, "Panel Discussion on Corporate Governance: U.S., German, andJapanese Perspective," Journal of Comparative Business and Capital MarketLaw, Vol.8, 1986, pp.401-418.Lansing, P. and Wechselblatt, M, "Doing Business in Japan: The Importance of theUnwritten Law," The International Lawyer, Vol.17, No.4, Fall, 1983, pp.647-660.Matsumura, Yoshiyuki, "Attitude of Canadian Subsidiaries of Japanese FirmsToward the Law and the Legal System in Canada' in U.B.C. Law Review,Winter, 1987, pp.209-222.Meier-Schatz, Christian J., "Corporate Governance and Legal Rules: A TransnationalLook at Concept and Problems of International Management Control," TheJournal of Corporate Law, Vo113, No.2, Winter 1988), pp.431-480.McMurray, Marcia M., "An Historical Perspective on the Duty of Care and the Dutyof Loyalty, and the Business Judgment Rule," Vanderbilt Law Review, Vol.40,No.3, April, 1987, pp.605-629.Meryell, Dean, "Administrative Guidance in Japanese Law: A threat to the rule oflaw" in Journal of Business Law, July, 1991, pp.398-404.Michida, Shinichiro, "The Legal Structure for Economic Enterprise: Some Aspectsof Gipons Commercial Law," Law in Japan (Cambridge, Harvard UniversityPress, 1963), pp.507-546.Ministry of Justice, Counsellor's Office, Civil Affairs Bureau, "Reform of theJapanese Corporate Law Share System: A draft," Law in Japan: Annual, 1978,pp.91-101.Oghigian, Haig, "Law and Commercial in Japan," The Advocate, Vol.46, September,1988, pp.699-704.Okumura, Hiroshi, "Corporate Capitalism: Cracks in the System," Japan Quarterly,January-March, 1992, pp.54-61.Okuno, Yasuhisa, "Hiring Employees," Japanese Business Law Letter, November 15,1988, pp.1-6.Palmiter, Alan R., "Reshaping the Corporate Fiduciary Model: A Director's Duty ofIndependence," Texas Law Review, Vol.67, No.7, June, 1989, pp.1351-1464.224Paterson, Robert K, "Reformulating the Standard of Care of Company Directors,"Victoria University of Wellington Law Review, Vol.8, No.1, August, 1975, pp.1-21.Popofsky, Jodi L., "Corporate Opportunity and Corporate Competition: A DoubleBarrelled Theory of Fiduciary Duty," Hofstra Law Review, Vali), No.4,Summer, 1982, pp.1193-1227.Recio, Eduardo, "Shareholders' Rights in Japan," UCLA Pacific Basin Law Journal,Vol.10, No.2, Spring, 1992, pp.489-528.Robert, William M., "Searching for a Paradigm for the Fiduciary Duties of CorporateDirectors," Memphis State Law Review, Vol.21, No.3, Spring, 1991, pp.501-526.Rostrom, Dean L., "Corporate Extortion in Japan: SOkai-ya Endure CommercialCode Amendment," Brigham Young University Law Review, Vol.1987, No.2,pp.699-708.Rowley, Anthony, "A question of equity," Far East Economic Review, May 16, 1991,p.63.Rowley, Anthony, "Stock questions," Far Eastern Economic Review, September 12,1991, p.54.Rowley, Anthony, "Whistle Blower," Far Eastern Economic Review, May 23, 1991,p.65.Salwin, Lester N., "The New Commercial Code of Japan: Symbol of GradualProgress Toward Democratic Japan," The Georgetown Law Journal, Vol.50,1962, pp.478-512.Smith, Malcolm, "Commercial Law," Japanese Business Law Guide Vol.1,2(Australia, CCH International, 1988), pp.478-512.Takahashi, Isso and Mclbroy, Robert, "Corporate Law, New Development - Japan,"International Business Lawyer, december 1983, pp.34-56.Takayanagi, Kenzo, "Historical Introduction," The Commercial Code of Japan, Vol.1(Tokyo, The code Translation Committee, 1931), pp.ix-xliii.Takeuchi, Akio, "Should there be a general provision on the social responsibility ofenterprises in the Commercial Code," Law in Japan: An Annual, 1978, pp.37-56.225Taniguchi, Yoichiro, "Japan's Company Law and the Promotion of CorporateDemocracy: A Futile Attempt?," Columbia Journal of Transnational Law,Vol.27, No.1, 1988, pp.195-241.Tatsuta, Misao, "Enforcement of Japanese Securities Legislation," Journal ofComparative Corporate Law and Securities Regulations, 1978, pp.95-138.Tatsuta, Misao, "The Risk of Being an Ostensible Director under Japanese Law,"Journal of Comparative Business and Capital Market Law, 1986, pp.445-455.Waxman, Michael P., "The Japanese Legal System: Myth and Reality," WisconsinBar Bulletin, January, 1988, pp.27, 66-67.Yazawa, Makoto, "The legal structure for corporate enterprise: Shareholder-Management relations under Japanese Law," Law in Japan (Cambridge,Harvard University Press, 1963), pp.547-566.Zackula, Shoron K., "Corporate Law in Japan," East Asian Executive Reports, June,1989, pp.15-17.III. BOOKS(JAPANESE)Hironaka, Toshio, Saiken Kakuron Rongi Dai-5-han [Discussion of Particulars of Rightin Personam (5th Edition)] (Tokyo, Yuhikaku, 1980).Iwata, Kikuo, Keizaigaku no Kisochishiki(Shinpan) [Basic Knowledge of Economics](Tokyo, Nihon Keizai Shinbunsha, 1991).Kanzaki, Katsuro, Shinpan Shoho II(Kaishaho):Gendai Horitsugaku Koza 17 [TheCommercial Code II (Company) New Edition: Study of ContemporaryJurisprudence Vol.17] (Tokyo, Yuhikaku, 1984).Kanzaki, Katsuro, Kigyobaishu no Jitsumu to Hon [Practice and Legal Theory ofMerger and Acquisitions] (Tokyo, Shojihomu Kenkyukai, 1985).Kashima, Morinosuke, Nihon GaikOshi 1. Bakumatsu GaikOshi [Japanese DiplomaticHistory 1. Diplomatic history in the late shogunate era] (Japan, Kashima HeiwaKenkyfisho, 1970).Kawamoto, IchirO, Gendai Kaishaho (Shintei Dai 1-pan) [Contemporary CompanyLaw (New Edition-1] (Tokyo, ShOji HOmu Kenkyilkai, 1980).226Kawashima, Takenori, Mimpo Sosoku [General Regulation of Civil Law] (Tokyo,Yuhikaku, 1980).Kitazawa, Masayoshi, KaishahO (Shinpan): Gendai HOritsu-gaku Zenshil 18 [CompanyLaw (New edition): Series of Contemporary Jurisprudence 18] (Tokyo, SeirinShoin Shinsha, 1982).Kitazawa, Masayoshi(ed.), Shoho I: Hanrei to Gakusetsu 5 [Commercial Law 1:Presidents Scholarly Views] (Tokyo, Nihon Hyoronsha, 1980).Kitazawa, Masayoshi, Kabushiki KaishahO kenkya [Study on Limited Companies](Tokyo, Ythikaku Co.Ltd., 1976).Kojima, Yasuhiro, DaikigyO Shakai no HOchitsujyo [Legal Order in the LargeCorporations Society] (Tokyo, Keis6 Shob6, 1981).Kurusu, Saburo, KeiyakuhO: Hritsugaku Zenshil 21 [Contract Law: Series ofJurisprudence Vol.21] (Tokyo, Yilhikaku, 1977).Masaki, Hisashi, Sengo ni Okeru kabushiki gaisha no shoyu to shihai: wagakuni saidaishisangaku 200 sha (Hi Kinya gaisha) bunseki [Ownership and Control ofLimited Companies in Post War Period: An Analysis of the Actual Circumstanceof the Japan's Biggest 200 Companies (excluded financial institutions] (Tokyo,doshisha Shogaku, No.21-1, 1965).Nakamura Kazuhiko(ed), Gendai Kigyoho Soron [contemporary Corporate Law](Kigyoho-I)(Tokyo, Dobunkan Shuppan, 1984).Nakamura Kazuhiko(ed), Gendai Kigyo Sohikiho (Kigyoho-II) [Contemporarycorporate organization Law] (Tokyo, Dobunkan Shuppan, 1984).Nakamura Kazuhiko(ed), Gendai Kigyo Katsudoho(Kigyoho-III) [contemporaryCorporate Activities Law] (Tokyo, Dobunkan Shuppan, 1984).Namiki, Toshimori, Torishimariyaku no Gimu to Sekinin [Directors' Duties andLiabilities] (Tokyo, Chuou Keizaisha, 1991).Osumi, Kenichiro and Toda, Shuzo and Kawamoto Ichiro(ed.), Hanrei KonmentalII (Jyo & Ge) [Comments on Precidents, Vol.] of 2] (Tokyo, Sanseido, 1977).Ryuzaki, Kisuke, Saiban to Gin Ninjy6 [Justice and Obligation Humanity] (Tokyo,chikuma shobo Co. Ltd., 1988).227Shigematsu, Kazuyoshi, Nihon HOseishi [Japanese Legal History] (Tokyo, KeibundO,1987).Suzuki, Takeo, Shinpan KaishahO [Company Law, New Edition] (Tokyo, Kobondo,1980)Takahashi, Kamekichi, Nihon no Kigy6, Keieisha Hattatsu-shi [History ofDevelopments to Japanese Corporations and Corporate Managements] (Tokyo,TOyO Keizai ShinpO-sha, 1977).Takeuchi, Akio, Kaisei Kaishaho Kaisetsu [A study on Revised Company Law](Tokyo, Yilhikaku Co.Ltd., 1981).Takeuchi, Akio and Tatsuta, Setsu (ed.), HOritsugaku KyOzai: KaishahO Dai-2-han[Materials on Jurisprudence: Company Law (2nd. Ed.)] (Tokyo, TokyoUniversity Press, 1980).Takenaka, Seiichi and Kawakami, Masatomo, Nihon ShOgyO-shi [JapaneseCommercial History] (Tokyo, Minebea ShobO, 1965).Tamaki, Hajime, Gendai Nihon SangyO Hattatsu-shi =IX, SOron -Jy6- [History ofIndustrial Developments in Modern Japan: General Remarks -Vol.1 of 2](Tokyo, Gendai Nihon SangyO Hattatsy-shi Kenkyilkai, 1967).Tanaka, Seiji, Zentei Kaishah6 ShOron (Jyokan) [Study in Detail in Company Law,Vol.] of 2] (Tokyo, KeisO ShobO, 1979).Tokyo flOgaku Kenkyfikai and Inoue HOritsu SOgO Kenkyilkai, Gendai Shih6shikenKOza 5: Kaitei KaishahO [Contemporary Judicial Examination Vol.5: RevisedCompany Law] (Tokyo, FlOsO DOjin, 1991).Ueyanagi, Katsuro, Kouno, Tsuneo, and Takeuchi, Akio (ed.), Shinpan ChashakuKaishahO (5), (6) [Commentary of Company Law: New edition Vol. (5), (6)](Tokyo, Yilhikaku, 1989).Wagatsuma, Sakae, Shintei MinpO SOsoku (MinpO KOgi p[General Provisions of theCivil Code (Lecture on the Civil Code, I)] (Tokyo, Iwanami Shoin, 1980).III. ARTICLES (JAPANESE)Discussion, "Gaikokujin Kara Mita Nihon-hO [Japanese Law from the View Point ofForeign]," Jurisuto, No.1000, May 1-15, 1992, pp.380-391.228Discussion, "Kaisha HOsei to Kigy6 Keiei no Kadai [Problems of Corporate LawRegulation and Corporate Management]," ShOji HOmu, No.1272, January,1992, pp.10-33.Discussion, "Kojin Kabunushi Mondai no HOteki Sokumen o Saguru [Search forLegal Aspects of Individual Shareholders' Problems] in Sh6ji H6mu, No.1249,May, 1991, pp.6-52.Endo, Hiroshi, "Kaisha H6sei No Arikata Ni Tsuiteno Keidanren Kenkai Ni Tsuite"[Concerning the view of the Federation of Economic Organization regardinghow the legal system governing corporations ought to be", in ShOji HOmu,No.1281, April 1992, pp.2-4.Horiuchi, Akiyoshi, "Tenkan Semarareru Nihongata Shihon-shugi [Japanese-styleCapital Market Being Urged Divergency]," Ekonomisuto (Tokyo, MainichiShinbun-sha), pp.92-95.Kamiya, Mitsuhiro, "Pickens-Koito Jiken ni okeru HOteki Shomondai no KentO -J3/6-[Analysis on Legal Problems in Pickens-Koito Case 1]," ShOji HOmu, No.1258,August 5, 1991, pp.32-42.Kamiya, Mitsuhiro, "Pickens-Koito Jiken ni okeru HOteki Shomondai no KentO -Ge-[Analysis on Legal Problems in Pickens-Koito Case 2]," ShOji HOmu, No.1259,August 25, 1991, pp.36-40.Kawamot, Ichiro et.al ., "Saikin no Kabunushi SOkai kankei SoshO o Megutte[Regarding the recent cases involving the shareholders general meeting],"ShOji HOmu, No.1078, June 5, 1986, pp.2-10.Kubori, Hideaki, "YOchili Kabunushi ni Taisuru Kaisha-gawa no Taisaku[Corporations' Counter Measures Toward Shareholders requiring attention]in ShOji HOmu, No.1249, May 5/15, 1991.Mitsueda, Kazuo, "Kabunushi-ken no Genjy6 to Kadai [Present Situation andProblems Regarding Shareholders' Rights]," HOritsu JihO, Vol.64, No.7, pp.14-22.Noguchi, Yukio and Shimada, Haruo, "Taidan: ShOhisha Jytishi No Shakai o Mezase[Discussion: Pursue the Consumer-oriented Society] in Shakan TOy6 Keizai:Keizai Hakusho Tokusha '92 [The Weekly Eastern Economy, Special Edition:The White Paper on Economy '92] (Tokyo, TOyOkeizai ShinpOsha), pp.30-17.229Miyama, Yilz6, "Kigy6 o eguru Hik6 Shogensh6 to 6 no Yakuwari [VariousPhenomena of Misconduct Surrounding Corporations and the Role of Law],"HOritsu JihO, Vol.64, No.7, pp.6-13.Smitka, Michael J., "Nihonteki Keiretsu Torihiki no Koko ga Mondai [Problems ofJapanese Keiretsu trade]," TOyO Keizai: Nihon no KigyO GurOpu, '93 , pp.16-19.Suenaga, Toshikazu, "Kabunushi SOkai no Genjy6 to Kadai [Present Situation andProblems of Shareholders' General Meetings]," HOritsu Jill& Vol.64, No.7,pp.24-30.Tyson, Laura, "Nihongata Shihonshugi wa Sekai ni Tsily6 Suruka? [Does theJapanese style capitalism apply to the world?]," Shakan TOyO Keizai [TheWeekly Eastern Economy], Special Edition, August 28, 1992, (Tokyo, TOyOkeizaiShinpOsha), pp.58-61.Ueyanagi, Katsuro, et al., "Torishimari-yaku no KyOgy6 ni Kansuru Jirei Kenkyil [1]- [6]", ShOji HOmu, No.1055, October 5, 1985, pp.74-83; No.1056, October 25,1985, pp.12-20; No.1057, November 5, 1985, pp.2-9; No.1058, November 11,1985, pp.8014; No.1060, November 25, 1985, pp.10-16; No.1061, December 15,1985, pp.18-27; No.1064, January 5, 1986, pp.68-76; No.1065, January 25, 1986,pp.32-38; No.1066, February, 1986, pp.28-34; No.1067, February 15, 1986,pp.22-27; No.1069, March 5, 1986, pp.24-29; No.1070, March 15, 1986, pp.36-41; No.1071, March 25, 1986, pp.28-33; No.1072, April 15, 1986, pp.21-29;No.1076, March 15, 1986, pp.29-34; No.1077, March 25, 1986, pp.18-30.IV. PUBLICATIONSCommercial Law and Practice, Course Handbook Series Number 352, Legal Aspects ofDoing Business with Japan 1985 (New York, Practising Law Institute, 1985).Country Report: Japan, No.2, 1992 (London, The Economic Intelligence Unit).Ekonomisuto [Economist] Special Edition, August 31, 1992 (Tokyo, Mainichi Shinbunsha).Keidanten GeppO [The Federation of Economic Organization Monthly Report] (Tokyo,Keizai Dantai Reng6-kai, February 1991 .Topics in International Business Transactions: Regulation of Large Corporations inJapan (Vancouver, U.B.C. Law Materials, Law 442 by Tatsuta, Misao andSmith, Malcom, Spring, 1983).230ROdO JihO [Labour Report], May, 1992 (Tokyo, The Ministry of Labour).ROdO Jih6 [Labour Report], August, 1992 (Tokyo, The Ministry of Labour).TOO Keizai, Nihon No Kigy6 GuriIpu, '93 [Eastern Economy, Japanese CorporateGroups, '93] (Tokyo, TOyelkeizai ShimpO-sha, January 31, 1992).TOy6 Keizai, Kigy6 Keiretsu SOran,'93 [Eastern Economy, Corporate Groups: GeneralRemarks, '93] (Tokyo, TOyOkeizai ShinpO-sha).Legal Counselling in Canada-Japan Business Transactions - II (Vancouver, C.L.E.,March, 1983).Japanese Business Law Guide Vol.1,2 (CCH International, 1988-).Japan Economic Almanac: The Nikkei Weekly, 1992 (Tokyo Nihon Keizai Shimbun,Inc.).Kabunushi SOkai Hakusho [The White Paper on the Shareholders' General Meetings](Tokyo, ShOji HOmu Kenkyukai, 1992).Keizai Hakusho [The White Paper in Economy] in the Ekonomisuto Special Edition,August 31, 1992 (Tokyo, Mainichi Shinbun-sha).Tokyo Stock Exchange report, "Kabushiki TOshisha no Kakudai ni Tsuite - ShOhe•Kaisei to eno Taiel" [Report concerning the expansion of the class of shareinvestors - Report made corresponding to the Amendments of the JapaneseCommercial Code etc] in Sh6ji HOrnu, (Tokyo, Tokyo ShOji HOmu KenkyOkai)No.1249, April 5, 1991.IV. JAPANESE LAW MATERIALS (English)The Commercial Code of Japan, EHS Law Bulletin Series (Eibun-Horei-Sha, Inc.,Tokyo, 1970 -current).The Civil Code of Japan, EHS Law Bulletin Series (Eibun-Horei-Sha, Inc., Tokyo,1970 -current).Law, Rules and regulations concerning the Reconstruction and Democratization ofJapanese Economy, edited by the Holding Company Liquidation Commission(Tokyo, Kaiguchi Publishing Company, 1949).231The Commercial Code of Japan (Tokyo, Maruya & Co., 1906) translated byLoenholm, L.H. The Commercial Code of Japan and The Law Concerning ItsOperation (Tokyo, Tokyo Kokubunsha, 1906).The Commercial Code of Japan VoLI,II (Tokyo, The Code Translation Committee;The League of Nations Association of Japan, 1931).VI PERIODICALSThe Japanese Annual of International Law (Tokyo, The International Law Associationof Japan).Japanese Business Law Letter (Tokyo, Japan Legal Publishers Inc.).The Japan Economic Almanac (Tokyo, Nihon Keizai Shinbun, Inc., 1989).Japanese Economic Studies (New York, ME.Sharpe, Inc., 1989).Law in Japan: An Annual (Tokyo, Japanese American Society for Legal Studies).

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