When you enter into a joint venture in Japan with a Japanese business partner, the two most frequently used business entities are a Kabushiki Kaisha and a Godo Kaisha.
What is a Godo Kaisha?
A Kabushiki Kaisha is a stock company in Japan and a Godo Kaisha is a company similar to a Limited Liability Company (LLC) in the United States.
Unlike a stock company, stakeholders of a Godo Kaisha are in charge of management, whereas, like a stock company, stakeholders only bear limited liability.
For this reason, a Godo Kaisha is often used for a closed business relationship and when the human assets take a large part of the business. It is used quite a lot because the setup process is much simpler and incurs fewer costs compared to incorporating a stock company in Japan.
Removing a Partner from Godo Kaisha Is Not Easy
However, it should be noted that ending the relationship with the business partner in a Godo Kaisha is not so easy. If there is a disagreement between the partners in managing the business, if a certain member commits wrongdoings, or if some key members are unreachable for any reason, you will have to go through a harder way to remove that business partner from the Godo Kaisha.
Requirements and Procedure to Remove a Partner Forcibly
Under Japanese Corporate Law, in order to forcibly exclude any member of a Godo Kaisha, ① any one of the following reasons should be met, ② a resolution of a majority of the members should be made, and ③ the company must file an action with the court to grant the court’s permission (Article 859 of the Companies Act).
(i) a failure to perform the obligation of contribution;
(ii) a breach of fiduciary duties under Japanese law;
(iii) engagement in misconduct in executing duties or involvement in the execution of duties when having no right to execute the duties;
(iv) engagement in misconduct in representing the Godo Kaisha or conducting an act by representing the Godo Kaisha when having no authority of representation; or
(v) a failure to fulfill an important obligation.
You cannot exclude other partners at will even if you are the majority stakeholder. You also have to go through a trial. Just an internal resolution among the majority of the members is not enough.
Japanese Court Puts More Restriction
Furthermore, the court proceeding for the exclusion of a partner is not just a formality. The court performs substantial judicial reviews.
It even applies some additional rules to limit the easiness of removal. Here is what the Japanese court held in an actual case.
“Since the petition under Article 859 is to forcibly exclude a partner from a Godo Kaisha, it is not enough that the act of the partner in question falls within any of the events described in the Article. The law requires more than that. It should be escalated to a level that the business operation and/or continuation of the business are no longer possible or significantly difficult due to the act of the member and breakdown of trust thereby, and there is no reasonable option for the company other than excluding the partner in question to remain its entity and activities”
This means that even if a partner commits any activities under Article 859 and it damaged the trust with other partners to some degree, unless it causes the company to cease its activities or cause a significant impediment to the continuation of the business, other partners cannot exclude the other partner by their resolution.
This Japanese court’s position implies more hardship for a partner whose main role and interests are providing financial contribution and getting the financial gains. That is because, for such a partner, removing the partner in charge of a business operation means a disruption of business activities. As the removal under Article 859 is permitted only when the removal is inevitable for the existence and continuation of the corporate business, the petition by the financial partner is likely to be dismissed by the Japanese court. Actually, there are many court cases where the petitions were denied for the same reason.
Summary
The Japanese law imposes considerable legal restrictions on the forcible exclusion of a partner from the Godo Kaisha. And, that is why, in practice, it is common to seek voluntary resignation through a private settlement with the relevant partners. If you are considering setting up a joint venture in Japan, you should be fully aware of this legal aspect of Godo Kaisha.
For further information on the Japanese God Kaisha and a joint venture in Japan, please reach out to us by clicking here. Our Japanese business lawyers in Tokyo and Osaka offices have been serving foreign clients in the field of a joint venture in Japan.
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