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Tuesday, May 2, 2006
New Corporate Law sets stage for LLCs, M&As
The new Corporate Law took effect Monday, setting a legal basis for business activities. The law eases restrictions on company management, aiming to give them a freer hand in decision-making and encouraging entrepreneurialism.
Following are questions and answers regarding the new law:
Why was a new law needed?
There were separate laws governing corporate activities before, including the second section of the Commercial Law, limited company law and a law on corporate audits stipulating exemptions to the Commercial Law.
The government decided to rewrite them so they are easier to understand. The previous legislation, first drafted in 1899, was written in katakana in the form of literary Japanese. The new law is in hiragana in colloquial language.
Has the Commercial Law ever been revised?
It has been revised almost every year in the past decade to meet the times. Because it has been revised so many times, it became a patchwork with inconsistencies among relevant legislation. That's why the government decided to compile related laws into one comprehensive law.
Were there changes to the contents of the law?
Many. The purpose of the new law is to allow company executives greater flexibility in management.
For instance, the minimum number of directors a stock company must have was lowered from three to one. The new law also allows boards of directors to approve key policies in writing or via the Internet.
Is this good news for management?
Yes, but there are also obligations that managers must fulfill. Large firms with capital of at least 500 million yen, or debt of 20 billion yen, have to draft policies to ensure their directors are fulfilling their duties properly under the law or company regulations. This is one effort to enhance corporate governance.
Does it make it easy for people to start a business?
Yes. Under the law, there is no minimum capital requirement to set up a business entity. Under the previous law, 10 million yen in capital was required to set up a joint stock company.
The new law provides for the limited liability company category, which has fewer restrictions than joint-stock firms in starting a business.
Will the new law trigger more M&As?
It should. Under the previous laws, once an M&A was done, the firm doing the buying could only give its stock to shareholders of the purchased firm. Under the new law, companies can compensate those shareholders via other means as well, including giving them cash or corporate bonds.
But because this clause is also expected to pave the way for hostile takeovers, the government decided to delay its enforcement for a year so companies can better prepare against them.
How can companies better prepare against hostile takeover bids?
The new law allows companies to issue various kinds of stock that can limit privileges, including voting rights, dividends and asset inheritances.