3 key considerations to oust a director in your Japanese subsidiary

If you are not happy with the performance of your Japanese subsidiary or just acquired a Japanese company, you may come across an occasion to replace your directors in the company. As long as you have the majority voting shares in the company, you can do so anytime by the resolution of the shareholders unless otherwise provided in the articles of incorporation. However, once you step into that process, you may be faced with a series of different problems as discussed below. This is to help your planning so you are aware of these forthcoming issues.

Director may bring a wrongful termination claim

As mentioned above, you have the right to terminate directors in your Japanese company, but this only refers to your power given to the shareholders under corporate law. It is a separate question whether such directors are protected under employment law. In fact, in Japanese companies, some directors start their careers as employees and are then promoted to directors, in which case most of them maintain dual status as employee and director. Terminating a director’s position per se will not trigger employment law questions, but if you plan to oust a director with the dual position of employee, you would have to terminate his/her employment as well. Thus, at your planning stage, you should carefully consider if your course of action involves the termination of employment. Usually, this becomes an issue for a director, but not for the representative director (i.e., director with the authority to represent and bind a Japanese KK).

Director may demand remuneration for the entire tenure

In many companies, directors receive their appointments with two years’ term of their offices. Under Japan’s Companies Act, if they are dismissed in the middle of their term without cause, they are entitled for the remuneration, as compensation for their damages, that they would have received for the remainder of their term. What constitutes cause to justify the dismissal is a million dollar question to be found based on individual facts and circumstances. Usually, differences in business objectives or management styles are not sufficient. As such, if you plan to remove your director for those reasons, check the tenure of the affected director, and then book these extra costs in your budget. In practice, companies offer an exit package, taking into account the compensation for the rest of his/her term, in exchange for the voluntary resignation of the affected director.

Director may be off the hook from what you have not been aware of

As mentioned above, common practice is to negotiate a separation agreement where a company pays certain amounts of compensation in exchange for the voluntary resignation of the targeted director. The separation agreement usually includes a mutual release that both parties shall not bring any claims thereafter. However, in a situation where a parent company did not closely monitor the operation of its Japanese subsidiary, and a local country manager has enjoyed his/her kingdom or empire for a long time, issues may be revealed after he/she leaves the company, such as mismanaged expenses or colluded transactions with local partners. 

If you try to pursue your claim against his/her liability, it may be too late once you sign up for the mutual release. Due to the nature of a separation agreement, it is often difficult to have an exiting director accept a clause with an exemption for wrongdoing. Ideally, you should undertake background research on the behavior of your director before initiating a separation discussion. If this does not work, you could negotiate forebearance options for your payment to the exiting director, giving your company time to regroup after his/her departure. For example, the company could reserve 20–30% of the payment for 6–12 months, during which the director must cooperate with any investigation by the company.

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