Local Directors no longer needed in Japan: Practical Issues with the Recent Rule Change

Over the past decade Henry Tan, Representative Director of Tricor K.K., has helped companies of all industries enter the Japanese market.  Each time a company planned to set up an entity in Japan, without fail, there was a discussion about why there was a requirement to appoint a local Japanese resident, member or officer (details are explained below) (“local representative”).  With the 16 March 2015 official statement by the Japanese Ministry of Justice (“MoJ”) abolishing this requirement, the details of the discussion have changed considerably.  In the following article he will explore the history of the issue, how it was before the recent statement by the MoJ and provide personal insights into the reality of the situation.
 
The Companies Act of Japan, which came into effect on 1 May 2006 and before it, the Commercial Code of Japan put into place in 1899 states that there are four types of companies that can be incorporated under Japanese Law.  Before the Companies Act, it was the Kabushiki Kaisha (“KK”, stock company), Yugen Kaisha (“YK”, limited company) and two other less frequently used types of companies (Gomei Kaisha, Goshi Kaisha).  Now, after the establishment of the Companies Act, the YK has been removed and the Godo Kaisha (“GK”, limited liability company) has been added.
 
Neither the Commercial Code nor the Companies Act states anywhere that the above respective four types of entities are required to appoint a local representative.  However, in 1984 and 1985 the MoJ provided a set of official statements which in summary required that at least one representative director named at the time of registration be a local resident.
 
The policy adopted by the 1984 and 1985 official statements was followed in company registration practice by all Legal Affairs Bureaus (“LAB”s) in the Japan, surviving the change from the Commercial Code to the Companies Act.
 
The MoJ and the LAB also, in company registration practice, applied the concept of this policy to the other three types of companies that were incorporated under Japanese Law.  In such types of companies each member (i.e., equity holder) (or a part of members if otherwise provided by the AoI) has representative power; and if a member with representative power is a corporate body it must appoint an individual as a representative officer (shokumu-shikkosha).  Under the policy at least one member with representative power who is an individual, or one representative officer appointed, was required to be a local resident.
 
However, since the Japanese business environment has become much more international and technology allows the people of the world to be in many places at one time it has led to an increased pressure and demand for Japanese companies to be able to incorporate under Japanese Law without a local representative.
 
In response, a Working Group for Fostering Inbound Investments organised by the Cabinet Office in December 2014 (the “Inbound Investment WG”) led government-internal discussion towards changing the policy and under “Abenomics” the MoJ accepted abolition of the requirement based on two factors:
 
1. Adoption of a new requirement that all directors (not just representative directors) register their addresses for the benefit of creditors.
2. Confirmation by the Japanese Supreme Court that directors of a Japanese company residing abroad would be subject to jurisdiction in Japanese courts.
 
From the discussion held by the Inbound Investment WG, the officers of the MoJ announced on 16 March 2015 that the company registration practice announced in 1984 and 1985 would be rescinded, and the LAB would accept applications for the establishment of KKs with no local representatives.  This new announcement is also applied for local representatives of the other three types of companies incorporated under Japanese law.
 
The abolition of the local representative requirement does not apply to Japanese branches of non- Japanese entities.  The Companies Act clearly states in Article 817 that a branch of a foreign company needs to have at least one representative who lives in Japan.  Since this is an explicit statutory requirement it cannot be overridden by administrative action by the MoJ.  The Inbound Investment WG has announced that it will consider further deregulation for branches of foreign companies in Japan.
 
After the New Official Statement made by the Ministry of Justice: Now that the policy has changed, practically speaking, it has become relatively easier to set up a subsidiary in Japan.  Without the requirement of a local representative, simply collecting the information for preparing the necessary documents is enough for submission to the LAB (evidence of capital and a registered address in Japan are still required to be provided during registration).  Even with this perceived simplification of the establishment process, there are some issues that may be of interest to foreign based executives of multi-national companies.
 
How to show Evidence of Capital: When you set up a KK [1] evidence of the initial capital has to be shown in a Japanese bank account before the LAB will process the registration of establishment of the company.  Before the official statements were changed by the MoJ it was normal practice that the evidence of capital would be simply a copy of the bank book of the local representative showing the applicable capital amount.  Now that the guidelines have changed it is not clear exactly how evidence of capital will be established.  There are some options that can be entertained:
 
1. Still appoint a local representative during the establishment phase to use his or her personal bank account.
2. Appoint a promoter locally to set up the company who will initially own the shares of the KK.  Once established the promoter would then transfer the shares to the appropriate shareholder immediately.
3. Set up an Escrow bank account (別段預金“betsudan yokin” in Japanese) for deposit of initial capital for evidence to show the LAB.  Setting up an Escrow account may take considerable time depending on the bank.
 
Setting up a Bank Account: Most banks in Japan require a local representative to set up a bank account.  As of the writing of this article, Mizuho Bank is the only bank I have identified that accepts bank account applications without having a local representative in Japan.
 
Dealing with Landlords: If you have ever dealt with a Japanese Landlord you know how different the requirements can be amongst owners.  My general assumption and experience is that foreign multinational friendly office space providers that offer “turnkey” solutions will be willing to rent space to companies without a local representative.  It is yet to be seen how more conservative landlords will act towards companies without a local representative.
 
Business Licenses: Even though the policy regarding company registration practice has been changed, many business licenses in Japan still require a local representative to be named in order to apply.
 
Directors of Japanese Entities residing Abroad subject to Japanese Jurisdiction: During legal matters directors of Japanese companies residing abroad may be subject to jurisdiction in Japanese courts and thus be asked to appear in court.
 
Corporate Seals: Even if there isn’t a local director, every company must have at least one Corporate Seal (basically a portable power of attorney of the company which can bind the company to any agreement).  Given that it is most practical to keep the seal in Japan for execution of Japanese documents, transactions, etc, it isn’t clear where the seal will be held.  The seal is linked to the listed representative on the Corporate Registry (each representative can have their own seal, but only one seal is required).  Without someone local to wield that power responsibly, how will the seal be maintained safely for clients that set up with the representative residing abroad?

What would I do?
 
So what do you do when setting up an entity in Japan? Honestly, with the ripple-effects from the announcement still visible it is hard to say.  I am learning each day what the effects may be but it is still very exciting to see things changing in Japan; however small or large of a step it may be.  One thing is for sure though; if you do not want to run into delays during your set up phase, it may be best to either hire a representative director from the pool of talent in Japan or to appoint a nominee local representative from a reputable service provider.  Removing the local representative (hired internally or a nominee) later on once things are set up properly may be OK but it remains to be seen for all cases.
 
It should be noted that removing a local representative working at the company can become a burdensome task as this person may not be the most cooperative during a forced removal.  I will cover this issue in more detail in a later article coming out soon.  Further, if a company sets up without someone local to hold the Corporate Seal responsibly, a corporate governance risk exists since the seal is a portable power of attorney of the company.  If not held safely issues may arise.  At the end of the day I know that companies entering Japan do not want to take their first step backwards or in the wrong direction, so for now, I would still use a local representative during set up stages at the very least.
 
Key Points Summary:
 
1. There is a difference between companies incorporated under Japanese Law and those that are not.  Companies incorporated under Japanese law include the KK and GK among less commonly used company types.  A Branch Office is always incorporated under the laws of the country the branch extends from and not under Japanese law.
2. As of 16 March 2015 the KK and GK no longer require a local representative for establishment, Branch Offices do.
3. The Japanese Companies Act, established on 1 May 2006 has not changed – this is a common misconception.  Simply, the Ministry of Justice has announced a new official statement for Legal Affairs Bureaus to adhere to in order to accept an application for setting up a company incorporated under Japanese law.
4. Issues may arise from this official statement change.  The extent of the issues remains to be seen but as of writing this I have noticed that:
5. The way of showing evidence of capital for a KK has shifted toward other, arguably, less commonly used methods before the official statement change.
6. Opening a bank account at certain Japanese banks may still require a local representative.
7. Mizuho Bank, however, has been identified as a bank that accepts companies without a local representative.
8. Dealing with Landlords without a local representative may become more difficult.
9. Obtaining business licenses may be difficult or impossible without a local representative.
10.Representatives appointed abroad may be subject to jurisdiction in Japanese courts.
11.Where will the Corporate Seal be held if there is no local representative? The seal is a portable power of attorney which can bind the company to any agreement, so it should be held somewhere responsibly.  Holding it outside of Japan is impractical, so how can companies ensure its safety?
12.Using a local representative still is the most understood way for setting up smoothly in Japan.  It remains to be seen what sort of delays may occur without one.

Tricor K.K. (Tricor Japan), the Japan arm of Tricor Group, supplies comprehensive business and corporate services including entity establishment, accounting, payroll/benefits, HR Advisory, banking & administration, and tax and corporate secretarial services.  Due to the complex nature of Japan, we also provide a myriad of back office consulting services with a primary focus on Financial and Human Capital Management.  Our firm boasts a bilingual and bi-cultural approach dedicated solely to foreign managed multi-national enterprises which value a native English point of contact and an understanding of the business culture, both locally as well as internationally.  As a group we strive to be Asia’s one-stop shop for international expansion back office needs.  For more information please contact matthew.kyle@jp.tricorglobal.com.
 
The views and opinions expressed herein are solely the views and opinions of the author and are not in any way a guarantee or definitive conclusion on the subject.  Any actions taken by the reader based on the information presented in this document are solely the responsibility of the reader and not the responsibility of Tricor Group, Tricor K.K.  or any other affiliated companies.
 
¹Evidence of equity contribution is required for a KK and GK establishment.  [For KK, this is Article 47(2)(v) of the Rules of Commercial Registration.  For GK, this is Article 117 of the Rules.] For a Gomei Kaisha and Goshi Kaisha, actual evidence of capital is not needed.