Oppressed minority shareholders seemingly have an obvious solution for their woes: vote with their feet, sell their shares, and leave the company. But what if selling shares on the stock market is simply not an option—because there is no market for them? Although the availability and importance of shareholder exit is not unreasonably taken for granted by corporate governance scholars devoted to the study of public corporations, exit’s equally essential role in close corporations—privately-owned business entities for which a market for shares does not exist—is often overlooked.
Legal solutions enabling the shareholder to voluntarily exit a company with their capital such as the oppression or unfair prejudice remedies in the United States and Anglo-Commonwealth corporate law—defined as ‘withdrawal remedies’—are therefore vital in close corporations. This family of doctrinally distinct but functionally equivalent legal solutions is ubiquitous and well-established in the world’s leading corporate law jurisdictions—eg, the United States, the United Kingdom, and Germany—save one: Japan.
Until relatively recently, shareholders in Japan’s close corporations had no access to withdrawal under the law, as neither of Japan’s then-dominant close corporation forms—the Kabushiki Kaisha (KK) (‘Stock Corporation’) and the Yūgen Kaisha (YK) (‘Limited Liability Corporation’)—offered it. This omission attracted little attention in international corporate law literature and was unremedied by both judicial development and statutory reform despite the efforts of Japanese scholars influenced by foreign law models. By revealing how shareholders and other stakeholders in Japan responded to the absence of withdrawal, my forthcoming article in the Vanderbilt Journal of Transnational Law, ‘Shareholder Protection in Close Corporations and the Curious Case of Japan: The Enigmatic Past and Present of Withdrawal in a Leading Economy’, shows how Japan’s experience powerfully demonstrates the importance of withdrawal remedies in practice.
After decades without withdrawal, in 2005 things changed—but not quite as one might expect. It was not the country’s venerable close corporation forms that finally received long-overdue withdrawal rights; rather, a new close corporation form, the Gōdō Kaisha (GK), as introduced by the watershed Kaisha-hō (‘Companies Act’), came with withdrawal rights. A legislative invention inspired by the American limited liability company (LLC) and with no relationship to the YK, the GK was conceptualized as a third member of a new legal category, the Mochibun Kaisha (‘Membership Companies’), which is separate and distinct from both the KK and YK. The availability of withdrawal in the GK flowed from this quirk of legal classification, rather than as any belated response to earlier serious (but ultimately defeated) reform efforts arising from the problems associated with the lack of withdrawal in the KK and YK, or as any result of inspiration from the United States.
In analyzing shareholder withdrawal rights in the GK, my article makes the following contributions to the literature. First, it makes the case for shareholder withdrawal as a distinct and important form of shareholder protection in close corporations. Second, it is the first English-language publication to provide data demonstrating the GK’s gradual rise as a close corporation form. Third, it offers a practical and rigorous explanation of shareholder withdrawal rights in this increasingly important close corporation form.
Finally, the article situates the GK’s withdrawal rights within the broader universe of shareholder withdrawal regimes by comparing it to their counterparts in leading jurisdictions, namely the unfair prejudice remedy in the United Kingdom, and Austritt aus wichtigem Grund in Germany. I conclude that the GK presents corporate law jurists with a historic opportunity: a near-blank slate on which conflicts in a new close corporation entity can be solved without the baggage of bad precedent or outdated doctrine. Although Japanese jurists working on the GK have often looked to the United States as a source of inspiration and ideas, this article takes a different perspective by suggesting how the withdrawal remedies developed in the United Kingdom and Germany may offer different—and possibly greater—guidance from a comparative perspective.
Alan K Koh is Assistant Professor of Law at Nanyang Business School, Nanyang Technological University, Singapore.