JETRO Spotlight Interview: Al Zencak

Continuing its efforts to simplify and streamline the process of opening and managing business operations, the Japanese government recently revised its Commercial Code. Al Zencak, Senior Tax Manager of PricewaterhouseCoopers Japan spoke with JETRO in September about these revisions and how they might affect US companies considering doing business in Japan.

JETRO: Give us an overview of the changes to the Commercial Code.  What changes should US firms be aware of?

AZ: My understanding is that these changes create a lot more flexibility for corporate management, more flexibility with respect to setting up businesses, and a lot more flexibility with respect to reorganizations.  For example, the amount of share capital that is necessary to incorporate in Japan has been relaxed. Historically, setting up a Kabushiki Kaisha (KK) had a 10 million yen requirement, and the capital requirement of a Yugen Kaisha (YK) was 3 million yen.  These minimum requirements are eliminated now, so you can effectively set up a company with as little as 1 yen.  

By way of reorganization, the process has been simplified.  For example, the new Corporate Law provides for simplified mergers and short form reorganizations in which, depending on the situation, shareholder approvals may not be required. For other types of reorganizations, the consideration that may be used to complete the reorganization is relaxed, such that it may be possible to use cash as opposed to just stock or make an in-kind dividend of shares to the shareholder

Another area that is noteworthy, at least from a tax or corporate side, is dividends.  Typically dividends were paid on an annual basis, but a company was allowed to make interim dividend payments if certain requirements were met.  With the promulgation of the Corporate Law, a company can now make a dividend payment essentially anytime it wants, subject to certain requirements being satisfied.

The last noteworthy area relates to YKs.  YKs that exist at the time that the Corporate Law becomes effective around April or May 2006 will automatically be converted into a form of KK and will be subject to the corporate laws governing KKs. For U.S. investors, this is a big issue because on the U.S. side, the YK could be treated as a flow through entity for US tax purposes if an election was made. Because of this change, there is a risk that the flow through treatment of existing YKs for US tax purposes will terminate upon the conversion to a KK.

JETRO:  What are the major factors that supported the revision of the Commercial Code?

AZ: I understand that one impetus for the change was to modernize the overall corporate legislation in response to changing societal and economic circumstances.  Another factor was that the government wanted to stimulate foreign investment by making it simpler for investors to establish as well as reorganize their business operations in Japan.  I think that another impetus relates to the influx of the M&A carried out by foreign companies around 2004. The Japanese government and legislators were concerned about the amount of M&A activity, which came to a peak with Livedoor’s hostile takeover attempt earlier this year.  People were concerned about the potential increase in hostile takeovers, and as a result, the Corporate Law will enable companies to adopt poison pill and other types of defensive strategies against hostile takeover attempts.