Doing Business In Japan

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Japanese Business Law

Japanese Business Law: Getting Good Advice

When setting up a business in Japan, a good understanding of Japanese business law will help to ensure a smooth start up and successful future for your business.  Japanese laws can differ considerably from what you may be used to in the UK or elsewhere but there are no significant legal impediments to starting up operations in Japan in most sectors. The Doing Business in Japan Guide's Strategic Partner Freshfields Bruckhaus Deringer has a Tokyo office which includes approximately 30 bilingual lawyers admitted to advise on Japanese and English law.  Further information about Freshfields Bruckhaus Deringer and how it can help you is set out in the "Partner Profile" section of this Guide.

 

What's in this Guide?

This Guide is a basic overview of Japanese business law relevant to:

  • Setting up a new business in Japan;

  • Managing a Japanese workforce; and

  • Dealing with Japanese customers, suppliers and other stakeholders.

Depending on the nature and size of your business, there will be a range of other Japanese laws which may be relevant to your business in Japan, such as Japanese intellectual property, product liability and environmental laws.  In particular, businesses in regulated sectors - such as finance - will need regulatory approvals to commence operations. Freshfields Bruckhaus Deringer can help you get further advice.  Freshfields Bruckhaus Deringer has published a range of English language briefings on Japanese law which are available here: www.freshfields.com/locations/japan/briefings

 

Setting Up a New Business

Entering the Japanese Market

UK companies considering entry into the Japanese market have a variety of options including:

  • Establishing a new Japanese representative office, branch office or Japanese company (or other entity);

  • Entering into a joint venture or strategic alliance with an existing Japanese business; or

  • Buying an existing Japanese business.

In general terms, the first option is typically the easiest and cheapest initial step for a company intending to develop a Japanese business.  The table below summarises the advantages and disadvantages of setting up a new Japanese representative office, branch office and Japanese company.  Typically, most UK businesses set up a Japanese joint-stock company (kabushiki kaisha or KK) to operate their Japanese business.  A KK is very similar to an English company and can offer an impression of "substance" in the Japanese market.  However, other corporate entities (such as a Japanese limited liability company (godo kaisha or GK)) can also be used to set up a business when that is appropriate, taking into account tax, running costs and other considerations.

Table: Comparison of Typical Business Forms in Japan

Type of Business Venture in Japan

Advantages

Disadvantages

Representative Office of UK Company
  • Relatively cheap and easy to establish: no registration required.
  • Allows UK business to conduct preliminary market surveys and collect information.
  • Cannot transact in Japan on a going concern basis.
  • Cannot open bank account, lease property etc, so contracts must be signed by UK company or an individual representative personally.
Branch Office of UK Company
  • Can engage in business.
  • Can lease real estate, can open bank accounts.
  • Registration of branch office required: must appoint individual representative (branch manager) who must be a Japanese resident (but not necessarily a Japanese national).
  • Unlimited liability: Branch office does not have seperate legal status, so UK company is ultimately responsible for branch office's liabilities on unlimited basis.
Japanese 'KK' Company Owned by UK Parent Company
  • Seperate legal entity.
  • Limited Liability: UK parent company only has liability as a shareholder.
  • Registration/Incorporation of company required.
  • Must have at least one director who must be a Japanese resident (but not necessarily a Japanese national).

 

Set Up and Features of New Japanese Company

Setting up a new Japanese company such as a 'KK' or 'GK' normally takes a few weeks.  The basic features of a KK, by way of example, are:

  • A KK must have at least one shareholder.  Typically, a company setting up a business in Japan will be the sole shareholder of the KK;

  • The liability of the KK shareholder(s) is/are limited to the amount of their capital contribution.  The capital contribution made by the KK's shareholder(s) can be in cash or in kind (although an in kind contribution is uncommon and may require a valuation);

  • There is no minimum capital requirement;

  • A KK must have at least one director who must be a Japanese resident (but not necessarily a Japanese national).  If the KK has a board of directors, the KK must appoint at least three directors and at least one statutory auditor; and

  • If the KK has a capitalisation above JPY 500 million or total debt of JPY 20 billion, it will be a "large company" and additional requirements will apply to it.

 

Requirement to Engage Local Japanese Staff

Every KK must have at least one director who is a Japanese resident (but not necessarily a Japanese national).  Similarly, if you want to set up a branch office in Japan, you must appoint a branch office manager who must be a Japanese resident.  Practically, most UK companies who set up a KK engage both local (Japanese) and expatriate (UK and other foreign) staff in board and senior management positions.

 

Joint Ventures and M&A in Japan

Established UK businesses may identify opportunities to enter the Japanese market through joint ventures or strategic alliances with, or acquisitions of, existing Japanese businesses.  Each joint venture and M&A transaction is bespoke and it generally takes quite a lot of time and work to agree appropriate terms.  Any UK company considering joint ventures or M&A in Japan should seek external advice at an early stage.

Some key legal considerations relevant to joint ventures and M&A in Japan are:

  • Proper due diligence is critical: you should engage experienced external advisers who are able to advise on the legal risks associated with undertaking a proposed transaction in Japan.  Navigating Japanese law and legal documents, as well as Japanese language, without the help of experienced advisers is risky;

  • Regulatory hurdles: acquisitions of interests by UK companies in Japanese businesses (even if the Japanese business is quite small) may trigger filing and/or regulatory approval obligations under Japanese antitrust, foreign exchange and/or other applicable Japanese laws;

  • Hostile takeovers: hostile takeovers of listed Japanese companies are almost impossible to execute.  In contrast, friendly acquisitions and joint ventures are common in practice;

  • Negotiation and execution: negotiating and executing a deal in Japan often takes longer than in the UK, but, once a Japanese counterpart agrees to do a deal, it will generally stick to its word.  Legal documents can be negotiated in English, although it is not uncommon for bilingual or Japanese-language only documents to be used; and

  • Integration: integrating a newly acquired Japanese business or newly founded Japanese joint venture into a UK company's global business can be complicated by unique legal and cultural considerations, such as corporate governance and internal control structures.  You should assume integration will be a long and occasionally painful process.

Managing Your Workforce in Japan

Workforce Flexibility is Achievable

Maintaining a flexible workforce is a key concern faced by companies operating in Japan.   Traditionally, a Japanese employee was supposed to enter a company as a new graduate and stay with that company until retirement.  This situation has changed over the past 20 years, and Japanese employment law and practice has evolved.  However, Japanese employment law retains some peculiar features.

'Work Rules' in the Workplace

Most of the terms and conditions of employment are usually stipulated in an employer's 'work rules' rather than individual employment contracts.  'Work rules' cover matters such as working hours, holidays, wages and benefits, termination of employment and disciplinary actions.  All employers who continuously employ 10 or more employees at a workplace must:

  • Establish work rules;

  • Obtain a written opinion on the work rules from a labour union or employee representative representing the majority of the employees in the workplace;

  • File the work rules with the relevant Japanese authority with the written opinion from the labour union or employee representative; and

  • Inform the employees of the contents of the work rules.

Probationary Periods for New Hires

Japanese law provides some flexibility for ensuring the suitability of new employees.  It is customary in Japan to designate a fixed period of time (normally three to six months) as a probationary period for a new employee. During a probationary period, an employee can be dismissed fairly easily if they do not perform satisfactorily despite appropriate trainings and warnings.

Limits on Maximum Working Hours

The general rule under Japanese law is that non-managerial employees cannot be required to work for more than eight hours per day and 40 hours per week.  While this general rule must be observed by all employers, it is subject to various exceptions which allow for flexible scheduling.  In particular, Japanese law permits overtime work if an 'Article 36 Agreement' is entered into.  This is an agreement between an employer and labour union or employee representative representing the majority of employees in the workplace which is filed with the relevant Japanese regulator.

Using Temporary Workers and Contractors

Foreign employers starting a business in Japan may consider using secondees or contract workers to provide short or mid-term staffing solutions.  Companies considering using such arrangements should be aware that the relevant Japanese rules can be very complex.  Workers despatched from agencies to work for a company on temporary contracts can be used for most types of work, but not all (for example legal work, construction work and security are all subject to restrictions).  Additionally, as you would expect, Japanese law limits the length of time during which a temporary contractor can be used.

Workforce Restructuring

Implementing workforce restructuring in Japan needs to be carefully planned and, unlike some countries, may not be possible by terminating employees without cause.  In particular, there are greater restrictions in Japan on a company's ability to dismiss employees without cause than in the UK.  In general, under Japanese law, "reasonable grounds" are necessary to dismiss an employee.  In the context of larger scale redundancies based on business needs, four conditions are assessed in determining whether there are "reasonable grounds" to dismiss employees:

  • Whether there is a genuine need to carry out the redundancies;

  • Whether the company has made efforts to avoid the redundancies;

  • Whether reasonable selection criteria were used in determining whose employment should be made redundant; and

  • Whether the company has consulted in good faith with the employees.

Because of the above criteria, it may be difficult to dismiss employees in Japan as part of a workforce restructure. However, the above criteria do not generally apply to voluntary redundancy programs.  For this reason, businesses operating in Japan have used voluntary redundancy programs successfully to restructure their Japanese workforce and achieve cost synergies.

Further Information about Japanese Employment Law

The above information is only a brief overview of key employment law issues faced by UK companies doing business in Japan.  For further information, please refer to the Freshfields Bruckhaus Deringer briefing "Introduction to employment law in Japan":  www.freshfields.com/publications/pdfs/2009/feb09/25116.pdf

 

Dealing with Japanese Customers, Suppliers and Other Stakeholders

UK companies doing business in Japan typically enter into agreements with a range of stakeholders, including customers, suppliers, distributors, agents and employees.  In order to execute a contract with a Japanese stakeholder, you need to understand how they approach decision-making and contract negotiation, as well as their expectations of standard terms and conditions. Here are some general tips on contracting with Japanese stakeholders.

Understand the Japanese Stakeholder's Decision-Making Process

Japanese companies tend to be hierarchical, but top-down decision making is relatively rare, even at larger companies. Corporate decisions tend to be made on a collective, bottom-up basis, reflecting the importance of collective responsibility.  Ideas are often first studied by a broad group of middle management before moving up the corporate chain. Even where an idea originates with a senior executive, he or she will often pass it to a mid-level manager to begin the consensus-building process.  When a new project is proposed, consensus is sought from all departments affected by the decision (not just those who will implement it).

Reach Consensus with the Team

The need for consensus means that an individual team with which you are working is unlikely to have the power (or to be willing) to make a decision on its own.  Contract negotiations can be more of an introductory and information-gathering exercise rather than a forum for decision making.  Even if you are negotiating with a senior executive with apparent authority to make decisions, it will be important that all team members support a decision.

The Need for Nemawashi

Consensus-building for a negotiation begins with an informal process of discussions within an organisation, called "nemawashi", before seeking formal approval.  These discussions involve all levels of an organisation that will be involved in the formal authorisation process, and allow a proposal to be properly explored, minimising objections during the formal process that follows.

Passing the Ringi Process

Ringi is the name of the formal process traditionally used by larger Japanese companies for making decisions about entry into agreements or implementing new ideas.  A document (the ringi-sho) is put together by the team proposing the transaction and circulated first to all teams at the same hierarchical level in the organisation that will be affected by the decision.  Each person involved in the ringi process shows their agreement (or disagreement) by adding their seal (akin to a signature) on the document, and can add conditions to their agreement.  If a general agreement is reached at that level of the organisation, the document is then circulated at the next hierarchical level until all necessary parties have been consulted before a final decision is taken.  If changes are made to the terms being considered, the ringi-sho may need to be re-circulated.

Clearly, this method of decision making requires long lead times.  However, the fact that all affected parties should have been consulted during the approval process means that a Japanese stakeholder's decision, once made, will be followed and can help speed up post-signing implementation of a contract or transaction.

Written Agreements Are Standard Practice

You may have heard that most Japanese companies do not use written agreements for their business relationships.  This is largely a myth.  Written agreements are almost always used in Japan.  They can be quite lengthy, although may not exist before the parties actually begin business.  Once a written agreement exists, the Japanese parties will expect it to be followed.

Navigating Japanese Language and Japanese Law

Although large and sophisticated Japanese businesses are willing to negotiate and sign written agreements in English, there are a range of agreements which in Japan are typically written in Japanese, such as Japanese customer contracts, employment contracts and contracts with suppliers who are SMEs.  As such, a UK company considering business in Japan should seek help from experienced bilingual advisers.  In particular, it is important to understand how contracts are interpreted in Japanese, particularly if a dispute arises which is resolved in a Japanese court.  Additionally, engaging bilingual advisers to control production of documents and translations of them can assist in ensuring the preparation of clear and accurate agreements.

Limits on Terminating Long Term Agreements

In doing business in Japan, UK companies will often enter into core agreements - such as material supply, distribution or licensing agreements - with the expectation that they will successfully continue in the long term.  Such agreements may be difficult to terminate under Japanese law even if the agreement expressly provides for a short, fixed term.  Generally, Japanese law requires a 'justifiable ground' for the termination or non-renewal of an agreement which presupposes a longer term continuous relationship, regardless of the express terms of the agreement.  In practice, this means that some agreements may not be terminated or ended without reasonable prior notice given to the Japanese counterparty and, in some cases, compensation.

Unique Japanese Laws Impacting Business Agreements

Japan has a range of sector and/or product specific rules which should be considered before entering into agreements with Japanese stakeholders.  For example:

  • A special Japanese law relating to dealings with certain 'small' subcontractors requires payment to such subcontractors within a fixed period; and

  • Japan has a range of consumer protection laws which apply to the marketing of products, including the labelling of products sold in Japan.

Disputes with Japanese Stakeholders

Before a UK company enters into an agreement with a Japanese supplier, customer or other stakeholder, it should consider how the agreement deals with the resolution of disputes, in the unlikely event a dispute occurs.  Some key points are:

  • As compared to UK courts, Japanese courts are less likely to interpret written agreements literally and tend to view a written agreement (even if entered into by two businesses on arm's length terms) as only one part of the wider commercial relationship.  It is therefore very important that the written terms of a contract with a Japanese stakeholder clearly and accurately reflect the parties' full commercial agreement.

  • An agreement with a Japanese counterparty may specify that disputes shall be resolved by domestic or international arbitration, rather than litigation in a Japanese court.  Where the parties do not wish to include such an arbitration provision in the agreement, it is important to specify the local Japanese court that will hear any dispute. It is common for parties to nominate the Tokyo District Court in the first instance because it is experienced in handling commercial disputes including disputes involving foreign companies.

For more information on Japanese Business Law, please contact Freshfields Bruckhaus Deringer

This material is for general information only and is not intended to provide legal advice.

Source - Freshfields Bruckhaus Deringer

 

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