Running Board of Directors Meetings in Practice: Convocation, Resolutions, Minutes and Written Resolutions

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

A company that has established a board of directors in connection with a fundraising and has gained one outside director nominated by an investor is pressed to review its previous management style. It must move from a stage in which decisions were made only through verbal exchanges among the founders to operations that are mindful of the procedures under the Companies Act, such as when to send convocation notices, the requirements for passing resolutions, and signing or sealing the minutes.

The board of directors is an organ with more operational flexibility than the shareholders' meeting, but if the statutory rules are not correctly understood, there is a risk of disputes later arising over the validity of resolutions. Shortening the convocation procedures for the shareholders' meeting was covered in How Far Can the Shareholders' Meeting Schedule Be Shortened Under the Companies Act?, but the board of directors has its own resolution requirements and rules on written resolutions. This column deals with the operation of a typical company with a board of directors. In what follows, "company with company auditors" follows the definition in the Companies Act and does not include companies that have only company auditors whose audit scope is limited to accounting.

Convocation Procedures and Shortening the Notice Period

Article 368, Paragraph 1 of the Companies Act provides that, when convening a board of directors meeting, a convocation notice must, as a rule, be sent to each director (and, in a company with company auditors, also to each company auditor) at least one week before the date of the meeting. However, the articles of incorporation may provide for a period shorter than one week, so the company can set a period in its articles of incorporation that suits its operations. Checking what convocation period the company's articles of incorporation provide is the starting point for lawful operation. Because the law does not restrict how convocation notices are sent, notice by email or chat tools is also possible, but it is wise to check whether the articles of incorporation or board of directors regulations provide otherwise.

Where urgent deliberation is needed, a board of directors meeting can be held with the convocation procedure itself omitted by obtaining the consent of all directors (and, in a company with company auditors, also the company auditors) under Article 368, Paragraph 2 of the Companies Act. This omission of convocation procedures by unanimous consent is a system for skipping the step of sending a convocation notice; it is different from passing a resolution unanimously or from cancelling the holding of the meeting itself. Where outside directors are involved, it is desirable, also to prevent later disputes, not to rely on verbal or tacit understanding but to keep a record of the fact of consent by email or the like.

Resolution Requirements and Determining Directors with Special Interests

As for the resolution requirements of the board of directors, Article 369, Paragraph 1 of the Companies Act provides that a resolution is adopted by a majority of the directors present, where a majority of the directors entitled to participate in the vote are present. The articles of incorporation may make the quorum and resolution requirements stricter (by setting a higher ratio), but they may not lower them below the statutory requirements.

Furthermore, what cannot be overlooked in practice is the rule on directors with special interests under Article 369, Paragraph 2 of the Companies Act. A director who has a special interest in a matter to be resolved not only cannot exercise a vote but is also, as a matter of law, excluded from "the number of directors entitled to participate in the vote," which is the basis for calculating the quorum. When a transaction involving the investor that nominated an outside director (such as entering into an additional investment agreement or a transaction with an affiliated company) is submitted to the board, do not exclude the director formally; instead, judge whether there is a special interest based on the specific content of the transaction and the capital relationship. Also, where matters requiring the investor's prior consent are set out in a shareholders' agreement, that is a contractual obligation among shareholders and does not automatically replace a board of directors resolution. The relationship between this contractual obligation and resolutions under the Companies Act is discussed in detail in Review Points for Shareholders' Agreements: Matters Requiring Prior Consent, Information Rights and Obligations of Management Shareholders.

Preparing Minutes and the Practice of Signing or Affixing Name and Seal

For the proceedings of the board of directors, minutes stating the matters prescribed by Ministry of Justice ordinance must be prepared under Article 369, Paragraph 3 of the Companies Act and Article 101 of the Ordinance for Enforcement of the Companies Act. Where the minutes are prepared in writing, the directors and company auditors present must "sign or affix their name and seal." This applies only to officers who actually attended; there is no need to ask absent directors to sign, but directors who participated remotely are still counted as present and are not excluded from signing or affixing their name and seal. Even when a meeting is held remotely using a web conferencing system or the like that allows two-way communication, it is possible to continue preparing written minutes.

When the minutes are prepared as an electronic record, the electronic signature prescribed in Article 225 of the Ordinance for Enforcement of the Companies Act must be applied. Simply typing in a name or pasting an image of a seal impression is not sufficient; an electronic signature equipped with measures that indicate the creator and make it possible to confirm whether the record has been altered must be used. In addition, under Article 369, Paragraph 5 of the Companies Act, a director who participated in a resolution and did not record an objection in the minutes is presumed to have approved the resolution. This presumption applies to directors who participated in the resolution, so it is important for outside directors and others who opposed a resolution to have their opposition clearly recorded in the minutes, also to accurately record how they voted at the time.

Requirements for Written Resolutions and the Obligation to Report Once Every Three Months

When it is difficult for all officers to gather physically or online, a written resolution (deemed resolution) under Article 370 of the Companies Act is used. When all directors entitled to participate in the vote express their consent in writing or by electronic record to a matter proposed by a director, and, in a company with company auditors, no company auditor objects, a board of directors resolution is deemed to have been adopted. The most important prerequisite for using this system is that the articles of incorporation contain a provision in advance that permits written resolutions. Unlike written resolutions of the shareholders' meeting (Article 319 of the Companies Act), written resolutions of the board of directors cannot be used without a provision in the articles of incorporation, and even if consent forms are collected from everyone, they will not be recognized as having legal effect as a resolution. Even when a written resolution is adopted, minutes of the deemed resolution must be prepared and kept under Article 101, Paragraph 4 of the Ordinance for Enforcement of the Companies Act.

Article 372, Paragraph 1 of the Companies Act permits omitting a report where directors or others have notified all directors (and, in a company with company auditors, also the company auditors) of the matters to be reported. However, periodic reports on the status of the execution of duties are excluded. Article 363, Paragraph 2 of the Companies Act requires the representative director and executive directors to "report the status of the execution of their duties to the board of directors at least once every three months," and this reporting obligation is expressly excluded from omission of reports by Article 372, Paragraph 2. In other words, no matter how many written resolutions are used, a board of directors meeting for reporting on the status of the execution of duties must actually be held at least once every three months. Do not judge by the number of meetings held in the year alone; schedule meetings so that the interval between reports does not exceed three months.

Annual Board Operations and Support for Establishing the Framework

To make a board of directors with outside directors function properly, it is effective to avoid ad hoc meetings and draw up an annual operating plan in advance. The starting point in practice is to fix in the annual calendar the meeting dates for the "report on the execution of duties once every three months," which cannot be replaced by written resolutions. With these regular meetings as the backbone, for agenda items that arise unexpectedly, proceed through each step without omission, including complying with the convocation notice period, checking in advance for directors with special interests, and having attendees sign or seal the minutes.

When new officers or investors join, confirm who is responsible for each step from convocation to keeping the minutes and what the procedures are. Overall redesign of governance, such as designing convocation procedures and quorums, amending the articles of incorporation for written resolutions, and raising the standard of what is recorded in minutes, falls within our Corporate Governance support. The statutory items to be stated in minutes and points to check when attaching them to registration applications are discussed in detail in How to Prepare Minutes of Shareholders' Meetings and Board of Directors Meetings. We also provide ongoing support for individual consultations and minutes reviews in day-to-day board operations through our Legal Outsourcing framework.