When Does a Director's Term Expire? Practice for Reappointment Registration, Resignation, and Removal

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

At the shareholders' meeting at which a director's term expires, even if the same person will continue, the company confirms the reappointment resolution and the acceptance of office and applies for reappointment registration. If business continues without checking the term clause in the articles of incorporation, the company may overlook the reappointment procedures and registration. First, confirm the appointment date and term of each director.

The Two-Year Rule and Extension in Non-Public Companies

Under the Companies Act, a director's term in principle lasts until the conclusion of the annual shareholders' meeting for the last business year ending within two years after appointment (Article 332, paragraph 1 of the Companies Act). The expiration date cannot be identified solely from the date two years after the appointment date or from the number of meetings held. The term may also be shortened by the articles of incorporation or a shareholders' meeting resolution. Where the business year is one year long, as at many small and medium-sized companies, the expiration date of the term is identified by checking the appointment date and the last day of the business year and calculating in accordance with the provision.

There is an exception to this rule for companies that are not public companies, that is, non-public companies whose articles of incorporation impose transfer restrictions on all of their shares (excluding companies with an audit and supervisory committee and companies with a nominating committee, etc.). By so providing in the articles of incorporation, such a company can extend the term until the conclusion of the annual shareholders' meeting for the last business year ending within ten years after appointment (paragraph 2 of the same Article). Also check whether your company's governance structure qualifies for this exception.

Whether to extend the term depends on the company's structure and policies. For a company whose board composition is largely fixed and which wants to reduce the effort involved in elections and registration, extending the term to ten years is a practical option. Even if the term is extended, an annual shareholders' meeting is still required every year. What can be reduced is the frequency of officer elections and reappointment registrations. On the other hand, for a company that anticipates future fundraising or wants to be able to review its board structure flexibly, maintaining the two-year rule secures regular opportunities to seek a vote of confidence at the shareholders' meeting. A company that is still using the template from its incorporation should first check the provisions of its articles of incorporation to see whether the term has been extended. If it has, registrations become less frequent, but the length of the period, "once every ten years," also makes it easy to forget when the term expires.

Overlooking the Expiration of a Term and Failure to Register Reappointment

When a director whose term has expired continues to serve as an officer, the director takes office through a lawful reappointment resolution passed to coincide with the expiration of the term and the director's acceptance of office. The change registration accompanying this reappointment is called a reappointment registration. Even when the same person continues, the company should confirm the appointment and acceptance of office anew to coincide with the expiration of the term. If the expiration of the term results in a shortfall in the number of directors required by law or the articles of incorporation, the rules on directors with rights and obligations, discussed below, apply. A problem that often arises in practice is that the company does not notice the expiration date and lets the time pass without a reappointment resolution at the shareholders' meeting.

When a change occurs in a registered matter, the company must, as a rule, apply for a change registration at the location of its head office within two weeks from the date the change took effect (Article 915, paragraph 1 of the Companies Act). For reappointment registration as well, the company must apply for registration within two weeks from the date the appointment took effect, which requires not only the shareholders' meeting resolution but also the director's acceptance of office. If the company fails to register within this period, it may be subject to a non-penal fine of up to JPY 1 million (Article 976, item 1 of the Companies Act).

This fine is not a criminal penalty but an administrative sanction; the Legal Affairs Bureau that becomes aware of the failure to register sends a notice to the court, and the court decides on the fine. Although the amount is not set uniformly in advance, if an expired term is left unaddressed for a long time, the company may have to deal with a fine in addition to correcting the registration. A registration application is made in accordance with past objective facts, and it is not permissible to prepare fictitious minutes after the fact and backdate them. Even a non-public company that has extended the term to ten years will fall into the same situation if it does not track the expiration dates internally. It is important to build the expiration dates of officers' terms into the annual schedule in advance and begin preparing for the shareholders' meeting several months before expiration.

Resignation of Directors and Directors with Rights and Obligations

Because the provisions on mandate apply to the relationship between a director and the company (Article 330 of the Companies Act), a director may manifest the intention to resign at any time (Article 651, paragraph 1 of the Civil Code). The resignation takes effect when the director's manifestation of intention reaches the company, or on a future date specified in the manifestation of intention, and neither the company's consent nor an approving resolution of the shareholders' meeting is required. However, if the director resigns at a time that is disadvantageous to the company, the resigning director may be required to compensate the company for damage arising from the resignation, unless there is an unavoidable reason (Article 651, paragraph 2 of the Civil Code).

An officer's departure due to resignation also constitutes a change in registered matters, so if the resignation does not create a vacancy, the company applies for registration of the departure within two weeks from the date the resignation took effect. If the deadline is missed, the company may be subject to a non-penal fine of up to JPY 1 million, as with reappointment registration (Article 976, item 1 of the Companies Act).

What deserves attention is the case where a resignation brings the number of directors below the minimum required by law or the articles of incorporation. In this case, the resigning director continues to have the rights and obligations of a director until a newly appointed successor director takes office (Article 346, paragraph 1 of the Companies Act). This is what is called a director with rights and obligations. Even if the person believes they have resigned, they may not be able to fully escape external responsibilities and obligations until the successor takes office. In a company where the law or the articles of incorporation require one or more directors, if only one of two directors resigns, there is no shortfall, so no director with rights and obligations arises and the ordinary registration of departure proceeds. Where a director with rights and obligations has arisen, the two-week deadline for registering that director's departure is calculated not from the date of resignation but from "the date the successor director took office." Because postponing the selection of a successor prolongs the burden on the director with rights and obligations, it is necessary to arrange promptly for the selection of the next director as soon as notice of resignation is received.

Removal by the Shareholders' Meeting and Whether There Is Just Cause

A director may be removed at any time by a resolution of the shareholders' meeting (Article 339, paragraph 1 of the Companies Act). The position differs from resignation, which is a voluntary departure, in that the company can remove the director at its own discretion even in the middle of the term.

On the other hand, the Companies Act provides that, unless there is just cause for the removal, the removed director may claim compensation from the company for damage arising from the removal (Article 339, paragraph 2 of the Companies Act). The design is that the shareholders' meeting can freely resolve to remove a director, but if there is no just cause, the company may be liable for monetary compensation. The damage subject to compensation includes an amount equivalent to the officer's remuneration that would have been received during the remaining term had the removal not occurred. However, the full amount for the remaining period is not necessarily awarded unconditionally; it is calculated in light of the specific circumstances. Compared with a company with a two-year term, a company that has extended the term to ten years as a non-public company tends to face larger compensation amounts if it removes a director mid-term, and this is a factor worth considering when designing the term in the articles of incorporation.

When considering removal, it is important to sort out before the resolution whether, based on objective facts, there can be said to be just cause for the removal. In addition, even if the removal results in a shortfall in the statutory or articles-based number of directors, the removed director does not become a director with rights and obligations. Unlike resignation or expiration of the term, the removed person does not continue to perform duties, so if a vacancy arises, the company should take measures such as appointing a successor director at the same time or petitioning the court to appoint a temporary director. When opinions within the company differ over whether there is just cause, consider the facts and the possibility of compensation with an attorney before proceeding with the shareholders' meeting resolution.

Day-to-Day Management and Support to Prevent Failures to Register

Whether the cause is expiration of the term, resignation or removal, it is important to use the effective date of the change as the starting point and to prepare by working backward from the registration deadline. The registration period for a change of officers is, as a rule, two weeks from the effective date, but there are exceptions, such as directors with rights and obligations, where the starting point is the date the successor takes office, so check the deadline for each cause of departure.

In internal management, checking the following points makes it easier to prevent gaps in the procedures.

• Confirming the term set in the articles of incorporation and listing the expiration date of each director's term
• Operating the practice of applying for registration within two weeks from the effective date as a rule, and tracking the date a successor takes office when a director with rights and obligations arises
• Giving consideration to directors with rights and obligations when a resignation causes a shortfall in the number of directors, and preparing in advance the procedures for appointing a successor when a removal causes a shortfall

The registration of a change of officers itself can be completed by engaging a judicial scrivener, but if the company does not know internally who will reach the end of their term and when, the procedures cannot even get started. Decide who is responsible for updating the list of terms, and manage the dates of shareholders' meetings and registration deadlines in the same register.

The management of officers' terms and the operation of reappointment registration are matters to be checked as part of corporate governance, together with the operation of shareholders' meetings and the preparation of internal rules. On the Corporate Governance page, we describe our support for reviewing the term provisions of articles of incorporation and the operating structure of the board of directors and shareholders' meetings. If you want to move from handling each change of officers on an ad hoc basis to a structure in which you can entrust legal work on an ongoing basis, including term management, please also see legal outsourcing. The relationship between election timing and preparation for the shareholders' meeting is covered in Your First Annual Shareholders' Meeting, and the resolution on remuneration after an election in How to Determine Officers' Remuneration. Related issues are also covered in A Founders' Agreement Can Only Be Made While Everyone Gets Along in connection with the design of the articles of incorporation in the founding stage, and in A Legal Checklist to Review Before Series A regarding the review of the legal structure before fundraising.