Conflict-of-Interest Transactions between Japanese Group Companies

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When the same person represents both companies in an intercompany agreement, preparing the contract is only part of the legal work. Each company must separately determine whether the transaction is a conflict-of-interest transaction and complete the approval process required for its own corporate structure.

Transactions that require review

The Companies Act covers direct transactions between a director and the company and certain indirect transactions in which the director’s interests conflict with the company’s interests. Intercompany service agreements, loans, guarantees and asset transfers may require analysis where a director controls or represents the counterparty.

The relevant facts include the parties, ownership, directors serving both entities, economic terms and whether one company assumes an obligation for another. A “market price” label does not by itself remove the need to examine the statutory process.

Approval by each company

The approving body depends on whether the company has a board of directors. The transaction’s material facts should be disclosed before approval. In a board company, a director with a special interest may not participate in the vote, and the minutes should identify the treatment of that director.

For applicable transactions in a board company, the responsible director must also report material facts after the transaction. The contract, approval materials, minutes and post-transaction report should form one record.

Contract validity and director liability

Failure to obtain approval can create issues concerning director duties, liability and the effect of the transaction. The analysis may differ depending on whether the dispute is between the company and director or involves a third party. A company should not assume that later ratification automatically resolves every issue.

A group-wide process

Maintain a register of related-party transactions showing the entities, transaction type, interested directors, approving body, resolution date, contract and post-transaction report. Apply the process separately to each participating company. During financing, audit or M&A due diligence, this record helps demonstrate that the group did more than sign an intercompany contract; it also completed the required governance steps.