How Far Can You Shorten a Shareholders' Meeting Schedule under the Companies Act?
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
Startup shareholders' meetings are often scheduled by working backward from dates that cannot be moved, such as the signing date of the investment agreement, the payment date and the date of the registration application. It is natural for requests to "wrap up the resolution as quickly as possible" to arise in fundraising, stock option issuances and M&A, and the Companies Act provides mechanisms for shortening the procedures.
On the other hand, the shareholders' meeting is the company's fundamental decision-making body. Even when shortening the schedule, the company cannot force things through while neglecting the convocation notice period, who holds the voting rights, prior consent requirements under investment agreements and so on. If these points are handled carelessly, the validity of the resolution may be questioned later, during due diligence (DD) in a subsequent financing or in an M&A, even if minutes were prepared as a formality. It is important to correctly understand the legal requirements of each mechanism and to keep evidence that can withstand future scrutiny.
Checking the Articles of Incorporation and Understanding the Corporate Governance Structure
When considering shortening a shareholders' meeting, the first document to pull out is the current articles of incorporation.
The matters to check are whether the company is a public company or a non-public company (a company with share transfer restrictions), its governance structure, such as whether it has a board of directors or company auditors, whether it has issued class shares, and what the articles of incorporation provide about when convocation notices must be sent. The procedures available are determined by the combination of these factors.
Most startups are non-public companies, but in companies that have raised several rounds and issued preferred shares, the articles of incorporation have become complex. It is also not uncommon for companies to have transitioned to having a board of directors at the time investors came on board. If you assume, based on your sense from the early days, that "it is enough to confirm with all shareholders by email," deficiencies arise, such as a class shareholders' meeting resolution actually being required, a prior approval procedure under the investment agreement being missed, or the notice period set in the articles of incorporation not being met. Shortening the meeting schedule is not simply a matter of preparing documents; it begins with carefully cross-checking the articles of incorporation, the Companies Act and the investment agreements.
Shortening the Convocation Notice Period and Omitting Convocation Procedures
Under the Companies Act, when a shareholders' meeting is held, a convocation notice must, as a rule, be sent a certain period in advance.
Article 299 of the Companies Act provides that, as a rule, the convocation notice must be sent at least two weeks in advance. For non-public companies this is in principle one week in advance, but even non-public companies need two weeks where voting in writing or electronic voting is adopted. This notice period can be shortened further by the articles of incorporation only for "non-public companies that do not have a board of directors."
On the other hand, under Article 300 of the Companies Act, a shareholders' meeting can be held without going through convocation procedures if all shareholders consent. Here too, however, omitting the convocation procedures is not permitted where voting in writing or electronic voting is adopted. One method used in practice is to obtain consent to omitting the convocation procedures from all shareholders and then hold the meeting on the same day or on an extremely short schedule.
In adopting this method, the main points to check are who the shareholders whose consent is required are, whether they hold voting rights, whether a class shareholders' meeting also needs to be held, and whether the fact that consent was obtained can be objectively proven. Where shareholders are venture capital firms or overseas funds, operational checks also greatly affect the schedule, such as whether an email reply from the person in charge is sufficient, whether consent or a signature from an authorized person is required, and how many business days the counterparty's internal approval takes.
Written Resolutions and Omitting Board Resolutions
There are also situations in which written resolutions can be used instead of actually gathering at a venue or holding the meeting online.
Article 319 of the Companies Act provides a mechanism under which, when a director or shareholder proposes a matter that is the purpose of the meeting and all shareholders who can exercise voting rights on that proposal express their consent in writing or by electromagnetic record, a resolution approving the proposal is deemed to have been adopted. A company with a limited number of shareholders that can reach its shareholders should consider whether it can use this procedure.
The point to note is that the consent of "all" shareholders who can exercise voting rights on the proposed matter is required. A majority or two-thirds of the voting rights in favor is not enough, and the resolution is not adopted if even one shareholder abstains or objects. In addition, for matters that require a resolution of a class shareholders' meeting, omitting the shareholders' meeting resolution alone is not sufficient. The necessary class shareholders' meeting procedure must also be carried out, and if that resolution is to be omitted, the consent in writing or by electromagnetic record of all class shareholders who can exercise voting rights on the proposed matter must be obtained.
In addition, for companies with a board of directors, confirm the matters to be decided by the board, such as the decision to convene the shareholders' meeting, and their timing. Include in the schedule any board procedures required after the shareholders' meeting, such as appointing a representative director after officers are elected. The board of directors also has a convocation notice period as a rule, but under Article 368 of the Companies Act, the convocation procedures can be omitted with the consent of all directors and, for companies with company auditors, all company auditors. However, company auditors of a company whose articles of incorporation limit the scope of their audit to accounting matters are excluded from those whose consent is required.
Further, using the omission of board resolutions (deemed resolutions) under Article 370 of the Companies Act presupposes that the articles of incorporation already contain a provision to that effect. The requirements are that all directors who can participate in the vote on a matter proposed by a director consent in writing or by electromagnetic record and, for companies with company auditors, that no company auditor objects. In this case too, a company auditor whose audit scope is limited to accounting by the articles of incorporation is not a company auditor with the authority to object.
Class Share Issues and Prior Approval under Investment Agreements
In companies that have issued preferred shares, whether a class shareholders' meeting is required, separately from the shareholders' meeting, must be judged carefully. Share issuances accompanying fundraising, share consolidations, amendments to the articles of incorporation, reorganizations and the like may prejudice class shareholders, and in some cases a class shareholders' meeting resolution is mandatory under the Companies Act.
What particularly needs to be addressed in practice are cases in which, even where a class shareholders' meeting is not required under the Companies Act, the matter is designated as requiring the investor's prior consent under the investment agreement. Even if the company is set up to adopt a same-day resolution with unanimous consent under the Companies Act, the overall schedule cannot be moved forward if the investor's investment committee or internal review takes several weeks. When setting the schedule, it is essential to line up the shortest schedule under the Companies Act and the number of days required for approval procedures under the investment agreements, and to work backward based on whichever takes longer. This only becomes clear by cross-checking both the investment agreement and the articles of incorporation, so it is necessary to avoid making a judgment by looking at only one of them.
Working Backward from Registration and Preserving Evidence
Even after a shareholders' meeting resolution is adopted, there are many transactions that are not complete at that point. Where there are changes to registered matters, such as changes in officers, an increase in the amount of stated capital or the issuance of stock acquisition rights, the registration application must be filed with the Legal Affairs Bureau without delay. Not every amendment to the articles of incorporation requires registration, but for matters that do, the entire process must be planned to allow for collecting the necessary documents, affixing seals, paying the registration and license tax and the Legal Affairs Bureau's review period. In fundraising, where meeting deadlines is a given, the resolution date, contract signing date and registration application date are planned together by working backward.
The more the procedures were rushed and shortened, the more important it is to carefully preserve evidence that can withstand later scrutiny. Systematically organize and store the agendas for the shareholders' meeting and board meeting, the consent documents and consent emails required for the procedure adopted, the shareholder register (as of the record date, if one was set), memos on whether a class shareholders' meeting was required, registration attachments and so on. The standard to aim for is a state in which a third party with no direct knowledge of what happened at the time can objectively understand, just by reviewing the materials, that the resolution was legally valid.
At LegalAgent, we review shareholders' meetings, board meetings, registration and related matters together in line with fundraising and stock option issuance schedules. Beyond preparing minutes, we also design procedures that can be explained in later DD.
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