The “what the hell” theory of Japanese law

Unless you follow the business media in Japan, you probably haven’t heard about the upcoming overhaul in Japanese corporate law. It’s pretty intense, and it illustrates my personal favorite theory of Japanese legal policy: the What The Hell Theory. Basically, the theory states that:

  1. Japan sees a legal instutition overseas and decides to adopt it.
  2. Japan picks a random portion of the institution and says “What the hell! Let’s change it!”
  3. This change leaves Japanese society with an evil mutant form of a foreign institution that doesn’t really work properly.

Case in point: this new institution called the godo kaisha (GDK). Up until now, there have been two basic kinds of corporations in Japan: the kabushiki kaisha (KK) and yugen kaisha (YK). The YK structure is for small companies, and the KK structure is for large companies (or, more often, small companies that want to seem large). As of April, the YK will cease to exist and its place in the system will be filled by the GDK.

Now, the GDK is an almost exact copy of what is known in America as a limited liability company (LLC). An LLC is pretty cool because there aren’t many hard and fast rules on how to run it; you don’t need a board or officers or other corporate nonsense. If you wanted to, you could structure the governance of an LLC like the European Union codecision process, or run it like an autocrat, and nobody would really care as long as the rules were written down somewhere. The other nifty thing about an LLC is that only the owners pay taxes on the income: in a regular corporation, the corporation itself has to pay taxes on top of the income taxes paid on the shareholders’ dividends.

So Japan decided to adopt the LLC form and call it a GDK. Which is pretty cool, except for that “what the hell” change they made: GDKs don’t get a tax benefit. They pay corporate taxes just like KKs do. This means that the only benefit to being a GDK, essentially, is being able to make your own governance rules. But, at the same time, the new corporate law is loosening the governance rules on KKs, so this isn’t too much of a benefit. Which leaves one wondering: Why would you want to be a GDK and basically proclaim to the world that you’re a little pissant company?

Another “what the hell” provision I’ve noticed is that a corporation can be appointed as a manager in a GDK. That’s right, you can have one company managing another company it doesn’t own. But if you go this route, the managing company has to appoint a human manager to do the managing on its behalf, so basically, your company is delegating choice of management to another company. I cannot figure out, for the life of me, what the hell this provision is supposed to accomplish; all I can envision is some hacks in the Cabinet office saying “Let’s throw this in, just for shits and giggles!” Any ideas?

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9 thoughts on “The “what the hell” theory of Japanese law”

  1. I had heard about the “New Corporation Law” but was iffy on its specifics… are there any other major provisions that are worth caring about? Any good resources?

  2. There are lots of changes going down but they haven’t been summarized very well in English except in non-public documents (I got a lot of my info from a newsletter being circulated by an American law firm in Tokyo). There was a great feature in Shukan Diamond last summer covering all the changes, but that’s in Japanese, as are the countless books that have already been published about the changes.

    One good resource is JETRO’s website on setting up shop in Japan. I’ve also been listing some of the notable changes in the Wikipedia articles on KKs and GDKs.

  3. Hi,
    I just arrived on your blog through a google search. I’m looking for every scrape of information I can get about those new laws since I’m thinking about creating a business

    Any idea where one might find the information about the fees and exact process of creating a godo kaisha compared to KK?

    What is the law firm that provide you the newsletter you talk about? Is it possible to have access to it?

    Thanks

  4. Hi, I found your article quite intresting and I am currently runing my business in Yokohama, a web TV about fashion in Japan. I have a problem to know what taxe”s I have to pay and who? I attended a meeting yesterday which was supposed to clarify the topic, and this is even more blur. Thank you if you have any link of ressources.

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