Limitations on the Powers of Representative Directors
Let’s say that you (Ms. Thomas) and your business partner, Mr. Yamada, are shareholders and both of you are representative directors of the company.
The Companies Act stipulates that the representative director of a company has a wide range of authority. Of course, there are limitations on their authority under the law and the company’s internal rules.
Mr. Yamada might act beyond (and in violation of) his authority as a representative director.
For example, he might sell the company’s property (ex. building) without your permission.
Principle powers of a representative director
The authority of the representative directors is stipulated in Article 349, Section 4 of the Companies Act of Japan, which gives them comprehensive authority over the business of the company.
(Article 349, Paragraph 4 of the Companies Act)
The representative director has the authority to perform all judicial or extrajudicial acts related to the business of the company.
On the other hand, it is possible to limit the authority of representative directors.
However, even if you restrict Mr. Yamada’s authority as a representative director, you cannot claim that there is a restriction to a third party who does not know the circumstances of your company.
This is true even if Mr. Yamada is not a representative director, but just a director.
In other words, it is possible to limit or restrict the scope of the representative director’s authority both inwardly and outwardly
But externally, you can’t say to a third party who doesn’t know the situation that “Mr. Yamada’s actions were beyond his authority”.
On the other hand, the Companies Act stipulates that “a resolution of the board of directors or a general meeting of shareholders is required” in order for a representative director to take a specific action.
An example is a merger of a company. Unlike everyday transactions, these have an impact on the company as a whole, so according to the Companies Act, a resolution of the general meeting of shareholders is required to determine a merger.
Assumed that Mr. Yamada merges a company without a resolution of the shareholders meeting.
In this case, as long as there is no resolution of the shareholders meeting, the merger is invalid.
In order to claim that the merger is invalid, it is necessary to file an action for invalidation with the court.
This is because the invalidation of a corporate merger may affect many people.
In addition, a resolution of the board of directors is required for a representative director to dispose of the company’s important assets.
For example, assumed that Mr. Yamada disposed of (sold, etc.) the company’s important assets without a resolution of the board of directors.
In this case, if the other party (buyer of the asset) to the transaction was not aware of the situation (he did not know that there was no resolution of the board of directors) and was not negligent, the other party (buyer) to the transaction will be protected (the effect will be attributed to the company).
So the buyer can purchase the important asset from the company.
Assumed that Mr. Yamada sold the company’s building to Mr. Akiyama without a resolution of the board of directors.
If Akiyama does not know that there is no resolution of the board of directors and he is not negligent in not knowing, Akiyama can acquire ownership of the building from the company.