KOJIMA LAW OFFICES
Labor and Employment Practice Group

Vol. 6 January 2015

Labor & Employment Law Newsletter
Representative Directors – Frequently Asked Questions
Anyone tasked with setting up aJapanese subsidiary of a foreigncompany has probably experienced
the frustration of trying to makesense of what exactly a “representtative director” is. Our clients frequently get confused when attempting to figure out the intricacies ofhiring and firing a representative
director, as well as everything in
between. To make it as painless as
possible to understand the key
points about representative directors in Japan, we have preparedanswers to some of the most commonly asked questions on this topic.
What exactly is a “representative
director”?
Before we get to that, we need toaddress the inconvenient reality thatthe term “representative director” (inEnglish) is in no way an official title
or a legal description. It is merely aliteral translation of the Japaneseterm daihyo-torishimariyaku (which
definitely is official, though admittedly a mouthful). How unofficial is the
English translation “representative
director”? Well, some companies
have opted to use such alternate
translations as “managing director,”“country manager” or even “CEO.”The precise translation is not the
point here. What’s important tounderstand is that “representative
director” or any other English title issimply a translation of the actual
Japanese term. These English terms
have no independent significanceunder Japanese law, and are usedsolely for the convenience of the
non-Japanese speaking world.
So there’s no advantage in giving adaihyo-torishimariyaku an English

job title other than “representative director”?
That’s right. It doesn’t matter what
English term a company chooses tocall its head person. At the end of
the day, it is the official title ofdaihyo-torishimariyaku that will determine how a company handles avariety of issues including hiring,terms of employment, remunerationand termination. With that said, forthe remainder of this article, we willrefer to the position of daihyotorishimariyaku as “rep director.”
Now, getting back to the question.
Perhaps the simplest explanation isthat every company incorporated inJapan with a board of directors islegally required to have at least one
rep director who, well, is able torepresent the company in every way
possible. This includes the ability tosign virtually any contract on behalfof the company, and make oral representations that will bind the company. A company without a board of
directors can still choose to have
rep director. If it does not do so, however, then each director may individually represent the company. The
company’s board supervises the rep
director, who has a fiduciary duty to
act in the best interests of the company (including avoiding any material
conflicts of interest). Although a company may have multiple rep directors,
in fact most small to medium-sizedcompanies have only one.
That sounds like a lot of power for
one person to have.

It is. In the hands of an unprincipled
rep director, this broad authority could

Message from the Labor and Employment
Practice GroupKojima Law Offices have provided legal services
in the area of labor and employment law since its
founding in 1984. Our Labor and Employment
Practice Group represents clients in labor
disputes and assists them in structuring andimplementing HR policies. We work with bothforeign headquarters and local management totimely and appropriately resolve employment
issues that overseas companies face operating inJapan. As part of our continuing effort to reachout and share our expertise with others, the Laborand Employment Practice Group publishes thisnewsletter to provide a better understanding of
this complex area of law, thereby enabling thereader to make more appropriate employment
and labor decisions. We hope you find thenewsletter both interesting and informative andwelcome any feedback you wish to share with us.
Labor Practice GroupKojima Law Offices
URL:
http://www.kojimalaw.jp/en/index.html
Contact: (E-mail) webmaster@kojimalaw.jp(Telephone) 81-3-3222-1401

be misused, potentially opening the company up to massive liability. Which is why
a company needs to be extremely carefulin choosing its rep director. This is especially true for a foreign company looking
for a rep director to lead its Japanesesubsidiary. Unless the company adopts a
policy of having everything translated fromLabor & Employment Law Newsletter© Kojima Law Offices 2015

Labor & Employment Law Newsletterthe original Japanese (a prohibitively expensive practice), muchof what happens at the Japanese subsidiary will be inaccessible
to the non-Japanese speaker. Because the rep director issometimes the only person in the company capable ofcommunicating effectively with the foreign parent, he or she caneffectively control what information the foreign parent receives.
This makes it easier for a rep director to conceal mistakes orunfavorable developments concerning the company. In theworst case, it would not be that difficult for an unscrupulous rep
director to hide embezzlement or other serious wrongdoing.
Can the rep director be non-Japanese?
Yes, but at least one rep director must reside in Japan. If thecompany does not have a board of directors and does nothave a rep director, then one of the directors must be a
Japanese resident. This could be a challenge for foreigncompanies wishing to enter the Japanese market but that
do not currently have a presence in Japan.
What if a company trying to set up a subsidiary in Japan
doesn’t have anyone that can serve as a resident rep
director?
This is one of the challenges in establishing a branch or
subsidiary in Japan. In fact, you’ll need a rep director just toclear one of the initial hurdles – registering the company withthe legal affairs bureau. You need to list a rep director in theregistration application, even if the foreign parent does not
yet have any real presence in Japan. This requirement can
result in an almost Catch-22 type situation where to set up acompany you need a rep director, but it is difficult to retain asuitable rep director until your company is set up. In
response, companies have sprung up to assist foreign
entities in setting up a Japanese subsidiary. These
companies can provide temporary rep directors to satisfy
the registration requirements. Once the subsidiary isproperly set up, the foreign parent can then replace thetemporary rep director with the “real” one.
What’s the difference between a company’s “president”
and its rep director?
This is a bit confusing. Even a lot of Japanese aren’t quite sure.
What can muddle the issue even more is the fact that thesame individual usually serves both as “president” (shacho inJapanese) and rep director. As noted above, the Japaneseword for rep director is a legal term. The position carries with itcertain rights and duties under Japanese law. On the contrary,
the title of “president” is something that companies often
confer on an individual on top of his or her official rep director
title under the company’s articles of incorporation. Strictly
speaking, however, unless this “president” is also officiallyregistered as the company’s rep director, he or she legally has
no right to make decisions for or act on behalf of the company.
Regardless, companies should be extremely careful not toallow non-rep directors to call themselves “president.”2Vol. 6

January 2015

Why? Because people will assume that the “president” isalso the company’s rep director even if that’s not the case?
Yes. Since most presidents are also rep directors and rep
directors have the legal right to bind the company, mostpeople understandably (though incorrectly) assume that allpresidents have that authority, even ones who aren’t rep
directors. To protect these unwitting individuals, Japanese
law effectively provides that a company should give the titleof “president” only to one with actual authority to represent
the company. It does this by making it clear that even a“president” who’s not registered as the rep director canbind the company in order to protect third parties who
reasonably believe this person has such authority.
So the rep director is basically the highest-ranking
employee in the company.
Okay, here’s where things start to get a bit tricky. Saying inJapanese that a rep director is “employed” or an “employee”
can be costly when the company wishes to terminate therep director prior to the end of his or her term.
Why? What’s so bad about treating a rep director an“employee”?
In Japan, certain workers are classified as “employees” who(at least in the past) are supposed to be virtually layoff-proof.
Among these classes, by far the most relevant to a
discussion of rep directors is what is popularly referred to as
seishain employees. This is because most rep directors
promoted from within the company were seishain prior totheir promotion (the same is usually true for rep directors
poached from other companies). Seishain, which is not alegal term, is usually translated as “full-time employee,”“regular employee,” or “permanent employee,” even thoughthese English terms in no way come close to capturing thefull import of what a seishain really is. It is not a job title or aposition. Instead, seishain is an employment classification,
and a coveted one at that. If you fall into this category, you
are usually a seishain employee from your first day on the
job as a brand-new recruit, and remain a seishain employee
all the way up until the day you retire. Japan watchers areprobably familiar with the seishain concept – if not the term
itself – because of the “lifetime employment” system thatwas prevalent in better economic times. For purposes of this
discussion, it is enough to know that seishain employees
enjoy an extremely high level of job security. (For details of
how difficult it can be to dismiss employees in Japan, please
see the discussion of “ordinary dismissals” in Volume 3 ofthis newsletter, which is available on our website at
http://www.kojimalaw.jp/en/newsletters/index.html.)
So treating rep directors as “employees” risks placing
them into the seishain category, therefore rendering
them dismissal-proof?
In a nutshell, yes. In Japan, it is extremely difficult toLabor & Employment Law Newsletter© Kojima Law Offices 2015

Labor & Employment Law Newsletter

terminate what the law considers an “employee,” includingof course seishain. In fact, it is sometimes impossible to doso if the employee is adamant about staying. In some cases,
a court will find that a company had abused its rights as an
employer by attempting to terminate the employee without
valid legal grounds. In the worst case, the court can issue anorder effectively forcing the company to keep the employee
on payroll for an indefinite period of time.
Can we avoid this problem by classifying a rep director as
an “employee,” as long as it’s a non-seishain employee?
No. But as discussed above, the only class of “employee”
that’s really meaningful to rep directors is seishain, which is
why we highlighted it. To be safe, you should scrupulously
avoid any mention of or reference to “employee” or“employment” in your correspondence, the directorship agreement, and any other documents related to the rep director.
Okay, but isn’t it true that under Japanese law, an individualautomatically loses his or her “employee” status upon
being appointed as rep director. If so, I don’t see a problem.
Yes, that’s true. In most companies, this effectively meansthat a rep director has virtually no chance of being
considered an employee (a “standard” director is anotherstory). But the same may not necessarily be true for foreigncompanies with Japanese subsidiaries. Many rep directors
were seishain employees prior to the start of theirdirectorships, and some rep directors were seishain
employees of a parent company prior to being seconded toserve as a director of a subsidiary. For rep directors of
foreign companies, it is often unclear which entity the rep
director had been an employee of - the foreign headquarters
or its Japanese subsidiary. When faced with termination,some rep directors claim that they were in fact hired by theforeign headquarters and seconded to the Japanesesubsidiary. This can create enough uncertainty to allow therep director to argue that his employment status with theforeign headquarters never terminated. Even if the company
can ultimately prevail in court, it’s usually best to avoid thetime, cost and uncertainty of litigation.
How can companies minimize the chance that the rep
director will claim to be an employee of the foreign
headquarters?
For starters, companies should enter into a service (not“employment”) agreement with a prospective rep director
and make it clear that any prior employment relationshipwith the company will terminate upon his or her appointment. The service agreement should also explicitly state thatthe rep director will not be an employee of the company (as“employee” is defined in Japan, as keenly discussed above).
Instead, the rep director should be the equivalent of aservice provider. Some companies try to include a provisionthat prohibits the rep director from claiming damages other3Vol. 6

January 2015

than those agreed to in advance. In addition, the rep
director should not simply be acting under the supervisionof the foreign parent. The company should make it clear thatthe rep director has broad discretion in the performance of
his or her duties, and is not merely parroting the foreign
parent’s directions. This is because, under Japanese labor
law, whether or not one is an employee is determined not
only by the individual’s title, but also by the person’s actual
authority and work responsibilities.
Okay, so let’s assume we manage to avoid having therep director classified as an employee. Does that meanit’s now easy to terminate the rep director?
Here’s the dreaded answer – it depends. Because the rep
director is not officially an employee but is instead more akinto a service provider, the company can terminate the rep
director’s services at any time and for any reason.
Sounds simple enough. But then why does it “depend”?
If the company terminates the rep director’s services forreasons that are legally justifiable, then it is in fact pretty
simple. The shareholders pass a resolution and the rep
director is effectively out (okay, technically the company willneed to retain the departing rep-director long enough for it
to register its new rep director, but you get the point). You
normally don’t even need to provide any advance notice orseverance pay. On the other hand, without “legally justifiable”
reasons, the company will probably need to pay the rep
director a certain amount of compensation. The default ruleis that this compensation is the remaining remuneration andbonuses that the rep director would have received had he or
she served out the remainder of the directorship, plus any
compensation he or she would have received at the
expiration of the directorship (such as a retirement
allowance). This amount shouldn’t be an issue for acompany that wishes to terminate its rep director near theend of the directorship. However, terminating a rep director
at any other point in time can get very expensive. Take forexample a rep director serving in the first six months of a
two-year directorship. A legally unjustified termination could
result in this rep director receiving a windfall severance
package of a year and a half’s worth of pay, plus retirement
allowance. Not bad for only six months of work.
Hold on. If that’s true, why not limit all directorships to,say, just one year?
If possible, that’s the best option. A company can always
provide in its articles of incorporation that directorships canlast no more than two years. However, many highly-qualified
candidates will have to give up the security of a seishain
employee position at an established Japanese company inorder to serve as a rep director. These candidates are very
aware that they will no longer be considered “employees”
when serving as rep directors. Because of this concern,

Labor & Employment Law Newsletter© Kojima Law Offices 2015

Labor & Employment Law NewsletterVol. 6some rep director candidates may insist on a multi-year
directorship in exchange for the loss of the seishain-level job
security they currently enjoy. Companies that refuse may findit harder to attract top-level talent. This is probably even moretrue of foreign companies looking for a qualified rep director.
Because most foreign companies will require a bilingual rep
director, the pool of available candidates is much smaller.
What are some examples of valid legal grounds thatwould justify terminating a rep director?
It would be great if there were clear-cut guidelines to answer
that question. As you can probably guess, though, it’s reallya case-by-case determination. Obviously, a company would
likely be justified in terminating a rep director who, in
connection with his or her directorship, had engaged inillegal activity or who had been found guilty of a serious
violation of the company’s rules. On the other hand, “merely”
exercising poor judgment or making bad decisions thatnegatively impact the company may not be considered valid
grounds for a dismissal.
Are there any other things to be aware of?
Well, there is the issue of the retirement allowance that some
rep directors receive just prior to the start of their term.
I’m confused. Why would a rep director receive a retirement allowance before the start of their term? Isn’t aretirement allowance meant for someone who is leaving
the company?
Yes, that’s true. However, in certain circumstances rep
directors receive a retirement allowance thanks to what canreasonably be described as a technicality. Your confusion isunderstandable because, by all appearances, the company
has effectively promoted one of its employees (and not justany promotion, but a promotion to the highest position in thecompany). If so, why the need for a retirement allowance?
Well, recall some of the issues discussed above. First, some

January 2015

rep directors are hired from within the company. Second,
any “employee” status is terminated once the directorshipbegins. Taken together then, the company is officiallyterminating the soon-to-be rep director’s employment status,
and then entering into a service provider-type relationship forthe directorship. At least on paper, then, the rep director-to-be is actually being terminated. That’s how an employeeof the company can receive a retirement allowance one day,and then take control of the company the very next day.
Is there any way to avoid paying a retirement allowance
to a rep director-to-be?
Some companies include in their work rules a provision that
requires an employee who is “departing” to become a director to receive his or her retirement allowance at the end of thedirectorship instead of at the end of their official “employment.”
How about just eliminating the retirement allowance
altogether?
If the company’s employment rules grant employees theright to receive a retirement allowance, Japanese courts
would probably invalidate any attempt by the company tohave an employee waive that right completely.
Do these FAQs represent every single thing I need toknow about rep directors?
Shockingly, no. But all kidding aside, this is obviously a very
complex area of law and it would take an entire book to cover
every facet of the rep director position. The goal of theseFAQs was to clear up some of the more confusing issues. It
was not designed to be a comprehensive guide. In fact, tomake the FAQs as readable and concise as possible we
simplified our explanation of certain issues and in some cases
omitted quite a bit of detail. If you have any questions about
this area of law, you should seek experienced counsel at theearliest stage possible to avoid problems down the line.

The contents of this publication, current at the date of publication, are for reference purposes only. They do not constitutelegal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always besought separately before taking any action based on this publication.

Labor and Employment Practice Group
Partner
Hiromasa Ogawa

Counsel/Associates
Izumi Okada
Hitomi Sakai
Tatsuro Terada

Darcy H. Kishida *Norio Mitsuuchi
Seizaburo Taira* Mr. Kishida is licensed to practice law in Hawaii, New York andWashington, D.C. and is admitted in Japan as a Registered Foreign
Lawyer (gaikokuho jimu bengoshi). He provided editorial assistance forthis newsletter.

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Labor & Employment Law Newsletter© Kojima Law Offices 2015