International Bonds and Application of Japanese Mandatory Rules (Summary)
Yoshiaki Nomura *The Japanese Company Law has two important mechanisms for the protection ofdebentureholders (hereinafter referred to as “bondholders”): the requirement of a“trustee” (Commercial Code Article 297) and the regulation for the bondholders’meeting by the courts (particularly, Commercial Code Articles 319 and 327). These
rules are mandatory in the sense that they cannot be derogated from by contract.
However, it is not clear whether they are mandatory irrespective of the law otherwise
applicable.
This Article intends to clarify the manner and grounds of application of thebondholder protection rules. In particular, it examines whether the protection rules
should be applied as part of the applicable law designated by the conflict-of-law rules orwhether they should be applied as absolute or international mandatory rules, which areobligatory irrespective of the law otherwise applicable.
Article 297 of the Commercial Code provides the requirement for a “trustee”. It
requires the debenture issuer to contract with the Shasai-kanri Kaisha (commissionedcompany for bondholders, hereinafter referred to as the “Commissioned Company”).
The Commissioned Company, acting on behalf of the bondholders, receives payments,
protects rights, and does other matters for the management of special bonds. Mostwriters interpret this requirement to be mandatory irrespective of the law otherwise
applicable. Though I agree with this conclusion, I argue that the reasoning istheoretically faulty in two ways.
First, these writers argue that the Commissioned Company requirement is appliedirrespective of the law otherwise applicable, because it belongs to the “public law” or
has a public law nature. Secondly, they reason that because the rule is characterized as
public law, it should be applied “territorially” in the country of the bond issue. This
Article argues that it is the purpose and manner of the regulation intended and employedby the particular legal rule that determines how it should be applied, and not thecharacter of the rule as public or private law.
The Commissioned Company rule is intended for the protection of the individual
investors who acquire the publicly offered bonds. It interferes in the issuer-bondholders
relationship by inserting a compulsory contract with the Commissioned Company. For
the failure of the issuer to comply with the rule, a penalty (karyo) not exceeding one* Professor of Law, Osaka School of International Public Policy, Osaka University.

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million yen (approximately US$9,000) is imposed on the directors and other officers ofthe issuer (Commercial Code Article 498). This is an expression of a strong public
policy that must be implemented irrespective of the law otherwise applicable by choiceof law, especially one chosen by the parties.
In contrast, the regulation of the bondholders’ meeting by the courts is intendedfor the proper administration of a bondholders’ meeting, which might not be realized bycontractual private ordering. The purpose of this regulation is not limited to protection
for individual investors of the publicly offered debentures. The regulation is given teeth
by requiring a court’s consent to make the bondholders’ meetings effective(Commercial Code Article 327). Thus, the method of regulation is by way of extension
or enhancement of private ordering. The public policy at which this regulation aims is
not so mandatory as to apply irrespective of the law otherwise applicable by choice oflaw. This conclusion is shared by some of the writers who consider the Commissioned
Company requirement as internationally mandatory.
The second weakness of the “public law analogy” approach is that it appears to
explain the territorial application of the Commissioned Company rule from its public
law nature. It is widely accepted that the territorial principle is not the only basis ofinternational or “extraterritorial” application of so called public law. The principle ofnationality has long been accepted as a prima facie ground for the application of
criminal law. The effects doctrine, though not officially recognized in Japan, has
support among academic writers for the international application of Japaneseanti-monopoly law.
This Article argues that it is important to properly refer to mandatory rules with apublic law nature. It is proposed that the terms “absolutely mandatory” rule or“international mandatory” rule be used as they have gained international currency. It issuggested that if the Commissioned Company rule is to be interpreted as an“international mandatory” rule, the scope of its application should be made clear bylegislation. It is reasonable to provide that the rule should apply, irrespective of the law
otherwise applicable, to the bonds that are publicly offered in the Japanese market.
In the remainder of this Article, I discuss whether the Commissioned Company
requirement, as it stands, should be applied when the governing law of the debentures isJapanese. I answer in the affirmative on the following grounds: To say that theCommissioned Company requirement should be applied irrespective of the law
otherwise applicable does not mean that the rule is not to be applied as part of theapplicable law designated by the conflict-of-law rules. If the Japanese law is chosen in
the terms and conditions of the bonds, it should be applied to protect the expectations of2the parties, i.e., the issuer, subscribers and the investors who acquire the securities on
the secondary market. It would be contrary to the expectation of these parties and legal
stability if the mandatory rule of the forum is interpreted to interfere.
This Article concludes by suggesting that as a matter of legislative policy theCommissioned Company provision, as it stands, is not a wise method of regulation.
This provision has produced conflicting interpretations of the scope of international
application, and decreases predictability in international business. Its benefit is notdemonstrated as against the cost of the regulation. It is suggested that the provision
should be deleted completely or more preferably be modified into a default rule, which
is used to supplement and enhance the private autonomy of the parties.

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