Public Comments: Interim Draft for Companies Act Revision

Corporate Action Japan (CAJ) has submitted public comments in response to the “Interim Draft for the Revision of the Companies Act (Related to Shares, Shareholders’ Meetings, etc.)” issued by the Legislative Council of the Ministry of Justice.

To drive corporate value enhancement and the realization of a sustainable, decarbonized society, we place a strong emphasis on “engagement” (constructive dialogue) with target companies. At the same time, depending on the progress of such dialogue, situations may arise where we are compelled to consider exercising shareholder proposal rights as the next step.

CAJ’s comments specifically address the “Revision of Voting Right Requirements for Shareholder Proposal Rights” in the Interim Draft. Under the current system, shareholder proposal rights are granted to shareholders holding 300 or more voting rights. In contrast, the Legislative Council has proposed a revision to these requirements, presenting two alternative options (Option A and Option B).

Interim Proposal on the Review of the Companies Act (Regarding Shares, Shareholders Meetings, etc.) [Provisional Translation]

Section 5: Review of Rules on Shareholders’ Right to Propose

1. Review of the Requirements for the Number of Voting Rights for Shareholders’ Right to Propose

Regarding the requirement for the number of voting rights (300 or more voting rights) among the requirements for the exercise of shareholders’ proposal rights in companies with a board of directors, either [Proposal A] or [Proposal B] shall apply. [Proposal A] The requirement for the number of voting rights shall be abolished. (Note 1) [Proposal B] The requirement for the number of voting rights of ‘300’ shall be increased to a certain number (Note 2). (Note 3)

(Note 1)  There is also a view that the requirement for the number of voting rights should be allowed to be excluded where the articles of incorporation so provide.

(Note 2)  There are views that the specific number should be set at ‘500’, as well as views that it should be set at ‘1,000’ or ‘1,500’, taking into account future reductions in investment units, among other factors. (Note 3)  There are views that: (i) where the articles of incorporation so provide, ‘300’ may be increased to a certain number; or (ii) after increasing ‘300’ to a certain number in accordance with [Proposal B], it may be further increased by the articles of incorporation.

The details of our arguments and supporting evidence for Options A and B, respectively, are outlined below. To ensure that the regulatory amendments continue to safeguard the voices of minority shareholders, we formulated our comments by referencing research from ClientEarth, a group of international legal experts on climate, energy and the environment. Members of the media and institutional investors wishing to make inquiries regarding this matter are invited to contact us here.

Public Comments on the Interim Draft for the Revision of the Companies Act  (Related to Shares, Shareholders’ Meetings, etc.)

Opinion 1: We oppose Option A.

Rationale (a): De-facto obsolescence of shareholder proposal rights in large-cap companies and deviation from the original legislative intent

For companies ranked in the top tier of the Tokyo Stock Exchange by market capitalization (¥1 trillion or more), a shareholder would need to hold shares worth ¥10 billion or more to meet the requirement. This would make it extraordinarily difficult not only for individual shareholders but also for institutional investors to submit shareholder proposals. When shareholder proposal rights were introduced in 1981, the “300 units of shares” threshold was established precisely because relying solely on the 1% ownership requirement would mean that no one could submit shareholder proposals in large-scale corporations. Under Option A, submitting shareholder proposals would become virtually impossible in top-tier companies by market capitalization. Such an amendment is inappropriate.

Rationale (b): Inconsistency with the Corporate Governance Code

Option A is based on the rationale that proposals from shareholders holding less than 1% are never approved, and that unapproved shareholder proposals hold no value for a company. However, the Corporate Governance Code states that if a company proposal faces a substantial number of opposing votes, the company should consider appropriate actions. By the same logical interpretation, even if a shareholder proposal is not approved, the company should consider appropriate actions if it receives a substantial level of shareholder support. Shareholder proposals that garner a significant number of supporting votes can prompt changes in the behavior of directors and cannot be deemed worthless to the company. The underlying rationale of Option A runs contrary to the spirit of the Corporate Governance Code.

Rationale (c): Contradiction with the promotion of Japan as a “Leading Asset Management Center”

To realize the government’s goal of establishing Japan as a “Leading Asset Management Center,” it is indispensable for individual investors, asset owners, and asset management companies to invest in a wide range of enterprises and foster their growth.
In recent markets, passive investment and diversified investing have become mainstream, which tends to lower the ownership ratio per shareholder in individual stocks. Many of these “minority shareholders” invest from a medium- to long-term perspective. They frequently identify medium- to long-term risks (such as climate change and governance challenges) that individual management teams might overlook, and they submit effective proposals that contribute to enhancing corporate value. Excluding their voices solely based on ownership ratios would undermine the essence of corporate governance, which emphasizes dialogue with shareholders. This appears to directly contradict the promotion of Japan as a “Leading Asset Management Center.”

Rationale (d): Reversal of foreign investors’ expectations for Japanese market reforms

For foreign investors who have purchased Japanese equities with expectations for progress in Japan’s corporate governance reforms, this amendment—which makes it harder for investor voices to be heard—may well be perceived as a step backward in corporate governance reform. We believe this could diminish the attractiveness of the Japanese market and potentially lead to capital flight.

Opinion 2: Regarding Option B, we oppose any legal amendment or allowance of charter provisions (Articles of Incorporation) that raises the voting right requirement beyond “500 voting rights” (approximately 1.5 times the current threshold).

Rationale (a): Opposition to a substantial threshold increase that does not align with the actual reduction of investment units

Under the policy directive of “moving from savings to investment,” listed companies have been encouraged to lower their investment units. If the reduction in the required investment amount for shareholder proposals (compared to 1981 when the right was established) due to stock splits and other measures constitutes the legislative fact necessitating this amendment, it is only reasonable to find an investment amount that is economically equivalent to that of 1981. According to a July 2025 report by the Tokyo Stock Exchange, the level equivalent to the 300-unit share (voting right) threshold of 1981, adjusted for the reduction of minimum investment units, is calculated to be 441 voting rights. The scope that can be reasonably justified by the reduction of investment units is limited to an increase of approximately 1.5 times; any increase beyond that lacks a valid foundation.

Rationale (b): Opposition to gutting proposal rights by allowing the threshold to be raised via Articles of Incorporation

If companies are permitted to raise the threshold beyond 300 voting rights up to a certain number through their Articles of Incorporation, it will practically bring about the same outcome as Option A. Looking at the legislative intent, the 300 voting rights threshold was never meant to be a mere substitute for the 1% criterion. Any proposal that allows companies to raise the 300-unit requirement up to a certain number via their Articles of Incorporation would completely gut the legislative intent—which is to enable shareholder proposals in large-scale corporations—and is therefore unacceptable.