JAPAN Law and Practice Contributed by: Hiroshi Mitoma, Tomohiko Iwasaki and Kosuke Hamaguchi, Nagashima Ohno & Tsunematsu
4.10 Approvals and Restrictions Concerning Payments to Directors/ Officers Compensation to Directors Compensation to directors must be approved by a shareholder meeting unless it is provided in the articles of incorporation. In usual circumstances, a shareholder meeting approves the maximum aggregate amount of compensation of all direc - tors and delegates to the board of directors the authority to decide the compensation to be paid to each director within the approved maximum aggregate amount. In such a case, the board of directors of a listed company with a board of statutory auditors that is a large-sized company or a company with an audit and supervisory committee must approve the policy as to how to determine the specific amount of compensation of each director and disclose this policy in the annual business report. The authority to decide the compensation of each director based upon this policy is often delegated to a representa - tive director or an independent compensation committee. If the total amount of the compensation of all directors exceeds the maximum aggregate amount of compensation approved by a share - holder meeting, the compensation in excess of the maximum aggregate amount is invalid. In such case, it is considered that the amount of the compensation of each director would be reduced based on a ratio of the total amount of the compensation of all directors to the maxi - mum aggregate amount approved by a share - holder meeting; and a company has a right to request each director to return the excessive amount regardless of its negligence. In addition, the directors involved in such illegal payment are jointly and severally liable to the company for the amount in excess of the maximum aggregate amount approved by a shareholder meeting.
In addition, a director who is neither a repre - sentative director nor an executive director or a statutory auditor may enter into an agreement with a company to limit their liability, if so permit - ted by the articles of incorporation. Indemnification Agreement/D&O Insurance A director may enter into a corporate indemni - fication agreement with a company, pursuant to which in certain circumstances the company indemnifies the director for the costs (including attorneys’ fees) and damage that the director has incurred in connection with the performance of their duties. D&O insurance is widely available in Japan. The Companies Act makes clear that in order to enter into a corporate indemnification agreement or D&O insurance, a company needs to obtain an approval of its board of directors or, in case of a company without a board of direc - tors, a shareholder meeting. 4.9 Other Bases for Claims/Enforcement Against Directors/Officers In relation to corporate governance, a third party is able to make claims against directors, statutory auditors and other officers for damage incurred in connection with misrepresentations in a company’s financial statements, business reports or any other documents unless the directors, statutory auditors or other officers can prove that they have exercised due care. Directors, statutory auditors and other officers of a listed company are also liable for misrepre - sentations in the public disclosure documents of the company, such as annual securities reports, under the FIEA.
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