Shareholders' Meeting Q&A (General)

We have compiled a Q&A regarding shareholders' meetings. Please note that we have used the simplest language possible so that it can be used in internal documents, etc., and that some prerequisite explanations may be omitted. Furthermore, this description is intended for shareholders' meetings of listed companies, and separate considerations may be required for private companies. Please be aware that for individual cases, an accurate answer cannot be provided without assuming the specific circumstances.

We hope this will be helpful to you.

Proceedings of the General Meeting

Q. Please tell me the flow of the proceedings of a shareholders' meeting.

The general flow of a meeting is as follows.

First, the declaration of the assumption of the chair and the declaration of the opening of the meeting (declaration of the fulfillment of the quorum) are made, followed by an explanation of the rules of procedure. After that, reports such as audit reports and business reports are presented. Narrations are often used for business reports. Then, the proposals are submitted. After an explanation of the deliberation rules, a Q&A session is held. Finally, the voting on the proposals is conducted, and the declaration of the closing of the meeting is made.

Q. To what extent must directors answer shareholders' questions?

Directors, etc., bear an obligation to explain at the shareholders' meeting (Article 314 of the Companies Act). However, this is not unlimited; they do not bear the obligation to explain in cases such as when the matter does not relate to the purpose of the shareholders' meeting or when it harms the common interests of the shareholders (proviso to Article 314 of the Companies Act, Article 71 of the Ordinance for Enforcement of the Companies Act).

The purpose of the shareholders' meeting is considered to include not only matters for resolution but also matters for reporting. In particular, at an ordinary general meeting of shareholders, business reports and financial statements are matters for reporting, so it can be said that the scope of the purpose of the meeting is broad. As one way of thinking, it is safe to consider that matters stated in the reference documents for the shareholders' meeting are related to the purpose of the shareholders' meeting.

Also, the degree of explanation is judged based on the position of a reasonable average shareholder. Such a shareholder must be given an explanation to the extent that they can reasonably understand and make judgments regarding the purpose of the meeting (Nihon Kotsu case, Kyushu Electric Power case, Tokyo Style case, etc.).

Q. Can the chairperson restrict the method of Q&A or cut off questions?

At a meeting attended by many shareholders, it is necessary to organize the proceedings appropriately, and it may be realistically impossible to answer all shareholders' questions. Therefore, it is interpreted that restrictions on the speaking time per person and the number of questions are permitted at the discretion of the chairperson (chairperson's authority to organize proceedings, Article 315, Paragraph 1 of the Companies Act). It is also interpreted that it is possible to cut off questions once a situation is reached where it can be objectively judged that a reasonable average shareholder has been provided with the necessary degree of explanation for a reasonable understanding.

Q. At our company's meeting, there are shareholders who are hostile to the current management team, and they repeat questions every year. How much should we answer?

It is interpreted that it is acceptable to cut off questions once a situation is reached where it can be objectively judged that a reasonable average shareholder has been provided with the necessary degree of explanation for a reasonable understanding. It is also interpreted that if it is clear that the questioning shareholder has more knowledge than the average shareholder, it is acceptable to simplify the explanation based on that fact (Nihon Kotsu case, Hiroshima High Court Matsue Branch, September 27, 1996 judgment).

It is safe to respond to some extent, but if questions unrelated to the proposals or reporting matters continue, we believe it is not a problem to interpret that the explanation necessary for a reasonable average shareholder to exercise their voting rights for or against has been exhausted. Before the COVID-19 pandemic, generally, about 2 hours (about 1 to 1.5 hours for Q&A) was the standard.

Q. Can we shorten the Q&A time due to concerns about preventing the spread of COVID-19?

In response to the spread of COVID-19, the "Q&A on the Operation of Shareholders' Meetings" has been published jointly by the Ministry of Economy, Trade and Industry and the Ministry of Justice (last updated on March 30, 2023). According to the Q&A, if it is judged unavoidable to take necessary measures to prevent the spread of infection, it is considered possible to take reasonable measures when operating the shareholders' meeting, and one such method is to shorten the time of the proceedings compared to previous years in order to shorten the time shareholders spend at the venue.

In light of this way of thinking, we believe that it is permissible to shorten the Q&A time to some extent. However, COVID-19 was changed to a Class 5 infectious disease on May 8, 2023, so the situation may be slightly different from before. Please be aware that it is not permissible to limit the Q&A time solely for the reason of preventing the spread of infection without careful consideration.

Q. A shareholder asked a question designating a specific director, but does that director need to answer?

The chairperson can designate a respondent who can provide an appropriate explanation and have them answer. Therefore, it is not necessarily required to comply with this. It is sufficient for the explanation to be provided by a respondent whom the chairperson deems appropriate.

However, the role of outside directors is being viewed with particular importance, and there is an increasing number of questions asking for the views of outside directors. Furthermore, since they are on the podium as directors or similar officers, it is necessary to be prepared to answer at any time. If the company does not believe the shareholder has malicious intent, it is worth considering responding flexibly.

Q. If a shareholder disrupts the proceedings, can they be removed?

Under the Companies Act, the chairperson has the authority to maintain order, manage proceedings, and order removal (Companies Act, Article 315, Paragraphs 1 and 2).

Therefore, it is possible to remove a shareholder who disrupts the proceedings. However, since attendance at the general meeting is a prerequisite for a shareholder's right to ask questions and exercise voting rights, and is also an important shareholder right, an order for removal is considered a 'last resort.' It is only permitted when order cannot be maintained through other reasonable means, such as when the shareholder cannot be controlled even after being warned. Specifically, it is advisable to think in terms of three steps: (1) an initial caution, (2) a warning that they will be removed if they continue, and (3) an order for removal.

Q. What is a motion?

A 'motion' refers to a proposal submitted by an attendee (shareholder) in a meeting body that is then subjected to discussion and voting. Motions submitted at a general meeting can be broadly divided into (1) amendment motions (also called motions regarding the amendment of a proposal or substantive motions) and (2) procedural motions (motions regarding procedures such as the management of proceedings).

Q. A motion of no confidence in the chairperson has been submitted. Is it necessary to put it to the floor?

Since it concerns the floor itself, it must be put to the floor unless it is obvious at first glance that it lacks rationality, such as being an abuse of rights (Taisei Kogyo Case). Remember that if a motion of no confidence in the chairperson is submitted, it must be put to the floor at least once.

Note that even if a motion of no confidence in the chairperson is submitted, the chairperson does not need to be replaced just for the vote on that motion; it is acceptable to put it to the floor as is.

Q. A procedural motion has been submitted. Is it necessary to put it to the floor?

In addition to a motion of no confidence in the chairperson, motions requesting the appointment of an investigator for materials submitted to the general meeting (Companies Act, Article 316, Paragraph 1), motions requesting the postponement or continuation of the general meeting (Companies Act, Article 317), and motions requesting the attendance of an accounting auditor (Companies Act, Article 398, Paragraph 2) must always be put to the floor.

Other procedural motions, such as a motion requesting a recess (recess motion), a motion requesting the collective deliberation of proposals, a motion requesting a change in the order of agenda items, or a motion requesting the termination or continuation of questioning, are considered to be within the scope of the chairperson's authority to manage proceedings, so they do not need to be put to the floor and can be decided by the chairperson themselves. However, there is no problem with putting them to the floor for the purpose of proceeding smoothly. In practice, this is often how it is handled.

Q. What is the scope within which an amendment motion is legal?

Shareholders may submit an amendment motion regarding a proposal on the day of the general meeting (Companies Act, Article 304). However, it is interpreted that they cannot exceed the scope that can generally be foreseen from the purpose of the general meeting, and amendment motions that exceed this are illegal.

For example, at a general meeting where the agenda item 'Election of 5 Directors' has been submitted, an amendment motion requesting the additional election of new candidates is not considered a change to a proposal within the scope generally foreseeable by shareholders and is interpreted as illegal. On the other hand, an amendment to reduce the number of candidates to be elected is interpreted as permissible to the extent that it does not conflict with the Articles of Incorporation.

Matters Concerning the Exercise of Voting Rights

Q. What is the Stewardship Code?

It is a code of conduct for institutional investors who manage large amounts of shares, such as insurance companies, banks, pension funds, and government-affiliated financial institutions. In February 2014, the 'Japanese version of the Stewardship Code' was formulated by the 'Study Group on the Stewardship Code' established at the Financial Services Agency, and it was revised in May 2017 and re-revised in March 2020.

The May 2017 revision required the formulation of guidelines for the exercise of voting rights and the individual disclosure of the results of the exercise of voting rights, which has had a significant impact on practice.

Q. What are the voting guidelines (voting criteria) for institutional investors?

　These are the voting guidelines formulated and published by institutional investors based on the Stewardship Code. The institutional investors' perspectives are disclosed.

Q. Please tell me about recent themes addressed in voting guidelines.

　Notable themes in recent years include initiatives for sustainability issues, ensuring gender diversity, and the appointment of a certain percentage or more of independent outside directors.

Q. What is a proxy advisory firm?

　These are firms that provide advice on whether to vote for or against proposals at shareholder meetings for institutional investors. Overseas institutional investors often refer to the opinions of proxy advisory firms, which have a significant influence on the results of resolutions.

　Representative proxy advisory firms include ISS (Institutional Shareholder Services Inc.) and Glass Lewis & Co.

Q. What are the notable points in the policy revisions of proxy advisory firms?

　Notable points in their advisory policies include: (1) recommendations for the disclosure of climate change risk information and the setting of greenhouse gas emission reduction targets, (2) recommendations for gender diversity (number or percentage of women on the board of directors), (3) recommendations for increasing the number of outside directors, (4) non-recommendation of excessive holding of cross-shareholdings, and (5) non-recommendation of virtual-only shareholder meetings. (As of 2023)

Q. What are the recent movements of institutional investors regarding ensuring gender diversity?

　There is a movement to require the appointment of at least one female director, and subsequently, to request the appointment of multiple female directors.

　Corporate Governance Code(the "CG Code") and the fact that Glass Lewis has adopted criteria that actively seek the appointment of female directors, many institutional investors are moving toward making the appointment of at least one female director mandatory. Furthermore, some institutional investors are moving to request the appointment of multiple female directors, and as Glass Lewis has also shifted to a percentage-based standard, it is expected that the movement to request the appointment of multiple female directors will strengthen in the future. Additionally, an information disclosure system based on the Act on Promotion of Women's Participation and Advancement in the Workplace has been introduced, and it can be said that companies are required to provide solid external disclosure regarding their thinking on ensuring diversity.

Q. What is the view of institutional investors regarding the tenure of outside directors?

　It has been pointed out that when reappointments of outside directors overlap and their tenure becomes long, doubts arise regarding their expected independence, and there is a movement to vote against the appointment of long-serving outside directors.

　Regarding tenure settings, there are examples of voting against those with 12 or more years of service (Sumitomo Mitsui Trust Asset Management, Nikko Asset Management, BlackRock Japan).

Q. What is the view of institutional investors regarding cross-shareholdings?

　Regarding the holding of cross-shareholdings, the Corporate Governance Code also requires disclosure of policies and thinking regarding their reduction (Principle 1-4), and this is an area with a high degree of attention from institutional investors. There are movements such as voting against the reappointment of representative directors at companies where it cannot be judged that sufficient efforts toward reduction are being made, or at companies where cross-shareholdings account for a certain percentage of consolidated net assets and ROE is low.

Q. What are the recent trends regarding the introduction of takeover defense measures?

The introduction of takeover defense measures has been pointed out as a concern due to the risk that they may be used for the self-preservation of management and the possibility that they may hinder the reflection of intrinsic shareholder value in the stock price. Both proxy advisory firms and institutional investors show a fairly negative stance, and in most cases, institutional investors vote against them. ISS's proxy voting guidelines also generally recommend voting against them, except in exceptional cases following a two-stage review.

However, with the recent increase in hostile takeover cases, there have been instances where takeover defense measures are introduced after a specific acquirer appears and are approved by shareholders at a general meeting to confirm shareholder intent (emergency-type takeover defense measures). Some institutional investors have established separate criteria and make individual judgments regarding takeover defense measures in situations where such disputes over management control have become apparent.

Q. What amendments were made regarding the execution of duties by outside directors in the 2019 Companies Act amendment?

Under the Companies Act, the requirement for an outside director is that they must not be an executive director (Article 2, Item 15(a) of the Companies Act). However, it was pointed out as an issue that outside directors sometimes negotiate from an independent position in situations such as MBOs or transactions between parent and subsidiary companies, and that they might lose their 'outside' status in doing so. Therefore, a new provision was established regarding the delegation of business execution to outside directors, allowing the board of directors to delegate business execution to an outside director in situations involving conflicts of interest (Article 348-2, Paragraph 1 of the Companies Act), and it was clarified that an outside director does not lose their qualification requirements even if they perform the business execution delegated in this manner (Article 348-2, Paragraph 3 of the Companies Act).

In addition, a new mandatory provision was established requiring certain companies with a board of corporate auditors that are obligated to submit securities reports to appoint outside directors (Article 327-2 of the Companies Act).

Shareholder Proposal Related

Q. Please classify the attributes of shareholders who make shareholder proposals.

In principle, any shareholder who has continuously held at least 1/100th of the voting rights of all shareholders or at least 300 voting rights for the past six months can make a shareholder proposal (Article 303, Paragraph 2; Article 305, Paragraph 1 of the Companies Act).

However, the attributes of shareholders who actually make shareholder proposals are limited, and they can be broadly classified into: (1) activist shareholders (who acquire a significant number of shares backed by financial power and raise governance issues), (2) activist-type shareholders (who act as part of traditional social movements), and (3) leading shareholders/major shareholders.

Q. Please tell us about the characteristics of recent shareholder proposal cases.

Even now, shareholder proposals questioning governance are submitted as proposals for amendments to the articles of incorporation. Since a special resolution (approval by two-thirds or more of the voting rights of shareholders present, who hold a majority of the voting rights, Article 309, Paragraph 2 of the Companies Act) is required for passage, cases that actually reach passage are considered limited.

However, recently, if concrete and persuasive shareholder proposals are made, they have been gathering high approval votes from other shareholders. This trend is particularly noticeable regarding ESG-related shareholder proposals. As a result, management cannot ignore and leave these issues unaddressed, and they are forced to appropriately explain the raised issues, disclose information, and take de facto action.

Q. What changes can be seen in recent shareholder proposals and their voting results?

As the importance of dialogue with shareholders is emphasized, shareholder proposals as an exercise of shareholder rights have also become more active. Recent cases of shareholder proposals often involve serious opinions on the company's management structure, such as those questioning the company's governance or those questioning the company's efforts on environmental issues from an ESG perspective. As mentioned earlier, since institutional investors can no longer easily vote in favor of company proposals, shareholder proposals that gather high support rates of 20% or 30% are appearing, even if they are not from major shareholders. Therefore, the company is in a position where it cannot ignore shareholder proposals.

A major feature of recent shareholder proposals is that proposals by so-called activist shareholders have become common. Of the 76 companies that received shareholder proposals at the June 2022 general meeting, 38 companies, or half, received proposals from activist shareholders. In addition, shareholder proposals by leading shareholders and major shareholders were made at 30 companies. From activist-type shareholders, shareholder proposals regarding anti-nuclear power have been made at electric power companies.

Q. What amendments were made to the shareholder proposal right in the 2019 Companies Act amendment (enforced in 2021)?

In the past, there were successive cases of abusive exercise that appeared to be for the purpose of confusing the company, and the shareholder proposal system stood out in aspects different from what it should originally be. Therefore, in the 2019 Companies Act amendment, a limit was placed on the number of proposals that can be made, and the upper limit on the number of proposals a shareholder can submit at the same general meeting of shareholders was limited to 10 (Article 305, Paragraph 4 and 5 of the Companies Act).

Q. Please tell us about the trends in activist shareholder proposals.

As for the content of shareholder proposals by activists, proposals for the appropriation of surplus (dividends), such as adding a certain amount to the dividend amount proposed by the company, are typical. Regarding shareholder proposals questioning governance, proposals for amendments to the articles of incorporation are used, and specific examples include disclosure of capital costs, abolition of advisors and consultants, and sale of cross-shareholdings. Regarding executive compensation, there are examples of proposals related to the introduction of restricted stock compensation plans and proposals for the acquisition of treasury stock, and individual disclosure of executive compensation (submitted as a proposal for amendment to the articles of incorporation) tends to gather relatively high support.

In addition, there have recently been many cases where shareholders sharply pursue issues such as the unsuitability of management or problems in responding to scandals, in light of the specific circumstances of each company. In such cases, proposals for the appointment or dismissal of officers are submitted as shareholder proposals.

It is also considered that there are not a few cases where activist shareholders negotiate behind the scenes with the company before reaching the point of a formal shareholder proposal, and the company effectively responds to these requests.

Q. Why are shareholder proposals submitted as proposals for amendments to the Articles of Incorporation?

When a proposing shareholder makes certain requests to a company, especially regarding governance, proposals for amendments to the Articles of Incorporation are generally used.

This is because, under the Companies Act, it is understood that in a company with a board of directors, resolutions can only be made at a general meeting of shareholders regarding matters stipulated by the Companies Act or the Articles of Incorporation (Article 295, Paragraph 2 of the Companies Act), and shareholder proposals that directly mandate specific business execution matters outside of these are not permitted.

Therefore, it is customary for shareholders to submit shareholder proposals as amendments to the Articles of Incorporation in order to stipulate such content in the Articles of Incorporation.

Q. Please tell me about cases where shareholder proposals were approved.

In the June 2022 general meetings, there were three cases: Hokuetsu Metal, Fast Fitness Japan, and Future Venture Capital.

The Hokuetsu Metal (2022) case involved a conflict over management with Topy Industries, the largest shareholder (holding approximately 35%), and a shareholder proposal regarding the appointment of officers was submitted by the largest shareholder. The company's proposal for the appointment of officers was partially rejected, and the shareholder's proposal for the appointment of officers was approved (approval rate of approximately 74%).

The Fast Fitness Japan (2022) case was one where, although the board of directors had selected director candidates based on the opinion of the Nomination and Compensation Committee, the Chairman of the Board and the Director who is an Audit and Supervisory Committee member, who effectively held a majority of the voting rights, opposed this and submitted a shareholder proposal themselves. While it is a somewhat unusual case in that a shareholder proposal was made that directly contradicted the opinion of a voluntary advisory committee, the shareholder proposal was approved (approval rate of approximately 73% to 79%).

The Future Venture Capital (2022) case was one where an individual investor appealed for a change in management through social media and other means, submitted a shareholder proposal, and the shareholder proposal for the appointment of officers was approved (approval rate of approximately 68%). Although the individual investor who made the shareholder proposal was not a major shareholder, it is a rare case where the approval of a majority of shareholders was obtained. All company proposals were rejected, and the entire management team was replaced.

Q. What are the trends in shareholder proposals regarding sustainability issues?

As a global trend, there is a very strong interest in the impact of corporate activities on the global environment, and corporate efforts toward SDGs and ESG are now required as essential. In response to these environmental changes, there has been an increase in cases where sustainability issues are submitted as shareholder proposals. Unlike traditional activist-style shareholder proposals, these types of shareholder proposals have succeeded in persuading many institutional investors, especially overseas institutional investors, and tend to gather high approval votes.

In the June 2022 general meetings, at J-Power (Electric Power Development Co., Ltd.), a major coal-fired power company, British bank-affiliated HSBC Asset Management, British hedge fund Man Group, and the NGO Australasian Centre for Corporate Responsibility jointly submitted a shareholder proposal for an amendment to the Articles of Incorporation requesting the formulation and publication of a business plan that specifies greenhouse gas emission reduction targets in line with the Paris Agreement, and the disclosure of evaluations of the consistency between capital investment and these targets. Some of these shareholder proposals gathered an approval rate of approximately 25.8%. Similarly, in the cases of Mitsubishi Corporation and Sumitomo Mitsui Financial Group, shareholder proposals requesting the formulation and disclosure of business plans including medium- and short-term greenhouse gas reduction targets consistent with the Paris Agreement goals also gathered approval rates exceeding 20%.

That is all.