Management Control Disputes

① Advance prevention of the possibility of disputes with internal and external stakeholders of the company

② Minimization of procedural legal defects when a management control dispute arises

③ If major decisions, such as the general meeting of shareholders, the board of directors, the dismissal of the representative director, and the issuance of new shares, do not undergo legal review, the risk of invalid resolutions, damages, and criminal accusations increases

④ Preparation of a response manual and preventive measures against the exercise of statutory rights, such as the right to inspect financial information, accounting books, and the shareholder register

A deterioration in a company's financial structure or poor performance is a major cause of conflict between shareholders and the board of directors.

When poor performance continues, demands for the dismissal of the representative director or the replacement of officers arise at the general meeting of shareholders, and measures to defend management control, such as differential dividends, the issuance of new shares, and the issuance of convertible bonds, can also become grounds for dispute.

Accordingly, securing transparency in advance financial reporting and preparing a strategy for responding to the general meeting of shareholders may be needed.

When lawsuits related to a company's major contractual relationships, business structure, labor, or tax matters are frequent, they can deal a blow to management control.

If such disputes become known externally or affect the external credit rating, shareholder departures and litigation risk follow, so it is important to establish a legal risk management system and conduct regular examinations.

Cases of intervening in a company's management control by exercising minority shareholder rights, such as the right to inspect accounting books and the right to claim the dismissal of a director, are increasing.

Because statutory rights can be exercised with even a 1 to 3 percent stake, advance management of the shareholding structure and the maintenance of the articles of incorporation and the rules for operating the general meeting of shareholders may be needed.

One of the direct causes of management control disputes is embezzlement, breach of trust, and improper expenditures by officers and employees.

An inadequate internal control system also works unfavorably for defending management control, so preventive measures, such as control of fund execution, maintenance of management meeting minutes, and the establishment of an audit committee, are essential.

Disputes over the validity of resolutions through claims that a board of directors' resolution is invalid or defective are also frequent.

Defects in the procedure for convening directors, failure to meet resolution requirements, and the exercise of voting rights by a director with a conflict of interest are points at issue, and operating a board of directors without legal review carries a high risk of dispute.

Therefore, it is recommended to examine the convening of the board of directors and the resolution procedure together with a legal expert.

The right to inspect accounting books and the right to inspect the shareholder register are specified as statutory rights, so they appear as essential elements in management control disputes.

Because the status of fund execution and shareholder stakes can become the basis for an aggressive lawsuit, preparing a method of responding to inspection requests may be needed.

Under the Commercial Act, the dismissal of a representative director is possible through a dismissal resolution of the board of directors, and a lawsuit over defects in the dismissal resolution and an application for a provisional injunction to suspend the performance of duties are typical means in management control disputes.

Securing the legality of the dismissal resolution, maintaining the articles of incorporation, and managing the resolution requirements of the general meeting of shareholders and the board of directors are important.

▶Detection of warning signs, such as changes in the stakes of major shareholders, movements to secure proxies, and the exercise of minority shareholder rights

▶Securing of key documents, such as board meeting minutes, the shareholder register, accounting books, and records of fund execution

▶Confirmation of the positions of key officers and employees and measures to prevent their departure

▶Formation of a task force consisting of advisory attorneys, accountants, tax accountants, and the IR and disclosure teams

▶Preparation for a provisional injunction to suspend the performance of the representative director's duties and a provisional injunction to prohibit the issuance of new shares

▶Legal review of the procedure for convening the general meeting of shareholders, the exercise of voting rights, and the possibility of claims regarding defects in resolutions

▶Review of potential illegality in major contracts and fund transactions, and determination of whether to freeze or recover funds

▶Review of the articles of incorporation and determination of whether an urgent amendment is needed (record date for dividends, quorum for resolutions, etc.)

▶Establishment of a plan for the public notice of the convening of the general meeting of shareholders and for securing proxies

▶Management of key friendly shareholders and advance response to the possibility of M&A

▶A strategy for responding to alleged violations of the Monopoly Regulation and Fair Trade Act and the Financial Investment Services and Capital Markets Act

▶Preparation of a manual for disclosures and media response related to management control disputes

▶Review of criminal risks such as internal embezzlement and breach of trust

▶Measures to prevent the loss of personnel, the departure of business partners, and a decline in corporate value

▶Refinement of strategies for each dispute-resolution scenario, including negotiated and mediated proposals