The Commercial Code of Japan/Book 2

Book II.
Business Associations.

Section 1.—General Provisions.

Article 42. A business association within the meaning of this Code is an association formed for the purpose of carrying on commercial transactions as a business.

The reader will find a short account of the business associations of Japan and under the Continental Codes, in two articles by the present editor, University of Pennsylvania Law Review, Vol. 58, pp. 1 and 61.

There are two kinds of juristic persons under the Civil Code: (1) association, the organization of persons; (2) trust property, the organization of property.

Thus, a business association is a trader within the meaning of Art. 4.

Article 43. Business associations are divided into four kinds: société en nom collectif, société en commandite, société anonyme, and société en commandite par actions.

Article 44. A business association is a juristic person.

The residence of a business association is at the place of its principal office.

There is no such provision in the German Commercial Code. It is maintained by the majority of the jurists of that country that the société en nom collectif, société en commandite, and société en commandite par actions are not juristic persons. On the other hand, a business association is construed as a juristic person in France, though there is no express provision in the French Commercial Code to that effect. The Commercial Codes of Belgium and Spain are the only commercial codes besides the Japanese, which expressly provide that a business association is a juristic person.

The legal effects of being a juristic person are as follows:—

1. The property of the association will be independent of the property of its members or shareholders. A debtor of the association cannot set off against the claim of the association a debt due him by a member of the association.

2. The association will have an independent residence.

3. The association can be put in bankruptcy independently of its members or shareholders.

4. The association will be capable of suing or being sued.

5. The association will be obliged to make a registration in the court.

Article 45. The existence of a business association cannot be set up as a defence against third parties unless the formation of such business association is registered.

Derived from Arts. 123, par. 1, and 200, par. 1, sentence 1, of the German Commercial Code.

Article 46. A business association cannot make preparation to begin business before it is registered at the place of its principal office.

Art. 128, par. 2, of the German Commercial Code provides that if a société en nom collectif begins its business before it is registered, its legal relations begin at the same time. This provision is also applicable to a société en commandite.

Art. 200, par. 1, of the German Commercial Code provides that any act done by a société anonyme in the name of the association before it is registered personally binds the person who has done it, and if several persons participate in doing it, they are jointly and severally liable. These provisions are applicable to a société en commandite par actions.

Article 47. If a business association does not open business within six months after it has been registered, the court may dissolve it on the application of the attorney-general or by exercising its executive power. But if there is reasonable cause, such period of time may be extended on the application of the association.

In Japan, as in all civil law countries, the courts have certain administrative power which they may exercise on their own initiative. This is the fundamental difference between the civil and the common law conceptions of a court.

Article 48. If a business association acts contrary to the public order or good morals, the court may dissolve it on the application of the attorney-general or by exercising its executive power.

Section 2.—Société en nom collectif.

Sub-Section 1.—Formation.

Article 49. Articles of association shall be made on the formation of a société en nom collectif.

The association begins to have its existence as soon as the written contract is made. The doctrine that such a written contract is essential to the existence of an association is derived from the French system of jurisprudence. It is quite unnecessary in Germany to observe such formality; for in Germany a société en nom collectif may be formed by an implied intention.

Article 50. The following particulars shall be set forth in the articles of association, with the signatures of all the members:—

1. The object of the association.

2. Its trade name.

3. The names and residences of the members.

4. The place of the principal office and the place of each branch establishment.

5. The nature and value or basis of valuation of the contributions of the members.

Article 51. Within two weeks after the making of the articles of association, the association shall register the following particulars at the place of the principal office and the place of any branch establishment:—

1. The particulars enumerated in Art. 50, Nos. 1–3.

2. The principal office and each branch establishment of the association.

3. The date of its formation.

4. The term for its existence or causes for its dissolution, if such term or causes have been fixed.

5. The nature of the contributions of the members and the value of the property contributed.

6. The names of the members who are to represent the association, if such members have been designated.

If a branch office is established after the formation of the association, the registration mentioned above shall be made at the place of such branch establishment within two weeks, and the fact that such branch office is established shall be registered at the place of the principal office and the place of any other branch office within the same period of time.

If a new branch office is established within the same province as the court which has jurisdiction over the place of the principal office or the place of any other branch establishment, it is sufficient to register the fact that such branch office is established.

Art. 106 of the German Commercial Code reads as follows:—

“The partnership (société en nom collectif) must make a declaration before the court within whose jurisdiction its place of business is, which must include,—

1. The names, forenames, profession and place of abode of each member.

2. The firm name of the company and the place where it carries on business.

3. The date when the partnership was formed.

Article 52. When the principal office or any branch establishment is removed to another place, the registration of such removal shall be made at the former place within two weeks; and the registration mentioned in Art. 51, par. 1, shall be made at the new place within the same period of time.

If the principal office or a branch establishment is removed to a place within the jurisdiction of the same court, only such removal shall be registered.

Article 53. If any alteration takes place in the particulars enumerated in Art. 51, par. 1, such alteration shall be registered at the place of the principal office and the place of any branch establishment within two weeks.

Art. 107 of the German Commercial Code reads as follows:—

“If the firm name of the partnership (société en nom collectif) is changed, or the business carried on in another place, or if a new member enters into the partnership, this has also to be entered in the trade register.”

Sub-Section 2.—The Internal Relations of the Association.

Article 54. In regard to the internal relations of the association, the provisions of the Civil Code concerning partnership are applicable, unless the articles of association or this Code provide to the contrary.

A partnership under the Civil Cede is a contract under which each party promises to contribute money, property or service for the purpose of carrying on a common enterprise. The special characteristic of this partnership is that unless a joint liability is created by a special contract, a mere contract of partnership does not make the partners jointly liable for partnership debts, though each of them is unlimitedly liable for his own share of the partnership debts. Such a partnership is not necessarily a commercial organization. Even an educational institution or a scientific association may be a partnership provided it has not been incorporated. See University of Pennsylvania Law Review, Vol. 58, p. 1.

Article 55. If debts are assigned to the company by a member as his contribution, such member is responsible for the payment on default of the debtor. In such case, the member is not only liable for the interest but also for damages.

When such contribution is made, the debts must be completely assigned to the association. If the debts are non-negotiable, the debtor must be duly informed by the original creditor, or the consent of the debtor must be obtained. If they are negotiable, the instruments must be properly indorsed and delivered. In case of a government bond, a mere delivery is sufficient. See Arts. 467, 469 and 473 of the Civil Code.

Article 56. In the absence of a special provision in the articles of association, each member has a right as well as a duty to manage the business of the company.

Identical with Art. 114 of the German Commercial Code.

Article 57. The appointment or dismissal of a manager is performed by the majority of the members, even if certain members have been appointed for the management of the business.

Art. 116, pars. 3 and 4, of the German Commercial Code reads as follows:—

“The appointment of an agent necessitates the approval of all the managing partners unless there is danger in delaying to appoint.

“Revocation of the agent’s authority can be made by any one of the partners having authority to make the appointment or to concur in making the appointment.”

Article 58. The alteration of the articles of association or any act beyond the scope of the object of the association¹ cannot be effected without the agreement of all the members.²

¹According to the report made by the committee for compiling the Commercial Code, when an association makes a donation to some charitable institution, it is an act beyond the scope of the purpose of the association.

²Identical with Art. 116, par. 2, of the German Commercial Code.

Article 59. If a member transfers the whole or part of his interest in the association to a third person without the consent of the other members, such a transfer cannot be set up as a defence against the association.

I.e. Though such a transfer is valid between the transferor and the transferee, the transferor is still liable to the association as a member, if the association holds him.

This is a provision derived from the old German Commercial Code.

Article 60. A member without the consent of the other members cannot carry on commercial transactions within the scope of the business of the association or become a member of unlimited liability of any other business association doing the same business, either on his own account or on account of third persons.

If a member in violation of these provisions carries on commercial transactions for himself, the other members on a conclusion of the majority may consider them as done on account of the association.

If the other members fail to exercise such right within two weeks after one of them has been informed of such transactions or if one year has elapsed from the time of such transactions, they can no longer enforce such right against the member.

This article is derived from Arts. 112 and 113 of the German Commercial Code.

Sub-Section 3.—The External Relations of the Association.

Article 61. If particular members of the association have not been appointed representative members by the articles of association or by agreement of all the members, each member represents the association.

The representation of the association is distinguished from the management of the business of the association, the former arising from the external relation and the latter from the internal relation. All the Codes based on the German system generally recognize such a distinction. On the other hand, under the French system, these two rights are confounded. See Art. 125 of the German Commercial Code.

Article 62. A representative member of the association has authority to do all acts in court or outside of court in regard to the business of the company.¹

The provisions of Arts. 44, par. 1, and 54 of the Civil Code are applicable to a société en nom collectif.²

¹Identical with Art. 126, par. 1, of the German Commercial Code.

²Art. 44, par. 1, of the Civil Code provides that a juristic person is responsible for damage done to third persons by its directors or other representatives. Art. 54 of the same Code provides that any restriction on the authority of the directors cannot be set up as a defense against third parties acting in good faith.

Art. 126, par. 2, of the German Commercial Code reads as follows:—

“A limitation of authority to represent is of no effect against a third person, especially in the case of a limitation that shall extend the representation only to certain transactions or class of transactions, or that shall hold good only under certain circumstances or for a certain time or place.”

Article 63. If the debts of the association cannot be satisfied out of its assets, each member is jointly liable for the payment.

A creditor of the association cannot sue the individual members unless he avers that he cannot be satisfied out of the firm assets. He has practically to show either that the association is in bankruptcy or that he has sued the association and failed of satisfaction. In other words, the individual members are not principal debtors, but “accessory debtors.” On the other hand, under the German Code, as well as the Hungarian Code, the members of the association are treated as principal debtors. A creditor of the association has a right of election to sue either the association or the individual members, or the association and its members jointly. Thus, the Japanese treat the société en nom collectif as an entity; the Germans treat it as a partnership. The present article is probably derived from the Commercial Codes of Italy and Belgium: in the former it is provided that no claim can be made against the members unless the right of action has been exercised against the company; the latter provides that there can be no judgment against the members unless there has been a judgment rendered against the association. The Code fédéral des obligations of Switzerland has a similar provision.

I have used the term “accessory debtor” to describe the relation between the members of the association and the creditors, as the relation has no exact counterpart in the English and American common law. Under the Civil Code, a surety is an accessory debtor. If he can show that the principal debtor is able to perform the debt and that such a performance can be easily enforced, the creditor is obliged to exhaust the property of the principal debtor. Strictly speaking, the members of the société en nom collectif are neither principal debtors nor sureties; for according to the Japanese Civil Code, in case there are several sureties, they are not jointly liable to the creditor.

Article 64. A member who has been admitted to the association after its formation is responsible for the debts incurred before his admission to membership.

This provision is identical with Art. 130, par. 1, of the German Commercial Code. Under that Code, any agreement contrary to such provision is of no effect against third parties. It is also held in France that a new member must be liable for the old debt, but this liability can be dispensed with by a contract between the members. Again, the new member’s liability for the old debt is recognized by Art. 89 of the Hungarian Commercial Code, Art. 78 of the Italian Commercial Code and Art. 565 of the Code fédéral des obligations of Switzerland. The theory that a member is not liable for debts contracted by the société en nom collectif prior to his admission as a member prevails only in England and the jurisdictions under its system.

Article 65. If a person, though not a real member, does an act which may induce other persons to believe that he is a member, he shall be responsible as a member to the third parties acting in good faith.

No such provisions can be found in the German Commercial Code or other continental codes. Probably this article is of an English origin, expressing, as it does, a rule corresponding to the “partnership by estoppel” of the common law.

Art. 113 of the First Japanese Commercial Cade provides that a person shall be liable as a member to third persons in the following cases:

1. If he allows his name to be used in the trade name.

2. If he participates in the management of the business.

3. If he enjoys the rights and assumes the duties of a member.

Article 66. A decrease of the contribution of a member cannot be set up as a defense against the creditors of the company unless such decrease is not objected to by the creditors within two years after it has been registered at the place of the principal office.

Article 67. An association cannot distribute profits before any impairment of its capital has been made good. If profits are distributed in violation of this provision, the creditors of the company may demand that they be refunded.

There are no such provisions in the German Commercial Code. The provisions concerning the reduction of capital are derived from the Italian Commercial Code.

Sub-Section 4.—The Retirement of Members.

Article 68. If articles of association have failed to stipulate for the duration of the association or have stipulated that the association shall last as long as the life of a certain member,¹ any member may retire at the end of a business year. But in such case a notice must be given six months before such retirement.

In case of unavoidable necessity, a member may retire at any time, irrespective of whether the articles of association have or have not stipulated for the period of the duration of the company.²

¹The result of this provision is, that a provision that the association shall continue as long as one of its members shall live is illegal or at least is not effective.

²According to the German Commercial Code, a cause of the retirement of a member is a cause of the dissolution of the association. In Europe, the Codes, either of the German or of the French system, except the Italian Commercial Code, do not recognize that the members of a société en nom collectif or société en commandite may independently retire without effecting the dissolution of the company. As the Japanese société en nom collectif is considered as a juristic person, so the provision of the Italian Code is adopted in order to accord with the entity theory. Consequently, though provisions similar to the present article are found in the German Commercial Code, Arts. 132, 133, 134, the latter provide that the retirement of a member and the dissolution of the association are simultaneous events.

Article 69. In addition to the cases mentioned in Art. 68, a person will cease to be a member of the association,—

1. On the happening of any cause mentioned in the articles of association;

2. With the consent of all the members;

3. On his death;

4. On his bankruptcy;

5. On his incompetency being declared by the court;

6. On his expulsion.

Nos. 1–4 are causes for a dissolution of the association under the German Commercial Code, except that in case of death or bankruptcy the association may continue if it has been so agreed between the members. See Arts. 131, 138, 139, of the same code. Nos. 5 and 6 are not found in Art. 131 of the German Code, though expulsion is recognized by Art. 140.

Article 70. A member can be expelled only in the following cases and then only with the unanimous consent of the other members. The expulsion cannot be set up as a defense against the expelled member unless notice has been given to him,—

1. When a member is unable to contribute or does not contribute within a reasonable time after a call has been made;

2. When a member acts in violation of the provisions of Art. 60, par. 1;

3. When a member has committed an improper act towards the association, during his management of its business or his representation of it;

4. When a member has interfered with the management of the business in case he has no right to do so;

5. When a member in any other respect fails to perform important duties.

For instance, certain duties of the member may be stipulated in the articles of association, the violation of which will justify an expulsion.

In Germany the expulsion of a member can be effected only by the Court. See Arts. 133 and 140 of the German Commercial Code.

Article 71. A retired member is entitled to repayment of his interest in the company, even if the contribution of such member is no more than service or good will. But this provision is not applicable where the articles of association have provided to the contrary.

For instance, a man who has a good credit in the business world allows his name or trade name to be inserted in the trade name of the association; this is a contribution of good will within the meaning of this article.

Article 72. If the surname or full name of a retired member is still used in the trade name of the association, he may demand the discontinuance of such use.

Article 73. A retired member is responsible for a debt of the association incurred before the registration of his retirement at the place of the principal office. Such responsibility terminates when two years have elapsed after the registration.

The preceding provisions are applicable to new members to whom the interest in the association has been transferred with the consent of all the other members.

See notes to Art. 103, infra.

Sub-Section 5.—Dissolution.

Article 74. The association is dissolved,—

1. At the expiration of the time for which the association is formed, or on the happening of any cause specified in the articles of association;

2. When the enterprise of the association is accomplished, or its accomplishment becomes impossible;

3. With the consent of all the members;

4. By a consolidation with or absorption by other associations;

5. When there remains only one member in the association;

6. By the bankruptcy of the association;

7. By a decree of the court.

Art. 131 of the German Commercial Code makes no provision for the dissolution of the association on the happening of the events designated in Nos. 2, 4 and 5 of the article. On the other hand, the bankruptcy or death of a member is in the German Code a cause of dissolution, and also a notice of retirement given by a member is a cause of dissolution.

Article 75. In cases falling under Art. 74, No. 1, the association may be continued with the consent of the whole or part of the members. The dissenting members are to be treated as if they had retired.

Article 76. When an association is dissolved, except in the case of consolidation or absorption¹ or bankruptcy, such dissolution shall be registered within two weeks at the place of the principal office and the place of any branch establishment.²

¹In Japanese, there is a word pronounced “Gohei,” which signifies either the consolidation of two associations or the absorption of one association by the other.

²Art. 143 of the German Commercial Cade provides that when the dissolution of the association has not taken place owing to bankruptcy, the dissolution must be inscribed by all the members in the trade register. A similar provision exists in case a member retires from the association.

Article 77. The consolidation or absorption of associations may take place by a unanimous agreement of the members.

This provision is derived from the Italian Commercial Code, but under that Code consolidation is not considered as dissolution. The German Commercial Code makes no provision for the consolidation of a société en nom collectif and a société en commandite.

Article 78. When a resolution of consolidation or absorption is passed, the association shall make an inventory and a balance sheet within two weeks.

The association must publicly announce to its creditors within this period that they may present their objections within a certain time, and if the creditors are known to the association, they must be separately notified. But the time within which they may present their objections shall not be less than two months.

Article 79. If creditors make no objections against the consolidation or absorption within the time mentioned in Art. 78, par. 2, they are considered to have consented to it.

If creditors make objections, the consolidation or absorption cannot take place unless the debts are paid or adequate security is furnished.

A consolidation or absorption in violation of the preceding provision cannot be set up as a defense against the creditors who have presented their objections.

Article 80. If a consolidation or absorption has taken place without making the public announcement mentioned in Art. 78, par. 2, it cannot be set up as a defense against the creditors of the company.

If a consolidation or absorption has taken place without making separate notifications to the creditors who are known to the association, it cannot be set up as a defense against such creditors.

Article 81. When a consolidation or absorption has taken place there shall be made at the place of the principal office and the place of any branch establishment within two weeks a registration of alteration, in the case of an absorption, on the part of the association which continues to exist after the absorption, and, in the case of consolidation or absorption, a registration of dissolution on the part of the association or associations which cease to exist through the consolidation or absorption, and in the case of consolidation, a registration of the particulars mentioned in Art. 51, par. 1, on the part of the association which is created by the consolidation.

Article 82. The association which continues to exist after an absorption, or which is created by a consolidation, succeeds to the rights and duties of the association or associations which cease to exist through the consolidation or absorption.

Article 83. In case of unavoidable necessity, any member may apply to the court for a dissolution of the association. But, in such case, the court, on the application of a member, may expel a member or members instead of dissolving the association.

Similar to Art. 183, par. 1, and Art. 140, par. 1, of the German Commercial Code.

Sub-Section 6.—Liquidation.

Article 84. For any purpose connected with liquidation, an association is deemed to continue in existence after its dissolution.

Thus, during the time of liquidation, the dissolved association can sue or be sued in the name of the association.

Article 85. The method of disposition of the property of a dissolved association may be concluded by the unanimous agreement of the members. In such case an inventory and balance sheet shall be made within two weeks after the dissolution.

The provisions of Arts. 78 (par. 2), 79 and 80, are applicable to the case mentioned above.

Art. 158 of the German Commercial Code provides that if the members agree upon another kind of partition instead of liquidation, the enactments concerning liquidation are applicable to the rights of a third person, so long as there are any assets still undivided.

Article 86. If the method of disposition of the property has not been concluded according to the provisions of Art. 85, liquidation shall take place according to the provisions of the following thirteen Articles, except in cases of consolidation and bankruptcy.

Derived from Art. 145, par. 1, of the German Commercial Code.

Article 87. When a liquidation takes place, all the members are to be liquidators or the majority of the members may appoint the liquidators.

Derived from Art. 146, par. 1, of the German Commercial Code.

Article 88. In cases arising under Art. 74, No. 5, the court will appoint liquidators on the application of any person interested.

Art. 146, par. 2, of the German Commercial Code reads as follows:—

“At the request of one of the interested parties, the nomination of the liquidators may be made by the Court in whose jurisdiction the partnership has its place of business, when there is serious ground for so doing; in such a case the Court may nominate persons as liquidators who do not belong to the partnership. (Société en nom collectif.)”

Article 89. When an association has been dissolved by a decree of the court, the same court will appoint liquidators on the application of any person interested or of the attorney-general.

Article 90. When liquidators have been appointed they shall register their names and residences at the place of the principal office and the place of any branch establishment within two weeks.

Similar to Art. 148, par. 1, of the German Commercial Code.

Article 91. The duties of liquidators are as follows:—

1. To wind up the pending business.

2. To collect and pay debts.

3. To distribute the remaining property.

Liquidators have authority to do all acts in court or outside of court necessary for the performance of these duties. Any restriction on the authority of the liquidators cannot be set up as a defence against third parties acting in good faith.¹

The provision of Art. 81 of the Civil Code is applicable to the liquidation of a société en nom collectif.²

¹This article is derived from Arts. 149, 151, and 155, par. 1, of the German Commercial Code.

²Art. 81 of the Civil Code reads as follows:—

“When the liquidators, during the liquidation of a juridical person, have found that its property is not sufficient to pay its debts, they shall instantly apply to the Court for a declaration of bankruptcy and make a public notice thereof.

“The office of the liquidators terminates as soon as they assign the business to the trustee in bankruptcy.

“In such case any debt paid or delivery made by the liquidators can be taken back by the trustee in bankruptcy.”

Article 92. If the existing property of an association is not sufficient to meet the debts, the liquidators may require the members to make contributions, even though such contributions are not due at the time of liquidation.

Article 93. If there exist several liquidators, all acts in regard to the liquidation are concluded by the majority. But as to third parties, each liquidator may represent the association.

Art. 180 of the German Commercial Code reads as follows:—

“When there are several liquidators, they can only undertake matters concerning the liquidation acting together unless it has been agreed that they can act alone and separately; such an agreement must be inscribed in the trade register.”

“The enactments of par. 1 do not take away from the liquidators the right of authorizing certain among them to do certain acts or a certain class of acts.”

Article 94. As soon as the liquidators assume their offices, they shall examine the assets of the association, make an inventory and balance sheet, and deliver them to the members.

The liquidators, on the application of the members, must make a monthly report to them in regard to the progress of the liquidation.

According to Art. 154 of the German Commercial Code, the liquidators must make a balance sheet at the beginning and end of the liquidation.

Article 95. The liquidators cannot distribute the assets of the association to its members before all the debts have been paid.

Art. 155 of the German Commercial Code provides that the assets that are over after payment of debts must be divided by the liquidators between the members, in proportion to their shares in the capital of the association.

Article 96. The liquidators who have been appointed by the members may be dismissed at any time. The majority of the members must concur in such dismissal.

In case of necessity, the court may dismiss the liquidators on the application of any person interested.

This article corresponds to Art. 147 of the German Commercial Code, which, however, requires “the unanimous resolution of interested parties.”

Article 97. The dismissal or change of liquidators shall be registered at the place of the principal office and the place of any branch establishment.

Corresponds to Art. 148, par. 1, of the German Commercial Code.

Article 98. As soon as liquidation is finished, the liquidators shall render an account and submit it to the members for their approval.

If the members make no objection to the account within a month, they are considered to have approved it, except where the liquidators have acted dishonestly.

Article 99. As soon as liquidation is finished, the liquidators shall make a registration thereof at the place of the principal office and the place of any branch establishment.

Identical with Art. 157, par. 1, of the German Commercial Code.

Article 100. If the formation of an association has been rescinded after the commencement of its business,¹ liquidation shall take place as in the case of dissolution. In such case, the court will appoint liquidators on the application of any person interested.²

¹For instance, the contract of the formation of an association may be rescinded on the ground of fraud or duress, or a party to the contract may be an infant who has entered into it without the consent of his guardian. In such cases, all acts done in the name of the association alter its formation and before its rescission are deemed to be valid under this article.

²In the German Commercial Code there is a similar provision for a société anonyme, but not for a société en nom collectif or a société en commandite. According to the Commercial Codes of Portugal and Belgium, the general rule for all business associations is that a liquidation takes place in case the formation of the association is void.

Article 101. The books of the association, its business correspondence, and all documents connected with the liquidation shall be preserved for ten years after the dissolution has been registered at the place of its principal office in the case of Art. 88, or, in any other case, after the completion of the liquidation has been registered. The custodian of these books and documents is appointed by the majority of the members.

Art. 157, par. 2, of the German Commercial Code reads as follows:—

“The books and paper of the dissolved partnership (société en nom collectif) are given into the safe keeping of one of the partners or of a third party. In default of an arrangement being come to, such partner or third party will be chosen by the Court in whose jurisdiction the partnership has its seat of business.”

Article 102. On the death of a member leaving several heirs,¹ one representative shall be appointed in order to exercise the rights of the member in regard to the liquidation.²

¹See note to Art. 428, infra.

²Derived from Art. 146 of the German Commercial Code.

Article 103. The liability of the members mentioned in Art. 68 is terminated when five years have elapsed after the dissolution of the association was registered at the place of its principal office.

Even after the expiration of the said period, the creditors of the association may demand the payment of the debts out of the remaining property which has not been distributed.

The period of time spoken of, as well as that mentioned in Art. 78, supra, is not prescription within the meaning of the Civil Cede; and therefore the rules of the Civil Code concerning suspension of prescription, etc., i.e. suspending the operation of the Statute of Limitations for civil obligations, are not applicable. However, the German Commercial Code deems this period of time as prescription. Art. 159 of that Code provides that claims against a member for contracts entered into by the company are not maintainable after five years from the dissolution of the company or retirement of the member, so long as the claim is not subject to a shorter prescription; and that prescription begins with the end of the day on which the dissolution of the company, or retirement of the member, is entered in the trade register of the district in which the company has its place of business.

Section 3.—Société en commandite.

Article 104. A société en commandite is composed of members of unlimited liability and members of limited liability.

Art. 161, par. 1, of the German Commercial Code reads as follows:

“A company which has for its object the carrying on of a business under a firm name, the responsibility of one or several of the members with regard to the creditors of the company being limited to the amount of their subscribed capital, whilst that of the other members is unlimited, is a commandite company (société en commandite).”

Article 105. The provisions for a société en nom collectif are applicable to a société en commandite in case there are no special provisions in this section.

Derived from Art. 161, par. 2, of the German Commercial Code.

Article 106. In addition to the particulars mentioned in Art. 50, the limited or unlimited liability of each member of a société en commandite shall be set forth in the articles of association.

Article 107. In addition to the particulars mentioned in Art. 51, No. 1, the association shall register the limited or unlimited liability of each member at the place of its principal office and the place of any branch establishment within two weeks after the articles of association have been made.

Derived from Art. 162, par. 1, of the German Commercial Code.

Article 108. The contributions of the members of limited liability can only be made with money or other property.

Thus, service or good-will cannot be contributed. In Germany, as far as the members inter se are concerned, a member of limited liability may give a service as his contribution towards the capital.

Article 109. Each member of unlimited liability has a right and duty to manage the business of the association unless the articles of association provide to the contrary.

If there are several members of unlimited liability, the management of the business is concluded by majority.

See Arts. 56 and 105, supra, and their notes.

Article 110. The appointment and dismissal of a manager must be concluded by the majority of the members of unlimited liability, even if there are special members appointed for the management of the business of the association.

See Arts. 57 and 105, supra, and their notes.

Article 111. The members of limited liability, at the end of a business year, within business hours, may demand an inspection of the inventory and balance sheet of the association and inquire into its affairs and the state of its property.

In case of necessity, the court may, on the application of the members of limited liability, allow them to inquire into the affairs of the association and the state of its property.

This article is derived from Art. 166 of the German Commercial Code.

Article 112. A member of limited liability cannot transfer the whole or part of his interest in the association without the consent of all the members of unlimited liability.

The interests of the members of unlimited liability can be transferred only with the unanimous consent of both the members of unlimited liability and those of limited liability. See Arts. 59 and 105, supra, and their notes.

Article 113. A member of limited liability may carry on commercial transactions within the scope of the business of the association or become a member of unlimited liability of any other company of the same business, either on his own account or on account of third persons.

Derived from Art. 165 of the German Commercial Code.

Article 114. If there are no members of unlimited liability appointed by the articles of association or by an agreement of all the members to represent the association, each member of unlimited liability represents the association.

See Arts. 61 and 105, supra, and their notes.

Article 115. A member of limited liability has no right to manage the business of the association or to represent it.

Derived from Arts. 170 and 164 of the German Commercial Code.

Article 116. If a member of limited liability acts in such a manner as induces others to believe that he is a member of unlimited liability, he is responsible as a member of unlimited liability to third parties acting in good faith.

This is derived from the old German Commercial Code, Art. 169, which provided that a member of limited liability should be unlimitedly liable if his name appeared in the trade name.

Article 117. On the death of a member of limited liability, his heir takes his place as a member.

A declaration of incompetency against a member of limited liability is not a cause for his retirement.

Art. 177 of the German Commercial Code provides that the death of a member of limited liability does not necessitate the dissolution of the association.

Article 118. A société en commandite is dissolved when all the members of unlimited liability or all those of limited liability have retired; but in the latter case, on a unanimous resolution of the remaining members of unlimited liability, the company may be continued as a société en nom collectif.

In case the company is changed into a société en nom collecif as mentioned above, the dissolution of the société en commandite shall be registered within two weeks at the place of the principal office and the place of any branch establishment; and as to the société en nom collectif, a registration shall be made in accordance with the provision of Art. 51, No. 1.

Section 4.—Société anonyme.

Sub-Section 1.—Formation.

Article 119. There must be at least seven promoters for the formation of a société anonyme.

In Germany only five promoters are required. This article is of English or French origin.

Article 120. The promoters must draw up and sign the Articles of Association, in which the following particulars must be set forth:¹—

1. The object of the association.

2. The trade name.

3. The total amount of the capital.

4. The amount of each share.

5. The number of shares which a director must own.²

6. The place of the principal office and the place of any branch establishment.

7. The manner in which the association has given its public notice.³

8. The names and residences of the promoters.

¹All these requirements, except Nos. 5 and 8, are found in Art. 182 of the German Commercial Code, but according to the latter, the mode of nominating and composing the directorate and the manner in which a general meeting of shareholders is summoned must be fixed in the articles of association.

²A director must be a shareholder in Germany, but in France, even a stranger may become a director. Under the present article, a Japanese director must at least hold one share. See Arts. 164 and 168, infra.

³For instance, the association may fix a certain newspaper in which any notice of the association is to be given. By doing so, the holders of certificates to bearer as well third persons dealing with the association may refer to such paper for all information concerning the business of the association.

Article 121. The particulars mentioned in Art. 120, Nos. 5–7, if not set forth in the articles of association, may be inserted afterwards by the preliminary meeting of shareholders or by the general meeting of shareholders.

The resolution of such general meeting shall take place in accordance with the provisions of Art. 209.

As these particulars are comparatively unimportant, their omission is not a ground for avoiding the articles of association. They may, therefore, be supplied later at the meetings. The preliminary meeting is called by the promoters after the first payment has been made upon each share. See Art. 131, infra.

Article 122. Promises touching the following matters shall have no effect unless they have been set forth in the articles of association:—

1. The term for the existence of the association and the causes for its dissolution.

2. The issue of shares above their face value.

3. The special interests to be received by the promoters and the names of the promoters who are to receive such interests.

4. The names of the persons who contribute property other than money, the nature and value of such property, and the number of shares issued in consideration for such contributions.

5. The expenses of the formation of the association, for which the association will be liable, and the amount of compensation to be received by the promoters.

This article is identical with Art. 186 of the German Commercial Code, except Nos. 1 and 2; as to No. 2, however, Art. 184 of the same Code provides that shares may be issued at a higher price if the articles permit.

Article 123. The association begins to have its existence when the promoters have subscribed the whole amount of its shares.¹ In such case, the first payment, not less than one fourth of the shares, must be made by the promoters without delay;² and the directors and auditors must be appointed. Such appointment is concluded by the majority of the promoters.³

¹The German Commercial Code recognizes the difference between the simultaneous formation and the successive formation of a société anonyme: in the latter, the promoters ask for subscriptions to the shares; in the former, they themselves are subscribers to all the shares. The present article deals with the method of the simultaneous formation of a société anonyme. But the French Commercial Code provides only for the successive formation and there is no special provision for the simultaneous formation. Neither did the First Japanese Commercial Code recognize the latter. See Art. 188 of the German Commercial Code.

²Both in Germany and France, the first payment must not be less than one fourth of the whole amount of the capital.

³Art. 190, par. 1, of the German Commercial Code reads as follows:—

“When the founders subscribe for all the shares, they ought at the time of the foundation of the company, or even at a special meeting held under the court or before a notary, to appoint a council of supervision (auditors).”

The word “auditors” is explained under Art. 180, infra.

Article 124. As soon as the directors are appointed, they must apply to the court for the appointment of inspectors for the purpose of inspecting the particulars mentioned in Art. 122, Nos. 3–5, and whether the first payment has been made or not.

The court, on the report of the inspectors, may take action under the provisions of Art. 135.

This article is derived from Arts. 192 and 193 of the German Commercial Code.

Article 125. If the promoters do not subscribe the whole amount of the shares, they shall invite subscriptions.

Similar to Art. 189, par. 1, of the German Commercial Code.

Article 126. If a person desires to subscribe for shares, he must sign two copies of the certificate of subscription and designate therein the number of shares to be subscribed.¹

The certificate of subscription must be made by the promoters and must contain the following particulars:—

1. The date on which the articles of association were drawn up.

2. The particulars mentioned in Arts. 120 and 122.

3. The number of shares subscribed by each promoter.

4. The amount of the first payment.

If the subscriber pays more than the face value of the shares, he must state on the certificate of subscription the amount which he pays for the shares.²

¹The reason why two copies must be made is, that one copy is for the association itself and the other is for the court when the formation of the company is registered. See Art. 187, pars. 2 and 3, of the Code of Procedure in Non-actionable Matters.

²This article is derived from Art. 189 of the German Commercial Code.

Article 127. A subscriber is obliged to make payment according to the number of shares subscribed.

Article 128. Shares cannot be issued at a price less than their nominal value.¹

The amount of the first payment cannot be less than one-fourth of the amount of the shares.²

¹Identical with Art. 184, par. 1, of the German Commercial Code.

²See Art. 123, supra, and notes. There is an exception to this rule. The first payment in a railway company may be less than one fourth, but not less than one tenth.

Article 129. As soon as the shares are subscribed the promoters must call for the first payment.

If shares are issued at a price more than the nominal value, the excess amount shall be paid with the first payment.

Article 130. If the subscriber does not make the payment mentioned in Art. 129, the promoters may notify him that he must pay within a certain period of time and that, upon his default, he will lose his rights. But such period of time shall not be less than two weeks.

If the subscriber who has been notified does not make the payment, he loses his rights. In such case the promoters may again invite subscriptions for the shares subscribed by him.

The above provisions do not affect the right to claim damages from the subscriber.

The promoters may sue the subscriber without such notification and claim a specific performance. But as soon as the subscriber loses his rights, the promoters can no longer compel him to pay for his subscription, though he is still liable for damages. “To lose rights” means that he can no longer enjoy the rights of a subscriber, that is, the right to attend a preliminary meeting of shareholders, or to become a shareholder when the association is completely formed.

Article 131. As soon as the payment mentioned in Art. 129 has been made, a preliminary meeting of shareholders must be called by the promoters.

In a preliminary meeting of shareholders, all resolutions shall be passed by a majority of the votes of the subscribers present, provided such majority represents at least one-half in number as well as in interest of all the subscribers.

The provisions of Arts. 156, pars. 1 and 2, 161, pars. 3 and 4, 162, and 163, pars. 1 and 2, are applicable to the preliminary meeting of shareholders.

Art. 190, par. 2, of the German Commercial Code provides that when the promoters do not subscribe for all the shares, they ought, after the capital has been subscribed, to call a general meeting for the purpose of electing auditors.

Article 132. The promoters shall make a report to the preliminary meeting of shareholders on all matters in regard to the formation of the association.

Article 133. At the preliminary meeting of shareholders, directors and auditors shall be appointed.

See note to Art. 131.

Article 134. Directors and auditors shall examine the following particulars and make a report to the preliminary meeting of shareholders:¹—

1. Whether the whole number of shares has been subscribed.

2. Whether the payment mentioned in Art. 129 has been made on each share.

3. Whether the matters mentioned in Art. 122, Nos. 3–5, are reasonable.

In case directors or auditors are appointed from the promoters, the preliminary meeting of shareholders may appoint special inspectors instead of the directors and auditors to make the examination and report.²

¹The preliminary meeting is usually continued for several days, the members meeting and then adjourning to meet again to hear the report.

²This article as well as Art. 124 is derived from Arts. 192 and 193 of the German Commercial Code.

Article 135. If the preliminary meeting of shareholders is of opinion that the matters mentioned in Art. 122, Nos. 3–5, are unreasonable, they may be altered. But in case a contribution is made in property other than money, and the number of shares to be given in consideration is decreased, the contribution may be made in money.

Article 136. In case some shares have not been subscribed or the payment mentioned in Art. 129 has not been made, the promoters shall be jointly liable for such subscription or payment. This provision is applicable where the subscription has been rescinded.

Art. 202, par. 1, of the German Commercial Code reads as follows:—

“The founders are jointly and severally responsible to the company for the accuracy and detail of the declarations they make relating to the subscription and the money paid up of the capital, as well as those referring to the statements provided for by Art. 186 for the registration of the company in the trade register, in addition to the obligation which is incumbent on them to repair possible damages that might be sustained hereafter; they are especially held responsible for the amount of capital not yet subscribed, to get overdue instalments paid, and to repay any amount which has not been taken into account in the estimates of foundation expenses.”

Article 137. The right to claim damages from the promoters is not affected by Arts. 135 and 136.

Art. 202, pars. 2, 4 and 5, of the German Commercial Code reads as follows:—

“The founders are severally and jointly liable to the company for damages which it may sustain on account of wilful misrepresentation regarding the share capital, on those things taken into account as designated in Art. 186.

“If a company suffers a loss on account of the insolvency of a shareholder, the founders who knew of such insolvency and allowed him to become a shareholder are jointly and severally liable to repair such a loss.

“With the founders the following are responsible to the company jointly and severally for damages:—

“1. He who takes a sum of money not included in the estimates of the expenses of foundation, if, when he takes such money, he knew, or from the circumstances ought to have known that this sum was being paid to him secretly, as well as every person who is knowingly an accomplice in such secret payment.

“2. In case of damage caused by malicious intention in anything connected with the subscription of the capital, every third person knowingly an accomplice in causing such damage.”

Article 138. The preliminary meeting of shareholders may alter the articles of association or abandon the formation of the association.

Art. 196 of the German Commercial Code reads in part as follows:—

“In case the promoters have not subscribed for all the shares, the court calls a general meeting of shareholders inscribed on the list to come to a resolution concerning the formation of the company.

“The majority which expresses itself in favor of the formation of the company must include at least one-fourth of the shareholders inscribed on the list; the amount of their share must at least represent one-fourth of the whole capital.

“When even this majority is reached the formation of the company is considered as refused when a portion of the shareholders falls under the conditions provided for by Art. 186, and when the majority of votes given by the other shareholders are against the formation.”

Article 139. When the promoters have not subscribed the whole amount of shares, the association begins to have its existence at the end of the preliminary meeting of shareholders.

Article 140. If the payment mentioned in Art. 129 is not fully made within one year after the subscription of the whole amount of shares, or the preliminary meeting of shareholders is not called by the promoters within six months after such payment, subscribers may rescind their subscriptions and demand that the money paid be refunded.

The promoters will be jointly liable for the repayment of the subscription. See Art. 136, supra.

Article 141. A société anonyme shall register the following particulars at the place of the principal office and the place of any branch establishment within two weeks from the ending of the examinations mentioned in Art. 124 in case the promoters have subscribed the whole amount of shares, or from the ending of the preliminary meeting of shareholders in case the promoters have invited subscriptions:—

1. Those particulars mentioned in Art. 120, Nos. 1–4 and 7.

2. The principal office and any branch establishment.

3. The date of the formation of the association.

4. The term of its duration or causes for its dissolution, if they have been stipulated.

5. The amount paid on each share.

6. The rate of interest, if interest is to be distributed before the commencement of business.

7. The names and residences of the directors and auditors.

The provisions of Arts. 51, pars. 2 and 3, 52 and 53 are applicable to a société anonyme.

According to the majority of the continental codes, the whole articles of association must be registered or filed in the court; but the German Code, from which the present article is derived, only requires the important facts to be registered. See Arts. 195, 198 and 199 of the German Commercial Code.

Article 142. No subscriber shall be allowed to rescind his subscription on the ground of fraud or duress after a company has been registered at the place of its principal office according to the provisions of Art. 141, par. 1.

This provision is an exception to the general rule of the civil law in regard to rescission of contract. But persons incompetent to make a contract, as infants who have not the permission of parents or guardians, are allowed to rescind this subscription.

Sub-Section 2.—Shares.

Article 143. The capital of a société anonyme shall be divided into shares.

Article 144. The responsibility of a shareholder is limited to the amount of shares subscribed by or transferred to him.¹

As to payment on shares, a shareholder cannot claim a set-off against the association.²

¹Identical with Art. 211 of the German Commercial Code.

²Payment on shares must be made in money. Claims against third persons, such as bills, notes or bonds, and claims against the association cannot be contributed as payment on shares.

Art. 221 of the German Commercial Code provides that shareholders and their predecessors cannot be discharged from making the payments indicated in Arts. 211 and 220; they cannot set off debts due to them by the association against such payments.

Article 145. The amount of all the shares shall be equal.¹

The amount of each share cannot be less than fifty yen, but in case the whole amount of the shares is to be paid in at once, the amount of each share may be reduced to twenty yen.²

¹This provision is derived from the French and Italian Codes.

²Art. 180 of the German Commercial Code provides as follows:—

“The capital of the company must amount to at least 1,000 marks.

“In the case of an undertaking of public utility, the federal council may, if it be a matter of special local interest, authorize an issue of non-transferable shares to a less amount, but never less than 200 marks….”

Article 146. If one share is owned by several persons, the owners in common shall appoint one person in order to exercise the rights of a shareholder.

The owners in common are jointly liable to the association for the payment of the share.

This article is identical with Art. 225, pars. 1 and 2, of the German Commercial Code. Under the German system a share is indivisible and the existence of a partial shareholder is not recognized.

Article 147. No certificates of shares¹ shall be allowed to issue unless registration has been made at the place of the principal office according to the provisions of Art. 141, par. 1.

Certificates issued in violation of this provision are void, but the right to claim damages from those who issue them is not affected.²

¹A certificate may be issued for one share or for many shares. The former is called a simple certificate; the latter, a compound certificate. In Japan, it is usual to have one certificate for one share.

²This article is identical with Art. 200, par. 3, and Art. 209, par. 2, of the German Commercial Code.

Article 148. A certificate shall contain the following particulars, bearing a number and signed by the directors:—

1. The trade name of the company.

2. The date on which the registration mentioned in Art. 141, par. 1, was made at the place of the principal office.

3. The total amount of the capital.

4. The amount of each share.

The amount of each payment on the shares must be inserted in the certificate if the whole amount of shares is not to be paid up all at once.

Article 149. In the absence of any provision in the articles of association to the contrary, shares can be transferred without the consent of the association; but no transfer or even a promise to transfer can be made before a registration has been made at the place of the principal office according to the provisions of Art. 141, par. 1.

The same provisions are found in Art. 222, par. 2, a Art. 200, par. 2, of the German Commercial Code.

Article 150. Unless the name and residence of a transferee have been entered in the book of shareholders, and his name written on the certificate, no transfer of a personal share can be set up as a defence against the company or third persons.

Shares are divided into two kinds, personal shares and shares to bearer. In the former, the name of its holder is inserted, but in the latter, there is no specific name. A valid transfer of a share to bearer can be executed by delivery.

Art. 222, par. 1, of the German Commercial Code provides that personal shares must be inscribed in the share register of the association with the name, address and profession of the holder accurately written.

Article 151. A société anonyme shall not acquire or take as security its own shares.¹

Shares cannot be canceled except the provisions in regard to the reduction of capital are strictly followed. But this provision is not applicable where, in accordance with the articles of association, such cancelation is made from the profits which otherwise would be distributed to the shareholders.²

¹There are three principles of law in regard to the question whether a société anonyme can acquire its own shares. According to the French Commercial Code and the old German Commercial Code, such acquisition is neither limited nor prohibited. On the other hand, a société anonyme is absolutely restrained from acquiring its own shares as in Japan by the German law of 1870 and the Commercial Codes of Hungary, Spain and Sweden. However, the present Commercial Code of Germany as well as those of Austria, Italy, Belgium and Switzerland, only make certain restrictions upon such acquisition. For instance, Art. 226 of the German Cade provides that in the usual course of business a société anonyme must not acquire or take as security its own shares unless in execution of a commission to purchase. In the usual course, it cannot acquire or accept as security its certificates even to execute an order to purchase. It is the same with its own shares if they have not been fully paid up, or, when they have been issued at a price above their nominal value, if this price has not been fully paid up.

²Art. 227 of the German Commercial Code reads as follows:—

“The regaining possession of (paying off of) shares is only authorized if provided for by the articles of association. Provision for so doing ought to be made in the original articles or in articles modifying the original ones, drawn up before subscription to the shares, unless such regaining possession is to be effected, not by drawing lots, giving notice, or by similar means, but by purchasing shares outright.

“No repurchasing may be effected except by means of profit available at the annual taking of account, in so far as it is not done in the way prescribed for the reduction of capital.”

Article 152. A call on shares must be made to each shareholder two weeks before the call is due.

If a shareholder fails to pay on the day appointed, the association may notify him that he must pay within a certain period of time, and that upon his default, he will lose the rights of a shareholder. But such period of time shall not be less than two weeks.

In such a case, the association may instantly sue the delinquent shareholder without giving the second notification. The purpose of allowing the association to give the second notification is to avoid the inconvenience of bringing an action. As soon as an action has been brought, the association can no longer avail itself of this convenient method.

“To lose the tights of a shareholder” means that the share will be forfeited by the association. When a share is forfeited, the association will acquire it as long as it has not been reacquired by the original transferor or resold to a third person.

Art. 219 of the German Commercial Code reads as follows:—

“If a call is not paid punctually, shareholders may be given time to pay such call with the notice that after the expiration of such time, they will be deprived of their right to participate in profits as well as their right to the money they have already paid.

“Notice must be given three times in the papers mentioned in Art. 182, par. 3. The first publication should take place at least three months, the last at least one month, before expiration of the time given for payment. When the right to participate in profits cannot be transferred without the consent of the company, it is sufficient, instead of public advertisement, to address a single notice to each shareholder whose money is overdue. This notice ought to grant an extension of time of not less than one month from the day of receiving such notice.

“If a shareholder does not pay his call in spite of such notice, he must be declared deprived of his rights to profits, as well as to his instalments already paid. Such declaration must be made by advertisement in the company’s papers.”

Article 153. When a shareholder does not pay a call after the association has taken all necessary steps mentioned in Art. 152, he loses his rights.

In such case, the association must make a call to each transferor of the share and require him to pay within a certain period of time not less than two weeks. The transferor who first makes payment on such call acquires the share.¹

When no transferor makes payment, the association shall sell the share at auction. If the sale results in a deficit, the company is entitled to look to the former shareholder. If such shareholder does not pay within two weeks, the association may look to any transferor for such payment.²

The provisions of this article do not affect the right of the association to claim damages and any penalty stipulated in the articles of association.³

¹Here the original transferor of the share is treated as warranting that the transferee will pay the call. According to the French law of 1867 and the Codes of Spain and Switzerland, the liability of a transferor of shares as a warrantor is extinguished when one-half of the amount of the shares has been paid up. The first Japanese Commercial Code also adopted this principle. But in France, this law was abolished in 1893, and now most jurisdictions under the continental system make a transferor of shares responsible as long as they have not been fully paid up. For instance, Art. 220 of the German Commercial Code reads as follows:—

“To the extent that a shareholder omits to pay his call on shares, the last holder, and each one previously registered as such in the register of shares is responsible to the company; every registered holder of shares is only responsible for the amount his successor omits to pay.

“Such responsibility arises when payment has not been made by the latter before expiration of one month of his receiving notice, and advice that such notice has been given, has been forwarded to his legal predecessor.”

“The new certificate is sent to the former holder on payment of the money owing….”

²The German Commercial Code also provides that the former shareholder remains responsible to the association for the loss that it may sustain, not only on account of the non-payment of this one call but for all subsequent calls.

³Identical with Art. 218, par. 3, of the German Commercial Code.

Article 154. A transferor of shares is exempted from any liability mentioned in Art. 153 after two years have elapsed since the transfer has been entered in the book of shareholders.

Identical with Art. 220, par. 4, of the German Commercial Code.

Article 155. A certificate may be made out to bearer on the demand of its holder, provided that the amount of the share has been fully paid.

A share to bearer may be again changed into a personal share at any time on the demand of the shareholder.

This article is derived from Art. 179, pars. 2 and 3, Art. 183, par. 2, of the German Commercial Code.

Sub-Section 3.—The Organization of the Association.

A.—The General Meeting of Shareholders.

Article 156. When a general meeting of shareholders is called, a notification shall be given to each shareholder two weeks before the date appointed for this meeting.

The notification shall state the purpose of the meeting and the matters which are to be discussed.

In case the association has issued shares to bearer, public notice of the call for the general meeting of shareholders and the particulars mentioned in the last paragraph shall be given three weeks before the date appointed for the meeting.

Provisions similar to this article will be found in Arts. 255 and 256 of the German Commercial Code.

Article 157. A regular meeting of shareholders shall be called once a year at a definite time by the directors of the association.

If a société anonyme distributes profits more than once a year, a general meeting shall be called when each distribution takes place.

Art. 253, par. 1, of the German Commercial Code provides that a general meeting of shareholders is convened by the directorate in so far as the law and the articles of association do not give this right equally to other persons.

Article 158. The regular meeting is to inspect the documents submitted by the directors and the report of the auditors and pass resolutions concerning the distribution of profits or interest.¹

The general meeting may appoint special inspectors for the purpose of inspecting the books submitted by the directors.²

¹Corresponds to Art. 260, par. 1, of the German Commercial Code.

²Corresponds to Art. 266, par. 1, of the German Commercial Code.

Article 159. A special meeting of shareholders is called by the directors in case of necessity.

Corresponds to Art. 253, par. 2, of the German Commercial Code.

Article 160. The shareholders representing not less than one-tenth of the capital may request the directors to call a special meeting by filing an application in writing with the directors, stating the purpose of such meeting and the reason for calling it.

If the directors do not call the meeting within two weeks after such application, these shareholders may call the meeting with the permission of the court.

Identical with Art. 254, pars. 1 and 4, of the German Commercial Code except that in the latter such shareholders need not represent one-tenth of the capital, but only represent one-twentieth of the capital.

Article 161. A resolution at a general meeting is passed by the majority of the votes of the shareholders present,¹ unless this Code or the articles of association provide to the contrary.

Holders of certificates to bearer cannot vote unless their certificates have been deposited with the association a week before the date appointed for the meeting.

A shareholder may vote by proxy; but the holder of such a proxy must produce a written instrument to the association in order to prove his authority.²

Those who have special interests in the resolution of the general meeting cannot vote.³

¹Thus, a resolution is not passed by the majority of the shareholders, but by the majority of their votes. One shareholder may have hundreds of votes, if not limited according to Art. 162, infra. This provision is identical with Art. 251, par. 1, of the German Commercial Code.

²Identical with Art. 252, pars. 3 and 4, of the German Commercial Code.

³Thus, the directors have no right to vote when a resolution is presented concerning the approval or disapproval of the account submitted by them. Art. 252, par. 5, of the German Commercial Code provides that whoever may, as a result of a resolution to be passed, be discharged or freed from an obligation cannot take part personally in voting, nor exercise the night of voting on some one else’s account. But in Japan, a director may vote a proxy for other shareholders, even if he is interested in such a resolution.

Article 162. Each shareholder has one vote for one share; but the number of the votes of a shareholder who owns more than ten shares may be limited by the articles of association.

Derived from Art. 252, par. 1 and 2, of the German Commercial Code.

Article 163. If a general meeting is called or a resolution passed in violation of the law or ordinances or the articles of association, any shareholder may apply to the court for a decree annulling such resolution.

This application shall be made within a month after the resolution.¹

If the application is made by a shareholder other than a director or an auditor he must deposit his certificates, and on the application of the association he is required to furnish an adequate security.²

¹The first two paragraphs of this article are derived from Art. 271, pars. 1 and 2, of the German Commercial Code. But in Germany the shareholder who brings such suit must have disagreed with the resolution passed.

²Art. 272, par. 4, of the German Commercial Code provides that the court may order, if asked, that the shareholder bringing the action shall furnish security to the association by reason of possible damage resulting to it.

B.— Directors.

Article 164. Directors are appointed from the shareholders¹ by the general meeting of shareholders.²

¹The principle that the directors must he shareholders is derived from the French system of law. The Codes of Switzerland and Portugal adopt the same principle. In Italy and Belgium, the directors must deposit a certain amount of shares with the company, though it is quite immaterial whether the shares belong to the director depositing them or to other persons. According to this article and Art. 168 infra, the Japanese adopt the French as well as the Italian and Belgian principle. There is no similar provision in the German Commercial Code.

²In Germany, the directors are usually appointed by the auditors, but the law does not provide by what organ the directors shall be appointed. It is a French theory that the directors are appointed by the general meeting of shareholders.

Article 165. The board of directors shall consist of three or more persons.

This is derived from Belgium. In Germany and most jurisdictions in Europe even a single director is sufficient. See Art. 231, par. 2, of the German Commercial Code.

Article 166. The term of office of a director shall not be longer than three years; but he may be reappointed at the expiration of such term.

The same provision is found in the Codes of Portugal and Argentine; but in these countries a director cannot be re-appointed after the expiration of the term. According to the German Commercial Code there is no restriction upon the term of office of a director, though in some other countries such term is limited to four, five or six years.

Article 167. A director may be dismissed at any time by the general meeting of shareholders, but in case the term of office has been fixed and he is dismissed before the expiration of such term without reasonable cause, he may claim damages arising from such dismissal.

Art. 231, par. 3, of the German Commercial Code provides that the appointment of a member of the directorate can always be revoked without prejudice to the right to the compensation agreed upon.

Article 168. The directors shall deposit with the auditors the number of certificates the articles of association direct.

See notes to Art. 164, supra.

Article 169. Unless the articles of association provide to the contrary, the management of the business of the company is concluded by the majority of the directors. The appointment and dismissal of a manager is subject to the same rule.

Art, 232, par. 1, of the German Commercial Code reads as follows:—

“For formal notices, especially having reference to the signature of the directorate, the co-operation of all the members of the directorate is necessary, in default of contrary provision in the articles of association. The directorate can nevertheless authorize certain of its members to conclude specified business transactions or certain kinds of transactions….”

Article 170. Each director represents the association.¹

The provisions of Art. 62 are applicable to directors.²

¹Art. 222, par. 2, of the German Commercial Code reads as follows:—

“When each member of the directorate is not authorized by the articles to individually represent the company, it may be stipulated in the articles that members of the directorate may represent the company with the co-operation of an authorized representative, when several of them cannot act together. The council of supervision (auditors) can also be authorized by the articles to give certain members of the directorate power to represent the company alone or with a representative.”

²Corresponds to the provisions of Art. 231, par. 1, and Art. 235, par. 2, of the German Commercial Code.

Article 171. The directors shall keep at the principal office as well as any branch establishment [copies of] the articles of association, and the minute book of the general meeting of shareholders, and at the principal office the book of shareholders and the book of bonds.

Shareholders and the creditors of the association may at any time during business hours demand the inspection of these documents or books.

Art. 239 of the German Commercial Code provides that the directorate must see that all necessary books are kept. The keeping of the book of bonds is derived from the English system of law.

Article 172. The following particulars shall be entered in the book of shareholders:—

1. The names and residences of the shareholders.

2. The number of shares owned by each shareholder and the serial numbers of the certificates.

3. The amount already paid on each share and the date on which such payment was made.

4. The date on which a share was acquired.

5. If certificates to bearer have been issued, their total number, serial numbers, and the dates on which they were issued.

Article 173. The following particulars shall be entered in the book of bonds:—

1. The names and residences of the bond-holders.

2. The serial number of each bond.

3. The total amount of the bonds.

4. The amount of each bond.

5. The rate of interest of the bonds.

6. In what manner and at what time the bonds are to be repaid.

7. The date on which a bond was issued.

8. The date on which a bond was acquired.

9. If bonds to bearer have been issued, their total number, serial numbers, and the dates on which they were issued.

Article 174. As soon as one half of the capital of a société anonyme has been lost, the directors must call a general meeting of shareholders and make a report of the conditions to such meeting.¹

If a société anenyme is in such a condition that its property is insufficient to pay its debts, the directors must directly apply to the court for a declaration of bankruptcy.²

¹Derived from Art. 240, par. 1, of the German Commercial Code.

²Art. 240, par. 2, of the German Code reads as follows:—

“When the company is insolvent, the directorate ought to petition to wind up; it is pronounced bankrupt when it is shown by the annual balance sheet or by one taken at any time, that the profits (assets) do not exceed the liabilities.”

Article 175. A director without the consent of the general meeting of shareholders cannot carry on commercial transactions within the scope of the business of the association or become a member of unlimited liability of any other business association doing the same business either on his own account or on account of third persons.

If a director carries on commercial transactions in violation of such provisions, the general meeting of shareholders may consider such transactions as done for the association.

If the general meeting fails to exercise this right within two months after any one of the auditors has been informed of such transactions or one year has elapsed after the transactions, it can no longer enforce such right against the director.

This article is identical with Art. 286 of the German Commercial Code.

Article 176. A director cannot transact business with the association either on his own account or on account of third persons without the permission of the auditors.

The French and Italian Codes provide that the stockholders must authorize the transaction and that an account of it must be rendered annually. There is ne such restriction upon the directors under the German Commercial Code. On the contrary, such transactions are absolutely prohibited in Portugal and Argentine.

Article 177. If a director acts in violation of the law or ordinances, or the articles of association, he is liable for damages to third persons even if he acts in accordance with a resolution of the general meeting of shareholders.

This provision is not applicable to a director who has presented his objection [to the resolution] in the general meeting of shareholders and has given notice thereof to the auditors.

In Germany as a general rule the directors are not directly liable to the third persons, though they are jointly and severally able to the company for damages resulting from their acts contrary to their obligations. See Art. 241, of the German Commercial Code. On the contrary, in Portugal and Argentine the directors are absolutely liable to third persons for their breach of duty.

The principle that the directors are only liable to third persons in case the law or the articles of association are violated, as under this article, is derived from the French as well as the English system of law.

Article 178. If the general meeting of shareholders resolves to bring an action against the directors, or the shareholders representing not less than one tenth of the capital apply to the auditors for such an action in case the general meeting disapproves of it, the association shall bring the action within one month after the day of the resolution or application.¹

The shareholders who make such application shall deposit their certificates and upon the demand of the auditors shall furnish an adequate security.²

When the action fails, these shareholders are liable for damages to the association only.³

¹According to Arts. 268 and 269 of the German Commercial Code, claims of the association concerning the direction of its affairs against members of the directorate and the auditors must be enforced when a general meeting of shareholders has decided on it by a simple majority, or when a minority representing one tenth of the capital has demanded it, and in the latter case, proceedings must be begun within three months after the general meeting.

²Art. 269, pars. 2 and 3, of the German Commercial Code reads as follows:—

“The minority, during the course of the proceedings, must deposit shares amounting to one tenth of the capital, and the shareholders composing such minority must show authentically that the shares have been in their possession for six months previously to the general meeting.”

“The defendant may demand, on account of the loss he may be put to, that the minority should furnish a guarantee, the extent to be left entirely to the discretion of the Court….”

³Thus the plaintiff is not liable for damages to the directors. Art. 269, par. 4 and 5, of the German Commercial Code provides that the minority is obliged to find the costs so far as the association is concerned; and if the shareholders have acted in bad faith, they are jointly and severally liable to the defendant for any damage he may sustain on account of an unfounded charge.

Article 179. The amount of compensation to be received by the directors is fixed by the general meeting of shareholders, if it has not been fixed by the articles of association.

C.—Auditors.

Article 180. The term of office of an auditor is one year, but he may be re-appointed at the expiration of the term.

A société anonyme consists of three organs. The board of directors is the organ of representation which may be likened to the executive body of a state. The general meeting of shareholders is a will-organ which may be compared to a legislative body. Though the latter is the highest organ and has power to supervise the former, a general meeting of shareholders is only a temporary organ and is usually called by the directors. It is therefore regarded as necessary to have a permanent organ to exercise the power of supervision which the general meeting of shareholders owing to its temporary character cannot exercise. For this reason, the German Commercial Code recognizes the existence of a board of auditors and the Japanese Code adopts this system. Again, under the present Code, inspectors may be also appointed either by the court or by the general meeting of shareholders, but these are only temporary officers appointed for the purpose of inspecting certain particulars and their power is far more limited than that of the auditors. In France as well as in England, only such temporary inspectors are recognized, there being no such permanent organ as the board of auditors. See Art. 234 of the German Commercial Code.

Article 181. The auditors may at any time require the directors to make a report of the business, or may examine the business of the association and the condition of its property.

Art. 246, par. 1, of the German Commercial Code reads as follows:—

“The council of supervision (auditors) must supervise the carrying on of the business of the company in all its branches, and to this end must inquire into the progress of the company’s affairs. It can always demand a report on this subject from the directorate and look into the books and papers of the company, as well as what money is standing to its name in the bank and the amount of valuables and goods it possesses. It ought to examine the annual accounts, the balance sheets and the proposals how to divide the profits, and make a report on all these points to the general meeting.”

Article 182. The auditors may call a general meeting of shareholders when they think necessary.¹ This general meeting may appoint special inspectors to examine the business of the association and the condition of its property.²

¹Corresponds to Art. 246, par. 2, of the German Commercial Code.

²Because the report of the auditors may not be trustworthy.

Article 183. The auditors shall examine the documents submitted to the general meeting of shareholders by the directors and express their opinion to such general meeting.

A similar provision will be found in Art. 243, par. 2, of the German Commercial Code.

Article 184. An auditor cannot act at the same time as a director or manager; but when there is a vacancy among the directors, an auditor may be appointed to act temporarily as a director by an agreement of both the directors and the auditors. An auditor acting as director in such a case cannot discharge the duty of an auditor without the approval of the general meeting of shareholders mentioned in Art. 192, par. 1.

This article is derived from Art. 248 of the German Commercial Code.

Article 185. If the association brings an action against its directors or vice versa, the auditors represent the association for such action; but the general meeting of shareholders may appoint other persons to represent it.

When the shareholders who represent not less than one tenth of the capital apply for bringing an action against the directors, a special representive may be appointed.

This article is identical with Arts. 247, par. 1, 268, par. 2, of the German Commercial Code. But in Germany when the responsibility of the auditors is in question, they have the right to proceed against the directors without the authority of the general meeting or even against its will. See Art. 247, par. 2, of the same Code.

Article 186. When the auditors neglect their duties, they are liable for damages to the company and third persons.

Derived from Art. 249 of the German Commercial Code.

Article 187. If the general meeting of shareholders resolves to bring an action against the auditors, or the shareholders representing not less than one tenth of the capital apply to the directors for such action in case the general meeting disapproves of it, the association shall bring the action within one month after the day of the resolution or application. In such case, the general meeting may appoint persons other than the directors to represent the company and when the shareholders who represent not less than one tenth of the capital apply for bringing such action, a special representative may be appointed.

The shareholders who make such application shall deposit their certificates and upon the demand of the directors shall furnish an adequate security.

If the action fails, those shareholders are liable for damages to the association only.

See notes to Art. 178, supra.

Article 188. The office of an auditor is terminated on a declaration of his bankruptcy or incompetency.

A director’s office also terminates on his bankruptcy or incompetency, but there is no such provision for a director in the Commercial Code, for a director being an agent falling under Art. 653 of the Japanese Civil Code, which provides that an attorneyship terminates on the death, or bankruptcy, of either the principal or the agent, or on the declaration of incompetency of the agent, it is a matter of course that the office of a director is vacated by his bankruptcy or incompetency. Thus, the special provisions of this article may mean that the auditors are not agents within the meaning of Art. 653 of the Civil Code, though some writers maintain that such a provision is quite unnecessary, since an auditor may be held as a quasi agent within the meaning of Art. 656 of the Japanese Civil Code.

Article 189. The provisions of Arts. 164, 167 and 179 are applicable to the auditors.

That is, the auditors must be appointed from the members by the general meeting of shareholders; they can be dismissed by the general meeting; the compensation which they receive is to be fixed by the meeting. Arts. 243, pars. 1 and 4, and 245, pars. 2 and 3, of the German Commercial Code are identical with these provisions.

Sub-Section 4.—Accounts of the Association.

Article 190. The directors shall submit the following documents to the auditors a week before the day appointed for the regular meeting of shareholders:—

1. Inventory.

2. Balance sheet.

3. Report of the business of the association.

4. An account of gains and losses.

5. Proposals concerning the sinking fund, and the distribution of profits or interest.

Art. 260, par. 2, of the German Commercial Code reads as follows:—

“The directorate must, within the first three months of the financial year, present a balance sheet of the preceding year to the council of supervision (auditors) and with such council’s observations to the general meeting; also an account of profit and loss, with a report showing the financial state and condition of the company.”

Article 191. The directors shall keep at the principal office of the association the documents mentioned in Art. 190 and the report of the auditors before the day appointed for the regular meeting of shareholders.

Shareholders and the creditors of the association may at any time during business hours demand an inspection of such documents.

Art. 263, pars. 1 and 2, of the German Commercial Code reads as follows:—

“The papers mentioned in Art. 260, par. 2, must be deposited at the offices of the company for the convenience of shareholders and for their inspection, at least two weeks before the general meeting.

“Every shareholder has the right to demand delivery, at least two weeks before the day of the general meeting, of a copy of the balance sheet, of the account of profit and loss, of the observations of the council of supervision (auditors) and of the report on the condition of the company.”

Article 192. The directors shall submit the documents mentioned in Art. 190 to the regular meeting of shareholders and ask for their approval.

The directors shall publish the balance sheet after such approval has been obtained.

According to Art. 265 of the German Commercial Code, the balance sheet and the account of profit and loss must be published by the directorate in the papers of the company immediately after their approval, and such publication must be placed in the trade register.

Article 193. When the regular meeting has given the approval mentioned in Art. 192, the association is considered to have released the responsibility of the directors and the auditors unless they have acted dishonestly.

I.e. The documents are thus affirmed, in the absence of fraud; if mistakes are discovered afterwards, the directors and auditors are not liable.

Article 194. Whenever profits are distributed, the association shall set apart one twentieth of such profits as a sinking fund until it amounts to one fourth of the capital.

When shares have been issued above the nominal value, the excess amount shall be added to the sinking fund until it amounts to one fourth of the capital.

This is called the legal sinking fund, which is recognized by the Codes of Germany, France and other continental countries. But the amount of this fund is different in different jurisdictions. In Germany and France, a société anonyme must set apart one twentieth of the profits earned until the sinking fund amounts to one tenth of the capital.

Article 195. A société anonyme cannot distribute profits unless losses have been made good and the amount of sinking fund mentioned in Art. 194, par. 1, has been set apart.

If profits have been distributed in violation of this provision, the creditors of the association may demand that the distributed profits be refunded.

Article 196. If, according to the nature of the business of the association, its business cannot be commenced within two or more years after the registration mentioned in Art. 141, par. 1, has been made at the place of the principal office, the association may provide in the articles of association that a certain amount of interest shall be paid to the shareholders until the commencement of the business; but the rate of this interest shall not exceed the legal rate.

Such a provision of the articles of association must be sanctioned by the court.

This is an exception to the rule of Art. 195, under which no distribution can be made unless losses have been made good and the legal sinking fund has been set apart. The interest spoken of is known to the German law as Bauzinsen (construction interest); that is, in an association carrying on a gigantic constructive work, as a railroad or canal, certain shareholders are allowed to receive interest before the commencement of the business. This principle is also recognized by Hungary, Italy, Portugal, Switzerland and other jurisdictions.

Article 197. Profits or interest must be distributed in proportion to the amount paid on the shares according to the articles of association; but this provision is not applicable where the association has issued preferred shares.

Thus, if a shareholder has paid more money on his shares than he ought to have paid according to the articles of association, he is not entitled to any distribution for the excess payment; for the distribution must be made in proportion to the amount paid on the shares “according ta the articles of association,” not merely in proportion to the amount paid on the shares. Again, a shareholder who holds more shares but has paid less on them is entitled to a less amount of distribution than he who holds less shares and has paid more on them; for the distribution must be made “in proportion to the amount paid on the shares” and not merely in proportion to the number of shares.

In Germany there were three principles of law on which profits were distributed: first, a distribution was made in proportion to the amount paid on the shares; second, a distribution was made in proportion to the amount paid on the shares according to the articles of association, and if a shareholder had paid a greater amount than the general shareholders, he was entitled to a certain amount of interest on the excess payment; third, a distribution was made in proportion to the numbers of shares. In Japan the third principle is also adapted, if there is no special provision in the articles of association in regard to the payment on the shares.

Art. 214 of the present German Commercial Code reads as follows:—

“The amount of profit is calculated proportionately to the amount of the value of the shares.

“When the calls on shares are not paid in the same proportion, shareholders, preliminary to receiving the profits, take four per cent on the amount of their payment; if the profit of the year is insufficient for that, distribution is made at a proportionately reduced rate….

“The articles of association may provide for another method of division of profits.”

Article 198. The court may appoint inspectors for the purpose of inspecting the business of the association and the condition of its property on application by shareholders representing not less than one tenth of the capital.

The inspectors shalt report the result of the inspection to the court. In such case the court may order the auditors to call a general meeting of shareholders, if necessary.

This article corresponds to Arts. 266, par. 2, and 267, par. 2, of the German Commercial Code.

Sub-Section 5.—Bonds.

Article 199. A company cannot invite subscription for bonds without a resolution passed according to the provisions of Art. 209.

There are no special provisions for issuing bonds in the German Commercial Code. The issuing of bonds in that country, being an operation within the scope of the business of the association, may take place at the discretion of the directors if not otherwise provided in the articles of association. In Italy, Belgium and Portugal the issuing of bonds is regulated by the Commercial Codes. In Japan there was once a statute in regard to issuing bonds, but it was abolished in 1890 and all the regulations thereof were inserted in the Commercial Code.

A bond, within the meaning of this Code, is mere evidence of debt, and not necessarily secured by a mortgage. Thus, in case of insolvency, a bondholder would have no better right than an ordinary creditor, and a holder of a bond issued earlier would have no better right than a holder of a bond issued later. Practically, it is no easy matter for a société anonyme to raise money by issuing such bonds. In order to make up the deficiency of the Commercial Code, two statutes were passed afterwards; that is, the Law of Trust Companies Dealing with Secured Bonds, and the Law of the Mortgage of Manufactories. The former is modelled on the law of the United States.

Article 200. The total amount of the bonds issued shall not exceed the amount which has been paid up on the shares.

If it appears in the last balance sheet that the existing property of the association is less than the amount which has been paid up on the shares, the total amount of the bonds cannot exceed the amount of the property.

Article 201. The amount of each bond shall not be less than twenty yen.

Article 202. If it is stipulated that the amount to be repaid to the bondholders shall exceed the nominal value of the bonds, the excess amount to be repaid on each bond shall be uniform.

Article 203. When a société anonyme invites subscriptions for bonds, the following particulars shall be published by the directors:—

1. The particulars mentioned in Art. 173, 3–6.

2. The trade name of the association.

3. If bonds have been issued before, the total amount which has not been paid back.

4. The value of the bonds issued and the lowest market value.

5. The capital of the association and the total amount of shares which has been paid up.

6. The amount of the existing property of the association according to the last balance sheet.

Derived from English Companies Act of 1900, as well as the Codes of Switzerland and Italy.

Article 204. When all the bonds have been subscribed, the directors shall cause the total amount of the bonds to be paid up.

The directors shall register at the place of the principal office and the place of the branch establishment the particulars mentioned in Art. 173, 3–6, within two weeks after the total amount of the bonds has been paid up according to the provision of the preceding paragraph.

Article 205. A bond must bear a serial number and contain the particulars mentioned in Art. 203, Nos. 1 and 2, with the signature of the directors.

Article 206. No transfer of a personal bond can be set up as a defence against the association or third persons, unless the name and residence of the transferee have been entered in the book of bonds and his name written on the bond.

Bonds, like shares, are divided into personal bonds and bonds to bearer. See note to Art. 150, supra.

Article 207. The provisions of Art. 155 are applicable to bonds.

Sub-Section 6.—The Alteration of Articles of Association.

Article 208. The articles of association can be altered only by a resolution of the general meeting of shareholders.

Art. 274, par. 1, of the German Commercial Code provides that alterations can only be effected by a resolution of a general meeting; but the undertaking of alterations which only consist of mere wording may be conferred on the auditors by such a resolution. The doctrine that the articles of association can be freely altered by the general meeting of shareholders is adopted by Austria, Italy, Belgium, Switzerland and Sweden. It is quite contrary to the doctrine adopted by the English system of law.

Article 209. The alteration of the articles of association is effected by a majority of the votes of the shareholders present, and the shareholders present must represent at least one-half the shareholders in number as well as in interest.¹

If such a quorum is not present, the shareholders present may pass a temporary resolution² by a majority of their votes. Notice of such a temporary resolution shall be given to each shareholder; and in case certificates to bearer have been issued, such resolution shall be published; and within a period not less than one month, a second general meeting of shareholders shall be called.

In the second general meeting of shareholders, the approval or disapproval of the temporary resolution will be made only by a majority of the votes of the shareholders present.

The provisions of the preceding paragraphs are not applicable to the case where the resolution contemplates a change in the nature of the business of the association.

¹This method of passing a resolution is different from the general rule of Art. 161. In such case, under Art. 275 of the German Commercial Code, the resolution ought to be passed by a majority representing at least three-quarters of the capital represented at the time of voting. Thus, an alteration of the articles of association can be much more easily effected in Japan than in Germany.

²This method of passing a resolution is derived from France. There is no such provision in the German Commercial Code.

Article 210. The capital of an association shall not be increased before the total amount of shares has been paid up.

Derived from Art. 278, par. 1, of the German Commercial Code. The same provision will be found in the Commercial Codes of Austria, Hungary, and Spain. But such issuing of new shares before the total amount of shares has been paid up is not prohibited by the French Code.

Article 211. A société anonyme may issue preferred shares only in case the capital of the association is increased, provided the articles of association permit such shares to be issued.

Thus, a société anonyme cannot issue preferred shares before the total amount of the original shares has been paid up; that is, preferred shares cannot be issued when the association is formed. There is no such restriction in the German Commercial Code.

Article 212. In case a société anonyme has issued preferred shares, if any alteration of the articles of association may be prejudicial to the preferred shareholders, the resolution shall be passed not only by the general meeting of the ordinary shareholders, but also by that of the preferred shareholders.

The provisions in regard to the general meeting of shareholders are applicable to the meeting of the preferred shareholders.

Derived from Art. 278, par. 3, of the German Commercial Code.

Article 213. In case a société anonyme has increased its capital, as soon as the payment mentioned in Art. 129 has been made on all the new shares the directors must call a general meeting of shareholders, and make a report on the issue of the new shares.

Article 214. The auditors shall examine the following particulars and make a report thereon to the general meeting of shareholders:—

1. Whether the total amount of new shares has been subscribed.

2. Whether the payment mentioned in Art. 129 has been made on each new share.

3. If property other than money has been contributed, whether the number of shares issued in consideration of such property is reasonable.

The general meeting of shareholders may appoint special inspectors for the purpose of making the examination and the report mentioned in the last paragraph.

Article 215. If the general meeting of shareholders finds that the number of shares issued in consideration of property other than money is unreasonable, the meeting may reduce the number. In such case, the preferred shareholder may make payment in money.

Art. 279 of the German Commercial Code reads as follows:—

“When an addition is made to the increased capital other than in cash, or when, at the time of such addition, payment is made corresponding to the interest taken by the company in such an addition, the resolution relating to increase of capital must specify what actual article is brought in in place of cash, or what thing is brought into account, the person from whom the company acquires such thing, and the number of shares to be given in return for such article brought in or the indemnity to be granted for the thing brought into account.

“Every agreement relating to the above enumerated subjects which has not been arrived at by a resolution of the general meeting is of no effect as against the company.”

Article 216. In case some shares have not been subscribed or the payment mentioned in Art. 129 has not been made, the directors shall be jointly liable for such subscription or payment. This provision is applicable where the subscription has been rescinded.

Thus, when the capital is increased, the directors are looked upon as the promoters when the association is formed. See Art. 136, supra.

Article 217. The association shall register the following particulars at the place of the principal office and the place of any branch establishment within two weeks after the conclusion of the general meeting of shareholders called according to the provision of Art. 213:—

1. The total amount of the increase in capital.

2. The date on which the resolution to increase the capital was passed.

3. The amount paid on each new share.

4. If preferred shares have been issued, the rights of the preferred shareholders.

Before the said registration has been made at the place of the principal office, new certificates cannot be issued, and a transfer of new shares, or even a promise to transfer, cannot be made.

Similar provisions to this article will be found in Arts. 280, 284, 286, 287, of the German Commercial Code.

Article 218. When new shares are issued, the date on which a registration was made at the place of the principal office according to Art. 217, No. 1, shall be set forth in the certificates.

When preferred shares are issued, the rights of their holders shall be designated in the certificates.

Article 219. The provisions of Arts. 127–130, 140, 142 and 147, par. 2, are applicable where new shares are issued.

Article 220. When a resolution to decrease the capital is passed by the general meeting of shareholders, the method by which the capital is to be decreased shall be resolved at the same time.¹

The provisions of Arts. 78–80 are applicable where the capital is to be decreased.²

¹Art. 288, par. 3, of the German Commercial Code provides that the resolution ought at the same time to define the object of such reduction, especially if such reduction is destined for the partial repayment to the shareholders, and in what manner the measure is to be carried out.

²Derived from Art. 289 of the German Commercial Code.

Sub-Section 7.—Dissolution.

Article 221. A société anonyme is dissolved,—

1. In the cases mentioned in Art. 74, Nos. 1, 2, 4, 6 and 7;

2. By a resolution of the general meeting of shareholders;

3. When the shareholders become less than seven.

According to Art. 292 of the German Commercial Code, a company is only dissolved by expiration of the term fixed by the articles, by a resolution of the general meeting and by bankruptcy.

Article 222. A resolution of the general meeting of shareholders in regard to the dissolution or consolidation [or absorption] of the association shall be passed in accordance with the provisions of Art. 209.

In Germany, such a resolution should be passed by a majority of at least three-quarters of the capital voting.

Article 223. When a consolidation or absorption is to take place, a public notice thereof may be given and the transfer of personal shares may be suspended during a period not more than one month before the day of the general meeting of shareholders, and during this meeting.

When a resolution of consolidation or absorption has been passed by the general meeting of shareholders, the shareholders cannot transfer their personal shares after such resolution until a registration is made at the place of the principal office according to the provisions of Art. 81.

Article 224. When a société anonyme is dissolved, except in the case of bankruptcy, the directors must without delay give notice thereof to the shareholders and if certificates to bearer have been issued a public notice thereof must be given.

Article 225. The provisions of Arts. 76 and 78–82 are applicable to a société anonyme.

Sub-Section 8.—Liquidation.

Article 226. When a société anonyme is dissolved, except in the case of consolidation or absorption or of bankruptcy, the directors will become liquidators, unless the articles of association provide to the contrary or other persons are appointed by the general meeting as liquidators.

If there are no such liquidators as mentioned above, the court will appoint liquidators on the application of any person interested.

This article corresponds to Art. 295 of the German Commercial Code.

Article 227. As soon as the liquidators assume their offices they must examine the condition of the property of the association, make an inventory and balance sheet and submit them to the general meeting of shareholders for their approval.

In such case the provisions of Arts. 158, par. 2, and 192, par. 2, are applicable.

This article is derived from Art. 299 of the German Commercial Code.

Article 228. A liquidator who has been appointed by the general meeting of shareholders may be dismissed at any time by the same meeting.

In case of necessity, the court may dismiss the liquidators on the application of the auditors or shareholders representing not less than one tenth of the capital.

This article is derived from Art. 296 of the German Commercial Code.

Article 229. The remaining property shall be distributed to the shareholders in proportion to the amount paid on the shares according to the articles of association; but this provision is not applicable where the company has issued preferred shares, for which there have been special provisions.

Art 300, par. 2, of the German Commercial Code provides that the partition is made in proportion to the amount of the shares, unless there are several classes of shares enjoying different rights.

Article 230. When the liquidation is completed, the liquidators must without delay make a report and submit it to the general meeting of shareholders for their approval.

In such case the provisions of Arts. 158, par. 2, and 193 are applicable.

Article 231. If a general meeting of shareholders is called or a resolution passed in such a manner as to violate the law or ordinances, or the articles of association, the liquidators shall apply to the court for a decree annulling such resolution.

Article 232. If, after the formation of a société anonyme and the commencement of its business, it is found out that such formation is absolutely void,¹ liquidation shall take place as in the case of dissolution; in such case the court will appoint liquidators on the application of any person interested.²

¹For instance, there may have been less than seven promoters; some important particulars imposed by the law may have been omitted in the articles of association; the promoters may have failed to call for the first payment on the shares, or failed to take necessary proceedings, such as the report they should make to the preliminary meeting of shareholders, or the appointment of directors and auditors by such meeting, or the examination which should be made by the directors and auditors. Unlike the Codes of France and Portugal, where the cases in which the formation of the association is void are enumerated, the Code of Japan allows the extent of irregularity which shall render void the organigation of the association to be determined by the judges.

²Art. 311 of the German Commercial Code provides that when the nullity of a société anonyme is registered in the trade register, the enactments applicable to its dissolution must be applied by analogy to the liquidation of its affairs.

Article 233. The books of the association, its business correspondence and all documents connected with the liquidation shall be preserved for ten years after the completion of the liquidation has been registered at the place of the principal office. The custodian of these books and documents is appointed by the court on the application of the liquidators or any person interested.

Derived from Art. 302, par. 2, of the German Commercial Code.

Article 234. The provisions of Arts. 84, 89–93, 95, 97, 99, 159, 160, 163, 176–178, 181, 183–185 and 187 of this Code and Arts. 79 and 80 of the Civil Code are applicable to the liquidation of a société anonyme.

The reference to the Civil Code means that the liquidators must give public notice at least three times during two months to the creditors, who must present their demand within a period of not less than two months; and in case they present their demand after that period, they can only claim against such property as remains undistributed to the members after the other debts have been paid. Similar provisions exist in Art. 297 of the German Commercial Code.

Section 5.—Société en commandite par actions.

Article 235. A société en commandite par actions is composed of members of unlimited liability and shareholders.

Art. 320, par. 1, of the German Commercial Code provides that at least one of the members of a société en commandite par actions assumes unlimited liability with regard to creditors of the association, while the rest are interested only to the extent of their subscription to the capital of the association.

Article 236. The provisions for a société en commandite are applicable to a sociéié en commandite par actions so far as the following particulars are concerned:—

1. The mutual relation between members of unlimited liability.

2. The relation between members of unlimited liability and shareholders and third persons.

3. The retirement of members of unlimited liability.

Besides the particulars above mentioned, the provisions for a société anonyme are applicable to a société en commandite par actions except in case there are contrary provisions in the present chapter.

This article, except No. 3 of par. 1, corresponds to Art. 320, pars. 2 and 3, of the German Commercial Code.

Article 237. The members of unlimited liability shall act as promoters, and make and sign the articles of association, in which shall be inserted the following particulars:—

1. Those mentioned in Art. 120, Nos. 1, 2, 4, 6 and 7.

2. The total amount of the shares.

3. The names and residences of the members of unlimited liability.

4. The nature and value or basis of valuation of the contributions made by the members of unlimited liability other than the amount paid for shares.

Art. 321 of the German Commercial Code reads as follows:—

“The terms of the articles ought to be fixed by at least five persons in legal form or through a notary. The members personally responsible are all obliged to participate in the drawing up of the deed; besides these, only those may become parties to it who have subscribed for shares as shareholders.

“The amount of shares subscribed for by each interested party must be shown on the deed.

“Those who have fixed the terms of the articles, or those who have brought in capital in a shape other than money, are looked upon as the promoters of the company.”

As to the particulars which must be contained in the articles of association, see Art. 322 of the same Code.

Article 238. The members of unlimited liability shall invite subscriptions for the shares.¹

A certificate of subscription shall contain the following particulars:²—

1. Those mentioned in Arts. 122, 126, par. 2, Nos. 1 and 4, and 237.

2. When the members of unlimited liability have subscribed for shares, the number of shares subscribed by each member.

¹Here the members of unlimited liability act as promoters and invite subscription for the shares in the same manner as in the successive formation of a société anonyme. But in Germany, even the shareholders of such an association can be promoters, and, therefore, a simultaneous formation of the company is recognized.

²Derived from Art. 323 of the German Commercial Code.

Article 239. At the preliminary meeting of shareholders auditors shall be appointed.

Members of unlimited liability cannot be appointed auditors.

Because the auditors are to represent the general meeting of shareholders as distinguished from the members of unlimited liability.

Identical with Art. 328, par. 5, of the German Commercial Code.

Article 240. Members of unlimited liability may attend the preliminary meeting of shareholders and express their opinions; but they cannot vote, even if they have subscribed for shares.

The shares subscribed by members of unlimited liability or contributions made by them are not counted in regard to votes.

The provisions of the preceding paragraphs are applicable to the general meeting of shareholders.

Derived from Art. 323, par. 3, and Art. 327, par. 1, of the German Commercial Code.

Article 241. The auditors shall examine the particulars mentioned in Arts. 134, par. 1, and 237, No. 4, and make a report to the preliminary meeting of shareholders.

Article 242. The association shall register at the place of its principal office and the place of any branch establishment the following particulars within two weeks after the conclusion of the preliminary meeting of shareholders:—

1. Those mentioned in Art. 120, Nos. 1, 2, 4, 7, and Art. 141, par. 1, Nos. 2–6.

2. The total amount of the shares.

3. The names and residences of the members of unlimited liability.¹

4. The nature of the contributions of the members of unlimited liability other than the amount paid on shares and the value of the property contributed by them.

5. The names of the members of unlimited liability who are to represent the association, if such representative members have been appointed.²

6. The names and residences of the auditors.

¹Derived from Art. 323, par. 5, first sentence, of the German Commercial Cade.

²Derived from Art. 323, par. 5, second sentence, of the German Commercial Code.

Article 243. The provisions for the promoters of a société anonyme are applicable to members of unlimited liability who are to represent the association, with the exception of the provisions of Arts. 164–168, 175 and 179.

Art. 325 of the German Commercial Code reads as follows:—

“The enactments relating to the directorate of a limited liability company are applicable by analogy to the members personally responsible so far as they concern,—

“1. The notices, deposits and declarations to be made in the trade register;

“2. The calling of a general meeting;

“3. The drawing up, presentation and publication of the balance sheet and profit and loss account, as well as the presentation of the report upon the condition of the company;

“4. Any action taken against the resolution of a general meeting;

“5. The procedure for nominating examiners for verifying the balance sheet, or for the verification of the facts concerning the foundation or carrying on of the business of the company, as well as the obligations to the examiners and council of supervision (auditors);

“6. The summons to be addressed to creditors in the event of a reduction of capital;

“7. The claiming of any damages by the company sustained in the carrying on of its business;

“8. The opening of bankruptcy proceedings;

“9. Penal responsibility and condemnation to pay fines.”

Article 244. Whenever in the case of a société en commandite the unanimous agreement of the members is necessary, an agreement of the members of unlimited liability is necessary as well as a resolution of the general meeting of shareholders.

The provisions of Art. 209 are applicable to the resolution mentioned above.

Identical with Art. 327, par. 2, of the German Commercial Code.

Article 245. The auditors are responsible for making the members of unlimited liability enforce the resolution of the general meeting of shareholders.

This is the only point on which an auditor of a société anonyme is different from an auditor of a société en commandite par actions. But this does not mean that the auditors of a société en commandite par actions may compel the members of unlimited liability to carry into effect the resolutions of the general meeting of shareholders, since the meeting is no longer the highest will organ of the association as in case of a société anonyme. If an agreement of the members of unlimited liability is necessary to carrying out a resolution of the meeting, the auditors must recommend it to the members of unlimited liability. If these members fail to carry out a resolution with which they have agreed, it is the duty of the auditors to urge them to act in accordance with the resolution as well as the agreement, but if the members of unlimited liability have never agreed to the resolution of the meeting of shareholders, the resolution fails.

Corresponds to Art. 328, par. 1, of the German Commercial Code.

Article 246. A société en commandite par actions is dissolved by the same causes as a société en nom collectif except in the case mentioned in Art. 83.

Derived from Art. 330 of the German Commercial Code.

Article 247. In case all the members of unlimited liability have retired, the general meeting of shareholders may, by a resolution passed according to the provisions of Art. 209, continue the company as a société anonyme. In such case, resolutions shall be passed in regard to the particulars necessary for the formation of a société anonyme.

In such case the provisions of Art. 118, par. 2, are applicable.

Article 248. When a dissolution takes place through any other cause than consolidation, absorption, bankruptcy, or a decree of the court, liquidation is executed by all the members of unlimited liability or by these appointed by such members acting with those appointed by the general meeting of shareholders, unless there are special provisions in the articles of association.

The appointment of liquidators by the members of unlimited liability is concluded by their majority.

The number of liquidators appointed by the general meeting of shareholders shall be the same as that of all the members of unlimited liability or their heirs, or that of the persons appointed by the members of unlimited liability.

Art. 331, par. 1, of the German Commercial Code provides that so long as it is not otherwise provided by the articles, liquidation is brought about by all the members of unlimited liability together with one or several persons chosen by the general meeting acting as liquidators.

Article 249. The members of unlimited liability may at any time dismiss the liquidators appointed by themselves.

The provisions of Art. 248, par. 2, are applicable to the dismissal of liquidators.

Art. 331, par. 2, of the German Commercial Code provides that each member of unlimited liability may also demand that the nomination or dismissal of the liquidators be authorized by the court.

Article 250. The provisions of Art. 102 are applicable to the members of unlimited liability of a société en commandite par actions.

Article 251. In regard to the accounts mentioned in Arts. 227, par. 1, and 230, par. 1, the liquidators shall obtain not only the approval of the general meeting of shareholders, but also the approval of all the members of unlimited liability.

Article 252. A société en commandite par actions may be changed into a société anonyme in accordance with the provisions of Art. 244.

Identical with Art. 332, par. 1, of the German Commercial Code.

Article 253. When the organization of the association is altered according to Art. 252, the general meeting of shareholders shall pass resolutions in regard to the particulars necessary for the formation of a société anonyme. In this general meeting even the members of unlimited liability have a right to vote in proportion to the number of shares to be subscribed by them.¹

In such case the provisions of Arts. 78 and 79, pars. 1 and 2 are applicable.²

¹Art. 332, pars. 3 and 4, of the German Commercial Code reads as follows:—

“The interests of the majority of shareholders voting for the change ought to represent at least one quarter of the capital, not including that portion formed by shares belonging to members of unlimited liability.

“The resolution ought to define the rules necessary for carrying through the change, as well the method of nominating and constituting the directorate.”

²Corresponds to Art. 334, pars. 1 and 2, of the German Commercial Code.

Article 254. After the creditors of the association have consented to the alteration of its organization or after the association has performed the duties imposed by Art. 79, par. 2, the dissolution of the société en commandite par actions shall be registered at the place of its principal office and the place of any branch establishment within two weeks; and as to the société anonyme, a registration shall be made in accordance with the provisions of Art. 141, par. 1.

Section 6.—Foreign Business Associations.

This section relates to any business associations formed in foreign countries, not merely to sociétés anomymes formed in foreign countries.

Article 255. If a foreign business association¹ establishes its branch office in Japan, it shall make the same registrations and public notifications as the business associations of the same kind or the most similar kind formed in Japan.²

A foreign business association which establishes its branch office in Japan shall appoint a representative in Japan, and at the time of registration of the branch office, shall register his name and residence.

The provisions of Art. 62 are applicable to a representative of a foreign business association.

¹There are no special provisions by name for foreign business associations in the German Commercial Code. Such special provisions for foreign business associations can only be found in the law of 1873 of Belgium and the Codes of Hungary, Italy, Portugal and Argentine. The present section is modeled on the law of the latter countries.

²Art. 202 of the Code of Procedure in Non-actionable Matters reads as follows:—

“When a foreign business association establishes its branch office in Japan, an application for registration must be made by the representative of such business association and he must designate his name and residence in a written application and file it with the court together with the following documents:—

1. Documents showing the existence of the principal office of the association.

2. Documents certifying the qualification of the representative.

3. The articles of association of the association or any documents by which the nature of the association may be ascertained.

“The documents mentioned above shall have been acknowledged before the authorities of the native country of such business association or before a Japanese consul.”

Article 256. If whatever must be registered according to Art. 255, pars. 1 and 2, occurs in a foreign country, the period of time for the registration begins as soon as the notice thereof is received.

Article 257. When a foreign business association begins to maintain a branch office in Japan before a registration is made at the place of the branch office, the existence of the association may be denied by third persons.

Article 258. If a foreign business association has its principal office in Japan or its principal object is to carry on business in Japan, it must be subject to the same provisions as a business association formed m Japan, even if it is formed in a foreign country.

“What is a foreign business association?” is a mooted question in Japan which has puzzled the minds of many jurists. Some maintain that the Japanese Code has adopted the “law standard test”; that is, whether a business association is foreign or domestic depends entirely upon the law under which it is formed. Some insist that Japan has adopted the “domicile test”; that is, if the principal office of the association is within Japanese territory, it is a domestic business association, otherwise it is a foreign one.

But under the present article, it is quite plain that Japan adopts the “place of formation” test; that is, a domestic business association is a business association formed in Japan; and any business association formed outside the territory of Japan is a foreign business association. However, since a business association formed in Japan must be subject to the Japanese law, the natural consequence is that the Code at the same time has adopted the “law standard test.” Again, since the principal office of any association mentioned in this Code always means the principal office in Japan, it naturally has adopted the “domicile test.” Thus, the Japanese law has adopted the “place of formation” test as the principal test and the “law standard test” and the “domicile test” as accessory tests.

According to the decision of the international conference in regard to sociétés anonymes held in Paris, 1889, and the report of the International Law Association held in Hamburg, 1891, the “domicile test” seems to have been universally recommended; and, indeed, many Japanese writers claim that Japan has adopted this principle. But, if se, it would be a matter of course that any business association having its principal office in Japan is a domestic association and it would have been unnecessary for this article to declare that a business association formed in a foreign country having its principal office in Japan is subject to the same provisions as a similar association formed in Japan.

Article 259. The provisions of Arts. 147, 149, 150, 155, par. 1, 206, 207 and 217, par. 2, are applicable to the issue of shares and the transfer of shares or bonds of a foreign company in Japan. In such case the branch office first established in Japan is considered as a principal office.

Article 260. If a representative of a foreign business association establishing a branch office in Japan commits any act contrary to the public order or good morals during the management of the business of the association, the court may upon the application of the attorney-general or by its own executive power order the branch office to be closed.

Section 7.—Penal Provisions.

Article 261. Promoters, members managing the business of a business association, directors, representatives of foreign business associations, auditors or liquidators are punished by a fine of from five yen to five hundred yen in the following cases:—

1. When they neglect to make the registrations provided for in this Book.

2. When they neglect to make public notifications or notices provided for in this Book or make false public notifications or notices.

3. When they without reasonable cause refuse the inspection of the books which are allowed to be inspected by the provisions of this Book.

4. When they hinder examinations provided for in this Book.

5. When they begin to make preparations for opening business in violation of the provisions of Art. 46.

6. When they omit to make certificates of subscription or omit to set forth the necessary particulars in the certificates or make a misrepresentation in the certificates, in violation of the provisions of Arts. 126, par. 2, and 238, par. 2.

7. When they issue certificates in violation of the provisions of Art. 147, par. 1, or Art. 217, par. 2.

8. When they omit to set forth the necessary particulars in a certificate or bond or make a misrepresentation thereof.

9. When they omit to keep at the principal office or any branch establishment the articles of association, the book of shareholders, the book of bonds, the minute-book of the general meeting of shareholders, the inventories, the balance sheets, the business reports, the accounts of gains and losses, the proposals concerning the sinking fund and the distribution of profits or interest; or they omit to set forth the necessary particulars, or make a misrepresentation thereof.

10. When they omit to call a general meeting of shareholders in violation of the provisions of Arts. 174, par. 1, or 198, par. 2.

See Sect. 3, Chapter VI, Penal Provisions, Arts. 312–319 of the German Commercial Code. But the German provisions are for a société anonyme alone.

Article 262. Promoters, members managing the business of a business association, directors, representatives of foreign business associations, auditors, or liquidators are punished by a fine of from ten yen to one thousand yen in the following cases:—

1. When they make misrepresentations to the public authorities or to the general meeting of shareholders, or conceal facts from them.

2. When they carry out a consolidation, a disposition of property of the association, a reduction of the capital or an alteration of its organization in violation of the provisions of Arts. 78–80.

3. When they hinder the examination made by inspectors.

4. When they acquire shares or take them as security or cancel shares, in violation of the provisions of Art. 151.

5. When they issue certificates to bearer in violation of the provisions of Art. 155, par. 1.

6. When they neglect to apply for a declaration of bankruptcy in violation of the provisions of Art. 174, par. 2, or Art. 81 of the Civil Code.¹

7. When they omit to set apart a sinking fund in violation of the provisions of Art. 194 or make distributions in violation of the provisions of Art. 195, par. 1, or Art. 196.

8. When they invite subscriptions for bonds in violation of the provisions of Art. 200.

9. When they act contrary to an order of the court issued according to the provision of Art. 260.

10. When they make payment to certain creditors within the period mentioned in Art. 79 of the Civil Code² or distribute property of the company in violation of the provision of Art. 95 of this Code.

¹See notes to Art. 91, par. 3, supra.

²See note to Art. 234, supra.