MOEA Interpretations on Company Articles’ Treatment of Employee Annual Bonuses.

[2016/03/10]

In 2015, a new Article 235-1 was added to the Company Act, requiring companies to include in their articles of incorporation an express provision that they will distribute to their employees a fixed amount or proportion of their profits for each fiscal year. Such employee bonuses may be distributed as shares or as cash, but if a company has accumulated losses, it should first cover its losses. In response to uncertainties regarding the application of Article 235-1, the Ministry of Economic Affairs (MOEA) issued written interpretations in June 2015 and January 2016. The main points of the interpretations are as follows:

1. If a company does not make the relevant amendments to its articles of incorporation until its regular shareholder meeting in 2016, the employee bonus for fiscal 2015 should nevertheless be handled according to the amended articles. Therefore when a company holds its regular shareholder meeting for 2016, the meeting should first debate the motion to amend the articles of incorporation, and only then receive the board of directors’ report on the allocation of the employee bonus for fiscal 2015 (in accordance with the amended articles).

2. Article 235-1 Paragraph 3 of the Company Act provides: “Employee remuneration as referred to in the two preceding paragraphs shall be distributed in the form of shares or cash; [such distribution] shall be made by a resolution adopted by majority vote of a meeting of the board of directors attended by at least two thirds of the directors, and shall be reported to a shareholder meeting.” The purpose of introducing Article 235-1 into the Act is to incentivize employees by requiring enterprises to share their profits. The express provision that a resolution on the employee bonus must be passed by a simple majority vote of a board meeting attended by at least two thirds of the directors provides a statutory maximum threshold for such a board resolution. Therefore, in order to be compliant with the legislative intent of assuring employees’ interests, a company may not set a higher threshold for such a board decision in its articles of incorporation. The form in which the employee bonus is distributed is a matter to be determined exclusively by a special resolution of the board of directors; accordingly, the articles of incorporation may not restrict such distribution to cash payment.

3. All companies must complete amendments to bring their articles of incorporation into line with the new law by the end of June 2016. A company that fails to do so will have no basis in its articles for distributing employee bonuses, so that employees will be unable to receive their bonuses, and the company may not distribute profits to shareholders alone.