King, Henry T.

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Case Western Reserve University School of Law

Case Western Reserve Journal ofInternational LawVolume 6 | Issue 21974Corporate Divorce--Japanese StyleHenry T. King Jr.Follow this and additional works at: https://scholarlycommons.law.case.edu/jilPart of the International Law CommonsThis Comment is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law ScholarlyCommons. It has been accepted for inclusion in Case Western Reserve Journal of International Law by an authorized administrator of Case WesternReserve University School of Law Scholarly Commons.Recommended CitationHenry T. King Jr., Corporate Divorce--Japanese Style, 6 Case W. Res. J. Int'l L. 250 (1974)Available at: https://scholarlycommons.law.case.edu/jil/vol6/iss2/6[Vol. 6: 250COMMENTCorporate Divorce - Japanese StyleHenry T. King, Jr.*HE PROSPECT of corporate divorce in a joint venture in Japanraises special problems for the foreign investor, which areunique to Japan. In other areas of the world, when things wentsour with a joint venture, the U.S. partner could just move in andTHE AUTHOR: HENRY T. KING, JR.(B.A., Yale University; LL.B., Yale LawSchool) is a member of the Connecticut,New York, Washington D.C., and Ohiobars, and is Chief Corporate Interna-tional Counsel for TRW Inc. Mr. Kinghas served as Chairman of the Legal Ed-ucation Committee of the InternationalLaw Section of the American Bar As-sociation, and is currently the Vice-President of the Greater ClevelandInternational Lawyers Group and Vice-Chairman, International Law Division,of the International Law Section of theAmerican Bar Association.buy out his partner. This al-ternative has not been availablein Japan because of governmen-tal restrictions on foreign own-ership,1 although these restric-tions have been recently some-what liberalized.' In addition,American businesses have foundit difficult to operate whollyowned subsidiaries in Japan be-cause of cultural and languagedifferences and because of dif-ferences in Japanese businesstraditions and practices. Fur-thermore, if an American partner in a joint venture were to attemptto force out his Japanese partner, the American company wouldprobably find that the collective attitude of the Japanese businesscommunity toward him would be quite cold, rigid, and unified. In* The views expressed herein are those of the writer and not necessarily those ofTRW Inc., with which he is associated.1 The Foreign Investment Law (Gaishi ni kansuru h6ritsu kankeish6rei) (Law No.163, 1950) applies to any degree of investment, not merely majority shareholding, butin the past the foreign investor was largely relegated to a minority position. D. HEN-DERSON, FOREIGN ENTERPRISE IN JAPAN (1973) is probably the best general study offoreign investment in Japan, particularly as to historical aspects.2 Cabinet Resolution, Concerning Liberalization of Direct Incoming Investment,April 27, 1973. Note that no significant amendment to the Foreign Investment Lawwas needed to carry out the liberalization program because of the vast discretion vestedby that law in the Cabinet, the Foreign Investment Council, and the government min-istries. See, generally, F. L. Hartman, "Japanese Foreign Investment Regulation:'Se-mantics and Reality," 18 N.Y. LAW FORUM 355 (1972). Even under the Fifth Liber-alization, a number of industries are still subject to restrictions on foreign ownership.See, Note, The Fifth Liberalization of Capital Movements into Japan infra at 279.CORPORATE DIVORCE - JAPANESE STYLEthis ostracized position, it would be exceedingly difficult for theAmerican company to attract an alternative Japanese partner.In addition, after a joint venture in Japan has been terminated,the American company may find itself in competition with its formerJapanese partner. Since many Japanese firms enter into joint ven-tures with the gaining of access to technology as their primary goal,when the joint venture terminates, it may be difficult, if not impos-sible, to avoid use of this technology, especially where it is un-patented, by the Japanese partner. Suffice it to say, it just does notseem practical for you to assume that your technology can just begathered up and returned to you when the joint venture is termi-nated.It is common for a Japanese firm to be engaged in several jointventures. Your joint venture may be just one of many, in whichcase your Japanese partner may be able to favor his other joint ven-tures, especially where they are prospering, and ignore or neglectyour interests when insurmountable differences arise.It is vital that you spell out in detail, in the joint venture agree-ment, the circumstances that will trigger termination. Normally, thelicensing agreement should terminate at the same time; if the licens-ing agreement is not to terminate, the conditions of its extensionshould be specified. The agreement must also provide for strictlimits on the use of the technology during the life of the joint ven-ture. For instance, it might be best to bind your partner directlyto secrecy at all times regarding the know-how transmitted and tocommit him not to use that know-how without your prior approval.This committment should survive the joint venture agreement.If it is deemed desirable that, in the event of termination, thejoint enterprise is to continue without the American partner's fur-ther involvement, the agreement should provide for the mandatorypurchase by the Japanese partner of the American party's interest, ata predetermined price, or at a price determined by an agreed-uponformula. Disposition of the equipment used by the joint ventureshould also be specified in the agreement. In fact, you should getall understandings in writing, signed by all the parties. Do not relyon verbal understandings, as is done in many European countries,where lawyers oftentimes are not even present at negotiations.There are no special United States tax problems incident to a jointventure termination other than the capital gain or loss realized atthe termination. Where the joint venture has been operating at aloss, it is possible that on dissolution the U.S. partner will realize19741 251.CASE W. RES. I. INT'L L. [Vol. 6: 250an overall gain, due to the unrealized value of the venture's assets(in turn due to the enhanced value of the yen vis-4-vis the dollar),'and thus, the dissolution may not involve a non-recurring loss onthe U.S. company's financial statement.Some problems may arise from the Japanese tax laws. In addi-tion, problems may arise from the matter of Japanese governmentclearances4 on the termination, and from the currency clearancesincident to returning funds to the United States. As a general mat-ter, you will find that the transfer of buy-out funds requires Japa-nese government approval; you will also find that the Japanese in-vestment validation regulations require a mandatory report on thetermination of a licensing agreement between a foreign licensorand a Japanese licensee.6It should be stipulated in the joint venture agreement that dis-putes are to be settled by arbitration pursuant to the Japanese-American Arbitration Agreement of September 16, 1952. 7 Thisavoids litigation in the Japanese courts (and conversely, from yourJapanese partner's point of view, avoids litigation in Americancourts). It should be specified in the arbitration clause exactlywhere the arbitration is to be held and which law will govern dis-position of the substantive and procedural issues involved in the dis-3 Before August 1971, when the yen was revalued to 308 yen (central rate) to thedollar, the yen had been pegged at 360 yen to the dollar, the parity rate established withthe International Monetary Fund in May 1953. Since February 13, 1973, the yen hasbeen floating and the exchange rate has fluctuated between a low of 306.30 yen to thedollar and to a high of 259 yen per dollar.4 Under present Japanese foreign exchange regulations, proceeds from the dispo-sition by tlhe foreign investor of shares of the Japanese corporation may be repatriated ifsuch proceeds are deposited directly into a nonresident free yen account of such investor.5 The only condition for remitability of proceeds from the disposition of validatedshares is that the price at which the shares were sold is "fair." Determination as towhether the price is fair or not is left, to the foreign exchange bank. In case there shouldbe any uncertainty as to the fairness of the price, the matter should be referred to theBank of Japan. Thus, the safest way to ensure remitability of the proceeds would beto obtain the Bank of Japan's informal clearance in advance.6 Japanese government approval (validation) of the license agreement normallycontains the following condition: "In case the subject agreement should be canceled,suspended, or terminated due to expiration of its term, report to that effect shall bemade to the competent ministers without delay." Pursuant to this condition, the term-ination of the license agreement must be reported to the relevant ministers throughthe Bank of Japan.7 Despite the prevalence of arbitration clauses in Japanese - U.S. commercialagreements as a means of resolving disputes, it still may be true that a formal arbitrationproceeding may be even more rare than a lawsuit in trans-Pacific transactions. Theoverwhelming majority of disputes are settled informally without resort to court orarbitration.CORPORATE DIVORCE - JAPANESE STYLEpute. The results of the arbitrator's decision can be enforced bythe courts of either country. 8The overriding cause of joint venture termination is, of course,lack of business success, the causes of which may include:(1) Lack of Clear Understanding Between the PartiesOne must be wary of the unarticulated assumptions of bothparties when they entered the joint venture. In Japan, there is adistinct need for accurate communication. The partners shouldwork out a document detailing the plans and anticipations of theparties and a guide for united action. It is vital that the neces-sary mutuality exist from the beginning. The American partnershould not attempt to oversell the potential of his products.(2) Lack of Compatibility Between the PartiesThe key element in a successful joint venture is having theright partner. You should note that geography plays an importantpart in influencing the behavior and attitudes of 'persons from dif-ferent parts of Japan. Furthermore, before the venture agreement isfinalized, the American partner should be certain that his futurepartner does not have other business interests that might conflictwith the interests of the joint venture.(3) Lack of Independent Status of the Joint VentureIdeally, the joint venture should have its own personality, sepa-rate and distinct from that of the Japanese partner. This is oftenhard to accomplish when the venture is staffed with personnel of theJapanese partner; it is hard for these employees to differentiate thejoint venture's interests from those of the Japanese parent. Forexample, in the area of marketing, the temptation will be to allowthe Japanese parent to handle the export sales distribution or re-placement sales. Should this occur, accounting techniques should beused which carefully delineate the profits of the venture and keepthem separate from the profits of the Japanese partner. Provisions8Art. IV(2) of Treaty of Friendship, Commerce and Navigation between theUnited States and Japan of 1953; also U.N. Convention of 1958. Under the JapaneseCode of Civil Procedures, the arbitration award has the same effect as a final judgmentand can be enforced by execution judgment; Arts. 800, 802. See, American PresidentLines v. C. Subra KK (Tokyo Dt. Ct., Oct. 23, 1959), translated in 6 JAPAN ANN.INT'L L. 203 (1962); Casaregi Compagnia Di Navigazione E Commercio SPA v. NishiShoji KK (Tokyo Dt. Ct., Aug. 20, 1959), translated in 5 JAPAN ANN. INT'L L. 112(1961).1974]CASE W. RES. J. INT'L L.should be made in the joint venture agreement for an audit of theseoperations by the American partner or by a third party.(4) Other Business ReasonsOther reasons for the termination of a joint venture, which frompast history and experience are identifiable, include lack of sufficientsales, lack of profits, failure of the venture to carry out its most im-portant obligations under the license agreement, stalemate withinthe board of directors, failure of the parties to agree on the budgetfor the future or on past financial statements, and bankruptcy of oneof the partners in the venture.These reasons are immediate, factual, and identifiable. Thosespecified in the preceding three paragraphs are more fundamental.All underly the catch-all reason for joint venture failures - name-ly, lack of business success.ConclusionsDon't be in too much of a hurry to enter into a Japanese mar-riage. If it becomes necessary to extricate yourself from a joint ven-ture your Japanese partner generally will have more leverage thanyou in accomplishing that extrication, if not successfully, at leastwith a minimum of adverse consequences, if only because he isplaying on his own home ground.Take your time in selecting your partner; develop criteria foryour future partner and be sure that these criteria are met.Take your time in negotiating your venture agreement. Remem-ber that your prospective partner's nod in a negotiation may bemerely a mark of politeness and not an indication of understanding.Full use should be made of a translator if there arises any doubt.Absolute mutuality of understanding concerning the objectives andoperation of the joint venture and concerning the responsibilities ofeach of the partners is the basic objective which must be fully metfor success to be achieved. Considerable patience must be part ofyour arsenal. Distance, language barriers, and the typical turnoversin American personnel make a subsequent understanding far moredifficult to achieve if an initial understanding has not been reachedat the beginning.You can afford to be selective and cautious in expanding opera-tions into Japan which just is not as attractive an area for invest-ment as it once was. It's infrastructure, the best example of which is[Vol. 6: 250CORPORATE DIVORCE - JAPANESE STYLEprobably the distribution system, requires much further develop-ment. It is a relatively high cost area in which to operate; wagerates and fringe benefits, for example, are exploding at the rate ofabout 2 5 percent per year. It also has all of the problems associatedwith highly developed industry, such as pollution and the energyshortage. There is also an acute shortage of available land. Fur-thermore, Japan's lack of natural resources and overcrowding ac-centuate the problems which modern industry faces all over the world.The prospects for success of a new business enterprise in Japan havefallen considerably in the last few years except for those situationswhere the foreign investor is able to fill a special need in Japan orsupply desired technology.Above all, protect your technology. Watch your patent situa-tion closely and police it carefully. The Japanese respect patents,and your patent situation at the outset will be a key factor in deter-mining what kind of deal you get with your Japanese partner. Itis your basic lever, and technological virginity is normally a pre-requisite to any successful venture. Hopefully, your patent positionwill adequately protect you from competition in patented items fromyour former partners when the joint venture is terminated.Finally, even though you will probably have to go the joint ven-ture route in Japan for logistical, cultural, and other reasons, youwill want to try to get as much equity ownership as possible andan equal voice in critical business decisions. Maximization of yourequity position will afford you a decided influence on the operationof the joint venture, will aid you in taking corrective steps in theevent the situation does not progress according to your expectations,and will increase your leverage in the event of a breakup. In short,you should have as many votes on your side as possible when thecrunch comes and you need them.9 According to an estimate of the Economic Planning Agency of Japan, the averageincrease in the level of wages since April 1974 was 31.9%.1974]CASE WESTERN RESERVE JOURNALofINTERNATIONAL LAWVolume 6, No. 2 Spring/Summer 1974Editor-in-ChiefJOHN E. CODREAExecutive EditorKARL M. SCHWENKELManaging EditorGREGORY J. LAVELLEEditorsSteven J. DeerwesterLawrence E. GawellScott K. GoldsmithRichard M. LorenzoJohn F. MelvinJ. Alex MortonAssociatesVivian BalesterJohn CampbellGeorge KimmelStaffGlen DavisJames DennisPeter GadielPhillip KolczynskiPatrick McLaughlinBrian StormerGerald VargoRichard VerriJoseph ZingalesCitations conform to f Uniform System of Citation (IIth ed. 1967); style conforms to the United StatejGovernment Printing Ofice Style Manual (rev. ed. 1967).

Corporate Divorce--Japanese Style

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Corporate Divorce--Japanese Style

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