Defendant, you are ordered to pay to Plaintiff Mr Hori 26 million yen as well as 6% per annum interest on each of the following amounts, accruing from the dates indicated until the date of full payment: on the amount of 2.6 million yen (accruing from Sept. 26, 1996); on the amount of 2.6 million yen (accruing from Oct. 26, 1996); on the amount of 2.6 million yen (accruing from Nov. 26, 1996); on the amount of 2.6 million yen (accruing from Dec. 26, 1996); on the amount of 2.6 million yen (accruing from Jan. 26, 1997); on the amount of 2.6 million yen (accruing from Feb. 26, 1997); on the amount of 2.6 million yen (accruing from Mar. 26, 1997); on the amount of 2.6 million yen (accruing from Apr. 26, 1997); on the amount of 2.6 million yen (accruing from May 26, 1997); and on the amount of 2.6 million yen (accruing from June 26, 1997).

Defendant, you are ordered to pay to Plaintiff Mr Sekiguchi 10.3 million yen as well as 6% per annum interest on each of the following amounts, accruing from the dates indicated until the date of full payment: on the amount of 1.03 million yen (accruing from Sept. 26, 1996); on the amount of 1.03 million yen (accruing from Oct. 26, 1996); on the amount of 1.03 million yen (accruing from Nov. 26, 1996); on the amount of 1.03 million yen (accruing from Dec. 26, 1996); on the amount of 1.03 million yen (accruing from Jan. 26, 1997); on the amount of 1.03 million yen (accruing from Feb. 26, 1997); on the amount of 1.03 million yen (accruing from Mar. 26, 1997); on the amount of 1.03 million yen (accruing from Apr. 26, 1997); on the amount of 1.03 million yen (accruing from May 26, 1997); and on the amount of 1.03 million yen (accruing from June 26, 1997).

Costs of litigation shall be borne by Defendant.

This judgment may be used to make provisional seizures.

Plaintiffs were directors of the defendant kabushiki kaisha Maytech Corp., and claim that while in office their remuneration was illegally reduced. They seek unpaid directors’ fees for the duration of their term of office (difference between agreed amount and paid amount), and relating to such amounts, they also seek the legal interest rate of 6% per annum , accruing from the day following each agreed payment day.

Maytech Corp., in response, argues that according to a Board resolution, decisions on directors’ fees were entrusted to a representative director, who decided to reduce the fees in question (no dispute concerning such facts); that plaintiffs agreed to the reduction of their fees; and that after becoming a part-time director it is contrary to the principles of good faith and fairness to demand continuation of previous full-time directors’ remuneration. Plaintiffs argue that the decision to reduce their fees is invalid.

Maytech Corp. engages mainly in the business of dispatching technical personnel for work relating to design and development of machinery, electrical and electronic devices, and computer software. It was incorporated in 1974, and is listed on the Section 2 of the Tokyo Stock Exchange, and Section 2 of the Nagoya Stock Exchange. The founder of the company, also named Sekiguchi (hereinafter "Sogai Sekiguchi") [Translator’s Note: "sogai" means "outside the litigation", and is used to identify a person not a party to the litigation] was dismissed from his position as representative director by a Board resolution in July 1996.

Mr Hori was appointed director at Maytech’s 22^nd ordinary shareholders’ meeting on June 27, 1995. As of August 1996, he was an executive director responsible for Western Japan business.

Plaintiff Sekiguchi was appointed director at Maytech’s 23^rd ordinary shareholders’ meeting on June 29, 1996, pursuant to an increase that year in the number of directors. As of August 1996, Plaintiff Sekiguchi was director responsible for the New Business Development Office.

The 24^th ordinary shareholders meeting was scheduled to be held in June of 1997, and was held on June 27 of that year. The terms of the two plaintiffs expired as of that day.

Pursuant to the articles of incorporation, directors’ fees are determined by resolution at a shareholders’ meeting. At the June 29, 1996 shareholders’ meeting, the range for the total amount of directors’ fees was determined, and the precise amounts for each director were entrusted to the Board of Directors. At a Board meeting on the same day, each director’s monthly fees was decided. Plaintiff Hori’s fee was set at a rate of 2.7 million yen per month, and Plaintiff Sekiguchi’s was set at a rate of 1.13 million yen per month, both effective as of July 1, 1996. On July 25 and August 25, fees were paid to the plaintiffs at those rates.

On July 31, 1996, a resolution was passed at a regular Board meeting dismissing Sogai Sekiguchi as representative director. 13 directors attended the meeting, of whom 10 were in favor of the resolution. The two plaintiffs opposed it.

At the same Board meeting, a resolution appointing Mr Otsuki as representative director was approved. The two plaintiffs and Sogai Sekiguchi opposed this resolution.

At a regular Board meeting held on August 31, 1996, resolutions were approved entrusting to Mr Otsuki decisions concerning directors’ fees, dismissing the plaintiffs and Sogai Sekiguchi from their positions as full-time directors, and making them instead part-time directors, effective September 1, 1996.

On the same day, Mr Otsuki decided that the plaintiffs’ fees effective September 1996 would be 100,000 yen per month.

Starting from September 1, 1996, until the end of term June 27, 1997, each of the plaintiffs was paid every month, by the end of the month, a fee of 100,000 yen.

Plaintiffs argue that when a director’s fee is specifically decided, such amount becomes a term of the contract between the corporation and the director, binding on both sides, and unless the plaintiffs consented otherwise, the decision to reduce their fees is invalid, and the plaintiffs’ right to claim fees has not disappeared.

Maytech Corp. argues that a director’s fee is partly consideration for attending Board meetings and stating one’s opinion, participating in resolutions, and reviewing the work performance of the representative director; but that it is also, in addition, consideration for comprehensive responsibility in a specific area or representation of the corporation. It is normal that a director who holds general responsibility for a specific area and is representing the corporation would be paid larger fees than a director with no such position of responsibility.

Maytech Corp. further argues that plaintiffs knew such custom, and that it was foreseen and understood in advance that if duties changed from full-time to part-time duties, and if a director lost his position of general responsibility for a particular area, that his fees would be reduced remarkably, compared to the fees of a full-time director.

Maytech Corp. also pleads that plaintiffs agreed to the fee reduction. At the August 23, 1996 Board meeting, plaintiffs were demoted to part-time director, and a resolution entrusting director’s fee decisions to Mr Otsuki was passed. Mr Otsuki reduced the plaintiffs’ fees to 100,000 yen per month each, and afterwards met separately with each of the plaintiffs, telling them that the part-time director’s fee is 100,000 yen per month, and that if they resigned to become outside advisers on the basis of "rules relating to outside advisers", they would be paid half of their former salary as full-time directors. Mr Otsuki says that he asked the plaintiffs which choice they prefer, and that both said that they wished to stay as directors. Maytech Corp. pleads that this can be considered an agreement with respect to fee reduction.

Plaintiffs deny this testimony. Plaintiff Sekiguchi says that at his meeting with Mr Otsuki, his only response was to say, "Let me think about it." Mr Hori says that he left the meeting with Mr Otsuki without responding.

Maytech Corp. argues that the plaintiffs’ claim is a violation of principles of good faith and fairness. According to this argument, the nature of fees paid to a director is consideration for the work assigned to such director, and it is therefore reasonable to make a substantial reduction in the plaintiffs’ fees since the nature of their work changed: they were dismissed from their positions as full-time directors with general responsibility for a particular area, and became part-time directors who only participated in Board meetings. Maytech alleges that the average annual remuneration for part-time directors in Japan (regardless of industry or size of company) is 2.91 million yen, compared to which plaintiffs demand their former high fees, which are 11 and 4.6 times the national average respectively.

Plaintiffs argue that the change in the contents of their work was not in the ordinary course of business of Maytech, but rather it was retaliation related to executive personnel matters, or a measure to exclude dissent, and in such situation there is no basis for a pleading of good faith or fairness. Plaintiff further argues that a decision on director’s fees binds the parties. In this case, it should have been predicted that the contents of work might change over the course of a 2-year term, and taking that into account, claiming the former fees is not a violation of good faith. Moreover, even when the contents and amount of a director’s work change, he still can not escape his responsibility at Board meetings to verify the work performance of the representative director and others.

Judgment on points in controversy

According to the evidence and pleadings, the court finds the following facts. On August 9, 1996, Representative Director Otsuki and Executive Director Nishimoto decided at an Executive Directors’ meeting to remove Plaintiff Sekiguchi of his responsibilities, and demote him from a full-time to part-time position. After that, Messrs Otsuki and Nishimoto discussed with Plaintiff Sekiguchi their decision to demote him to part-time director status and reduce his fees (although the precise amount was not discussed), and they informed Plaintiff Sekiguchi that he could also choose to resign and become an outside adviser at half of his former full-time director salary. Plaintiff Sekiguchi asked for time to consider this.

On August 23, 1996, the Board approved resolutions removing plaintiffs of their responsibilities, making them part-time directors, and entrusting Mr Otsuki with decisions concerning directors’ fees. Plaintiffs opposed these resolutions. Mr Hori demanded an explanation for his demotion, and Mr Nishimoto responded that under the new organization the directors’ former responsibilities could not be maintained.

After the Board meeting, Mr Otsuki decided the plaintiffs’ monthly fees to be 100,000 yen each, and had separate meetings with each of Sogai Sekiguchi, Plaintiff Sekiguchi and Mr Hori, in that order. Mr Nishimoto also attended all of these meetings.

At the meeting with Plaintiff Sekiguchi, Mr Otsuki showed him a document entitled "Treatment of Part-time directors" which stated that monthly salary for a part-time director is 100,000 yen, and explained that if he left to become outside adviser for one year, he would be paid at half the rate of his former full-time director’s salary, in accordance with rules relating to directors and outside advisers. Mr Otsuki asked Plaintiff Sekiguchi to choose between the two alternatives.

At the meeting with Mr Hori, Mr Otsuki showed Mr Hori a document entitled "Treatment of Part-time directors", stating that monthly salary for a part-time director is 100,000 yen, and explained to him that he had the choice of resigning and becoming an adviser, in which case, in accordance with the relevant rules, he would receive half of his full-time director’s fee. Mr Hori was asked to decide between resigning and becoming an adviser on the one hand, or remaining a director on the other. Mr Hori at that time asked again the reason for his demotion.

Prior to the Board meeting of August 23, 1996, Maytech Corp. had no position of part-time director.

Also, in the Articles of Incorporation, there are provisions for appointment by the Board of a director-president, and if necessary a Chairman of the Board, a director vice-president, and executive directors.

Whether plaintiffs agreed to the fee reduction. Immediately after the Board resolution of August 23, 1996 and the decision to reduce fees, Mr Otsuki, together with Mr Nishimoto, met separately with each of the plaintiffs, explaining to each of them the alternatives of becoming an outside adviser or part-time director, and the corresponding remuneration. The plaintiffs were asked to decide between being outside adviser and being part-time director. It is not the case that the plaintiffs were asked to give their consent to change the contents of their contract with respect to the amount of their fees.

According to Mr Nishimoto’s testimony, the plaintiffs responded that they wished to remain as directors. Mr Hori testified that he left the meeting without responding, and Plaintiff Sekiguchi testified that he asked for time to think. It is not clear from the evidence whether the plaintiffs expressed an intention to remain as directors.

Taking into consideration the events prior to the demotion of the plaintiffs, the Board resolution immediately preceding the conversations with the plaintiffs, and the plaintiffs’ actions, it can be inferred that the plaintiffs were more interested in whether they would remain as directors than in the amount of their fees. Even if the court adopts Mr Nishimoto’s testimony that the plaintiffs expressed an intention to remain as directors, the court cannot find that the plaintiffs agreed to a reduction in their fees.

Validity of representative director’s decision to reduce plaintiffs’ fees. In a kabushiki kaisha, where the articles of incorporation or a shareholders resolution determine fees (including cases where a shareholders’ resolution decides a total amount for all directors, and the Board allocates the amount among the directors), such fees represent a contract between the corporation and the director, binding both sides. In such case, even if the Board or the representative director entrusted by the Board reduces a director’s fees, if there is no agreement by the director, such director does not lose the right to demand fees, even if there is a remarkable change in the director’s work.

In the case at bar, the articles of incorporation provide that directors’ fees are determined by a shareholders’ meeting, a shareholders’ meeting set a range for directors’ fees, and the Board decided by resolution to pay each director every month a fixed fee. In accordance with this Board resolution, the plaintiffs were paid every month by the 25^th a fixed fee. As of August 1996, such monthly rate was 2.7 million yen for Mr Hori and 1.13 million yen for Plaintiff Sekiguchi.

The court does not find that the plaintiffs agreed to Mr Otsuki’s decision to reduce their fees to 100,000 yen per month or to the Board resolutions which changed the contents of their work from full-time to part-time and entrusted to Mr Otsuki responsibility concerning directors’ fees. Also, taking into consideration that there was no part-time director position prior to the August 31, 1996 Board meeting which established such position; and that a part-time position is not particularly provided for in the articles of incorporation, the court finds that there was no prior comprehensive understanding or agreement with respect to the fee reduction.

Even if the representative director mandated by the Board decided to reduce such fees, such decision is invalid. The plaintiffs’ right to claim fees for their entire term did not disappear.

Whether plaintiffs’ claims violate good faith and fairness principles. It is true that directors’ fees are in exchange for their work, and therefore if the work of a director changes, it is also reasonable to change his fees. However, the court doubts that such reasonableness can be determined by a comparison with the average part-time directors’ compensation of all companies, regardless of industry or size; rather it would be studied in light of the nature of the work at the particular company.

In any case, there is a contract between the corporation and the directors concerning fees, and in order to reduce fees, it is not sufficient that the reduction be reasonable. There must also be the consent of the directors, and in this case the court does not find such an agreement. The determination of directors’ fees binds the parties for at most the director’s two-year term, which cannot be said to be a long period of time. The corporation should certainly foresee that in such two-year period the contents of a director’s work might change. Also, taking into consideration that even if a director becomes part-time, his responsibility at the Board to verify the propriety of work does not change, the court cannot find that the plaintiffs’ claims violate principles of good faith and fairness.

The plaintiffs claim unpaid fees from September 1, 1996 to the end of their terms, as well as interest at the fixed legal rate of 6% per annum from the day following each month’s contract payment date until the actual payment date. These claims are justified.

The plaintiffs’ claims, because they are justified, are upheld. Litigation costs will be borne in accordance with Civil Procedure Law Article 89. With respect to a declaration of provisional attachment, Article 196 of the same law will be applied. Judgment as stated above.

© 1998 Sander Cohen, Attorney at Law. Adjunct Professor of Law in Temple Law Program, 1997/98.

(translation by Vicki L. Beyer)

---

Temple University Japan