The House of Councilors on Wednesday passed into law a bill to update the corporate legal system, facilitate mergers and acquisitions and enhance defenses against hostile takeovers.

The new law, which cleared the House of Representatives in May, puts an end to a series of Commercial Code revisions started in the 1990s.

It is aimed at responding to changes in the business environment with rapid globalization and enabling corporate competition in line with international rules.

The law will take effect in 2006, excluding provisions for easier M&As, which will go into force in 2007.

The delay for the M&A provisions is designed to allow firms to develop defenses against hostile takeover bids after Internet portal site operator Livedoor Co.'s attempted acquisition of Nippon Broadcasting System Inc. with foreign funds struck fear in the heart of corporate Japan earlier this year.

One takeover defense under the new law will allow any company to give equity warrants to shareholders in advance and to issue new shares to them when a hostile bidder acquires a predetermined equity stake in the firm.

The poison pill will thus dilute the bidder's stake and make it difficult for the bidder to take control of the firm.

Another takeover defense will enable firms to change their corporate charters to toughen conditions for shareholders' approval of mergers at their general meetings.

The law will eliminate the minimum capital requirement at 10 million yen for stock companies, making it possible to start a company for as little as 1 yen.

The limited-liability company category will be abolished, while such existing firms will be allowed to remain intact.

A new company category will be created for ventures where employees can make management decisions. An accountant-counselor system will be introduced to allow certified public accountants to undertake accounting management inside companies.

The law specifies restrictions on shareholders' litigations to pursue unjust benefits or damage companies.

Big business happy

Business leaders responded with enthusiasm Wednesday to the passage of a bill to update the corporate legal system.

"We welcome the enactment, as the law is designed to strengthen the soundness of corporate management, while enhancing flexibility," Kakutaro Kitashiro, chairman of the Japan Association of Corporate Executives, said in a news release.

Managers should be keenly aware that boosting the value of their firms amounts to the best defense against hostile bidders, according to the chairman of IBM Japan Ltd.