Founder and Business Partner Disputes in Japan
Two people start a company together.
One develops the product. The other raises money and handles sales.
The relationship deteriorates.
One founder wants the other founder out.
At this point, people often ask:
"Can I remove my business partner from the company?"
That is usually not the first legal question to ask.
The better starting point is: what rights does each person actually have?
A founder dispute usually contains several separate disputes
A founder can simultaneously be:
- a shareholder
- director
- employee
- lender to the company
- owner or creator of intellectual property
- party to a shareholders' or founders' agreement
Removing someone as a director does not necessarily eliminate his shares.
Ending an employment relationship does not necessarily cancel shareholder rights.
Repaying a founder loan does not necessarily resolve an equity dispute.
The legal relationships must therefore be separated before a strategy is chosen. Where the disputed asset is an option or a promise of shares rather than registered shares, see stock option and equity disputes in Japanese startups.
Documents to review
The core documents often include:
- articles of incorporation
- corporate registry
- shareholder register
- shareholders' agreement
- founders' agreement
- share transfer agreements
- investment agreements
- loan agreements
- employment agreements
- IP assignment agreements
- shareholder and board minutes
- relevant communications
Informal startup arrangements often leave critical issues undocumented. In those cases, contemporaneous email and chat records become especially important.
Where the intellectual property was created with an outside company or a university rather than inside the business, the allocation of rights is a separate question again: see who owns the IP in a joint development.
Common exit solutions
Not every founder dispute should end in litigation.
Founder buyout
One founder purchases the other's shares.
Mutual separation
The departing founder transfers shares and resigns from management in return for agreed consideration.
Role restructuring
Both founders remain shareholders but management authority is reorganized.
Settlement of multiple relationships
A comprehensive agreement may address share transfers, director resignation, founder loans, intellectual property, company property, confidential information, non-disparagement, customer communications, releases and payment schedules.
This is often more effective than attempting to settle each issue independently.
Be careful with company assets
A dispute between shareholders is not permission to treat company property as personal property.
Bank funds, software, domains, source code, customer lists and other assets may belong to the company rather than either founder individually.
Unilateral withdrawals, deletion of data or lockout of another founder can create additional legal problems.
Preserve value while resolving the dispute
Founder litigation can damage the very company whose value the parties are fighting over.
Where possible, the legal strategy should therefore address both:
- preservation of the client's legal rights
- preservation of the underlying business value
This can be particularly important where investors, employees or customers are affected by the dispute.
Where one founder also put money into the company, the characterisation of that money is its own question: see recovering loans and investment money in Japan.