As I have previously noted, the prevalence of
misrepresentation-related securities litigation in Japan increased
significantly after the 2004 revisions to the Japanese securities laws. The
increase largely has been due to the legislative changes and to a number of
high-profile accounting and financial scandals. There are features of the
Japanese law that, according to a recent review, make Japan “an attractive
forum for securities litigation.”
However, claimants still face a number of
hurdles, as a result of which, according to a recent academic study, securities
litigation in Japan “is still not a widespread phenomenon.” The June 15, 2016 Law 360 article entitled “A Look at Shareholder
Remedies in Japan,” can be found here. University of Tokyo Professor Gen Goto’s January
2016 article “Growing Securities Litigation Against Issuers in Japan: Its
Background and Reality” can be found here.
In 2004, the National Diet, Japan’s legislature, amended
the 1948 Securities and Exchange Law by introducing Article 21-2, providing
statutory liability for issuers to secondary market investors for misrepresentations.
In 2006, the Diet reformed the Securities and Exchange Law, which was renamed
the Financial Instruments and Exchange Act (FIEA). An English translation of
the FIEA can be found here. FIEA also introduced a
number of provisions containing internal controls and certification
requirements often referred to as “J-Sox” because of the provisions
similarity to comparable features of the Sarbanes Oxley Act.
The liability provisions
of FIEA share certain similarities with the secondary market liability
provisions in the U.S. in Section 10(b) of the ’34 Act and Rule 10b-5
thereunder; however, a plaintiff proceeding under the Japanese laws has certain
advantages over a U.S. plaintiff.
In Japan, in order to
establish liability, a plaintiff need only prove that there were material
misrepresentations in an issuer’s public disclosure document and that the
plaintiff purchased securities after the document’s publication. The plaintiff
does not have to prove that he or she relied on the document in making his or
her investment decision.
The plaintiff also does
not have to show intent to deceive or recklessness; originally, Article 21-2
had been a strict liability provision. As a result of revisions in 2014,
plaintiffs in a secondary market action against an issuer must now establish
negligence in connection with the misleading publication, with the burden on
the defendants to establish non-negligence. (The standard of liability for
misrepresentations in offering documents remains a strict liability standard.)
In addition, the
plaintiff’s burden of proof is substantially eased by a statutory presumption
of the amount of damages. Damages are presumed to be the difference between (1)
the average market value of the security during the month prior to the
announcement date and (2) the average market value of the security during the
month after that date. The defendants may rebut the presumption by showing that
the loss in share value was due to reasons other than the disclosure of the
misrepresentation.
The presumption is not available for claims against
directors and officers; in claims against directors and officers, plaintiffs
must establish loss causation. Directors and officers can also escape liability
by establishing that even with the exercise of due care they had not discovered
the misrepresentation.
In addition, the
Japanese legal system shares some features with the U.S. system that are
investor-friendly. Thus, for example, contingent fees are permitted in Japan,
and Japan, like the U.S., does not have a “loser pays” model for attorneys’
fees, but instead follows practices similar to the American Rule, where each
party bears its own costs.
While the substantive
securities law in Japan affords plaintiffs certain advantages, there are a
number of procedural aspects of securities litigation in Japan that make
pursuing securities claims more challenging. First, and most significantly,
unlike the U.S., Japan does not have an “opt-out” class action litigation
mechanism. In order to proceed on a collective basis, Japanese can use one of two
“opt-in” procedures. Either the plaintiffs can individually join their claims
together in a collective procedure, or they can delegate authority to a
representative plaintiff to litigate on behalf of the group. In connection with
several of the high profile scandals in Japan, several law firms have succeed
in building large groups of claimants by using “victim shareholder” websites.
In addition, the
Japanese civil procedures do not have a system for compulsory disclosure of
evidence comparable to pre-trial discover under U.S. civil procedures. While
this may pose evidentiary challenges for plaintiffs, it does have the effect of
keeping costs down.
Despite these procedural
hurdles, plaintiff shareholders have attempted to use the new procedures
available under the reformed securities laws to try to obtain recoveries for
alleged misrepresentations, particularly from companies involved in highly
publicized accounting scandals, such as Seibu Railway, Livedoor, and Urban
Corporation, was well as, more recently, Olympus and Toshiba. (For details
regarding the settlement of one of the Olympus scandal securities actions,
refer here.)
Interestingly, and as
detailed in Professor Goto’s paper, there have been far more instances of
public enforcement of securities law violations (in the form of enforcement
actions by Japan’s securities regulator) than there have been instances of
private securities litigation activity. Based on this observation, Professor
Goto concludes that while “securities litigation is now beginning to be filed
in Japan,” it is “at a rate that is not so high.” The authors of the Law 360
article note that despite that investor friendly nature of the Japanese
securities laws, securities litigation “still accounts for only a few cases
each year. “ The article’s authors also suggest that in light of the various
procedural hurdles it is “unlikely that securities litigation in Japan will
expand rapidly.”
The costs associated
with proceeding in a coordinated group actions, as well as the dearth of
published case authority on many aspects of Japanese securities laws, means
that pursuing a securities liability action can be costly and uncertain.
According to the Law 360 article’s authors, “it remains to be seen whether a
case against a company will be attractive enough to warrant the serious efforts
required to prosecute an action on behalf of foreign investors.”
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