japanAs 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.”