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27 January 2009
Under the Financial Instruments and Exchange Law (25/1948, formerly known as the Securities and Exchange Law), a company that files a securities report containing a material false statement is liable to past and present shareholders for damages caused thereby. In 2008 a number of court decisions shed light on issues of civil liability for false statements in securities reports, especially on the methods by which shareholders plead and prove the amount of damages. The significant cases were In re Associant Technology Inc,(1) Nippon Life Insurance Company v LDH Corporation(2) and the litigation involving Seibu Railway Co Ltd, in which institutional and retail shareholders brought claims.(3)
In theory, as in any shareholder's claim for compensation, the shareholder must prove the amount of damages by providing evidence of the difference between the price at which the stock was purchased and the estimated market price of the stock if no false statement had been made, the latter being termed the 'imaginary market price'. The law provides for an artificial presumption which reduces the shareholder's burden of proof by evaluating the amount according to a formula: damages are equal to the average stock market price for one month before the date on which the false statement was publicly announced, minus the average stock market price during the month after the public announcement.
In re Associant Technology Inc
Associant Technology was delisted because of false statements in its financial statements. Its shareholders claimed for compensation for damages caused by the false statements. The court decided that the amount of damages was equal to the difference between the purchase price and disposal price, stating that such damages normally result from false statements.
Retail Shareholders v Seibu Railway Co Ltd
Seibu Railway was delisted because of false statements on shareholder composition in its securities report. The plaintiffs claimed for compensation. The retail shareholders pleaded that the amount of damages was equal to:
The court rejected all but the last analysis (ie, the amount of damages for former shareholders). It held as follows:
However, the court agreed with the second part of the third contention, even though both parts were based on the same logic. The court stated that when stock prices fall sharply and a company is on the brink of delisting because of the disclosure of a false statement, it is reasonable for investors to dispose of stock in order to minimize their losses. Therefore, the losses that former shareholders had sustained in disposing of their stock could be considered as damages resulting from the false statements.
Institutional Shareholders v Seibu Railway Co Ltd
Basing their claims on the same factual background as that in Retail Shareholders, Japan Trustee Services Co Ltd and other institutional shareholders claimed compensation from Seibu Railway for damages caused by its false statements. The plaintiffs' pleadings were almost identical to the retail shareholders' first two pleadings and were rejected on the same grounds. The plaintiffs made no pleadings equivalent to the third pleading in Retail Shareholders.
Nippon Life Insurance Company v LDH Corporation
LDH Corporation was delisted because of false statements in its securities report. Nippon Life Insurance Company and other institutional investors claimed compensation from LDH by applying the formula for damages. The court applied the formula for the first time since its introduction. However, the law provides that once the formula is applied, the defendant must plead and prove the amount of excludable damages that were caused by factors other than the false statement, although the court may exercise its discretion and determine the amount of excludable damages if the defendants cannot prove this amount.
The court exercised its discretion and found that the amount of excludable damages was 30% of the calculated amount. The court considered various factors which may have caused the drop in stock price other than the false statements (eg, the arrest of the representative director and general macroeconomic conditions). It applied a liberal interpretation of the law's public announcement requirement, which is one of the requirements for the application of the formula. The court stated that a public prosecutor is one of the parties that may publicly announce that a statement is false, and that if a public prosecutor unofficially discloses the existence of a false statement to the media, such disclosure may be deemed a public announcement.
Although these decisions appear to offer strong indications of how shareholders should plead and prove amounts of damages caused by false statements, it is unclear whether their implications can be reconciled. As all of the decisions have been appealed, it is hoped that future findings will clarify the position.
For further information on this topic please contact Naoki Iguchi or Tatsuya Soeda at Anderson Mori & Tomotsune by telephone (+81 3 6888 1000) or by fax (+81 3 6888 3089 ) or by email (email@example.com or firstname.lastname@example.org).
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