Waseda University Institute of Comparative Law

     On September 13, 2011, No. 3 Petty Bench of the Supreme Court issued a remarkable judgment regarding the liability for damages that the Issuer Corporation, who had filed and presented annual securities reports with false statements over the long term, shall assume for shareholders who suffered economic losses from the decline in stock value after the false statements was revealed.

     In this case, Seibu Railway Co., Ltd., (hereinafter referred to as “S-Railway”), whose stock has been listed on the Tokyo Stock Exchange, incorrectly reported the number of shares in the possession of the parent company, Kokudo Corporation, and its affiliated companies on the annual securities reports from 1957 to 2004. Furthermore, the actual ownership-status of the company stock and the fact that the status had not been disclosed properly had resulted in the possibility of delisting by the Tokyo Stock Exchange.

     On October 13, 2004, S-Railway publically announced the false reporting. After that, the price of the stock of S-Railway collapsed, and the Tokyo Stock Exchange made the decision to delist the stock of the company. The stock was actually delisted in December 2004.

     The part of shareholders of S-Railway claimed compensation for damages from economic losses, and several lawsuits were filed against S-Railway and the representative director and other directors. The central issues addressed by the litigation were whether the court would adjudicate the assumption of liability by the company for damages under general tort law, which had not been adequately addressed in Japan. The reason why the liability under the general tort law had been important problem in these cases is that the Securities and Exchange Act revised in 2004 couldn’t be applied to these cases. The Act contains provisions prescribing liability by the Issuer Corporation regarding any false statements, and provides an estimate of monetary damages, in the event of such liability.

     The lower courts found in favor of the shareholders with regard to the claim in tort on the liability of S-Railway, especially for shareholders who suffered losses upon the sale of the stock after the price collapsed because of the false statements. However, differences of opinion were evident in the precedents on the method of approving damages which shareholders suffered.

     In this respect, the Supreme Court decided in this case that the damages S-Railway should pay to shareholders as plaintiffs shall be considered on the basis of the amount after reducing the disposal price from the acquisition price when the stock has already been disposed of on the market, or the amount after reducing the evaluated price at the time of ending oral arguments in the trial from the acquisition price if the stock was still in the possession of the shareholders, under the premise that the shareholders might not have acquired the stocks of S-Railway if there had been no false statements. On the other hand, the Supreme Court decided that any decline in the market price caused by the economic circumstances, market movement, and reasons not attributable to the false statements made by the company, which occurred before the fact related to the false statement was made public, shall be excluded from the scope of damages.

     With reference to the decision of the Supreme Court, there are opinions that decision may result in an unreasonable burden on the Issuer Corporation who made the false statements and the decision fails to protect shareholders or investors because the damages for the decline in the market price were not based on a specific reason.

     Considering a stock market with many investors and the economic losses to all investors were substantial once the Issuer Corporation made the false statement, the issue of liability for damages is now argued in every country in the world. The decision of the Supreme Court of Japan would have an impact upon worldwide arguments.