Growing Securities Litigation Against Issuers in Japan: Its Background and Reality

Abstract

Securities litigation against issuers is growing in Japan. In the latter half of the 2000’s, many suits against issuers that made material misrepresentations were filed by investors in the secondary market, and in many of them, plaintiffs were granted judgments in their favor. Before then, such litigation was very rare. After reviewing Article 21-2 of Financial Instruments and Exchange Act, which is a special provision for statutory liability of issuers to investors in the secondary market, and a few aspects of Japanese civil procedural law, such as a lack of the U.S.-style class actions, this article tries to grasp the reality of securities litigation in Japan.First, securities litigation against issuers has increased, but still it is not filed in every possible case. In other words, securities litigation is still not a wide-spread phenomenon, but it has attracted attention as court decisions in a few notable cases have accumulated quickly, as multiple suits by different plaintiffs were filed concurrently against the same issuer for the same misrepresentation by different plaintiffs. Second, these plaintiffs can be categorized into three types, namely, institutional investors, a group of other investors (i.e., other than institutional investors) gathered by lawyers via the Internet, and individual investors. Although the second type resembles class actions in the U.S. to some extent, their lawyers’ compensation differs as they take retainers and set modest rates of 10-20% for contingency fees. Also, the focus of discussions that followed the increase of securities litigation was not on an increase of strike suits without merit, but rather on the theoretical rationale of the issuer’s liability. These findings show that securities litigation is possible even without the U.S.-style class actions, if there is strong substantive law, but that it could develop differently from that in the U.S. Research on the deterrence effect of securities litigation in Japan should take these factors into consideration.