Toshiba Case

“The Book-Entry Transfer Act provides, in order to enable a company issuing shares to ascertain its current shareholders and to process uniformly the collective legal relationships involved in the exercise of shareholders’ rights, that the attribution of rights in book-entry shares shall be determined by the entries or records in the book-entry account registry (Article 128, paragraph (1) of the Book-Entry Transfer Act), and that the registered holder of the book-entry account (the ‘participant’) is presumed to lawfully hold the rights in the book-entry shares recorded in that account (Article 143 of the same Act). In addition, with respect to transfers of book-entry shares, in order to secure the liquidity of such shares and to achieve, for book-entry shares as well, the substance equivalent to Article 128, paragraph (1) of the Companies Act—which requires delivery of share certificates as a requirement for the effectiveness of a share transfer in the case of share-certificate-issuing companies—the Book-Entry Transfer Act provides that an increase entry in the book-entry account registry with respect to the relevant shares is a requirement for the effectiveness of the transfer (Article 140 of the same Act), and that absent such an increase entry, the transfer of shares does not become effective. Accordingly, where book-entry shares are transferred, no person who has not received the corresponding increase entry in its book-entry account registry may be deemed to have acquired such book-entry shares, and it is the person who has received the increase entry in its book-entry account registry who acquires the book-entry shares with legal effect. Article 21-2, paragraph (1) of the Financial Instruments and Exchange Act provides that it applies to a ‘person who has acquired securities.’ In light of this wording, it is a natural textual interpretation, consistent with the framework of the Book-Entry Transfer Act, to construe that the person who has received the increase entry corresponding to the transfer of the book-entry shares—namely, the registered holder—falls within that category as a person who has acquired securities-represented rights deemed to be securities under Article 2, paragraph (2) of the Financial Instruments and Exchange Act.

Moreover, Article 21-2 of the Financial Instruments and Exchange Act is a special provision, from the standpoint of investor protection, that relaxes the burden of proof as an exception to the general tort provisions for investors who have suffered damages due to false statements in securities reports and the like; … and the scope of its application should not be readily expanded.

For these reasons, it is appropriate to construe that the registered holder who has received the increase entry in its own book-entry account registry falls within the above ‘person who has acquired’ securities.”

“Because the Book-Entry Transfer Act presumes that the registered holder of the book-entry account registry (the participant) lawfully holds the rights in the book-entry shares recorded in that account, and provides that where an increase entry has not been made in the book-entry account registry, the transfer of shares does not become effective, the legal owner of the defendant’s shares (the ‘owner’ under the Financial Instruments and Exchange Act, i.e., the person holding shareholder rights) purchased on the market as book-entry shares should be the registered holder, and not the Non-Registered Holder Plaintiffs who are the beneficial investors behind them. Nor are there any special circumstances in this case that would justify treating the Non-Registered Holder Plaintiffs as the legal owners of the defendant’s shares. In other words, in this case, it was the registered holder, not the Non-Registered Holder Plaintiffs, who purchased and acquired the defendant’s shares from the transferor of the book-entry shares.

Accordingly, the person who directly suffers damage due to impairment of the value of book-entry shares is, in the end, the owner (i.e., the person holding shareholder rights), namely the registered holder. If the contractual relationship between the Non-Registered Holder Plaintiffs and the registered holder is a trust (a possibility that cannot be entirely ruled out in this case), it is clear that the registered holder, as trustee, is the person entitled to exercise the damages claim against the defendant (the Non-Registered Holder Plaintiffs, as beneficiaries, can only make claims against the registered holder within the contractual relationship of the trust scheme). Even if their contractual relationship is not a trust, the registered holder holds shareholder rights and has the damages claim against the defendant for the (direct) damages described above, and no legal basis can be found for concluding that the same claim belonging to the registered holder also belongs to the Non-Registered Holder Plaintiffs. Nor is it apparent that the Non-Registered Holder Plaintiffs suffered any independent damages not suffered by the registered holder (so-called indirect damages). The Non-Registered Holder Plaintiffs do not hold shareholder rights and hold only a claim against the registered holder; as stated above, the registered holder is the one who suffered direct damages as a result of the defendant’s conduct, and the damages asserted by the Non-Registered Holder Plaintiffs are the same damages and not independent damages. Considering also the manner of infringement by the defendant in this case, the absence of a finding that the defendant intended to harm the Non-Registered Holder Plaintiffs’ claim against the registered holder, and the statutory language of the Companies Act and related laws including the Book-Entry Transfer Act, it cannot be found that the defendant committed a tort by infringing the Non-Registered Holder Plaintiffs’ claim.

Furthermore, even under this interpretation, it remains possible for the registered holder to exercise the damages claim against the defendant in its own name upon instruction from the Non-Registered Holder Plaintiffs, or (if that is not realistic under current custodial contract practices) for the Non-Registered Holder Plaintiffs to receive an assignment of the claim from the registered holder. (In this case, even if the Non-Registered Holder Plaintiffs believed that they had a damages claim as ‘beneficial shareholders,’ it was clear that this issue entailed legal risk; thus, as a response to that risk, they could have, prior to the completion of the limitation period, taken measures such as obtaining an assignment of the claim as described above, although from their perspective of this would have been ‘just in case.’) No circumstances suggesting that such measures were difficult in this case are recognized, and therefore this does not result in a lack of protection of the rights of the Non-Registered Holder Plaintiffs.

Accordingly, the Non-Registered Holder Plaintiffs’ tort claims for damages are not permitted.”

“Documents relating to financial calculations submitted pursuant to the provisions of the Financial Instruments and Exchange Act must be prepared in accordance with generally accepted accounting standards (see Article 193 of the FIEA, Article 1, paragraph (1) of the Ordinance on the Terminology, Forms and Preparation Methods of Consolidated Financial Statements, etc.). In light of this, whether statements in securities reports and the like constitute false statements capable of giving rise to tort liability, and whether they fall under ‘false statements’ as referred to in Article 21-2, paragraph (1) of the FI EA, should be determined, with respect to matters that materially affect investors’ investment decisions and the formation of the price of the relevant securities in the market, based on whether the statements were made through accounting treatment that violates generally accepted accounting standards.”

“It is found that top management, such as the defendant’s representative director and president and the executive officers in charge of business groups, were involved in, or at least could have recognized the continuation of, improper accounting that was being implemented or continued simultaneously and systematically across many in-house companies, yet did not direct that it be stopped or corrected, and that the responsible personnel such as senior employees also implemented or continued improper accounting for the purpose held by top management of inflating apparent current-period profits; this caused the improper accounting related to the false-statement portion in this case (Exhibit Ko 23 and the entire import of proceedings). In light of this, it can be seen that improper accounting was conducted as an act of the defendant as an organization, and as a result, the securities reports and the like in this case, including the false-statement portion, were submitted and an important legal interest—investors’ property rights—was infringed, and it can be said that at least one of the persons mentioned above was negligent.

Accordingly, the defendant, as a corporation, should be found liable to the Registered Holder Plaintiffs for damages under Article 709 of the Civil Code as it breached its duty of care to ensure that no material misstatements were made in connection with the submission of securities reports and the like.”

“First, investors suffered damages by expending amounts corresponding to the portion exceeding the value of the shares absent the false-statement portion (i.e., the portion of share value equivalent to the inflated amount resulting from the false-statement portion, whereby the share price was unjustifiably valued higher and inflated). Therefore, the portion of the share value that was overvalued due to the failure to reflect accurate information (the inflated acquisition portion) constitutes damages having an adequate causal relationship with the false-statement portion in this case.”

“Next, the fact that the false-statement portion in this case came to light may cause reputational harm and the like and lead investors to sell the shares they hold ( ‘panic selling, etc.’). Such behavior was foreseeable to the defendant, and declines in share price arising from panic selling and the like should also be regarded as ordinary damages that typically arise from the tort of making false statements.”

“…In light of the above, damages having an adequate causal relationship with the false-statement portion in this case should be understood to include the inflated acquisition portion and the damages arising from panic selling and the like. Such damages are considered to become apparent in the process by which the false-statement portion is revealed and the share price declines, and to be reflected in that decline. Accordingly, in calculating damages, it is necessary to ascertain the extent of the decline. First, (i) by examining the post-disclosure stock price movements, the scope of the stock price decline that has an adequate causal relationship with the false statements should be determined from among the declines before and after the revelation of the false statements. Next, (ii) if, within the scope determined in (i), there is a portion of the decline attributable to factors recognized as unrelated to the false statements, such as market factors, that portion cannot be regarded as damages having an adequate causal relationship and must be deducted. Further, (iii) the false-statement portion in this case was continuously carried out and cumulatively increased, and the degree of falsity differs depending on the time of acquisition (i.e., the closer the acquisition time is to the time of disclosure, the more the false-statement portion increased), and thus adjustments corresponding thereto are necessary. In addition, (iv) among the defendant shares disposed of by the plaintiffs, there are shares for which the disposal price exceeds the acquisition price depending on the acquisition and disposal timing, and thus it is necessary to determine the amount of damages by taking into account the acquisition and disposal prices from the perspective of adequate causal relationship and the like. Based on the foregoing, damages should be examined; however, (v) the extent to which the inflated acquisition portion and panic selling and the like contributed to the stock price decline is, by its nature, difficult to determine precisely. Moreover, in this case, false statements of different content were made over multiple fiscal periods, the inflated acquisition portion differs depending on the acquisition timing of the defendant’s shares, and the impact of panic selling and the like on the stock price decline also differs; accordingly, it must be said that it is extremely difficult to ascertain the decline in the stock price. Since the above damages fall within the category where it is extremely difficult to prove the amount due to the nature of the damages, it is appropriate to apply Article 248 of the Code of Civil Procedure and determine a reasonable amount of damages.”