About Securities Litigation
Overview of Securities Litigation
Click on the question you want answered to see the response.
- What is securities litigation?
- Against whom and on what basis can shareholders who suffered losses bring claims?
- What must be alleged and proven when seeking damages from a company under the Financial Instruments and Exchange Act (FIEA)?
- What does “false statement regarding a material matter” (Article 21-2(1) of the FIEA) mean?
- What is the statutory presumption of damages under the FIEA?
- What constitutes “public disclosure” under the FIEA damage presumption?
- What must be alleged and proven when bringing a claim under Article 709 of the Civil Code?
- Can an investor who acquired shares in a custodian’s name claim damages as the beneficial shareholder?
- What losses are considered causally related to false statements in securities reports?
- What is the presumption of damages in FIEA-based claims?
Q: What is securities litigation?
In Japan, securities litigation generally refers to lawsuits in which shareholders who purchased securities in reliance on false statements in securities reports or similar disclosures and thereby suffered losses seek damages from the company that made the false statements and/or its officers/directors or related parties.
Q: Against whom and on what basis can shareholders who suffered losses bring claims?
Claims for damages arising from false statements are typically brought under:
• the Financial Instruments and Exchange Act (FIEA), and
• the tort provisions of the Civil Code.
Claims may be asserted against both the company and its officers.
• Claims against the company: FIEA Article 21-2; Civil Code Article 709
• Claims against officers/directors: FIEA Articles 24-4 and 22; Civil Code Article 709
Claims under the FIEA are special provisions of tort liability under the Civil Code and therefore have relaxed requirements. On the other hand, because the FIEA imposes a statutory cap on damages (FIEA Articles 21-2(1) and 19(1)), claims under Civil Code Article 709 may potentially result in higher recoveries. Accordingly, in practice, both types of claims are often asserted.
Q: What must be alleged and proven when seeking damages from the company under the FIEA?
Compared with Civil Code Article 709, the requirements are relaxed.
To bring a claim against the issuing company under the FIEA, the plaintiff needs only allege and prove the followings:
1. There was a false statement regarding a material matter in, for example, a securities report;
2. During the public inspection period of the disclosure document, the plaintiff acquired or disposed of the securities other than through a public offering or secondary distribution; and
3. Either:
(i) the plaintiff suffered damages due to the false statement; or
(ii) the statutory damages amount calculated as:
• the average market price during the one-month period before public disclosure of the false statement, minus
• the average market price during the one-month period after such disclosure.
Unlike Civil Code claims, intent or negligence need not be proven (FIEA Article 21-2(1)).
For certain shareholders, damages are presumed under Article 21-2(3). Where this presumption applies, the plaintiff need not prove causation between the false statement and the loss.
However, damages may not exceed the acquisition price minus the market price at the time of claim (or the disposal price if already sold) (FIEA Articles 21-2(1) and 19(1)).
Q: What does “false statement regarding a material matter” (FIEA Article 21-2(1)) mean?
A “false statement regarding a material matter” refers to a statement concerning matters that would have a material impact on an investor’s investment decision that violates generally accepted accounting standards (Tokyo District Court judgment of March 22, 2024).
To assert and prove the existence of “false statements”, according to lower court precedents, it is necessary to :
• identify the accounting treatment underlying the financial information in the securities report,
• specify the applicable generally accepted accounting standard(s), and
• assert that the accounting treatment violated such standard(s).
In recent court rulings, it is not uncommon for claims regarding these requirements to be deemed insufficiently proven; therefore, it is crucial to properly assert and prove the these requirements. Because determining whether there is a violation of generally accepted accounting standards frequently requires specialized accounting expertise, it is important to choose a law firm which can work with legal counsel experienced in accounting-related disputes and with appropriate accounting professionals.
Q: What is the statutory presumption of damages under the FIEA?
Under the FIEA, certain shareholders may rely on a statutory presumption of damages.
Specifically, shareholders who:
• acquired the securities within one year before the public disclosure of the false statement, and
• continuously held the securities until the disclosure date,
are presumed to have suffered damages equal to:
the average market price during the one-month period before disclosure
minus
the average market price during the one-month period after disclosure
(FIEA Article 21-2(3)).
Only shareholders meeting the above requirements may rely on this presumption.
Q: What constitutes “public disclosure” under the FIEA damages presumption?
“Public disclosure” in the presumption of damages provision under FIEA means that the submitter of the disclosure document or a person with statutory authority over the submitter’s business or assets has taken measures—such as public inspection under FIEA Article 25(1)—to put the material facts relating to the false statement, or the material facts necessary to prevent misunderstanding, in a state where they can be known by the public (Article 21-2(4)).
In the Supreme Court ruling in the Livedoor case (Sup. Ct. March 13, 2012 Minshū Vol.66 No.5 page 1957 (Japan)), the Court held:
• Merely announcing that a false statement exists without mentioning its content is insufficient;
• However, it should not be interpreted as requiring that “disclosure” measures be taken even with respect to the truthful information that should be stated in securities reports and similar disclosure documents (i.e., what the actual correct information is).;
•“It is sufficient if the aforementioned measures are taken regarding the fundamental facts sufficient to demonstrate an error in the market’s valuation of securities issued by the submitter of the securities reports containing the false statements or similar issues.”
Q: What must be alleged and proven when bringing a claim under Civil Code Article 709?
To assert tort liability against the issuing company, the plaintiff must prove:
1. The existence of a false statement in the securities report;
2. Intent or negligence of the issuing company regarding the false statement;
3. The occurrence and amount of damages; and
4. Causation between (1) and (3).
Q: What losses are considered causally related to false statements in securities reports?
When the statutory presumption is not used—or when bringing a Civil Code claim—the shareholder must prove both the amount of loss and causation.
Losses with adequate causal relationship are defined as the difference between:
• the economic position the shareholder would have been in absent the false statement, and
• the shareholder’s actual economic position.
The following two types of claims are possible:
(1) Acquisition itself as damages | Loss suffered where the shareholder would not have acquired the shares absent the false statement. |
(2) Damages incurred at high price (damages due to the difference at the time of acquisition) | Loss suffered where the shareholder would still have purchased the shares but at a lower price absent the false statement. |
However, it is pointed out that the recent trend in the judicial precedents is to determine damages is determined based on the extent to which an adequate causal relationship can be established between the false statements and the subsequent decline in market price of the shares, regardless of which argument is being made.
Above all, it has been observed that the ultimate damages calculation may not materially differ between the two theories.
Q: Can an investor who acquired shares in a custodian’s name claim damages as the beneficial shareholder?
There is a case holding that a claimant under FIEA Article 21-2(1) or Civil Code Article 709 must be the registered shareholder, and that an investor holding shares in a custodian’s name (a non-registered shareholder) does not have standing to claim damages (Tokyo District Court judgment of December 21, 2023).
Under this approach, such investors must either:
• have the custodian (the registered shareholder) file the lawsuit, or
• obtain an assignment of the damages claim from the custodian.
Analysis of Securities Litigation
1. Number of Cases
- Official statistics: There are no public official statistics on the number of securities litigation cases in Japan.
- Published precedents: Number of reported cases that include claims under Article 21-2 of the Financial Instruments and Exchange Act (FIEA).
- Total: 45 cases (including lower court rulings in the same matter).
- Successful claims: Damages were awarded in 33 cases.
2. Duration of Securities Litigation
- Average time to first-instance judgment: Approximately 3 years
- Longest case: 10 years (1 case)
- Shortest case: Less than 1 year (1 case)