Olympus Case
Osaka High Court Judgment of June 29, 2016
Toshiba Case
Investors claiming to have acquired Toshiba shares allege:(1) material misstatements regarding improper accounting in securities reports and quarterly reports; (2) false statements in internal control reports to the effect that the internal controls were effective; (3) impairment losses at consolidated subsidiaries.
Olympus Case
Investors who acquired shares in Olympus Corporation sought damages from Olympus, citing false statements including the overstatement of consolidated net assets by approximately ¥50 billion to ¥120 billion in the financial statements submitted by Olympus.
The Seibu Railway Case
This is a leading case in which the Supreme Court, for the first time, ruled on the scope of damages causally related to false statements in securities reports and other documents, based on such false statements.
Livedoor Case
Investors who acquired shares in Livedoor Holdings Co., Ltd. are seeking approximately ¥10.8 billion in damages, alleging that the securities report submitted by the company contained false statements—reporting a consolidated ordinary loss of approximately ¥300 million instead of a consolidated ordinary profit of approximately ¥5 billion.
Urban Corporation Case
Shareholders of Urban Corporation, Inc., a real estate consulting firm, filed a lawsuit challenging the assessment of rehabilitation claims, alleging false statements in the company’s extraordinary report and securities report.
IHI Case
This case concerns investors who acquired shares of IHI Corporation (“IHI”) and sought damages from IHI on the grounds that its securities registration statement and semiannual report contained false statements regarding consolidated interim net income/loss and consolidated net income/loss.
Summary of the Case
Investors who acquired shares of Olympus Corporation (“Olympus”) sought damages against Olympus on the grounds that its annual securities reports and quarterly reports contained false statements, including the overstatement of consolidated net assets by approximately JPY 120 billion.
Since the 1990s, Olympus had failed to record losses from unrealized losses on securities investments. In order to mitigate those unrealized losses, Olympus caused funds to purchase financial instruments bearing unrealized losses at book value and postponed their recognition, while also funneling disproportionate acquisition funds and financial advisory fees to the funds to cover the losses. The deferred losses amounted to approximately JPY 117.7 billion, or approximately JPY 134.8 billion including maintenance costs and related expenses.
Summary of the Judgment
The Court characterized this case as one involving inflated acquisition damages, in which the plaintiffs suffered losses by paying more at the time of share acquisition than the shares would have been worth absent the false statements.
The Court held that recoverable damages include:
• the amount by which the share price was inflated at the time of acquisition due to the false statements; and
• losses arising from panic selling and similar reactions caused by acquiring shares affected by the false statements.
The Court further held that:
• As a general rule, a decline in share price before public disclosure of the false statements is typically attributable to factors unrelated to the false statements and therefore lacks reasonable causation.
• However, after examining the causes of the price decline, the contents of the misstatements, market participants’ perceptions, and their interrelationships, if the decline is found to have been caused by the false statements, it may be included within the scope of causally-related damages.
• Accordingly, the share price decline triggered by news reports of the dismissal of Mr. A (Olympus’s then President and Representative Director), even though before formal disclosure of the misstatements, was held to be within the scope of damages having a reasonable causal relationship with the misstatements.
Additionally, there is another case involving false statements in Olympus’s securities reports: the Tokyo District Court judgment of March 19, 2015.
Holding (Excerpt)
As to the amount of a shareholder’s damages, it should in principle be assessed by reference to the difference in the money and other value actually expended by the shareholder. However, insofar as all damages having a reasonable causal relationship with the false statements in this case are included, damages are not limited to the value of the shares inflated at the time of acquisition due to the false statements (the ‘inflated amount’) itself, but should also include the price decline suffered as a result of acquiring shares containing false statements (including impairment of the company’s credit and panic selling, etc., upon discovery of the false statements) (‘panic-selling and related damages’). In response, the defendant at first instance argued that because the time at which the damages occur is the time of share acquisition, the damages should be valued as of that time; however, the amount of damages in tort should be evaluated based on circumstances up to the close of oral arguments.”
“Because the inflated amount at the time of acquisition and panic-selling and related damages are not manifest at the time of acquisition but are reflected when the share price falls upon disclosure of the false statements, the inflated amount and the panic-selling and related damages cannot be directly determined, and must be estimated by reference to, inter alia, the extent of the decline in market price before and after the disclosure of the false statements.”
“Various estimation methods exist for this purpose; however, it is considered that there is no established method. Accordingly, in estimating the inflated amount and the amount of panic-selling and related damages, it is appropriate to examine and adopt a method that is considered reasonable in light of the facts and evidence of this case, without relying on any of the above estimation methods. In doing so, it is necessary to identify, within the portion of the share price decline before and after the disclosure of the false statements, the portion in which the inflated amount and the panic-selling and related damages are reflected.”
“With respect to a decline in the share price occurring between the time the shareholder acquired the shares and the time the fact of the false statements was publicly disclosed to the market, in many cases such decline should be regarded as resulting from unrelated factors not connected with the false statements, and therefore, in principle, as a share price decline lacking a reasonable causal relationship with the false statements. However, where, after examining the factors that caused the decline, the false statements at issue, market participants’ perceptions, and the interrelationships among them, the decline is recognized as having been caused by the false statements, it may be included within the share price decline having a reasonable causal relationship with the false statements.”
“Although prior to the public disclosure of the false statements in this case, it is appropriate to regard the price movements of the Olympus shares after October 14, 2011, the date on which the dismissal of A was reported, as having a reasonable causal relationship with the false statements in this case.”
“In light of the foregoing, the starting and ending points of the share price decline having a reasonable causal relationship with the false statements in this case are the decline in the price of the Olympus shares from October 14, 2011, the date of the report of A’s dismissal, through each plaintiff’s respective sale date. The per-share amount at the starting point is JPY 2,482, which was the closing price of Olympus shares on October 13, 2011, and the share price at the ending point corresponds to each plaintiff’s sale price.
Provided, however, that (i) with respect to shares whose market price at the time of acquisition was lower than JPY 2,482 (the starting point of the above decline), the portion of the decline after the report of A’s dismissal from JPY 2,482 down to the market price at the time of acquisition merely reflects a fall from a price that had risen for reasons unrelated to the false statements and cannot be said to reflect an inflated acquisition price at the time of purchase; therefore, the difference between the market price at the time of acquisition and the disposition price constitutes the share price decline having a reasonable causal relationship with the false statements in this case.
(ii) With respect to shares whose market price at the time of acquisition was higher than JPY 2,482 (the starting point of the above decline), the difference between the market price at the time of acquisition and JPY 2,482 is a share price decline unrelated to the false statements in this case; because the decline from the time of the report of A’s dismissal to the time the plaintiffs sold the shares falls within the scope of decline having a reasonable causal relationship with the false statements, the amount calculated by deducting the disposition price from JPY 2,482 constitutes the share price decline within the scope causally related to the false statements.”
“Although the inflated amount and panic-selling and related damages are reflected in the share price decline in this case, they cannot be said to be reflected in an amount equal to the share price decline having a reasonable causal relationship with the false statements. Even if it is assumed that the inflated amount and panic-selling and related damages are reflected in the share price decline at a certain ratio, that ratio varies depending on circumstances such as the timing of acquisition, the extent to which the false statements affected the defendant’s true financial statements at the time of acquisition, and the length of time from acquisition until disclosure. Moreover, adjustments are required for each shareholder’s shares acquired in each transaction, taking into account differences in sale timing and other factors. For these reasons, it is extremely difficult to determine with forward-looking precision the ratio at which such damages are reflected.
Accordingly, while it is clear that damages have occurred in this case, the case falls within circumstances where, by the nature of the damages, it is extremely difficult to prove the amount; therefore, it is appropriate to apply Article 248 of the Code of Civil Procedure and determine a reasonable amount of damages (i.e., the inflated amount and the amount of panic-selling and related damages).”
“Considering comprehensively that: (i) the defendant at first instance occupied an overwhelmingly dominant position in the growing endoscope market and was regarded as an excellent company with strong core business performance and high technological capabilities, such that no sign of a slowdown in growth in its medical business was perceived (Ex. Otsu 19, p. 11); (ii) as stated in Section 3(2) of the ‘Facts and Reasons’ portion of the original judgment (as quoted and explained in the present judgment), the false statements in this case inflated the net asset amount on the defendant’s consolidated balance sheets by up to more than JPY 120 billion over a long period from the fiscal year ended March 2001 through the first quarter of the fiscal year ended March 2012, a large-scale inflation of up to approximately 40% when comparing the true net asset amount and the false net asset amount, but, as also noted in the reasons given when the Tokyo Stock Exchange determined (as stated in Section 3(4) of the ‘Facts and Reasons’ portion of the original judgment, as quoted and explained in the present judgment) that it could not find delisting of the Olympus shares to be appropriate, the false statements did not concern the amount of net profit on the defendant’s consolidated statements of income and thus were not such as to mislead the market’s evaluation based on the defendant’s core profit levels and performance trends; and (iii) notwithstanding the foregoing, given the contents and large scale of the false statements, and the fact that A’s dismissal attracted investor attention, together with extensive coverage by numerous media outlets, the share price of the Olympus shares, which was JPY 2,482 on October 13, 2011, fell sharply to approximately JPY 900 to JPY 1,300 by January 31, 2012—these factors taken together support a finding that the share price decline in this case includes, to some extent, a portion that should not be treated as the plaintiffs’ damages. It is appropriate to regard that portion as 20% and to deduct it.
Accordingly, it is appropriate to find that the inflated amount and the panic-selling and related damages in this case correspond to 80% of the share price decline.”
“The presumed damages amount under Article 21-3, paragraph 2 of the Financial Instruments and Exchange Act is JPY 602.16 per share, which is smaller than the damages amount claimed under Article 709 of the Civil Code; therefore, there is no room to grant the plaintiffs’ claims under Article 21-2 of the Financial Instruments and Exchange Act.
Accordingly, without needing to determine Issue 7, the plaintiffs’ claims under Article 21-2 of the Financial Instruments and Exchange Act are without merit.”
