IHI Case
Supreme Court Judgment of October 11, 2018
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
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.
The alleged misstatements involved large-scale, long-term construction projects to which the percentage-of-completion method was applied. Specifically, the total estimated construction costs were understated, resulting in the overstatement of revenue. With respect to long-term construction contracts that are not yet completed, two methods of revenue recognition are permitted:
• the method of recognizing construction revenue on the date the project is completed and delivered (the completed-contract method), and
• the method of estimating the degree of completion at the fiscal year-end and recognizing revenue based on a reasonable estimate using an appropriate profit rate prior to completion and delivery (the percentage-of-completion method) (Proviso to Accounting Principles for Business Enterprises II-3-B).
Under the percentage-of-completion method, the rate of completion is calculated as cumulative actual manufacturing costs incurred divided by the estimated total construction costs. Therefore, if the total estimated construction costs are understated, the percentage of completion becomes overstated, resulting in an overstatement of revenue recognized for the period. IHI used this mechanism to overstate its revenue.
Summary of the Judgment
This case involved liability to purchasers in the primary market under Article 18 of the Financial Instruments and Exchange Act (FIEA). In such cases, the amount of damages is statutorily defined under Article 19, paragraph 1 of the FIEA as follows:
If the securities are still held at the time of the claim:
The amount paid for the acquisition of the securities minus the market value at the time of the claim.
If the securities were disposed of before the claim:
The amount paid for the acquisition of the securities minus the disposal price.
However, if the issuing company proves that all or part of the damages were caused by factors other than a decline in the securities’ price attributable to the false statements, the company may reduce the amount of damages with respect to that portion (Article 19, paragraph 2 of the FIEA).
That said, where it is extremely difficult to prove the amount of damages caused by factors other than the price decline attributable to the false statements, Article 19 of the FIEA (which governs liability to purchasers in the primary market) does not contain a provision equivalent to Article 21-2, paragraph 6 of the FIEA (which applies to secondary market purchasers and allows the court to determine a reasonable amount of damages).
In this judgment, the court held that in a damages action based on Article 18, paragraph 1 of the FIEA, where it is recognized that part of the claimant’s loss was caused by factors other than the price decline attributable to false statements in the securities registration statement, and where it is extremely difficult to prove the amount of such loss by its nature, the court may, by analogy to Article 248 of the Code of Civil Procedure, determine a reasonable amount of damages not subject to compensation under Article 19, paragraph 2 of the FIEA based on the entire import of the oral proceedings and the results of the examination of evidence.
Holding (Excerpt)
“The main clause of Article 18, paragraph 1, of the Financial Instruments and Exchange Act (FIEA) provides that where a securities registration statement contains a false statement regarding a material matter, or omits a material matter that should be stated or a material fact necessary to avoid misleading statements, the person who filed the securities registration statement shall be liable for damages to any person who acquired the securities in response to the offering or secondary distribution.
Article 19 of the FIEA provides, in paragraph 1, that the amount for which a person is liable for damages pursuant to Article 18, paragraph 1 shall be the amount paid by the claimant for the acquisition of the securities minus the amounts listed in the respective items of Article 19, paragraph 1. At the same time, paragraph 2 of Article 19 provides that a person liable for damages under Article 18, paragraph 1 shall not be liable for all or part of the damages if that person proves that all or part of the damages suffered by the claimant were caused by factors other than a decline in the price of the securities that should have resulted from the false statements or omissions in the securities registration statement (“false statements, etc.”).
These provisions impose strict liability for damages on the issuer of a securities registration statement containing false statements, etc., and, in light of the difficulty faced by claimants in proving damages, are policy-based rules intended to both compensate claimants and ensure fairness in the securities market by deterring improper disclosure through the reduction of the claimant’s burden of proof. They achieve this purpose by statutorily fixing, as the amount of damages for which liability is to be borne, a certain amount that is relatively easy for the claimant to prove, while adopting a mechanism under which that amount is reduced by the portion that the liable party proves was caused by factors other than the decline in the price of the securities that has a reasonable causal relationship with the false statements, etc., thereby enabling the calculation of damages appropriate to the individual case.
Accordingly, where it is recognized that part of the damages suffered by a claimant under Article 18, paragraph 1 of the FIEA was caused by factors other than a decline in the price of the securities attributable to the false statements, etc., but the nature of such damages makes it extremely difficult to prove the amount thereof, it would be inappropriate from the standpoint of equity between the parties—and contrary to the above legislative purpose—to deny entirely the amount of damages not subject to compensation under Article 19, paragraph 2.
Article 248 of the Code of Civil Procedure is understood to provide that, where the occurrence of damages is established but the nature of the damages makes it extremely difficult to prove the amount thereof, it is inappropriate from the standpoint of equity between the parties to deny the amount of damages altogether; therefore, in such cases, the court may determine a reasonable amount of damages based on the entire import of the oral proceedings and the results of the examination of evidence.
In light of the foregoing, in a damages action based on Article 18, paragraph 1 of the FIEA, where it is recognized that part of the claimant’s damages were caused by factors other than the decline in the price of the securities attributable to false statements, etc., in the securities registration statement, and where the nature of such damages makes it extremely difficult to prove the amount thereof, it is appropriate to construe that the court may, by analogy to Article 248 of the Code of Civil Procedure, determine a reasonable amount as the portion of damages not subject to compensation under Article 19, paragraph 2 of the FIEA based on the entire import of the oral proceedings and the results of the examination of evidence. The absence in Article 19 of a provision similar to Article 21-2, paragraph 6 of the FIEA does not affect the above interpretation.”
