The Seibu Railway Case
Supreme Court Judgment of September 13, 2011
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 claims for damages brought under Article 709 of the Civil Code by investors who had acquired shares of Seibu Railway Co., Ltd. (“Seibu Railway”). The investors alleged that the company’s annual securities reports contained false statements regarding the shareholdings of its parent company, Kokudo Co., Ltd. (“Kokudo”), and sought damages from Prince Hotels, Inc. and others, which had absorbed Seibu Railway through a merger.
The false statements at issue related to Kokudo’s long-standing ownership of approximately 80% of Seibu Railway’s shares. In order to avoid violating the listing maintenance requirements (minority shareholder ratio), Kokudo had dispersed its holdings under the names of multiple third parties and Seibu reported a false ownership ratio in its annual securities reports.
Summary of the Judgment
This judgment is a leading case in which the Supreme Court, for the first time, clarified the scope of damages having a reasonable causal relationship with false statements in securities reports in claims for damages based on such misstatements.
The Court held that where it should be deemed that the investors would not have acquired the shares but for the false statements, the amount of damages reasonably caused by the false statements is calculated as follows:
• (i) If the investor disposed of the shares after the disclosure of the false statements: the difference between the acquisition price and the disposal price; or
• (ii) If the investor continued to hold the shares: the difference between the acquisition price and the market price at the close of oral arguments in the fact-finding proceedings,
in each case after deducting the portion of the decline in market value not attributable to the false statements.
The Court further held that an excessive decline in share price caused by a concentration of so-called panic selling cannot be deducted from the above difference as damages lacking a reasonable causal relationship with the false statements.
Holding (Excerpt)
“Where an investor acquires listed shares on an exchange in reliance on annual securities reports, etc., containing false statements, and it should be deemed that the investor would not have acquired the shares but for such false statements, the amount of damages suffered by the investor as a result of the false statements—that is, the amount of damages having a reasonable causal relationship thereto—should be calculated, after the disclosure of the false statements, based on the difference between the acquisition price and the disposal price if the investor disposed of the shares on the exchange, or based on the difference between the acquisition price and the market price of the shares at the close of oral arguments in the fact-finding proceedings (or, where the listing has been abolished, the valuation as unlisted shares) if the investor continues to hold the shares, and by deducting from such difference the portion of the decline in market value attributable to factors other than the false statements, such as economic conditions, market trends, and the company’s performance.”
“Among post-disclosure market price fluctuations, an excessive decline caused by a concentration of so-called panic selling is an event ordinarily expected to occur when false statements in securities reports, etc., come to light, and therefore cannot be regarded as a market fluctuation based on factors unrelated to the false statements; accordingly, such decline must not be deducted from the above difference as damages lacking a reasonable causal relationship with the false statements.”
