Urban Corporation Case
Supreme Court Judgment of December 21, 2012 (Minshu Vol. 242, p. 91)
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
Urban Corporation Co., Ltd. (“Urban”), a real estate consulting company, was alleged to have made false statements in its extraordinary report and annual securities reports. Investors who had acquired Urban shares on the market filed proofs of claims in Urban’s civil rehabilitation proceedings, asserting damages claims under Article 21-2 of the Financial Instruments and Exchange Act (FIEA) as rehabilitation claims.
Because Urban did not fully admit these claims, the shareholders filed actions to oppose the assessment of rehabilitation claims.
The case arose from the following circumstances. Urban, whose cash flow had been deteriorating, issued convertible bonds with stock acquisition rights (CBs) totaling approximately JPY 30 billion to BNP Paribas Securities. In reality, however, Urban had simultaneously entered into a swap agreement with BNP Paribas Securities, under which the subscription proceeds from the CBs were to be immediately repaid to BNP Paribas Securities. Despite this, the securities reports merely stated that the funds raised through the CBs were to be used for debt repayment, and did not disclose that the proceeds would be applied to repayments under the swap agreement.
Subsequently, after a major U.S. investment bank with which Urban had been negotiating refused to proceed with a tender offer (TOB), Urban publicly disclosed the above false statements and simultaneously filed a petition for commencement of civil rehabilitation proceedings.
Summary of the Judgment
In this case, the key issue was whether the decline in Urban’s share price caused by the filing of the civil rehabilitation petition—made simultaneously with the public disclosure of the false statements—constituted a price decline attributable to the false statements.
The court of prior instance held that the entire decline was caused by the false statements. In contrast, the Supreme Court held that the decline was not entirely caused by the false statements and quashed and remanded the lower court’s judgment, which had denied any reduction under Article 21-2, paragraphs 4 or 5 of the FIEA (now paragraphs 5 or 6).
It should be noted that, in addition to this case, numerous investors filed similar lawsuits concerning Urban’s false statements, and there exists one other Supreme Court judgment as well as many lower court judgments.
Holdings (Excerpt)
“Accordingly, the decline in Urban’s share price during the one-month period after the disclosure date was caused by the combined effect of the false statements in this case and the filing for civil rehabilitation, and the portion of the decline attributable to the rehabilitation filing cannot be said to have a reasonable causal relationship with the false statements. Therefore, the decline attributable to the rehabilitation filing should be subject to reduction under Article 21-2, paragraph 4 or 5 of the Financial Instruments and Exchange Act as having arisen from factors other than the decline reasonably caused by the false statements.”
“Looking at the movement of Urban’s share price during the one-month period prior to the disclosure date, the record indicates that after reaching a market price of JPY 716 (closing price) on May 14, 2008—more than one month before the submission of the extraordinary report—the price continued to decline almost consistently until the disclosure date. In light of the foregoing facts, the appellant was, at the time, in a condition in which its management was in jeopardy, including difficulties in raising funds, and it cannot be denied that part of the above decline was caused by factors unrelated to the false statements, such as Urban’s business condition.
(omitted)
Accordingly, part of the damages suffered by the appellees due to the decline in Urban’s share price must be regarded as having been caused by factors other than those having a reasonable causal relationship with the false statements. The prior instance court’s judgment denying this and holding that the entirety of the appellees’ damages was caused by the false statements, thereby rejecting any reduction under Article 21-2, paragraph 4 or 5 of the Financial Instruments and Exchange Act clearly violates applicable laws and regulations in a manner affecting the judgment.”
“Article 21-2, paragraph 2 of the Financial Instruments and Exchange Act provides that the amount obtained by deducting the average market price of the relevant securities during the one-month period after the disclosure date from the average market price during the one-month period prior to the disclosure date may be deemed the amount of damages caused by the false statements. It is clear from the wording that the ‘disclosure date’ itself is not included in either the ‘one-month period prior to the disclosure date’ or the ‘one-month period after the disclosure date.’ Therefore, in this case, where the disclosure date is August 13, 2008, the ‘one-month period prior to the disclosure date’ refers to the period from July 13 to August 12 of the same year (provided, however, that because July 13 was a Sunday on which no trading occurred, the average market price should be calculated for the period from July 14 to August 12).”
