Officials and Judges at the Tokyo District Court are likely to be working overtime in the coming weeks and months. Two of the largest claims to have been made in Japan are likely to commence at virtually the same time. There the similarity ends in that the first case involving Olympus relates to a problem with financial statements, whereas the second involving Tokyo Electric Power Co (TEPCO) relates to the aftermath of the Fukushima Nuclear Crisis. What, if anything, do these cases tell us about litigation trends against directors in Japan?
New Regulatory Frontiers
Without attracting a great deal of international attention, Japan has taken a number of important steps over the last six years or so to strengthen the regulation and governance of Japanese companies and to improve rights of recourse for shareholders and other claimants.
On 1st May 2006 Japan introduced a new corporate code, which, for the first time, imposed a duty on the board of directors to build adequate internal control systems. In March 2009, Japan implemented its own form of the Sarbanes Oxley Act, “the J SOX”. Many of the new provisions of this Act remain untested.
These fundamental changes in law and regulation combine with a comparatively well established body of case law relating to shareholder derivative suits to provide prospective plaintiffs with reasonably fertile soil in which to bring their claims.
Indeed as long ago as 2000 (before being significantly reduced on appeal) the Osaka District Court granted damages of US$775m in a shareholder derivative action against 11 former directors of Daiwa Bank for breach of duty of care in connection with a US$1.1bn loss caused by a bond trader in New York. On the other hand, there has been little evidence of shareholder activism aimed at taking advantage of these relatively new rights of recourse.
Olympus Advised to Seek US$1.7bn
Much has already been written about the allegations relating to Olympus to the effect that the company deliberately inflated fees paid to advisers on the US$2.1bn acquisition of Gyrus Group in order fraudulently to disguise earlier losses.
An independent panel set up to investigate management involvement in the alleged fraud has criticized the board of Olympus and accused it of failing in its duty to stop a number of executives from concealing the truth from outsiders.
The result is that Olympus has stated its intention to sue 19 current and former executives over their role in the cover-up including the company’s former chairman. The amount which, according to the independent panel, should be sought by Olympus is in excess of Y90bn (approximately US$1.7 billion). The action has recently been announced.
TEPCO One of the “Largest D&O Claims”
The TEPCO claim could take the form of a shareholder derivative claim. Several months ago, a number of Tokyo Electric’s shareholders asked the company to file a suit against as many as 60 current and former board members alleging negligence. The claim, if pursued, could dwarf even the Olympus claim and would stand alongside the very largest of D&O claims with damages of Y5.5trn (approximately US$175 bn).
TEPCO itself has recently decided not to pursue this legal claim and will (as it is required to do) state its reasons to the shareholders very shortly. Under the relevant legislation, it is believed that the shareholders have up to 60 days from the refusal to file their own suit. Whilst at this stage we can only speculate as to whether this claim will be made and, if so, as to the prospects of success, it is not difficult to identify some of the relevant facts that are likely to be relied upon.
How Clear Should a Director’s Crystal Ball be?
A critical question will be whether TEPCO’s former management ought to have taken steps to have raised the height of tsunami barriers to protect the plant against a wave of the order of magnitude of that struck it on March 11, 2011.
The question as to the predictability or otherwise of an event of the magnitude of the tsunami is one with which the courts in Japan may have to take into consideration. It is not all that different from the type of hindsight questions with which courts are having to grapple with in various jurisdictions in the aftermath of the financial crisis which has been affecting banks and the wider world economy.
To what extent and when, if at all, should the board have realized that preventative action was necessary, and what would have been the outcome if such action had been taken? This was the issue at the heart of the Equitable Life case all those years ago.
Whilst it is a pity that case never came to trial, it did at least in preliminary hearings confirm and uphold the general principle under English law that directors cannot and must not delegate their supervisory functions with respect to the company’s activities. This is likely to prove a key battle ground in both the Olympus and TEPCO cases.