In the past few months, various Japanese companies have disclosed to the market that they faced data quality issues. For instance, the share price of Mitsubishi Materials Corporation dropped following an announcement that some of its subsidiaries falsified certain technical specifications (e.g. rewriting inspection records data). The shares of Kobe Steel Ltd lost more than 20% of their value following the admission by the company that it had also falsified quality-related data. The primary question that investors now have is: do I have a claim against these companies?
While initially perceived by the large public as an “exotic” jurisdiction, Japan seems to have gained some traction in the world of securities litigation following the Olympus and Toshiba cases. Statutory law and case law are interesting and the court system is relatively efficient; this does not however mean that Japan is the new hot spot for shareholder litigation, like the Netherlands was initially hailed to be after the decision in Morrison. We vividly remember enthusiastic articles, written mostly by US lawyers, stating how the Netherlands would become the number one litigation hub in Europe, owing to its unique foundation and opt-out mechanisms. It’s fair to say that today this trend is over.
The combination between the announcement that so-called “irregularities” have taken place and the occurrence of losses does not mean that investors automatically have a viable claim in Japan. While we at Deminor are not Japanese lawyers, we understand that it is of paramount importance that the announcements lead to a restatement of financial accounts. The misstatements, as understood under Japanese financial legislation, cover two types: (1) the existence of false statements about materials which are required to be included in the securities reports. So far, neither Kobe Steel nor Mitsubishi Materials Corporation have restated their accounts meaning this type of misstatement has not taken place; and (2) the omission of materials which prevents the investors from understanding the true situation of the company.
In the present case, the second possibility could – in theory – be considered but there is no precedent for this type of misstatement, meaning that prospective plaintiffs can expect a fierce debate in court. Shareholders could also potentially lodge claims based on general tort law and argue that their losses result from an inefficient internal control system. A similar assertion was, however, rejected by the Japanese Supreme Court a few years ago.
Some remedies might be available to consumers in these cases. Shareholders would however, still lack a remedy: making a claim based on data quality issues is a long shot, since any such claims will likely fall outside the scope of Japanese financial legislation.
