Legal Framework and Key Case Law Pertaining to Shareholder Derivative Actions in Japan

In Japanese corporate governance, shareholder derivative actions are an extremely important legal tool to ensure sound management of a company and protect the interests of all shareholders. This system allows shareholders to pursue the responsibility of directors and other officers who have neglected their duties and caused damage to the company, on behalf of the company, and to claim compensation for damages. The Japanese Companies Act provides detailed provisions for this mechanism of shareholder derivative actions, which is essential for foreign investors and stakeholders of companies operating in Japan to understand. As a deterrent against improper conduct by management, the importance of this litigation system is growing in ensuring the transparency and accountability of investment targets.

Article 847, Paragraph 1 of the Japanese Companies Act states, “Shareholders may request the company to file a lawsuit to pursue the responsibility of promoters, directors at the time of incorporation, auditors at the time of incorporation, officers, or liquidators by a written or other method prescribed by the Ministry of Justice ordinance,” providing a legal basis for shareholders to pursue the responsibility of officers on behalf of the company. This provision grants shareholders the means to protect the company’s interests, based on the reality that it is unrealistic to expect officers to pursue their own responsibility.

This article will provide a detailed explanation of the basic structure of shareholder derivative actions in Japan, the requirements for filing, procedures, the officers subject to liability pursuit, and key court cases. Furthermore, by comparing the shareholder derivative action systems in major legal jurisdictions such as the United States and the United Kingdom, we will clarify the uniqueness and international positioning of the Japanese system. We sincerely hope that this comprehensive explanation will deepen your understanding of Japanese corporate governance and assist you in your business and investment activities in Japan.

The Basic Concepts and Objectives of Shareholder Derivative Actions Under Japanese Corporate Law

Shareholder derivative actions in Japan are lawsuits in which shareholders pursue legal responsibility on behalf of the company against officers such as directors, auditors, executive officers, and liquidators who have caused damage to the company through their management duties, yet the company itself has not sought accountability. These actions aim to preserve the company’s assets and maintain the integrity of corporate governance.

Article 847, Paragraph 1 of the Japanese Companies Act provides the legal basis for these actions, clearly stating that they are intended to pursue the responsibilities of “incorporators, initial directors, initial auditors, officers, or liquidators.” This represents an expansion from the old Commercial Code system, which targeted only directors, to a broader range of officers.

The primary purpose of these actions is to recover damages suffered by the company due to illegal acts or negligence of duties by its officers. Since officers cannot be expected to pursue their own accountability, shareholders take on this role. If shareholders win a shareholder derivative lawsuit, the compensation is paid not to the individual shareholder who initiated the action but to the company that suffered the damage. This highlights the essence of shareholder derivative actions as being for the benefit of the company as a whole, not for individual shareholders, and emphasizes the nature of the system where shareholders act as ‘agents’ for the company.

This system strengthens corporate governance by allowing shareholders to monitor the health of company management and pursue responsibility for inappropriate actions. The fact that the filing fee for initiating such a lawsuit is set at a uniform 13,000 yen under the Japanese Law on Civil Procedure Costs, indicates that shareholders can exercise this important right without feeling an excessive financial burden. However, the fact that any compensation won is attributed to the company reflects the design philosophy that encourages shareholders to act for the benefit of the company rather than for private gain. This seemingly contradictory design emphasizes the essence of shareholder derivative actions as lawsuits ‘for the company.’ The low filing fee removes economic barriers for shareholders to act ‘for the company,’ encouraging oversight of the management. However, the mechanism by which compensation is attributed to the company serves as an important deterrent function to prevent the lawsuit from becoming a means for shareholders to ‘raid’ the company or pursue unjust profits. Thus, shareholder derivative actions serve as the ‘last bastion’ in corporate governance, strongly personalityized by their public nature, and cleverly balanced to encourage shareholders to act not out of private motives but for the public good of the company’s benefit.

Requirements and Procedures for Filing a Shareholder Derivative Suit in Japan

To initiate a shareholder derivative suit in Japan, it is necessary to follow specific requirements and procedures as stipulated by the Japanese Companies Act.

Shareholder Standing in Derivative Actions

Shareholders who wish to initiate a derivative lawsuit in Japan must meet certain qualifications. For public companies, as a general rule, the shareholder must have continuously held shares in the company for at least six months prior to the time of filing the lawsuit [Japanese Companies Act, Article 847, Paragraph 1]. However, the company’s articles of incorporation may allow for a shorter period than six months. In contrast, for private companies, there is no restriction on the period of share ownership, and any shareholder at the time of the lawsuit request can file a lawsuit [Japanese Companies Act, Article 847, Paragraph 2]. Regarding the number of shares held by the shareholder, in principle, holding at least one share is sufficient, but the articles of incorporation may restrict the right to file a derivative lawsuit for shareholders with less than one unit of shares [Japanese Companies Act, Article 847, Paragraph 1 (in parentheses)].  

The following table compares the requirements for initiating a shareholder derivative lawsuit in public and private companies in Japan.

[Table] Comparison of Requirements for Initiating Shareholder Derivative Lawsuits: Public Companies vs. Private Companies

Criteria	Public Companies	Private Companies
Shareholding Period	Continuous ownership of shares for 6 months prior (can be shortened by articles of incorporation) [Japanese Companies Act, Article 847, Paragraph 1]	No restriction on shareholding period (must be a shareholder at the time of lawsuit request) [Japanese Companies Act, Article 847, Paragraph 2]
Requirement for Lawsuit Request	Generally, a request to the company (such as to the auditors) is required [Japanese Companies Act, Article 847, Paragraph 3]	Generally, a request to the company (such as to the auditors) is required [Japanese Companies Act, Article 847, Paragraph 3]
Omission of Lawsuit Request	Possible to file a lawsuit immediately if there is a risk of irrecoverable damage [Japanese Companies Act, Article 847, Paragraph 5]	Possible to file a lawsuit immediately if there is a risk of irrecoverable damage [Japanese Companies Act, Article 847, Paragraph 5]
Claim Target (in case of pursuing responsibility of officers, etc.)	Auditor (in companies with auditors) [Japanese Companies Act, Article 386, Paragraph 2, Item 1]	Auditor (in companies with auditors) [Japanese Companies Act, Article 386, Paragraph 2, Item 1]

Principles of Filing a Derivative Lawsuit

Under Japanese corporate law, shareholders must, as a general rule, first request the company to pursue liability against officers who have neglected their responsibilities. This request must be made in writing or by electronic means as stipulated in Article 217 of the Enforcement Regulations of the Japanese Companies Act. The request should typically be addressed to the statutory auditor, in accordance with Article 386, Paragraph 2, Item 1 of the Japanese Companies Act. Even if there are multiple statutory auditors, it is sufficient to make the request to just one of them.

If the company (statutory auditor) does not file a lawsuit to pursue liability within 60 days from the date of the request, the shareholder who made the request may initiate a shareholder representative lawsuit on behalf of the company, as provided for under Article 847, Paragraph 3 of the Japanese Companies Act. This 60-day period is considered a ‘deliberation period’ for the statutory auditor to investigate the facts and conduct legal considerations to decide whether or not to file a lawsuit.

Exceptions Where Omission of Demand for Filing a Lawsuit Is Permitted

There are exceptions to the aforementioned 60-day rule. If there is a risk that the company will suffer irreparable damage due to the lapse of the 60-day period from the date of the demand for filing a lawsuit, shareholders are permitted to omit the demand to the company and immediately initiate a shareholder derivative lawsuit [Article 847, Paragraph 5 of the Japanese Companies Act (2005)].  

Limitations on Filing Lawsuits for Illegitimate Purposes Under Japanese Corporate Law

Under Article 847, Paragraph 1 of the Japanese Companies Act, a shareholder derivative lawsuit cannot be initiated if the purpose is to seek illegitimate benefits for the shareholder or a third party, or to cause harm to the company. Such lawsuits with these objectives will be dismissed for failing to meet the necessary legal requirements for filing a suit.

The Critical Role of Statutory Auditors Under Japanese Corporate Law

In response to shareholder derivative demands, statutory auditors in Japan play a crucial role by conducting investigations within 60 days and determining whether to initiate litigation. This investigation must be carried out under the auditors’ own responsibility, and they cannot rely on conclusions from the legal department or internal audit division. If the statutory auditor decides not to sue, they are obligated to notify the shareholders of the reasons if requested, as stipulated by Article 847, Paragraph 4 of the Japanese Companies Act.

The role of statutory auditors in the Japanese system is particularly noteworthy when compared to systems in the United States or the United Kingdom. In the US, if the board of directors decides not to comply with a pre-litigation demand, that decision is generally protected under the business judgment rule, and shareholders are typically not allowed to pursue a derivative lawsuit. In contrast, in Japan, even if the statutory auditor decides not to pursue litigation, it does not affect the shareholders’ right to file a lawsuit, regardless of the reasons. This difference in system design highlights the fundamental philosophical differences between countries regarding the balance between ‘management discretion’ and ‘shareholder oversight’ in corporate governance. In Japan, even if the internal checks by statutory auditors fail to function, the system ensures that shareholders can maintain a final check on management by allowing them to file lawsuits ‘for the company.’ This is based on the idea of preventing the impairment of corporate value through external pressure when internal controls are inadequate. Conversely, in the US, there is a tendency to prioritize the stability of management by strongly respecting the principle of the board’s business judgment, thereby protecting management from unnecessary litigation. This distinctive feature of the Japanese system is an important consideration for foreign investors when assessing the potential for shareholders to hold management accountable in Japanese companies.

Scope of Responsibility and Targeted Officers in Shareholder Representative Litigation Under Japanese Corporate Law

In Japan, shareholder representative litigation targets a wide range of officers involved in the management and operation of a company.

Range of Targeted Officers

Under Japanese shareholder representative litigation, not only directors but also promoters, initial directors, initial auditors, accounting advisors, executive officers, auditors, accounting auditors, and liquidators are subject to responsibility [Japanese Companies Act, Article 847, Paragraph 1; Article 423, Paragraph 1]. While the former Commercial Code limited this to directors, the current Japanese Companies Act has expanded the scope, enabling more comprehensive corporate governance. This expansion is based on the recognition that various officers, including auditors and executive officers, not just directors, can potentially affect the company’s losses in modern corporate activities.

Examples of Duty of Care Negligence and the Business Judgment Rule

The most common responsibility that officers owe to a company is the ‘duty of care negligence,’ which requires compensating for damages incurred by the company due to neglect of their duties [Japanese Companies Act, Article 423, Paragraph 1]. When determining the presence of this duty of care negligence, the ‘business judgment rule’ becomes a crucial consideration. This principle states that directors’ business decisions do not violate the duty of care as long as there are no significant and careless errors in fact recognition, and the decision-making process and content are not particularly irrational or inappropriate for corporate managers. The principle aims to respect managerial discretion and protect them from unnecessary litigation.

Claims for Return of Illegally Provided Benefits

If officers provide undue benefits from company assets in relation to the exercise of shareholder rights, a lawsuit demanding the return of those benefits also falls under shareholder representative litigation [Japanese Companies Act, Article 120, Paragraph 3; Article 847, Paragraph 1]. This provision aims to prevent unfair conveniences to specific shareholders and maintain fairness among shareholders.

Unfair Subscription Prices for Shares and Stock Options

Claims against those who subscribe to shares or stock options at unfair payment amounts are also targeted, demanding payment to the company [Japanese Companies Act, Article 212, Paragraph 1; Article 285, Paragraph 1; Article 847, Paragraph 1]. This is to prevent the unjust outflow of company assets during the issuance of new shares.

Theories on the Scope of Directors’ Responsibility and Trends in Japanese Supreme Court Precedents

Regarding the scope of ‘directors’ responsibility’ that can be pursued in shareholder representative litigation, two main theories have long been in conflict: the ‘general liability theory’ and the ‘limited liability theory.’ The general liability theory argues that all debts owed by directors to the company are included, reasoning that the possibility of the company neglecting to pursue directors’ responsibilities exists regardless of the cause of the debt. On the other hand, the limited liability theory advocates that respect for corporate management discretion should limit responsibility to specific liabilities that are difficult or impossible to exempt.

The Supreme Court of Japan, in its judgment on March 10, 2009 (Heisei 21), provided its first decision on this issue. This judgment is interpreted as adopting an intermediate stance between the general liability theory and the limited liability theory, recognizing that responsibilities based on directors’ positions, as well as transactional debts owed to the company by directors, are subject to shareholder representative litigation.

Key Japanese Legal Precedents and Their Significance

To understand the operation of shareholder representative lawsuits in Japan, it is essential to analyze past key legal precedents. These cases provide concrete guidelines on how Japanese courts assess the responsibilities of corporate officers through specific instances.

Precedents Clarifying the Principle of Business Judgment

• Supreme Court of Japan Decision on July 15, 2010 (Heisei 22) (Apaman Shop Shareholder Representative Lawsuit)
  • Case Summary: In a case where a listed company intended to make a subsidiary a wholly-owned subsidiary as part of a business reorganization plan and purchased shares from other shareholders at approximately five times the fair price based on voluntary agreement, the breach of the directors’ duty of care was disputed.
  • Court Ruling: The Supreme Court of Japan ruled that as long as there were no significant and careless errors in the recognition of facts that formed the basis of the directors’ business judgment, and the decision-making process and content were not particularly irrational or inappropriate for corporate managers, the actions of the directors did not violate their duty of care. This judgment was the first Supreme Court decision to clearly demonstrate the review criteria related to the “principle of business judgment” in Japanese civil cases, significantly influencing subsequent shareholder representative lawsuits regarding directors’ responsibilities.

Precedents Concerning Benefit Provision

• Supreme Court of Japan Decision on April 10, 2006 (Heisei 18) (Janome Sewing Machine Co. Shareholder Representative Lawsuit)
  • Case Summary: The case involved a company that suffered damages by paying a large sum of money in response to threats from a person known as a market manipulator, and the breach of the directors’ duty of loyalty and duty of care was questioned.
  • Court Ruling: The Supreme Court of Japan determined that the negligence of the listed company’s directors, who proposed or agreed to pay a large sum of money to shareholders in compliance with unjust demands, could not be denied. This judgment strictly held directors accountable for complying with unjust demands from antisocial forces and reaffirmed the importance of directors’ duty of loyalty.

Other Important Precedents

• Tokyo High Court Decision on April 25, 2002 (Heisei 14) (Mitsubishi Oil Shareholder Representative Lawsuit)
  • Case Summary: The case involved a company that illegally and unjustly provided funds to petroleum distributors through inflated transaction prices for petroleum products and site difference trading.
  • Court Ruling: The Tokyo High Court recognized the breach of the listed company directors’ duty of care. This clarified the responsibility of directors who engage in improper transactions that harm the company’s interests.
• Tokyo District Court Decision on September 27, 2007 (Heisei 19) (Kanebo Shareholder Representative Lawsuit)
  • Case Summary: The case questioned the breach of the duty of care and duty of loyalty of directors who adopted a scheme to improve financial conditions by transferring main operations and converting the transfer proceeds into loans.
  • Court Ruling: The Tokyo District Court denied the claim for damages and did not find the directors negligent in their duties. This judgment is significant as it recognizes the discretion of directors’ business judgment in business reorganization under challenging management conditions.

Defensive Strategies Against Shareholder Derivative Lawsuits in Japan

The Japanese shareholder derivative lawsuit system promotes management oversight by shareholders while equipping companies and their officers with essential restraining mechanisms to protect against unjust litigation.

Demand for Security and Its Requirements

Officers facing litigation can employ a defense strategy known as a “demand for security” to shield themselves and the company from unwarranted shareholder derivative lawsuits. This system allows the court to order the plaintiff shareholder to deposit security for litigation costs and potential future damage claims if the lawsuit is proven to be filed with “malice” [under Japanese Corporate Law, Article 847, Paragraphs 7 and 8]. The determination of “malice” includes the “hostile intent theory” (where the purpose of the lawsuit is to unjustly harm the company) and, more recently, the “pure malice theory” (filing a lawsuit while knowing that there is no basis for the claim). When a security provision order is issued, many plaintiff shareholders tend to abandon the lawsuit, making it an effective practical defense measure.

Defense of Shareholder Rights Abuse and Its Criteria

Another significant defense is the “abuse of shareholder rights” argument. This contends that the filing of the shareholder derivative lawsuit itself constitutes an abuse of rights, which is impermissible under Article 1, Paragraph 3 of the Japanese Civil Code. To establish shareholder rights abuse, both the plaintiff shareholder’s “malicious intent” (pursuit of unjust personal benefits or harassment) and the “lack of validity” in the plaintiff’s claims are required. Although cases of shareholder rights abuse are rare in precedents, it was recognized for the first time in the Nagasaki Bank case.

Potential for Damage Claims Against Frivolous Lawsuits

If a security provision order is issued or if the defense of shareholder rights abuse is accepted and the shareholder derivative lawsuit is dismissed, the defendant officers may have the possibility to claim damages based on the frivolous lawsuit. This is established when the lawsuit is deemed to “significantly lack appropriateness” in light of the purpose of the judicial system, allowing victorious officers to seek compensation for attorney fees and emotional damages.

While it is possible to initiate litigation with low filing fees, the existence of these defense measures indicates a balance between promoting healthy management oversight by shareholders and protecting companies from abusive litigation. The security provision system deters frivolous lawsuits by imposing financial burdens through the recognition of “malice” in litigation. The defense of shareholder rights abuse provides a legal basis to dismiss a lawsuit when its very purpose is inappropriate. Together with low filing fees, these defense strategies create a clever balance to prevent shareholder derivative lawsuits from being misused as a means of “corporate raiding.” In particular, the potential for damage claims against frivolous lawsuits serves as a powerful incentive for shareholders to carefully consider the basis and purpose of their litigation before proceeding.

Comparing Shareholder Derivative Action Systems Abroad

The shareholder derivative action system in Japan shares commonalities with those of other major legal jurisdictions, while also having several important differences. Understanding these differences is extremely important in international corporate activities.

The U.S. Shareholder Derivative Action System

Rule 23.1 of the U.S. Federal Rules of Civil Procedure sets forth the prerequisites for a shareholder derivative action. In the U.S., a plaintiff shareholder must specifically detail in the complaint the efforts made to obtain the desired action from the directors or equivalent authorities, or the reasons why such efforts were not made. This is known as “demand futility,” which is allowed to be omitted only if the board of directors is incapable of appropriately responding to the pre-suit demand. However, the claim of futility must be detailed factually in the complaint. Additionally, if the board of directors decides not to comply with the shareholder’s pre-suit demand, that decision is protected under the “business judgment rule,” and shareholders are generally not permitted to pursue a liability lawsuit. To continue the lawsuit, shareholders must argue and prove in detail that the board’s decision not to sue was improper.

The UK Shareholder Derivative Action System

Under Section 260 of the UK Companies Act 2006, a derivative claim can only be brought for acts or omissions involving negligence, default, breach of duty, or breach of trust by a director. In the UK, permission from the court is not required to initiate a shareholder derivative action, but is necessary to “continue” the lawsuit. This permission process is two-fold, initially requiring a demonstration of a “prima facie case,” followed by the court’s final permission based on various considerations set out in Section 263 of the Companies Act (such as the shareholder’s good faith, the importance of the lawsuit in promoting the company’s success, and the availability of alternative remedies). Also, in the UK, whether alternative remedies available to shareholders, such as relief from unfair prejudicial conduct, exist is a significant consideration for the court when deciding on permission.

Differences and Similarities with the Japanese System

The shareholder derivative action systems in Japan, the U.S., and the UK each strike a different balance between “management freedom” and “shareholder oversight” in corporate governance. Japan’s system differs significantly from those of the U.S. and the UK in that it obligates shareholders to make a demand to the statutory auditor, while not principally hindering shareholders’ right to initiate a lawsuit even if the company decides not to sue. In the U.S., the board’s decision is highly respected, and in the UK, the court’s permission is essential, with the decision heavily influenced by whether “a reasonable director would continue the lawsuit.” Looking at the hurdles for continuing litigation, Japan allows lawsuits to be filed for a nominal fee, whereas the U.S. requires proof of demand futility, and the UK has a two-stage court permission process, each presenting different high barriers. However, in all three countries, shareholder derivative actions are conducted for the benefit of the company, and any damages awarded belong to the company. This comparison clarifies that each country’s legal system takes a different form in balancing “management freedom” and “shareholder oversight” in corporate governance. Japan maintains a relatively strong external check on management by emphasizing internal controls (demands to the statutory auditor) while ultimately ensuring that shareholders can directly initiate lawsuits. This reflects an attitude that values the role of shareholders as a “last resort” against managerial inaction or misconduct. On the other hand, the U.S. and the UK tend to place more emphasis on the stability of management and protection from unnecessary litigation through the principle of managerial judgment and a stringent court permission process. For foreign investors, understanding these differences is essential in assessing the risks and returns in the investment environment of each country.

Summary

The shareholder representative lawsuit system in Japan is a cornerstone of corporate governance, enabling shareholders to pursue the liability of company officers who neglect their duties and cause damage to the company on behalf of the company itself. While it is possible to initiate litigation at a low cost, measures are in place to limit frivolous lawsuits with improper motives, including the requirement to provide security and defenses against the abuse of shareholder rights. This system strikes a balance between promoting sound management oversight by shareholders and protecting companies from abusive litigation.

Monolith Law Office possesses deep expertise in Japanese Corporate Law and corporate governance, having accumulated a wealth of experience in handling a wide range of corporate legal affairs, including shareholder representative lawsuits, for numerous clients within Japan. We are committed to providing practical and strategic solutions to complex legal issues. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to support our international clients with meticulous care through our bilingual Japanese and English capabilities. We offer expert and precise advice on Japan’s legal system, especially regarding corporate governance and litigation procedures, without the barrier of language.