GPIF Sues Toshiba: Japan’s Securities Law that Makes it Easy to Sue

The the news of the day is that GPIF is suing Toshiba for $10 million. It is only one asset manager that is suing, almost certainly under Article 21-2 Japan securities law (FIL) which makes it very easy for plaintiffs to sue and claim a “presumed damages amount”, and then shifts the burden of proof to the defendant company (unlike US law) to disprove its negligence.  The stock has come down by about 26% or so.   (Interestingly, Japanese securities law in this area is much harsher than US law, which never shifts the burden of proof in such cases.)

Probably not in Toshiba’s case, but in general the scary thing about these lawsuits in Japan, is that if a lot of shareholders start suing, in the worst case there could be a snowball effect. Because there is no class action system here, it is “first come first served”. If you don’t sue, you cannot receive damages. And if others sue before you, so later on there are no net assets left in the company, that is your bad luck.  So if you think that all these lawsuits may result in damages that might endanger the company’s ability to pay if the lawsuits proliferate, that is – then you have an incentive to get in line as quickly as you can.

I experienced this danger when I was a director at Livedoor Holdings after the scandal, and I was appointed to develop and oversee the company’s legal defense strategy against the $1Bln+ in damages that were being claimed by shareholders (or former shareholders). A snowball did not develop, because it was the first time there was ever a civil action under the securities law in Japan, but I certainly spent a lot of time worried about this possibility.

It will be interesting to see if other fund mangers used by GPIF sue Toshiba.  Since this lawsuit is reported to be being made “on behalf of GPIF”, you would think that GPIF’s (the customer’s) opinion on the matter (its desire to receive compensation for damages incurred) would not be different in the case of different fund managers, especially given that it is so easy to sue under Article 21-2.

Nicholas Benes

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