Corporate wrongdoing fuels rise in shareholder lawsuits

As cases of misconduct involving major companies and corporate executives increase, so do lawsuits by shareholders seeking damages under the Commercial Code.

Whenever a case of corporate misconduct is revealed, irate shareholders increasingly tend to sue the company or its officials involved for damages, taking advantage of their position as shareholders. But Hideto Iida, 54, an experienced Tokyo lawyer, is critical of the country’s legal mechanism for such suits because there is no reward for plaintiffs who take on corporate misconduct. “A shareholder lawsuit in Japan is like a car running without gasoline,” said Iida, who has dealt with some 10 such suits. “There are few incentives for plaintiffs to brave social pressure and fight a court battle,” he said. “In this country, people are inclined to automatically regard corporate executives as ‘good people’ and refrain from criticizing them.”

Shareholders can file a suit against board directors and demand that they compensate for losses they allegedly caused their company. But under the Commercial Code, even if plaintiffs win the suit, compensation is paid to the company, not the plaintiffs, who are only awarded expenses for the lawsuit, including attorney fees.

The system is primarily designed to keep “sokaiya” corporate extortionists from filing such lawsuits for money. This contrasts with the United States, where there is no limit on compensation awarded to successful plaintiffs and judges have discretion over the amount, Iida said. “In Japan, plaintiffs in shareholder lawsuits are performing something like charity work,” Iida said. “So, only ‘thrill-seekers’ will take action.”

Even so, the number of suits has been on the rise, jumping from 31 in 1992 to 188 in 1996, according to statistics available at the Supreme Court. Behind the increase is a 1993 Tokyo High Court decision setting court procedural fees for a shareholder suit at a mere 8,200 yen.