How Do Shareholder Derivative Suits Work in Japan?

Japanese Attorney at Law - Bengoshi L.L.

• 10 min read

Shareholder derivative suits are a vital component of corporate governance, providing a mechanism for shareholders to hold company management accountable for wrongdoing when the company itself fails to act. In Japan, this legal avenue allows shareholders to step into the company's shoes and pursue claims against directors and other fiduciaries for harm caused to the corporation. Understanding the intricacies of this system is crucial for anyone involved with Japanese corporations, whether as an investor, director, or advisor.

The primary rationale behind shareholder derivative suits (株主代表訴訟 - kabunushi daihyō soshō) in Japan is to address the inherent conflict of interest that arises when corporate management—directors and officers—are responsible for deciding whether to sue themselves or their colleagues for misconduct. There is a natural reluctance, often termed "litigation oversight possibility" (提訴懈怠可能性 - teiso ketai kanōsei), for management to pursue such actions vigorously. Derivative suits empower shareholders to overcome this inertia and ensure that legitimate claims for damages or other remedies are pursued for the company's benefit.

The principal statutory basis for these actions is Article 847 of the Japanese Companies Act (会社法847条 - Kaishahō happyaku yonjūnana-jō). This article, along with related provisions, outlines the scope, procedures, and effects of such lawsuits.

Claims Subject to Derivative Action

Derivative suits in Japan can be brought to enforce a range of "responsibilities" or "liabilities" (責任 - sekinin) owed to the company by various fiduciaries. These include claims against:

  • Incorporators (発起人 - hokkinin) for liabilities arising during the company's formation.
  • Directors (取締役 - torishimariyaku), both current and former, for breaches of their duties of care and loyalty.
  • Statutory Auditors (監査役 - kansayaku), Accounting Advisors (会計参与 - kaikei san'yo), and Accounting Auditors (会計監査人 - kaikei kansanin) for neglect of their respective duties.
  • Executive Officers (執行役 - shikkōyaku) in companies with a committee governance structure.
  • Liquidators (清算人 - seisan'nin) during the company's dissolution.

Beyond these general liabilities, derivative suits can also be used to demand:

  • The return of property benefits illegally provided to any person in connection with the exercise of shareholder rights (Companies Act, Article 120, Paragraph 3).
  • Payment from individuals who subscribed to shares or share options issued at a "specially favorable price" without proper shareholder approval, for the shortfall amount (Companies Act, Article 212, Paragraph 1, for shares; Article 285, Paragraph 1, for share options).

A crucial aspect is the interpretation of the term "liability" (責任). Historically, there was debate about whether this was limited to damages for breach of fiduciary duties or if it included other types of obligations. The Supreme Court of Japan, in a judgment on March 10, 2009 (Heisei 21), significantly clarified this. It held that "liability" under Article 847 is not confined to liabilities arising specifically from the director's official position (e.g., breach of duty of care) but can also encompass ordinary contractual debts owed by a director to the company. This broad interpretation means, for example, that if a director defaults on a loan from the company or fails to pay for assets purchased from the company, shareholders can initiate a derivative suit to recover these amounts. The case study in Problem 44 of the reference PDF involves such a scenario: A社 sold land to its director, Y, on an installment basis. When Y defaulted on payments, a shareholder, X, sought to compel A社, through a derivative suit, to recover the outstanding debt from Y.

Procedural Requirements for Initiating a Derivative Suit

Bringing a derivative suit in Japan involves specific procedural steps:

1. Shareholder Standing

  • Generally, a shareholder who has continuously held shares in the company for the preceding six months is eligible to file a derivative suit (Article 847, Paragraph 1). This six-month holding period can be shortened or eliminated by the company's articles of incorporation.
  • For non-public companies (companies whose shares are not freely transferable, typically requiring company approval for transfer), this six-month continuous holding period requirement does not apply.
  • Importantly, this is a right exercisable by a single shareholder (単独株主権 - tandoku kabunushiken); there is no minimum percentage of shareholding required beyond owning at least one share (and meeting the holding period, if applicable).

2. Pre-Suit Demand on the Company (提訴請求 - Teiso Seikyū)

Before a shareholder can file a derivative suit, they must first formally request the company to initiate legal action against the responsible fiduciaries. This is known as a "demand for filing of an action to pursue liability" (責任追及等の訴えの提起の請求 - sekinin tsuikyū-tō no uttae no teiki no seikyū), often shortened to teiso seikyū.

  • Form and Content: The demand must be made in writing (or by electronic means permitted by law) and should specify the claim the company is being asked to pursue (Article 847, Paragraph 1).
  • Addressee of the Demand:The Supreme Court, in a judgment on March 31, 2009 (Heisei 21), provided guidance on this. It held that even if a demand letter is formally addressed to the company's representative director, it can still be considered a valid demand on the statutory auditor if the statutory auditor actually receives the letter (or is made aware of its contents) and is thereby given a genuine opportunity to consider whether the company should file the suit. The case in Problem 44 involves a shareholder sending the demand to the representative director, but the company's sole statutory auditor was present at the board meeting where this demand was discussed. This factual nuance suggests the demand might be considered effective under the Supreme Court's reasoning.
    • In a company with statutory auditors (監査役設置会社 - kansayaku setchi kaisha), which is common for many Japanese companies that are not large publicly traded entities adopting committee structures, the demand is made to the statutory auditor(s) (Article 386, Paragraph 2, Item 1). The statutory auditor has the authority to represent the company in lawsuits against its directors (Article 386, Paragraph 1).
    • In a company with an audit committee (監査等委員会設置会社 or 監査委員会設置会社), the demand is directed to that committee.
    • In a company with a nominating committee, etc. (指名委員会等設置会社), a member of the audit committee designated by that committee will represent the company.

3. Company's Response and the 60-Day Waiting Period

  • After the demand is made, the company (acting through its statutory auditors or relevant committee) has 60 days to investigate the matter and decide whether to file the requested lawsuit (Article 847, Paragraph 3).
  • If the company files the suit within this 60-day period, the shareholder's right to bring a derivative action is generally extinguished for that specific claim.
  • If the company does not file the suit within 60 days from the date of the demand, the demanding shareholder is then entitled to file the derivative suit themselves.
  • Notification of Non-Filing: If the company decides not to file the suit, it must, without delay, notify the demanding shareholder of this decision and the reasons for it (Article 847, Paragraph 4). This allows the shareholder to assess the company's rationale before proceeding with their own suit.
  • Exception for Irreparable Harm: The 60-day waiting period can be circumvented if waiting would cause "irreparable harm" (回復することができない損害 - kaifuku suru koto ga dekinai songai) to the company (Article 847, Paragraph 5). In such urgent cases, the shareholder can file the derivative suit immediately after making the demand.

Conduct and Effects of the Derivative Suit

Once a derivative suit is properly filed by a shareholder:

  • Parties: The shareholder acts as the plaintiff on behalf of the company. The company itself is not the plaintiff, though it is the ultimate beneficiary of any recovery. The defendants are the directors or other fiduciaries whose liability is being pursued.
  • Notice to the Company: The court will notify the company that a derivative suit has been filed (Article 849, Paragraph 1).
  • Company Intervention: The company has the right to intervene in the lawsuit, either to support the plaintiff shareholder or, in some circumstances, to assist the defendant directors (Article 849, Paragraphs 2 and 3). However, if the company intervenes to assist the defendant directors, it requires the consent of all statutory auditors (or audit committee members) (Article 849, Paragraph 4).
  • Effect of Judgment: Any judgment rendered in a derivative suit—whether it upholds the claim or dismisses it—is binding on the company (Article 850, Paragraph 1). This prevents the company from re-litigating the same claim later.
  • Litigation Costs and Attorneys' Fees:
    • If the plaintiff shareholder wins the derivative suit (i.e., the court finds the defendants liable to the company), the shareholder is entitled to request the company to pay their necessary litigation expenses, including reasonable attorneys' fees, up to the amount of benefit the company received as a result of the suit (Article 852, Paragraph 1).
    • If the plaintiff shareholder loses the suit, they are generally not liable for the company's or the defendant directors' legal costs, unless the court finds that the shareholder brought the suit in bad faith (e.g., with malicious intent or for an improper purpose) (Article 852, Paragraph 2). This provision aims to protect shareholders from being deterred from bringing legitimate derivative claims due to the risk of adverse cost awards.

The "Indispensable Director" Dilemma and Management Discretion (Problem 44)

Problem 44 presents a scenario where A社's board, influenced by Representative Director B, decided not to sue Director Y for defaulting on his land purchase payments. B's rationale was that Y was an indispensable technical expert for A社, and Y had threatened to resign if sued, potentially harming A社 more than the unrecovered debt. The company's sole statutory auditor, C, was present at the board meeting where this decision was made (presumably C also investigated and decided against suing on behalf of the company, as is his role).

Does such a "business judgment" by the company (via its board or auditors) not to sue preclude a shareholder from filing a derivative suit? In Japan, the answer is generally no. If the statutory auditor, after receiving the demand, decides not to file suit and the 60-day period elapses, the shareholder's right to file the derivative suit matures. The merits of the auditor's or board's decision not to sue are not a procedural bar to the shareholder initiating the derivative action. The Japanese system does not have a direct equivalent of the U.S. "demand futility" doctrine, where a shareholder can be excused from making a demand if it would clearly be useless, nor does it employ Special Litigation Committees of independent directors whose decision to terminate a suit is given deference by the court. The statutory auditor's decision is primarily a trigger for the shareholder's right to proceed. The ultimate merits of the claim against the director will be decided by the court in the derivative suit itself.

Post-Filing Assignment of the Company's Claim (Problem 44)

A particularly interesting issue raised in Problem 44 is the company's action after shareholder X filed the derivative suit. A社, under B's direction and with board approval, assigned its claim against Y (the subject of X's derivative suit) to a third party, D, for a small sum (8 million yen on a remaining debt of 400 million yen). The assignment agreement also stipulated that D would waive any recovery from Y exceeding 10 million yen.

Can a company effectively nullify an ongoing derivative suit by assigning away the underlying claim, especially for a fraction of its value? The PDF's commentary on Problem 44 cites a Tokyo District Court judgment from May 12, 2005 (Heisei 17), which suggested that such a maneuver could be problematic. If the assignment is found to have been made for the primary purpose of circumventing director liability or undermining the legitimate derivative action initiated by shareholders, it could potentially be deemed invalid as an abuse of rights or contrary to public policy (Civil Code Article 1, Paragraph 3; Article 90). This is particularly so because Japanese law has strict rules about when and how director liability can be forgiven or waived (generally requiring unanimous shareholder consent for full waiver – Article 424), and a collusive assignment for a nominal sum could be seen as an attempt to achieve a de facto waiver without proper procedure. This area highlights the tension between the company's general power to manage its assets (including legal claims) and the specific statutory regime for derivative suits.

Comparison with U.S. Derivative Litigation

While both Japan and the U.S. provide for shareholder derivative suits, there are notable differences:

  • Demand Requirement: As mentioned, the U.S. "demand futility" doctrine allows shareholders to bypass the demand on the board in certain circumstances (e.g., if a majority of directors are interested). Japan has no such doctrine; the demand on the statutory auditor (or relevant committee) is a mandatory prerequisite.
  • Board/Committee Role in Dismissal: In the U.S., a Special Litigation Committee (SLC) of independent directors can investigate a derivative claim and, if its process and conclusions are deemed sound by the court, its recommendation to dismiss the suit can be highly influential or even determinative. The Japanese statutory auditor's decision not to sue does not terminate the shareholder's right to proceed after 60 days.
  • Attorneys' Fees: The U.S. system often involves plaintiffs' attorneys working on a contingent fee basis, with the potential for substantial fee awards from the corporate recovery if the suit is successful. This creates strong incentives for U.S. plaintiffs' firms to pursue derivative actions. In Japan, while successful shareholders can recover reasonable attorneys' fees from the company (Article 852), the fee structures and overall litigation cost dynamics are different.
  • Scope of "Liability": The Japanese Supreme Court's expansive interpretation of "liability" to include ordinary contractual debts owed by directors to the company (Supreme Court, March 10, 2009) may be broader than the typical focus of U.S. derivative suits, which predominantly concern breaches of fiduciary duties (care, loyalty, good faith).

Recent Developments: Multiple Derivative Suits

It is also worth noting that a 2014 amendment to the Japanese Companies Act introduced provisions for "multiple derivative suits" or "double derivative suits" (多重代表訴訟 - tajū daihyō soshō) under Article 847-3. This allows shareholders of a final parent company, under certain stringent conditions (e.g., holding at least 1% of the parent's shares, the subsidiary being wholly-owned, and the subsidiary's assets being significant relative to the parent's), to file a derivative suit against the directors of that wholly-owned subsidiary. This was a significant development aimed at enhancing governance in complex corporate groups where misconduct in a subsidiary might otherwise go unaddressed.

Conclusion

Shareholder derivative suits in Japan serve as an essential, albeit procedurally distinct, mechanism for corporate accountability. They empower shareholders to act as guardians of the company's interests when its own fiduciaries fail to do so. Key features include the mandatory pre-suit demand on statutory auditors (or equivalent bodies), a relatively broad definition of the "liability" that can be pursued, and specific rules governing litigation costs. While the system differs from its U.S. counterpart in several respects, its underlying objective—to ensure that those entrusted with corporate power are answerable for its misuse—is a shared principle of sound corporate governance. The ongoing evolution of case law, particularly concerning issues like the scope of pursuable claims and the company's actions during pending litigation, continues to refine this important area of Japanese company law.