Suing Directors in Japan: What's the Claim Value for Breach of Duty?

In Japanese corporate governance, holding directors accountable for breaches of their duties is a cornerstone of shareholder rights and company health. Shareholders have specific legal avenues to address director misconduct, notably through shareholder derivative suits aimed at recovering damages for the company, and through actions seeking to enjoin unlawful director conduct. A critical, yet often overlooked, procedural aspect of initiating such lawsuits is the determination of the "Sogaku" (訴額) – the value of the subject matter of the action. This valuation is not merely a technicality; it directly impacts the initial court filing fees and can influence jurisdictional considerations. This article explores how "Sogaku" is determined for these pivotal types of shareholder actions against directors in Japan, revealing a unique approach designed to balance accountability with access to justice.

The Context: Director's Duties and Shareholder Recourse

Directors of Japanese companies operate under stringent duties, including the duty of care (zenkan chūi gimu) and the duty of loyalty (chūjitsu gimu), primarily enshrined in the Companies Act (会社法 - Kaishahō, Act No. 86 of 2005). When directors breach these duties, causing financial harm to the company, the Companies Act provides shareholders with the right to step in. Similarly, if directors are about to engage in unlawful acts that could irreparably damage the company, shareholders are not without recourse. The "Sogaku" assigned to these actions plays a crucial role in ensuring that these mechanisms for director oversight are practically accessible.

Shareholder Derivative Suits (株主代表訴訟 - Kabunushi Daihyō Soshō) for Damages

A shareholder derivative suit, as provided for under Article 847 and subsequent articles of the Companies Act, is an action brought by a shareholder (or shareholders meeting certain criteria) on behalf of the company. The objective is typically to recover damages for the company from its directors or other officers whose breach of duty has resulted in financial loss to the corporation. The recovered funds, if any, are paid to the company itself, not directly to the plaintiff shareholders.

The "Sogaku" Conundrum: Valuing Harm to the Company vs. Shareholder's Stake

Calculating the "Sogaku" for a derivative suit presents a unique challenge if one were to strictly apply traditional valuation methods based on the plaintiff's direct economic interest:

1. Valuation Based on Company's Damage: If the "Sogaku" were based on the total monetary damage alleged to have been suffered by the company, this figure could be extraordinarily large, especially in cases of significant mismanagement or fraud. The corresponding court filing fees, which are tiered based on "Sogaku," would become prohibitively expensive for most individual shareholders, effectively barring such actions.
2. Valuation Based on Individual Shareholder's Interest: Conversely, if the "Sogaku" were based on the plaintiff shareholder's personal, proportional interest in the company's recovery (e.g., the anticipated minute increase in the value of their shares if the suit is successful), this amount would often be very small. Such a low "Sogaku" might not reflect the societal importance of the litigation and could also lead to complex and impractical calculations. Furthermore, the primary aim of the suit is the company's well-being, not the shareholder's direct enrichment.

The Japanese Solution: Treatment as a Non-Monetary Claim for "Sogaku" Purposes

Japanese law and long-standing judicial practice have resolved this valuation dilemma with a pragmatic approach. For the specific purpose of calculating court filing fees, shareholder derivative suits are treated as if they are claims not concerning property rights (hi-zaisanken-jō no seikyū).

As a result of this classification, shareholder derivative suits are assigned a deemed "Sogaku" of 950,000 yen. This figure is stipulated by Article 4, Paragraph 2 (first part) of the Act on Costs of Civil Procedure (Minji Soshō Hiyō tō ni Kansuru Hōritsu, "Costs Act") for claims not concerning property rights. While the Companies Act outlines the substantive right to bring a derivative action, the "Sogaku" for fee purposes is determined under the Costs Act, drawing on this principle. This treatment evolved from provisions in the former Commercial Code (e.g., Article 267, Paragraph 4, before its full replacement by the Companies Act) and reflects a consistent policy.

Rationale for This Special "Sogaku" Treatment

This distinct approach to "Sogaku" in derivative suits is underpinned by several important policy considerations:

• Ensuring Access to Justice: The paramount reason is to ensure that shareholder derivative litigation remains a practically viable mechanism for enforcing director accountability. Without this special valuation, the financial barrier to entry would be insurmountable for most shareholders, rendering the remedy ineffective.
• Promoting Corporate Governance: Derivative suits serve a vital function in promoting good corporate governance and deterring managerial misconduct. Facilitating such suits through manageable filing fees is seen as beneficial for the health of the corporate sector and the protection of corporate assets.
• Difficulty in Plaintiff-Centric Valuation: As discussed, the direct, quantifiable economic benefit to the individual plaintiff shareholder from a successful derivative suit is indirect (through potential improvement in company value) and exceptionally difficult to ascertain precisely at the commencement of litigation. The primary beneficiary of any monetary recovery is the company itself.
• Legislative Endorsement and Practicality: This valuation method received legislative endorsement through past revisions of company law (such as the 1993 amendment to the Commercial Code which reinforced this view ) and has been consistently applied in practice, reflecting a long-standing recognition of the unique nature of these actions. The focus is on the societal and governance utility of the suit rather than a strict application of economic interest valuation from the plaintiff's direct perspective.

The consequence of this 950,000 yen deemed "Sogaku" is a predictable and relatively low initial court filing fee, regardless of the actual quantum of damages being sought for the company, which could run into billions of yen. If multiple shareholders join as plaintiffs in a single derivative action, the "Sogaku" generally remains a single 950,000 yen, as it is one claim on behalf of the company.

Actions for Injunction Against Unlawful Director Conduct (取締役等の違法行為の差止請求 - Torishimariyaku-tō no Ihō Kōi no Sashitome Seikyū)

Another important tool for shareholder oversight is the action to enjoin (or stop) unlawful conduct by directors. Under provisions like Article 360 of the Companies Act, shareholders who have held shares for a specified period (typically six months) can demand that a director refrain from committing an act that is outside the company's scope of business, or violates laws or the articles of incorporation, if there is a risk that such an act will cause "irreparable damage" to the company.

"Sogaku" Valuation Challenge for Injunctive Actions

Similar to derivative suits seeking monetary recovery, calculating the "Sogaku" for these injunctive actions presents challenges. The value being protected is the company's well-being by preventing potential future harm. Quantifying the direct economic benefit to the individual plaintiff shareholder from obtaining such an injunction is often highly problematic and speculative at the time the action is filed. The averted "irreparable damage" to the company, while potentially immense, is not a direct monetary sum being claimed by the shareholder for themselves.

The Adopted Solution: Deemed Value due to Calculation Difficulty

For these reasons, actions by shareholders to enjoin unlawful director conduct are generally treated as claims where the "Sogaku" is either extremely difficult to calculate (falling under Article 8, Paragraph 2 of the Code of Civil Procedure) or are considered analogous to claims not concerning property rights for "Sogaku" valuation purposes.

This, too, leads to the application of the deemed "Sogaku" of 950,000 yen for the purpose of calculating court filing fees, pursuant to Article 4, Paragraph 2 of the Costs Act.

Rationale

The underlying logic mirrors that for derivative suits:

• The primary benefit—the prevention of often unquantified or speculative irreparable harm to the company—is intangible from the perspective of a direct, immediate monetary gain for the plaintiff shareholder.
• While one could argue that the "Sogaku" should be the potential damage to the company that is being averted by the injunction, the practical assessment of such a figure at the outset of litigation is often fraught with extreme difficulty.
• The essential nature and purpose of these preventative shareholder actions are seen as aligning closely with the policy objectives that justify the special "Sogaku" treatment for derivative suits for damages. It's about empowering shareholders to act as watchdogs without imposing overwhelming initial financial hurdles.

Distinguishing Direct Claims by Shareholders for Personal Harm

It is crucial to distinguish the shareholder actions discussed above (derivative suits and injunctions for the company's benefit) from lawsuits where shareholders sue directors for damages caused directly to themselves in their personal capacity. For instance, if a director's fraudulent misrepresentation induced a shareholder to buy shares at an inflated price, leading to a direct personal financial loss for that shareholder (a loss distinct from a general diminution in the company's overall value), that shareholder could bring a direct action against the director.

In such direct personal claims, the "Sogaku" would be calculated based on the actual economic loss or damages asserted by the individual shareholder, following the standard principles for valuing claims concerning property rights. The 950,000 yen deemed "Sogaku" applicable to derivative or company-focused injunctive actions would not apply to these personal suits. The "Sogaku" would be the specific monetary amount the shareholder is claiming for their own individual harm.

Practical Significance of the Deemed "Sogaku" in Shareholder Oversight Actions

The consistent application of a 950,000 yen deemed "Sogaku" for both derivative suits for damages and shareholder actions to enjoin director misconduct carries significant practical weight:

• Enhanced Access to Justice and Director Accountability: This standardized, relatively low valuation drastically reduces the initial court filing fees. (Based on historical fee schedules, a 950,000 yen "Sogaku" would incur a fee of 8,200 yen; current rates must be verified). This affordability is vital for ensuring that shareholder litigation remains a credible and accessible instrument for holding directors accountable and deterring corporate malfeasance.
• Predictability of Initial Costs: It provides shareholders and their legal advisors with a high degree of predictability regarding one of "the major upfront costs of initiating these types of corporate governance lawsuits.
• Jurisdictional Considerations (Primarily Fee-Related): While a "Sogaku" of 950,000 yen would, in ordinary civil cases, typically fall within the monetary jurisdiction of a Summary Court, most substantive company law disputes, including shareholder derivative suits and actions concerning director conduct under the Companies Act, are handled by District Courts as the court of first instance. This is often due to the complexity of the issues involved or specific jurisdictional provisions for company matters. Therefore, in this specific context, the 950,000 yen "Sogaku" primarily functions to set a reasonable filing fee rather than being the determinative factor for choosing between a Summary Court and a District Court.

Conclusion: Facilitating Corporate Governance Through Procedural Pragmatism

When shareholders in Japan take legal action against directors for breach of duty – whether by filing derivative suits to recover damages for the company or by seeking injunctions to prevent unlawful acts – the "Sogaku" for the purpose of calculating court filing fees is typically deemed to be 950,000 yen. This is not an arbitrary figure but rather a considered, policy-driven approach embedded in Japanese procedural law. It acknowledges the unique nature of these shareholder oversight mechanisms, the inherent difficulties in applying standard plaintiff-centric valuation methods, and the overarching public interest in promoting director accountability and sound corporate governance. By ensuring that the initial financial hurdles are not insurmountable, this special "Sogaku" treatment plays a crucial role in empowering shareholders to fulfill their essential function as stewards of corporate integrity.