Japanese Law Update #16: A Year-in-Review of Dispute Resolution in Japan (2/3) - Case Developments

2023 has seen significant developments in the dispute resolution landscape in Japan. This article covers legislative changes in litigation, arbitration, and mediation as well as the developments in judicial decisions by the Japanese courts.

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1. Legal Actions following Investigations

Japan has continuously updated its regulations on corporate governance and compliance. Investigations of corporate fraud or other corporate misconduct sometimes led to legal action by stakeholders. It is common for a company to establish a special committee to investigate corporate misconduct. The report by the committee is usually published for public access.

And the regulator will also often publish their investigation report on such a company. These investigation reports serve as a tool to gather supporting evidence when potential claimants consider filing a lawsuit. 

2. Shareholder Derivative Actions against Toshiba’s Former Executives

Toshiba Corporation (Toshiba) was delisted in December 2023. A major accounting scandal that came to light in 2015 was the beginning of their delisting process. Through voluntary and regulatory investigations, it was revealed that accounting misconduct, involving profit inflation, had occurred over many years at the company. After a series of investigations, Toshiba itself and its shareholders initiated legal action against some former executives. In 2023, the Tokyo District Court rendered a judgment acknowledging the liabilities of some of the executives. The case is now pending before the Tokyo High Court. 

In relation to the scandal, both domestic and foreign investors filed numerous securities lawsuits against Toshiba. Toshiba settled some of these cases for significant sums for the investors. This would be a reminder that companies operating in Japan should be aware that, in the event of a corporate scandal, there is a real risk of legal action against the management and the company.

3. The Nuclear Power Plant Meltdown and Shareholder Derivative Actions

In 2012, some of the shareholders filed a shareholder derivative action against former directors of the Tokyo Electric Power Company, Inc., claiming compensation for damages caused by the meltdown at the Fukushima nuclear plants in 2011. More than a decade later, the Tokyo District Court awarded the shareholders JPY13.3 trillion (equivalent to approximately USD90 billion) in damages, the highest amount ever awarded in Japan. The court found that the former directors had breached their duty of care by failing to order the immediate implementation of tsunami countermeasures based on the scientific tests that indicated the significant likelihood of a tsunami of sufficient height and magnitude to damage or destroy the nuclear power plant’s equipment. The finding is in accordance with the business judgement rule, which is also used in Japan as a framework for the assessment of directors’ liability. The case is now being heard at the Tokyo High Court. 

4. Tax Litigation - Mizuho v government of Japan

Tax regulation is one of the most complex and frequently changing areas in Japan. In 2023, the Supreme Court of Japan made its decision on the application of the tax haven countermeasure.

Mizuho Bank, Ltd. (Mizuho) strengthened its capital through issuing preferred securities in offshore special purpose companies. In the year under investigation for tax assessment, the preferred securities had already been redeemed, leaving only common shares held by Mizuho at the end of the fiscal year at issue. The tax authorities classified this arrangement as subject to the tax haven countermeasure. The appellate court found that there were no justifiable grounds for applying the tax haven countermeasure in this case. One of the main issues before the Supreme Court was whether certain provisions of the tax haven countermeasure, which designate tax authorities to use the ratio of shares in a foreign entity owned by a Japanese parent company at the end of a fiscal year when calculating the taxable income of the Japanese entity, shall be applied without considering the intentions of the company or other background facts. In 2023, the Supreme Court handed down a decision reversing the judgment of the appellate court.

The Supreme Court pointed out that the provisions setting a certain standard date to assess the ratio of shares owned by a Japanese entity are reasonable and found that Mizuho could have arranged for the taxable amount in this regard to be JPY0 by scheduling the redemption of preferred securities for a different time.

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Authors

Yoshie Midorikawa, Partner
Yoshie Midorikawa has extensive experience in complex disputes and arbitration. Having worked with leading law firms in Japan and Singapore, she has handled parallel proceedings across multiple jurisdictions as well as domestic disputes before Japanese courts. She has also served as a board member of listed companies in Japan, improving their corporate governance. Her deep understanding of the civil law system, her working experience in international environments, including common law jurisdictions, and her knowledge of business, enable her to bring practical and nuanced legal solutions to international businesses. She is listed among “Next Generation Partners (Dispute Resolution)” by Legal500 Asia Pacific 2023, “Best Lawyers in Japan (Litigation)” in the editions of 2021 to 2024, “Best Lawyers in Japan (Corporate Governance & Compliance)” in the edition of 2023 and 2024, “Best Lawyers in Japan (International Arbitration)” in the edition of 2024 by Best Lawyers.

Shunsuke Ebihara, Associate
Shunsuke Ebihara handles a wide range of corporate matters, focusing on commercial litigation, dispute resolution, corporate crisis management, and white-collar crime. After graduating from Waseda University School of Law, he worked in the Public Prosecutor’s Office as a public prosecutor and for a major law firm in Japan.

Daichi Ito, Associate
Daichi Ito handles a variety of cases including structured finance, real estate transactions, capital markets, corporate law and dispute resolution. After starting his career as a lawyer, he worked for a major law firm in Japan and is seconded to Slaughter and May in Hong Kong.