Why Shareholders Sue: The Evidence from Japan

Abstract:     
This Article explores the dynamics of and motivations behind shareholder litigation in a heretofore overlooked context: Japan. Following a 1993 reduction of filing fees, the number of shareholder derivative suits filed in Japan has increased dramatically, creating a database from which to study litigation incentives. This Article shows that most plaintiffs in Japan lose, few suits settle, settlement amounts are low, and, as in the United States, shareholders do not receive direct stock price benefits from suits. Most derivative suits in Japan, as in the United States, can be explained not by direct benefits to plaintiffs, but by attorney incentives.

But derivative suits, like most things in life, have more than one source of causation. The residuum of suits not explained by attorney incentives is best explained by a combination of (a) non-monetary factors such as altruism, spite, and social concerns, (b) corporate troublemakers (sokaiya), (c) insurance, and (d) close corporation fights. I also find that many derivative actions "piggyback" on government enforcement actions in Japan, which, especially given the lack of information available to shareholders and low white-collar crime enforcement rates, raises interesting questions regarding the relationship of public and private enforcement. These findings suggest that the difficult and messy issues of derivative suits are not unique to the relatively "litigious" or "attorney-centered" United States, and instead simply are endemic to the derivative suit mechanism.

Working Paper Series