Japan's Love for Derivative Actions: Irrational Behavior and Non-Economic Motives as Rational Explanations for Shareholder Litigation

Abstract

Not long ago, there was a consensus in the legal academy that the Japanese were irrational litigants. As the theory went, Japanese people would forgo litigating for financial gain because of a cultural obsession with maintaining social harmony. Based on this theory, it made perfect (but economically irrational) sense that Japanese shareholders let their U.S.-transplanted derivative action lay moribund for almost four post-war decades, while at the same time the derivative action was a staple of shareholder litigation in the United States. The 1980s brought a wave of law and economics to the scholarship of Japanese law, which largely discredited the cultural explanation for Japan’s (economically irrational) reluctant litigant. In this new academic era, reasonable minds could disagree as to whether the efficiency of settlement or high cost of litigation explained the dearth of litigation in Japan. However, the assumption that the Japanese litigant was economically motivated and rational (i.e., that they would litigate only when the financial benefit from doing so exceeded the cost) was virtually beyond reproach. In the early 1990s, the number of derivative actions in Japan skyrocketed. Japanese shareholders suddenly found themselves as strange bedfellows with their American counterparts as the only shareholders of listed companies in the world that utilized the derivative action on a regular basis. This extraordinary change in the behavior of Japanese shareholders has largely been understood through the lens of the economically motivated and rational shareholder litigant. This Article challenges the assumption that the dramatic increase in Japanese derivative actions can be understood solely through the narrow lens of the economically motivated and rational shareholder. Using original empirical and case study evidence, this Article demonstrates that in Japan, neither shareholders nor attorneys stand to gain significant financial benefits from derivative actions. To the contrary, this Article suggests that the non-economic motives (i.e., political and environmental motives and veiled extortion) and irrational behavior of Japanese shareholders, (i.e., the use of inaccurate mental heuristics, self-serving bias, and herding behavior) are critical for providing an accurate explanation for one of the most dramatic increases in shareholder litigation in recent times. This revelation further suggests that the leading literature on shareholder litigation — which forms the basis for the current understanding of shareholder litigation in the United States — is flawed, as it overlooks the critically important role that non-economic motives and irrational behavior play in driving shareholder lawsuits.

Keywords: Derivative Actions, Shareholders' Remedies, Comparative Corporate Law, Japanese Corporate Law, Law and Economics, Behavioural Law and Economics, Comparative Law, Asian Law, Shareholder Litigation, Company Law, Corporate Governance

JEL Classification: K00, K41, L3, B00, C00, C4