Litigation 2021

Last Updated December 04, 2020

Japan

Law and Practice

Authors



Anderson Mori & Tomotsune is a full-service law firm formed by the winning combination of three leading law firms in Japan: Anderson Mori, known for serving overseas companies doing business in Japan since the early 1950s; Tomotsune & Kimura, particularly well known for its expertise in international finance transactions; and Bingham Sakai Mimura Aizawa, a premier international insolvency/restructuring and crisis-management firm. The firm has a long tradition of serving the international business and legal communities and is one of the largest full-service law firms in Japan. The firm's expertise enables the delivery of comprehensive advice on virtually all legal issues that may arise from a corporate transaction. The majority of the firm's lawyers are bilingual and experienced with communicating, drafting and negotiating around the globe.

The modern Japanese legal system is primarily based on the civil law system, with partial modifications engrafted under the influence of the US legal system after World War II.Japanese civil proceedings, which are now regulated by the Code of Civil Procedure (1996 Law No 109, or CCP), follows a mixture of the inquisitor model and the adversarial model.

The CCP provides for oral arguments for parties to submit their allegations and evidence to the court. Written briefs are submitted in preparation for oral arguments. In most cases, however, oral arguments are regarded as being a mere formality in which the parties are deemed to have presented their arguments in written briefs and documentary evidence submitted in advance.

All courts in Japan are national courts. There is a unified hierarchy in the Japanese civil court system, with four tiers.Litigants are given opportunities to go though up to three, among the four, tiers of the court system.

At the top is the Supreme Court of Japan which, as the final appellate court, hears appeals from high courts functioning as intermediate appellate courts. High courts not only hear, as intermediate appellate courts, appeals from district courts or family courts functioning as courts of first instance, but also hear, as the final appellate courts, appeals from district courts in cases where a summary court was the court of first instance. District courts function as the courts of first instance, as well as intermediate appellate courts, hearing appeals from summary courts.

Among the courts of first instance, district courts handle all civil cases, including ordinary civils cases, commercial cases and administrative cases, except for those cases which family courts or summary courts have jurisdiction. Summary courts have jurisdiction over civil cases involving an amount in controversy not exceeding JPY1.4 million.

Court filings and proceedings of formal litigations are generally open to the public. As an exception, a trade secret of, or confidential and detrimental information about the private life of, a party may be protected from public disclosure by the court’s ruling issued in response to the party’s motion (Article 92 of the CCP). 

Also, examination of a party or their legal representative or a witness about matters concerning serious family-related secret in personal status litigations may be protected from public audience by court order (Article 22 of the Personal Status Litigation Act). In such a case, the court record of the examination will be automatically protected from public disclosure and may be inspected only by a party to, or a third party who has shown a legal interest in, the litigation (Article 91 of the CCP).

In any courts other than summary courts, a legal representative needs to be either an attorney-at-law licensed in Japan or a person who is authorised to act in court for the principal pursuant to law or regulation, such as a registered manager for a corporation or a captain for a ship. In summary courts, a certified judicial scrivener or a person who has obtained the court’s permission may also appear as a legal representative (Article 54 of the CCP).

Foreign lawyers cannot conduct cases in Japanese courts.

There is no statutory rule which specifically prohibits third-party funding. As such, it is generally considered to be permitted unless it is made in a manner which violates the relevant laws or regulations, such as the Attorney Act, Trust Act, etc.

There is no statutory rule or established practice regarding third-party funding.

Third-party funding is generally considered to be available for both parties.

There is no statutory rule or established practice regarding maximum or minimum amounts of third-party funding.

There is no statutory rule or established practice, but the costs may cover mainly legal fees, and also out-of-pocket expenses required for lawsuits.

Contingency fees are generally permitted, and there is no specific restriction universally applicable to all types of cases. However, the Bar Association has set some rules about the maximum percentage in cases where lawyers work for consumers on their multiple debts.

There is no statutory rule or established practice regarding time limits for obtaining third-party funding.

Generally, no pre-action conduct is required. There are some exceptions in certain categories of matters, such as family cases where filing for conciliation procedures is required prior to the initiation of lawsuit. Generally speaking, a potential plaintiff may or may not send an inquiry letter to a potential defendant prior to the initiation of lawsuit. The potential defendant, in case of receiving it, would be obligated to respond to such inquiry. However, no specific sanction on the potential defendant is provided in the statute.

Under the current rule which came into force on 1 April 2020, in principle, the statute of limitations period (or prescriptive period) is five years from the time a potential plaintiff became aware that certain right was exercisable, or ten years from the time when the right became exercisable, whichever comes earlier. There are exceptions depending upon the nature of the claims. For example, as regards damages compensation claim arising from tortious act, the period is three years (five years in case of claim for bodily injury) from the time a potential plaintiff became aware that the tort claim was exercisable, or 20 years from the time the tortious act took place whichever comes earlier. Further, as to rights which had accrued before 1 April 2020 (ie, before the amendments to the Civil Code took effect), the old rule will still apply.

The CCP lists certain requirements for determining whether Japanese courts have jurisdiction over certain case, such as that the defendant is located in Japan; that in case of a contract dispute, the obligation is supposed be performed in Japan; that in case of tort, the tort took place in Japan, etc. This rule is generally applicable to first instance cases to be filed with district courts and summary courts. However, in relation to cases to be filed with family courts, they are subject to a modified rule.

A plaintiff has to submit a complaint to initiate a lawsuit. It is possible for the plaintiff to amend the complaint later as long as it does not fundamentally change the claim and doing so would not substantially delay the litigation proceedings. However, the plaintiff cannot add defendants later in the same proceeding. So if the plaintiff wants to extend their claims to other parties who are not named defendants in the complaint, the plaintiff has to file another lawsuit against those parties, and ask the court to consolidate those proceedings.

Once a plaintiff should file a complaint with a court, the court clerk shall be responsible for serving the summons and the complaint upon the defendant. In the most of the cases, the court clerk will engage the Japanese postal service to serve the defendant. It is possible for a plaintiff to sue a defendant located outside of Japan, in which case the service shall be made through diplomatic channel, including those provided for in the Hague Service Convention. 

If the defendant fails to appear at the court hearing and to submit their answer to the court despite they have been duly served, the court may deem that they have admitted all of the allegations in the complaint, and as such enter a default judgment in the plaintiff’s favour, unless the court thinks it lacks the jurisdiction of the case.

Japan has its own class action system which adopts an opt-in type. However, claims allowed to be made in a class action are limited to those arising from consumer contracts and damages to be recovered through the system are limited. Further, parties who can be plaintiffs in a class action are limited to organisations licensed by the government.  In fact, this class action system has been rarely used. There is also a system by which persons with a common interest may appoint one or more persons from among themselves to act as the plaintiff or defendant, but this system has been rarely used.

The Bar Association rule requires a lawyer to give an estimate when so requested by a client.

Parties may make an interim application for provisional remedies under the Civil Provisional Remedies Act (1989 Law No 91, or CPRA) and/or case management issues. An application for case management issues is normally handled by the same judge overseeing the substantive claim, but that for provisional remedies may be handled by a different court because request for such provisional remedies can be filed at another court which has jurisdiction due to presence of the subject assets, etc, in addition to the court handling the main case (Article 12 of the CPRA).

Generally, all issues on the procedures and merit are assessed in the same process. However, if it is obvious that a certain procedural requirement is not met as challenged by the counter party, the judge may conclude the process without admitting evidence on the merit such as witness examinations and dismiss the case.

Motions to dismiss the case due to lack of international jurisdiction, existence of an arbitration agreement, and lack of standing are dispositive motions that are commonly made before trial.

To join a lawsuit, the following can occur:

  • By fling a written petition with the court, a third party with an interest in the outcome of litigation may intervene in the litigation in order to assist either party (Article 42 of the CCP). 
  • By filing a written petition with the court, a third party asserting that a right will be prejudiced by the outcome of litigation or a third party asserting entitlement to the whole or part of the subject matter of litigation may intervene in the litigation as a party, designating either or both of the parties to the litigation as an adverse party (Article 47 of the CCP).
  • By filing a written petition with the court, a third party may intervene in the litigation as co-plaintiff/defendant if the subject matter of litigation is to be determined for one of the original parties and a third party only as a unified matter (Article 52 of the CCP).

If the plaintiff is not a resident of Japan or other countries that are signatories to the Hague Convention on Civil Procedure, the defendants may apply for an order to provide security for the court cost, which includes court filing fees, fees for court-appointed professionals, and very limited costs of the defendants which exclude attorney’s fee (Article 75 of the CCP).

Separate from the above, in the case where an interim relief is granted, the court normally requires the applicant to make a security deposit for potential damage due to the interim relief (Article 14 of the CPRA).

Interim applications/motions will be handled in the same way as with procedures on the full merits of the case. Normally, court fees are not required/expensive for interim applications and if there are indeed such fees, they (not including attorney’s fee) shall be borne by the defeated party. 

In the case that a party requests an urgent interim relief, the court may deal with the application/motion within a timeframe corresponding to the urgency of such relief. In any way, the court will deal with such an application/motion on a case-by-case basis.

The CPP provides a limited scope of document production. A litigant shall file a petition with the court, clarifying the indication, the purport, and the holder of and the fact to be proven by the documents sought, as well as the grounds of the obligation to submit the documents (Article 221 of the CCP). Deposition (taking of witness testimony in advance of the evidentiary hearing) is not available in ordinary circumstances. Having said that, if the court finds that there are extraordinary circumstances under which it would be difficult to examine the witness at the evidentiary hearing, it may examine the witness in advance (Article 234 of the CCP).

A litigant can file a petition for document production against a third party. Where the court intends to order a third party to submit a document, it shall hear the third party prior to the ruling (Article 223(2) of the CCP).

The scope of discovery is very limited, in that CCP does not provide for deposition per se and that it allows various exceptions to the obligation to produce documents. 

As in other civil law jurisdictions, litigants are expected to rely primarily on those evidence that they already have in their hands prior to the litigation. 

In civil litigations, no legal privilege is recognised per se, but lawyers may refuse to testify or produce documents relating to any fact which they have learnt in the course of providing legal services and which should be kept confidential (Article 197 and Article 220 of the CCP).

Article 220 of the CCP provides that one may refuse to disclose:

  • a document relating to matters for which themselves or their close relative is likely to be subject to criminal prosecution or conviction;
  • a document concerning a secret in relation to a public officer's duties, which is, if submitted, likely to harm the public interest or substantially hinder the performance of their public duties;
  • a document stating (i) any fact that a doctor, dentist, pharmacist, pharmaceuticals distributor, birth assistant, attorney at law (including a registered foreign lawyer), patent attorney, defence counsel, notary or person engaged in a religious occupation, or a person who was any of these professionals has learnt in the course of their duties and which should be kept confidential; or (ii) matters concerning technical or professional secrets;
  • a document prepared exclusively for use by the holder thereof (excluding a document held by the State or a local public entity, which is used by a public officer for an organisational purpose); or
  • a document concerning a suit pertaining to a criminal case or the record of a juvenile case, or a document seized in these cases.

Injunctive relief can be sought through a normal litigation as well as provisional remedy process in case of urgency. Injunctions freezing assets are commonly requested through such provisional remedy process for the purpose of future enforcement of monetary claims. Unlike the Mareva injunction in the common law jurisdictions, however, as a general rule, the petitioner has to identify the assets to be seized.

Injunctions to prevent certain action damaging the interest of another party (eg, publication on the internet/other media, corporate action such as security issuance, etc) are relatively common.  However, as far as can be known, an injunction to prevent parallel proceedings in another jurisdiction (ie, anti-suit injunction) has not been granted in Japan.

As mentioned in 6.1 Circumstances of Injunctive Relief, the court may respond to an urgent request. The court normally has an out-of-hours window, however, there are no out-of-hours judges in Japan. In practice, some courts in big cities which are used to handle urgent commercial cases are likely to respond more quickly but that also depends on a nature of the case.

For injunctions obtained through provisional remedy process to maintain the status quo (eg, freezing assets), the court usually grants such provisional injunctive order on an ex parte basis (Article 3 of the CPRA). However, injunctions that determines a provisional status due to a reason that such status is necessary in order to avoid any substantial detriment or imminent danger that would occur to the applicant with regard to the rights in dispute cannot be granted on an ex parte basis (Article 23 of the CPRA).

If the respondent suffers any damages from the provisional injunction which is later discharged, the applicant is liable for the damages. However, the applicant may argue its negligence and liability if it demonstrate its reasonable ground to apply and obtain the order. For such potential liability, the applicant is ordinarily required to provide a security deposit except in the case where such potential liability cannot be assumed (Article 14 of the CPRA).

As long as the Japanese court has the jurisdiction to adjudicate the merit of the case, the Japanese court can grant the injunctive relief against worldwide assets of the respondent (Article 11 of the CPRA).

Where an applicant has a monetary claim against a defendant and the defendant in turn has a monetary claim against a third party, injunctive relief can be obtained against the third party. The applicant may then seek injunctive relief to prevent the third party from paying to the defendant.

If a respondent fails to comply with the terms of an injunction, the court may additionally order that the respondent shall pay a daily penalty during the period of non-compliance. In addition, such non-compliance itself can be a tort against the applicant.

In general, several weeks after the complaint is filed, the court will hold the first oral hearing, during which the plaintiff will plead the complaint and the defendant the answer. After that, in the case of relatively complicated business disputes, the court will hold several oral hearings, or preparatory hearings if the court deems appropriate, for every six to eight weeks. During such pleading period, both parties will submit their legal briefs and supporting written evidence to advance their arguments, and the court will try to narrow down the issues to be determined. At the end of this pleading period, if the court finds it necessary to examine witnesses/experts in person to determine the issues, the court will proceed to hold the trial (ie, evidentiary hearing).

At the evidentiary hearing, counsel for the parties are primarily responsible for conducting the examination-in-chief and cross-examination, while the judge may ask supplementary questions at any time. It is very rare for the parties to present opening/closing oral arguments at the hearing.

Interim petitions, such as a petition to transfer case, a petition to challenge/disqualify the judge and a petition for document production, are usually heard and ruled upon at an oral hearing or a preparatory hearing during the pleading period.

Where the court finds it necessary to examine witnesses/experts in person, the court usually consults with the parties as to the logistics relating to the trial (ie, evidentiary hearing).

No jury trial is available in civil cases. 

There is no particular rule that governs the admissibility of evidence in civil cases. Unless the evidence has been obtained by extremely unethical ways (such as stolen by the litigant), any evidence (including hearsay evidence) is admissible as a general rule.

Expert testimony is permitted at trial. An expert witness can be appointed either by the parties or by the court.

Oral hearings (including the evidentiary hearing) are open to the public, while preparatory hearings are not. In patent/knowhow litigations, in order to protect the party’s business activities based on the knowhow, the court may decide not to open the evidentiary hearing to the public. 

During a trial (ie, evidentiary hearing), a judge may ask questions to the witnesses at any time. The judge may also intervene in counsel’s examination of witnesses, if the court finds it inappropriate or confusing.

At the evidentiary hearing, the judge will rule, on the objections on examination (such as leading, repetitive or insulting questions), which ruling is not subject to an appeal. If a witness refuses to testify for any reason, the court will rule on whether such refusal is based on a good reason, which ruling is subject to an appeal to the higher court.

In our experience, a commercial dispute between reasonably sophisticated companies will in average take 12 to 18 months from the filing of the complaint to the trial (evidentiary hearing). The trial (evidentiary hearing) will usually last a half day or one full day, while in a case where a number of witnesses are called, it may take several days.

Parties may settle a lawsuit either in court or outside the court. 

An out-of-court settlement requires no court approval. An in-court (judicial) settlement is established when its details are recorded in the record of settlement which is prepared by the court. In this sense, an in-court settlement is regulated to a certain extent, although need not be approved, by the court.

For a judicial settlement, the record of settlement, which is a part of the court record, is generally open to the public, with the exceptional protection from public disclosure as set forth in 1.3 Court Filings and Proceedings. Even under the exceptional protection, however, it is virtually impossible to protect the fact of the settlement itself from public disclosure, because such fact does not fall within the protected secret under Article 92 of the CCP. 

As for an out-of-court settlement, which is usually followed by a withdrawal of the lawsuit, only the fact of the withdrawal is open to the public. The reason for the withdrawal (ie, an out-of-court settlement) remains unknown. Accordingly, the out-of-court settlement can remain confidential, so long as the parties comply with the confidentiality clause, if any, in the settlement agreement.

The record of a judicial settlement has the same effect as a final and binding judgment (Article 269 of the CCP), so the party may commence enforcement procedures by submitting the record to the enforcement court. 

An out-of-court settlement agreement may be similarly enforceable only if it takes the form of a notarial deed prepared by a notary public if the following two conditions are met:

  • the claim to be enforced is a claim for payment of a certain amount of money or any other fungible thing or a certain amount of securities; and
  • the agreement contains a statement to the effect that the obligor will immediately accept compulsory execution.

A judicial settlement may be set aside upon certain action by a party who demonstrates that the settlement is null and void for certain reasons such as fraud or material mistake. Such action includes the party’s motion for re-opening of oral proceedings for the lawsuit which was settled, the party’s objection to the enforcement of the judicial settlement and the party’s filing of a new lawsuit seeking the declaratory judgment to confirm that the judicial settlement is null and void.

Depending on the type of claim pursued by the successful litigant, the court’s judgment takes one of the following three forms:

  • a judgment ordering specific performance (such as paying money, evacuating premises, surrendering movables or otherwise doing or refraining from doing a certain act);
  • a formative judgment creating, altering or nullifying a certain legal relation; and
  • a declaratory judgment. 

In all types of judgments, the defeated party is ordered to bear all or part of the court fees (such as filing fees or witness’ expenses) disbursed by the successful party. A judgment ordering specific performance is accompanied by an order to pay delinquency charges until full performance by the defeated party.

The court determines the amount of damages based on the actual damage incurred by the party who has convinced the court that the other party is liable. No punitive damages are available. There is no rule limiting the maximum damages, except that the court’s judgment amount shall not exceed the amount claimed by the successful party.

The successful party may collect interest from the day when the defeated party becomes delinquent in its monetary obligation until the date when the defeated party has fully performed the monetary obligation. In calculating both pre and post-judgment interests, the court generally uses a statutory rate, which is currently 3% per annum and will be reviewed every three years. In the case where the claim is based on a contract which provides for a different interest rate, the court uses the contracted rate.

The Civil Execution Act (Act No.4 of 1979, or CEA) provides the mechanism for enforcement of judgements. Under the CEA, a domestic judgment ordering payment of money is enforced by attachment of the defeated party’s assets (such as bank accounts, accounts receivable, lease deposit, real estate and movables). A judgment ordering evacuation of premises or surrendering of movables is enforced by physical coercion by a court execution officer. Other types of non-monetary judgments are enforced likewise in the respective manners in accordance with the CEA.

To enforce a foreign judgment in Japan, enforcing party needs to file a lawsuit with a Japanese court seeking an execution judgment (Article 24 of the CEA). The court cannot review the merits of the foreign judgment, and must grant the execution judgment if all of the following conditions provided for in Article 118 of the CCP are satisfied:

  • the foreign judgment is final and conclusive
  • the jurisdiction of the foreign court is recognised pursuant to laws and regulations, conventions, or treaties;
  • the defeated party has been properly served or has appeared without being so served;
  • the content of the judgment and the litigation proceedings are not contrary to public policy in Japan; and
  • a guarantee of reciprocity is in place.

Once the execution judgment is rendered and becomes final and conclusive, the enforcing party is able to proceed with enforcement of the foreign judgment in Japan in the same manner as set forth in 9.4 Enforcement Mechanisms of a Domestic Judgment.

As a general rule, an aggrieved party in a court of first instance can appeal to a court of second instance and in the second instance may appeal to the final appellate court. In the case where a district court or a family court is the court of first instance, a high court is the second instance and the Supreme Court is the final appellate court. In the case where a summary court is the court of first instance, a district court is the second instance and a high court is the final appellate court.

As an exception, an aggrieved party in the first instance can appeal directly to the final appellate court if the parties, after the judgment in the first instance is rendered, agree to circumvent the proceedings in the second instance (Articles 311 and 281 of the CCP).

An aggrieved party at the court of the first instance may appeal to the court of the second instance as of right (Article 281 of the CCP). There is no need to secure a grant or a leave to proceed to the second instance, nor are there any limitations in the grounds for such appeal. 

In contrast, the grounds for a final appeal are narrowly stipulated in the CCP. A litigant may appeal to the court of the third instance as of right only where the court of the second instance misinterpreted the Constitution of Japan or committed the fatal procedural error (such as the judge was not qualified to hear the case) (Article 312 of the CCP). In addition, where a high court is the court of second instance, the Supreme Court may in its discretion accept the case if it involves significant issues regarding interpretation of laws and regulations (Article 318 of the CCP). Upon acceptance of the case, a final appeal is deemed to have been filed.

An aggrieved party in the first instance may make an appeal to the court of second instance, by submitting a written appeal to the court of first instance within two weeks from the date of service of the written judgment on the party. Unless the grounds for appeal are stated in the written appeal, the appellant is required to submit a brief stating the grounds for appeal to the court of second instance within 50 days from the date of submission of the petition. Failure to comply with the deadline for submission of the written statement is not sanctioned by an automatic dismissal of the appeal.

The procedures for making an appeal (including a petition to accept the case) from the judgment of the second instance to the final appellate court is basically the same as set forth above, except that failure to submit a brief stating the grounds for the final appeal or for the petition to accept the case within 50 days is sanctioned by an automatic dismissal (Articles 315, 316 and 318 of the CCP).

Proceedings in the second instance are considered to be a continuation of those in the first instance. The appeal court rehears the case and considers whether there is an error in the first instance judgment in terms of fact finding or application of law. In addition, new issues which were not explored at first instance may be examined at the appeal. However, those issues which could have been raised in the first instance and raising which will delay conclusion of the proceedings in the second instance may not be allowed to be presented (Article 157 of the CCP).

When the Supreme Court grants a petition to accept a case (see 10.2 Rules Concerning Appeals of Judgments), it may determine which grounds for the petition are to be reviewed. Other grounds are excluded from the Court’s review. (Article 318 of the CCP).

Once the court of second instance closes the oral proceedings, it may render a judgment either reversing the judgment in the first instance or dismissing the appeal. When reversing the judgment below, the court may adjudicate the case by itself or may remand the case to the lower court. It also may encourage the parties to settle the case at any time before rendering a judgment (Article 89 of the CCP). 

“Court costs” and “legal fees” paid to lawyers are clearly distinguished from each other. “Court costs” are subject to the CCP rules and are composed of out-of-pocket expenses, such as revenue stamp put on a complaint, documents translation costs, etc. “Court costs” shall be borne, in principle, by the defeated party. In other words, the winning party is entitled to recuperate them from the defeated party,  however, “legal fees” are not treated as constituents of “court costs”. Thus “legal fees” are not subject to the CCP rules, and shall be borne, in principle, by each party respectively, irrespective of the result of the lawsuit.

If a plaintiff wants to recover a certain portion of its “legal fees”, the plaintiff should explicitly include them in the complaint as additional damages to be compensated. However, they are not generally granted by the court even if the plaintiff wins in the other portions of the claims, except in certain types of tort cases where the plaintiff seeks damages compensation arising from patent infringement, medical malpractice, car accident, etc.

In principle, the defeated party bears the “court costs”. For example, if 70% of a plaintiff’s claim is granted, the plaintiff and the defendant will be ordered to bear the “court costs” on a 30:70 basis, respectively. As to “legal costs”, usually 10% of the amount of damages sought other than “legal cost” are granted.

Regarding “court costs”, in principle, the interest thereon is not awarded. As to “legal fees”, if they are granted in the judgment, 3% per annum will be awarded, in principle. However, if they are considered to have accrued before 1 April  2020 (ie, before the amendments to the Civil Code took effect), then 5% per annum will be awarded.

In the context of international dispute resolutions, the popularity of arbitration is rising. For domestic disputes, mediations presided by the court and mediations offered by industrial associations (eg, the security company association) are popular.

ADR is promoted by a law called the ADR Promotion Act. In general, ADRs are not compulsory. Court-administered mediations can be viewed as a part of court procedures, but not necessarily. Any refusal of ADR may not result in a sanction. However, under certain rules of mediations offered by industrial associations, a member of the association is obliged to respond and there is certain penalty for unreasonable refusal.

As mentioned above, certain ADRs are offered and promoted by industrial associations and those associations are well organised. For international arbitrations, the Japan Commercial Arbitration Association provides standard international arbitration institution services.

In November 2018, the Japan International Mediation Center in Kyoto (JIMC-Kyoto) was established to provide world-class mediation services for various kinds of cross-border disputes between foreign and Japanese parties.

The Arbitration Act (Act No 138 of 2003), which was enacted based on the UNICITRAL Model Law (1985), governs the conduct of arbitrations, and the recognition or enforcement of arbitral awards.

An arbitration agreement shall be enforceable only when the subject thereof is a civil dispute (excluding disputes of divorce or dissolution of adoptive relation) which can be settled between the parties (Article 13(1) of the Arbitration Act). In addition, for the time being until otherwise enacted, an arbitration agreement concluded on or after 1 March 2004 and the subject of which constitutes individual labour related disputes that may arise in the future, shall be null and void (Article 4 of the supplemental provisions to the Arbitration Act).

If the arbitration has been seated in Japan, the parties may file a petition with a Japanese court to set aside the arbitral award. The petition must be filed within three months from the date on which a notice was given through the sending of a copy of the written arbitral award.

The grounds for setting aside an arbitral award (Article 44 of the Arbitration Act) are identical in substance to those set forth in Article 34 of the UNCITRAL Model Law.

Article 46 of the Arbitration Act provides the same mechanism to enforce domestic and foreign arbitral awards. To enforce an arbitral award, the enforcing party shall file a petition with a court for an execution order (meaning an order allowing civil execution based on an arbitral award). The court is required to make an execution order, unless it finds a ground to refuse enforcement as set forth in Article 45(2) of the Arbitration Act, which are identical in substance to those set forth in Article 36 of the UNCITRAL Model Law.

Since June 2020, the Legislative Council has been deliberating a reform of civil procedures utilising information technology. It aims to amend the CCP to introduce the e-Fling (ie, online court filing), the e-Case Management (ie, on-line access to the court record and the e-Court (ie, web hearing). It is envisaged that the CCP will be amended sometime in 2022.

In addition, since October 2020, the Legislative Council has been deliberating an amendment of the Arbitration Act corresponding to the amendment of the UNCITRAL Model Law in 2006, and the Mediation Act corresponding to the Singapore Convention on Mediation, as well as the reform of the arbitration related court proceedings.

In response to the state of emergency announced by the government, the respective courts announced cancellation of hearings except in certain limited cases with urgency in the middle of April. From June to time of publication, courts started to resume the hearing process, but still their pace is slower than usual.

Irrespective of the COVID-19, courts in Japan has started to utilise web conferences to the extent an amendment of laws is not required. This move has allowed courts to utilise web conferences under the COVID-19 situation, especially in relation to the restriction of transportation. And courts maintained minimum functions under the situation. Therefore, no severe difficulties have been reported and no special legislation or order has been implemented for the limitation periods.

Anderson Mori & Tomotsune

Otemachi Park Building
1-1-1, Chiyoda-ku
Tokyo 100-8136

+81-3-6775-1096

hiroki.wakabayashi@amt-law.com www.amt-law.com
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Trends and Developments


Authors



Ushijima & Partners is one of the major full-service law firms in Japan representing domestic and international clients in Japan and providing overseas legal services. Ushijima & Partners has expertise and a high reputation in Japan in its dispute resolution practice, among others. The team is located in Tokyo and consists of approximately 40 attorneys. Recently, the team has been involved in many disputes concerning protection of minority shareholders of listed and non-listed companies.

Trends in Protection of Minority Shareholders and Development of Court Practices in Japan

Trends in protection of minority shareholders in Japan

Awareness of the protection of minority shareholders is currently growing and a number of legal actions brought by minority shareholders, who believe they are not adequately protected under the law, is increasing in Japan. Japanese law does not have a controlling shareholder's fiduciary duty to protect the rights of minority shareholders. Although the legal system differs from country to country by nature, it is difficult to say that the protection of minority shareholders is being sufficiently addressed in Japan.

The need for minority shareholder protection exists for minority shareholders of both listed and unlisted companies. Listed companies have many domestic and overseas funds and institutional investors as minority shareholders, and the impact on overseas investors is also significant. This is one of the reasons why the Japanese government has recently focused on protecting minority shareholders in listed companies. This article focuses on trends in the protection of minority shareholders in listed companies in Japan, which are considered to be of greater interest to foreign investors, and discusses trends in court practices regarding the developing protection of minority shareholders.

Progress of corporate governance reforms in Japan

The bubble economy collapsed in the early 1990s, and over the next quarter century, Japan's growth has been sluggish relative to the growth of world GDP.

The second Abe administration, born in December 2012, was strongly aware of the need for corporate governance reforms in Japan, and as part of the government's growth strategy it positioned the strengthening of corporate governance as one of the measures to increase "earning power" (medium- to long-term profitability and productivity) by supporting "aggressive" corporate management. Various reforms related to corporate governance were promoted, such as the establishment of Japan’s Stewardship Code and Corporate Governance Code.

Amid this trend in corporate governance reform, Prime Minister Abe stressed in March 2019 that "there are criticisms that the governance of listed subsidiaries is untouched and the credibility of the Japanese market may be compromised", and instructed relevant ministers to consider creating rules to enhance the corporate governance of “listed subsidiaries”. This means that the Japanese government has also embarked on corporate governance reforms for "listed subsidiaries". In August 2020, Abe announced his resignation for health reasons, and Yoshihide Suga, who had supported the Abe administration as Chief Cabinet Secretary for many years, became the successor prime minister. The Suga administration, too, has announced its intention to succeed the Abe administration, and this policy will continue for the time being.

Necessity of protecting minority shareholders of listed subsidiaries in Japan

In order to increase confidence in the Japanese market and attract overseas investment in Japan, it is necessary to enhance the protection of minority shareholders of listed companies. In particular, there must be sufficient protection of minority shareholders in M&A and MBO transactions, where conflicts of interest with minority shareholders tend to emerge. It is extremely important to protect the interests of minority shareholders of listed companies, such as domestic and overseas funds and institutional investors, and to ensure global confidence in the Japanese market through fair M&A.

In particular, the governance of listed subsidiaries and the protection of minority shareholders in Japan has become an urgent issue for the Japanese market which faces severe criticism from overseas investors for having an extraordinary number of listed companies with controlling shareholders, such as parent-subsidiary listings, relative to overseas markets.

For example, when a parent company enters into a transaction for a listed subsidiary to become a wholly-owned subsidiary, there is risk of a serious structural conflict of interest between the parent company and the minority shareholders of the listed subsidiary. Parent companies generally exercise a certain degree of influence over the management of listed subsidiaries through the exercise of voting rights at shareholders' meetings and the dispatch of directors to listed subsidiaries. Therefore, in determining the terms of M&A transactions, the management of listed subsidiaries may, out of self-interest, act in the interests of the parent company rather than its own minority shareholders, and the parent company may unilaterally determine favourable transaction terms.

Legislative discipline

However, legislative discipline is insufficient in Japan to protect the interests of minority shareholders in M&A transactions. For example, in the USA, a controlling shareholder may be liable to a minority shareholder for breach of fiduciary duty if the consideration for the transaction is not fair. In Japan, however, controlling shareholders owe no fiduciary duty to minority shareholders. Therefore, even if the consideration for an M&A transaction is not fair, the controlling shareholder will not be liable for breach of fiduciary duty. The fairness of consideration virtually depends on the directors of the target company (listed subsidiary).

In recent years, M&A transactions aimed at unwinding parent-subsidiary listings in the Japanese market have been increasing. It is an urgent issue for the Japanese stock market to correct unfair terms arising from structural conflicts of interest in M&A through litigation and to ensure appropriate protection for minority shareholders.

Development of Judicial Precedents

Basic framework for determining fairness of transaction terms in M&A transactions

In Japan, there has been a recent development in judicial precedents on (i) what constitutes fair transaction terms (consideration for transactions) in M&A transactions that have structural conflicts of interest and asymmetry of information between minority shareholders and the company or controlling shareholder, and (ii) what role the court should play in these transactions.

The TECHMO case and the JCOM case set the leading Supreme Court precedents.

TECHMO case (Supreme Court decision, 29 February 2012)

In the TECHMO case, a shareholder who exercised the appraisal right in opposition to a merger of two publicly traded companies with no special capital relationship by organisational restructuring (joint share transfer) asked the court to determine the purchase price.

The Supreme Court of Japan held that the share transfer ratio is fair if the share transfer was effected in accordance with “procedures generally accepted as fair”, such as lawful approval at the shareholders meeting and proper information disclosure for shareholders to make informed decisions, unless there are special circumstances sufficient to find that the shareholders’ reasonable judgment at the shareholders meeting was obstructed.

Thus, in the TECHMO case, the Supreme Court made clear its position to respect the judgment of directors and majority shareholders, in principle, when conducted in independent M&A transactions where no structural conflicts of interest or information asymmetry issues are found through "procedures generally accepted as fair".

JCOM case (Supreme Court decision, 1 July 2016)

In the JCOM case, JCOM shareholders who opposed a two-step merger (namely, a cash out following a tender offer) of JCOM shares by controlling shareholders (KDDI and Sumitomo Corporation) asked the court to determine the acquisition price of JCOM shares that were lost as a result of the cash out.

The Supreme Court held that the tender offer price (ie, the acquisition price) is the fair price in principle when the tender offer is made under "procedures generally accepted as fair," in which measures are taken to eliminate the arbitrary decision-making process due to the existence of conflicts of interest between majority and minority shareholders (such as hearing the opinions of independent third-party committees and experts), and shares held by shareholders who did not subscribe for the tender offer are clearly purchased at the same price as the tender offer price.

Unlike the TECHMO case, the JCOM case is an M&A transaction by controlling shareholders which involved structural conflicts of interest and asymmetry of information. The Supreme Court, however, made it clear that it will judge such cases on the basis of whether "procedures generally accepted as fair" are implemented.

Close attention should be given to Supreme Court Justice Hiroshi Koike’s supplementary opinion in the JCOM case. Specifically, Justice Koike pointed out that it is important to examine whether "procedures generally accepted as fair" were "substantially" implemented. This is extremely important from the perspective of M&A practice. If the determination is made based only on whether such procedures were implemented formally or superficially, the protection of minority shareholders will not be realised.

The recent development in judicial precedents of the Supreme Court has almost established a basic framework for determining the fairness of transaction terms in M&A transactions with structurally conflicting interests. It is expected that in the future, judicial precedents in Japan will be matured regarding specific criteria for recognising whether "procedures generally recognised as fair" have been implemented "substantially."

Obligations of directors of companies subject to M&A transactions

Recent high court judicial precedents on the duties of directors of target companies also affect M&A practice as they materialise the protection of minority shareholders.

Rex HD case (Tokyo High Court judgment, 17 April 2013)

In the Rex HD case, Rex HD announced a substantial downward revision to the company's earnings forecast in a press release, which triggered its stock price collapse and subsequent MBO. The shareholders were forced to give up their shares at a low MBO price, and sought damages from directors for the difference between the MBO price and the fair price based on a breach of the duty of care.

The Tokyo High Court held that directors of a company subject to MBO owe the obligation to transfer fair value to shareholders and the obligation to disclose adequate information as part of their duty of care; and that the directors are found to be in breach of their duty of care (i) when the MBO is carried out at an acquisition price that does not fairly reflect corporate value or a fair price is not paid to the shareholders releasing their shares (breach of the obligation to transfer fair value) or (ii) when directors of the company subject to MBO make a false announcement of material fact based on which shareholders make their decisions, or fail to disclose material facts that should have been disclosed (breach of the obligation to disclose adequate information).

Charle case (Osaka High Court judgment, 29 October 2015)

In the Charle case, an MBO was aborted due to an attempt by one of the directors to unjustifiably intervene in the third-party valuation. Charle’s shareholders sued the directors for damages arising from the abortion of the MBO, and filed a derivative suit.

The Osaka High Court held that directors of a company subject to MBO owe an obligation to transfer fair value to shareholders and an obligation to the company to proceed with the MBO in a manner that does not undermine the fair transfer of corporate value (obligation to implement fair procedures) as part of their duty of care, and that the directors were obliged to compensate for the loss incurred by the company as a result of the expenditure which was not originally necessary based on their breach of duty. The Court ordered the directors (excluding outside directors) to pay approximately JPY120 million, which Charle was forced to pay for the investigation of unfairness in the MBO.

Fair M&A Guidelines

Establishment and announcement of fair M&A guidelines (28 June 2019)

On June 28, 2019, METI established and announced "Fair M&A Guidelines: Enhancing Corporate Value and Securing Shareholders’ Interests" (the "Guidelines").

The Guidelines present approaches for fair M&A in Japanese corporate society, mainly from a procedural perspective, with a focus on MBOs and acquisitions of a controlled company by the controlling shareholder (making listed subsidiaries wholly owned), where structural conflicts of interest and information asymmetry issues typically exist.

With the continuing globalisation of corporate activities and capital markets in Japan, the Guidelines aim to raise confidence in the Japanese capital market and attract mid- to long-term investment in Japanese companies in the competitive global market by responding to the expectations of stakeholders both within and outside Japan including overseas investors, and by earning the trust of such shareholders by clarifying approaches to fair M&A.

Functions of the guidelines in M&A practice

Although the Guidelines do not impose new regulations on M&A, when the fairness-ensuring measures are implemented effectively, the likelihood that the transaction terms agreed between the parties will be respected in the court’s decision on “fair price” is expected to increase, and it is anticipated that breach of fiduciary duty by directors of the target company will not be found.

In this way, the Guidelines supplement the judicial precedents (“procedures generally accepted as fair”) for cases in which the fairness of M&A transactions is contested, and are considered to act as an important reference for courts in determining the fairness of procedures.

Fairness-ensuring measures listed in the guidelines

The Guidelines address certain fairness-ensuring measures that are generally considered highly effective and explain their functions and advisable practices.

The following are typical measures addressed by the Guidelines:

  • establishing an independent special committee;
  • obtaining independent expert advice from external advisors;
  • ensuring opportunities for other acquiring parties to make proposals (market checks);
  • establishing a majority-of-minority (MOMs) condition;
  • enhancing information disclosure to general shareholders and improving transparency; and
  • eliminating coerciveness.

In addition, the Guidelines emphasise the importance and effectiveness of fairness-ensuring measures, stating that even if only the appearance of fairness-ensuring measures is arranged, such measures will be meaningless (Section 3.1.3). For example, the Guidelines point out that the establishment of a special committee is particularly significant among other measures in terms of protecting the interests of minority shareholders (Section 3.2.3), and in order for such special committee to function effectively, it is necessary to carefully examine the suitability of the special committee members and whether they can be expected to proceed with the M&A under the best interests of general shareholders (minority shareholders).

Enhancing information disclosure required by the guidelines

There is a large asymmetry of information between the acquirer and general shareholders (minority shareholders) in MBOs or acquisitions of a controlled company by a controlling shareholder. For such cases in the past, information disclosure was not sufficient for minority shareholders to verify the rationality of the M&A transactions.

In this regard, the Guidelines advise enhanced disclosure in order to sufficiently verify the rationality of M&A transactions, and specifically identify the information for enhanced disclosure. Such proposal takes greater steps than in traditional practice where information disclosure to minority shareholders is limited.

Further, the Guidelines point out that in addition to direct disclosure to general shareholders in disclosure documents at the time of an M&A, the submission of evidence in court proceedings and other ex post facto disclosures also have significant importance. In response to the Guidelines, it is expected that further progress will be made in enhancing information disclosure which in the past was only reluctantly performed for minority shareholders.

Increasing Substance and Depth of Minority Shareholder Protection

The formal implementation of procedures is not sufficient, and the substance of procedures should be questioned

As described above, the development of relevant judicial precedents including the JCOM case, and the establishment of the Guidelines, have shown the basic direction of Japanese practice for M&A with structural conflicts of interest.

On the other hand, merely formal implementation of procedures in M&A transactions is meaningless. "Whether procedures generally accepted as fair were substantially implemented" (Justice Koike’s supplementary opinion in the JCOM case), and the importance and effectiveness of the fairness-ensuring measures taken (the Guidelines), are particularly important. In addition, the procedures should be thoroughly reviewed in any subsequent litigation.

Enhanced information disclosure is expected to be realised

In doing so, one of the points is whether the information disclosure required by the Guidelines has been sufficiently made. In the case of MBOs and acquisitions of a controlled company by the controlling shareholder, there is a large asymmetry of information as buyers (directors and controlling shareholders/parent companies) have more accurate and abundant information about the target company than the sellers (minority shareholders of the listed subsidiary). It is also unlikely that controlling shareholders (parent companies) will voluntarily disclose information to general shareholders (minority shareholders).

Moreover, in Japan, there are limited means to compel extensive information disclosure from a counterparty unlike in the US discovery system. Historically, even if minority shareholders tried to litigate the fairness of M&A transactions at their own expense and time, they were unable to obtain sufficiently detailed evidence about the procedures implemented, and as a result they often lost the case.

As stated above, the Guidelines point out the significance of ex post facto information disclosure, such as production of evidence in litigation. Following the announcement of the Guidelines, courts have urged parties to voluntarily produce relevant documents listed in the Guidelines, and are expected to implement practical measures for voluntary production of a wider range of relevant information without waiting for legislation.

Involvement in Minority Shareholder Protection Cases

Increase in minority shareholder activity

Traditionally, minority shareholders of listed companies in Japan have not been able to obtain sufficient protection in court proceedings given the limited legal means of obtaining sufficient information about the company. As a result, minority shareholders had little incentive to contest the fairness of M&A transaction terms or seek protection of their interests through litigation.

However, with the growing awareness of minority shareholder protection in Japan, there has been an increase in approaches to investee companies by minority shareholders who are institutional investors, such as overseas funds. Domestic and overseas institutional investors who have accepted Japan’s Stewardship Code have fiduciary duties that drive them to seek governance improvements for the companies in which they invest by using their high financial resources and ability to collect and analyse information, and they do not hesitate to litigate issues that cannot be resolved through engagement.

Strengths in minority shareholder protection cases

With a long record of success in M&A transaction disputes, cases of note include victories against the hostile takeovers of Hokuetsu Paper Mills by Oji Paper and Origin Toshu by Don Quijote.

Recently,  there has been an increasing number of cases representing minority shareholders of both listed and unlisted companies, which has become one of the trends in dispute resolution practice.

In resolving M&A transaction disputes, it is necessary not only to understand the current legislation of Japan, but also to have financial expertise concerning valuation of fair price. In addition, it is necessary to monitor the latest trends in overseas legal systems and court precedents. Furthermore, many cases require close collaboration with academics, economists, and other experts. For these reasons, it is often very difficult for traditional Japanese lawyers to successfully handle these kind of cases.

In Japan, there are a limited number of law firms with sufficient experience and ability to handle such difficult cases. In addition, Japan's largest firms are often involved in M&A transactions on behalf of the company (controlling shareholder) or the target company (eg, listed subsidiary) from the deal-formation stage, creating conflicts that make it difficult for minority shareholders to retain such firms.

Conclusion

Minority shareholder protection and governance of listed subsidiaries are urgent issues for the Japanese market. As a means of protecting the interests of minority shareholders in M&A transactions with structural conflicts of interest, the need for ex-post judicial remedies is rapidly increasing because statutory regulations are not necessarily sufficient in Japan.

Whether or not specific M&A transactions have been conducted through fair procedures should be thoroughly examined based on sufficient information disclosure in ex-post litigation. The protection of minority shareholders in M&A transactions with structural conflicts of interest will not be realised without maturation of judicial precedents in Japan.

The role of Japanese legal practitioners is vital in realising the protection of minority shareholders through judicial proceedings in Japan, and efforts in this area need to be continued.

Ushijima & Partners

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Chiyoda-ku
Tokyo 100-6114
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+81.3.5511.3200

+81.3.5511.3258

ushilaw@japan.email.ne.jp www.ushijima-law.gr.jp
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Law and Practice

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Anderson Mori & Tomotsune is a full-service law firm formed by the winning combination of three leading law firms in Japan: Anderson Mori, known for serving overseas companies doing business in Japan since the early 1950s; Tomotsune & Kimura, particularly well known for its expertise in international finance transactions; and Bingham Sakai Mimura Aizawa, a premier international insolvency/restructuring and crisis-management firm. The firm has a long tradition of serving the international business and legal communities and is one of the largest full-service law firms in Japan. The firm's expertise enables the delivery of comprehensive advice on virtually all legal issues that may arise from a corporate transaction. The majority of the firm's lawyers are bilingual and experienced with communicating, drafting and negotiating around the globe.

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Ushijima & Partners is one of the major full-service law firms in Japan representing domestic and international clients in Japan and providing overseas legal services. Ushijima & Partners has expertise and a high reputation in Japan in its dispute resolution practice, among others. The team is located in Tokyo and consists of approximately 40 attorneys. Recently, the team has been involved in many disputes concerning protection of minority shareholders of listed and non-listed companies.

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