2000.07.07

1996 (O) 270

Judgment on the joint shareholder derivative action claiming liability for damage to Nomura Securities Caused by Compensation of Losses

Judgment of the Second Petty Bench of July 7, 2000

Tokyo High Court

1. Meaning of "statute" in Article 266, Paragraph 1(5) of the Commercial Code.
2. When a shareholder derivative action is brought jointly by more than one shareholder and an appeal is then filed by some of the co-litigants, the remaining co-litigants will not be held to appellant status.

Jokoku appeal is dismissed.
Appellants shall bear the costs of the Jokoku appeal.

I. OUTLINE OF FACTS

1. An outline of the legally relevant facts found by the Court of Appeals are as follows:

(1) B Securities Co., Ltd. (hereinafter "B") is Japan's largest securities firm. It focuses on selling and buying securities; providing brokerage, intermediation, and representation services for securities transactions; and the underwriting and offering of securities, etc. Jokoku Appellees were directors of B as of March 1990, and Jokoku Appellants were shareholders of B as of that same date.

(2) C, Inc. (hereinafter "C") is a major client of B since March 1973, B and C have continuously engaged in transactions of selling and buying securities and other securities transactions. In addition, B became the main underwriter in the issuance of securities by C. The relationship between B and C has, in turn, generated large commissions to B.

Because a principal underwriter can earn a large amount of money from underwriting commissions other securities firms fiercely compete for the position. Moreover, once a securities firm loses its position as the principal underwriter, it is difficult to restore. Each securities firm, therefore, endeavors to maintain and expand its business relations with clients engaged in issuing securities.

(3) (i) Eigyo Tokkin are transactions based on a specified trust agreement entered into between a trustor and a bank as trustee whereby the trustee bank opens an account for the trust money at a securities firm, then sells and buys securities under instruction of the trustor (hereinafter "Tokkin Account Transactions" or "TAT"). Decisions to sell and buy securities are carried out according to instructions given by the securities firm to the trustee bank on behalf of the trustor without the trustor and investment advisor entering into an investment advisory agreement.

(ii) In April 1989, C entered into a specified money trust agreement with D Trust & Banking Co., Ltd. (hereinafter referred to as "D"). This agreement had an expiration date of the end of March 1990. C as trustor further entrusted to D as trustee an amount of 1,000,000,000. Moreover, based on this agreement, D opened a transaction account at B and commenced fund management transactions for C. Since C did not enter an investment advisory agreement with an investment advising company with regard to the above transation, this was an Eigyo Tokkin transaction.

(iii) The C Tokkin Account Transactions incur a loss of approximately 270,000,000 as of the end of 1989. The loss further increased due to a sharp deterioration of market conditions from around January 1990. The loss was recorded at approximately 360,000,000 at the end of February of the same year when transactions were halted prior to the expiration of the agreement.

(4) (i) When the news was broadcast that E Securities Co., Ltd. had compensated approximately 10,000,000,000 for its major clients' losses, the Ministry of Finance (MOF) issued a directive "Concerning Appropriate Operation by the Improved Management of Securities Firms and Prevention of Irreguralities" (hereinafter "the Directive") on December 26, 1989 under the name of the Chief of the Securities Bureau to the chairman of the F Association. The Directive required that security companies belonging to the Association cease solicitations prohibited by law, such as promising compensation of losses or providing special benefits, and refrain from compensating losses or providing benefits ex post facto. The Directive also, in principle, required that an investment advisory agreement be entered into between c lient and investment advisor. In order to accomplish these goals, the director of the Securities Company Division of the MOF Securities Bureau had issued an internal memorandum on the same date to all the heads of the finance divisions of the Local Finance Bureau. This memorandum required each securities firm to adopt the measures stipulated under the Directive concerning existing Tokkin Account Transactions prior to the expiration date of end of 1990. The memorandum further required each securities firm to make a report at the end of every March and September detailing the number of TAT accounts in which no investment advisory agreement exist.

(ii) In response to the Directive, the F Association revised its bylaw, Fair Practices Rules No. 9: "Rules Concerning the Solicitation of Investments Canvassing, Client Management, etc. by Members" (hereinafter "the Rules"), by adding the following provision: "Each member shall not only cease solicitation by promises to compensate losses or providing special benefits, but also strictly refrain from compensating losses or providing benefits ex post facto. (Article 8 of the Rules).

(iii) Securities firms, including B, understood that the primary objective of the Directive was the prompt elimination of Eigyo Tokkins. They realized that compensating losses would be indispensable toward maintaining favorable relations with their clients in a climate of a rapidly deteriorating stock market, while at the same time proceeding with the elimination of the Eigyo Tokkins.

(5) (i) Shortly after the issuance of the Directive, the person at B in charge of dealing with C entered into negotiations with the chief of the finance division of C regarding the possible termination of Eigyo Tokkins; and agreement, however, was not reached. He believed that if B did not compensate C's losses, relations with C would be materially affected. He therefore reported to Jokoku Appellee Y1, a chief officer of the management department, that it was necessary to compensate the losses sustained by C. Jokoku Appellee Y1 concluded that it was necessary to compensate those losses considering that C had already suffered losses through its Eigyo Tokkin even when securities markets were brisk, and that B would lose its position as main underwriter of C's future issuance of securities if it failed to compensate such losses. compensation,. At a meeting of the Board of Managing Directors held on March 13, 1990, the Jokoku Appellee Y1 proposed that loss compensation in total of 166,100,000,000 be extended to C. This proposal was approved. At that time, Jokoku Appellees had not made any professional inquiry regarding the legality of such compensation of losses.

(ii) B chose to compensate C for its losses (hereinafter "Compensation of Losses") through bilateral transactions of foreign currency-denominated warrants in order to avoid any negative impact on markets and general investors. On March 14, 1990, B compensated the losses by selling warrants of H Corporation listed on the G Stock Exchange to C and buying such warrants back from C on the very same day. C made a profit of 360,191,127, thereby compensating the losses incurred by C's Eigyo Tokkins, and the Eigyo Tokkins themselves were dissolved.

(6) After the Compensation of Losses, B's business relationship with C remained intact, and B earned large fees, which included commissions as the principal underwriter of C's issuance of debentures of 30,000,000 in July 1992, and 20,000,000 in March 1993. It was anticipated that B would continue to earn more fees from its relationship with C.

2. This case is a joint shareholders derivative suit where the Jokoku Appellants, as shareholders of B, claimed that Jokoku Appellees as representative directors are liable based on Article 266, Paragraph 1, Item 5 of the Commercial Code (hereinafter "the Provision"), contending that Compensation of Losses approved and carried out by Appellees caused B to suffer damages in violation of their obligations as directors.

The Court of Appeals dismissed the Appeal filed by Jokoku Appellants, concluding that (a) the Compensation of Losses were not in violation of Article 50, Paragraph 1, Items 3 and 4 or of Article 58, Paragraph 1 of the Securities and Exchange Law, prior to the amendment thereof by Law No. 96 of 1991 (hereinafter "the Former Securities Exchange Law"); (b) the Compensation of Losses were in violation of Article 19 of the Law concerning the Prohibition on Private Monopolies and Maintenance of Fair Trade (hereinafter "the Anti-Monopoly Law") since it fell under "unjust enrichment" [solicitation of clients by unjust enrichment] as specified by the Fair Trade Commission (1982 FTC Ordinance No. 15 (hereinafter "the General Designation") in Article 2, Paragraph 9, Item 3 of the Anti-Monopoly Law; and (c) B is not a harmed party under Article 19 of the Anti-Monopoly Law, whose purpose is to protect the interest of co mpetitors.

.The Jokoku Appeal seeks to overrule the judgment of the Court of Appeals contending that that Court erred in its reasoning in the conclusions reached in (a) and (c) above.

REASONS

II. GROUNDS FOR JOKOKU APPEAL UNDER THE FORMER SECURITIES AND EXCHANGE LAW

Appeal was jointly submitted by X1, a Jokoku Appellant, an attorney of Jokoku Appellant X2, and Jokoku Appeals attorneys Nobutake Yoshitake and Hideto Iida.

This Court finds no procedural error in the Court of Appeals Judgment and affirms the finding of that Court that the Compensation of Losses were not, under the relevant facts stated above, in violation of Article 50, Paragraph 1, Items 3 or 4 or of Article 58, Paragraph 1 of the Former Securities and Exchange Law. These grounds for the Appeal are rejected since Appellants merely make an assertion based on its own peculiar and irregular interpretation that the judgment reached by the Court of Appeals was arbitrary.

III. OTHER GROUNDS FOR THE JOKOKU APPEAL

1. Directors of a stock corporation, as members of the Board of Directors, have a duty to make decisions regarding the operation of a corporation's affairs or a duty to execute such decisions based on their role as representative directors. Article 266 of the Commercial Code examines the substance of these duties and clarifies and establishes severity of the liabilities to be assume by directors of stock corporations. Since the Provision, based on the above objectives, provides that any director who engages in an act that is in violation of a statute will be liable for compensatory damages suffered by a corporation so harmed, it is apparent that the "statute" referred to in the Provision, includes Article 254, Paragraph 3 of the Commercial Code (Article 644 of the Civil Code) and Article 254-3 of the same Code (hereinafter collectively "the General Provisions"), which generally provides for the obligations of a director as a fid uciary as well as other provisions individually stipulating other duties directors need to fulfill in the course of materialization of their duties. However, not limited to these General Provisions, it is appropriate to consider that "statute" referred to in the Provision includes reference to any or all of the provisions of the Commercial Code and other laws and ordinances which are applicable to stock corporations and with which they are required to comply with in the course of their business operations. Since stock corporations must comply with the law, and directors of a stock corporation are responsible for making decisions regarding the operations of the corporation's affairs and are under a duty to execute these decisions, and in order to prevent directors from violating those provisions, compliance with applicable provisions is included within the directors' obligations to a stock company. Thus, if a director of a stock corporation engages in an act that violates any of these obligations, which in turn causes the company to violate any of the provisions applicable to corporations, such an act will be construed as "an act in violation of a statute", as referred to in the Provision, without the necessity of ascertaining whether or not the act is in violation of any obligation provided for under the Provisions.

2. Based on the above, since a securities firm's action in compensating part of its clients losses precipitated by securities transactions can be equated to having provided an unfair benefit in light of normal practices in the securities industry, B's compensation of the losses of C in order to maintain or expand its business relations with C will thus fall under Item 9 of the General Designation (solicitation of customers by unjust enrichment), and is seen as a violation of Article 19 of the Anti-Monopoly Law. Since Article 19 of the Anti-Monopoly Law prohibits business entities from being unfairly enriched in their attempts to comply with the objective stipulated in Article 1 of the Law, and it is a provision business entities (including stock corporations) are required to comply with, this Article is unquestionably included under "statute" as referred to in the Provision. Accordingly, Jokoku Appellees' act in determining an amo unt for compensation of losses and effectuating payment thereof, is construed as "an act in violation of a statute", as referred to in the Provision.

The Court of Appeals, however, concludes that it is improper to assume that an act in violation of Article 19 of the Anti-Monopoly Law naturally falls under "an act in violation of a statute", as referred to in the Provision. In respect hereof, we find the Court of Appeals erred in its interpretation of the law.

3. Nonetheless, imposition of liability for damages under the Provision as a result of a director of a stock corporation engaging in an act that violates a statute or the corporation's articles of incorporation requires a showing that such director engaged in such an act intentionally or negligently (cf. Supreme Court, Second Petty Bench Judgment, (O) No. 506, 1973, decided March 23, 1976, Minshu Vol. 117, p. 231).

According to Court of Appeals legal finding of facts: (a) Jokoku Appellees were greatly concerned whether or not the Compensation of Losses were in violation of the Former Securities Exchange Law or the Directive. Since the Compensation of Losses were not a solicitation of transactions toward general investors, however, they did not consider whether Compensation of Losses were contrary to Article 19 of the Anti-Monopoly Law; (b) Not until more than one and a half years had passed since payment of the Compensation of Losses had Jokuku Appellees or the relevant authorities taken up the issue of whether these Compensations, when accompanying securities transactions, are contrary to the Anti-Monopoly Law, especially since it was generally understood in the industry that securities transactions were regulated by the Ministry of Finance through the Securities and Exchange Law and other related statutes; (c) As of August 31, 1991, at Meeting No. 121 of the L ower House Special Committee regarding Securities and Financing, the Fair Trade Commission had not yet established that Compensation of Losses violate the Anti-Monopoly Law. The Commission only announced its recommendations for the first time on November 20 of the same year, stating that under Article 48, Paragraph 2 of the Law, loss compensations paid by securities firms, including the Compensation of Losses, did constitute unfair enrichment, and were therefore in violation of Article 19 of the Anti-Monopoly Law.

As can be seen above, as of March 1990 when the Jokoku Appellees determined the amount of Compensation of Losses and effectuated payment thereof, they lacked the required intent to violate the Law since they were not aware that this act was in violation of the Anti-Monopoly Law. Nor can they be found negligent in lacking such awareness. Although compensation of losses is in violation of Article 19 of the Anti-Monopoly Law, imposition of liability for damages suffered under this Provision is inapplicable to Jokoku Appellees in this case.

4. The conclusion reached by the Court of Appeals denying liability for damages based on the Provision regarding Jokoku Appellees' act in determining the amount of the Compensation of Losses and effectuating payment thereto is upheld. The contention of X1 and others are claims of the illegality of irrelevant matters that do not affect the validity of the conclusion of the Court of Appeals, and is therefore not admissible.

IV. Regarding the status of A and I Electric Design Jimusho Co., Ltd. in Jokoku Appeal

The shareholder derivative action provided for in Article 67 of the Commercial Code permits a shareholder of a corporation to seek, on behalf of the corporation, the liability of a director of the corporation. Judgment rendered in such an action will bind the corporation as well (Article 115, Paragraph 1, Item 2 of the Code of Civil Procedure). This forecloses other shareholders from contesting the force and effect of such judgment. A shareholder derivative action instituted by two or more shareholders is, thus, to be construed as analogous to an action of compulsory joinder.
In an action analogous to compulsory joinder, if some of the co-litigants file an appeal, the judgment of the lower court is not final and conclusive and the whole case is transferred to an appeal, and the judgment in the appeal binds even those co-litigants not participating in the appeal. However, in order to achieve uniform judgment and to bind non-appealing co-litigants, it is sufficient when the appeal judgement and subject matter thereof brings into an effect to the extent stated above. Furthermore co-litigants who have no further interest in proceeding with the action should not be compelled to assume the status of co-appellants. Finally, even in a case that is initiated by more than one shareholder, the interest of each shareholder is not individually considered, the scope of the trial, the method of the hearing. Therefore, the force and effect of the judgment will not be affected by a decrease in the number of co-litigant shareholders after initiating the action. Should this occur with regard to shareholder derivative actions, Article 40, Paragraph 1 of the Code of Civil Procedure cannot be construed as compelling co-litigant shareholders who do not file an appeal to assume the status of appellants. Therefore, co-litigant shareholders who do not file an appeal shall not be considered appellants (cf. Supreme Court, Grand Bench Judgment, case (Gyo Tsu) No. 156, 1992, decided on April 2, 1997, Minshu vol. 51, No. 4, p. 1673.)

We therefore find that A and I Electric Design Jimusho Co., Ltd., are excluded as Jokoku Appellants since neither has filed a Jokoku Appeal.

This court unanimously finds as stated in the text above. The supplementary opinion of Justice Shinichi Kawai follows.

SUPPLEMENTARY OPINION OF JUSTICE SHINICHI KAWAI

The opinion of the Court states that "statute" referred to in the Provision includes any and all of the provisions of the Commercial Code and other laws and ordinances which are applicable to stock corporations and with which they are required comply (hereinafter "Provisions Applicable to Corporations"). Thus, if a director of a stock corporation engages in an act that results in the corporation's violating the Provisions Applicable to Corporations such act will be construed as "an act in violation of a statute", as referred to in the Provision, without the necessity of ascertaining whether or not the act is in violation of any obligation provided for in the General Provisions. The Court thus relies on the premise that when a director "fails to fulfill his obligations" under Article 415 of the Civil Code (hereinafter "the Requisite for Default"), the director is by default liable to the corporation. The Provision in this regard shall thus be construed to conform to specified parts of the Article in the Civil Code.

There is, however, an different interpretation (hereinafter "Opposing Interpretation") that asserts that if a director violates all or part of the Provisions Applicable to Corporations, such violation will not automatically be construed as fulfilling the Requisite for a Default, unless the director is found to be in violation of any of the obligations set forth in the General Provisions (hereinafter "Violation of General Obligations). I believe the Court of Appeals adopted this Opposite Interpretation.

It is in my opinion that the disadvantages inherent in the Opposing Interpretation are too numerous when compared to the opinion stated by this Court to warrant application even in the handling of individual cases. The gist of the problems is as follows:

1. In brief, the goal of directors managing a stock corporation whose purpose is to make a profit is to perform their duties in good faith, similar to that of a manager acting reasonably to target the best interest of the corporation. Under the Opposing Interpretation, it is necessary to find a Violation of General Obligations to establish default, even if any of the acts of a director are in violation of the Provisions Applicable to Corporations. This view is predicated on a consideration of the totality of the circumstances wherein the acts of such a director, including those violating the Provisions Applicable to Corporations, may not also be seen as a Violation of General Obligations. In such a case, the director can be said to have fulfilled the above-referenced goal. The court thereby admits that there can be situations where the acts of a director which result in the corporation violating any of the Provisions Applicable to Corporations wil l not necessarily constitute a default of director's obligation to the corporation if these acts were performed for the purpose of pursuing the corporation's interests. The Opposing Interpretation, in short, acknowledges situations where acts of a director which result in the corporation's violating any of the Provisions Applicable to Corporations could be regarded as part of the proper performance of a director's duties if such acts are performed for the purpose of pursuing the corporation's interests. I, however, disagree with this interpretation.

Moreover, the Opposing Interpretation seems out of step with the structure and expressions of the Commercial Code. There is no disagreement among advocates of the Opposing Interpretation that "statute" as referred to in the Provision includes reference to the General Provisions. These advocates do not necessarily agree, however, on whether "statute" also includes reference to Provisions Applicable to Corporations. If included, it follows those Provisions Applicable to Corporations, which are subordinate to the General Provisions, are in the same Article and accorded the same precedence as General Provisions. If excluded, it follows that the Provisions would have almost the same meaning as the provisions of Article 266, Paragraph 1, prior to revision thereto of 1950, which stated "If a director is negligent in performing his duties," and such meaning would vitiate the tenor of the revision which was to clarify and esta blish the strict duties of directors while further reinforcing their status and authority. Moreover, it does not comport with the fact that, although many sections in the Commercial Code regarding a statutory auditor refer to provisions pertaining to directors, regarding the liability of a statutory auditor to a corporation, the same Code provides that "if [any statutory auditor is] negligent in performing his duties" (Article 277). It is also difficult to understand then why it is that while reference to "statute" in Article 254-3 of the Commercial Code undoubtedly includes Provisions Applicable to Corporations, reference to "statute" in the Provision regarding the duties of a director should be interpreted differently.

2. Even though the Opposing Interpretation has the problems cited above, this view is advocated because, as stated in the opinion of the Court, there seems to be a concern that a director will incur severe liability.

Provisions Applicable to Corporations contain a great variety of duties, and it is difficult to expect that a director will be familiar with all of them. As in this case, it cannot be denied that there is a possibility that unbeknownst to the director, he may commit an act that may result in the corporation's violating any of the Provisions Applicable to Corporations. The liability incurred in such as case is heavy and severe (Article 266 of the Commercial Code). Furthermore, the number of shareholder derivative actions based on the Provision have been increasing in recent years. After the revision of Article 267, Paragraph 4 of the Commercial Code, many cases have made huge damage claims. The concerns stated above do, therefore, have some legitimate grounds.

To perform their duties, Directors are required to make judgments regarding the management of a corporation by taking various factors into account, based on their professional knowledge and expertise, and under complex and fluid conditions. Directors should, therefore, should be accorded broad discretion in carrying out their duties. Although a judgment of a director may result in the corporation's suffering damage, it does not naturally follow that the director was negligent in performing his or her duties, and it is generally understood that, when evaluating the director's conduct, various factors must be considered within the totality of the circumstances on a case-by-case basis. The Opposing Interpretation appears to expand grounds for exempting directors from severe liability, even when a director's violation of the Provisions Applicable to Corporations has actually caused damage to the corporation, by granting to the director discretion regar ding his business decisions and by determining whether the director's conduct, when considered in the totality of circumstances in the individual case amounts to a Violation of General Obligations.

In my opinion, however, only a minor difference subsists between the Court's opinion today and that of the Opposing Interpretation when the requisites for liability of a director as set forth in the Provision are specifically considered.

(i) First, a director in violation of any of the Provisions Applicable to Corporations that has caused damage to the corporation cannot escape liability under Violation of General Obligations if he was aware that his actions were in violation of the same Provisions, even when taking into account the general understanding of the duties of directors, as discussed above. A director's discretionary right does not include the right to commit an act that is in violation of a statute or which causes the corporation to violate a statute. Directors, moreover, are not permitted to intentionally violate a statute even for the purpose of pursuing the corporation's interests. In fact, many advocates of the Opposing Interpretation concur with this conclusion.

(ii) However, what of the case in which a director was not aware of the illegality of the act or acts?

Looking at the Court opinion, it becomes a question of whether negligence were a constituent element of responsibility at the time of the default. In other words, was the default caused by the director's failure to take reasonable care as is ordinarily required in the course of such transactions? In our hypothetical case, under various circumstances, we must examine whether the director was unaware of his or her violation of any of the Provisions Applicable to Corporations because he or she lacked the requisite level of care expected of an ordinary director under similar circumstances when making decisions regarding management, namely a lack of good faith and failure of due care.

The Opposing Interpretation seems to question not the criterion of responsibility but rather whether the act fulfills a criterion for default. After all, the liability of a director to a corporation will be determined based on whether or not the director lacked the requisite level of good faith and due care as described above. If so, then it seems that there is no difference in terms of the criteria used in the opinion of the Court. However, under this view, facts and other elements to look for and to be recognized will be different from those under the Court opinion; yet, since facts concerning acts of a director in violation of any of the Provisions Applicable must be included in such elements to look for and to be recognized, it is difficult to images cases where such differences will alter the conclusion reached here today, except in the cases described below.

(iii) There may be cases where, if a director had fully exercised the requisite level of good faith and due care, he would have been able to recognize that his acts were in violation of the Provisions Applicable to Corporations. But, when the relevant facts leading to such recognition and the surrounding conditions are considered more extensively, there may be some cases where a director's Violation of General Obligations cannot be found. However, those facts and conditions to be considered more extensively, in most cases, will be those facts in the context of legality or non-responsibility under ordinary default criteria. In the Court's opinion, a director will not be liable if any element existed which would make his act lawful, such as emergency factors, or which is an act in fulfillment of responsibilities, such as expected actions.

(iv). Adopting the reasoning of the Court or that of the Opposing Interpretation regarding the burden on the party who brings allegations and the burden of proof, may alter the conclusion reached regarding the liability of a director. Most of the cases in which the liability of a director is pursued under the Provision tend to fall in the category of failure to perform. In this situation, the burden to make allegations and submit proof of imperfect performance is generally on the obligee. Using this as a premise under the Court opinion, if it is proved that a director acted in violation of any of the Provisions Applicable to Corporations, default will be established based on the facts of the case. If no elements of responsibility are found, or existence of facts which makes acts or omissions lawful or which establishes whether they have been conducted with the required level of responsibility, the burden to make allegations and proof of imperfect p erformance falls squarely on the director. On the other hand, under the Opposing Interpretation, most of the facts are combined in the Violation of General Obligations, and it is thus the party pursuing the liability of a director who will bear the burden to make allegations and the burden of proof.

The above is merely theoretical. In the real world of litigation, however, there will not be such a clear and rigid distinction between the two views. Nevertheless, if litigation were conducted exactly in accordance with the theoretical arguments outlined ab ove, the Opposing Interpretation would lead to an increase in the number of cases in which the liability of director will be denied.

Nonetheless, I question both the theoretical arguments and the reasonableness of the results of the Opposing Interpretation. For example, in the case of an objective and concretely specified obligation which the obligee can clearly know whether or not the obligation has been performed completely, such as an obligation requiring goods to have a certain level of quality, it will be fair to impose the burden to make allegations and proof of default criteria on the obligee. However, if a Violation of General Obligations is seen as a criterion of default as the Opposing Interpretation asseverates, the same level of reasonableness will not be imposed as in the case above since the elements constituting a Violation of General Obligations will be diverse and complex, and most will fall within the sphere of director discretion. Especially in a shareholder derivative action, it is not fair or reasonable to shift the burden to make allegations as well as the burden of proof on the plaintiff, thereby virtually assuring that a director will prevail in the action.

3. I would also like to comment on the amount of damages a director would be liable for under the Provision.

As mentioned above, advocates of the Opposing Interpretation express concern that directors might incur an unfair and severe liability. I do not deny the possibility and understand that concern. However, this unwelcome outcome can be avoided and a fair result attained more effectively by affirming a director's liability for violating the Provisions Applicable to Corporations and by setting a reasonable amount of damage. Fairness is not achieved by denying liability of the director in full by making default criteria a necessary part of the Violation of General Obligations, as is asserted by the Opposing Interpretation. There is adequate room for limiting liability under current interpretations of the law.

(i) For example, consider a profit-loss set-off. In the event a corporation incurs losses attributed to a director's violation of the Provision but which act simultaneously profits the corporation, the amount to be compensated by the director will in principle be the difference between those amounts. This comports with the intention of Article 266 of the Commercial Code stipulating compensation by a director be in the amount of actual damages.

There may be cases where, although a corporation has made a profit due to an act of a director's violation of the Provision, the director's act constituted a crime and it would be unsuitable to apply the loss-profit set-off. It would be acceptable in such a case for the director to fully compensate the amount of loss incurred by the company.

(ii) Consideration should also be given to applying or applying by analogy the main purpose of the comparative negligence provision (Article 418 of the Civil Code).

A director is an instrument of a corporation and should be regarded as an inseparable unit within the corporation in its dealings with the outside world. However, in the event a corporation institutes an action to claim damages from a director, regardless of his status as director, the relationship between the director and the company will be that of an obligor and obligee. Article 418 of the Civil Code is thus applicable to these cases.

In addition, in cases where the corporate culture further contributes to a director's acts violating the Provision, including cases where a director followed a precedent set by the management of the company, or where there exists a major flaw in the organization or administrative system of the corporation, application of the same Article will be considered admissible based on the principle of justice, the basic principles regarding compensation of damages, or the principle of good faith fundamental to the credit law (cf. Supreme Court, First Petty Bench, Judgment, (O) No. 33 of 1984, decided on April 21, 1988, Minshu Vol. 42, No. 4, p. 243; Supreme Court, First Petty Bench, Judgment, (O) No. 1094 of 1988, decided on June 25, 1992, Minshu Vol. 46, No. 4, P. 400).

However, in the event thereof, it should be noted that a director is obliged to improve the corporate culture. Further, there may be cases where direct application or application by analogy of the laws providing for comparative negligence will be difficult based on the nature of joint and several liability of directors under the Provision. With that in mind, I consider that application of the principle of comparative negligence will lead to a reasonable conclusion in certain cases.

Other than the examples cited above, there may be other interpretations or methods available to assure that an award of damages is reasonable in light of individual circumstances. Applying such methods by the court will not be contrary to the purpose nor obviate the function of Article 266 or the shareholder derivative system. Especially in a shareholder derivative system where the director's function to make reasonable operation has become clear from the revision of the law which provides provisions concerning amount of claim in law suits, further vitalization of the system of derivative action is expected by such application of the method by the court.

It cannot be denied that there is considerable difficulty under the current statute to realize the corrective measure mentioned above. In order for such adjustments to be appropriately and adequately instituted, revision of the current laws is necessary. However, it is my contention that until such revision, there is be scope for avoiding unfair results through interpretations of current law.

Justice KAWAI Shinichi
Justice FUKUDA Hiroshi
Justice KITAGAWA Koji
Justice KAMEYAMA Tsugio
Justice KAJITANI Gen