A New Era for the Business Judgment Rule in Japan?

Domestic and Comparative Lessons from the Apamanshop Case

Dan W. Puchniak & Masafumi Nakahigashi

I. AN OVERVIEW OF THE APAMANSHOP CASE1

This case involved a derivative action brought under Article 847 of the Companies
Act (the "CA") 2 by a group of Apamanshop Holdings Co. Ltd's ("Apamanshop") 3
shareholders (the "plaintiff-shareholders"). 4 The plaintiff-shareholders claimed that
Apanmanshop's directors (the "defendant-directors") breached their duty of care by causing
Apamanshop to purchase shares from one of its group companies (the "Partially-Owned
Subsidiary") for 50,000 Yen per share when the alleged actual value of the Partially-Owned
Subsidiary's shares was 10,000 Yen per share. As such, the plaintiff-shareholders claimed that
the defendant-directors should be held liable under Article 423-1 of the CA in the amount of

Dr. Dan W. Puchniak is an Assistant Professor in the Faculty of Law, National University of Singapore
(lawdwp@nus.edu.sg) and Dr. Masafumi Nakahigashi is a Professor in the School of Law, Nagoya University
(nakahigashi@nagoya-u.jp).
1
Supreme Court, 15 July 2010, in: Kinyu-shji Hanrei 1347 (2010) 12 (the Supreme Court Decision). The
decision is available at the Supreme Courts website <
http://www.courts.go.jp/hanrei/pdf/20100715143943.pdf>. The overview contained in Part I of this case
summary and comment above was not contained in the original Supreme Court Decision. However, we have
included it to provide a context to help the reader more clearly understand the translation of the Supreme Court
Decision which begins in Part II of this case summary and comment below.
2
Kaisha H, Law No. 86/2005; Engl. Transl.: Ministry of Justice of Japan, Japan Law Translation
<http://www.japaneselawtranslation.go.jp/> (as of 2011).
3
In the version of the Supreme Court Decision available on the Supreme Courts website
(<http://www.courts.go.jp/hanrei/pdf/20100715143943.pdf>) single roman letter names (i.e., Z, A, B and Y) are
used to refer to the parties in this case. In the version of the Supreme Court Decision that appears in a prominent
case reporter (Kinyu-shji Hanrei), different single roman letter names are used to refer to the parties in this
case. We have chosen to substitute descriptive names for the single roman letter names used in both reported
versions of the Supreme Court Decision as it makes the decision easier to follow and does not meaningfully
alter the substance or content of the decision. As such, throughout this case summary and comment we have
substituted the following descriptive names for the original single roman letter names used in the version of the
decision available on the Supreme Courts website: Z = Apamanshop; A = Partially-Owned Subsidiary; B =
Wholly-Owned Subsidiary; and Y = Directors.
4
Although the case was originally commenced by three shareholders only one of the three shareholders
ultimately pursued the appeal to the Supreme Court. However, as the facts found by the court in the first
instance (i.e., the Tokyo District Court) involved three shareholders and the original case was commenced by
three shareholders we refer to the plaintiffs herein as the plaintiff-shareholders.

Electronic copy available at: https://ssrn.com/abstract=2257827

130,040,320 Yenwhich was the difference between what Apamanshop paid for the shares
and the alleged actual value of the shares plus "delinquency charges".5

The Tokyo District Court held that the defendant-directors were not liable as their
actions were protected by the business judgment rule.6 However, on appeal, the Tokyo High
Court reversed the District Court's decision and found the defendant-directors liable. The
Tokyo High Court reasoned that the defendant-directors were liable because the process by
which they arrived at the decision in question was unreasonable.7 The basis for this finding
was that the information available to the defendant-directors at the time of the impugned
decision made it clear that the actual value of the shares was indeed 10,000 Yen per share
(and not the 50,000 Yen per share which Apamanshop paid) and that the defendant-directors
did not cause Apamanshop to enter into negotiations with the sellers of the shares to achieve a
lower purchase price. The Tokyo High Court's decision was appealed to the Supreme Court.

The Supreme Court reversed the Tokyo High Court's decision and found that the
District Court's decision, which dismissed the plaintiff-shareholders' derivative action, should
be upheld.8 Applying the same reasoning as the District Court, the Supreme Court held that
the defendant-directors' decisions were protected by the business judgment rule. In arriving
at this decision, the Supreme Court summarized the High Court's decision and set out its
decision as follows.

II. THE SUPREME COURTS DECISION 9

5
Delinquency charges are interest charges that are required by law (Civil Code (Minp, Law No. 89/1896) art.
412 para. 3 and art. 404) and which are calculated based on a 5% interest rate on the damages awarded that
begin to accrue from the day on which the claimant requests the defendants performance. In a derivative action
case, the date when a request is considered to be made is the day after the complaint letter is delivered through
the court.
6
Tokyo District Court, 4 December 2007, in: Kinyu-shji Hanrei 1304 (2008) 33. We have not included the
names of the plaintiff-shareholders or director-defendants in the citation of the decision as the parties names
were omitted from the original court decision for privacy purposes. As such, this citation (without the parties
names) is the official citation.
7
Tokyo High Court, 29 October 2008, in: Kinyu-shji Hanrei 1304 (2008) 28.
8
Supreme Court Decision, note 1.
9
Part II of this case summary and comment is a summary/translation of the Supreme Court Decision. We have
omitted Part 1 of the Supreme Court Decision from this summary/translation as it merely repeats the basic facts
concerning the parties, which is provided in detail in Part I of the summary/translation above. As such, the
translation in this section starts from Part 2 of the Supreme Court Decision.

Electronic copy available at: https://ssrn.com/abstract=2257827

 1. The Facts

Apamanshop built a franchise business in real-estate rental services by developing a

"Corporate Group" that was made up of a number of companies (the "Affiliated Companies")
which included the Partially-Owned Subsidiary. As of September 2006, the Corporate Group
had, on a consolidated basis, approximately 103.8 billion Yen of combined assets, 49.7 billion
Yen in sales, and 4.3 billion Yen in profit.

In 2001, the Partially-Owned Subsidiary was established with the primary purpose of
engaging in the business of renting furnished apartments on a monthly basis. At the time that
the Partially-Owned Subsidiary was established, its shares were issued for 50,000 Yen per
share. In the initial offering, Apamanshop retained 6,630 shares in the Partially-Owned
Subsidiary which corresponded to approximately 66.7% of the total 9,940 shares issued.
However, Apamanshop also acquired and retained affiliated shops (the "Affiliated Shops")
which it believed were essential for the purpose of carrying out the above mentioned real-
estate rental business of the Corporate Group.

Apamanshop drew up a business restructuring plan which was designed to create a

more dynamic Corporate Group and to strengthen the Corporate Group's competitiveness. To
achieve this, the business restructuring plan proposed to transfer the main operations of the
real-estate rental business to a wholly-owned subsidiary of Apamanshop (the "Wholly-
Owned Subsidiary") and to transform Apamanshop into a holding company. In May 2006, in
accordance with the restructuring plan, the Affiliated Companies were integrated into the
holding company structure. It was planned that the Partially-Owned Subsidiary would be
amalgamated with one of Apamanshop's existing wholly-owned subsidiaries and that the
Partially-Owned Subsidiary's operations, including its real-estate rental management
operations, would then be transferred to the Wholly-Owned Subsidiary.

Subsequently, a management meeting was set up within Apamanshop to discuss the

overall management policy for Apamanshop and for each of the Affiliated Companies in the
Corporate Group. The management meeting included all of Apamanshop's board members
who were acting in an advisory capacity to assist the CEO of Apamanshop in carrying out its
operations. On May 11, 2006, a management meeting was held, with "Director 1" attending
as Apamanshop's representative director, and "Director 2" and "Director 3" attending as other
Apamanshop directors. At the management meeting, topics relating to the merger of the
Partially-Owned Subsidiary and the Wholly-Owned Subsidiary were discussed.

 At the management meeting, it was proposed that: (1) as the Wholly-Owned

Subsidiary was an important subsidiary of Apamanshop and should remain a wholly-owned
subsidiary of Apamanshop, it was therefore necessary to also transform the Partially-Owned
Subsidiary into a wholly-owned subsidiary before the Wholly-Owned Subsidiary and
Partially-Owned Subsidiary merged; (2) the process for making the Partially-Owned
Subsidiary into a wholly-owned subsidiary, which would best facilitate Apamanshop's
operations, would be for Apamanshop to purchase as large a stake as possible in the Partially-
Owned Subsidiary through a voluntary agreement rather than through a share-for-share
exchange; and (3) the amount per share to be paid by Apamanshop for the Partially-Owned
Subsidiarys shares would be the same as the initial issuance price of 50,000 Yen per share
(the "Proposal").

Apamanshop retained a lawyer to provide an opinion on the aforementioned

Proposal. The legal opinion was that the Proposal involved a management decision and that
on that basis there was no legal issue preventing the Proposal from going forward. It further
stated that the management decision involved a balance between the necessity of purchasing
the shares and the offer price to be paid for the voluntary purchase of the shares. Moreover,
considering that the total amount of the share purchase was not very large, the purchase price
of 50,000 Yen would be considered to be within the acceptable range if such a price was
deemed necessary to maintain good relations with the important Affiliated Shops (which also
were shareholders in the Partially-Owned Subsidiary).

Arising out of the discussions at the management meeting, there was a decision (the
"Decision") to make an offer to purchase the Partially-Owned Subsidiarys shares at the price
of 50,000 Yen per share (the "Purchase Price")which was in line with the above mentioned
Proposal. Furthermore, a decision was made that those shareholders who were opposed to
Apamanshop's proposal, and who thus refused to accept its offer to purchase the Partially-
Owned Subsidiarys shares, would be subject to a share-for-share exchange.

Apamanshop prepared for the share-for-share exchange which was designed to

transform the Partially-Owned Subsidiary into a wholly-owned subsidiary of Apamanshop.
As part of the preparations, a request was made to two audit companies to calculate the share-
for-share exchange ratio. One of the share-for-share exchange calculations set the price for
the Partially-Owned Subsidiarys shares at 9,709 Yen per share. The other share-for-share
exchange calculation, based on comparisons with similar companies in the market, set the
price for the Partially-Owned Subsidiary in the range of 6,561 Yen to 19,090 Yen per share.

 Pursuant to the Decision, between June 9 and June 29, 2006, Apamanshop purchased
3,160 shares from the Partially-Owned Subsidiary's shareholders who were willing to
voluntarily sell their shares at the Purchase Price of 50,000 Yen per share. In total,
Apamanshop paid a total of 158 million Yen for the shares acquired in the voluntary purchase
(hereafter referred to as the "Deal"). Subsequently, a share-for-share exchange agreement was
concluded between the Partially-Owned Subsidiary and Apamanshop at a rate of 0.192
Apamanshop shares for every 1 Partially-Owned Subsidiary share.

The High Court accepted the shareholder-plaintiffs' claim that Apamanshop's

defendant-directors should be held jointly and severally liable as a result of violating their
duty of care by ordering the "over-payment" of 126.4 million Yen to the Partially-Owned
Subsidiary's shareholders.10 Although the original issuance price of shares in the Partially-
Owned Subsidiary was 50,000 Yen, the High Court found that there was no proper
investigation or consideration by Apamanshop's defendant-directors of the feasibility of a
lower purchase price. Apamanshop, which already held two-thirds of the total shares issued
in the Partially-Owned Subsidiary, did not properly consider how beneficial it would be from
a business perspective to make the Partially-Owned Subsidiary a wholly-owned subsidiary as
compared to maintaining the status quo. The High Court went on to hold that there was no
reasonable grounds or cause that could be identified for the Purchase Price (i.e., 50,000 Yen
per share) selected for making the offer for the Partially-Owned Subsidiarys shares, given
the fact that it was seen as appropriate to have set the value of the shares at 10,000 Yen for the
share-for-share exchange. As such, the High Court held that Apamanshop's defendant-
directors violated their duty of care as directors and were negligent in carrying out their
duties. The Tokyo High Court's decision was appealed to the Supreme Court.

2. The Decision11

The Supreme Court overruled the decision of the High Court for the following
reasons. According to the above mentioned facts, the Deal was carried out for the purpose of
making the Partially-Owned Subsidiary a wholly-owned subsidiary of Apamanshop as a part
of the Corporate Group's restructuring plan to merge the Partially-Owned Subsidiary into the

10
The Tokyo High Court found that the directors violated their duty of care by causing Apamanshop to
overpay for the Partially-Owned Subsidiarys shares based on the Courts finding that Apamanshop paid
50,000 Yen per share when the actual market value of the shares was 10,000 Yen per share. As such, the decision
of Apamanshops directors to cause Apamanshop to purchase 3,160 shares at a price which was 40,000 Yen per
share above the actual market price caused 126.4 million Yen in damages to Apamanshop.
11
This section is based on a translation of Parts 4 and 5 of the Supreme Court Decision.

Wholly-Owned Subsidiary and to transfer its real-estate and rental management operations to
the latter. The formulation of such business restructuring plans can be seen as something to be
appropriately entrusted to the "specialized managerial judgment" of the directors which
involves considering future business prospects, including evaluating the merits of forming a
wholly-owned subsidiary. Therefore, in regard to the methods and pricing for acquiring
shares in such cases, directors can consider the overall situation and make decisions about not
only share price, but also the necessity of obtaining shares, Apamanshop's financial burden,
the necessity of smoothly acquiring shares, and so on. So long as there are no significantly
unreasonable aspects involved in the process and content of such decisions, it should be
understood that the directors will not violate their duty of care as directors.

When seen in these terms, the purchase offered by Apamanshop for the Partially-
Owned Subsidiary's shares, on the basis of a voluntary agreement, must be considered a
reasonable method for ensuring the smooth process of the share acquisition, and in regard to
the Purchase Price, given that there had been less than five years since the Partially-Owned
Subsidiary's establishment, setting the issuance price at 50,000 Yen cannot generally be seen
as unreasonable. Furthermore, the Supreme Court reasoned thateven in light of the above
valuation and actual ratio of the share-for-share exchange of the Partially-Owned
Subsidiarys sharesit would be difficult to suggest that the decision to set the Purchase
Price at 50,000 Yen per share was significantly unreasonable given that: the Partially-Owned
Subsidiarys shareholders, including Apamanshop's Affiliated Shops, were considered to be
an essential part of Apanmanshop's operations; the smooth purchase and the maintenance of
cordial relations between the Affiliated Shops would be beneficial for the Apamanshop and
its Corporate Group's future business; there was an acceptable range for the value of the
Partially-Owned Subsidiary's unlisted shares; and, the value of the Partially-Owned
Subsidiary may increase as a result of business restructuring.

In the process for arriving at the decision, there was consideration given to: the
deliberations at the managerial meeting considering the overall management policy of
Apamanshop and each company in the Corporate Group; the procedure for listening to the
opinion of a lawyer which was put into practice; and, that there were no unreasonable aspects
found in the decision making process. Based on the above, the judgment made by
Apamanshop's defendant-directors concerning the Decision was not significantly
unreasonable. As such, Apanmanshop's defendant-directors cannot be said to have violated
their duty of care as defendant-directors.

 With the Supreme Court's view differing from the High Court's earlier decision
summarized above, the finding against the defendant-directors is quashed. The Supreme
Court's judgment was rendered as summarized above by the unanimous consent of the
Judges.12

III. THE DOMESTIC IMPORTANCE OF THE DECISION

From a domestic perspective, there are at least three reasons why the Supreme Courts
decision is important. First, the decision marks the first time that the business judgment rule
has been explicitly applied by the Supreme Court in Japan. 13 The Supreme Courts
application of the business judgment rule is particularly significant in light of its failure to
apply the business judgment rule in a number of recent cases involving directors of banks
who were found liable for deciding to extend loans to corporations on the brink of
insolvency.14 This shift in the Supreme Courts position is a watershed development because
now, for the first time, it is explicitly clear that the business judgment rule is part of Japanese
company law. Previously, this was unclear as the business judgment rule had only been
applied in lower courts and does not exist in the statutory language of the CA or any other
statute. The Supreme Courts explicit recognition of the business judgment rule makes it a
powerful defense for directors in Japan who have increasingly found themselves as
defendants in derivative actions.15

Second, the decision is important because it affirms the general framework for
applying the business judgment rule which has previously been used in several lower court

12
In this Part of the Supreme Court Decision, the Supreme Court dealt with a minor issue which was not related
to the business judgment rule. We therefore decided not to include this minor issue in the summary/translation as
it is irrelevant in the context of this case summary and comment.
13
See M. KITAMURA, Hi-jj-kaisha no kabushiki no kaitori to keiei-handan-no-gensoku [Purchase of Shares in
Unlisted Corporations and the Business Judgment Rule], in: Juristo 1420 (2011) 139; R. KOBAYASHI, hi-j-j-
kaisha no kaitori kakaku no kettei to torishimariyaku no zenkan-chui-gimu-ihan no umu [Decision of Purchase
Price of Unlisted Companies and the Existence of Directors Breach of the Duty of Care], in Hanrei Select 2010
[II] (2010) 18.
14
Supreme Court, 28 January 2008, in: Hanrei Jih 1997 (2008) 148; Supreme Court, 28 January 2008, in:
Hanrei Jih 1997 (2008) 143; Supreme Court, 27 November 2009, in: Hanrei Jih 2063 (2010) 138.
15
M. NAKAHIGASHI / D. PUCHNIAK, Land of the Rising Derivative Action: Revisiting Irrationality to Understand
Japan's Unreluctant Shareholder Litigant, in: Puchniak / Baum et al. (eds.), The Derivative Action in Asia: A
Comparative and Functional Approach (Cambridge, Forthcoming 2012).

decisions.16 According to this framework, directors managerial decisions should be protected

from liability by the business judgment rule when: (1) the decision was based on reasonable
research and analysis of the relevant facts; and (2) the decision was not irrational or
inappropriate in comparison to what a reasonable manager in the specific business
environment would have decided.17 In the Supreme Courts decision, it articulated a standard
which generally mirrors the framework used by the lower courts. Specifically, the Supreme
Court held that so long as there are no significantly unreasonable aspects involved in the
process and content of such decisions, it should be understood that the directors will not
violate their duty of care as directors".18 Similar to the lower courts, the Supreme Court
prima facie appears to carve out a fairly wide ambit of managerial discretion for the directors
by stating that they will not be held liable unless their conduct is found to be "significantly
unreasonable". Also, similar to the approach taken by the lower courts, the Supreme Court
draws a clear distinction between the "decision making process" and the "content of the
decision".

Third, the Supreme Court's decision is important because it sheds light on what
factors courts will consider when determining whether the decision making process and
content of a decision are significantly unreasonable. In terms of the decision making process,
in arriving at its decision that the process was not significantly unreasonable, the Supreme
Court placed considerable weight not only on the directors' reasonable deliberations of the
relevant facts but also on the directors' decision to seek and follow a lawyer's opinion.19 In
terms of the content of the decision, the Supreme Court cited several specific facts (e.g., the
short time since the Partially-Owned Subsidiary's public offering, the range in the value of
the Partially-Owned Subsidiary's unlisted shares, the essential nature of the Affiliated Shops,
the maintenance of cordial relations, and the Corporate Group's future business) to support its
finding that the content of the decision was not significantly unreasonable.

16
S. OCHIAI, Apamanshop kabunushi-daihy-sosh saiksai-hanketsu no igi [Significance of the Supreme
Courts decision in the Apamanshop Shareholder Derivative Action], in: Shji Hmu 1913 (2010) 7. See M.
YANAGA, torihiki-sba no nai kabushiki no shutoku to keiei-handan-gensoku [The Purchase of Stocks without a
Market Price and the Business Judgment Rule], in: Juristo 1406 (2010) 110.
17
OCHIAI, note 16, 7. See K. EGASHIRA, Kabushiki-kaisha-h [Laws of Joint Stock Corporations] (Tokyo 3rd
ed. 2009) 433-435.
18
Supreme Court Decision, note 1, Part 4 para. 2.
19
Supreme Court Decision, note 1, Part 4 para. 3. Some scholars have expressed support for the Supreme
Courts deference to the lawyers opinion in this caseparticularly because the court chose not to question the
precise content of the lawyers opinion. See H. MATSUI, jigy-saihen-keikaku no sakutei ni okeru
torishimariyaku no zenkan-chui-gimu [Directors Duty of Care in Drawing up a Plan for Business
Restructuring], in Min-Sh-H Zasshi 143 (2011) 711.

 It may be argued that the Supreme Court's detailed examination of the specific facts
concerning the content of the decision caused it to venture beyond a formal evaluation of
whether the directors' decision was "substantially unreasonable" and into the territory of
evaluating whether the content of the decision was indeed "reasonable". In practice, if
"reasonableness" (as opposed to "substantial unreasonableness" or "irrationality") becomes
the standard which must be met for a director to gain the protection of the business judgement
rule then the scope of protection provided by the business judgment rule will be significantly
diminished. Indeed, if a director can prove that his actions are reasonable then there would
seem to be little need for the protection provided by the business judgment rule because
"reasonable decisions" normally do not attract liability in the first place. Other commentators
have noted that the Supreme Court's consideration of such detailed facts concerning the
reasonableness of the content of the directors' decision was not entirely unexpected. 20 Indeed,
such an approach has generally been taken by the lower courts. 21 In addition, as discussed in
detail below, commentators have also noted that the willingness of courts in Japan to engage
in a detailed examination of the reasonableness of the content of directors' decisions
distinguishes the Japanese business judgment rule from the business judgment rule in the
United States.22

IV. THE POTENTIAL OF THE DECISION TO SHAPE THE FUTURE OF JAPANESE

CORPORATE GOVERNANCE

Each of the aforementioned important findings has the potential to significantly shape
the future of Japanese corporate governance. First, the Supreme Court's recognition of the
business judgment rule should provide a wider and more predictable ambit of protected
managerial discretion for directors in Japan. This development is timely as directors in
Japan, particularly those in large listed companies, are now subject to a substantially higher
rate of derivative litigation than in almost any other jurisdictions (with the notable exception
of the United States).23 In addition, the Supreme Court's recognition of the business judgment
rule is in line with the trend in most other developed countries which have increasingly come
to recognize the business judgment rule as an essential company law doctrine for properly

20
MATSUI, note 19, 714.
21
MATSUI, note 19, 714.
22
MATSUI, note 19, 714.
23
NAKAHIGASHI / PUCHNIAK note 15.

incentivizing entrepreneurial risk taking, attracting talented directors and ensuring that
directors (and not the courts) are the primary decision makers in companies.24

Second, the Supreme Court's recognition of the importance of engaging an outside

lawyer for establishing the reasonableness of the decision making process will likely further
increase the role of lawyers in Japanese boardrooms. 25 Sceptics may suggest that the
heightened importance of lawyers may simply amount to a tax on corporate profits that
merely provides "full employment for lawyers" with marginal corporate governance benefits
for shareholders. 26 Although such an argument may be true in other countries, it is less
persuasive in the context of Japan. Compared to other developed countries, the boardrooms
of Japan's largest listed companies are strikingly dominated by corporate insiders (i.e., there
are comparatively very few outside and/or independent directors). 27 In this context, the
emphasis on involving an outside lawyer as an "external check" on the decision making
process of Japanese boards may improve corporate governance efficiency more than in most
other countries. It may also provide an avenue for a valuable "outsiders perspective" without

24
See generally, K. HOPT, Comparative Corporate Governance: The State of the Art and International
Regulation, in American Journal of Comparative Law 59 (2011) 39; W. KAAL / R. PAINTER, Initial Reflections
on an Evolving Standard: Constraints on Risk Taking by Directors and Officers in Germany and The United
States, in Seton Hall Law Review 40 (2010) 1459; T. AMAN, Cost-Benefit Analysis of the Business Judgment
Rule: A Critique in Light of the Financial Meltdown, in Albany Law Review 74 (2010-2011) 3.
25
For an interesting analysis of how the Daiwa Bank case may have started the increasing trend of outside
lawyers being involved in Japanese boardrooms. See B. ARONSON, Reconsidering the Importance of Law in
Japanese Corporate Governance: Evidence From the Daiwa Bank Shareholder Derivative Case, in Cornell
International Law Journal 36 (2003) 37-38, 44.
26
See generally, ARONSON note 25, 38.
27
The insider-dominated nature of Japanese boards has continued in the face of a 2003 amendment to the
Commercial Code (that was substantially integrated into the CA) which provides the option for companies to
adopt a US-style board with committees (See D. PUCHNIAK, The 2002 Reform of the Management of Large
Japanese Corporations: A Race to Somewhere?, in The Australian Journal of Asian Law 5 (2003) 59; D.
PUCHNIAK, Delusions of Hostility: The Marginal Role of Hostile Takeovers in Japanese Corporate Governance
Remains Unchanged, in Journal of Japanese Law 14 (2009) 117-18). It further appears that even in the face of
the 2010 amendment to the Tokyo Stock Exchange Listing Rules (See generally, the Tokyo Stock Exchange,
Securities Listing Regulations Rule 436-2; Tokyo Stock Exchange, Enforcement Rules for Securities Listing
Regulations Rule 436-2. English translation, for reference purposes only, is available at <
http://www.tse.or.jp/english/rules/regulations/>), which requires all listed companies to have at least one
independent director or statutory auditor (i.e., kansayaku), that the vast majority of corporate boards in large
listed Japanese companies remain insider dominated. Currently, the Japan Corporate Auditors Association uses
the term corporate auditor to refer to kansayaku (See <http://www.kansa.or.jp/english/index.html>). They
claim that kansayaku can be understood as having powers which are equivalent to directors who serve as audit
committee members. However, it should be noted that kansayaku do not have any voting power to remove the
CEO or other senior executives.

10

dismantling the insider-dominated "company community" which some pundits see as a key
component in the success of many of Japan's most important companies.28

Third, the Supreme Court's detailed examination of the content of the directors'
decisions suggests that the manner in which the business judgment rule is applied in Japan is
markedly different from how it is applied in the United States.29 In the United States, the
business judgment rule has been applied in a way that essentially "direct[s] courts not to
examine the substantive merits of business decisions that are not accompanied by a conflict
of interest."30 As explained above, in the Apamanshop case, the Supreme Court appeared to
evaluate the "reasonableness" of the content of the directors' decisions. Such a detailed
consideration of the content of directors' decisions arguably makes the protection provided by
the business judgment rule in Japan much narrower than in the United States. The narrower
protection provided by Japan's business judgment rule may be criticised on the basis that it
will unduly deter risk taking and dissuade skilful executives from becoming directors in
Japan.

Alternatively, however, the Supreme Court's decision may be justified based on the
idiosyncratic nature of Japan's wider corporate governance framework. Specifically, Japan's
corporate governance framework lacks many features that exist in American corporate
governance (e.g., Japan lacks a market for corporate control, independent directors, class
action lawsuits and has limited discovery rights) which effectively place restrictions on
managerial discretion. As such, when viewed through this wider lenseven with the
narrower scope of managerial discretion provided by Japan's business judgment rulein
practice, Japanese directors may enjoy a similar (or even greater) level of discretion than
directors in the United States in the context of Japan's wider corporate governance
environment.

Moreover, it is important to note that the scope of managerial discretion afforded to

directors in the United States by its business judgment rule is considerably wider than in most
other jurisdictions such as Germany (which recently codified its business judgment rule but

28
See, for example, Z. SHISHIDO, Japanese Corporate Governance: The Hidden Problems of Corporate Law and
Their Solutions, in Delaware Journal of Corporate Law 25 (2000) 189.
29
MATSUI, note 19, 714.
30
W. KLEIN / J. COFFEE ET AL., Business Organization and Finance: Legal and economic Principles (New York
2010) 157. This has led commentators to suggest that when plaintiffs in the United States solely allege that
directors have breached their duty of care "the presumption established by the business judgement rule is all but
impossible to overcome". AMAN, note 24, 8.

11

allows directors to be held liable for excessive risk-taking)31 and the UK (which does not
have a formal business judgment rule but which in practice avoids second guessing the
business decisions of directors as long as they meet the "reasonably diligent person"
standard).32 In this sense, it may be the United States (and not Japan) that is the outlier in
terms of the extremely strict constraints that it places on the ability of US-courts to review
directors' business decisions. Thus, considering Japans wider corporate governance
environment and the international norms for judicial review of business decisions, the
Supreme Courts decision appears reasonable. It may even be seen as forward looking as the
global financial crisis has increasingly caused scholars to question the extremely broad scope
of protection that the business judgment rule (and other statutory measures) in the United
States provides for directors discretion.33

V. THE IMPORTANCE OF THE DECISION TO COMPARATIVE CORPORATE LAW

There are two important, albeit brief, lessons that can be drawn from the Supreme
Court's decision which shed light on some influential theories in comparative corporate law.
First, it has been suggested that with respect to legal transplantswhich some scholars posit
are bringing about a global convergence in shareholder lawthe "reception of foreign law
generally starts from codified law".34 The business judgment rule in Japan is an example
which clearly does not follow this broad theory. Indeed, although Japan's business judgment
rule is rooted in United States' corporate law, the rule has been "transplanted" to Japan
entirely through case lawnot statute. This example of a company law provision being
"transplant" through case law is even more interesting considering that Japan is generally
classified as a civil law country which ostensibly should be inclined to incorporate changes in
its company law via statutory amendment.

Second, now that the Supreme Court in Japan has acknowledged and applied the
business judgment rule, those who like to approach the study of comparative corporate law
through the lens of leximetrics (i.e., by coding company law provisions in a number of
countries for the purpose of comparing them with other variables using statistical analysis)

31
KAAL / PAINTER, note 24, 1461.
32
D. KERSHAW, Company Law in Context: Text and Materials (New York 2009) 428-30.
33
AMAN, note 24, 1-6; KAAL / PAINTER note 24, 1473-74, 1485.
34
M SIEMS, Convergence in Shareholder Law (Cambridge 2008) 245.

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can now "code" Japanese company law as having the business judgment rule.35 However,
this brief analysis illustrates why such coding explains little and confuses a lot. 36 The
important issue is not whether Japan formally has (or has not) adopted a business judgment
rule. Instead, in practice, the real issue surrounds the precise standard that has been used by
the Supreme Court in Japan when applying the rule. This is illustrated by the fact that now
Japan and the United States both technically have adopted the business judgement rule but, as
we have seen, the rule has a distinctly different effect in both countriesa fact that "coding"
would not only miss but confuse. Indeed, in practice, Japan's business judgment rule likely
involves a standard of review and a permissible level of directors' managerial discretion that
is more in line with the UK (which technically has no business judgment rule) than the US
(which has a business judgment rule). Again, an important point that "coding" would obscure.

VI. THE CONCLUSION

Of course, like most things in life, there is a silver lining in the complexities of both
the important domestic and comparative lessons that can be drawn from the Supreme Courts
decision. First, the unique evolution of the Japanese business judgment rule suggests full
employment not just for lawyers but also for law professors, as it illustrates how company
law continually evolves in complex ways. Second, it demonstrates that to properly understand
Japans (and every other countrys) corporate law it is necessary to develop a detailed
understanding of how the black letter corporate law actually works in practice (as opposed to
merely on the books). Developing such an understanding of the law in practice, especially for
comparative corporate law scholars who analyze several jurisdictions, can be dauntingbut
also has the potential to be extremely rewardingas it often requires a broader knowledge of
the countrys legal culture and informal norms.

35
La Porta et al.s article (which is arguably the most influential article in comparative corporate law over the
last decade) is based on the leximetrics method of coding specific provisions in the company laws of a large
sample of countries with either a 0 or 1 to indicate whether or not they exist (R. LA PORTA ET AL., Law and
Finance, in Journal of Political Economy 106 (1998) 1113). Then, the 1s and 0s are tabulated and regression
analysis is used to see if there is a correlation between the existence of certain legal rules and other variables
such as a countrys legal origin or level of economic development. This type of research has become extremely
popular in the area of comparative corporate law (e.g., H. SPAMANN, The Antidirector Rights Index Revisited,
in The Review of Financial Studies 23 (2008) 468; A. LICHT ET AL., Culture, Law, and Corporate Governance,
in International Review of Law and Economics 25 (2005) 229).
36
For a more detailed analysis of this issue See D. PUCHNIAK, The Complexity of Derivative Actions in Asia: An
Inconvenient Truth, in: Puchniak / Baum et al. (eds.), The Derivative Action in Asia: A Comparative and
Functional Approach (Cambridge, Forthcoming 2012).

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 Professor Harald Baum, whose scholarship inspired us to write this piece, is an

eminent example of one of those extremely rare scholars who for decades has found this
silver lining: continually embracing the complex evolution of corporate law while at the same
time developing a detailed knowledge of local Japanese practice and culture. By doing this,
Professor Baum has inspired a generation of Japanese and comparative corporate law
scholars. He has also forever raised the bar of scholarship in this field.

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