Japan’s Love for Derivative Actions:
Revisiting Irrationality as a Rational Explanation for Shareholder Litigation
Abstract
It was not long ago that there was a consensus in the legal academy that the Japanese were irrational litigants. As the theory went, Japanese people would forgo litigating for pecuniary gain because of their cultural obsession for maintaining social harmony. Based on this theory, it made perfect (but economically irrational) sense that Japanese shareholders let their US-transplanted derivative action lay moribund for four post-war decades when at the same time the derivative action was a staple of shareholder litigation in the US.
The 1990s brought a wave of law and economics to the scholarship of Japanese law which largely discredited the cultural explanation for Japan’s (economically irrational) reluctant litigant. In this new academic era, reasonable minds could disagree on whether the efficiency of settlement or high cost of litigation explained the dearth of litigation in Japan. However, the assumption that the Japanese litigant was rational (i.e., that they would litigate when the pecuniary benefits from litigating outweighed the costs) was virtually beyond reproach.
In the early 1990s, the number of derivative actions in Japan skyrocketed. Japanese shareholders suddenly found themselves as strange bedfellows with their American counterparts as the only shareholders in the world that utilized the derivative action on a regular basis. This extraordinary change in the behaviour of Japanese shareholders has largely been understood through the lens of the rational shareholder. Specifically, a consensus has emerged that the number of derivative actions dramatically increased in Japan because in the early 1990s the exorbitant fee for filing a derivative action was largely eliminated. In other words, as the theory goes, since the early 1990s rational Japanese shareholders have utilized derivative actions because the pecuniary benefit of doing so has exceeded the cost.
Based on a substantial empirical research project conducted by Masafumi Nakahigashi (Nagoya University) and Dan W. Puchniak (National university of Singapore) this article challenges the assumption that the dramatic increase in Japanese derivative actions can be understood solely through the lens of the rational shareholder. Using empirical and case study evidence, this article demonstrates that in Japan neither shareholders nor lawyers stand to gain significant pecuniary benefits from derivative actions. Rather this article suggests that the irrationality of Japanese shareholders (i.e., the use of inaccurate mental heuristics, self-serving bias, herding behavior, political and environmental motives, and veiled extortion) is critical for providing a rational explanation for one of the most dramatic increases in shareholder litigation in recent times.