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Unlike the US, there have been few civil actions brought in Japan against issuers for misrepresentations in their disclosure documents. But this may change after an amendment to the Securities and Exchange Law, expected to take effect on December 1 2004, which will provide investors in the secondary market with a statutory right to sue issuers for damages caused by misrepresentations in certain disclosure documents. The amendment is part of a substantial revision to the securities law that is under deliberation in the Diet. Before the amendment, the Law did not provide secondary market investors with a right to sue issuers for misrepresentations and only provided primary market investors (who purchased securities relying on offering disclosure documents such as securities registration statements and prospectuses) a statutory right to sue issuers for damages caused by misrepresentations in their offering documents.

Liability for misrepresentations

At present, if a secondary market investor holding a security of an issuer wishes to sue the issuer for making a public material misrepresentation, written or oral, the investor's only remedy against the issuer is to bring an action under the tort law provisions of the Civil Code. To succeed, the investor must prove the existence of a material misrepresentation, that the issuer was negligent in making the misrepresentation, the precise quantum of damages and causation between the misrepresentation and the damages. Secondary market investors also have a statutory right to sue directors, corporate auditors and public accountants of issuers under the Law. However, the Law only presumes that the defendant was negligent in making any misrepresentation. Investors still have to prove all of the other elements. The burden of proof on investors to establish these facts has deterred many from bringing such actions.

The amendment provides that, if an issuer's disclosure document contains a material misrepresentation, a secondary market investor who purchased a security of the issuer at a time when the disclosure document was available for public inspection at the applicable local finance bureau generally has a right of action for damages against the issuer, whether or not the issuer was negligent. Such actions are only available during the two years after the investor learns of the misrepresentation or five years after the date the relevant document was publicly filed. Disclosure documents in this context primarily include continuous disclosure documents such as annual and semi-annual securities reports, extraordinary reports and treasury stock purchase reports, as well as securities registration statements and shelf registration statements. The amendment does not provide a remedy to investors who had knowledge of the misrepresentation when they acquired the securities, nor does it provide a right of action for rescission.

Amount of damages

The amendment also provides that the amount of damages incurred by a secondary market investor based on a misrepresentation in a disclosure document are presumed to be the difference between the average price of the security for the month preceding the day when the issuer publicly corrects the misrepresentation and the average price of the security for the month after. But an issuer is not liable for all or any part of the damages that it proves does not reflect the depreciation in value of the security resulting from the misrepresentation. Also, damages cannot be greater than the amount by which the purchase price of the security exceeds the disposition price or the market price at the time of the action.

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