Facts

Y, a director for A Company, an electrical alliance manufacture, with other directors meeting on February 27, 1962, passed a resolution authorization the issuance of 30 million shares of new stock and the public offering of 2 million of those shares at the market price. At a board of directors meeting on June 26 of the same year, a resolution was passed to have two securities companies, A and B purchases and underwrite the above 2 million shares, one million each, for a price of Y390 per share; the transaction was executed. At the time the above price was determined, the actual price of A Company shares was Y456 per share and A Company did not undertake the procedures required by Commercial Code Art. 280-2, Para. 2 for transactions of this type. At that point, X, a shareholder in A Company holding 100 shares, brought this representative action, alleging that undertaking the above purchase and underwriting without getting a special resolution of the shareholders' meeting is a violation of the Commercial Code, and that because the issuing price of the new shares was extremely inequitable, A Company is entitled to reasonable damages proportionate to the difference between the share price at the time the decision to issue shares was taken and the actual underwritten price (issuing price minus underwriting fees), according to the provisions of Commercial Coded Art. 265, Para. 1, Item 5. The court of first instance dismissed the claim, holding that while it was illegal for new shares to be issued through purchase underwriting, since it is possible to infer that the issuing price of the new shares was a proper issuing price, there was no damage to A Company. Because the original court has dismissed X's appeal saying it could not recognize in Y any negligent or intentional violation of the law, X brought this jokoku appeal, saying that the liability for damage indemnification by directors for their violations of the law should be understood to be strict liability.

Gist

Jokoku appeal dismissed.

"We hold that where the directors of a stock company have violated the law or the company's Articles of Incorporation, it is proper to understand that such violative action on the part of the directors must be either intentional or negligent. As for Y, acting as a director of A Company with other directors, at a board of directors meeting, there was certainly no intent nor was there negligence in his lack of recognition that passing a resolution to have B and C purchase underwrite share the new issuance of which was undertaken without getting a special resolution from the shareholders' meeting, and executing that transaction would violate the law. Accordingly, he has no responsibility to compensate Y for its damage."

(translation by Vicki L. Beyer)

Temple University Japan