1. Batchelder v. Kawamoto 2014-04-16 International Business Law Laura Vidotto (132SIS59)

2. Plaintiff: Mr. Harry C. Batchelder Holder of 1,246 American Depositary Receipts of Honda Japan Defendant: Mr. Nobuhiko Kawamoto CEO of Honda Motors & others

3. Depositary receipt:  Financial negotiable instrument  Issued by a bank  Represents foreign company’s publicly traded securities  Traded on a local security exchange Broker (Country A) Custodian Bank (Country A) Depositary Bank (Country B)

4. The Facts Batchelder Morgan Guaranty American Honda Honda Japan Director Defendants Lyon & Lyon has 1,246 ADR of derivative action in behalf of against ADR issued by Deposit agreement

5. The Facts District court: Batchelder: Asserted “shareholder” derivative claims for breach of duty, waste of corporate assets, abuse of control, constructive violation, mismanagement, dissemination of false and misleading proxy statements in violation of United States Code, title 15, 78n(a) Batchelder: Asserted “shareholder” derivative claims for breach of duty, waste of corporate assets, abuse of control, constructive violation, mismanagement, dissemination of false and misleading proxy statements in violation of United States Code, title 15, 78n(a) Director Defendants, American Honda and Lyon&Lyon: Filed motion to dismiss the case

6. The Facts District court dismissed Batchelder’s complaint :  Batchelder is not a shareholder under the Japanese law (choice of law of deposit agreement)  Batchelder has no right to derivative actions District court dismissed Batchelder’s complaint :  Batchelder is not a shareholder under the Japanese law (choice of law of deposit agreement)  Batchelder has no right to derivative actions Batchelder appeals

7. Issue Whether the holder of an American Depositary Receipt has standing to bring a shareholder derivative action against a Japanese corporation 1) ADR holder = shareholder? 2) ADR = share?

8. Rule The general rule is that the governing law of a contract is the one expressed in the choice-of-law clause, which should be enforced in cases of “freely negotiated private international agreements” (i.e. deposit agreement)

9. Analysis Standing to bring derivative action is not determined by Japanese law but by Federal Rules of Civil Procedure or California Corporation Code (need of conflict of law analysis) ADR holders are shareholders, whether under Japanese or American law. He is entitled to a double derivative action in behalf of Honda Japan and American Honda Standing to bring a derivative action is determined by Japanese law ADR holders are not shareholders Batchelder is not entitled to a double derivative action

10. Analysis Deposit agreement has choice-of-law clause (Section 7.07)  Law of State of New York for contract rights and construction of the deposit agreement  Japanese law for regulating shareholders’ rights and company’s duties and obligations towards them. Batchelder wants to assert a “shareholder right” not specified in the deposit agreement. Japanese law has to be applied.

11. Analysis  According to Depositary agreement, Batchelder’s standing to derivative action is determined by Japanese law  Japanese Commercial Code gives derivative action right only to “any shareholder”, not ADR holders  According to Japanese law expert Professor Kitazawa ADR holders are not shareholders (i.e. no derivative action right)

12. Analysis The Court of Appeal concluded that Batchelder had no standing to a derivative action as a ADR holder under the Japanese law The Court affirmed the district court’s dismissal

13. Conclusion No, the holder of an American Depositary Receipt has standing to bring a shareholder derivative action against a Japanese corporation ADR holder ≠ shareholder ADR ≠ share

14. Discussion questions  Should have the contract better specified the substantial difference between an ADR and a share?  What are the advantages and disadvantages of a deposit receipt? What would you prefer?

15. Thank you!