*Oasis initiates shareholder derivative lawsuit after Kobayashi Pharma’s Company Auditors choose not to file
*Oasis submitted a request to Kobayashi Pharma Auditors to commence legal action against its Directors on Nov. 20, 2024
*Oasis estimates that damages incurred by Kobayashi Pharma due to Directors’ breach of duties total approx. JPY 11 billion
HONG KONG--(BUSINESS WIRE)--Oasis Management Company Ltd. (“Oasis”) is the manager to funds that beneficially own approximately 10.1% of Japanese pharmaceuticals and food products manufacturer Kobayashi Pharmaceutical Co., Ltd. (4967 JT) (“Kobayashi Pharma” or the “Company”). Oasis has adopted the Japan FSA’s “Principles of Responsible Institutional Investors” (a/k/a the Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with its investee companies.
Oasis has been engaging with Kobayashi Pharma since 2023 with the aim to help improve the Company’s corporate governance and corporate value. In light of the health hazard scandal (the “Beni-koji Scandal”) that surfaced in March 2024 related to the Company’s Beni-koji Choleste-Help products (the “Products”), Oasis has accelerated its engagement efforts to enhance the Company’s governance, to secure appropriate reparations for the victims and their families, and to ensure improved product safety going forward.
In November 2024, Oasis, as a shareholder of Kobayashi Pharma, submitted a request to Kobayashi Pharma’s Company Auditors (the “Auditors”) for the initiation of a shareholder derivative lawsuit in order to address the deficiencies in Kobayashi Pharma’s quality-control structure and the lack of legal compliance awareness that had come to light in connection with the Beni-koji Scandal, and to hold the Directors accountable. Unfortunately, the Auditors have made the decision not to file a lawsuit.
According to the “Statement of Reasons for Not Suing the Directors” provided to Oasis by the Auditors, the Auditors determined that only Mr. Akihiro Kobayashi had executive power with respect to quality control for the food products produced and supplied by Kobayashi Pharma, as well as for decisions related to the response to the Beni-koji Scandal. Therefore, the directors other than Mr. Akihiro Kobayashi were deemed to have no primary responsibilities, with potential liability arising for the failure of their supervisory roles only if Mr. Akihiro Kobayashi violated his obligations as the executive director.
The Auditors’ decision ultimately upholds Mr. Akihiro Kobayashi’s actions in the name of “business judgement”. We believe this decision is fundamentally flawed. Based on the devastating outcome – hundreds of consumer fatalities, hospitalizations, and severe health damages due to the Beni-koji Scandal, according to the Ministry of Health, Labor and Welfare -- Mr. Akihiro Kobayashi’s failure to prioritize consumer safety was both irrational and dangerous. The Auditors’ refusal to hold Mr. Akihiro Kobayashi legally liable based on the pretext of “business judgement” is, from the perspective of shareholders and common sense, indefensible and completely unacceptable.
Furthermore, Kobayashi Pharma held a press conference on January 21, 2025, at which Director Satoshi Yamane explained the Company’s response to Oasis’s request for a lawsuit against the directors. However, as provided in Article 386, Paragraph 2, Item 2 of the Companies Act, only the Auditors have the authority to represent a company in respect to the request for such a lawsuit. Mr. Yamane had no right to represent the Company in this respect.
Each Auditor is required to make a fair decision on the directors’ accountabilities, independently from the Company’s management. Allowing Mr. Yamane to explain the response to the request for a lawsuit for and on behalf of Kobayashi Pharma was a clear oversight, as he not only lacked the authority to do so but would also, in fact, be a defendant in the requested lawsuit. Notably, neither Auditor attended the press conference, despite the fact that they are the only individuals authorized to explain the Auditors’ decision. The decision to have Mr. Yamane address the request for the lawsuit illustrates the lack of independence from management in the Auditors’ decision-making process.
In light of these corporate governance failures, Oasis has initiated a shareholder derivative lawsuit against Kobayashi Pharma’s Directors to recover approximately JPY 11 billion in damages on behalf of the Company:
- Mr. Kazumasa Kobayashi, Chairman and Executive Director at the time of the Beni-Koji Scandal
- Mr. Akihiro Kobayashi, President and Executive Director at the time of the Beni-Koji Scandal
- Mr. Satoshi Yamane, Executive Director at the time of Beni-Koji Scandal
- Mr. Kunio Ito, Outside Director
- Ms. Kaori Sasaki, Outside Director
- Ms. Chiaki Ariizumi, Outside Director
- Mr. Yoshiro Katae, Outside Director
Background Leading to the Initiation of Preparation for the Shareholder Derivative Lawsuit: An Overview of Kobayashi Pharma’s Beni-Koji Scandal
Although the Company was informed by a physician in mid-January 2024 of a health hazard incident possibly caused by the Products, the Company did not publicize the Beni-Koji Scandal until the announcement of a voluntary recall of Beni-koji-related products, including the Products, on March 22, 2024, over two months later. Subsequently, on March 27, the Ministry of Health, Labor and Welfare (the “MHLW”) presented its view that the Products produced by Kobayashi Pharma should be treated as a violation of Article 6, Item 2 of the Food Sanitation Law.
The damage to consumers caused by the Beni-koji Scandal is extremely serious. Specifically, according to the MHLW, up to January 19, 2025, there were 399 fatalities, 549 inpatients requiring hospitalization, and 2,670 patients in medical institutions. The Beni-koji Scandal has caused numerous types of severe damage affecting the lives and health of consumers and, despite nearly one year having passed since the initial report from the physician, the final number of victims has yet to be determined.
Basis of the Claims
Based on information revealed in the Fact-Finding Committee’s report and various media reports, Oasis believes that the following points, at a minimum, could constitute a breach of the obligations of the Company’s Directors:
- Breach of Duty to Establish and Cause the Company to Implement a Quality-Control Structure
- Inadequate personnel control system
- Inadequate facilities control system
- Breach of the Executive Directors’ Obligation to Prevent the Occurrence and Spread of Danger to the Lives, Bodies, and Health of Consumers
- Belated report to the authorities and disclosure of the Beni-koji Scandal based on wrong interpretation of related guidelines
- Failure to establish a Crisis Management Headquarters
- Failure to implement other effective crisis management measures
- Dysfunctional Supervision by Outside Directors
- Inadequate supervision to prevent defects in the quality-control structure
- Failure to establish a system for sharing information with the Outside Directors
- Failure to understand the Beni-koji Scandal
- Failure to correctly report to the MHLW the “number of cases being investigated for the relationship with deaths”
Seth Fischer, Founder and Chief Investment Officer of Oasis, said:
“The actions taken by Kobayashi Pharma’s Directors have led to irreparable harm for the victims of the Beni-Koji Scandal and their families, and for the Company itself. As shareholders, we are taking action to ensure accountability by holding the Directors responsible for their breaches of duty and to prevent such a tragedy from recurring ever again.”
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Oasis Management Company Ltd. manages private investment funds focused on opportunities in a wide array of asset classes across countries and sectors. Oasis was founded in 2002 by Seth H. Fischer, who leads the firm as its Chief Investment Officer. More information about Oasis is available at https://oasiscm.com. Oasis has adopted the Japan FSA’s “Principles of Responsible Institutional Investors” (a/k/a the Japan Stewardship Code) and, in line with those principles, Oasis monitors and engages with our investee companies.
The information and opinion contained in this press release (referred to as the “Document”) is provided by Oasis Management Company (“Oasis”) for informational purposes only or for reference purposes only. The Document is not intended to solicit or seek shareholders to, jointly with Oasis, acquire or transfer, or exercise any voting rights or other shareholder’s rights with respect to any shares or other securities of a specific company which are subject to the disclosure requirements under the large shareholding disclosure rules under the Financial Instrument and Exchange Act. Shareholders that have an agreement to jointly exercise their voting rights are regarded as Joint Holders under the Japanese large shareholding disclosure rules and they must file notification of their aggregate shareholding with the relevant Japanese authority for public disclosure under the Financial Instruments and Exchange Act. Except for the case where Oasis expressly enters into the agreement as a joint holder requiring such disclosure, Oasis does not intend to take any action triggering reporting obligations as a Joint Holder. The Document exclusively represents the opinions, interpretations, and estimates of Oasis.
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