The maker of cameras and medical equipment said on Tuesday all board members subject to the lawsuit would quit in March or April, leaving it in the extraordinary position for now of continuing with its most senior executive, Shuichi Takayama, and five other directors it is suing for mismanagement.

One analyst likened the current board to condemned men, resigned to their fate, and said they would have difficulty over the next few months making any strategic decisions, leaving Olympus more vulnerable to an eventual takeover.

"Essentially, everyone feels they are on death row. It does seem extremely strange to have the death-row cell inside the company," said Nicholas Smith, head of Japanese equity strategy at CLSA in Tokyo.

"Having nobody at the helm makes it easier for a takeover," he added.

Olympus shares surged as much as 28 percent on the news, with investors betting the company's clean-up efforts would help it to avoid a humiliating delisting from the Tokyo Stock Exchange, in turn helping to ensure it stayed on bidders' radars. The stock ended up 20 percent.

Investors also looked forward to the eventual renewal of the board and to Olympus finally drawing a line under a $1.7 billion accounting fraud which has thrown a spotlight on Japan's reputation for weak corporate governance.

Olympus has lost almost half its market value since the scandal first erupted in October, when it fired its British boss Michael Woodford, a rare foreign CEO in Japan, for questioning dodgy acquisition deals at the heart of the scandal.

"The plan is for the current board members who were found responsible and are subject to lawsuits to complete passing on their roles to avoid any impact on business implementation, and all resign at an extraordinary shareholders' meeting that is set to be held in March or April 2012," Olympus said in a statement.

Six of Olympus' 11 directors are being sued: five of its eight internal directors and one of its three external directors.

Woodford, who went public with his concerns after his sacking, said last week he was abandoning a bid to be reinstated to his old job, lashing out at big Japanese shareholders for their failure to back his bid.

Also among those being sued by Olympus are former Chairman Tsuyoshi Kikukawa, former Executive Vice President Hisashi Mori and former internal auditor Hideo Yamada.

An outside investigative panel found last year that this trio had played leading roles in a 13-year scheme to hide losses from Olympus investors.

Former presidents Masatoshi Kishimoto and Toshiro Shimoyama were also included in the lawsuits.

Olympus is seeking up to 3.6 billion yen ($47 million) in damages, with Kikukawa, Mori and Yamada being targeted for the largest amounts.

Shimoyama, who was president from 1984 to 1993, when the firm made many of the securities investments that later turned sour, declined comment, saying he had not seen the lawsuit.

Olympus said President Takayama had no public comment at this point and others could not be reached.

Olympus' decision to sue follows a report by a separate panel appointed by the firm to look into who was to blame for the scandal. The panel said the 19 current and former executives bore various degrees of responsibility.

"Considering that the truth would have remained in the dark if Woodford had not raised doubts, we must have deep misgivings about the closed nature of Olympus' management to date and the weakness of its corporate governance, which allowed this situation," said this panel's report, released on Tuesday.

SHARES SURGE

Some big Japanese investors resisted Woodford's campaign to be reinstated. They said very little publicly, but investment bankers say they were uncomfortable with the Englishman's combative style and also his plans to recapitalize the company through private equity or a rights issue.

Rights issues are unwieldy and rare in Japan and private equity firms are often viewed as foreign asset strippers.

Takayama, in a memo sent to employees on Tuesday and obtained by Reuters, said he and others who were set to resign at the shareholders' meeting would not be actively involved in nominating new directors or in drafting a new business plan.

But he added that two internal teams formed to revitalize Olympus and improve its corporate governance -- he heads both -- would continue to draft proposals for the meeting, though these would first be vetted by outside experts on management reform.

Olympus remains under joint investigation by Japanese police, prosecutors and regulators and that probe could eventually result in criminal charges, although experts have said the firm itself is unlikely to be targeted.

British and U.S. authorities are also investigating the affair, which has tarnished the reputation of the once-proud 92-year-old firm and has also stirred calls for reform of Japan's corporate governance regime.

Sources told Reuters on Monday that the Tokyo Stock Exchange was likely to keep Olympus listed under a "security on alert" designation, which would effectively enable it to remain traded provided it showed steady improvement in its internal controls.

The bourse said on Tuesday it had reached no decision.

"Investors are welcoming the move that Olympus shares will remain listed," said Ryosuke Okazaki, a director at ITC Investment Partners Corp.

"Investors who have been holding short positions are buying them back heavily. Also investors may be allocating funds into Olympus due to the expectation that the company will have a new governance.

"As Olympus shares are likely to be remain listed, investors are now eyeing the company to be in the target of M&A. In this kind of mood, shares are being bought back heavily today," Okazaki added. Olympus shares pared some gains but were still up more than 20 percent in mid-afternoon trade.

Olympus is in need of fresh capital after the accounting fraud, with its accounts recently restated to show that it is highly leveraged. Among firms rumored to be potential buyers or partners in a new capital tie-up with Olympus are Fujifilm, Hoya, Panasonic and Sony. ($1 = 76.8500 Japanese yen)

(Additional reporting by Reiji Murai, Nobuhiro Kubo, Maki Shiraki and Mari Saito; Writing by Linda Sieg; Editing by Chris Gallagher and Mark Bendeich)

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