HOW TO START YOUR BUSINESS IN JAPAN – M&A

Yuki Sato

Attorney at Law Admitted in Japan and New York

Topic

1. M&A in Japan

Types of M&A Transaction

M&A Process (LOI, DD, Reps and Warranties and Post Closing)

2. Investment in Real Estate in Japan

2

M&A in Japan

3

Recent M&A Trends in Japan

4

From Recof Merger and Acquisition Database (https://www.marr.jp/marr/product/recofdb.html)

5 Unique Features of M&A in Japan

1. Company Split 2. No Duty of Loyalty of Controlling

Shareholder 3. Longer Time Frame 4. Special Act to protect Employees

through M&A Process 5. No Established Court Precedents re.

Reps and Warranties

5

How to start/expand your business in Japan?

Distributor

Branch

Subsidiary

☆ M&A

6

Types of M&A Transaction

Merger

Company Split

Asset Transfer

(Share Exchange)

Share Purchase

7

Company Split

8

[Before Company Split] [After Company Split]

Company A

Shareholders

Company B

Absorption – type Company Split

Shareholders

Company A

Shareholders

Company B

Cash, Shares, etc.

Shareholders

Asset Purchase

9

[Before Asset Transfer] [After Asset Transfer]

Company A

Shareholders

Company B

Asset Transfer

Shareholders

Company A

Shareholders

Company B

Cash

Shareholders

Pros and Cons of Each Method Need Stock Corporation in Japan?

Protection (Notification) of Creditors

Transfer of Employment Contracts

Tax Issues

Merger Yes Yes*1 Yes Taxation on gain from the transfer of property. However, in “qualified merger”, you can defer recognizing capital gains.

Company Split

Yes Yes*1 Yes, but restricted by the special act.

Asset Purchase

No Yes*1 Also needs consents from all contractual parties.

Yes, but restricted by the special act.

Heavier compared with Corporate split (e.g. consumption tax, real estate acquisition tax, real estate registration tax)

Share Purchase

No No

10

M&A Process

11

Planning of Sale of a company

Searching for a Buyer

Preparation of Outline of the Company for

the Potential Buyer(s)

Receipt of Confidentiality Pledge

Preliminary Due Diligence Preliminary Due Diligence

Submission of Confidentiality Pledge

Research on the Company from Sources

other than the Target Company

Selecting a Target Company

Hearing from the Target

Company

Planning of M&A

【Seller】 【Buyer】

M&A Process (Continues)

12

Negotiation of the prices, etc.

LOI

Due Diligence

Negotiation for the Final

Agreement

M&A Agreement

Fulfillment of

obligations/CPs

Closing

Letter of Intent

Contents: • Intention to purchase a target company • Purchase price with certain conditions • Scope of Due Diligence • Exclusivity

Q. Legally binding in Japan? A. Depending on wordings of each LOI. You may have a duty to negotiate in good faith.

13

Legal Due Diligence – Major Issues

1. License, Government Approval

2. Major Contracts (e.g. Change of Control)

3. Product Liability

4. FCPA and any other anti-bribery laws

5. Regulation including Merger Control

14

Legal Due Diligence – Major Issues (Continues)

6. Labor Law Issue (Act on the Succession to Labor Contracts upon Company Split)

7. Intellectual Property (especially, employees’ invention)

8. Anti-social Forces 9. (If BtoC business) Personal Information

Protection Act, Act against Unjustifiable Premiums and Misleading Representations

15

How to Handle Findings during Legal Due Diligence

1. Including them in representation and warranties

2. Including them in covenants

3. Including them in CPs

4. Adjustment of the price

5. (Special) Indemnification

16

Representations and Warranties

Statement that certain facts are true and accurate at the signing date and closing date backed by indemnity

Functions: Allocation of Risks, Disclose of necessary information

17

Representations and Warranties

Natures of Reps and Warranties in Japan?

Our suggestion based on recent court precedents: • Tokyo District Court, January 17, 2006

• Osaka District Court, July 25, 2011

18

Post Closing

Amendment of Registration (corporate registry and real estate registry)

Obligation to cooperate

Adjustment of the price, earn out provision

19

Addendum - Resent Trends in Japan

Enforcement of Corporate Governance Code

Compliance

Still many officers and employees who are not familiar with cross-border transactions

20

Appendix

21

Merger

22

[Before Merger] [After Merger]

Company A

Company B

U.S.

Japan

Shareholders

Company C

Company A

Company B

Shareholders

*Company A can squeeze out former Company C’s shareholders by giving cash for considerations.

100% 100%

Merger

Shareholders

Share Purchase

23

[Before Asset Purchase] [After Asset Purchase]

Company B

Shareholders

Company A

Share Transfer

Company B

Shareholders

Company A

24

If you have any questions, please do not hesitate to contact us! Yuki Sato 81-3-3591-7148 yuki.sato@torachu.com sato@namura-law.jp https://twitter.com/YukiSatoLaw

Q&A Session