JAPAN Law and Practice Contributed by: Yusuke Murakami, Nobuhiko Suzuki, Yuma Ito and Masataka Hayano, Mori Hamada & Matsumoto
financing through loans from government-sponsored financial institutions (such as the Japan Finance Cor- poration). Crowdfunding is not the main source of early-stage financing but is also available in Japan. Providers of early-stage financing typically have their own template documentation for financing, but angel investors sometimes invest in common shares without formal documentation to save administrative burden and costs. Early-stage financing is typically made through common shares or preferred shares, or convertible bonds or equity. Convertible equity in Japan uses an equity instrument called share acqui- sition rights, and there is a well-known seed-round convertible equity instrument called J-KISS, created by Coral Capital. 2.2 Liquidity Events Liquidity Events Historically, founders of start-up companies preferred IPOs, and the prevalent liquidity event was to take the company public. According to a report published by METI, approximately 70% of exits between 2017 and 2019 were made through IPOs. However, we have seen a growing trend of exits through M&A transac- tions. The Japanese government is actively working to facilitate M&A sales for start-up companies. For exam- ple, in 2023, the government expanded the existing tax incentive for companies that invest in start-ups to cover M&A deals. Companies that acquire more than half of the voting shares of start-up companies can, subject to certain conditions, deduct 25% of the acquisition cost from their taxable income. A dual-track process is not prevalent among Japa- nese start-up companies yet due to limited M&A opportunities as compared to the US, but could be considered by start-up companies where M&A is a viable option. For example, Paidy Inc., a Japanese online deferred payment service provider, underwent a dual-track process, and was eventually acquired by
companies have pursued a listing on the NASDAQ. These include MEDIROM Healthcare Technologies in the healthcare sector and TOYO Co., Ltd., a manufac- turer of solar power panels. One of the reasons is that the NASDAQ’s listing standard requires less time to prepare for an IPO (around 18 months), whereas com- panies must prepare for at least three years in order to conduct an IPO on a Japanese stock exchange. Sale: Transaction Structure A typical transaction structure for an M&A exit would be a share sale and purchase. As the major share- holders usually have drag-along rights, this structure is selected even if the company has a number of VC investors. While the acquisition could be implemented through statutory corporate reorganisation procedures such as a merger or share exchange (ie, a statutory proce- dure in which a company acquires 100% of the shares in another company), they are not widely used. One of the reasons may be because the Companies Act requires certain statutory creditor protection proce- dures as well as disclosures, and a merger or share exchange agreement is not as flexible as a share pur- chase agreement. There may also be negative tax consequences for the target company if the merger or share exchange does not qualify as a tax-qualified merger or share exchange. The current trend is to sell the entire company rather than to sell only a controlling interest. Because many acquirers are strategic buyers, they prefer to acquire 100% of the company; however, in some cases, key management and employees may be eligible to own equity in the company after the transaction.
3. Spin-Offs 3.1 Trends: Spin-Offs
PayPal Holdings, Inc. IPO: Choice of Listing
Spin-offs and carve-out transactions are becoming increasingly common as options in the energy and infrastructure space in Japan. In recent years, many developers have been keen to pursue and maximise the scale of development as well as synergies between
In respect of IPOs, most companies are likely to pur- sue a listing on a Japanese stock exchange if their main business is conducted in Japan. However, recently, some – but still a small number of – Japanese
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