JAPAN Law and Practice Contributed by: Akira Matsushita, Norihito Sato, Hideki Ben and Nobuhiko Suzuki, Mori Hamada
Further Funding A JV agreement usually provides that JV partners have no obligation to fund or provide a guaranty; thus, JVs usually rely on loans from third parties such as banks. However, as it may be difficult to secure exter - nal financing depending on the financial conditions of the JV company, a JV agreement would likely stipu - late that shareholders discuss and agree to provide a guaranty to support the JV company. Equity financing is usually stipulated as a reserved matter (see 6.2 Governance and Decision-Making ). It is often the case that all the JV partners will be offered the opportunity to subscribe for newly issued shares in proportion to their shareholding in the JV company (a pre-emptive right), rather than minority sharehold - A loan from JV partners is also an option and is usu - ally a reserved matter. Interest payments to affiliated foreign corporations are subject to thin-capitalisation rules (with a 3:1 debt-equity ratio) and earnings strip - ping rules (with a 20% threshold of adjusted income) where the excess amount of interest payable would not be tax-deductible. 6.4 Deadlocks In order to resolve a deadlock, delegates of the JV partners initially discuss the matter for a certain peri - od of time, and the JV partners are usually obliged to ensure that their delegates discuss in good faith. If not resolved at that stage, the matter is escalated to higher-level executives of the JV partners who will continue discussing for a further period of time. Occasionally, the JV agreement would provide for: • a put option to sell a JV partner’s shares to the other JV partners; • a call option to acquire the shares of the other JV partners; or • a right to dissolve the JV, where the right is trig - gered if the deadlock is not resolved amicably. 6.5 Other Documentation ers having a veto right. Loans From JV Partners If assets necessary for the JV’s operation such as IP, factories and facilities are transferred to the JV com -
pany in exchange for equity in the JV company (con - tribution in kind) or through a company split ( kaisha bunkatsu ) pursuant to the CA, the foregoing arrange - ments will be provided in the JV agreement. If a JV partner licenses rather than transfers the IP to the JV company, a licence agreement between the JV com - pany and the JV partner will be executed (see 8. IP and ESG for more detail). Also, a JV partner often enters into lease agreements under which offices or factories are leased to the JV company. If a JV partner seconds its employees to the JV com - pany, an employee secondment agreement between the JV company and the JV partner will be executed. If products or services are sourced from or provided to a JV partner, relevant agreements – such as supply agreements, distribution agreements and outsourcing agreements with respect to business administration and general affairs – will be executed between the JV company and the JV partner. 6.6 Rights and Obligations of JV Partners Most JVs in Japan are structured as corporations – particularly as stock companies ( kabusihiki-kaisha ). In a stock company, the liability of shareholders is limited to their investment, meaning that they do not share in the company’s losses. The profits of the company are distributed as dividends, generally based on the number of shares held by each shareholder. In order to pay dividends, the company must have capital sur - plus and obtain a shareholders’ resolution (which may be delegated to the board of directors under certain conditions). However, it is possible to change the dis - tribution ratio by issuing class shares. JV agreements often include non-compete clauses, particularly where the JV partners are strategic inves - tors. These clauses restrict the parties from engaging in competing businesses during the JV’s term and sometimes for a period after their exit. Other rights of the JV parties are discussed in 6.7 Minority Protection and Control Rights . As a separate entity, JV parties are not liable for the JV’s debts and obligations. However, the JV partners may contractually agree to provide security interests, guarantees or indemnities for the JV’s obligations.
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