JAPAN Trends and Developments Contributed by: Takao Shojima, Naohiro Nomura and Taiki Hirono, Anderson Mori & Tomotsune
bonds with warrants), each investor is typically enti - tled to acquire such securities in proportion to their existing fully diluted shareholding and voting ratios. This allows investors to maintain their relative owner - ship in the company despite new issuances. Stock options An exception to the above principle is stock options: if the company issues options to officers or employ - ees within a previously agreed percentage threshold, investors generally do not have the right to acquire these new shares. Transfer of shares by investors Investors are usually free to transfer all or part of their shares to a third party, provided they comply with applicable laws and the company’s articles of incor - poration. Transfer of shares by management shareholders/tag- along rights/right of first refusal Management shareholders are generally restricted from transferring their shares to third parties. Should a management shareholder wish to transfer shares, they must notify the investors in advance. Upon receiving such notice, investors have a right of first refusal – to purchase the shares under the same conditions. If investors decline, the management shareholder can proceed with the transfer, but in that case, investors usually have tag-along rights, allowing them to sell their own shares as well under the same terms. Drag-along rights If the majority investor decides to sell their shares to a third party, or proposes a major corporate transaction (such as a merger, share transfer, business transfer or company split), they may have the right to require all other investors and management shareholders to sell their shares under the same terms as the majority investor. Deemed liquidation If a majority of the company’s voting rights are trans - ferred to a third party, the total proceeds from the transaction are treated as the company’s residual assets. The company then distributes these assets among shareholders according to the terms set out
in the articles of incorporation, treating all classes of shareholders who receive such consideration as if they were shareholders at the time of liquidation. Other key provisions Most favoured nation (MFN) clause If the company or management enters into an invest - ment agreement with another third-party investor on terms more favourable than those offered to exist - ing investors, the MFN clause ensures that existing investors automatically receive the benefit of these improved terms. Statutory Company Splits for Establishing Joint Ventures About company splits A statutory company split is a legal mechanism under Japan’s Companies Act, allowing a company to trans - fer all or part of its businesses – including assets, debts, contracts, intellectual property and employees – to another party. This process is often used as an efficient way to structure joint ventures. To complete a company split, a series of statutory procedures are required. These include: • passing a shareholder resolution approving the split; • issuing public notices that give creditors an oppor - tunity to object; • giving notices to shareholders regarding their opportunity to object; and • making both prior and subsequent disclosures about the transaction. There are two major types of company splits: • absorption-type split – the business is transferred to an existing company; and • incorporation-type split – the business is trans - ferred to a newly established company. When forming a joint venture, the absorption-type split is most commonly used. Though similar to a standard business transfer, the company split differs in a key way: all related assets, liabilities, contracts and employees automatically
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