JAPAN Law and Practice Contributed by: Hiroki Aoyama, Yuki Matsuda and Shuhei Takaishi, Mori Hamada
vention Act, which aims to prevent money laundering and financial support for terrorism activities. To that end, the Act requires financial institutions to: • undertake know-your-customer procedures before entering into a loan transaction with a borrower; • create and maintain transaction records; • report to the relevant authority if they find suspi- cious transactions; and • identify the individuals who have substantial con- trol over corporate borrowers. If the loan proceeds are used for money laundering, terrorism or other anti-social activities, it may expose lenders to reputational risks at the very least. To miti- gate this risk, the use of the proceeds of a bank loan is usually specified in the loan agreement, and misuse thereof would be an event of default. Under standard syndicated loan documentation, the unanimous vote of the lenders is required in order for the borrower to In general terms, Japanese law recognises the con- cepts of agent and trust. In practice, administrative agents and security agents are commonly appointed in syndicated loan transactions governed by Japa- nese law. However, the agents’ roles are limited to administrative functions in most cases, and parallel debt structures (whereby the parallel debts belong to the agent who holds security interests on behalf of the lenders) are rarely adopted, although such structures are not impossible under Japanese law. change the use of the proceeds. 3.5 Agent and Trust Concepts The use of security trust structures – whereby the security trustee holds security interests on behalf of the lenders – is also limited, although they are explic- itly permitted under Japanese law. In many cases, each of the syndicated lenders holds its security inter- est on its own behalf and an inter-creditor agreement sets out the restrictions on its exercise, such as the enforcement being prohibited in the absence of major- ity lenders’ consent. 3.6 Loan Transfer Mechanisms The most common transfer mechanism in the sec- ondary loan market is the outright transfer of loan receivables. A loan receivable can be transferred
without the borrower’s consent, unless the relevant loan document provides otherwise. The benefit of the associated security package can be transferred, with or without the consent of the security provider and other lenders, depending on the nature of the security interests, such as whether the security interest is a fixed security or a blanket security. Many loan docu- ments oblige the security providers to co-operate with the secondary transaction by giving consent to the transfer of the security interest, subject to certain conditions. Another secondary mechanism is loan participation. Under a participation arrangement, the loan receiv- able and security package does not legally transfer to the participant. As such, the participant benefits indirectly from the security package via the lender’s enforcement. 3.7 Debt Buyback Japanese law does not prohibit a borrower or sponsor from agreeing with the lenders to buy back its debt. If the borrower buys back its own debt, the debt auto- matically disappears, unless it is provided as collateral in favour of a third party. If a sponsor buys back the debt, the debt obligation remains outstanding, which creates an issue regarding how to treat the sponsor’s share of the debt in the context of syndicate voting. Some syndicate loan agreements address this situa- tion, but many others do not. 3.8 Public Acquisition Finance Under the Japanese tender offer bid (TOB) regulation, the offeror must be able to demonstrate its ability to fund its tender offer at the launch date. The offeror may satisfy this requirement by submitting a com- mitment letter provided by a financial institution. The Japanese Financial Services Agency (the FSA) has stated that the commitment letter provided for this purpose must evidence the certainty of funding to a fairly reliable degree. However, no further details of this requirement have been officially announced. In practice, the relevant financial bureau may provide comments on the draft commitment letter before the launch date of the tender offer. Borrowers generally negotiate with the lenders over the conditions precedent to eliminate the uncertainty
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