JAPAN Law and Practice Contributed by: Hiroki Aoyama, Yuki Matsuda and Shuhei Takaishi, Mori Hamada
fection procedure for each type of collateral asset. As mentioned in 5.1 Assets and Forms of Security , future (after-acquired) movable property and receiva- bles can be collateralised to the extent that doing so is permitted under the applicable requirements. 5.3 Downstream, Upstream and Cross- Stream Guarantees There are no specific statutory limitations or restric- tions on downstream, upstream and cross-stream guarantees. However, there are often issues in relation to upstream guarantees, due to the general fiduci- ary duty owed by the guarantor’s directors. If a sub- sidiary provides an upstream guarantee solely for the benefit of a majority shareholder (owning less than 100% of the shares in the guarantor) in the absence of the subsidiary’s corporate benefit, the directors of the subsidiary will be exposed to the risk of breaching their fiduciary duties. To avoid this risk, in practice, upstream guarantees are often made subject to the consent of any minority shareholders. 5.4 Restrictions on the Target In general, a subsidiary is restricted from acquiring its parent’s shares. This restriction is interpreted to be applicable not only where the subsidiary legally acquires its parent’s shares, but also to a transac- tion that results in the economically equivalent result. Theoretically, it is not totally clear whether a target providing financial assistance for the acquisition of its own shares conflicts with such a restriction. However, it is common practice for the acquired target company to grant security or provide a guarantee to secure the acquisition facilities borrowed by the parent vehicle and partially funded by the sponsor. If an acquisition vehicle does not acquire 100% of the shares in a target and the target grants security or provides a guarantee in respect of the acquisition, this may give rise to an issue regarding the target director’s fiduciary duties. See 5.3 Downstream, Upstream and
under a liability insurance policy is prohibited. Also, an individual cannot guarantee unspecified obliga- tions without specifying the maximum amount of the guarantee. Guarantee by an individual is restricted in some other respects. 5.6 Release of Typical Forms of Security If the secured obligation of a security interest is speci- fied, the security interest disappears upon full pay- ment of the secured obligation by operation of law. If the secured obligations are designated as a certain group of unspecified obligations, the lenders usually need to release the security interest in order for that security interest to disappear. 5.7 Rules Governing the Priority of Competing Security Interests The general rule is that the priority among several security interests over an asset is determined by ref- erence to the time at which each security interest is perfected, or the first perfected security is given first priority. Therefore, as a matter of ranking the security interests, subordination can be created in many cases by perfecting the subordinated lender’s security after the senior lender perfects its own security. There are technical difficulties in creating several secu- rity interests with different rankings over some types of assets. For example, theoretically, it is not clear whether there can be several security assignments over one property. Moreover, the book-entry system does not accept multiple pledges over dematerialised shares. In these cases, senior lenders and subordi- nated lenders agree to contractual subordination or other arrangements to accomplish a similar outcome. Unsecured Obligations Among unsecured obligations, several methods of subordination are used. Aside from structural subor- dination (which involves borrowing entities at different levels, where the subsidiary borrows senior debt and the parent borrows subordinated debt), there are two types of contractual subordination structure: absolute
Cross-Stream Guaranties . 5.5 Other Restrictions
subordination and relative subordination. Absolute subordination arrangement
In addition to the general rules explained above, there are some special statutory restrictions in relation to granting security or providing guarantees. For exam- ple, granting security over insurance claims arising
Under an absolute subordination arrangement, in an insolvency situation, the payment of subordinated
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