JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
5. Structure of Transactions 5.1 Structure of the Acquisition
A typical legal due diligence investigation of a Japa - nese target covers capitalisation, corporate govern - ance, material contracts and assets, debt and other liabilities, employment, governmental authorisations, legal compliance, and litigation and disputes. For a private equity acquirer, the investigation of debt and material assets would involve analysis of the prepay - ment terms of existing indebtedness and considera - tion of a security package to be negotiated with the debt provider. Corruption risks pertaining to business conducted in Japan are generally considered low, but the Japa - nese government is paying closer attention to the for - eign corrupt practices of Japanese companies, and strengthening enforcement. As such, due attention should be paid to whether the target has sufficient systems in place to control foreign corruption risk. As in many other jurisdictions, there is an increas - ing business focus on customer and user data, which means that data protection compliance is becoming a new focus of legal due diligence. 4.2 Vendor Due Diligence It is not common for a buyer to be able to see or rely upon a vendor financial due diligence report or vendor legal due diligence report, even in an auction sale. A vendor may conduct its own due diligence investiga - tion in order to prepare for negotiations with potential buyers, but that is different from full-scale due dili - gence and the results would not typically be shared with potential buyers. If a vendor were to provide a due diligence report to a potential buyer, it would usually be on a non-reliance basis only. On the other hand, a buyer would usually be able to rely on due diligence reports prepared by its own advisers, but the buyer’s equity and debt providers are not typically permitted to rely on reports prepared by the buyer’s advisers.
The acquisition of a non-listed company by a private equity buyer would typically be structured as a stock sale, unless there is a specific reason to prefer an asset sale (eg, a high risk of hidden liabilities). The acquisition of a business by a private equity buyer from a company, whether listed or non-listed, would typically be carried out in the form of a straightforward asset sale or statutory demerger ( kaisha bunkatsu ) under the Companies Act. The transferred assets and assumed liabilities can be specified in both sce - narios, and there is no difference in the effectiveness of the separation of liabilities. It is not necessary to obtain consent from creditors in order to complete a statutory demerger. Instead, there are required proce - dures that must be implemented to protect creditors and employees, which would take at least a month to complete. A going-private transaction of a listed company would typically be carried out in a two-step acquisition, comprising a first-step tender offer and a subsequent squeeze-out transaction. See 7.6 Acquiring Less Than 100% for details of the squeeze-out transaction. A one-step cash merger is not typical, as it would trigger a revaluation of the transferred assets for tax purposes, and taxable income will be recognised on the difference between book value and fair value. In general, deal terms would be more competitive in an auction sale and there would be fewer representations and warranties made by the seller. 5.2 Structure of the Buyer A private equity fund would typically form an acquisi - tion entity, which is usually a corporation ( kabushiki kaisha ). Conceivably, a limited liability company ( godo kaisha ) could be used, but that is not usually an option because there is a legal hurdle for a limited liability company to enter into a commitment line agreement with banks to secure working capital. Generally speaking, it is not common for a private equity fund to be a party to an acquisition or sale agreement, or to provide a separate guarantee.
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