JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism In Japan, both fixed-price arrangements and comple - tion account mechanisms with respect to considera - tion structures are commonly used in private equity transactions, while locked-box mechanisms are rare. Earn-outs are not frequently seen, but are sometimes used in the acquisition of pharmaceutical and start- up companies to bridge a valuation gap between the seller and the buyer resulting from the inherent uncer - tainty regarding the target’s success. As discussed in 8.1 Equity Incentivisation and Ownership , rollover structures are sometimes seen in Japanese private equity deals. Fixed-price arrangements are common in relative - ly small transactions, or in transactions where the interim period between the signing and the closing is expected to be relatively short. In such cases, par - ties may want to minimise the administrative burden and expense of post-closing adjustments, and buyers tend to rely on interim covenants (covering conduct of business prior to closing) and representations and warranties (such as no material adverse effect after the latest financial statements date). In transactions where there are completion account mechanisms, the purchase price is usually adjusted based on net indebtedness and net working capital. In Japan, it is not common for private equity sellers to provide specific protections in relation to considera - tion mechanisms (such as adjustment escrows), and the terms relating to consideration mechanisms do not usually differ much from those with a corporate seller. Private equity buyers cannot usually provide a guar - antee to secure the obligations of the acquiring entity. To deal with their concerns regarding closing uncer - tainties in relation to financing, sellers often ask the buyer to submit binding debt commitment letters from banks prior to the execution of transaction documents (especially in an auction process). Equity commitment letters are less common but – specifically for going- private transactions, where tender offers are regu - lated under the Financial Instrument and Exchange
5.3 Funding Structure of Private Equity Transactions A private equity buyer will typically fund its acquisition entity with its own capital and with loans from banks, sometimes accompanied by mezzanine investments in the form of subordinated loans, preferred shares or convertible bonds. A private equity fund will typically acquire a controlling stake in the target, and the sen - ior lenders will take security over material company assets. In a tender offer, the acquisition entity will be required to provide evidence of its financing, both equity and debt, and must submit equity and debt commitment letters to the regulator, which will be publicly disclosed together with the registration statement. A seller in an auction process of a private target would also often require a private equity bidder to submit debt and equity commitment letters as part of the binding offer package. Because debt financing has continued to be avail - able in Japan due to the continued low interest rates, there has not been any material change in the market practice for the past 12 months. 5.4 Multiple Investors Club deals are not frequently seen in Japan, partly because the deal size may not be as large as in the United States or some other jurisdictions. In a trans - action with a large deal value, a consortium may be formed, as was the case in the acquisition of Kioxia (then known as Toshiba Memory) by a consortium formed by Bain Capital and strategic investors (where the aggregate value of the equity and debt invest - ments was approximately JPY2 trillion) and the public- to-private transaction of Toshiba launched in August 2023 by a consortium led by Japan Industrial Partners for JPY2.1 trillion. An example of a relatively smaller transaction is the management buyout of Topcon Cor - poration by KKR and Japan Investment Corporation for JPY350 billion in 2025.
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