JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
break fee is the failure to obtain regulatory clearance and the amount is typically less than 10% of the trans - action value. There are no specific legal limits on break fees or reverse break fees, but they are usually structured as liquidated damages that would restrict a party from pursuing additional damages claims against the coun - terparty. Structuring them as a penalty (which does not preclude a separate damages claim) is also pos - sible, but such intention must be expressly provided in the transaction agreement. 6.7 Termination Rights in Acquisition Documentation In general, termination events provided in the transac - tion documents for private equity sellers or buyers do not differ significantly from those for corporate sellers or buyers. Usually, the termination right is only exer - cisable before the closing of the transaction. Typical termination events include: • material breach of representations or covenants by the counterparty; • the insolvency of the counterparty; and • the passing of a long-stop date. While it depends on the specificities of the relevant transaction, a long-stop date would be typically nego - tiated based on the anticipated timeline for securing regulatory clearances. 6.8 Allocation of Risk Typical methods to allocate risk between the buyer and the seller in Japan do not differ substantially from general practices in other jurisdictions. Risks are allo - cated through:
ing the target’s business, although the scope of such representations and warranties would be more limited compared to those that would be given by sellers that are not private equity funds. Private equity sellers tend to avoid any post-closing exposures and to limit post-closing covenants and indemnification terms. Limitations on indemnification include short survival periods for representations and warranties (sometimes such survivals are less than a year after the closing) and limitations such as de mini - mis exclusions, deductibles or baskets, and caps on indemnity. Cap amounts negotiated by private equity sellers are often lower than those negotiated by cor - porate sellers. 6.9 Warranty and Indemnity Protection As discussed in 6.8 Allocation of Risk , even when the seller of the target is a private equity fund, the seller’s representations and warranties would usually include representations and warranties regarding the target’s business, although the scope of such representations and warranties would be more limited compared to those that would be given by sellers that are not pri - vate equity funds. Also, representations and warranties given by private equity sellers are often qualified by materiality (which may be simple materiality or “material adverse effect”) and seller’s knowledge (actual or constructive). A pri - vate equity seller would negotiate anti-sandbagging provisions. Although there are a limited number of court precedents, it is generally understood that the courts could deny indemnification claims with respect to breaches of warranties known to the buyer at the time of execution of the transaction document if the transaction document is silent about sandbagging. Exceptions to the representations and warranties are typically carved out by disclosure schedules, and sometimes by full disclosure of the data room. Limita - tions on indemnification include short survival periods for representations and warranties (sometimes such period is less than a year after the closing) and limita - tions such as de minimis exclusions, deductibles or baskets, and caps on indemnity. Cap amounts nego - tiated by private equity sellers are often lower than those negotiated by corporate sellers.
• representations and warranties; • pre- and post-closing covenants;
• closing conditions; • indemnification; and
• post-closing adjustments of the purchase price. Even when the seller of the target is a private equity fund, the seller’s representations and warranties would usually include representations and warranties regard -
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