JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
7.7 Irrevocable Commitments If the target has a principal shareholder (or sharehold - ers), it is customary for an offeror to enter into a tender offer agreement with such principal shareholder at the same time as the announcement of the tender offer. In a tender offer agreement, the offeror agrees to launch the tender offer in accordance with the agreed terms, and, in exchange, the principal shareholder agrees to tender its shares to the tender offer so long as it is conducted in accordance with the agreed terms. The tender offer agreement would usually include certain conditions to tender, and often a set of representa - tions and warranties and indemnification provisions. In addition to such conditions to tender, the principal shareholder would sometimes negotiate an “out” for the tender obligation in case a better offer is made by a competing bidder. 8. Management Incentives 8.1 Equity Incentivisation and Ownership While cash compensation is a common form of incen - tivisation for the management team in private equity transactions, there are cases where equity incentives are provided to the management team. The level of equity ownership in such cases depends on various circumstances, but typically falls within a range of 5% to 20%. 8.2 Management Participation Equity-based incentive schemes vary in structure, but are typically structured as a rollover of existing equity into new equity or a grant of stock options in either the post-buyout target company or its holding company. Typically, the management will subscribe for ordinary equity, and preferred instruments are not often used in the management equity structures. In Japan, no specific tax rules apply to manage - ment rollovers (eg, tax-free rollovers) or parachute payments (eg, the prohibition of deduction for such payments and the imposition of excise taxes on such payments). Regarding stock options granted to indi - viduals, “qualified stock options” (ie, certain qualified options that meet specific criteria) will be subject to tax at capital gains rates (about 20%) upon the sale of the underlying shares. In contrast, holders of non-
qualified stock options are first taxed based on the economic gain reflected in the difference in the value of the shares underlying such options compared to the exercise price of the options at the time of exercise of the options; such gain is taxed as salary income (which would usually subject such holder to a higher progressive tax rate compared to tax at the capital gains rates). Such holders are taxed a second time at the time of sale of the shares underlying such options; the capital gains rate tax will apply on any increase in the value of the shares since the exercise of the options. 8.3 Vesting/Leaver Provisions Typical leaver provisions for management sharehold - ers would include good leaver provisions whereby the management shareholder is entitled to retain equity (eg, if the employment is terminated by the private equity fund without cause), and bad leaver provisions whereby the management shareholder loses its equity in the target company (eg, if the employment is termi - nated for cause or the management’s breach of the employment agreement). In typical cases where the bad leaver provisions are triggered, shares are com - pulsorily transferred to the private equity shareholder at market price or the original issue price, and share options are waived and become no longer exercis - able. Vesting is usually tied to time or performance. Time- based vesting is generally linear, and the typical vesting period is around five years. With respect to performance-based vesting, equity will vest annually if a certain target is met (eg, EBITDA targets) or upon exit (ie, vesting will not occur before the exit, and the amount of equity to vest is tied to the sale price). 8.4 Restrictions on Manager Shareholders Management shareholders are usually subject to restrictive covenants (non-compete, non-solicitation and sometimes non-disparagement undertakings) under the shareholders’ agreements or executive services agreements with the private equity share - holder. Even where there is no express undertaking in such agreements, management shareholders who are directors will be subject to statutory non-compete obligations under the Companies Act and will be pro - hibited from engaging in transactions that belong to or
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