JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
are within the scope of the business of the target com - pany, unless the target board approves such transac - tions. Whether any post-employment non-compete and non-solicitation obligations apply to such man - agement shareholders will, in principle, depend on whether there is any express agreement binding such management shareholders. Japanese courts will typically enforce post-employ - ment non-compete obligations that extend for a peri - od of one to two years, and in some instances even longer if there are rational reasons to uphold long-term non-compete obligations. Non-compete obligations that are determined to be overly broad and restrictive by the court will be rendered unenforceable. In deter - mining the enforceability of particular non-compete obligations, the courts typically consider and weigh factors such as: • the position and responsibility of the former man - agers; • whether the former managers were adequately compensated; and • the scope and breadth of the non-compete obliga - tions. 8.5 Minority Protection for Manager Shareholders In general, shareholders’ agreements entered into between management shareholders and a private equity shareholder do not afford much minority pro - tection for management shareholders. Normally, minority protections such as anti-dilution provisions, veto rights, director appointment rights or the right to control or influence the exit of the private equity share - holder are not provided for, unless the management shareholder is also the seller/founder of the company, in which case the founder management shareholder may have some veto rights and board appointment rights. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights A private equity shareholder would typically hold a majority of the voting rights and would accordingly
have veto rights over certain fundamental corporate actions and events relating to the portfolio company that are subject to shareholder approvals, including amendments of articles of incorporation and merg - ers and other corporate reorganisations. The private equity shareholder would also be able to appoint and remove directors as a majority shareholder. Furthermore, a private equity shareholder will enter into management services agreements with the key management members, and may control the indi - vidual directors through such agreements. The man - agement services agreement would set forth the roles and responsibilities of the key management members, compensation and certain reporting requirements, among other matters. A private equity shareholder would also typically nom - inate one or more directors to serve in each portfo - lio company to facilitate its oversight of the portfolio company’s business operations. Such directors would attend the board meetings at which material business issues and agenda items would be discussed and approved. 9.2 Shareholder Liability Generally, a private equity fund majority shareholder will not be held liable for the actions of its portfolio company. However, in instances where it is unreason - able to treat the portfolio company as an independent juridical person, Japanese courts may apply the doc - trine of piercing the corporate veil and deny the inde - pendent legal personality of the portfolio company, holding the shareholders liable for the liabilities of the portfolio company. According to judicial precedents, the doctrine requires that the legal personality either is abused to avoid the application of laws or has no substance.
10. Exits 10.1 Types of Exit
The typical holding period for a private equity fund is around five years. The most common form of private equity exit is through M&A, but IPOs remain an attrac - tive option for private equity exits because a Tokyo Stock Exchange listing is available even to companies
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