JAPAN Law and Practice Contributed by: Jiro Mikami, Ryo Okubo, Hiromi Hattori and Tomohiro Koyasu, Nagashima Ohno & Tsunematsu
statutory enforcement of security. By including intangible assets, an EVC ensures that the full enterprise value is considered. When an EVC is created, disposal of assets out- side the ordinary course of business or the dis- posal of material assets is generally restricted. Despite these restrictions, the security interest holder cannot contest against a third party act- ing in good faith without gross negligence. This characteristic of an EVC indicates a weak effect when secured assets are diverted. It is likely therefore that lenders in acquisition finance will still need to create individual security interests on certain material assets even when an EVC is created. Depending on the asset composition of the borrower, a tailored approach may be nec- essary as to whether only traditional individual security interests will be created or both individ- ual security interests and an EVC will be created. 5.2 Form Requirements There is generally no statutory requirement for forms such as deeds for security agree- ments. However, for mortgages created over real property, a deed containing an acceptance of enforcement clause will enable lenders to enforce the mortgage without obtaining a court decision. 5.3 Registration Process See 5.1 Types of Security Commonly Used . 5.4 Restrictions on Upstream Security There is no specific restriction on providing upstream security in Japan. While the directors of the security provider are subject to a fiduci- ary duty, providing security over a subsidiary’s assets to its direct or indirect parent company in acquisition financing does not contradict the fiduciary duty of the subsidiary’s directors if, and to the extent, that the subsidiary, as a group
company of the parent, receives direct and indi- rect benefits, such as financing through inter- company loans, from the acquisition financing. On the other hand, if the subsidiary is wholly- owned, directly or indirectly, by the parent (or if all the minority shareholders consent to the crea- tion of a security interest over the assets of the relevant company), the interests of the parent and the subsidiary are fully aligned and the pro- vision of the upstream security by the subsidiary does not raise a fiduciary duty issue in terms of There is no statutory financial assistance restric- tion in Japan. However, the same discussion on the directors’ fiduciary duty as noted in 5.4 Restrictions on Upstream Security applies to providing security interests on behalf of an acquirer. the subsidiary’s directors. 5.5 Financial Assistance In the typical leveraged buyout structure, the target does not provide any security interest to the lenders until the target becomes the wholly- owned subsidiary of the borrower acquisition vehicle. 5.6 Other Restrictions See 5.4 Restrictions on Upstream Security . 5.7 General Principles of Enforcement Statutory enforcement will be implemented pur- suant to the Civil Enforcement Act (Act No 4 of 1979), which provides for specific methods of enforcement for each type of asset. However, in practice, the enforcement of security created for acquisition financing is not primarily intended to be enforced by the statutory method, but rather by way of private disposition.
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