JAPAN Trends and Developments Contributed by: Satoshi Inoue, Yuki Kohmaru, Hikaru Naganuma and Masahiro Yamamoto, Anderson Mori & Tomotsune
made by the management of target companies (ie, management buyouts) with co-investments from third parties, including PE funds. Additionally, the number of M&A transactions triggered by business succession concerns is on a steep upward trajectory. In recent years, these have accounted for approximately half of the total number of buyout transactions in Japan. A number of business succession trans- actions also involve leveraged finance from financial institutions such as banks and private equity funds. Management buyouts In Japan, the volume of management buyouts increased to a record amount in 2024. This was driven by various factors, including pressure on listed companies from activist investments pushing Japanese companies for higher returns and the Tokyo Stock Exchange’s campaign to improve corporate governance. External finan- cial contributors are often involved in manage- ment buyouts, and typically, the management accepts co-investments from PE funds and procures financing from financial institutions because the existing management of the target generally intends to purchase all or significant portions of ownership in the target and needs external financial support to achieve acquisi- tions. In contrast to typical leveraged buyout transac- tions, there are various management buyout- specific issues. For example, the interests of the management conflict with those of its tar- gets because the management as a buyer of the target is inclined to acquire the target for less, while it might be in the best interests of the target that it is either not sold, or is sold for more. To address this concern, the Ministry of Economy, Trade and Industry has introduced
various guidelines relating to management buy- outs, which propose various fairness-ensuring measures, including the formation of a special committee of independent persons, the reten- tion of external advisors, the introduction of majority-of-minority condition, etc. From a financing perspective, lenders often request to set various condition precedents out and information undertakings relating to fairness- ensuring measures that have been implemented in a deal. In addition, co-investment structures often adopted in this type of transaction involve some practical issues, such as how certain val- ues can be ascertained in the event of deadlock situations. In this case, lenders might request appropriate arrangements to be implemented to secure their interests, such as ensuring that share pledges and other security interests can be enforced. Mezzanine holdco finance In Japan, multiple tranche senior loans (with both amortisation and bullet repayment features) are the most typical method used to finance lev- eraged acquisitions. Mezzanine financing is also a valid option for sponsors wishing to limit the amount of their equity contributions and man- agements intending to conduct management buyouts but with limited cash available. Mezza- nine financing is typically provided in the form of subordinated loans or preferred shares (whether convertible or otherwise). Over the last few years, with more sponsors seeking higher leverage or opportunities for recapitalisation before full repayment of senior loans, mezzanine loans to the holdcos of bor- rowers in senior loans have been gaining in popularity. The main source for repayment of the holdco mezzanine loans often comes from the proceeds of an initial public offering (IPO)
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