JAPAN Trends and Developments Contributed by: Satoshi Inoue, Yuki Kohmaru, Hikaru Naganuma and Masahiro Yamamoto, Anderson Mori & Tomotsune
• absence of any material adverse change in financial or market conditions (the “Market MAC” ). In recent years, sponsors (including in Japan) have been increasingly inclined to negotiate limi- tations to the number of conditions precedent in loan documentation by incorporating cer- tain funds (or “Sungard” ) provisions, which are commonly adopted in acquisition finance trans- actions in the USA and UK. More specifically, sponsors now often ask for, among other things: • exclusion of matters related to the targets and their businesses from the scope of represen- tations, undertakings and events of default in the conditions precedent; and • elimination of the absence of the Target MAC and the Market MAC from the conditions precedent. Although the terms and conditions of financ- ing differ from transaction to transaction, the concept of “certain funds” is gradually being adopted mainly for transactions involving glob- al sponsors (including major co-investors) and foreign-based sellers. Permitted actions Internationally, facility agreements often con- tain a certain range of permitted actions, typi- cally incorporated in the definitions section or appendices, which constitute exemption from borrower contractual undertakings. These com- monly include permitted financial indebtedness, security interests and guarantees, loans, distri- butions, disposals, acquisitions, joint ventures and corporate reorganisations. Nevertheless, these general carve out provisions are not ordi- narily found in facility agreements in the tradi- tional Japanese market. These general and pre- supposed carve out provisions are not usually
acceptable to lenders in Japan unless individual- ly justified by operational and financial forecasts. However, in recent years, global PE funds have increasingly been requesting the inclusion of permitted actions in facility agreements in Japan. In this regard, a significant point of contention is the concept of permitted acquisition and the capacity to raise an incremental (accordion) facility as permitted financial indebtedness. This allows the borrower to acquire new subsidiaries or businesses and to obtain new loans for fund - ing these acquisitions. Roll-up transactions have also recently become more prevalent in Japan. Other topics In addition, negotiations in global sponsor deals are likely to include the scope of repeating rep- resentations, borrowers’ capacity for equity cure of a breach of financial covenants and condi- tions (including the requirement for borrowers’ consent) for loan assignments. Legal Updates Security trust and parallel debt structure Under Japanese law, it is a commonly accepted doctrine that the holder of a security interest must be the same person as the creditor of the claims that are secured by the security interest. Accordingly, the practice in Japan is for each lender in a syndicated loan transaction to be a secured party because a security agent is not permitted to hold a security interest securing claims owed to the lenders on their behalf. This has presented an obstacle to general syndica- tion as an assignment of secured loans requires changes to be made to the security interest already created. One way of circumventing this difficulty is the concept of the security trust, introduced by an amendment to the Trust Act of Japan in 2006,
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