JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
tag-along rights, drag-along rights, board and observer rights, and information rights. 3.4 Documentation In convertible equity (J-KISS) financings, the key deal documents are the term sheet (though a term sheet is not used in all J-KISS financings) and the J-KISS, which is itself comprised of an investment agreement and “terms of issuance” document that sets forth the key terms and mechanics of the instrument. In equity financings, the key deal documents are the term sheet, the investment or subscription agreement, the shareholders’ agreement, and the articles of incorporation. While the investor almost always prepares the term sheet, the start- up generally prepares the remaining documents. Parties sometimes choose to also enter into side letters. In some cases, the shareholders’ agreement is split into two separate agreements: a distribution agreement for deemed liquidations (in contrast to “true liquidations” addressed in the articles of incorporation), and a shareholders’ agreement without the deemed liquidation provision. The same investment or subscription agreement is typically signed by all investors, but there are also cases where different investors request customised provisions and thus sign slightly different investment agreements. Most practitioners use a publicly available form of the J-KISS. While there are publicly available templates for the other deal documents as well, they are not used as widely as the standard form of J-KISS. Thus, documents used in Japanese VC financings are generally more varied than their equivalents in other markets with well-established standard forms such as the United States.
Companies with many foreign investors some - times opt to use English-language financing documents, but it is much more common for the documents to be prepared in Japanese, in which case foreign investors will need to rely on Eng - lish translations that are prepared for reference purposes only. Even in the rare cases where English-language documents are used, Japa - nese will typically be the controlling language of certain provisions in the investment agreement that are required to be reflected in the start-up’s certificate of incorporation or commercial reg - istration (eg, the rights and preferences of the preferred stock). 3.5 Investor Safeguards Outside of the first financing rounds, when a J-KISS may be used, VC investors generally invest through preferred shares and receive a liq - uidation preference, which is often participating and uncapped. These liquidation preferences apply not only to “true liquidations” but also to M&A exits and other deemed liquidations, and therefore will benefit preferred stockholders in the event of portfolio company sales and liqui - dations. Additionally, weighted average anti-dilution pro - tections (broad-based or narrow-based) are typi - cally granted to preferred stockholders. It is quite rare to see full-ratchet anti-dilution protections. 3.6 Corporate Governance Each class of preferred shares is typically enti - tled to one seat on the start-up’s board, though this partly depends on the shareholding percent - age of the class following the closing. A class that makes up a significant percentage of all outstanding shares may receive multiple board seats, whereas a class with a low percentage may not receive any board seats at all.
315 CHAMBERS.COM
Powered by FlippingBook