JAPAN Trends and Developments Contributed by: Sadao Maeda, Yusuke Hayashi and Masato Tanaka, TMI Associates
ners of the partnership; or • Japanese entities in which the majority of the directors/officers or directors/officers with representative authority are non-resident individuals. In addition, the acquisition of even a single share of an unlisted company, such as a start-up, by a Foreign Investor falls under the FDI. Therefore, a foreign VC fund (or its partner) needs to consider whether to submit a prior notification or post- investment report upon the consummation of the FDI, unless certain exemptions apply. To determine whether or not a prior notification is required, investors must confirm whether or not a target start-up engages in business in a Desig - nated Business Sector. The scope of Designated Business Sectors has gradually been expanded over the past few years. If an investment is subject to prior notification, then prior notification must be filed unless an application for exemption can be utilised. The transaction is generally prohibited for 30 days (which can be reduced to a minimum of two weeks) from the date of filing the prior notifica - tion. Even if prior notification is not required, a post-investment report may be required in cer - tain cases. The exemption is available if (i) the target start- up does not operate in Core Sectors, (ii) the For - eign Investor complies with the following three conditions, and (iii) the Foreign Investor is not disqualified from using the exemption because of, among other things, having previously been sanctioned for a FEFTA violation and is not a for - eign government-owned company. Core Sectors mean specific industries among the Designated Business Sectors, as having a significant impact on Japan’s National Security, etc.
The above-mentioned three conditions are as follows: • investors or their closely related persons will not become board members or corporate auditors of the start-up; • investors will not propose to the general shareholders’ meeting of the start-up a trans - fer or other disposition and abolishment of its business activities in the Designated Busi - ness Sectors; and • investors will not access non-public informa - tion about the start-up’s technology in relation to its business activities in the Designated Business Sectors. If the exemption is applied, a Foreign Investor is always required to file a post-investment report. Financing documents for issuance of preferred shares Articles of Incorporation Under Japan’s Companies Act, the Articles of Incorporation (AoI) set forth the basic rules of a corporation, and before the issuance of pre - ferred shares, the features of preferred shares shall be set forth in the AoI. Some features of preferred shares in Japan are as follows. Liquidation preference • In the event of the dissolution or liquidation of a start-up, it is common practice to provide for the distribution of residual assets to pre - ferred shareholders in preference to ordinary shareholders. • It is also common to grant preferred share - holders the right to receive a second distribu - tion together with ordinary shareholders on a converted basis (right of participation), if there are residual assets after the preferred dis -
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