JAPAN Trends and Developments Contributed by: Sadao Maeda, Yusuke Hayashi and Masato Tanaka, TMI Associates
tribution is made (usually one times (1X) the amount paid in). • In addition, it is common to provide for “deemed liquidation preference” , which states that, in the event of an M&A transaction, the consideration therefor will be distributed preferentially to the preferred shareholders. This provision is usually also stipulated in the shareholders’ agreement (or agreement on the distribution of assets). Conversion – anti-dilution adjustment • It is common practice to provide that pre - ferred shareholders may request a start-up to convert their preferred shares into ordinary shares at a 1:1 ratio at any time. In Japan, this right is mainly used in the process of converting all preferred shares into ordinary shares prior to an IPO, since preferred shares cannot, in principle, be listed. • In order to prevent dilution, a mechanism for adjusting the conversion ratio is often included, which is triggered by the issuance of shares at a price lower than the original purchase price (down round financing). It is common to use a narrow-based or broad- based weighted average method for adjust - ment. Voting rights • It is common to provide that preferred shares have the same voting rights as ordinary shares, specifically, one voting right per share. Investment agreement An investment agreement is an agreement between a start-up and investor(s) that mainly stipulates the economic terms of the investment, investment preconditions, covenants and repre -
sentations and warranties (R&Ws). Investment agreements often provide not only indemnifi - cation obligations but also put options on the shares held by the investor(s), triggered by a breach of covenants or R&Ws, and stipulate that the founder(s) are jointly and severally liable for the purchase obligation of the start-up. Shareholders’ agreement Shareholders’ agreements are made by and between investors, start-ups and founders, mainly for the purpose of agreeing on matters related to: • the management of the start-up; • investor’s rights such as the right to appoint directors and corporate auditors and the pro rata right/pre-emptive right; • veto rights; • the right to request the company’s informa - tion; and • rules for the disposal of shares such as the right of first refusal, the co-sale right/tag- along right, and the drag-along right. The shareholders’ agreement (in some cases the agreement on distribution of assets separate from the shareholders’ agreement) will include a deemed liquidation provision, which is very important in the context of an exit through M&A. If this provision exists and an M&A transaction such as a merger or a transfer of shares with a change in control occurs, the consideration for the M&A transaction will be distributed to share - holders through the mutatis mutandis applica - tion of the liquidation preference provisions in the AoI, as if the start-up were being liquidated. Convertible securities – J-KISS and CB Early-stage start-ups are increasingly raising funds from investors by issuing “J-KISS Stock
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