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How to start your business in Japan (M&A)

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How to start your business in Japan (M&A)

  1. 1. HOW TO START YOUR BUSINESS IN JAPAN – M&A Yuki Sato Attorney at Law Admitted in Japan and New York
  2. 2. Topic 1. M&A in Japan  Types of M&A Transaction  M&A Process (LOI, DD, Reps and Warranties and Post Closing) 2. Investment in Real Estate in Japan 2
  3. 3. M&A in Japan 3
  4. 4. Recent M&A Trends in Japan 4 From Recof Merger and Acquisition Database (https://www.marr.jp/marr/product/recofdb.html)
  5. 5. 5 Unique Features of M&A in Japan 1. Company Split 2. No Duty of Loyalty of Controlling Shareholder 3. Longer Time Frame 4. Special Act to protect Employees through M&A Process 5. No Established Court Precedents re. Reps and Warranties 5
  6. 6. How to start/expand your business in Japan? Distributor Branch Subsidiary ☆ M&A 6
  7. 7. Types of M&A Transaction Merger Company Split Asset Transfer (Share Exchange) Share Purchase 7
  8. 8. Company Split 8 [Before Company Split] [After Company Split] Company A Shareholders Company B Absorption – type Company Split Shareholders Company A Shareholders Company B Cash, Shares, etc. Shareholders
  9. 9. Asset Purchase 9 [Before Asset Transfer] [After Asset Transfer] Company A Shareholders Company B Asset Transfer Shareholders Company A Shareholders Company B Cash Shareholders
  10. 10. Pros and Cons of Each Method Need Stock Corporation in Japan? Protection (Notification) of Creditors Transfer of Employment Contracts Tax Issues Merger Yes Yes*1 Yes Taxation on gain from the transfer of property. However, in “qualified merger”, you can defer recognizing capital gains. Company Split Yes Yes*1 Yes, but restricted by the special act. Asset Purchase No Yes*1 Also needs consents from all contractual parties. Yes, but restricted by the special act. Heavier compared with Corporate split (e.g. consumption tax, real estate acquisition tax, real estate registration tax) Share Purchase No No 10
  11. 11. M&A Process 11 Planning of Sale of a company Searching for a Buyer Preparation of Outline of the Company for the Potential Buyer(s) Receipt of Confidentiality Pledge Preliminary Due Diligence Preliminary Due Diligence Submission of Confidentiality Pledge Research on the Company from Sources other than the Target Company Selecting a Target Company Hearing from the Target Company Planning of M&A 【Seller】 【Buyer】
  12. 12. M&A Process (Continues) 12 Negotiation of the prices, etc. LOI Due Diligence Negotiation for the Final Agreement M&A Agreement Fulfillment of obligations/CPs Closing
  13. 13. Letter of Intent Contents: • Intention to purchase a target company • Purchase price with certain conditions • Scope of Due Diligence • Exclusivity Q. Legally binding in Japan? A. Depending on wordings of each LOI. You may have a duty to negotiate in good faith. 13
  14. 14. Legal Due Diligence – Major Issues 1. License, Government Approval 2. Major Contracts (e.g. Change of Control) 3. Product Liability 4. FCPA and any other anti-bribery laws 5. Regulation including Merger Control 14
  15. 15. Legal Due Diligence – Major Issues (Continues) 6. Labor Law Issue (Act on the Succession to Labor Contracts upon Company Split) 7. Intellectual Property (especially, employees’ invention) 8. Anti-social Forces 9. (If BtoC business) Personal Information Protection Act, Act against Unjustifiable Premiums and Misleading Representations 15
  16. 16. How to Handle Findings during Legal Due Diligence 1. Including them in representation and warranties 2. Including them in covenants 3. Including them in CPs 4. Adjustment of the price 5. (Special) Indemnification 16
  17. 17. Representations and Warranties  Statement that certain facts are true and accurate at the signing date and closing date backed by indemnity  Functions: Allocation of Risks, Disclose of necessary information 17
  18. 18. Representations and Warranties  Natures of Reps and Warranties in Japan?  Our suggestion based on recent court precedents: • Tokyo District Court, January 17, 2006 • Osaka District Court, July 25, 2011 18
  19. 19. Post Closing  Amendment of Registration (corporate registry and real estate registry)  Obligation to cooperate  Adjustment of the price, earn out provision 19
  20. 20. Addendum - Resent Trends in Japan  Enforcement of Corporate Governance Code  Compliance  Still many officers and employees who are not familiar with cross- border transactions 20
  21. 21. Appendix 21
  22. 22. Merger 22 [Before Merger] [After Merger] Company A Company B U.S. Japan Shareholders Company C Company A Company B Shareholders *Company A can squeeze out former Company C’s shareholders by giving cash for considerations. 100% 100% Merger Shareholders
  23. 23. Share Purchase 23 [Before Asset Purchase] [After Asset Purchase] Company B Shareholders Company A Share Transfer Company B Shareholders Company A
  24. 24. 24 If you have any questions, please do not hesitate to contact us! Yuki Sato 81-3-3591-7148 yuki.sato@torachu.com sato@namura-law.jp https://twitter.com/YukiSatoLaw Q&A Session

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