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Due diligence requirements
What due diligence is necessary for buyers?
The scope of legal due diligence changes depending on factors including the transaction type, deal size and the industry in which the target operates. Due diligence for a general M&A transaction should cover at least:
- the organisation;
- material assets and contracts;
- labour issues;
- regulatory compliance; and
- contingent liabilities, including litigation and disputes.
What information is available to buyers?
If the target is not listed on a stock exchange, the scope of public information available to the acquirer is limited (ie, only the information set out in the commercial register is available). On the other hand, if the target is a listed company, various public information is available about the company, including the following:
Annual, semi-annual and quarterly securities reports – listed companies must file these reports, which must contain:
- an outline of the company;
- the status of the business;
- the status of facilities; and
- accounting statements and other information.
These reports can be accessed free of charge online through the Financial Services Agency’s Electronic Disclosure for Investors Network (EDINET).
Timely disclosure and extraordinary reports – the securities listing regulations of each stock exchange require that listed companies timely disclose information to investors that may affect their investment decisions. Timely disclosures for the past five years are available online through the Timely Disclosure Network (a paid subscription to the Tokyo Stock Exchange is required). Extraordinary reports disclose information regarding corporate actions or other important matters that have occurred in relation to the company that are prescribed in the Financial Instruments and Exchange Law. The reports contain information that is in some respects similar to information that must be timely disclosed and can be accessed free of charge through EDINET.
What information can and cannot be disclosed when dealing with a public company?
Where the target is a public company, it must make timely disclosure of material facts concerning the operations, business, assets or securities that may have a significant impact on investors’ decisions.
In addition, if the acquirer obtains inside information about a public target, it may not acquire the target’s shares until such information is disclosed to the public, except for certain cases provided under the Financial Instruments and Exchange Law. Therefore, handling insider information is a key issue when dealing with a public company.
How is stakebuilding regulated?
Where the target is listed on a stock exchange, stakebuilding is regulated as follows.
A holder of securities whose shareholding is larger than 5% (including a holder of options to obtain a shareholding larger than 5%) (known as a ‘large shareholder’) must file:
- a large shareholding report within five business days of becoming a large shareholder; and
- an amendment report within five business days of the date on which its shareholding increases or decreases by 1% or more after becoming a large shareholder.
Under the Financial Instruments and Exchange Law, if a party intends to purchase shares of listed companies, purchases must be made by tender offer in the following cases:
- the aggregate voting rights held by the acquirer and ‘any affiliated persons’ (as defined in the Financial Instruments and Exchange Law ) divided by the total voting rights in the target (the ‘total voting ratio’) after the purchase to be made outside the stock exchange market exceeds 5% (unless the aggregate number of sellers under the contemplated share purchase and other sellers of shares to the acquirer that traded outside the stock exchange market within 60 days before the day of the purchase is less than 10);
- the aggregate number of sellers under the contemplated share purchase to be made outside the stock exchange market and other sellers of shares to the acquirer that traded outside the stock exchange market within 60 days before the date of the contemplated share purchase is less than 10 and the total voting ratio exceeds one-third after the purchase;
- the purchase is made according to certain methods of purchase prescribed by the prime minister (including purchasing through the Tokyo Stock Exchange Trading Network System) and the total voting ratio exceeds one-third after the purchase;
- within any three-month period:
- more than 5% of the voting shares are purchased outside the stock exchange market or by certain methods of purchase prescribed by cabinet order;
- in total more than 10% of the voting shares are obtained through purchases inside and outside the stock exchange market or issuance of shares for subscription; and
- the total voting ratio exceeds one-third after the purchases or the issuance;
- a party whose total voting ratio exceeds one-third intends to purchase over 5% of the shares of the listed company; or
- certain other cases as prescribed by cabinet order.
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