Cross-border cash management agreements
Banks provide a service to their customers called a 'cash management system', which enables customers that belong to groups of companies to promote the efficiency of their respective group's funding and fund management. When a cash management system is established, a cash management agreement is generally entered into by a company which works as a centralising company and one or more participant companies, all of which are members of the same group of companies. Under a typical cash management agreement, the centralising company transfers funds to participants which have cash requirements and receives funds from participants which have extra funds, by way of lending and borrowing. The centralising company also manages the funds and makes any necessary investments.
When a Japanese company joins this kind of cash management system, it is not uncommon for it to be a cross-border cash management system, under which a cash management agreement is entered into between a company located outside Japan and a Japanese company. A typical example is a cash management agreement between a foreign company acting as the centralising company and one or more Japanese companies acting as participants.
This update focuses on the regulation governing the lending and borrowing aspects of cross-border cash management agreements based on the example described above.
If a party is considered to be a lending business in Japan, the Money Lending Business Act applies and the party will be subject to various regulations under the act, including the requirement to be registered pursuant to Article 3(1). If a party lends money as a business, the party is deemed to be a lending business unless the lending falls under any of the exceptions listed in the act.
It is likely that the lending of funds by a participant or the centralising company under a cash management agreement may be considered to be conducted as a business. Although there is no clear rule which clarifies under what circumstances cross-border lending is considered to be conducted in Japan, there is an argument that if part of the lending takes place in Japan (ie, if a lender remits funds or a borrower receives funds in Japan), it is considered to be conducted in Japan.
Therefore, lending by a Japanese participant or the foreign centralising company under the cash management agreement may be considered a lending business in Japan unless the lending is certain to fall under one of the exceptions. The exception applicable to the cash management system is the same entity group exception (explained below). To avoid the burden of compliance with the act and the risk of being accused of an inadvertent violation, it is important to ensure the applicability of the same group entity exception for structuring a cash management system which involves a Japanese participant and a foreign centralising company.
In order to facilitate intra-group loans, the act was amended effective from April 1 2014. Under the amended act, loans made between members (including entities outside Japan) of the same entity group as defined in Article 1(2)(6)(i) of the Order for Enforcement of the Money Lending Act were added to the exceptions.
Where one or more Japanese participants and a foreign centralising company enter into a cross-border cash management agreement, it is advisable to ensure that the Japanese participants and the foreign centralising company belong to the same entity group so that the lending by the parties will fall under the same entity group exception. According to the Financial Services Agency's answers to public comments (announced on March 18 2014), the requirements for the same entity group exception should be satisfied at the time of lending. Therefore, Japanese participants and the foreign centralising company must belong to the same entity group only at the time of lending.
The term 'same entity group' can broadly be defined as an entity (the parent entity) and any other entities whose financial and business policy decisions are controlled by the parent entity (the member entity). In order to be a member entity – excluding the case where it is clearly found from the financial or business relationship that the parent entity does not control the entity's financial or business policy decisions or that the company is subject to insolvency proceedings or under similar circumstances and it is found that no valid controlling relationship exists – an entity should satisfy one of the two points below:
- More than 50% of its voting rights are held by the parent entity and/or any other member entity on their accounts.
- Forty percent or more of its voting rights are held by the parent entity and/or any other member entity on their accounts and any of the following items is met:
- the aggregate amount of the voting rights held by the parent entity and/or any other member entity, the voting rights held by persons considered to exercise their voting rights in a manner consistent with the parent entity and/or any other member entity because of a close relationship in terms of capital, human resources, funding, technology or transactions and the voting rights held by persons who agree to exercise their voting rights in a manner consistent with the parent entity and/or any other member entity account for more than 50% of the voting rights of that entity;
- the aggregate number of officers, executive members and employees and former officers, executive members and employees of the parent entity and/or any other member entity accounts for more than 50% of the members of the board of directors or an equivalent organisation of the entity, provided that officers, executive members and employees and former officers, executive members and employees of the parent entity and/or any other member entity will be limited to a member who can affect the entity's financial and business policy decisions;
- an agreement exists under which the parent entity and/or any other member entity controls that entity's important financial and business policy decisions;
- the amount of loans (including amounts provided via guarantees or security interests) provided by the parent entity and/or any other member entity (and persons having a close relationship with the parent entity and/or any other member entity in terms of capital, human resources, funding, technology or transactions) accounts for more than 50% of the aggregate amount of funds procured by that entity but limited to those stated as liabilities in that entity's balance sheet; or
- any other facts exist which lead to the assumption that the parent entities and/or any other member entity controls that entity's financial and business policy decisions.
Once a cash management agreement has been entered into, lending between the company and the participants may occur frequently and may continue after the parties cease to belong to the same entity group. It is advisable to insert a provision in the cash management agreement involving a Japanese participant which sets forth that if a Japanese participant and the foreign centralising company cease to belong to the same entity group, the cash management agreement will be terminated immediately in relation to the Japanese participant and all outstanding loans with respect to the Japanese participant will immediately be settled.
The provision will prevent a situation in which the Japanese participant and the foreign centralising company continue to be obliged to lend funds to each other and consequently lending which has the potential risk of violating the act will continue. The provision is not mandatory, but worth considering to mitigate the potential risk of violating the act, provided that the exact wording will be adjusted according to the relevant agreement and structure. However, the wording does not guarantee that the lending provided between the Japanese participant and the foreign centralising company will become unproblematic from the perspective of the act after the parties have ceased to belong to the same entity group, but before they recognise that fact.
For further information on this topic please contact Izuru Goto or Gen Takizawa at City-Yuwa Partners by telephone (+81 3 6212 5500) or email (firstname.lastname@example.org or email@example.com). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.
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