Due diligence and disclosure

Scope of due diligence

What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?

The scope of legal due diligence usually covers the following items:

  • corporate structure, including articles of incorporation and other internal rules;
  • validity of shares and shareholdings;
  • transactions with affiliated companies;
  • financing arrangements;
  • assets, including intellectual properties;
  • employee maters;
  • agreements;
  • licences and permissions;
  • compliance with laws; and
  • disputes.

It is uncommon in Japan for a seller to prepare a due diligence report for prospective buyers, or for a buyer to rely on a due diligence report prepared by a seller.

Liability for statements

Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?

A seller may be liable for pre-contractual or misleading statements. However, such liability may be excluded by agreement, and the seller usually attempts to negotiate that the definitive agreement provides to such effect.

Publicly available information

What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?

The information registered in the commercial registry is publicly available on private companies, which includes:

  • names of directors and statutory auditors;
  • number and types of authorised shares and outstanding shares;
  • amount of capital;
  • whether or not the share certificates are issued;
  • whether the approval of the company is necessary to transfer shares; and
  • the date of incorporation.

In addition, information concerning the intellectual properties registered under the name of the company is searchable on the database provided by the Japan Patent Office. Further, detailed information concerning real estate owned by the company is also publicly available on the real estate registry.

Usually, during due diligence, the commercial registry of the target company is obtained to ascertain whether it is duly registered or verify other information. A determination of the issues of whether to search the intellectual properties held by the target company or confirm the real estate registries depends on the importance of such properties for the target companies, etc.

Impact of deemed or actual knowledge

What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?

In a decision of a lower court in Japan, it was determined that actual knowledge of a buyer, or knowledge that the buyer did not have because of its gross negligence, precludes a claim for breach of representations and warranties from being brought. In other words, the current understanding is that a party would be precluded from bringing such claim unless it is clearly excluded in the definitive agreement by a sand-bagging provision.