Due diligence requirements
What due diligence is necessary for buyers?
Under Japanese law, a director of a company has a fiduciary duty, which is subject to a business judgment rule, where the court generally respects business judgments made by directors. As a prerequisite to applying the business judgment rule, the court requires directors to undertake reasonable investigations or research (including obtaining advice from outside experts) before making business judgements ‒ conducting due diligence is an important factor in this process. Legal due diligence in Japan typically covers areas such as:
- company organisation;
- shares and shareholders;
- material assets and intellectual property;
- material contracts;
- labour matters;
- litigation and disputes;
- governmental licences and permits; and
- other compliance issues.
What information is available to buyers?
If a target is privately held, publicly available information is limited to the information described in a commercial registry, including:
- the company name and address;
- its incorporation date; and
- the names of directors and auditors.
Shareholder information is not included. If a target is listed, thereby subjecting it to mandatory disclosure rules under the Financial Instruments and Exchange Act and rules of the stock exchange on which it is listed, some material information is available, including:
- financial quarter information;
- material information for investors; and
- large shareholder information.
What information can and cannot be disclosed when dealing with a public company?
No general rules apply regarding the restriction of information disclosed in the course of M&A transactions involving a public company. Disclosure of information restrictions (where applicable) depend on the target. Some technology companies are highly cautious with regard to disclosing technical information to buyers, as such buyers may be potential or actual competitors. Further, some companies are extremely cautious in disclosing highly confidential agreements with third parties.
Sometimes, in the course of due diligence, a buyer receives material information from a listed target, which is subject to the insider trading regulations under the Financial Instruments and Exchange Act. In such cases, unless the material information is disclosed to the public in the manner as described in the act, the relevant parties may be unable to sell or buy the shares of the target. Thus, the parties must pay close attention to whether the received information falls under the definition of ‘material information’ under the act and whether any disclosure of the fact is necessary before implementing the contemplated transaction.
How is stakebuilding regulated?
The Financial Instruments and Exchange Act regulates stakebuilding. Generally, anyone that holds 5% or more of the shares in a listed company (ie, a large shareholder) must file a report within five business days from the acquisition of the shares; any subsequent change of more than 1% is also subject to disclosure unless the shareholding becomes less than 5%.
Further, a tender offer is mandatory for certain off-maker acquisitions of shares of a listed company. While the Financial Instruments and Exchange Act provides for complex rules governing transactions subject to tender offers; the general rule is that a tender offer is required for off-market acquisitions of shares of a listed company exceeding one-third of the shares.
The Anti-monopoly Act requires a pre-closing notification to be sent to the Japan Fair Trade Commission if a buyer is going to acquire shares exceeding 20% or 50% of the voting rights of the target, as long as certain thresholds are met.