Preliminary agreements

What preliminary agreements are commonly drafted?

Typically, M&A negotiations begin with a non-disclosure agreement. As the discussions progress, a memorandum of understanding or letter of intent setting out the basic terms and conditions of the transaction is executed, particularly for large and complex transactions. In most cases, a memorandum of understanding or letter of intent is non-binding, except for exclusivity and confidentiality provisions. Depending on the transaction, the parties may forgo a memorandum of understanding or letter of intent and directly enter into a definitive agreement.

Principal documentation

What documents are required?

For share acquisitions or business transfers, the definitive agreement is a sale and purchase agreement. For mergers, share swaps or demergers, parties must enter into a merger, share swap or demerger agreement, which must provide for certain matters as required under the Companies Act (the Companies Act also provides for certain procedures, such as a procedure to protect creditors; such statutory procedure involves some additional documentation). As such statutorily required agreements must be disclosed, parties sometimes enter into separate agreements or memoranda which set out more detailed terms and conditions ‒ such as detailed representations and warranties, covenants and indemnifications ‒ which are believed to not be subject to the disclosure rules.

Which side normally prepares the first drafts?

If the sales process is an auction process, the seller normally prepares the first draft of the definitive agreement. Otherwise, whether a seller or buyer prepares the definitive agreement depends on the transaction and the parties.

What are the substantive clauses that comprise an acquisition agreement?

Substantive clauses include:

  • pricing;
  • closing;
  • closing conditions;
  • pre-closing covenants;
  • post-closing covenants;
  • representations and warranties of the parties and the target; and
  • indemnity.

Price adjustment clauses are becoming more common. The most popular price adjustment mechanism is a working capital adjustment.

What provisions are made for deal protection?

No reliable statistical data is available for deal protection clauses in Japan, but some transactions involve provisions for deal protection. The most typical deal protection provision is a no-shop provision, which restricts a seller from negotiating with or providing information to a competing buyer. No-shop provisions in Japan often accompany a fiduciary out provision, which allows a seller to talk to a competing buyer where a superior offer is made by the competing buyer. While break-up and reverse break-up fee provisions are uncommon, these fees are sometimes discussed and negotiated, particularly for transactions involving private equity buyers.

Closing documentation

What documents are normally executed at signing and closing?

Parties execute a definitive agreement, such as a share purchase agreement or business transfer agreement at signing. Normally, no other documentation is executed at signing. Typically, ancillary agreements such as transition service agreements and licence agreements are signed on or before closing. If a transaction involves a merger, demerger or share swap, the parties usually enter into a transaction agreement which sets out the detailed terms and conditions of the transaction (eg, detailed representations and warranties, covenants and indemnification) at signing, and the formal merger, demerger or share swap agreement is entered into between signing and closing. The Companies Act sets out matters that must be included in such agreements.

Are there formalities for the execution of documents by foreign companies?

No special formalities exist for the execution of documents by a foreign company.

Are digital signatures binding and enforceable?

Under the Act on Electronic Signatures and Certification Business, a digital signature has the same legal effect as a handwritten signature, and contracts executed by digital signatures are binding and enforceable. However, digital signatures are rarely used for the execution of contracts in Japan.