Guarantees and collateral for acquisition financings in Japan

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Although there are no financial assistance rules in Japan that would lead to restrictions on the ability of a related company to provide a guarantee, corporate benefit is an issue. The concept of corporate benefit in Japan relates to directors’ ‘duty of care’ and ‘duty of loyalty’. Directors are required to act for the benefit of the corporation. Since the ultimate beneficiaries of the corporation are its shareholders, it is generally understood that any actions that do not harm the interests of the shareholders will not violate the duties of care and loyalty.

Based on this, guarantees (whether secured or unsecured) provided by related companies with a common ultimate 100 per cent shareholder, are not typically restricted by corporate benefit. However, where minority shareholders exist, corporate benefit can complicate any analysis of whether related company guarantees can be provided.

There are no restrictions under Japanese law on the ability of foreign-registered related companies to provide guarantees, whether secured or unsecured.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Under Japanese law, there is no statutory restriction equivalent to financial assistance or on the provision of company guarantees in connection with the acquisition of shares in itself. However, the corporate benefit issues discussed in question 14 apply equally to a guarantee from the target.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Japanese law does not provide for a general form of all-asset security interest analogous to a floating charge or blanket lien. Subject to certain limited exceptions (which are not typically relevant in the context of an acquisition finance transaction), security in Japan must be granted on an asset-by-asset basis.

In the context of an acquisition finance transaction in Japan, the security package typically covers all assets of the target group and the acquirer, as well as all shares issued by the target group and the acquirer. However, it is common in Japan for the transfer or other disposal of trade receivables and certain other contractual rights (eg, rent deposits) to be contractually prohibited. In such circumstances, these assets are typically carved out of any security package.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

The method for perfection of security interests differs depending on the type of security interest being granted and the type of asset provided as security.

Shares

Under the Companies Act, an unlisted company may, in its articles of incorporation, choose whether to issue physical share certificates.

In the case of a company issuing share certificates, a pledge is established by an agreement between the parties and the physical delivery of the share certificates to the pledgee. The share pledge is perfected by the pledgee’s continuous possession of the share certificates.

In the case of a company not issuing share certificates, a pledge is established by an agreement between the parties and perfected by registration on the shareholders’ register maintained by the issuing company. Lenders generally require the issuance of share certificates when establishing a pledge over shares to ensure their control of any subsequent transactions in the shares.

When transactions involve dematerialised shares of a listed company, transfers of such shares are conducted through a book-entry system maintained by the Japan Securities Depository Center (JASDEC). A pledge over dematerialised shares is created by an agreement between the parties, and the transfer of the shares to the pledge sub-account of the pledgee held with a JASDEC system participant.

Receivables

Security over receivables can be established by a pledge or a security assignment. Essentially, a pledge is generally used for taking security over receivables (eg, bank deposits, insurance proceeds and inter-company loans); however, a security assignment is commonly used for taking security over trade receivables.

There are three options for perfecting a pledge or a security assignment over receivables:

• date-certified notice to the underlying obligor (generally delivered by certified mail);
• obtaining the date-certified consent of the underlying obligor (date certification is done by a notary public); or
• registration of the pledge or assignment at the Legal Affairs Bureau.

Among these options, date-certified consent is generally used (including for bank deposits, insurance proceeds and inter-company loans), while registration is more commonly used for trade receivables, especially where there are a large number of underlying obligors or the security provider does not want the underlying obligors to be aware of such security assignment (mainly from a business perspective). Note, however, that registration of an assignment only perfects the assignment against third parties. Registration does not perfect the assignment against the underlying obligors and notice to the underlying obligors will still be required to perfect the assignment against such obligors.

Movable assets

A security assignment of movable assets is established by an agreement between the parties and perfected either by delivery of the movable assets to the secured party or registration of the security assignment at the Legal Affairs Bureau. Physical delivery of the assets is not required if the parties agree that the security provider has delivered the underlying assets but retains them on behalf of the secured parties. This form of delivery is referred to as ‘constructive delivery’.

Real estate

A mortgage over real estate is established by an agreement between the parties and, to be perfected, must be registered at the local Legal Affairs Bureau in which the relevant property is located. The application for registration is made by both parties to the mortgage, generally through a qualified judicial scrivener acting on behalf of both parties. A registration tax of 0.4 per cent of the secured obligations (ie, the principal amount of the loan) is assessed on initial registration and a nominal charge will apply to any subsequent registrations securing the same obligations.

Intellectual property

Registration at the Patent Office is required for the establishment of a pledge over trademarks and patents. A pledge over copyrights is established by an agreement between the parties and, to be perfected, must be registered at the Agency for Cultural Affairs or the designated registration organisation.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

In Japan, perfection of most security interests does not have to be renewed to preserve its effect. One exception to this basic rule is for the registration of a security assignment (or pledge) of receivables and movables, which is subject to expiration after 10 years for movables and receivables against unspecified debtors and 50 years for receivables against specified debtors). In this case, an extension of the underlying registration will be required.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

There are no such requirements under Japanese law.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

The basic principle under Japanese law is that security must be granted to all lenders individually and an agent cannot hold security on behalf of or for the benefit of all lenders. If a secured lender assigns all or any of its rights in a secured loan to a third party, the security interest will be automatically or contractually (depending on the nature of the security interest) assigned to the assignee, and perfection of such assignment of security interest will need to be completed.

One alternative structure is a security trust, where a licensed trustee holds the security interest in trust for the benefit of each lender. In such a case, each secured party will obtain a trust beneficial interest (TBI) representing its interest in the assets of the security trust. When a lender assigns its loan to a third party, the assignor will also assign its related TBI to the assignee, without disturbing the security interest, which remains held by the security trustee. Although there have been a number of acquisition finance transactions in Japan where a security trust has actually been used (particularly in large transactions where active secondary market trading of the secured loan was anticipated), it is still not commonly used in practice due to the fees and time required because of the involvement of a third-party licensed trustee. Another alternative structure is a parallel debt, where a borrower owes the same debt to (i) a security agent and (ii) the secured parties in parallel, and the security agent holds security to secure such parallel debt owed to it by the borrower. To date, parallel debt structures have not been used in Japan despite strong arguments supporting their theoretical possibility. However, a bill for the comprehensive reform of the Civil Code was passed by the National Diet of Japan and will come into effect on 1 April 2020, which recognises, among other things, that joint and several claims may be created by agreement among parties. This change may promote the use of parallel debt structures.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

In Japan, there are no statutory protections afforded to creditors before collateral can be released.

Describe the fraudulent transfer laws in your jurisdiction.

Under the Civil Code, a creditor may request (within certain time restrictions) that a court rescind a fraudulent act conducted by a debtor who knew that such action would impair the creditor, unless any person that benefited from such act, or any person that succeeded to such benefit, was a bona fide third party at the time of the act or succession to such benefit and would be prejudiced by such rescission. Such a fraudulent act may include the creation of a security interest over the assets of a target company or its subsidiaries when such persons are under financial distress.