Underwriting arrangements for securities offerings in Japan

Underwriting arrangements

What types of underwriting arrangements are commonly used?

‘Firm commitment’ underwriting is commonly used, in which underwriters usually agree to jointly and severally purchase securities from the issuer for resale to the public at a specified public offering price. The lead manager organises and manages an underwriting syndicate, and executes an underwriting agreement on behalf of the syndicate with the issuer.

What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?

A typical underwriting agreement requires the issuer to indemnify the underwriters for any liability they may incur under the FIEL because of the SRS or a prospectus containing material misstatements or omissions.

A force majeure clause usually not only specifies force majeure events, such as financial, political or economic crises, war or other national disasters, and governmental restrictions on the securities market in general, but also has a catch-all clause to cover any material adverse event on the offering and distribution of securities or dealings therein in the secondary market.

Commission and fees are, in general, payable upon a successful closing in the usual form of the underwriting agreement.

Greenshoes and overallotments are common. The amount of the greenshoes and overallotments must not exceed 15 per cent of the total number of shares to be offered in Japan under the regulations of the JSDA.

What additional regulations apply to underwriting arrangements?

An underwriter of securities is required to be registered under the FIEL. The FIEL classifies financial businesses into four categories, and an underwriter of securities is required to be registered for the first-type (financial instruments business), which requires the most stringent financial, personnel or internal governance conditions as well as other matters. All financial institutions engaging in the underwriting business are members of, and are subject to the rules of, the JSDA.