General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
In terms of a financing transaction in which the financing will be provided in Japan, financing agreements are typically governed by Japanese law. The governing law of collateral agreements is determined based on several factors, such as location of the collateral and governing law of the underlying assets. Japanese law does not have any exclusive jurisdiction over matters in this context other than security created over assets located in Japan or receivables governed by Japanese law, and parties are otherwise free to agree on what governing law should apply.
A court will recognise a choice of foreign law to the extent that its application will not violate the Japanese doctrines of public policy or good morals. Notwithstanding the above, regardless of the choice of governing law, certain Japanese laws will have mandatory application with respect to Japanese entities (eg, Japanese insolvency laws and the Foreign Exchange and Foreign Trade Act).
A final, conclusive and unsatisfied judgment of the courts of a foreign jurisdiction would be permitted to be enforced in Japan, provided that the requirements of article 118 of the Code of Civil Procedure are met and, in particular, that:
- no applicable law or treaty denies subject matter jurisdiction to the court that rendered the relevant judgment;
- in the event that the debtor did not appear to defend the relevant suit, action or procedure, the debtor was personally served with a summons commencing the action while within the jurisdiction of the relevant court, under Japanese concepts, or process was served on the debtor in Japan with the assistance of the judicial authorities of Japan;
- recognition of the relevant judgment is not contrary to public policy or good morals as applied in Japan; and
- reciprocity exists at such time as to the recognition by the courts of the foreign jurisdiction of final and conclusive judgments obtained in the courts of Japan.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
Yes. Inward foreign direct investment is restricted in many jurisdictions and Japan is no exception. First, for reasons of national security and public safety, certain maximum foreign ownership restrictions may apply to foreign investments exceeding certain thresholds (broadly speaking, up to one-third or one-fifth ownership interest in the relevant company) in limited industry sectors (eg, telecommunications, airlines and broadcasting).
As well as the industry-specific regulations, the regulations under the Foreign Exchange and Foreign Trade Act will broadly apply to investments by a foreign investor in a Japanese company.
Cross-border lending to a Japanese company is restricted. Only banks licensed in Japan (including Japanese branches of foreign banks) or registered money-lending business operators are permitted to arrange or extend loans in Japan as a business.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
While it varies from transaction to transaction, typically between 60 and 70 per cent of the cost of an acquisition takes the form of a long-term senior loan, with the remaining portion being funded by equity. In large transactions, when the senior loan is not sufficient to fully finance the acquisition, mezzanine finance is often used to bridge the gap. Such mezzanine finance is typically provided in the form of a subordinated loan or preferred shares. In addition, a revolving working capital facility is commonly provided by the senior lenders, and sometimes other specific facilities, such as an acquisition facility or capex facility, are also provided as senior debt. In Japan, bonds are not commonly used in acquisition finance transactions.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In Japan, there is no requirement for ‘certain funds’ in acquisition finance transactions relating to public companies. However, a bidder is required to demonstrate that it has sufficient funds to settle the takeover bid (TOB). This disclosure document is required to be attached to the TOB registration. Where the TOB is financed by debt, the financial institutions providing the loan will provide a certificate of funds, which will include a description of any conditions attaching to their obligation to lend. This is so that existing shareholders can understand the conditionality of any such financing.
Notwithstanding the above, ‘certain funds’ provisions are becoming more common in Japan, not only in connection with the acquisition of public companies, but also for the acquisition of private companies. This is especially true for cross-border transactions documented in English.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
In Japan, there are no legislative restrictions on the borrower’s use of proceeds from loans or debt securities.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Borrowers in Japanese acquisition finance transactions are typically expected to indemnify the lenders against any losses incurred in connection with a breach of:
- representations and warranties;
- undertakings or other events of default;
- break costs;
- increased costs;
- taxes; or
- any required currency conversions.