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Types of joint venture
What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?
The ‘joint venture’ is not recognised as a distinct legal concept in Japan.
As a legal form, various types of joint venture vehicles are accessible, either in the form of a stock company, a limited liability company (LLC), a limited partnership company or a general partnership company, which are all corporations. Limited liability partnerships and general partnerships are merely contractual arrangements, not corporations.
Among them, a stock company is by far the most commonly used form of joint venture vehicle in Japan. This is mainly because the liability of the shareholders (ie, joint venture partners) is limited by its capital contribution and the company can be managed by directors rather than shareholders (‘separation of management’ is a basic concept of a stock company). Practically, a stock company is regarded as more credible than other types of companies in the business society in Japan.
There are various organisational structure options for a stock company; most commonly, stock companies will have a board of directors, whose shares cannot be freely transferred (ie, approval of the board of directors is required for the share transfer, the ‘restricted shares’). In this chapter, unless otherwise expressly noted, we will discuss this type of stock company as a joint venture vehicle.
In what sectors are joint ventures most commonly used in your jurisdiction?
There is no specific sector in which joint ventures are most commonly used. In many cases, a foreign company that intends to newly join the Japanese market chooses to enter into a joint venture arrangement with a Japanese partner to either utilise (i) a Japanese partner’s existing governmental licence or approval; or (ii) a Japanese partner’s existing customer base or distribution channel, while utilising its own special expertise and know-how or international brand. Regarding (i), aviation, medical or financial industries are good examples. Regarding (ii), there is no specific business sector to be mentioned.
Rules for foreign parties
Are there rules that relate specifically to foreign joint venture parties?
Ultimate beneficial ownership
What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?
If a joint venture partner is a listed company in the Japanese market, it is required to disclose certain information regarding either the material subsidiaries (including a joint venture company) or execution of the material agreements (including a joint venture agreement) through the stock exchanges. This is to provide information that could affect the market value of the listed shares for the investors. The information to be disclosed is not substantial, but the names of the other joint venture partners may be disclosed to the market as a result.
On the other hand, if a joint venture partner, foreign or Japanese, is not listed in Japan, the ultimate beneficial owner will not be disclosed.
Setting up and operating a joint venture
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Under Japanese accounting standards, regarding the financial statements of the subsidiaries (including in a joint venture company), basically, more than 50 per cent of the shares that are held by the parent company shall be consolidated in the parent company’s financial statements (note that some auditors would take another view depending on the provisions under the joint venture agreement). Any shares of more than 20 per cent, but not over 50 per cent, shall be partially reflected in the parent company’s consolidated balance sheet, pursuant to its shareholding ratio. Since the consolidated financial statements are disclosed to the public in the case of listed companies, and may affect the value of the company’s own shares in the market, Japanese listed companies often decide their shareholding ratio in the joint venture company according to the accounting treatment they prefer.
When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?
Unlike with LLCs in the United States, there is no pass-through tax treatment in Japan if a joint venture vehicle is a corporation.
Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
Yes, there are restrictions. To avoid inappropriate valuation of the contributed assets, confirmation by an inspector appointed by a court is required, which may prevent the timely and cost-efficient incorporation of a joint venture company.
However, there are exceptions in cases where:
- the assets contributed do not exceed ¥5 million;
- the assets contributed are publicly traded securities and the valuation under the contribution procedure is less than the ‘fair market price’ set pursuant to the regulations; and
- certification has been obtained stating that the valuation under the contribution procedure is fair by a qualified expert (eg, a lawyer or accountant).
If a contribution in kind is for the issuance of new shares by an existing joint venture company, exceptions also include in cases where: (i) shares issued to a person making a contribution in kind are not more than 10 per cent of the entire shares issued; and (ii) assets to be contributed as a monetary claim to the company and the valuation under the contribution procedure are not more than the value stated as debt in the company’s financial statements.
These technical requirements may be avoided (i) by incorporating the joint venture company in cash; and (ii) by using such cash proceeds, purchasing necessary assets from a partner.
Interaction between constitution and agreement
What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?
The constitution (ie, the articles) of the joint venture needs to be certified by the notary public as of the incorporation of the company (this is not required for the amendment of the articles after the incorporation). To have the articles certified by the notary without difficulties, the articles used for the joint venture entity in Japan tend to be quite simple and standardised, and unique and detailed provisions are often stated in the joint venture agreement.
Should a discrepancy arise between the provisions of the articles and the joint venture agreement, the articles take precedence (eg, all actions in violation of the articles are not valid) and a joint venture partner is entitled to damages and other civil relief on the grounds of breach of the contract, pursuant to the joint venture agreement with another joint venture partner.
In Japan, articles are neither registered nor disclosed to the public, but certain basic matters included in the articles need to be registered in the corporate registration and disclosed to the public. Shareholders and creditors of the company are entitled to check and copy the articles.
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
Under Japanese competition law, a joint venture partner and the joint venture company need to compete with each other; therefore, they must not share sensitive information, except when a majority of the shares of the joint venture company are held by a joint venture partner and the joint venture company and the majority partner are regarded as ‘equivalent as one corporation’. In this case, the restrictions applicable between competitors will not be applied. According to a document issued by the Japanese Fair Trade Commission (JFTC), circumstances where a parent company and its subsidiary are regarded as ‘equivalent as one corporation’ are stated as exceptional, and are strictly limited; equivalence will be decided by taking into consideration:
- the shareholding ratio;
- the financial situation of the parent company’s directors;
- the involvement of a parent company in a subsidiary’s financial situation and business policy; and
- any transaction between a parent and subsidiary or sister companies.
However, practically, if a partner holds more than 50 per cent shares of the joint venture company, they are generally regarded as the same corporation group and are not subject to anticompetition regulations.
Regarding interaction between a joint venture company and a minority joint venture partner, or between joint venture partners, anticompetition rules are applicable. However, rather than applying the same strict rules for the interaction among competitors, a report regarding business alliance and competition rules published by the JFTC in 2002 mentions that it will consider the pro-competitive effects and anticompetitive effects in the case of business alliances (which includes joint venture arrangements). It appears that the JFTC takes the position that, although strict anticompetition rules should be applied to matters not relating to joint ventures, anticompetition rules may be eased in matters concerning joint ventures.
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
The general resolution of a shareholders’ meeting is passed by majority voting rights of the shareholders present (ie, the minimum number of present shareholders required to constitute a majority of votes). In the case of a company with a board of directors, reserved matters for a shareholders’ meeting are matters listed in the Company Act and the articles. Statutory reserved matters are the following:
- basic corporate matters, such as the amendment of articles;
- appointment and removal of a director and other officers;
- financial matters, such as approval of annual financial statements;
- material matters for shareholders’ interests, such as a disposal of profit; and
- a conflict of interests between directors.
Matters such as the amendment of articles, merger of the company or decrease of register capital must be passed by a special resolution (ie, passed by two-thirds of present shareholders’ votes).
There are some situations under which a larger percentage of affirmative votes is required at the shareholders’ meeting. If a company that issues only freely traded shares (ie, shares that can be transferred without the consent of the board of directors or a shareholders’ meeting) intends to amend the constitution to have restricted shares, such amendment will be approved by a majority of the shareholders and two-thirds of the voting rights of the shareholders present. Also, a company with restricted shares may treat each shareholder differently as to, for example, dividends or voting rights; however, if it intends to adopt this arrangement, approval by three-quarters of all voting rights and a majority of all shareholders’ votes is required.
Generally, as the statutory protection of a minority shareholder is not sufficient for a joint venture arrangement, reserved matters and information rights for a minority shareholder are usually provided in the joint venture agreement.
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
The most common governance issue in Japan, and indeed in many other countries, is maintaining a balance between the majority partner’s control and minority partner’s protection without causing too many deadlock situations.
An issue unique to Japan is that each representative director (rather than every director, if a representative director is selected) has unlimited statutory authority to represent the company and internal limitation of authority cannot be claimed by a bona fide third party. Because in many Japanese joint venture companies a director nominated by the foreign company is a non-resident of Japan, the foreign partner tends to be concerned about the activities of the representative director nominated by the Japanese partner. In practice, the foreign partner has to rely on the contractual restriction over the authority of the representative directors.
With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?
There is no specific rule regarding nominee directors under Japanese law. In practice, nominee directors tend to represent the interests of the nominator and act pursuant to the nominator’s instruction.
Under the Company Act, a director owes fiduciary duty to a company; thus, there is a potential conflict of interest, just like in many other countries. However, if carried out in accordance with the instruction of the nominators, the nominee directors’ actions are generally regarded as being in the best interests of the joint venture company, as the best interests of the joint venture company could be achieved through the carefully negotiated balance of power provided in the joint venture agreement. That being said, if there is clearly a conflict of interest (eg, a director of a joint venture company is negotiating a contract with a nominator partner), the director shall disclose the details and obtain approval of the board of directors. Even if such approval is obtained, the director could owe personal liability for any loss of the company, owing to its breach of fiduciary duty, which can be waived by approval of all shareholders. Thus, in the case of a transaction between a joint venture partner and a joint venture company that is not conducted at arm’s length, the approval of all shareholders is recommended.
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
Merger control filing on the acquisition of shares is required if, among others, the acquirer’s turnover in Japan is more than ¥20 billion and the target’s turnover in Japan is more than ¥5 billion in its respective last financial statements. Therefore, if the joint venture company is newly established, no filing is required. As to the operation of a joint venture company, see question 9.
Provision of services
What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?
It depends on the service agreement entered into after the negotiation between the joint venture company and a joint venture partner, but one must be careful about the tax implications.
What impact do statutory employment rights have in joint ventures?
In Japan, many of the key employees working for a joint venture company are seconded (but not transferred) from a joint venture partner. This is because, among others, to transfer its employee to a joint venture company, the consent of the employee and execution of a new employment contract is necessary, whereas, in the case of a secondment, if an existing employment agreement or other employment regulations state that the employer may order secondment to the employee, the consent of the employee is not necessary and an employee can be seconded pursuant to the clauses under the existing contracts so long as the working condition is not materially changed. Also, in the case of a secondment, there is no need to change large parts of the social security arrangement or pension arrangement.
In the case of an employee’s transfer, all statutory obligations under labour law (eg, filing of relevant documents to the labour authority, due management of the employee working time) must be fulfilled by the joint venture company. In the case of secondment, although there is no explicit rule under the regulations, it is generally understood that such responsibilities shall be fulfilled either by a joint venture partner or joint venture company, the scope of which varies case by case and depending on the authority and responsibilities agreed between the joint venture partner, the joint venture company and the seconded employee.
Also, in the case of an employee’s transfer, the rights and obligations under the employment contracts must be adhered to by the joint venture company. In the case of secondment, rights and obligations related to the provision of services are fulfilled by the joint venture company and those that are not related to the provision of services are fulfilled by the joint venture partner. It is generally considered that a joint venture partner has the right to undertake disciplinary procedures against an employee, but other such rights and dismissals can only be exercised by the joint venture company. Often, the joint venture partner pays a salary to the seconded employee and reimburses the joint venture company.
Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
Typically, both parties will jointly own intellectual property (IP) rights for co-invented IP and one party will own the IP rights if it is the sole inventor of the IP, even if it is licensed to a joint venture company. Although, in some cases, a joint venture company can own IPs invented under the activities of the joint venture, a party contributing its technology may prefer to own any newly created IP if it is mainly based on its own technology. This is because a typical joint venture is a collaboration of different types of technology provided by each party.
Additionally, a joint venture partner usually prefers to utilise or further develop new IP based on invented IP in its own area of business. However, it depends on the role of each party and varies case by case. In any case, it is advisable that ownership of the IP that is newly created in a joint venture company is clearly detailed in the joint venture agreement in advance; partners should not simply rely on the interpretation of the law.
Funding the joint venture
How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?
The joint venture agreement does not usually specify a particular funding method but rather provides that it shall be decided by mutual agreement of both parties. Under Japanese law, although issuing of new shares should be approved by a shareholders’ meeting (special resolution) in the case of a company with restricted shares, each shareholder does not have a statutory pre-emption right. Thus, usually, the joint venture agreement expressly provides that each shareholder has the right to subscribe to new shares in proportion of their then current shareholdings.
Note that if the debt-to-equity ratio of the company and the foreign majority investor is too high (ie, debt is more than three times as much as the equity), any interest payment for the loan in excess of three times the capital amount by the subsidiary to the foreign parent cannot be recognised as a tax deductible expense (this is known as the thin capitalisation rule). The thin capitalisation rule applies to the loan from a majority foreign partner to the joint venture company.
Capital injection restrictions
Are any restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity imposed by law or regulation?
The total amount of profits distributed in dividends to the shareholders from a stock company must not be more than the ‘distributable amount’, which is essentially the retained earnings of the company (a detailed calculation method is provided under the Company Act). Even if there are retained earnings, if the net assets of the company are below ¥3 million, dividends are not allowed.
What tax considerations should be taken into account in the operation of the joint venture?
There is no special tax treatment simply because it is a joint venture. As to the interest payment for the loan from the parent to the subsidiary, the thin capitalisation rule will generally apply, as explained in question 17.
Accounting and reporting issues
Are there any noteworthy accounting or reporting issues for the joint venture partners regarding their investment in the joint venture?
The financial results of a joint venture company will be fully consolidated with a partner’s financial statements if the partner holds more than 50 per cent in shares of the joint venture company; those of a joint venture company will be partially consolidated in accordance with the shareholding percentage with the financial statements of a partner if that partner holds shares of 20 per cent or more (but not more than 50 per cent).
Deadlock, exit and termination
What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?
In Japan, similar to in other countries, escalation followed by put or call options (and, as a last means, dissolution) is the most common set of deadlock provisions. Typical escalation clauses include initial discussions between team leaders of the joint venture project for a certain period and, if not resolved, discussions between representatives from each joint venture partner (normally at the management level, such as the chief executive officers) will follow. Traditionally, if the issue cannot be resolved by an escalation clause, dissolution of the joint venture has been a typical outcome. However, recently, it has become more common to see rights of put or call options provided before the dissolution can begin to increase, especially in the case of a joint venture between a Japanese partner and a foreign partner.
What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?
There is no country-specific provision in Japan and normal exit provisions are often used, as in other countries, such as put or call options or termination rights (ie, dissolution of the joint venture company) in cases of material breach of joint venture agreements by the other partner, insolvency of the other partner or if financial difficulties arise for the joint venture company.
A joint venture agreement will often include the provision that if a joint venture partner becomes insolvent, another partner has termination rights or put or call options rights. However, under insolvency procedures that are most likely to be applied in the case of joint venture companies (ie, bankruptcy or civil rehabilitation procedure), the acquisition of certain assets at unfair value after insolvency occurs (or even at fair value, if such acquisition satisfies certain conditions, such as enabling concealment of property) can be nullified by the insolvency administrator. Thus, depending on the price or other terms for the put or call option, there is a risk that exercising such put or call option under insolvency could be challenged and nullified. Also, regarding bilateral contractual obligations of both parties that have not been fully performed, the insolvency administrator has the statutory right to choose termination or continuation of the contract, regardless of the other party’s view. Depending on the circumstances, exercising the right to a put or call option or termination may be void since it may be regarded as a denial of such statutory right of the insolvency administrator.
Tax considerations following termination
What are the tax considerations on termination of the joint venture?
Careful tax analysis is advisable for distribution of remaining assets in kind.
Choice of law and resolution methods
In your jurisdiction are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?
There are no such constraints (provided that mandatory law prevails over the agreed governing law in a certain area). As to the governance and operation of a Japanese company, some clauses under the Japanese Company Act shall mandatorily apply. As to the employment relationships between the employees and the company, some clauses under Japanese employment laws will apply.
Mandatorily applicable local law
What mandatory provisions of local law will apply irrespective of the choice of governing law?
Mandatory provisions in Japan are found in anticompetition laws, the Foreign Exchange and Foreign Trade Act, and some consumer- or labour-related regulations, among others.
Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?
No special restrictions are applicable regarding joint ventures.
Minority investor protection
Are there any statutory protections for minority investors that would apply to joint ventures?
There are no special protections for minority investors regarding joint ventures. General protections under the Japanese Company Act will apply to minority joint venture partners unless such protections are restricted or excluded by the joint venture agreement.
How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?
As to stock companies, other than general liability, such as tort, no particular liability is incurred owing to the status of a shareholder. Although piercing the corporate veil is admitted under Japanese law, its application is quite strict (eg, substantial lack of corporate formality or abusive use of corporate entity), and normally it is not applied to a joint venture case.
Disclosure of evidence
Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?
There is no comprehensive discovery system in Japan. However, when the court admits that confirmation is necessary to prove the claim of one party and there is no statutory reason to prevent the submission order, the court can make such order to submit the relevant document.
What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?
In general, there is no special advantage. However, the Act on Special Measures for Promotion of Research and Development Business, etc by Specified Multinational Enterprises is a special law to promote any global enterprise setting up its research and development (R&D) facility or management facility in Japan. If approved by the relevant minister by satisfying various requirements (eg, a foreign entity is acting globally, has valued knowledge or technology or will engage in R&D of high technology in Japan), the following advantages will be provided:
- the support of funds (for small and medium enterprises);
- expedited procedure on patent application;
- discount of patent application fee (for small and medium enterprises);
- expedited procedure on investment approval; and
- expedited procedure on visa application.
To obtain such approval, a foreign partner needs to hold majority shares of the joint venture company.
Requirements and restrictions
Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?
There are none. Direct inward investments into Japan made by foreign investors have been free, in principle, since the Foreign Exchange and Foreign Trade Act (the Forex Act) was amended in 1998. In general, the only requirement for foreign investors making investments in Japan is to submit a post facto report to the relevant ministries.
However, the Forex Act requires prior filing for certain limited investments involving particular business sectors and particular geographic areas or countries. The business sector restrictions are imposed on, among others, investments on the following business sectors:
- national security (eg, weapons, aeroplanes, nuclear power or space development);
- public infrastructure (eg, electricity, gas, water, telecommunications or railways);
- public safety (eg, vaccine manufacturing or private security service); and
- domestic industry protection (eg, agriculture).
The geographic area-related restrictions are imposed on, among others, investments from countries with which Japan has not executed a treaty on foreign direct investments (eg, North Korea) and certain activities involving the Iranian government, entities, individuals or groups.