Debt commitment letters and acquisition agreements

Types of documentation

What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?

In general, most acquisition finance transactions in Japan are documented in stages. The initial stage typically involves the preparation of a commitment letter with a detailed term sheet covering the material terms of the debt and equity aspects of the financing. Where the capital structure also includes a mezzanine facility or preferred shares, the term sheet will also cover these aspects and any related inter-creditor provisions. Fee letters are also usually executed simultaneously with the commitment letter. The commitment letter, term sheet and fee letters may be prepared in English or Japanese, depending on the requirements of the deal. In addition, where a TOB will be launched, the financial institutions providing the loan will provide a Japanese language 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.

In the definitive documentation stage (ie, prior to closing), the senior loan agreement and (if required) a mezzanine loan agreement, a preferred share purchase agreement and an inter-creditor agreement will be prepared.

Security documents are usually prepared in at least two separate packages. The day one security package typically covers (on day one, as a condition precedent to closing) the acquirer’s shares and assets (eg, the acquirer’s bank accounts, rights under the share purchase agreement, rights under any inter-company loan agreements etc) and (on day one, but after closing) the target’s shares. The day two security package will typically cover all of the target group assets and shares not picked up in the day one security package. The timing requirements for the day two security package and the scope and nature of collateral to be picked up are usually agreed in the financing agreement (often by reference to a set of agreed security principles). The lenders are usually very keen to have the day two security granted and perfected promptly following closing.

Level of commitment

What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?

In Japan, fully underwritten commitments are typically provided for acquisition finance transactions, subject to closing conditions. ‘Best efforts’ commitment letters are rarely provided.

Conditions precedent for funding

What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?

Conditions precedent included in a commitment letter in Japan often differ depending on the transaction. However, they typically include the lenders obtaining all required internal approvals, execution of definitive documentation, accuracy of the borrower’s representations (including the information representation) with no change of acquisition or equity structure. Business material adverse change (MAC) and market MAC conditions are also sometimes included, but these are often subject to substantial negotiation.

Flex provisions

Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?

In Japan, flex provisions are not commonly included in commitment letters. In large transactions requiring broad syndications pricing flex is sometimes seen, but this is still quite rare. Structural flex is not typically requested or granted.

Securities demands

Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.

In Japan, securities demands are not a key feature.

Key terms for lenders

What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?

The key elements in the acquisition agreement that are relevant to the lenders in Japan include:

  • the structure of purchase price adjustment provisions;
  • the scope of any indemnities;
  • the conditions precedent to closing (including the definition of material adverse effect); and
  • the closing logistics.
Public filing of commitment papers

Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?

In Japan, there is no statutory requirement to publicly file commitment papers except where an acquisition is conducted through a TOB (see question 4). Where an acquirer will use bank debt to finance the TOB, they must file a certificate of funds issued by the lenders. This certificate needs to include a summary of any conditions precedent to the funding. This information will be publicly disclosed through the Electronic Disclosure for Investors’ Network system.