Japan
Answer ... Typical representations and warranties (R&Ws) are as follows:
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Seller/buyer:
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- Incorporation and existence.: It is legally formed and existing (there is no concept of ‘good standing’ in Japan) and has all powers needed to conduct its business.
- Authorisation and enforceability: It has the authority to execute and perform the agreement. Internal procedures have been all done. The agreement is enforceable.
- No conflict: The execution and performance of the agreement do not conflict with laws, internal rules and contracts.
- Approvals: Governmental approvals necessary to consummate the transaction are not required or have been obtained.
- Insolvency proceedings: It is not insolvent or bankrupt. No such proceedings are pending.
- Anti-social force: It has no relationship with anti-social force such as gangs and other organised crime groups.
- Title (seller only): The shares are owned by it and are free of any liens.
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Target:
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- Incorporation and existence: As above.
- Shares and potential shares: Total number of authorised and outstanding shares and potential shares.
- Group companies: The target’s subsidiary and affiliates.
- Financial statements: Financial statements were made in accordance with the applicable account standards and accurate. There are no contingent liabilities or off-books debts.
- Disclosure: Disclosed information is true and accurate, and does not omit facts that make it misleading.
- Other items: These include permits, compliance, assets (including real estate and intellectual properties), contracts, employment and benefits, taxes, insurance, litigations, environment, related-party transactions and broker fees.
Japan
Answer ... Typical circumstances where the buyer may seek a specific indemnity include when it finds in the due diligence:
- pending litigation and claims;
- pending investigations;
- taxation risks;
- environmental issues;
- potential unpaid wage; or
- other compliance issues.
Japan
Answer ... Under the Civil Code, if the counterparty breaches the SPA, the other party can claim:
- performance of the obligation;
- compensation for damage; and
- termination of the agreement.
In addition, when the delivered shares have non-conformity in their kind, quality or quantity, the buyer can demand:
- cure of the non-conformity; and
- a reduction in price.
If the counterparty’s act constitutes a tort or fraud, the other party can claim respectively:
- compensation for damage; or
- rescission of the agreement.
The statute of limitations differs according to the types of remedy. For example, in the case of performance of the obligation, compensation for damage, cure of the non-conformity or a reduction in price, it is the earlier of:
- 10 years from when the right became exercisable; or
- five years from when the entitled party came to know that it was exercisable.
However, SPAs customarily have an exclusive remedy clause, which excludes any remedies under the Civil Code and limits the party’s remedies to the indemnity and termination set forth in the SPA. It is customarily provided in SPAs that:
- termination is possible only before closing; and
- indemnity is allowed within, depending on the case, six months to two years from closing, which is shorter than the statute of limitations.
Exclusive remedy clauses are construed not to exclude the claim for delivery of the shares and payment of the purchase price. It is uncertain, however, whether exclusive remedy clauses can exclude claims based on fraud or tort.
Japan
Answer ... SPAs usually have the following limitations on indemnity:
- Cap, floor (basket) and de minimis: Indemnity can be made only up to the cap amount and only when the aggregated amount of individual damages exceeding the de minimis amount exceeds the floor amount. When the floor is exceeded, according to the SPA, all amounts of damages or only the amount exceeding the floor can be indemnified. The former arrangement (tipping basket) is more common than the latter (deductible basket).
- Claim period: See question 6.3.
In many cases, SPAs provide that these limitations apply to indemnity based on breach of both covenants and R&Ws.
Also, SPAs in many cases provide that these limitations do not apply to:
- violation with wilful act or gross negligence; or
- violation of fundamental R&Ws such as the seller’s ownership of the shares.
In addition, SPAs sometimes have an anti-sandbagging clause – a clause prohibiting a party from making claims based on a breach of R&Ws known to the party. Even without such clause, there is a court decision suggesting that a party that knows, or does not know due to gross negligence, the other party’s breach of R&Ws cannot make a claim based on such breach where the agreement has neither an anti- nor pro-sandbagging clause (Tokyo District Court, 17 January 2006).
Specific indemnities are usually subject to no such limitations or more relaxed limitations (eg, higher cap, lower floor and/or longer claim period).
Japan
Answer ... Warranty and indemnity (W&I) insurance is now widely used by Japanese companies in cross-border transactions, especially auction deals, where the purchase of W&I Insurance is often a condition for bidding. W&I insurance is also used where the seller is an investment fund, which will often require the buyer to purchase W&I insurance to avoid indemnity liabilities post-closing.
Traditionally, W&I insurance is not as common in domestic deals as in cross-border deals. However, this situation is changing as Japanese major insurance companies are now beginning to underwrite W&I insurance. In Japan, the premium is approximately 1% to 3% of the maximum amount of coverage.
Japan
Answer ... Holdback: The most common approach is to make the payment in instalments. By paying only a portion of the total purchase price at the closing and holding back the remainder for a certain period, the buyer may offset the remaining purchase price and indemnity claims should an indemnity event happen.
Escrow: Escrow is a mechanism whereby the buyer deposits the remaining purchase price with an escrow agent until the payment becomes due. The agent pays the escrow amount to the seller when the payment becomes due unless an indemnity event happens during the escrow period, in which case the agent pays the indemnity amount to the buyer and the seller receives the balance. In Japan, trust banks offer escrow services. Escrow is used when the seller is unwilling to accept a holdback mechanism due to the low creditability of the buyer.
Guarantee: Where the buyer is concerned about the seller’s ability to pay the indemnity, it may request the seller to have a third party guarantee the seller’s indemnity liabilities. The buyer may also request a guarantee where the seller is:
- a small company with insufficient assets; or
- a fund that is scheduled to be dissolved shortly after the closing.
W&I insurance: W&I insurance is also used to insure indemnity claims. However, W&I insurance does not cover indemnity liabilities arising from certain events such as:
- risks known to the buyer;
- criminal fines; and
- environmental risks.
Japan
Answer ... Where the seller is a Japanese company, it often requests to include in the SPA a covenant that requires the buyer to maintain for a certain period (usually two to three years) after closing the target’s employees under the same employment conditions as before closing. However, the enforceability of this covenant is uncertain as even if the buyer breaches this covenant, it would not be likely to cause damages to the seller.
Other restrictive covenants that the seller may want to have in the SPA include those that prohibit the buyer from:
- suing the target’s resigning directors in connection with their activities before their resigning; and
- letting the target use the seller’s name, trademarks, logos and so on.
These covenants are generally thought to be enforceable regardless of the term.
Japan
Answer ... It is common to include conditions to closing in the SPA where there is a gap between signing and closing. Non-occurrence of a MAC is often included as a condition to closing for the buyer, especially when its bargaining power is stronger than the seller’s. When SPAs have a MAC clause, ‘MAC’ is usually very widely defined by the buyer. However, in recent deals, it has been defined to include exceptions called ‘carveouts’ – that is, changes that would not qualify as a MAC. Typical carveouts include changes in:
- general economic conditions;
- financial and capital markets; and
- the industries in which the target is active.
Also, since COVID-19, infectious diseases and pandemics have come to be specified as carveouts.
Where there is a gap between signing and closing, SPAs usually require the parties to make R&Ws not only on the signing date but also on the closing date. Also, the accuracy of the counterparty’s R&Ws on the closing date is usually specified as a condition to closing for both parties.
Japan
Answer ...
- Compliance with covenants: The parties have performed all obligations to be done by the closing and have not performed any prohibited acts. This includes the cure of any violations of laws by the target discovered in the due diligence process.
- Completion of reorganisation: Where the transaction is structured as a combination of the target’s internal reorganisation and a share purchase (see question 1.1), the target has completed such internal reorganisation.
- Merger filings and other statutory procedures: The buyer has obtained all necessary merger clearances from the relevant competition authorities. The parties have taken all necessary procedures required by relevant laws.
- No injunction procedure: No injunction procedure or similar that seeks for suspension of the transaction is pending.
- Approval of share transfer: The target has obtained the necessary approval for the share transfer from the relevant body (see question 4.1).
- Ancillary agreements: The parties have executed, or have had relevant third parties execute, all ancillary agreements (see question 5.1).
- Resignation letters: The target’s directors who are supposed to resign their office have signed and submitted resignation letters to the buyer.
- Consent from counterparties: The target has obtained the necessary consent from the counterparties of the contracts as required by such contracts (see question 4.3).
- Finance out (not very common): Where the buyer is using acquisition finance, the buyer has procured the necessary funds (see question 7.8).