Japan
Answer ... Portfolio companies typically take the form of a kabushiki kaisha, which is normally governed by the board of directors. If the portfolio company is wholly owned by the private equity firm, the private equity firm will typically nominate multiple directors of the portfolio company (and in many cases, a majority of the directors). The statutory auditor of the portfolio company is also often nominated by the private equity firm.
Japan
Answer ... The private equity firm often appoints several managers as board members of the portfolio company. Until 2015, a company was required to have at least one representative director who was a Japanese resident. However, this restriction no longer exists and private equity firms are free to choose talent from anywhere in the world.
The directors of a company are subject to a duty of care and should serve in the best interests of the company. Therefore, if a director is seconded from a private equity firm, the director and the firm should be aware that a conflict of interest may occasionally arise – especially if there are minority shareholders holding the portfolio company’s shares in addition to the private equity firm.
In order to mitigate the risk of the seconded directors, the private equity firm should consider executing liability limitation agreements between the directors and the portfolio company. According to the Companies Act, a liability limitation agreement can be executed if the articles of incorporation of the company allow for this. The private equity firm may also consider obtaining directors’ and officers’ liability insurance for the seconded directors.
In many cases, the private equity firm recruits talent from outside the firm to appoint to the portfolio company. When sending a director nominee recruited from outside the private equity firm, the private equity firm should bear in mind that if a board member is dismissed from his or her position as a director, pursuant to the Companies Act, he or she may claim against the company for damages incurred as a result of the dismissal, except where there are justifiable grounds for such dismissal. The concept of ‘justifiable grounds’ is narrowly interpreted in the precedents.
Japan
Answer ... Under the Companies Act, some corporate decisions are made by shareholders’ resolution and some are made by board resolution. The directors nominated by the private equity firm should bear in mind that their decisions as directors should be determined based on the best interests of the portfolio company, and not of the private equity firm.
From the shareholders’ viewpoint, no duties under the Companies Act are currently imposed on the controlling shareholder of a company. However, if there are minority shareholders in the portfolio company, it is advisable that when making strategic decisions on the portfolio company, the private equity firm ensure that such decisions will not harm the interests of the minority shareholders.
Japan
Answer ... In many cases, the private equity firm acquires 100% of the shares of the portfolio company. This means that the private equity firm takes full control of the company and thus has broad discretion on the strategies adopted by the portfolio company.
However, if there are other shareholders in the portfolio company, the private equity firm may not necessarily have controlling power and in such case will needs to secure its monitoring rights through contracts. For example, a private equity firm may seek information request rights against the portfolio company. While it is true that company shareholders have the legal right to receive annual financial statements under the Companies Act, further detailed information such as monthly financial information and updates on key performance indicator results should be obtained through contracts with the company. Inspection rights and access rights are also frequently contractually given to the private equity firm by the portfolio company.