- The yen’s recent plunge to around 135 to the U.S. dollar has made Japanese assets approximately 20% cheaper in U.S. dollar terms than they were 12 months ago.
- With the Bank of Japan bucking the cycle of central bank rate rises, many expect this trend to continue, with predictions of the yen going past 140 to the U.S. dollar, possibly even reaching 150.
- After two years of strict entry restrictions, Japan is again opening its doors to business travelers, releasing pent-up demand for overseas investment in Japanese assets.
- There is an overall shift in Asia-focused investments away from China. Worsening relations between China and the United States, China’s prolonged commitment to a zero-COVID policy and the growing barriers to investment under President Xi Jinping have all contributed to impair Western business confidence in China.
- An aging population, combined with a high proportion of small to medium-sized family-run businesses, creates opportunities for overseas acquirors to offer a succession plan. Many Japanese companies also face increasing pressures to restructure their businesses and to dispose of non-core assets, of which the recent battle for control of Toshiba is the most high-profile.
Many of the M&A opportunities will involve some form of joint venture or alliance with Japanese companies. But establishing a successful joint venture demands thorough due diligence, cultural awareness and consideration of numerous other factors. Based on our Tokyo team’s experience handling similar transactions, here are some important Do’s and Don’ts:
Do:
Consider whether you need an exclusivity period to conduct due diligence and engage in negotiations, particularly if competition is fierce.
- Bear in mind that due diligence processing of Japanese assets will typically take longer given that the underlying documents will not be in the English language. Selecting a good law firm that has experience working with both Japanese businesses and U.S. clients is absolutely key.
Do:
Conduct thorough due diligence and lay out the financial structure up front.
- If a JV partner has assets or technology/IP that is critical to the JV business, decide how it will be valued and whether it should offset the contributing party’s funding obligation. Consider how the JV will acquire rights to use such property (e.g., through lease, license or outright transfer) and the tax implications of each option. Note that Japan does not permit subletting of real estate without the approval of the lessor, which means that a Japanese partner that provides facilities to the JV on lease would maintain control over any use of such facilities other than by the JV.
- If financing is required, negotiate whether that funding will first be sought as a shareholder loan or third-party finance and on what terms; access to affordable Japanese interest rate finance cannot be overstated, although foreign entrants to the market will likely struggle to secure domestic loans unless they already have existing Japanese assets and operations.
- Decide whether to impose a cap on capital contribution obligations. We have seen JV partners compelled to make capital injections to support failing JVs. This can prove costly in the long run particularly when exit options are limited.
- Try to ensure that key documents such as the JV agreement are in the English language and that, where documents are prepared in both languages, the English version prevails. A Japanese business interested in receiving overseas investment or work with an overseas partner should accept this position, although they are likely to insist that the laws of Japan govern the document (not an unreasonable demand in our experience).
- Business disputes are often resolved by the responsible district court, such as the Tokyo District Court. These courts are impartial forums with experience handling business disagreements. However, the proceedings themselves will be conducted in Japanese. For parties wishing to hold proceedings in English, consider arbitrating disputes in a regional forum such as the Hong Kong International Arbitration Centre (HKIAC) or Singapore International Arbitration Centre (SIAC), or, alternatively, utilizing the Japan Commercial Arbitration Association (JCAA), which is becoming an increasingly sophisticated venue for business disputes with an international dimension. The JCAA provides a model arbitration clause that can be easily used in contracts
Do:
Settle the key details of the JV’s corporate governance up front.
- If your team is multinational, it is advisable to stipulate in the organizational documents that a Japan-based JV’s board meetings be conducted in English.
- Consider limiting board and shareholder rights of conflicted parties. If your JV partners have any commercial arrangements with the JV, ensure they and their board appointees must abstain from or otherwise have no ability to vote on any decision of the JV regarding those arrangements.
- Read the reserved matters, or veto rights, carefully and word them so they apply to specific decisions concerning the business—for example, do the capital expenditure investment figures relate to single items of spending or aggregated amounts? Poorly worded reserved matters lead to procedural uncertainty and increase the possibility for future disputes.
Do:
Plan your exit.
- Under Japan’s Companies Act, like in many jurisdictions, a stock company (Kabushiki Kaisha) may be dissolved in accordance with its organizational documents. Identify your end goals in each contingency and formulate detailed and airtight procedures to govern a potential termination of the JV and agree how core assets will be divided and what value will be attributed to them, so the processes can be set out clearly in a shareholders’ agreement or in the organizational documents. Agree to sound principles for methods of valuation.
Do:
Remember that Japan does not recognize attorney-client privilege.
- This can be an issue on cases that have an international dimension such as a cross-border arbitration or antitrust lawsuits (including when there are parallel proceedings in multiple jurisdictions). In a situation where your JV is involved in proceedings and is required to disclose attorney-client communications in Japan, any privilege attached to those communications in parallel non-Japanese proceedings may be deemed waived as a result of disclosure in Japan. This should be a consideration when receiving legal advice in Japan.
Don’t:
Forget to pay attention to transfer restrictions.
- Be aware of the distinction between a right of first offer and a right of first refusal. The latter can make it more difficult to sell to third parties (which may be one strategic intention).
- Consider commercial restrictions. Preclude other partners from exploiting the JV, such as by competing with the JV as to certain products, in certain markets and/or in certain territories.
Don’t:
Overlook remedies for breach.
- Insert an agreed quantum of damages for breach of key clauses. Punitive damages are not awarded for breach of contract claims in Japan, so consider liquidated damages and/or put/call triggers to incentivize good behavior. The two main remedies for breach of contract, injunctions and money damages, are often insufficient; injunctions can come too late to prevent loss, and the full amount of damages you seek might be difficult to prove due to issues of causation and directness.
Don’t:
Forget to check boilerplate provisions.
- Easily overlooked, poorly worded miscellaneous provisions can lead to expensive litigation and/or arbitration.