JAPAN: An Introduction to Banking & Finance: Domestic

Regulatory Framework for the Acquisition of Public Companies 

In Japan, where a purchase of shares of a public company is made outside a Japanese stock market or the organised over-the-counter market, that purchase must be made, in certain situations including (but not limited to) those illustrated below, by means of a tender offer bid (the “TOB”).

(a) “Exceeding 5% Rule” (off-market purchases) The total shareholding ratio (kabuken-tou-shoyu-wariai) of the purchaser in the target company following the off-market purchase will exceed 5% (except where the shares are purchased from not more than 10 persons within 60 days, including the number of counterparties to the contemplated sale and purchase; and shares are purchased thorough the Private Trade System (PTS) which are required to meet certain conditions);

(b) “Exceeding 1/3 Rule” (off-market purchases) The number of counterparties to any off-market purchases effected by the purchaser within 60 days is not more than 10, but the total shareholding ratio of the purchaser in the target company following the purchase will exceed 1/3.

Under the FIEA, an Offeror (purchaser) in a TOB transaction (the “Offeror”) must file a tender offer registration statement (the “Registration Statement”) before it can solicit shares from shareholders of the target company. A Registration Statement should describe the offer price, the number of shares to be purchased, the tender offer period and other terms and conditions of the tender offer, the purpose of the tender offer, as well as information concerning the Offeror, including, among others, its financial statements, with the Kanto Local Finance Bureau (the “KLFB”).

If an Offeror is to raise all or any part of the funds for settlement of the TOB by way of debt financing from other parties, then the Offeror must file “documents sufficiently showing the existence of funds necessary for the tender offer” (the “Financing Certificate(s)”) as an attachment to the Registration Statement. The Financing Certificate is required to show the certainty of funding for the TOB settlement. Financing Certificates will be disclosed publicly via the Electronic Disclosure for Investors' NETwork (EDINET) system together with the Registration Statement.

Requirements of Financing Certificates 

Certainty of Funding 

Financing Certificates must disclose, if any, a summary of all the conditions precedent to the drawdown of loan provided in the financing commitment letter accompanied by a term sheet for the financing (including a summary of any representations and warranties, undertakings and events of default in the term sheet to the extent referred to by the conditions precedent provisions).

The regulator will review if any of such conditions precedent to the loan drawdown has any potential of substantially undermining the certainty of funding. To be more specific, in the process of the pre-filing consultation with the KLFB, it will review the draft form Financing Certificates to examine whether any conditions precedent to the signing of a loan agreement or to the actual loan drawdown lacks specificity, concreteness or objectivity in any material respect. That said, the required level of the certainty of funding has been less restrictive than what is commonly known as the “certain funds” concept seen in the UK (or SunGard protections in the USA). In particular, the conditions precedent (to the signing of the loan agreement or the loan drawdown, as applicable) concerning the absence of material adverse effects on the business of the target company (i.e., no target MAC) or financial market (i.e., no market MAC) has been, more or less, generally accepted in Japan as a matter of practice.

However, a financing out condition is different. Since a failure in fundraising (i.e. financing out) is not permitted as a withdrawal event of a TOB under the FIEA, whether or not a condition precedent to the loan drawdown can be agreed between the lenders and the borrower/Offeror has been a controversial issue. Recently, we observe that sponsors such as global private equity funds have strictly negotiated with lenders to eliminate any conditions precedent which are beyond the sponsors’ control.

Other Requirements 

In addition to the above, the funding amount certified in the Financing Certificates must cover all the funds required for settlement of the TOB on an assumption that all the shares are tendered. The validity period of the Financing Certificates should cover a period which is no less than 10 business days longer than the scheduled tender offer period.

Financing Negotiations Timeline 

Pre-Launch Announcement of TOB 

In the event a pre-launch announcement of a TOB (ie an advanced announcement of scheduled commencement of the TOB process) is made prior to the filing of a Registration Statement, such pre-launch announcement would have the de facto effect of forcing an Offeror to commence the TOB process once the prescribed conditions therefor are satisfied. In other words, from the regulator’s enforcement point of view, the Offeror needs to launch the TOB precisely as announced, if and to the extent the prescribed conditions are met. As a result, an Offeror should not announce the TOB before it has secured all the financing arrangements to a certain degree.

In practice, an Offeror should consult with the KLFB at least three weeks prior to the date of the pre-launch announcement in connection with the draft press release for the pre-launch announcement. However, in this review process, the KLFB does not usually check the details of financing arrangements. Further, unlike at the timing of the launch of the TOB, no Financial Certificate is required for the pre-launch announcement.

Commencement of TOB (upon filing of a Registration Statement)

In the case where a pre-launch announcement of a TOB is not made, the Offeror should negotiate financing terms with lenders and obtain a commitment letter from them by the time of the commencement of the TOB. As a financing-out condition is not permitted as a withdrawal event which allows the Offeror to withdraw the TOB, it is common for the parties to negotiate and agree on a full, detailed term sheet for the TOB financing prior to the commencement of the TOB.

In addition, since Financing Certificates will be required as an attachment to the Registration Statement, the Offeror should consult with the KLFB on the draft form Financing Certificates (together with a summary of the financing term sheet, which can, in many cases, be still subject to negotiation between the parties) no later than three weeks prior to the filing of a Registration Statement. The draft form Financing Certificates, as well as a summary of term sheet of the financing, need to be prepared in Japanese for the KLFB’s review even if they are negotiated in English between the parties.

Settlement of TOB 

After the commencement of the TOB, an Offeror and its lenders will discuss the documentation of the definitive agreements (ie the loan agreement and initial security agreements). It is common that the definitive loan agreement is concluded upon, or the immediately following, the end date of the tender offer period after the number of tender shares is identified.

After the conclusion of the definitive loan agreement, an Offeror should submit a request for drawdown of the settlement funds and receive the loan proceeds by one business day prior to the settlement of the TOB.