June 30, 2022

Cross-Border: Japan’s M&A Outlook Brightens

This Pillsbury memo says that market conditions are ripe for a revival of M&A activity in Japan. With the yen trading at 20-year lows & geopolitical uncertainties causing some to shy away from deals in China, Japan is an increasingly attractive alternative for new investment in Asia.  The memo says that most inbound M&A activity in Japan will take the form of joint ventures and offers up some tips to companies considering doing a deal with a Japanese partner.  This excerpt provides some recommendations on due diligence, financing and documentation:

– 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.

– 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).

The memo says that if parties want dispute resolution proceedings to be conducted in English, they should consider arbitrating disputes in a regional forum such as the Hong Kong International Arbitration Centre (HKIAC) or Singapore International Arbitration Centre (SIAC). It also says that the Japan Commercial Arbitration Association (JCAA) is becoming an increasingly sophisticated venue for business disputes with an international dimension & provides a model arbitration clause that can be easily used in contracts.

John Jenkins