In Brief: Guarantees and Collateral for Acquisition Financing in Japan

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Guarantees and sureties

Related corporate guarantees

Are there any restrictions on the provision of guarantees from related undertakings? Are there any limitations on the ability of affiliated companies registered overseas to post guarantees?

There are no restrictions on the provision of guarantees from related undertakings. However, in the event that directors must observe the duty of care and are not authorized to take actions that harm the interests of shareholders, they must ensure that they carefully analyze whether the terms and conditions of the company’s guarantees , including the amount of the guarantees, the duration and the interest rate, are reasonable. Note that this is more necessary in cases where there are minority shareholders.

There is no limit on the ability of related companies registered abroad to provide guarantees.

Assistance by the target

Are there any specific restrictions on the target providing guarantees or guarantees or financial assistance in connection with an acquisition of its shares? What measures can be taken to enable such actions?

In Japan, there are no legal restrictions on the provision of guarantees or guarantees or financial assistance in association with the acquisition of shares per se. However, in light of the obligations of directors, including the duty of care under the Companies Act, collateral arrangements that adversely affect the interests of shareholders are not permitted.

Types of security

What types of security are available? Are floating and fixed charges allowed? Can a general lien be granted on all of a company’s assets? What are typical exceptions to an all-assets grant?

Under Japanese law, a general form of security over all assets, similar to a floating charge or general lien, is not available. With few exceptions, security interests in Japan must be granted on an asset-by-asset basis. In the case of an acquisition financing transaction in Japan, since it is a high-risk, high-return financing compared to ordinary corporate loans, and has a strong character cash flow financing, the security package generally covers all assets, including shares, debts, real estate and intellectual property rights, of the target company and the target group of companies unless the constitution of a security interest is prohibited by another agreement that the target company has entered into with other companies.

Requirements for perfecting a security right

Are there specific bodies of law governing the perfection of certain types of warranties? What types of notices or other steps must be taken to perfect a security right in an encumbered asset?

Shares

Since the creation of a security interest in shares is possible to acquire control of all companies in the target group, it can be said that shares are the assets which must be taken as security with the highest priority among all the types of assets.

To create a pledge over listed shares, it must be transferred to the pledge column of the book entry account held by the person who will be the security holder under the Book Entry Transfer of Bonds Act and company shares.

In the case of shares other than listed companies and shares of a company issuing share certificates, the agreement between the pledge and the pledgee on the constitution of the pledge as well as the issuance of the share certificate are required, and possession of the share certificate is a condition of opposition to the issuing company and third parties. Meanwhile, in the case of shares of a company not issuing share certificates, the agreement on the constitution of a pledge is necessary, and the shares must be registered in the register of shareholders to oppose to the issuing company and to third parties.

Receivables

Receivables are one of the most common types of collateral in Japan and will be subject to security by a pledge or collateral assignment. To have a perfect security mission, there are the following three ways:

  • dated certified notice to the underlying debtor (usually sent by certified mail);
  • obtain the attested consent of the date of the underlying debtor (certification of the date is carried out by a notary public); Where
  • registration of the pledge or assignment at the Office of Legal Affairs.

Among these options, the consent attested by the date is generally used.

Immovable

A mortgage is usually established on real estate. A mortgage is established by agreement between the mortgagor and the mortgagee, and the condition for opposition to third parties is registration.

Personal property

In the case of movable property, it is important to be able to provide security without physically moving it due to its nature. For this reason, the creation of a security right is done by means of a security right rather than a pledge. A security on the transfer of movable assets is constituted by agreement between the grantor of the security and the holder of the security. A security interest in the transfer of movables may also be enforced against a third party by surrender under the Civil Code (usually by review of possession) or by registration of the transfer of movables.

Intellectual property rights

Intellectual property rights are generally pledged. For patents, utility models, designs and trademarks, the agreement between the pledgor and the pledgee and the registration are the necessary conditions to take effect. For copyrights, on the other hand, the agreement between the pledgee and the pledgee is the condition for taking effect, and registration is the condition for opposing third parties.

Renewal of security

Once a lien is perfected, are there renewal procedures to keep the lien valid and registered?

In Japan, once a security right is perfected, renewal procedures to maintain the validity and registration of the lien are not necessary, except for the registration of an assignment of security over receivables and movables. . In this case, the duration of the registration is determined (furniture: 10 years from the application for registration and receivables: either 10 years or 50 years from the date of the application for registration). Although such registration is not often used in practice, it is important to note that upon expiry of the period, the registration will be forcibly canceled and the conditions for opposition to third parties will be extinguished.

Stakeholder Consent for Safeguards

Is there a “works council” or other similar authorizations necessary to approve the provision of guarantees or security by a company?

There are no such requirements in Japanese law.

Granting of guarantee through an agent

Can a guarantee be given to one agent for the benefit of all lenders or must a guarantee be given to the lenders individually and then changes must be executed on any assignment?

Under Japanese law, security is created for each individual creditor, and a person acting as agent for that creditor cannot hold such security on behalf of all creditors. In addition, if a creditor assigns a secured claim to a third party, the security interest in that secured claim will be incidentally assigned to the third party.

Protection of creditors before the release of the guarantee

What protection is generally afforded to creditors before the security can be released? Are there ways to structure around such protection?

In Japan, no legal protection is given to creditors before the security can be released.

Fraudulent transfer

Describe the fraudulent transfer laws in your jurisdiction.

The Civil Code provides for the right to annul an act of a debtor which harms the creditor (fraudulent act) by an action, and to restore to the debtor the property or the rights which have been lost on the property of the debtor (right of cancellation of the fraudulent act). The modification of the Civil Code in 2020, in addition to the act of decrease of property, which is a typical fraudulent act, clearly stipulated as fraudulent acts: the intention of concealment of the debtor, the fact of harming the creditor due to bad faith of the beneficiary, the act of partiality and the excessive payment in kind.

Date declared by law

Correct on:

Please indicate the date on which the law indicated here is accurate.

February 4, 2021

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