Selling Foreign Businesses: Strategic Legal Issues and Risks for Japanese Companies | Perspectives & Events


As business targets evolve, Japanese companies are increasingly looking to sell their non-core subsidiaries and operations abroad (target business). After the strategic decision to sell the target company has been made, there are still a number of potential issues for vendor management (seller) to consider as to how the sale might impact other existing companies or future business. It is important that management and its legal counsel discuss these issues in advance so that they are prepared to address them in the sales process.

Identify the key issues

One of the key aspects of selling a target company is preparation well before the start of the sales process. It is important to realize that you, as the seller, are able to identify key issues and direct the process of addressing them before entering into negotiations and either attempting to resolve them or positioning them as something for the buyer to deal with must deal as part of the transaction. Some common issues and factors to consider are:

  • Property disputes: is the overall risk known, what is the certainty of the potential damage, can they be settled before the sale, or does it have to be the responsibility of the buyer?
  • Major Debt Instruments and Other Credit Support Arrangements: Are they cross-collateralised with other assets or businesses, are they guaranteed by the seller or its other affiliates, do they have to be replaced by the buyer, or be repaid by the seller before closing?
  • Significant Capital or Debt Commitments: Are there any long-term commitments a buyer would like to know about, and are such commitments firm or callable?
  • Existing business partnerships, strategic alliances, etc. Are these key relationships for the seller’s other businesses that should be retained, or should they be sold with the target business?
  • Are there any transfer restrictions or other restrictive agreements such as non-competition clauses that need to be taken into account?
  • Contracts with certain third parties that have been difficult in the past and/or significant delays in trade accounts receivable: how are these priced into the transaction, can they be settled prior to the transaction?
  • Intellectual property, including licenses, proprietary rights and retention of title (explained below).
  • Key tax issues based on the target company profile or potential transaction structures.
  • Long-term obligations such as payment, guarantee or warranty obligations: Are these treated as debts of the target company and reduce the purchase price?
  • Probable indemnification obligations associated with any of the above: While the seller will initially try to have the buyer assume all of these, it is helpful to quantify the risks and decide whether they could accept bearing any of the risks.
  • Any potential ESG risks that are an increasing concern for buyers, particularly PE buyers and buyers from jurisdictions that have current or upcoming regulations that may be applicable to a buyer (discussed further below).

Intellectual property

There is almost always some form of license agreement or other intellectual property sharing agreement affecting the intellectual property portfolio of the target company and the other group companies and possibly also with unaffiliated third parties. Understanding where in the group companies intellectual property of the target company is currently being used or intended to be used (and vice versa in relation to the intellectual property of the other group companies used by the target company) and where the intellectual property will be licensed to third parties will be key to to determine what rights the seller must retain and what problems they can pose to a buyer who, unsurprisingly, expects to have full rights to (in many cases including ownership of) the intellectual property used in the target deal. More generally, it is important for group companies to understand where licenses and sublicenses were provided or obtained, as well as the scope and terms contained therein, as potential buyers will want to familiarize themselves with the scope of existing licenses, or the seller could otherwise incur losses related to the outstanding licenses. Clearly documenting these considerations at the outset and understanding the structure of the agreements upfront can help avoid major issues once the transaction closes.

Intercompany Agreements

For large Japanese companies, there is usually sales, services and/or logistics from the seller’s various group companies supporting the target business. A buyer may expect or need to outsource these functions and employees and incorporate them into the underlying transaction to ensure they continue to support the target company. Before beginning the sales process, it is important to determine the roles of other group companies in relation to the target company and also to consider what would be material to the target company and what the seller is willing to part with. Common intercompany agreements include:

  • If assets are located in group companies, such as For example, if you have intellectual property or inventory, consider whether you can sell it or whether a license, usage rights, or other agreement is required.
  • Contracts that need to be matched to the target company or buyer located within your group companies (e.g. parent guarantees, subcontractor agreements, secondary agreements such as equipment supply or manufacturing contracts).
  • Corporate financing arrangements and how they will be terminated or otherwise repaid prior to completion.
  • Insurance, employee benefit plans, support services, equipment, services or property shared between the target company and other group companies.
  • Personnel of other group companies who support the target company through an agreement between the parties or in the normal course of business (explained below).

Certain intra-group arrangements may be governed by a transitional services agreement, although there may be instances where an existing inter-group arrangement is an independent commercial transaction that the parties wish to continue (or enter into a similar arrangement to continue after completion). Also, it is important to fill any gaps across the business operations that result from the post-closing sale of the target company, such as: B. Key personnel or resources that you have previously relied on the target company for and will continue to need.

employees of the group company

If the Vendor has seconded key personnel to the target company, it must be determined whether these persons are to be transferred back to the relevant entity, retained by the target company after closing, or retained by the target company for a period of time (via a contractor or interim service agreement) . There may also be persons or groups of companies resident in other group companies who support the target company who may need to be transferred, particularly where they have been hired for the purpose of supporting the target company. As such, specific negotiations may be required with such seconded workers and their respective group companies, ideally prior to signing the final purchase agreement. With respect to all employees, regardless of location or affiliation with the target company, it is necessary to understand the relevant labor laws, which are unique to each jurisdiction and relevant regardless of the number of employees involved.

Overlapping Businesses

Another factor to consider is whether the seller or other group companies have an overlap in business with the target company, as this will also affect the business structure and transaction terms, including any non-compete clauses a buyer may request, or the service and Seller’s ability to maintain other businesses. After the completion of the sale transaction, the target company is no longer under your control and is no longer a group company. Accordingly, sellers should take steps to take the necessary measures to address and control any risks they retain after closing, just as buyers want security in the business they have acquired.

Emerging ESG diligence

A final note for sellers to consider is the increasing focus and regulatory requirements on foreign buyers, particularly PE and European buyers, regarding ESG risks related to human rights and environmental due diligence (HREDD), including the Require buyers to take steps to identify actual and potential adverse human rights and environmental impacts associated with operations and their supply chain. Countries like Germany and the Netherlands have already implemented these and the European Commission has proposed a directive for all European Commission countries.1 Therefore, a seller should understand if there are potential red flags in the target company or its supply chain related to HREDD and supply chain management in general.


Selling a target company with independent operations can be a fairly straightforward process, but as mentioned above, there are often many connections between the target company and the seller and their other affiliated companies that need to be understood and addressed beforehand. The better you understand the target business early on, the better prepared you can be to manage risk and find solutions to potential problems. A prepared yet flexible plan before you start negotiations can help you maximize the value of the sale while minimizing transaction-related risks.



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