A case of a Share Subscription Agreement and Shareholders Agreement with an Israeli company
Outline of the Case
Our client, a business partner, received a request from an Israeli company about making an investment in his company. The Israeli company was developing a promising security-related product and was considering listing on the Israeli and U.S. stock exchanges in the future. However, the company needed a large amount of money for its development activities and could not raise sufficient funds only through investments from related parties, so the company asked to our firm’s clients to invest by presenting them with an investment agreement.
Our client was fully aware of the details of the counterparty company based on past transactions, and since the investment amount was limited to several hundred million yen, if decided to make the investment without going through due diligence and other procedures, based on the understanding that the risk was within the scope of its ability to bear. However, since they wanted to obtain sufficient return in the event that the Israeli company went public in the future, they decided to request our firm to check the share subscription agreement and the shareholders’ agreement to confirm that their rights as shareholders were preserved.
Services offered by Kuribayashi Sogo Law Office
There are two ways for an already existing company to raise funds: indirect financing, in which the company borrows from financial institutions, and direct financing, in which the company issues new shares and raises funds through paid-in capital from underwriters. For a listed company, it is possible to raise funds from the capital market through a secondary offering of shares by a securities company, but for an unlisted company, it is not possible to raise funds from a large number of investors, except in the case of an IPO. Therefore, as in this case, we would consider issuing new shares to business partners or companies we know and raise funds through paid-in capital. Our firm was requested by the client (a Japanese company) to conduct a legal audit of the Stock Subscription Agreement and the Shareholders Agreement. Since these agreements were prepared in English, we were to provide an overview of the agreements in Japanese and identify any problems with each item.
In particular, in this deal, the Japanese company is to be the largest shareholder with more than 50% of the shares of the Israeli company through this investment. Therefore, an important checkpoint was to ensure that the company would be managed properly going forward and that the Japanese company would not be required to make additional payments or be held liable as a shareholder. In addition, the Japanese company was not particularly concerned about receiving dividends from its investment, but it wanted to reap the full fruits of a future stock listing, so it was necessary to check the contractual provisions regarding the treatment of investors at the time of the listing.
Cross-border M&A by Kuribayashi Sogo Law Office
When a Japanese company acquires shares in a foreign company through a third-party allotment of new shares, but also acquires management control of the company, this would fall under the category of cross-border M&A. As the Japanese company making the investment, it is necessary to conduct due diligence to properly understand the details of the target company and to have a proper understanding of the company in which it is investing. In addition, since the laws of the target company’s location will be the governing law when investing in a foreign company, it is necessary to have the company confirm that the procedures for issuing new shares are properly carried out in accordance with local laws and regulations. This can be done by having a local law firm prepare and issue a legal opinion.
In addition, the investor’s rights are defined in the company’s Articles of Incorporation and local corporate law, as well as in the Shareholders Agreement and the Subscription Agreement. Therefore, when investing in a foreign company, it is necessary to thoroughly investigate the contents of these agreements and laws to confirm that the contents are consistent with the rights and risks that you have in mind as an investor. At Kuribayashi Sogo Law Office, we investigate these laws and agreements when a Japanese company invests in a foreign company, and explain them to the client company in Japanese. If the Japanese company has any wishes, we will discuss them with the counterparty and ensure that they are reflected in the contract.
Costs (excluding consumption tax)
We generally charge a time fee for assisting Japanese companies with investments in or acquisitions of foreign companies. We will clarify our fees for our M&A support services in advance.
The hourly fee for partner attorneys is 35,000 yen. The hourly fee for associate attorneys is 25,000 yen. Each month, you will be billed with a statement for the amount of time spent by each attorney multiplied by the billable rate (per hour) of each attorney. A billing statement will be prepared in Japanese or English and submitted to the client along with the monthly invoice so that the client is aware of the work performed by the firm and the estimated amount of legal fees to be paid. In the event that there is a difference of opinion regarding fees, we will seek the client’s opinion and may adjust the amount of fees.
For cross-border M&A transactions such as this one (where one or both parties are foreign companies and the transaction crosses national borders), most law firms will propose a time charge system, but if you prefer a fixed fee, we will be happy to discuss this with you. Please inquire with us. We have also proposed a fixed fee for the transfer of management rights between group companies, in consideration of our client’s desire to save costs.