The Definitive Agreement Is Where Deals Are Won or Lost
A Japan M&A process can look smooth up to the point of signing the letter of intent. The real negotiation happens in the definitive agreement - specifically, in the representations and warranties, the indemnity structure, and the conditions precedent.
Foreign buyers who treat the definitive agreement as a standard form document to be signed quickly after due diligence often discover hidden liabilities, unenforceable protections, or incomplete closing conditions months after the deal closes. The reverse is equally true: foreign sellers who agree to unusually broad warranties without Japan-side legal review can find themselves on the hook for claims they never anticipated.
This guide explains the structure of a Japan share purchase agreement (kabushiki joto keiyaku (株式譲渡契約), commonly abbreviated SPA), what each section does, and the provisions that most commonly require negotiation in cross-border Japan deals.
See Japan M&A NDA and LOI Guide for the early-stage documents that precede the SPA, and Japan Stock Purchase vs Asset Purchase for the structural choice that determines which agreement type you need.
SPA vs. Asset Purchase Agreement
This guide covers the SPA, which governs a share purchase: the buyer acquires the shares of the target company, and the company itself (with all its assets, liabilities, contracts, and regulatory history) passes to the buyer.
An asset purchase agreement (jigyo joto keiyaku (事業譲渡契約)) governs a transaction where the buyer selects specific assets and liabilities to acquire, rather than the entire company. The choice between these structures has material tax and regulatory implications. See Japan Stock Purchase vs Asset Purchase for the comparison.
The Architecture of a Japan SPA
A Japan M&A SPA typically runs 60 to 150 pages in English (longer if bilingual Japanese/English format is used). Its structure follows a recognizable pattern:
(a) Recitals: Background facts about the parties and the transaction. Not operative but provides interpretive context.
(b) Definitions: Precise definitions for every defined term used throughout. The definitions section in a Japan SPA can run 15 to 25 pages in complex cross-border deals. Getting the definitions of "Material Adverse Change," "Fundamental Warranty," and "Tax" right is worth significant negotiating time.
(c) Sale and purchase of shares: The core operative provision stating that the seller agrees to sell, and the buyer agrees to purchase, the target shares on the closing date, at the purchase price.
(d) Purchase price and payment mechanics: How much, how paid, when, and how adjusted (locked box vs. completion accounts - explained below).
(e) Conditions precedent (teishi joken (停止条件)): The conditions that must be satisfied before the parties are obligated to close. Includes regulatory approvals (FEFTA, Antimonopoly Act), third-party consents, and absence-of-MAC conditions.
(f) Pre-closing covenants: What the seller (and sometimes the buyer) must and must not do between signing and closing. Typically includes a prohibition on conducting the business outside the ordinary course.
(g) Representations and warranties (hyomei hosho (表明保証)): The seller's factual statements about the company and its business. If any representation is false, the buyer has a claim.
(h) Indemnification (hosho joko (補償条項)): The framework governing claims for breach of warranty or other indemnified matters, including financial caps, baskets, and claim procedures.
(i) Closing mechanics: What happens on closing day: share transfer, payment, document delivery, and post-closing notifications.
(j) Post-closing covenants: Obligations that survive closing, including non-competition, transition services, and regulatory cooperation.
(k) General provisions: Governing law, dispute resolution, notices, assignment, entire agreement, severability.
Purchase Price and Payment Mechanics
Fixed Price
The simplest structure: the buyer pays a fixed amount on closing. No post-closing adjustment. The buyer accepts that the company's working capital on closing day may differ from what was modeled in due diligence.
Fixed-price structures shift working capital risk to the buyer. They are common in smaller Japan SME deals where the seller is unwilling to hold back escrow or engage in post-closing accounting.
Locked Box
In a locked box structure, the economic transfer of the company is treated as occurring at a historical reference date (the "locked box date") set before signing, typically the date of the most recent audited or management accounts. The purchase price is set based on the company's financial position at that date.
Between the locked box date and closing, the seller agrees to a covenant preventing "leakage" of value from the company to the seller or its affiliates - dividends, management fees above normal course, related-party payments, and similar extractions.
The buyer's exposure is that the locked box date may be several months before closing, and the company's value can change in the interim. Mitigated by the leakage covenant and appropriate due diligence on the locked box accounts.
Locked box is increasingly common in Japan mid-market deals where the seller wants price certainty and clean closing mechanics.
Completion Accounts (Closing Accounts Adjustment)
In a completion accounts structure, the purchase price is provisionally set at signing and then adjusted post-closing based on the actual financial position of the company at the closing date - typically net working capital, net debt, and free cash.
The process: the seller prepares draft closing accounts within a defined period (typically 30 to 90 days post-closing); the buyer reviews and may dispute; a final price adjustment is calculated and paid (or refunded) based on the difference between the target and actual positions.
Completion accounts shift the accounting risk closer to the closing date. They require significant post-closing cooperation and can generate disputes over accounting methodology. A detailed agreed accounting policies schedule - typically appended to the SPA - reduces but does not eliminate this risk.
Representations and Warranties (表明保証)
What They Are
Representations and warranties (hyomei hosho (表明保証)) are the seller's statements of fact about the company and its business. In a Japan SPA, the seller warrants:
(a) Corporate matters: Valid existence of the company, authority to enter the transaction, no conflicts with existing agreements or laws.
(b) Financial statements: That the accounts provided to the buyer are accurate and prepared in accordance with accounting standards, and that there has been no material adverse change since the accounts date.
(c) Assets: That the company owns or has valid rights to use the assets described in due diligence, free from material encumbrances.
(d) Contracts: That material contracts are valid, in force, and not subject to change-of-control provisions that require third-party consent that has not been obtained.
(e) Employees and labor: That employment contracts comply with Japan labor law, no material disputes, severance obligations disclosed.
(f) Real property: Leases valid, no material disputes, renewal terms disclosed.
(g) Intellectual property: Company owns or licenses the IP needed to operate the business; no infringement known.
(h) Tax: All taxes have been properly filed and paid; no pending investigations or disputes.
(i) Litigation: No pending or threatened litigation above a materiality threshold.
(j) Compliance: Operations comply with applicable law (including FEFTA, product regulations, import/export compliance).
(k) Environmental: No material contamination or outstanding remediation obligations.
Fundamental Warranties vs. General Warranties
Most SPAs distinguish between:
Fundamental warranties: High-risk, difficult-to-cure matters where the buyer should be able to terminate or claim without caps. Typically: title to shares, capacity and authority, and (sometimes) solvency. Fundamental warranties are often fully indemnified with no financial cap.
General warranties: The broader set of business representations. Subject to caps and baskets (see Indemnification section below).
Knowledge Qualifiers
Many seller warranties are qualified by "to the seller's knowledge" or "so far as the seller is aware." This limits the warranty to matters actually known to specified individuals (typically the key principals, not the entire workforce).
Foreign buyers should push for a "reasonable inquiry" standard where possible: the knowledge qualifier applies only to facts that the specified individuals knew or would have known after reasonable inquiry. Pure actual-knowledge qualifiers create gaps where the seller can argue ignorance.
Disclosure
In Japan M&A, sellers typically deliver a disclosure letter alongside the SPA. The disclosure letter qualifies the representations and warranties by disclosing specific exceptions or matters that are carved out from warranty coverage. For example, a disclosed pending litigation claim cannot form the basis of a warranty claim if the claim matches the disclosed matter.
The quality of disclosure matters significantly. A vague or incomplete disclosure letter leaves gaps that favor the buyer. A thorough disclosure letter effectively transfers known risk to the buyer and limits future warranty claims.
Indemnification (補償条項)
Structure
The indemnification framework in a Japan SPA governs how warranty claims are made, what losses are recoverable, and what financial limits apply.
The standard elements:
(a) Claim procedure: How a warranty claim is notified (timing, content, escalation for third-party claims). Missing the notification deadline bars the claim under most SPAs.
(b) Time limits for claims: General warranty claims are typically time-barred 12 to 24 months after closing. Fundamental warranty claims often run longer (7 years is common, tied to tax limitation periods under 国税通則法).
(c) Financial cap: The maximum aggregate liability for warranty claims. Typically expressed as a percentage of the purchase price. Common ranges: 15% to 50% of purchase price for general warranties; 100% for fundamental warranties.
(d) Basket (de minimis / threshold): A minimum claim threshold below which warranty claims are not payable. Common in two forms:
- Tipping basket (once the aggregate of claims exceeds the threshold, the entire aggregate is recoverable from the first yen): more favorable to buyers.
- True deductible (only the excess over the threshold is recoverable): more favorable to sellers.
(e) Consequential loss exclusion: Many SPAs exclude liability for consequential, indirect, or punitive damages. Buyers should check whether lost synergies or business interruption losses are captured as "direct" or "indirect" losses under the specific definition.
Warranty and Indemnity Insurance (表明保証保険)
Japan's warranty and indemnity (W&I) insurance market has developed significantly in the past five years. hyomei hosho hoken (表明保証保険) allows the buyer to insure against warranty breaches directly (buy-side policy), rather than relying solely on the seller's indemnity obligations.
W&I insurance is increasingly standard in Japan mid-market deals over JPY 500M. It allows sellers to receive cleaner exits (reduced escrow or holdback requirements) while giving buyers meaningful protection through an insurance policy rather than counterparty credit risk against the seller.
Key W&I considerations in Japan:
(a) Insurers require the buyer to have conducted genuine due diligence. A superficial review will not qualify for coverage.
(b) Tax warranties are often either excluded from W&I policies or covered under a separate tax indemnity insurance policy.
(c) Known issues disclosed in the disclosure letter are not covered. The insurance covers unknown breaches only.
(d) Policy exclusions should be reviewed carefully before the buyer agrees to reduce escrow arrangements in reliance on W&I coverage.
Conditions Precedent (停止条件)
The deal cannot close until all conditions precedent are satisfied or waived. Standard conditions include:
(a) FEFTA prior notification clearance: If the transaction is in a designated sensitive sector under the Foreign Exchange and Foreign Trade Act (外為法), the 30-business-day prior notification period must expire without a government objection. The Aplash Japan FEFTA M&A Guide covers this requirement in detail.
(b) Antimonopoly Act (独占禁止法) filing: If the deal meets the notification thresholds (target Japan-domestic sales > JPY 5 billion AND acquirer group worldwide sales > JPY 20 billion; or combined Japan market share thresholds), a prior notification to the Japan Fair Trade Commission (JFTC (公正取引委員会)) is required. The standard review period is 30 days for Phase 1; Phase 2 reviews can extend to 120 days.
(c) Third-party consents: Change-of-control provisions in material contracts, licences, or leases may require third-party consent before closing. Failure to identify and obtain these consents is one of the most common deal-disruption issues in Japan M&A.
(d) Absence of Material Adverse Change: The buyer typically has the right to not close if there has been a material adverse change in the business between signing and closing. Define "material adverse change" precisely in the SPA - vague definitions generate disputes.
(e) Seller's closing deliverables: Board and shareholder resolutions approving the transaction, resignation letters of departing directors, share certificates or registry entries, and other documents.
Closing Mechanics
In a Japan share transfer, the actual transfer of ownership is effected by:
(a) Share certificate delivery (if share certificates exist): Many KKs have dispensed with share certificates; check the 定款 and registry.
(b) Entry in the shareholder registry (kabunushi meibo (株主名簿)): The target company maintains a shareholder registry. The buyer's name must be entered in the registry on closing for the share transfer to be effective against the company (会社法).
(c) Payment: Wire transfer of the purchase price, typically against simultaneous or same-day registry entry.
(d) Board and officer resignations: Departing directors submit resignation letters effective on closing. Incoming directors are appointed by the new shareholder (the buyer) immediately after closing.
(e) Registry filings: Change of directors and potentially other matters must be filed at the Legal Affairs Bureau within two weeks of closing.
Japan does not have an escrow agent infrastructure as mature as the US or UK for M&A closings. Wire transfers are typically handled directly between the buyer and seller bank accounts, with documentary conditions agreed in advance. For deals where the seller is outside Japan, SWIFT timing should be confirmed well in advance of the closing date.
Post-Closing Covenants
Key post-closing obligations in a Japan SPA:
(a) Non-competition and non-solicitation: The seller typically agrees not to compete with the acquired business or solicit its employees or customers for a defined period. Japanese courts have upheld non-competition covenants that are reasonable in scope, duration, and geographic reach, but have reduced or voided overly broad restrictions under 民法第90条 public policy principles.
(b) Transition services: Where the acquired company is carved out of a larger seller group, the seller provides defined transition services (IT, HR, payroll, logistics support) for a transitional period, typically 6 to 24 months.
(c) Regulatory cooperation: Both parties agree to cooperate in post-closing regulatory notifications, including ministry notifications, customs registration updates, and licence transfers.
Governing Law and Dispute Resolution
Most cross-border Japan M&A SPAs designate Japanese law as governing law and commercial arbitration (typically the Japan Commercial Arbitration Association (JCAA) or the ICC) or the Tokyo District Court as the dispute resolution forum.
Japanese court vs. international arbitration:
(a) Japanese courts are predictable, well-reasoned, and efficient for commercial disputes. However, proceedings are conducted in Japanese, and discovery is limited compared to common law jurisdictions.
(b) International arbitration (ICC, SIAC, JCAA) is preferred for large cross-border deals where neither party wants to litigate in the other's home court. JCAA's international arbitration rules are procedurally comparable to ICC.
English law as an alternative: Some cross-border Japan deals use English law as governing law for the SPA, particularly where both parties are sophisticated international counterparties with existing English-law contract infrastructure. If English law governs, the Japanese-law formalities for share transfer (shareholder registry entry, directors registry changes) still apply, since those are governed by Japanese corporate law regardless of the SPA governing law.
How Aplash Can Help
Aplash advises on the Japan-side regulatory dimensions of M&A transactions: FEFTA prior notification, Antimonopoly Act filing, licence transfer planning, and post-closing regulatory integration. For the SPA itself, Aplash works alongside the buyer's or seller's transaction counsel to ensure the regulatory conditions, representations, and post-closing covenants reflect the actual Japan regulatory position of the target business.
See also: Japan M&A Due Diligence Guide, Japan FEFTA M&A Guide, and Japan Post-M&A Regulatory Integration.
This article is for informational purposes. It does not constitute legal advice. SPA structure and specific provisions require review by qualified Japan and home-country counsel.