Private Equity 2026 Comparisons

According to RECOFDATA, the number of Japanese M&A transactions announced in the first half of 2026 was 2,647, an increase of 5.1% compared to the first half of 2025, reaching a record high for the third consecutive year. By contrast, the total deal value in the first half of 2026 was JPY18.2 trillion, a decrease of 20.1% compared to the deal value in the first half of 2025. Deal value in the first half of 2025 was driven by two megadeals exceeding JPY4 trillion (the Toyota Fudosan-led take-private acquisition of Toyota Industries and SoftBank Group’s investment in OpenAI), whereas there was only one deal exceeding that threshold in the first half of 2026 (SoftBank Vision Fund 2’s investment in OpenAI).

Despite uncertainties regarding US tariffs and trade policies, geopolitical instability in the Middle East and the weak Japanese yen, there continues to be an observable steady flow of outbound M&A deals by Japanese companies, which recovered from a rapid decrease in cross-border transactions and a slowdown in outbound M&A deals in 2020 due to the COVID-19 pandemic. The number of outbound transactions by Japanese companies in the first half of 2026 was 309, a 27.5% increase compared to the first half of 2025. By contrast, the deal value of such outbound transactions decreased by 10.3% compared to the first half of 2025.

The number of M&A transactions in Japanese target companies by financial sponsors increased by 2.8% compared to the first half of 2025. The total deal value increased approximately 1.4-fold to JPY4.4 trillion, compared to JPY3.1 trillion in the first half of 2025. The number and deal value of transactions by foreign financial sponsors was 139 (a 27.5% increase) and JPY3.8 trillion (a 47.3% increase), respectively. Notable deals announced in the first half of 2026 include Apollo’s acquisition of Nippon Sheet Glass for JPY590 billion, EQT’s acquisition of Kakaku.com for JPY551.3 billion and KKR’s acquisition of Taiyo Holdings for JPY490.6 billion.

Active Transactions and Macro-Economic Factors

In response to the Japanese government’s policy of reducing the number of listed companies that are subsidiaries of listed parents, and to heightened investor scrutiny of parent–subsidiary listings, there have been notable transactions in the last few years in which the parent of a listed subsidiary either buys out the subsidiary or sells its holdings in the subsidiary to a third party, such as the take-private transaction of Toyota Industries, a major listed Toyota Group company, and NTT’s take-private transaction of NTT DATA Group.

In addition, Japan has seen a number of corporations reorganising their businesses to improve capital efficiency in response to increasing requests from investors and the Tokyo Stock Exchange to focus on the cost of capital and the return on equity. In April 2026, the Tokyo Stock Exchange updated this request, with a particular focus on the appropriate allocation of management resources. Certain Japanese companies have sold their non-core businesses in order to refocus their resources on future growth areas to ensure long-term sustainable success, generate value for shareholders and contribute to the wider society. As a growing number of Japanese companies adopt the strategy of selling unprofitable sectors of their business portfolio and acquiring new businesses to ensure sustainable growth amidst the rapidly changing business environment, this trend of deals driven by the need to change or diversify business portfolios looks set to continue.

In the small to mid-cap market, domestic M&A deals of family-owned businesses are likely to continue, as founders have difficulty in handing over their business to family members or employees and instead decide to sell the business to third-party buyers, including private equity buyers.

Against this backdrop, there has been a strong pipeline of take-private transactions, corporate carve-outs and small- to mid-cap acquisitions, and Japan continues to attract substantial interest from both domestic and international private equity sponsors. The relative weakness of the yen and still-low interest rates have also made Japanese assets more attractive for overseas investors.

Another interesting and important development in recent years has been an increasing number of hostile transactions, including unsolicited tender offers by Japanese companies, which have historically been very cautious about making such offers. Activist investors have also become increasingly influential in the Japanese M&A market. Through proposals for business divestitures, capital returns and changes in management strategy, activists have encouraged boards to consider strategic alternatives and have sometimes prompted competing bids or increases in offer prices.

Impact of Geopolitical Developments

While Japan is politically stable, Japanese companies are affected by global geopolitical tensions, as well as tariffs and trade policies rolled out by the USA. Instability in the Middle East has created additional uncertainty, particularly through its effect on crude oil prices, transportation costs and supply chain security. However, these geopolitical uncertainties do not seem to have materially hindered private equity deal activity in Japan – see 1.1 Private Equity Transactions and M&A Deals in General. Factors such as still-low interest rates and the continuously weak yen, as well as Japan’s relative geopolitical stability at a time when international investors face difficulty making new investments elsewhere in Asia, may have contributed to this trend. However, it is worth noting that some portfolio companies of private equity sponsors have faced financial difficulties and undergone restructuring proceedings in the last few years.

An example of a private equity deal affected by geopolitical considerations is MBK Partners’ attempted take-private transaction of Makino Milling Machine. MBK Partners was selected as a white knight through an auction process conducted by Makino in response to an unsolicited offer by NIDEC Corporation. NIDEC commenced its tender offer in April 2025, but later withdrew it after Makino Milling Machine introduced countermeasures to secure sufficient time to seek a potential buyer.

In June 2025, MBK Partners announced a plan to take Makino Milling Machine private through a tender offer at JPY11,751 per share (approximately JPY275 billion (USD1.72 billion) in total), and worked to secure clearance under Japan’s foreign direct investment (FDI) screening regime. However, on 22 April 2026, the Japanese government issued a formal recommendation under the Foreign Exchange and Foreign Trade Act (FEFTA) to MBK Partners to halt its planned acquisition of Makino Milling Machine. This was only the second time the government had issued such a recommendation (the first being the 2008 case involving The Children’s Investment Fund’s attempted acquisition of shares in Electric Power Development (J-Power)). The government cited national security concerns, noting that Makino’s business falls under the core sector as defined under the FEFTA framework and that its high-precision machine tools are widely used, including in defence applications.

MBK subsequently announced that it would abandon the tender offer. The case has set a significant precedent, with market commentators noting that FEFTA approval can no longer be considered low-risk for foreign takeovers of Japanese companies.

New Guidelines

The Corporate Governance Code and the Stewardship Code

As part of the continued efforts to enhance the corporate governance of Japanese listed companies, the Tokyo Stock Exchange adopted the Corporate Governance Code in 2015, and revised it in June 2018 and June 2021. The Corporate Governance Code adopts the “comply or explain” approach and sets forth principles for effective corporate governance for Japanese listed companies, which, among other things, require listed companies to give weight to the cost of capital in determining their business portfolio and resource allocation. The emphasis on the cost of capital may encourage Japanese listed companies to dispose of their non-core businesses and focus on expanding their competitive edge through M&A.

In addition, the Japanese Financial Services Agency (FSA) introduced Japan’s Stewardship Code in February 2014 and subsequently revised it three times, in May 2017, March 2020 and June 2025. The Stewardship Code sets out principles for institutional investors to fulfil their stewardship responsibilities to their clients and beneficiaries through constructive engagement with investee companies. As of 31 December 2025, 350 institutional investors were included in the FSA’s list of investors that had accepted the Stewardship Code at least once since its introduction. Among those institutional investors, 282 have accepted the third revised version of the Code published in June 2025.

Under the current Stewardship Code, institutional investors are expected to disclose their voting records for each investee company and each agenda item and, where particularly important from the perspective of constructive engagement, the reasons for their voting decisions. The June 2025 revision placed additional emphasis on effective dialogue, including greater transparency concerning institutional investors’ shareholdings and collaborative engagement among institutional investors. These developments are influencing institutional investors’ engagement with investee companies and the exercise of voting rights, and are becoming increasingly relevant to M&A practices in Japan.

Fair M&A Guidelines and Guidelines for Corporate Takeovers

More than ten years after it formulated guidelines for management buyouts in 2007, the Ministry of Economy, Trade and Industry of Japan (METI) released fully revised guidelines for M&A transactions involving conflicts of interest in June 2019, titled “Fair M&A Guidelines: Enhancing Corporate Value and Securing Shareholders’ Interests” (the “Fair M&A Guidelines”), which cover not only management buyouts but also the acquisition of a controlled company by a controlling shareholder.

Private equity M&A in which incumbent management participates (management buyouts) will be within the scope of the Fair M&A Guidelines; as a practical matter, compliance with the Guidelines is likely to have an impact on appraisal rights litigation brought by shareholders who dissent from squeeze-outs.

Furthermore, in response to the increase in hostile or unsolicited offers and the court rulings on defence measures, on 31 August 2023 METI published new guidelines titled “Guidelines for Corporate Takeovers” with respect to the principles and best practices of directors’ conduct in the context of acquisition of corporate control of a listed company, which, among others, recommend that a phase-based approach be taken by the board against a proposal for acquisition of corporate control, and that an individual director, upon receipt of an acquisition proposal, promptly report it to the board and that the board give “sincere consideration” to any “bona fide offer”. When the board decides to negotiate towards agreement, the Guidelines request that the directors negotiate diligently with the acquirer to improve the offered terms so that the acquisition is conducted on the best available terms for the shareholders. The Guidelines have had a material impact on the attitude of boards as they can no longer ignore an offer solely because it is unsolicited.

In June 2026, METI published draft interpretative materials for public comment, including the Interpretation, Key Points and Q&A on the Guidelines for Corporate Takeovers. These materials do not amend the Guidelines, but seek to clarify and reinforce their underlying principles and best practices, including that the desirability of an acquisition is not determined by price alone, but rather by whether it both enhances corporate value and secures the common interests of shareholders, and that target boards, acquirers and shareholders should properly understand and implement the Guidelines when considering acquisition proposals.

Change in Mandatory Tender Offer Rules and Large Shareholding Reporting Requirement

The amendments to the mandatory tender offer rules and the large shareholding reporting requirements, which were enacted by the Diet in May 2024, came into effect on 1 May 2026. Under the amended tender offer rules, market trades, including on-floor transactions that were generally outside the scope of the former rules, are now subject to the mandatory tender offer requirements, and the applicable ownership threshold has been lowered from more than one third to 30%.

The amendments to the large shareholding reporting requirements clarify the circumstances in which agreements among institutional investors concerning the exercise of voting rights or other shareholder rights do not cause them to be treated as joint holders, thereby facilitating collaborative engagement. They also clarify the scope of “material proposals”, expand the rules relating to deemed joint holders and cash-settled equity derivatives, and require more detailed disclosure regarding matters such as the purpose of the shareholding and material agreements relating to the shares.

Revisions to the Listing Rules Regarding Management Buyouts (MBOs) and Subsidiary Conversions

In response to continued investor concerns about the effectiveness of special committees and limited disclosure on assumptions adopted in valuation, the Tokyo Stock Exchange determined to supplement and enhance the requirements under the Fair M&A Guidelines and revise the listing rules concerning MBOs and taking-private transactions by a controlling shareholder. The revised listing rules, which took effect on 22 July 2025:

• expanded the scope of covered transactions to include taking-private transactions by certain related companies that are not controlling shareholders;
• require the target’s board to form a special committee consisting mainly of outside directors and obtain its opinion confirming that the relevant MBO or taking-private transaction is fair for general shareholders; and
• require the target to disclose the entire opinion of the special committee.

Foreign Investment Regulations

Major amendments

The Foreign Exchange and Foreign Trade Act (FEFTA) underwent a major overhaul in 2020, which drastically lowered the mandatory reporting threshold for the acquisition of listed equity from 10% to 1%, and the Diet at that time mandated the government to conduct a review of the framework under the FEFTA in five years. 2025 marked the fifth year following the 2020 amendment of the FEFTA, and the framework was reviewed.

On 29 May 2026, the amendment to the FEFTA (the “FEFTA Amendment”) was approved by the Diet, and the implementation regulations are currently subject to the public comment process. The FEFTA Amendment includes significant reforms, including:

• coverage of indirect acquisitions, such that the acquisition of 50% or more of the voting rights in a foreign entity that directly holds shares or voting rights in a Japanese company (a “Direct Holder”) will become subject to prior notification requirements;
• introduction of post-investment intervention measures (call-in powers), allowing the government to intervene in investments in non-designated business sectors if they are later determined to present national security risks;
• codification of risk mitigation measures – ie, covenants that investors are asked to make as a condition for FEFTA clearance, which previously lacked an express legal basis;
• expanded anti-circumvention measures to deem certain domestic investors acting on behalf of foreign investors as foreign investors for the purposes of the FEFTA; and
• establishment of an inter-ministry committee called the Japan Foreign Investment Committee (JFIC), modelled loosely on the Committee on Foreign Investment in the United States (CFIUS), requiring the Minister of Finance and other relevant ministers to seek the opinions of the Prime Minister, the Minister for Foreign Affairs, and heads of other relevant administrative authorities when reviewing whether an investment relates to national security.

The FEFTA Amendment is expected to come into force in January 2027, except that the provisions relating to the JFIC have already taken effect and the JFIC is already in operation.

One particularly notable aspect of the FEFTA Amendment is the more stringent treatment of “High-Risk Foreign Investors” compared to other foreign investors. High-Risk Foreign Investors include Chinese-linked investors, sovereign wealth funds and their affiliated entities.

The indirect acquisition provisions are particularly significant for cross-border M&A, as they may apply to transactions involving foreign companies that have Japanese subsidiaries even where the transaction is between entities incorporated in the same jurisdiction. Specifically, it is expected that indirect acquisitions by High-Risk Foreign Investors will be broadly subject to investment screening where the Direct Holder holds 1% or more of the voting rights in a Japanese listed company engaged in designated businesses, whereas foreign investors other than High-Risk Foreign Investors will be subject to investment screening only where the Direct Holder holds 50% or more of the voting rights.

Further, the post-investment intervention measures are expected to apply only to High-Risk Foreign Investors in relation to their acquisitions of 10% or more of shares or voting rights, and government intervention will be subject to a five-year time limit from consummation of the relevant transaction.

The significance of the FEFTA in M&A transactions was underscored by the blocking of MBK Partners’ proposed acquisition of Makino Milling Machine. Scrutiny and enforcement under the amended FEFTA will only become more stringent, and deal makers are required to pay closer attention to the government’s latest policies and national and economic security priorities.

More detailed and stringent review

The Japanese government has continued to tighten its review of foreign direct investments, and this tendency will certainly continue amidst the heightened tension between Western countries and Russia and China. Foreign investors are recommended to analyse the implications of the FEFTA process on any deal making in Japan at the outset of a potential transaction.

As discussed in 1.2 Market Activity and Impact of Macro-Economic Factors, the Japanese government blocked MBK’s attempted acquisition of Makino Milling Machine. This shows that even a tender offer by a non-state-owned private equity investor, which may generally be viewed as lower risk than an investment by a state-owned or government-affiliated investor because its objective is financial return, is not free from foreign direct investment blocking risk.

Accordingly, all private equity sponsors – not only those from China or Russia or those otherwise affiliated with foreign government agencies – should pay close attention to the sensitivity of the target’s industry and the supply chains in which the target may be involved – particularly defence-related supply chains.

Changes in Tax Law

Stock-for-stock acquisitions

There were several M&A-related tax amendments in 2021, which could have a significant impact on M&A structuring. Among others, there were amendments to the taxation of stock-for-stock acquisitions.

A number of legal and tax changes have been made to facilitate stock-for-stock acquisitions by Japanese companies, and an increase in such acquisitions is expected. Not all private equity buyers would be able to propose a stock-for-stock acquisition, but these tax changes have added more options for acquisition consideration.

Under the Companies Act, there are two statutory means for stock-for-stock acquisitions, namely, a “stock-for-stock exchange” (kabushiki kokan) and “share delivery” (kabushiki kofu). A stock-for-stock exchange can only be adopted when the acquirer intends to acquire all the issued shares of the target, while a share delivery is a similar exchange transaction introduced in 2021, and can be used when a Japanese corporation plans to acquire only part of the issued shares of another Japanese target if the target is not a subsidiary of the acquirer prior to the transaction but will become a subsidiary following it.

The tax amendment in April 2021 granted tax deferral on capital gains on the stock consideration received as a result of a share delivery, as long as the acquirer’s shares account for 80% or more of the total consideration.

Under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (the “Anti-Monopoly Act”), the acquisition of a company or business with Japanese domestic turnover can be subject to pre-transaction notification to – and clearance from – the Japan Fair Trade Commission (JFTC).

A stock acquisition is subject to such requirement if:

• either the acquirer holds 20% or less of the voting rights prior to the transaction but will hold more than 20% of the voting rights thereafter, or the acquirer holds 50% or less of the voting rights prior to the transaction but will hold more than 50% of the voting rights thereafter;
• the consolidated domestic turnover of the ultimate parent company of the acquirer (without taking into account the turnover of the target and its subsidiaries) exceeds JPY20 billion; and
• the consolidated domestic turnover of the target exceeds JPY5 billion.

There are comparable rules (with slightly different turnover thresholds) that apply to asset acquisitions, mergers, demergers and other types of business combination transactions. Depending on the fund structure, the domestic turnover of the portfolio companies of a private equity fund may be aggregated in applying the thresholds.

The statutory waiting period after the notification is 30 days, which may be shortened by the JFTC upon request, assuming there is no substantive competition issue. On the other hand, if the JFTC identifies any competition issue, it may extend the period and request additional information from the acquirer.

In addition to the mandatory filing, the JFTC recommends that acquirers consult the JFTC before the transaction in the following cases.

• Where the aggregate consideration of the transaction exceeds JPY40 billion.
• Where the thresholds for mandatory pre-transaction notification are met, except for the threshold pertaining to the consolidated domestic turnover of the target.
• Where the transaction will likely affect domestic consumers – eg, if any one of the following conditions is met:
1. the target has offices, R&D facilities or other business operations in Japan;
2. the target conducts sales activities targeting domestic consumers (eg, by maintaining a Japanese website or using Japanese brochures); or
3. the target’s consolidated domestic turnover exceeds JPY100 million.

As described in 2.1 Impact of Legal Developments on Funds and Transactions (under Foreign Investment Regulations), the jurisdiction of the FEFTA (which regulates foreign inward investments in Japan) will become even broader once the FEFTA Amendment becomes effective, because certain indirect acquisitions of shares in Japanese companies will be added to its jurisdiction and the government will obtain a limited scope call-in power for non-notified transactions.

Even under the current FEFTA regime, a wide range of investments may be subject to the prior notification requirement because even an acquisition of 1% of the shares in a listed company or one share in a non-listed company can be notifiable, and the scope of sensitive business sectors triggering the notification requirement is quite extensive. Furthermore, post facto reporting will be required in many cases, even if the relevant investments are not subject to the prior notification requirement, including when a foreign investor relies on the exemption from the prior notification.

Both the prior notification and post facto report will be submitted to the Bank of Japan, and will be circulated for review by the Ministry of Finance and other ministries supervising the industries in which the target engages. A statutory waiting period of 30 days will apply for a prior notification, which can be extended up to five months, but may be shortened if the investment does not relate to national security. A post facto report must be made within 45 days of the investment.

The FEFTA does not provide a standalone screening programme applicable solely to state-owned or sovereign wealth investors, but exemptions which may be available for other investors are not generally available for state-owned or sovereign wealth investors (see again 2.1 Impact of Legal Developments on Funds and Transactions (under Foreign Investment Regulations)). The EU FSR regime is generally not a major concern with respect to a Japanese target (unless it has operations in the EU).

Aside from the regulations under the Anti-Monopoly Act and the FEFTA, going-private transactions must comply with securities regulations governed by the FSA, including the mandatory tender offer and disclosure requirements (see 7. Takeovers), and the listing rules of the Tokyo Stock Exchange.

In response to the global trend of respect for human rights in corporate activities, METI released the “Guidelines on Respect for Human Rights in Responsible Supply Chains” in 2022. While global private equity players have already applied global human rights diligence requirements in their activities in Japan, the adoption of the Guidelines may require private equity investors in Japan to pay closer attention to the supply chain management of the targets of Japanese companies.

Following the start of the war in Ukraine, the Japanese government adopted economic sanctions against Russia and Belarus, like many other countries. These sanctions and counter-sanctions on Russia are putting Japanese companies with Russian operations in a very difficult situation, which may in turn present the same difficult questions to private equity buyers when considering the acquisition of such companies.

An acquirer typically conducts a due diligence investigation with the assistance of legal counsel and other advisers, and it usually covers business, legal, finance and tax matters. Of course, if the acquisition is made by way of an unsolicited offer, the acquirer would need to rely on annual reports and publicly available information on the target. However, it should be noted that Japan does not have a public database for litigation or lien searches, which limits the ability to conduct due diligence without the co-operation of the target.

A typical legal due diligence investigation of a Japanese target covers capitalisation, corporate governance, material contracts and assets, debt and other liabilities, employment, governmental authorisations, legal compliance, and litigation and disputes. For a private equity acquirer, the investigation of debt and material assets would involve analysis of the prepayment terms of existing indebtedness and consideration of a security package to be negotiated with the debt provider.

Corruption risks pertaining to business conducted in Japan are generally considered low, but the Japanese government is paying closer attention to corrupt practices by Japanese companies abroad and strengthening enforcement. As such, due attention should be paid to whether the target has sufficient systems in place to control foreign corruption risk.

As in many other jurisdictions, there is an increasing business focus on customer and user data, which means that data protection compliance is becoming an important focus of legal due diligence.

It is not common for a buyer to be able to see or rely upon a vendor financial due diligence report or vendor legal due diligence report, even in an auction sale. A vendor may conduct its own due diligence investigation in order to prepare for negotiations with potential buyers, but that is different from full-scale due diligence and the results would not typically be shared with potential buyers.

If a vendor were to provide a due diligence report to a potential buyer, it would usually be on a non-reliance basis only. On the other hand, a buyer would usually be able to rely on due diligence reports prepared by its own advisers, but the buyer’s equity and debt providers are not typically permitted to rely on reports prepared by the buyer’s advisers.

The acquisition of a non-listed company by a private equity buyer would typically be structured as a stock sale, unless there is a specific reason to prefer an asset sale (eg, a high risk of hidden liabilities).

The acquisition of a business by a private equity buyer from a company, whether listed or non-listed, would typically be carried out in the form of a straightforward asset sale or statutory demerger (kaisha bunkatsu) under the Companies Act. The transferred assets and assumed liabilities can be specified in both scenarios, and there is no difference in the effectiveness of the separation of liabilities. It is not necessary to obtain consent from creditors in order to complete a statutory demerger. Instead, there are required procedures that must be implemented to protect creditors and employees, which would take at least a month to complete.

A going-private transaction of a listed company would typically be carried out in a two-step acquisition, comprising a first-step tender offer and a subsequent squeeze-out transaction. See 7.6 Acquiring Less Than 100% for details of the squeeze-out transaction.

A one-step cash merger is not typical, as it would trigger a revaluation of the transferred assets for tax purposes, and taxable income will be recognised on the difference between book value and fair value. In general, deal terms would be more competitive in an auction sale and there would be fewer representations and warranties made by the seller.

A private equity fund would typically form an acquisition entity, which is usually a corporation (kabushiki kaisha). Conceivably, a limited liability company (godo kaisha) could be used, but that is not usually an option because there is a legal hurdle for a limited liability company to enter into a commitment line agreement with banks to secure working capital.

Generally speaking, it is not common for a private equity fund to be a party to an acquisition or sale agreement, or to provide a separate guarantee.

A private equity buyer will typically fund its acquisition entity with its own capital and with loans from banks, sometimes accompanied by mezzanine investments in the form of subordinated loans, preferred shares or convertible bonds. A private equity fund will typically acquire a controlling stake in the target, and the senior lenders will take security over material company assets.

In a tender offer, the acquisition entity will be required to provide evidence of its financing, both equity and debt, and must submit equity and debt commitment letters to the regulator, which will be publicly disclosed together with the registration statement. A seller in an auction process of a private target would also often require a private equity bidder to submit debt and equity commitment letters as part of the binding offer package.

Because debt financing has continued to be available in Japan due to the continued low interest rates, there has not been any material change in the market practice for the past 12 months.

Club deals are not frequently seen in Japan, partly because the deal size may not be as large as in the United States or some other jurisdictions. In a transaction with a large deal value, a consortium may be formed, as was the case in the acquisition of Kioxia (then known as Toshiba Memory) by a consortium formed by Bain Capital and strategic investors (where the aggregate value of the equity and debt investments was approximately JPY2 trillion) and the public-to-private transaction of Toshiba launched in August 2023 by a consortium led by Japan Industrial Partners for JPY2.1 trillion. An example of a relatively smaller transaction is the management buyout of Topcon Corporation by KKR and Japan Investment Corporation for JPY350 billion in 2025.

In Japan, both fixed-price arrangements and completion account mechanisms with respect to consideration structures are commonly used in private equity transactions, while locked-box mechanisms remain rare. Earn-outs are not frequently seen, but are sometimes used in the acquisition of pharmaceutical and start-up companies to bridge a valuation gap between the seller and the buyer resulting from the inherent uncertainty regarding the target’s success. As discussed in 8.1 Equity Incentivisation and Ownership, rollover structures are sometimes seen in Japanese private equity deals.

Fixed-price arrangements are common in relatively small transactions, or in transactions where the interim period between the signing and the closing is expected to be relatively short. In such cases, parties may want to minimise the administrative burden and expense of post-closing adjustments, and buyers tend to rely on interim covenants (covering conduct of business prior to closing) and representations and warranties (such as no material adverse effect after the latest financial statements date).

In transactions where there are completion account mechanisms, the purchase price is usually adjusted based on net indebtedness and net working capital.

In Japan, it is not common for private equity sellers to provide specific protections in relation to consideration mechanisms (such as adjustment escrows), and the terms relating to consideration mechanisms do not usually differ much from those with a corporate seller.

Private equity buyers cannot usually provide a guarantee to secure the obligations of the acquiring entity. To deal with their concerns regarding closing uncertainties in relation to financing, sellers often ask the buyer to submit binding debt commitment letters from banks prior to the execution of transaction documents (especially in an auction process). Equity commitment letters are less common but – specifically for going-private transactions, where tender offers are regulated under the Financial Instruments and Exchange Act (FIEA) – a private equity buyer that is the tender offeror will be required to submit and publicly disclose equity commitment letters from its fund entities and debt commitment letters from its banks to show that it has secured sufficient funds to complete settlement.

As discussed in 6.1 Types of Consideration Mechanism, locked-box mechanisms, in the strict sense of the term, are rare in Japan. There are a number of transactions where the purchase price is agreed as a fixed amount and is not subject to any closing adjustment. However, in such transactions, there are no mechanisms for leakage indemnification or interest accrual on the purchase price; the protections for the buyer are typically the seller’s interim covenants to conduct the target’s business in the ordinary course and not to:

• distribute dividends;
• enter into transactions with the seller and its affiliates; or
• enter into other specified transactions.

It is quite typical to have a dispute resolution mechanism in place for completion accounts consideration structures. A typical dispute resolution mechanism would include:

• a good faith discussion period between the parties to resolve any differences; and
• determination by an independent third party (usually an accounting firm) if the parties are unable to reach agreement.

The selection of such third party is often agreed in the transaction agreement beforehand, or the parties can agree to each select an independent firm and use the average figure of both firms’ results.

Closing conditions are usually heavily negotiated between the seller and the buyer, and it is difficult to generalise what is “market” because the outcome will largely depend on the specifics of the transaction.

In most cases, private equity sellers emphasise deal certainty and will therefore resist any closing conditions that are not within the seller’s control, except for regulatory approvals, which are in most cases provided as a closing condition. Non-controllable conditions include:

• the buyer’s financing;
• third-party consents;
• the absence of material adverse changes; and
• the retention of key personnel.

It is generally difficult for a private equity buyer to include financing as a closing condition, especially in an auction process. Other closing conditions do not generally differ much from the conditions provided for in transactions by a corporate buyer.

If the transaction involves a tender offer, conditions are kept to the minimum due to the rather stringent restrictions on withdrawing a tender offer, as further discussed in 7.5 Conditions in Takeovers.

“Hell or high water” undertakings are sometimes negotiated between the seller and the buyer, especially with respect to securing clearance under merger control, but are still not very common in Japan, regardless of whether the transaction involves a private equity fund as a buyer or not. Sellers would usually mitigate clearance risk through a simpler covenant obliging the buyer to use its best or reasonable efforts to obtain the clearance.

The EU Foreign Subsidies Regulation (FSR) has not become a major issue in transactions involving Japanese targets.

Break fees payable by the seller are not common in private equity transactions without tender offers (see 7.5 Conditions in Takeovers for transactions that involve tender offers), nor are fiduciary-out provisions. Reverse break fees payable by the buyer are also not common, but are used in some transactions where the seller is particularly concerned about deal certainty. While it depends on the specifics of the relevant transaction, a typical trigger for a reverse break fee is the failure to obtain regulatory clearance and the amount is typically less than 10% of the transaction value.

There are no specific legal limits on break fees or reverse break fees, but they are usually structured as liquidated damages that would restrict a party from pursuing additional damages claims against the counterparty. Structuring them as a penalty (which does not preclude a separate damages claim) is also possible, but such intention must be expressly provided in the transaction agreement.

In general, termination events provided in the transaction documents for private equity sellers or buyers do not differ significantly from those for corporate sellers or buyers. Usually, the termination right is only exercisable before the closing of the transaction.

Typical termination events include:

• material breach of representations or covenants by the counterparty;
• the insolvency of the counterparty; and
• the passing of a long-stop date.

While it depends on the specifics of the relevant transaction, a long-stop date would typically be negotiated based on the anticipated timeline for securing regulatory clearances.

Typical methods to allocate risk between the buyer and the seller in Japan do not differ substantially from general practices in other jurisdictions. Risks are allocated through:

• representations and warranties;
• pre- and post-closing covenants;
• closing conditions;
• indemnification; and
• post-closing adjustments of the purchase price.

Even when the seller of the target is a private equity fund, the seller’s representations and warranties would usually include representations and warranties regarding the target’s business, although the scope of such representations and warranties would be more limited compared to those that would be given by sellers that are not private equity funds.

Private equity sellers tend to avoid any post-closing exposures and to limit post-closing covenants and indemnification terms. Limitations on indemnification include short survival periods for representations and warranties (sometimes such survivals are less than a year after the closing) and limitations such as de minimis exclusions, deductibles or baskets, and caps on indemnity. Cap amounts negotiated by private equity sellers are often lower than those negotiated by corporate sellers.

As discussed in 6.8 Allocation of Risk, even when the seller of the target is a private equity fund, the seller’s representations and warranties would usually include representations and warranties regarding the target’s business, although the scope of such representations and warranties would be more limited compared to those that would be given by sellers that are not private equity funds.

Also, representations and warranties given by private equity sellers are often qualified by materiality (which may be simple materiality or “material adverse effect”) and seller’s knowledge (actual or constructive). A private equity seller would negotiate anti-sandbagging provisions. Although there are a limited number of court precedents, it is generally understood that the courts could deny indemnification claims with respect to breaches of warranties known to the buyer at the time of execution of the transaction document if the transaction document is silent about sandbagging.

Exceptions to the representations and warranties are typically carved out by disclosure schedules, and sometimes by full disclosure of the data room. Limitations on indemnification include short survival periods for representations and warranties (sometimes such periods are less than a year after the closing) and limitations such as de minimis exclusions, deductibles or baskets, and caps on indemnity. Cap amounts negotiated by private equity sellers are often lower than those negotiated by corporate sellers.

The management team of the target seldom provides separate representations and warranties to a buyer, unless the management team itself is a seller in the transaction.

While private equity sellers accept indemnification to a certain extent, a seller would negotiate to limit its exposure as much as possible, as explained in 6.8 Allocation of Risk and 6.9 Warranty and Indemnity Protection. There are cases where private equity funds agree to set up an indemnity escrow as the buyer’s sole recourse, although such practice is still relatively rare.

While warranty and indemnity (W&I) insurance has been used by Japanese companies in cross-border M&A, historically it had not been widely used in domestic M&A, partly because there was no insurance company capable of providing the insurance based on a Japanese-language due diligence report and transaction documents.

However, an increasing number of Japanese auction sellers, including private equity sellers, are now requesting bidders to rely on W&I insurance in place of recourse against the sellers. Furthermore, insurance companies have recently started to actively provide W&I insurance in Japan based on Japanese-language documents. There have also been increasing opportunities for providers of this insurance in connection with the rising number of small to mid-cap M&A transactions conducted for the purpose of “business succession”.

As a result, W&I insurance is becoming increasingly common even in domestic M&A, and there have been many auction processes where bidders are required to give up any recourse against the seller and instead rely on W&I insurance.

W&I insurance policies purchased for Japanese targets usually provide coverage for both fundamental and business representations and warranties.

Breaches of representations and warranties, such as inaccurate financial statements, are often negotiated and disputed between the seller and the buyer following the closing. However, the parties tend to resolve such disputes outside court.

For a going-private transaction, it is not uncommon to see appraisal rights litigation initiated by dissenting shareholders that have been squeezed out.

Going-private transactions have been common in the Japanese M&A market, and there has been an increasing number of management buyouts in the 2020s.

Recent going-private transactions sponsored by private equity funds include:

• the acquisition of Toshiba by a consortium led by Japan Industrial Partners, announced in 2023;
• the acquisition of FUJISOFT Inc by KKR, announced in 2024;
• the acquisition of Fujitec Co, Ltd by EQT, announced in 2025; and
• the acquisition of Nippon Sheet Glass, Co Ltd by Apollo, announced in 2026.

In going-private transactions, the target company must, after the commencement of the tender offer, file a document stating its position (for, against or neutral) on the tender offer under the FIEA, and must also make a public announcement regarding its position in accordance with the stock exchange’s rules and regulations. The target company’s directors must reach a decision on the company’s position in accordance with their duties of care and loyalty. While permissible, it is not very common for the bidder and the target company to enter into an agreement regarding the tender offer. If such an agreement is executed, it usually contains provisions obliging the target company to express its affirmative opinion regarding the tender offer. In such a case, the bidder and the target company would likely negotiate fiduciary-out provisions and break fees, and any such agreement must also be disclosed in the tender offer registration statement.

The FIEA imposes a reporting requirement on holders of more than 5% of the shares of a listed Japanese company. In calculating the shareholding ratio, the number of shares held by certain affiliated parties and other shareholders that have made an agreement (with respect to decisions on the acquisition or disposition of the shares or the exercise of the voting rights) will be aggregated. See 2.1 Impact of Legal Developments on Funds and Transactions (under Change in Mandatory Tender Offer Rules and Large Shareholding Reporting Requirement) for recent amendments. The reporting must be made to the relevant local finance bureau (zaimu-kyoku) within five business days of the 5% threshold being exceeded. Following the initial reporting, the shareholder must file an amendment whenever there is an increase or decrease in its shareholding ratio by 1% or more, or a change to the name, address or other material information in the previous reporting.

When commencing a tender offer, the offeror is required to file a tender offer registration statement with the relevant local finance bureau, which sets forth, inter alia, the offer terms, identity of the offeror, reason for the offer, plan on squeeze-out, and measures taken to avoid any conflict of interest.

The FIEA sets forth mandatory tender offer requirements applicable to acquisitions of shares in listed companies and non-listed reporting companies, although the latter are relatively rare. The rules are complex, but a principal requirement is the so-called 30% rule. Under this rule, a purchaser must generally conduct a tender offer if an acquisition would result in its ownership ratio exceeding 30%, regardless of whether the acquisition is made through an on-market or off-market transaction. The 30% threshold is tested by reference to the purchaser’s ownership ratio following the acquisition, and therefore may apply even where the purchaser holds no shares before the acquisition.

For purposes of determining whether the threshold is exceeded, the purchaser’s ownership ratio is calculated in accordance with detailed rules under the FIEA, including the aggregation of shares held by certain specially related persons. Such persons may include affiliated or related funds, portfolio companies or other shareholders that have agreed with the purchaser on the acquisition or disposition of shares or the exercise of voting rights or other shareholder rights. The scope of specially related persons was revised in connection with the extension of the 30% rule to on-market transactions.

Certain statutory exemptions apply, including, subject to prescribed conditions, to de minimis acquisitions by a purchaser whose ownership ratio already exceeds 30% (see 2.1 Impact of Legal Developments on Funds and Transactions (under Change in Mandatory Tender Offer Rules and Large Shareholding Reporting Requirement).

In almost all tender offers for Japanese targets, consideration has been cash only. Stock or mixed consideration has not been used, mainly because Japanese tax law did not grant a tax deferral on capital gains upon the sale of stock for stock or mixed consideration, which led dispersed shareholders of a listed company to face an immediate need for cash to pay taxes, and because the acquirer was subject to prohibitively burdensome requirements under the Companies Act, including an investigation by a court-appointed inspector into the value of the target’s shares prior to the issuance of the acquirer’s shares, and an obligation for the acquirer to indemnify the target’s shareholders if it later turns out that the value of the target’s shares they received was significantly less than the value on which the issuance of the acquirer’s shares was based.

However, as discussed in 2.1 Impact of Legal Developments on Funds and Transactions (under Stock-for-stock acquisitions), there have been some legal and tax changes to facilitate stock-for-stock acquisitions by Japanese companies, and an exchange offer may finally come into play following such changes.

There are no minimum price rules applicable to tender offers in Japan.

Offer conditions are strictly regulated, with the FIEA setting out the limited list of permitted conditions, including the occurrence of:

• a decision by the target to effect a merger, reduction of stated capital, issuance of new shares and other specified material corporate actions;
• the revocation of government authorisations held by the target, natural disaster and other specified material events relating to the target;
• the failure to obtain regulatory approvals; and
• the dissolution and bankruptcy of the acquirer.

Financing cannot be an offer condition, and the offeror must submit equity and debt commitment letters to the regulator as evidence of financing, which will be publicly disclosed together with the registration statement.

In order to secure successful completion of the tender offer, an offeror frequently enters into an agreement with the principal shareholders, and sometimes with the target, pursuant to which the offeror agrees to launch the tender offer in accordance with the agreed terms; in exchange, the target agrees to support – or the principal shareholders agree to tender their shares to – the tender offer so long as it is conducted in accordance with the agreed terms. In each case, the existence and contents of such agreement must be publicly disclosed in the registration statement. The target board would often negotiate a fiduciary-out clause in such agreement, and the offeror would negotiate a break fee in response.

Further, the amendments to the FIEA that came into effect on 1 May 2026 now permit an offeror to reduce the tender offer price where, during the offer period, the target declares a dividend or other cash distribution with a record date preceding settlement of the tender offer.

If an offeror wishes to acquire only a certain percentage of the shares of a listed company, it can generally set a cap for the acquisition in its tender offer. However, if the offeror will obtain two thirds or more of the total voting rights as a result of the tender offer, it cannot set any cap on its offer and must make an offer to purchase all the tendered shares.

If an offeror obtains 90% or more of the total voting rights of a listed company, it can squeeze out the minority shareholders by exercising a statutory call option available under the Companies Act. This requires approval from the board of the target (which can be controlled by the 90% shareholder), but not from the shareholders. Dissenting shareholders can exercise appraisal rights and can seek an injunction in limited circumstances (eg, when the exercise of the call option is in breach of law or when the call price is grossly improper).

If an offeror does not obtain 90% of the total voting rights but secures two thirds, it can still squeeze out the minority shareholders by alternative methods available under the Companies Act (all of which would require a two-thirds super-majority approval of shareholders). Such alternatives include a short-form cash merger, but a reverse stock split (kabushiki heigou) is the option predominantly used. The reverse stock split would be structured so that, following its completion, shareholders of the target other than the offeror would hold only fractional shares and would be subsequently cashed out. Dissenting shareholders can exercise appraisal rights and seek an injunction if the reverse stock split is completed in breach of the law or the articles of incorporation of the target, and the shareholders could be adversely affected.

Owing to corporate governance concerns, it would be difficult for the target to grant a shareholder additional governance rights that are disproportionate to its shareholding. As such, it is typically not possible to obtain only a minority position or a limited number of shares of a listed company through a tender offer and concurrently negotiate additional governance rights.

Similarly, debt push-down into the target company is not common in Japan due to concerns regarding minority shareholder protection.

If the target has a principal shareholder (or shareholders), it is customary for an offeror to enter into a tender offer agreement with such principal shareholder at the same time as the announcement of the tender offer. In a tender offer agreement, the offeror agrees to launch the tender offer in accordance with the agreed terms, and, in exchange, the principal shareholder agrees to tender its shares to the tender offer so long as it is conducted in accordance with the agreed terms. The tender offer agreement would usually include certain conditions to tender, and often a set of representations and warranties and indemnification provisions. In addition to such conditions to tender, the principal shareholder would sometimes negotiate an “out” for the tender obligation in case a better offer is made by a competing bidder.

While cash compensation is a common form of incentivisation for the management team in private equity transactions, there are cases where equity incentives are provided to the management team. The level of equity ownership in such cases depends on various circumstances, but typically falls within a range of 5% to 20%.

Equity-based incentive schemes vary in structure, but are typically structured as a rollover of existing equity into new equity or a grant of stock options in either the post-buyout target company or its holding company. Typically, the management will subscribe for ordinary equity, and preferred instruments are not often used in the management equity structures.

In Japan, no specific tax rules apply to management rollovers (eg, tax-free rollovers) or parachute payments (eg, the prohibition of deduction for such payments and the imposition of excise taxes on such payments). Regarding stock options granted to individuals, “qualified stock options” (ie, certain qualified options that meet specific criteria) will be subject to tax at capital gains rates (about 20%) upon the sale of the underlying shares. In contrast, holders of non-qualified stock options are first taxed based on the economic gain reflected in the difference in the value of the shares underlying such options compared to the exercise price of the options at the time of exercise of the options; such gain is taxed as salary income (which would usually subject such holder to a higher progressive tax rate compared to tax at the capital gains rates). Such holders are taxed a second time at the time of sale of the shares underlying such options; the capital gains rate tax will apply on any increase in the value of the shares since the exercise of the options.

Typical leaver provisions for management shareholders would include good leaver provisions whereby the management shareholder is entitled to retain equity (eg, if the employment is terminated by the private equity fund without cause), and bad leaver provisions whereby the management shareholder loses its equity in the target company (eg, if the employment is terminated for cause or the management’s breach of the employment agreement). In typical cases where the bad leaver provisions are triggered, shares are compulsorily transferred to the private equity shareholder at market price or the original issue price, and share options are waived and become no longer exercisable.

Vesting is usually tied to time or performance. Time-based vesting is generally linear, and the typical vesting period is around five years. With respect to performance-based vesting, equity will vest annually if a certain target is met (eg, EBITDA targets) or upon exit (ie, vesting will not occur before the exit, and the amount of equity to vest is tied to the sale price).

Management shareholders are usually subject to restrictive covenants (non-compete, non-solicitation and sometimes non-disparagement undertakings) under the shareholders’ agreements or executive services agreements with the private equity shareholder. Even where there is no express undertaking in such agreements, management shareholders who are directors will be subject to statutory non-compete obligations under the Companies Act and will be prohibited from engaging in transactions that belong to or are within the scope of the business of the target company, unless the target board approves such transactions. Whether any post-employment non-compete and non-solicitation obligations apply to such management shareholders will, in principle, depend on whether there is any express agreement binding such management shareholders.

Japanese courts will typically enforce post-employment non-compete obligations that extend for a period of one to two years, and in some instances even longer if there are rational reasons to uphold long-term non-compete obligations. Non-compete obligations that are determined to be overly broad and restrictive by the court will be rendered unenforceable. In determining the enforceability of particular non-compete obligations, the courts typically consider and weigh factors such as:

• the position and responsibility of the former managers;
• whether the former managers were adequately compensated; and
• the scope and breadth of the non-compete obligations.

In general, shareholders’ agreements entered into between management shareholders and a private equity shareholder do not afford much minority protection for management shareholders. Normally, minority protections such as anti-dilution provisions, veto rights, director appointment rights or the right to control or influence the exit of the private equity shareholder are not provided for, unless the management shareholder is also the seller/founder of the company, in which case the founder management shareholder may have some veto rights and board appointment rights.

A private equity shareholder would typically hold a majority of the voting rights and would accordingly have veto rights over certain fundamental corporate actions and events relating to the portfolio company that are subject to shareholder approvals, including amendments of articles of incorporation and mergers and other corporate reorganisations. The private equity shareholder would also be able to appoint and remove directors as a majority shareholder.

Furthermore, a private equity shareholder will enter into management services agreements with key members of management, and may control the individual directors through such agreements. The management services agreement would set forth the roles and responsibilities of the key members of management, compensation and certain reporting requirements, among other matters.

A private equity shareholder would also typically nominate one or more directors to serve in each portfolio company to facilitate its oversight of the portfolio company’s business operations. Such directors would attend the board meetings at which material business issues and agenda items would be discussed and approved.

Generally, a private equity fund majority shareholder will not be held liable for the actions of its portfolio company. However, in instances where it is unreasonable to treat the portfolio company as an independent juridical person, Japanese courts may apply the doctrine of piercing the corporate veil and deny the independent legal personality of the portfolio company, holding the shareholders liable for the liabilities of the portfolio company. According to judicial precedents, the doctrine requires that the legal personality either is abused to avoid the application of laws or has no substance.

The typical holding period for a private equity fund is around five years. The most common form of private equity exit is through M&A, but IPOs remain an attractive option for private equity exits because a Tokyo Stock Exchange listing is available even to companies with relatively small market capitalisation. An M&A/IPO dual-track process (ie, running an M&A sale track alongside an IPO track) is sometimes seen in Japan, but is not as popular as in other jurisdictions. An M&A/IPO/recapitalisation triple-track process is not yet common in Japan. Reinvestment by private equity sellers upon exit is not common practice.

Drag-along arrangements are typical in shareholders’ agreements between private equity shareholders and management shareholders. While it depends on negotiations, drag-along rights of private equity funds can also be found in shareholders’ agreements between private equity and institutional co-investors. Key terms of the drag rights are not substantially different from those agreed in non-private equity transactions. The typical drag threshold would be the sale of a controlling stake in the portfolio company.

In some cases, the drag-along rights of private equity shareholders are coupled with the management shareholders’ tag-along rights, which may be exercised upon the sale of all or a controlling stake by the private equity fund. The thresholds of the tag rights are typically not substantially different between management and institutional investors.

Under the Tokyo Stock Exchange’s listing rules, shareholders that were allotted shares within a one-year period prior to the last date of the business year immediately before the IPO application date are subject to a lock-up period of six months after the IPO (or one year after such allotment). In addition, underwriters will require major shareholders of the company to execute lock-up letters that prohibit the disposal of shares for a certain period after the date of the IPO (most commonly 180 days). After these lock-up periods, shareholders are allowed to freely sell the shares in the market.

In Japan, controlling shareholders and target companies will not enter into relationship agreements, but listing rules and disclosure requirements are designed to provide governance over the relationship between the controlling shareholder and the target company.