This column explains key legal rules and business practices in Japan that foreign investors should understand when investing in Japanese start-ups.

Chapter 4: Business and Capital Alliance

In this chapter, we outline key considerations for foreign investors when entering into a business and capital alliance with a Japanese start-up, particularly in the context of a minority investment.

In addition, a proper understanding of the Business Collaboration Guidelines jointly published by the Japan Fair Trade Commission (JFTC) and the Ministry of Economy, Trade and Industry (METI) is essential for investors seeking to establish business and capital alliances with Japanese start-ups and to position themselves as trusted partners within the Japanese start-up ecosystem. These guidelines will be discussed in the next chapter.

1. Overall Process

A typical business and capital alliance transaction involves the following steps:
– Execution of a confidentiality agreement
– Negotiation and execution of a term sheet
– Due diligence
– Execution of definitive agreements (e.g., subscription agreement, shareholders’ agreement, and business alliance agreement)
– Closing

In addition, depending on the nature of the business conducted by the start-up, filings under the Foreign Exchange and Foreign Trade Act of Japan will be necessary. Furthermore, in some cases, a filing under the Anti-Monopoly Act of Japan may also be required.

2. Confidentiality Agreement

Confidentiality agreements commonly used in Japan typically include the following key provisions:
– Definition of confidential information
– Confidentiality obligations (including restrictions on disclosure to third parties, subject to certain exceptions)
– Restrictions on use
– Return or destruction of confidential information
– Duration of obligations

Where the investor is considering a business and capital alliance with a start-up engaged in a similar line of business, particular care should be taken to avoid “information contamination.” This refers to the risk that information already possessed by the investor, or independently developed by it, becomes difficult to distinguish from confidential information obtained through the due diligence process—especially in relation to technical information and know-how.

In practice in Japan, one method used to mitigate this risk is to record pre-existing information on a physical medium (such as a DVD), seal it in an envelope, and obtain a certified date stamp (kakutei hizuke) from a notary public. To further ensure that subsequently developed information can be clearly distinguished, the establishment of a “clean room” arrangement is also considered.

In addition, it is important to ensure that appropriate carve-outs from the definition of confidential information are included in the agreement. These typically include, for example, information already in the receiving party’s possession prior to disclosure, and information independently developed by the receiving party without use of the disclosed confidential information.

3. Term Sheet

The key terms of the investment and the business collaboration are typically negotiated and documented in a term sheet.

(a) Terms of Preferred Shares

Where preferred shares are to be issued in connection with a business and capital alliance, the following matters are typically addressed:

– Number of shares, issue price, and issuance date
– Preferred dividends (including dividend rate, priority over or parity with existing preferred shares, and whether cumulative or non-cumulative)
– Liquidation preference (including the amount of preference (e.g., equal to or a multiple of the issue price), whether participating or non-participating, and priority relative to existing preferred shares)
– Conversion rights into common shares (typically on a one-for-one basis, subject to anti-dilution adjustments)
– Issuer’s conversion rights (often exercisable upon a resolution to apply for listing)
– Voting rights at shareholders’ meetings and class shareholder’s meetings (voting rights at shareholders’ meetings are usually equivalent to those of common shares; voting right in class shareholder’s meeting, which is entitled under Japanese Company Act as a default rule, may be limited under the articles of incorporation to a certain extent to avoid deadlock)
– Other standard provisions, including governing law and jurisdiction

In addition, the subscription agreement typically includes provisions regarding use of proceeds, as well as representations and warranties from the issuer and the founders. Investors are also often granted pre-emptive rights (or similar preferential subscription rights) in future financings.

Further, investors often negotiate a put option against the issuer (and in some cases the founders), exercisable upon the occurrence of certain material breaches or other specified events. Such put options—particularly those exercisable against founders—have been a relatively distinctive feature of Japanese practice. However, in recent years, this approach has attracted increasing scrutiny, especially where the economic burden is placed on individual founders. We will discuss it in more detail below.

(b) Terms of Shareholders’ Agreement

The term sheet also typically outlines the principal terms to be included in the shareholders’ agreement, such as:
– Matters requiring prior investor approval (reserved matters)
– Information and reporting rights
– Rights to appoint a director or observer
– Founders’ obligations, including, (i) commitment to devote sufficient time and attention to the business, (ii) restrictions on resignation or refusal of re-election, (iii) prohibition of “co-hatting” (serving in competing roles), and (iv) non-compete obligations during their tenure and for a certain period thereafter
– Exit-related provisions, including, (i) obligations to use reasonable efforts to achieve an IPO by a target date, and (ii) cooperation obligations in connection with an investor exit
– Right of first refusal and co-sale (tag-along) rights
– Drag-along rights
– Deemed liquidation provisions
– Other standard provisions, including governing law and jurisdiction

(c) Issues Concerning Put Option

As noted above, put options granted to investors—particularly those exercisable against founders—have become a subject of controversy in Japan.

The Business Collaboration Guidelines published by JFTC and METI (“Guideline”), which will be discussed in the next chapter, address concerns relating to these arrangements.

In particular, the Guidelines argues that if the parties include the put option in the investment agreement, the parties should carefully discuss the conditions for its exercise, which should be narrowly and clearly defined. The Guidelines provide the following examples of circumstances in which the exercise of a put option may be justified:

[Misrepresentation]
– False representations regarding intellectual property rights or other matters affecting the company’s competitive advantage
– Falsification of financial statements (e.g., recording fictitious sales or concealing liabilities)
– Relationships with antisocial forces
[Material Breach of Contract]
– Misappropriation of the issue proceeds (e.g., diversion to other businesses, investments in third parties, or personal use by founders)
– Breach of prior approval requirements on matters having substantial impact on the value of shares (e.g., the issuance of a substantial number of new shares or transfer of material business assets)
– Serious violations of applicable laws or regulations

The Guidelines further note that requiring a start-up to grant a put option allowing repurchase at a price significantly exceeding the investment amount—particularly without sufficient discussion—may, depending on the circumstances, constitute an abuse of a superior bargaining position under the Japanese Anti-Monopoly Act.

They also highlight the issue concerning put option exercisable against individual like founders. From a global perspective, provisions imposing joint repurchase obligations on both the issuing company and individual founders (or managing shareholders) are relatively uncommon. With respect to put options exercisable against founders, the Guidelines explain that such practices developed in Japan against the background of start-ups in which founding shareholders often hold a majority stake and effectively control both shareholder and board decisions, resulting in a close alignment between ownership and management. Historically, this led to a tendency to treat the actions of the company as equivalent to those of its founders. However, the Guidelines caution that requiring founders to assume personal liability alongside the issuing company may undermine incentives for entrepreneurship and sound management. In light of these concerns, they suggest that, in cases of contractual breaches, put options should in principle be structured as obligations of the issuing company only, rather than extending to individual founders or managing shareholders.

4. Due Diligence

Due diligence is typically conducted in parallel with the negotiation of the term sheet and definitive agreements.

In a legal due diligence exercise, particular attention is generally given to the following matters:

(a) Share capital and equity-related rights (including shareholders’ agreements):

Start-ups that have completed multiple funding rounds and granted stock options to officers and employees often have complex capital structures. It is therefore essential to clearly understand the current capitalization, typically by reviewing a capitalization table (“cap table”).

In addition, existing shareholders’ agreements should be carefully reviewed. If a new investor seeks more favorable terms, it is necessary to confirm whether the consent of existing investors is required, as they are usually granted veto rights over new equity issuances. Furthermore, new investors are usually required to accede to the existing shareholders’ agreement (with amendments as appropriate), making it important to fully understand its terms.

(b) Existing business alliance agreements:

Existing commercial or strategic alliance agreements should be reviewed to identify any restrictions—such as exclusivity, non-compete, or consent requirements—that could limit or conflict with the proposed business and capital alliance.

(c) Intellectual property (IP):

Where the contemplated alliance involves technology or intellectual property, it is critical to assess the start-up’s IP portfolio, including ownership, licensing arrangements, and protection measures. In practice, early-stage start-ups may not have fully implemented robust IP management systems due to limited personnel and financial resources.

(d) Regulatory compliance:

If the start-up’s business is subject to licensing or regulatory requirements, it is important to confirm that all necessary permits and approvals have been obtained. This is directly relevant to the sustainability and legality of the business. In some cases, early-stage start-ups may commence operations before completing all required regulatory procedures, which can present material risks.

5. Subsequent or Other Processes

Following the completion of due diligence, the parties proceed to negotiate and execute the definitive agreements, and then move toward closing.

In addition to the contractual process, foreign investors should pay particular attention to applicable regulatory filings in Japan, especially under the Foreign Exchange and Foreign Trade Act (“FEFTA”). In addition, in some cases, merger control under the Anti-Monopoly Act is also triggered.

(a) FEFTA (Foreign Direct Investment Regulations)

Under FEFTA, a prior notification to the relevant authorities may be required for example when a foreign investor acquires one or more shares in a non-listed Japanese company engaged in certain designated business sectors.

For these purposes, “foreign investors” include, among others:
– Foreign corporations
– Non-Japanese residents
– Japanese companies in which 50% or more of the voting rights are held (directly or indirectly) by foreign investors
– Partnerships in which 50% or more of investor (e.g., limited partners) or a majority of partners executing the business of the partnership (e.g., general partners) are foreign investors and the like

Where the target company operates in designated sectors, a prior notification must generally be filed, and a 30-day waiting period (which may be shortened or extended depending on the situation) applies before the investment can be implemented. During the waiting period, the Minister of Finance and the minister having jurisdiction over the relevant business (collectively, the “Competent Ministers”) review the proposed transaction from the perspective of whether it may impair national security, disrupt the maintenance of public order, or hinder the protection of public safety. If concerns arise from these perspectives, the Competent Ministers may recommend changes to, or order the cession of, the transaction. Historically, such recommendations or orders have been rare, and in most cases the Competent Ministers and the foreign investor have instead agreed on mitigation measures to address the identified concerns. However, regulatory scrutiny has recently become more stringent. In 2026, the Competent Ministers reportedly recommended that MBK Partners, a foreign PE fund, cease its proposed acquisition of Makino Milling Machine Co., Ltd., a Japanese machine tool manufacturer. According to public reports, the recommendation was based on concerns that the target company’s products constituted “sensitive cargo with a high possibility of military diversion” and were “widely used by domestic defense equipment manufacturers.”

Examples of business sectors that may trigger prior notification requirements include:
– Manufacturers of weapons, aircraft (including drone) or space development or nuclear power related items, as well as related repairment and software industries
– Manufacturers of general-purpose products that can be used for military purposes
– Manufacturers of pharmaceuticals for infectious diseases and advanced controlled medical devices
– Metal mining and refining relating to critical mineral resources, constructors of specific remote island port facilities
– Importers of certain fertilizers (such as potassium chloride)
– Manufacturers of permanent magnets and materials
– Manufacturers of machine tools (including parts) and industrial robots
– Manufacturers of semiconductor manufacturing equipment and device relating to semiconductor manufacturing
– Manufacturer of storage batteries and materials
– Manufacturers of ship parts (including engines)
– Manufacturers of metal 3D printers and metal powders
– Manufacturers of equipment, parts, and software concerning the information processing, and industries relating to information service
– Infrastructure-related industries (electric power, gas, telecommunications, water supply, railways, petroleum, heat supply, broadcasting, passenger transportation)
– Security services, agriculture, forestry and fisheries, leather product manufacturing, air transport, and maritime transport

(b) Merger Control under the Anti-Monopoly Act

In addition to FEFTA, a pre-closing filing with the JFTC may be required under the Anti-Monopoly Act.

Assuming that the investor is allotted newly issued shares or treasury shares or purchases shares from existing shareholders, a filing obligation is triggered if:
– The domestic turnover of the investor on a consolidated basis exceeds JPY 20 billion; and
– The domestic turnover of the target company on a consolidated basis exceeds JPY 5 billion; and
– The investor’s voting rights in the target (including those held by entities within the same consolidated group) exceed the thresholds (20% or 50%)

We think that startup investment triggering the above filing requirement is relatively exceptional, but if these thresholds are met, prior notification must be made, and the transaction cannot be completed until the applicable waiting period has expired.

Go back to the previous chapter ((3) Corporate Governance Matters)
Proceed to the next chapter ((5) JFTC/METI Business Collaboration Guidelines)

Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.