MK @ Legal Biz Leaf Deemed Liquidation Clause
In most cases, the contents of preferred shares include a provision for the distribution of residual assets. However, this provision is not intended for situations where the company is actually dissolved, but rather in the event of an acquisition when the company is deemed to be liquidated and a preferential distribution is made at that time. Therefore, the provisions in the Articles of Incorporation regarding distribution of residual assets are only effective when they are applied mutatis mutandis in the text of the deemed liquidation clause.
(In the event of an actual dissolution, most of the company’s assets would be paid to remaining creditors, so there would not be much left for investors)
Acquisitions of a Company by Share Transfer
In Japan, acquisitions are often made through share transfers rather than mergers, share exchanges, etc., due to the strict requirements for tax exemption qualification. In this regard, it is important to define how much loss of voting rights would be considered as “acquisition” of the Company in contracts of Agreements or Articles of Incorporation.
In most cases, the deemed liquidation clause regarding the transfer of shares is stipulated in the “asset distribution agreement with investors,” but it may also be stipulated in both the Articles of Incorporation and the agreement.
Acquisitions of a Company by through reorganization, etc.
It is also important to stipulate in the Articles of Incorporation for the case where an acquisition is made through a transfer of business or a reorganization. In such case also, the provisions pertaining to the right to distribute residual assets should be applied mutatis mutandis.
Example (in the case of business transfer or corporate split, etc.)
(Clause of acquisition with consideration of cash)
Article X
1. In the event that the Company transfers all or substantially all of its Company’s business to a third party as a result of a business transfer or corporate split, Class A Preferred Shareholders may demand the Company to acquire all or part of the Class A Preferred Shares they hold and deliver money in exchange based on this Article hereinafter in this Article referred to as the “Redemption Request”), within 30 days from on and after the effective date of such transfer or the completion date of delivery of all consideration for such transfer, whichever is later(hereinafter in this Article referred to as the “Class A Redemption Period”).2.The Redemption Request set forth in the preceding paragraph shall be made by delivering to the Company a document specifying the relevant shares to be acquired and shall become effective at the expiration of the Class A Redemption Period.
3. The amount of money to be delivered in exchange for the acquisition of one share of Class A Preferred Shares pursuant to this Article (the “Class A Acquisition Amount”) shall be the sum of the amounts set forth below. In addition, the Article X Paragraph X which stipulates the adjustment of the Class A Preferred Distribution Amount shall apply mutatis mutandis to the Class A Acquisition Amount.
(1) 1,000 yen
(2) The amount to be calculated by assuming that the Company is dissolved on the first day of the Class A Redemption Period, in accordance with the provisions of Article ●, Paragraph ● (however, “distribution under the preceding paragraph” shall be read as “delivery under the preceding paragraph”)4. If a Redemption Request for acquisition is made pursuant to this Article, the Company shall, as of the expiration of the Class A Redemption Period, acquire the Class A Preferred Shares subject to the request, and shall immediately pay to the Class A Preferred Shareholders the Class A Acquisition Amount multiplied by the number of shares subject to the acquisition.
Example of description (in the case of a merger, share exchange, share transfer, etc.)
(Measures in the case of merger, share exchange or share transfer)
Article X
1. In the event of an absorption-type merger or incorporation-type merger in which the Company becomes a dissolving company, or a share exchange, or share delivery in which the Company becomes a wholly owned subsidiary (hereinafter in this Article referred to as the “Merger, etc.”) the amount to be distributed per share of each class of shares held by Class A Preferred Shareholders shall be calculated in accordance with the following provisions.(1) If the consideration to be delivered upon the Merger, etc. is cash, the amount to be distributed per share of Class A Preferred Shares shall be the same as the amount of distribution of residual assets per share of Class A Preferred Shares required pursuant to the provisions of Article ●.
(2) If the consideration to be delivered upon the Merger, etc. is other than cash, the amount to be distributed per share of Class A Preferred Shares shall be the same as the amount of distribution of residual assets per share of Class A Preferred Shares required pursuant to the provisions of Article ●. Provided that, the value of the residual asset shall be calculated by the Class A Preferred Shareholders who hold a majority of the total number of issued shares of Class A Preferred Share (including cases where more than one person holds more than the said ratio).
MK @ 11/12/2022
