Investor demands under investment agreements

1. Checking the investor's assertions and the contractual relationships

Checking what the notice or demand says and when a reply is due

We sort the notice received from the investor into those withholding consent to a further funding round, those requiring a breach of contract to be remedied, and those demanding the purchase of shares or damages. We check whether the demand is addressed to the company or to the founder personally, which contract is cited as its basis, and the deadline for replying.

The distinction as to the addressee matters because it determines who has to answer. If the claim is against the company, a decision by the board of directors or the shareholders meeting may be required. If the claim is against the founder personally, the reply and performance by that individual are considered separately from the company's own decision-making. Even where the individual is to purchase the shares, the company's approval may be required if the shares are subject to transfer restrictions. Where the company is to be involved financially, we check whether this is justifiable from the company's own standpoint, on what procedural basis, and — if the founder is a director — whether approval as a conflict-of-interest transaction is required. A single notice may contain claims against the company and claims against the individual mixed together, so we work through it item by item.

If the investor is also calling a shareholders meeting, seeking the removal of officers, or exercising rights such as inspection of the company's books under the Companies Act, for the procedures for each of those, see the guide on responding to shareholder claims and disputes over control of the company. What this guide deals with is the response to demands founded on an investment agreement.

Comparing the investment agreement, the shareholders agreement and the articles of incorporation

In addition to the investment agreement and the shareholders agreement, we collect any amendment agreements, individual consent letters and the articles of incorporation, and compare the provisions that bear on the present demand.

What is easily missed at this stage is how the documents produced in successive rounds relate to one another. As the series progress, it is usual to find that further investment agreements have been layered on top of earlier ones, that the shareholders agreement has been remade, and that existing investors have signed documents waiving some of their rights. We check which documents remain in force and how the relationship between them is defined. Where nothing has been agreed about which document prevails, that in itself becomes a point in dispute.

We check the articles of incorporation at the same time. Where class shares have been issued, their terms are set out in the articles, and there will be areas where the contractual rights and the rights under the articles overlap and areas where they do not. It is not unusual to find a discrepancy: something the parties believed they had agreed in the contract has not been reflected in the articles.

Where there is a dispute about who actually owns the shares in question, see the guide on disputes over who owns the shares, including shares held in another person's name.

Checking how the obligations, liabilities and interests of the company and the founder differ

In an investment agreement, obligations owed by the company and obligations owed by the founder personally are sometimes written into the same provision. Provision by provision, we check who gives the representations, who owes the information obligations, to whom the covenants are addressed, and who bears any obligation to purchase shares.

On that basis, we consider whether the interests of the two are aligned. For example, where the founder personally may bear an obligation to purchase shares, an outcome that is favorable to the company may be unfavorable to the founder. The question then is whether both can proceed on the same approach, or whether the two positions need to be considered separately. Where we are approached by both the company and the founder, this is the first point that needs to be checked.

2. Considering the assertion of breach and the investor's rights

Checking the provisions on representations and warranties, use of funds and information rights

For each breach asserted, we check the wording of the provision relied on. The provisions that most often give rise to issues in an investment agreement are the following.

For representations and warranties, the agreement will set out what is represented, the time as of which it is given, any limitations on its scope (materiality limitations, knowledge qualifications) and the consequences of a breach. Even where a breach is said to have occurred, what follows from it — a claim for indemnification, a demand for the purchase of shares, or the arising of some other right — depends on how the provision is drafted.

For restrictions on the use of funds, we check the range of expenditure covered and any exceptions. For information obligations, we check what has to be provided, how often and by when. For matters requiring prior consent, the agreement will set out which acts require consent and how consent is to be given.

Information obligations are among the matters most often raised. A requirement to submit monthly management accounts by a set date tends to be handled as a formality while the business is going well, but once relations with the investor deteriorate, compliance with it comes into question. We check whether there are records that can show that submissions were made and when.

The same facts may also be said to engage several provisions at once — that an act was a breach of the restriction on the use of funds, and at the same time an act carried out without the required prior consent, and also something that was not reported. Because each provision attaches different consequences, we consider them provision by provision. The most serious consequence does not apply automatically to a single set of facts.

Checking whether there was a breach and the history of remedy, consent and waiver

Having checked the provisions, we compare them with the record of what was actually done. Were the materials requested submitted, and when? Did the investor raise any objection? For acts requiring prior consent, was consent obtained, and if not, was the act approved afterwards?

What needs to be checked here is the investor's own conduct. Where the state of affairs said to be a breach continued and the investor, knowing of it, raised no objection and continued to deal with the company, that is material for the discussions. That said, it does not follow that the investor's rights are lost as a matter of course. Agreements frequently include a provision on waiver — to the effect that a failure to exercise a right on one occasion is not to be treated as a waiver — and we check whether one is present.

Whether a consent given in the past extends to the present round depends on the transaction and terms it covered and on the authority of the person who gave it. An understanding reached at the level of the individuals handling the matter is not the same thing as consent given by a person holding a contractual right of consent.

Setting out the rights of multiple investors and which agreements prevail

Where there are several investors, we list who holds which rights. The investors holding prior consent rights, those holding preemptive subscription rights and those holding rights to demand the purchase of their shares may each be different. The same right may also be subject to different conditions or time limits for exercise from one investor to another.

Whether the consent of some investors is enough, or the consent of all of them is required, again depends on how the provision is drafted. Where the drafting refers to "the consent of a majority" or "the consent of investors holding at least a given proportion," we check the basis on which that is calculated — by number of shares, by number of investors, or by preferred shares only.

We also look at the relationships among the investors. Where some existing investors favor the present round and others oppose it, that division can affect the company's own decision. And where the shareholders agreement sets out the rights of the investors as between themselves — the order of preemptive subscription, restrictions on transfer, co-sale rights — an arrangement the company agrees with one investor may give rise to a separate obligation towards the others.

So far as possible, we also form a view of the investor's own circumstances. Where a fund is approaching the end of its term, or is working through its portfolio, what lies behind the demand may not be the alleged breach itself but the need to exit. In that case, alongside the question of breach and remedy, a transfer of the investor's holding may be among the options discussed.

3. Responding to objections to a further round and to contractual restrictions

Checking the scope of prior consent rights, preemptive rights and similar provisions

Investors' rights in relation to a further funding round take several forms: rights requiring prior consent to an issue of new shares; rights giving existing investors the opportunity to subscribe in priority; provisions restricting issues at a price below a given level; and provisions adjusting conversion ratios and similar terms to reflect dilution.

For each, we check the scope of application. Does it cover every issue, or are there exceptions (stock options, issues to existing investors, issues below a certain amount)? Does the "issue" it covers include convertible instruments or the issue of share options? How these are drafted determines whether the present round is caught by the restriction.

Considering dilution and the contractual adjustment mechanisms

Dilution is itself a consequence of raising further funds, and does not necessarily amount to a breach of contract. On the other hand, it is common practice for investment agreements to include anti-dilution provisions, and what gives rise to concrete issues is a failure to follow the procedure the contract lays down, or a failure to make the adjustment the contract requires.

Where the contract sets out the method of adjustment, we carry out that calculation. The method is sometimes drafted in a way that admits of more than one reading, in which case we seek to align the parties' understanding with the investor at an early stage. If a difference in the calculation comes to light after the round has closed, it becomes a problem that extends to the treatment of funds already paid in.

Distinguishing contractual consents from the issue procedure under the Companies Act

This is where confusion most often arises.

The Companies Act provides that, where a stock company seeks to solicit persons to subscribe for shares for subscription, it must determine on each occasion the number of shares for subscription, the amount to be paid in and other prescribed matters, and that as a general rule these matters must be determined by a special resolution of the shareholders meeting. Within the limits set by law, the determination may in some cases be delegated to the directors or to the board of directors. Separate rules are laid down for what the Companies Act calls a public company: as a general rule the board of directors makes the determination, although an issue at a particularly favorable price and similar cases call for a separate analysis. Whether a company is a public company in this sense is determined not by whether its shares are listed but by whether the articles of incorporation restrict the transfer of its shares. Which set of rules applies to a given company depends on its articles and on how its corporate bodies are structured. Where class shares have been issued, we also check whether a class shareholders meeting is required.

An investor's refusal of consent and the invalidity of a share issue are not the same question. An issue made in breach of a contractual consent provision may give rise, as a breach of contract, to damages or to other rights; but if the issue procedure under the Companies Act has been followed, the issue itself does not lose its effect as a matter of course.

That does not mean, however, that shares may be issued without consent. The Companies Act provides that, where an issue of shares for subscription violates laws and regulations or the articles of incorporation, or is carried out by a markedly improper method, and shareholders are likely to suffer disadvantage, a shareholder may demand that the company cease the issue. The mere fact that a demand for an injunction has been made, or that an application for a provisional disposition has been filed, does not of itself suspend the issue procedure as a matter of law. A provisional disposition is a Japanese court procedure for interim relief pending a decision on the merits. Where an order restraining the issue is made, its terms must be complied with. Even at the application stage, the terms agreed with a new investor and the effect of the dispute may make it necessary to revisit the timetable for the round. Damages for breach of contract, and the triggering of a share purchase provision, are also possible.

The analysis is therefore carried out separately on three fronts: the position under the Companies Act, liability under the contracts, and the management decision whether to proceed with the round. If the decision to proceed rests on the single point that the issue will not be invalid, the other two questions remain.

Managing the timetable for the round and discussions with the investor

Where a further round is planned, we work back from the payment date and consider separately the contractual consents to be obtained, the issue procedure under the Companies Act, and the requirements for contractual liability and for an injunction. Rather than deciding whether to proceed on the basis of the validity of the issue alone, we set out the state of agreement with each investor and the effect of the dispute on the round.

Where there is a new investor, the very existence of a dispute with existing investors affects the terms of the round. The extent and timing of disclosure are considered from both directions: the confidentiality obligations under the investment agreement, and the duty to explain matters to the new investor. If the round proceeds without the dispute being disclosed, that may later be raised as a breach of the representations and warranties.

4. Considering contractual demands for the purchase of shares and for damages

Checking who the demand is against, the triggering conditions and the procedure for exercise

When a demand for the purchase of shares is received, we first check who it is made against: the company, the founder personally, or both.

Next we check the conditions on which the purchase obligation arises. A contractual share purchase provision is usually drafted so that the right arises on the occurrence of specified events — that a listing has not taken place by a given date, that there has been a breach of the representations and warranties, that there has been a material breach of contract, or that there has been a change of control. We check, against the wording, whether the matter asserted falls within the events the provision specifies.

We also check the procedure for exercise: any period within which the right must be exercised, the manner of giving notice, the method for determining the price, and the time for payment. Whether these procedural requirements have been followed bears on the effect of the demand.

A demand under the Companies Act for the purchase of shares on a corporate reorganization or similar event is distinct from a contractual demand; for the procedure for that, see the guide on demands for the purchase of shares, and determination of the price by the court. What this guide deals with is a demand under a share purchase provision in an investment agreement.

Considering how the purchase price is calculated and the basis for the damages claimed

The method of calculating the purchase price is often set out in the contract: applying a specified rate of return to the amount invested, applying a multiple, or using market value. Where a method is specified, we check the figures and periods on which the calculation is based. Where no method is specified, or where the drafting is unclear, the price itself becomes a point in dispute.

Where damages are claimed as well, we check how that relates to the demand for the purchase of shares. The contract may specify whether, for the same event, both the purchase and damages may be claimed, or whether one or the other must be chosen.

Distinguishing an acquisition of treasury shares by the company from a purchase by the founder personally

Where the company is the purchaser, restrictions under the Companies Act apply. The Companies Act provides that the total book value of the monies and other property delivered to shareholders on an acquisition of treasury shares and similar transactions must not exceed the distributable amount as of the date on which it takes effect, and an acquisition of treasury shares falls within that restriction. Accordingly, even where a contractual purchase obligation is said to exist, the company cannot carry out the purchase if the distributable amount is insufficient. The acquisition procedure must also follow the requirements of the Companies Act.

The question that then arises is what happens where the company cannot purchase. The founder does not, as a matter of course, become obliged to purchase in the company's place merely because the company cannot perform. The founder is obliged only where the contract designates the founder as the party bound to purchase. Where a provision designates the company as the obligor, the identity of the obligor does not change because performance has become impossible.

Some contracts do, however, expressly provide that the founder is to purchase if the company cannot. Where such a provision exists, we check its validity, the conditions on which the purchase obligation arises, and the manner of exercise. The wording is the starting point.

Considering the validity of a share purchase provision and the limits on exercising the right

In some circumstances, it is possible to challenge the effect of the share purchase provision that the investor's demand rests on. The mere presence of a share purchase provision does not make it invalid as a matter of course. The validity of the provision and whether the particular demand succeeds are considered separately. Even where the provision is valid, the conditions for the purchase obligation to arise may not be met, and the exercise of the right may in some circumstances be limited by the principle of good faith or as an abuse of rights. We check how the contract came to be made, the nature and extent of the breach, the amount demanded, and how the investor conducted itself previously.

Separately from the validity of the share purchase provision, one further line of argument is that including in an investment agreement a provision of that kind, which strengthens the investor's bargaining position, and then in practice using the prospect of a share purchase to press for something — for instance, the transfer without consideration of intellectual property rights that should belong to the company itself — may itself raise an issue under the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade. That Act defines abuse of a superior bargaining position as engaging in specified conduct, unjustly in light of normal business practices, by making use of a bargaining position that is superior to that of the counterparty. It therefore cannot be said that the provision is engaged merely because a demand feels excessive. Each element — superiority of bargaining position (more concretely, the difficulty of switching to funding from other investors), the making use of that position, unjustness in light of normal business practices, and whether the conduct falls within the specified categories — has to be considered against the facts.

5. Taking discussions with the investor and dispute procedures forward

Setting the approach to replying, remedying and reserving rights

In replying, we distinguish the facts that are admitted from those that are disputed. Where a matter can be remedied, we set out what will be done and when. At the same time, using wording that proceeds on the basis of the other side's case can constrain the position later, so the reply states expressly that rights are reserved.

Where there are several investors, we keep the content of the replies consistent. Giving different explanations to different investors causes difficulty once the investors compare notes.

Considering consent, contract amendments and the terms of an investor's exit

Where a negotiated resolution is the aim, the options include a specific consent for the present round, an amendment to the contractual provisions, a transfer of the investor's holding to a third party, and an agreement for a purchase in stages. For each, we check the funding required, the procedures under the Companies Act, and the effect on the other investors.

In particular, agreeing terms that are favorable only to some investors creates difficulties in relation to the others. Where there are investors ranking equally, their treatment is considered at the same time. Where a most favored nation provision is present, we check before any agreement is made whether the present arrangement falls within it, the range of terms that would extend to the other investors, and whether it applies automatically or requires a request, a contractual amendment or some other step.

Where a purchase in stages, or treatment at some future point, is agreed, we also provide for how performance is to be secured. An agreement without funding behind it leads back to the same discussions. Where company funds are to be used, we also check the expected distributable amount at that future time.

Considering provisional relief, litigation and arbitration in light of the funding timetable

Where dispute procedures are under consideration, the timing matters. Where the payment date for the round has been fixed, we check the likely progress of each procedure and consider the response on the footing that a decision may not be obtained before that date. Where the investor may apply for a provisional disposition restraining the issue, preparation for that is also needed.

Investment agreements frequently specify a method of dispute resolution, and a dispute covered by a valid arbitration agreement is, as a general rule, to be resolved by arbitration. If litigation is commenced, we check the effect of the arbitration agreement and the scope of what it covers, and consider whether to seek dismissal of the action on the basis of the arbitration agreement, before responding on the merits. An arbitration agreement does not prevent an application to the courts for provisional relief. We check the provisions on jurisdiction, governing law, the seat of arbitration, and the arbitral institution and rules. Where a foreign investor is a party, this is checked at a particularly early stage.

What has to be prepared also differs according to whether the company is bringing the proceedings or is on the receiving end. Where the company may be the respondent, we anticipate the arguments the other side will make and secure the materials that answer them in advance. Records of internal decision-making, the history of reports to investors, and materials on how consents were obtained are, in particular, the kind of thing that becomes hard to locate as time passes.

Whichever procedure is chosen, we consider its effect on the business as well. A prolonged dispute affects the next funding round, relations with business partners, and the recruitment and retention of employees. The existence of the dispute also becomes part of the background to any later negotiation with investors. The choice of procedure is therefore a decision that takes in this dimension as well as the legal outlook.

Even where a negotiated resolution is the aim, having a view of how matters would go if they moved to a formal procedure is material for the negotiations. Conversely, making one concession after another without forming such a view leaves no yardstick for deciding where to stop.

How we assist

Setting out the investment agreement and the responsibilities of the company and the founder

We compare the investment agreement, the shareholders agreement, any amendment agreements and the articles of incorporation, and set out the rights held by each investor and the obligations owed by the company and by the founder. Where there have been several rounds, we also check which documents prevail.

Assisting with negotiations on a further round and on demands for the purchase of shares

We assist with drafting written replies, with how consents are to be obtained, and with considering contractual amendments and exit terms. We also check how this relates to the procedures under the Companies Act, in light of the timetable for the round.

Assisting with dispute procedures in light of the client's position and the funding timetable

We assist with the choice between arbitration, litigation and provisional relief, with organizing the evidence, and with decisions that take account of the effect on the business. Where the interests of the company and the founder are not aligned, we explain at an early stage how the engagement would need to be arranged.

Key legislation and official sources

English translations of legislation are provided for reference. The Japanese texts are authoritative.

Where it appears	Legislation	Source type
Distinguishing contractual consents from the issue procedure under the Companies Act	Companies Act（会社法）	Japanese legislation / English translation
Distinguishing an acquisition of treasury shares by the company from a purchase by the founder personally	Companies Act（会社法）	Japanese legislation / English translation
Considering the validity of a share purchase provision and the limits on exercising the right	Civil Code（民法）	Japanese legislation / English translation
Considering the validity of a share purchase provision and the limits on exercising the right	Act on Prohibition of Private Monopolization and Maintenance of Fair Trade（私的独占の禁止及び公正取引の確保に関する法律）	Japanese legislation / English translation
Considering provisional relief, litigation and arbitration in light of the funding timetable	Civil Provisional Remedies Act（民事保全法）	Japanese legislation / English translation
Considering provisional relief, litigation and arbitration in light of the funding timetable	Arbitration Act（仲裁法）	Japanese legislation / English translation

Legal information reviewed: 2026-09-18

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This article is provided for general informational purposes only and does not constitute legal advice on any specific matter. Please consult us regarding your specific situation. The content is based on the laws and regulations in effect as of the date of the last update.