I am selling my company for 1.3 billion yen. I thought this would lift the burden of management and let me move on to the next chapter of my life. But when I opened the contract, it stated that I would remain responsible for the company's issues even after the sale. Furthermore, the cap on indemnification is 1.3 billion yen. Could the sale proceeds end up having to be paid back later?

This is an issue just as important as the price for the selling owner-manager.

To sum up, representations, warranties, and indemnifications can be negotiated to be deleted or limited by the agreement of the parties. However, removing the clauses does not eliminate all legal liability. Practically speaking, it is important to specifically narrow down "what, until when, and how much to bear."

Regarding compensation caps as well, there is no uniform statutory rate for Japanese M&A. Comparing only numbers like "20% of the purchase price" or "100%" does not reveal the weight of responsibility. You can only compare conditions once you read down to what that cap applies to and what exceptions exist.

This paper delves into share transfers of unlisted companies governed by Japanese law, focusing on the perspectives of both the seller and the buyer. The numerical examples are hypothetical illustrations used to explain the mechanics and do not represent our client cases or actual contract terms.

Key points to understand first about post-sale liabilities

In particular, the condition of "two years after settlement" does not mean guaranteeing the entire management for two years after the sale.The point in time for which facts are warranted and how long claims can be made for any breach of those warranties are two different matters. Below, I will explain using specific examples.

What is the difference between "hoshō" (保証) and "hoshō" (補償)? Distinguishing them from "personal guarantee" (個人保証)

They are pronounced the same as "hoshou", but they have different roles.In representations and warranties, the "warranty" is a promise that the stated facts are accurate. "Indemnification" is the compensation for losses in accordance with the conditions stipulated in the contract.

For example, a representation and warranty is a promise stating, "As of the settlement date, there are no unpaid overtime wages other than those disclosed." Indemnification determines the extent to which the seller must bear financial costs if unpaid overtime wages are found in violation of that promise, resulting in damages stipulated in the contract.

Another concept familiar to business owners is the "personal guarantee." This is a system where, for money borrowed by a company from a bank or elsewhere, the guarantor assumes the responsibility of fulfilling the obligation if the company fails to pay.Article 446 of the Civil CodeThis is a matter of a guarantee obligation based on [X] and is considered separately from M&A representations and warranties.

Deleting the representations and warranties does not release the personal guarantee provided to the bank. Conversely, the release of a bank's personal guarantee does not mean that the indemnification obligations under the stock purchase agreement are eliminated.

Representations and warranties are facts, and indemnification is the rule for bearing damages.

Representations and warranties are a promise that facts at a point in time specified in a contract are "true and accurate." Meanwhile, indemnification determines who will bear which damages if there are facts that contradict that promise.

For example, suppose unpaid overtime for the period prior to the sale is discovered after the sale. The employer company is primarily liable to pay the employees. What the buyer can claim from the seller beyond that point is a separate issue.

Which representation and warranty is breached? Did the loss occur to the buyer or the company? Is there an agreement to treat the company's loss as the buyer's loss? Has it already been factored into the price? We will trace the contract to check.

It is not a simple mechanism where the seller simply pays 6,000,000 yen to the buyer because a 6,000,000 yen payment has arisen for the company.

What is the overall picture, including the personal guarantees and non-compete obligations that remain after the sale?Responsibilities remaining with the seller after M&Ais explained in. This paper focuses among them on representations and warranties and financial indemnification conditions.

Covenants are promises of action, and special compensation is the burden of specific problems.

Covenants: What to do or not do after entering into a contract

Covenants are translated as "seiyaku-jiko" (covenants/undertakings) in Japanese. While representations and warranties are promises that "this fact is accurate," covenants are promises that "I will take this action" or "I will not take this action."Anderson Mori & Tomotsune Commentary (Q2)It also distinguishes between the maintenance of business value prior to transaction execution, the acquisition of necessary consents, and post-execution obligations.

Even if you sign a contract to buy a company for 1.3 billion yen, there is sometimes a time gap before the actual delivery of the shares and payment. If the seller disposes of important company equipment or withdraws a large amount of company money through heavy dividends during that time, the contents of the company would change from what the buyer evaluated. Therefore, commitments are placed on actions leading up to the settlement as well.

The burden also differs depending on whether it is an "obligation to make best efforts" or an "obligation to achieve a result." The negotiating point is to what extent one should make promises regarding matters that cannot be decided by oneself alone, such as the consent of a third party.

Compensation for covenant breaches is not necessarily subject to the same caps and time limits as regular representations and warranties. For example, even if the claims period for representations and warranties is two years after closing, if a three-year non-compete obligation is separately agreed upon, that obligation does not disappear in two years. You should check both the period for observing conduct and the period during which claims can be made for a breach. Both timeframes are assumed here for explanatory purposes only.

Special compensation - Making a separate arrangement for an already known issue

In typical representations and warranties, "disclosed matters are exceptions." So, if a disclosed issue later turns into an actual loss, who bears the burden?

Special compensation is what determines the burden for that specific issue.Apart from the presence or absence of a breach of representations and warranties, it is possible to design a structure where compensation is paid if agreed-upon events occur. Nagashima Ohno & Tsunematsu explanationAlso, as a response to known risks identified in the investigation, they mention reflecting them in prices or providing special compensation.

For example, suppose it is discovered that there is a potential issue with the tax treatment for a specific fiscal year prior to the sale, but it has not yet been determined whether an additional tax burden will arise or what the amount will be. The approach is to disclose this, make it an exception to the representations and warranties, and separately agree that "the seller will indemnify the specified burden arising from this tax treatment." Rather than transferring the company's tax obligation to the seller, the economic burden is allocated between the parties.

In the special indemnification, rather than broadening it to "any tax issues whatsoever," the target fiscal years, transactions, tax items, and grounds are specified. It determines whether it covers only the principal tax or also additional taxes, delinquent taxes, and response costs. It also decides to what extent the seller can be involved when the target company files an amended tax return or contests a tax assessment. Confirmation is also necessary to ensure that amounts already borne through price adjustments are not compensated for a second time.

The name "Special" alone does not make it unlimited and indefinite. It will be clearly specified whether a cap is established separately from the standard indemnification, or if it is included within the standard cap, as well as by when and what kind of notice or claim must be made. In the case of tax risks, the statutory periods for tax purposes will also be taken into consideration, though that does not automatically become the claim deadline under the stock purchase agreement.

To sum up, representations and warranties are a "promise of facts," covenants are a "promise of actions," indemnification is a "rule for bearing losses," and special indemnification is a "rule for bearing the burden regarding specific issues." Rather than trying to remember the names,Which commitment leads to which burdenIt is important to read.

Can representations, warranties, and indemnification be completely removed?

It is not a standard clause that is legally required to be included.

Article 521, Paragraph 2 of the Civil Codeprovides that contract terms can be freely determined within the limits of laws and regulations. It is not the case that a share transfer agreement must include certain standard representations, warranties, and indemnities.

However, "not including representations and warranties," "keeping representations and warranties but limiting claims for compensation against the seller," and "taking responsibility only for specific matters" are each different conditions.

What the buyer wants to know is where they can recover losses if unexpected problems arise after the acquisition. If they cannot make a claim against the seller, this leads to decisions such as lowering the price, increasing due diligence, resolving the issues before closing, considering insurance, or abandoning the acquisition.

From the seller's perspective, deleting a clause can be a starting point for negotiations. However, if the deletion itself becomes the goal, it could lead to major concessions on price or other terms.

Even if a clause is deleted, other liabilities may remain.

Even if the indemnity clause is deleted, breach of any remaining contractual obligations will still give rise to liability for default under the Civil Code. In cases where a contract was induced by fraudulent misrepresentation, rescission on the grounds of fraud and tort liability will also be considered separately.Article 415, Article 96, and Article 709 of the Civil Codeand each has its own rationale.

Conversely, if there are problems with the company's assets or financial condition, you cannot necessarily hold the other party liable to the exact same extent without representations and warranties. This is because the direct subject of a share transfer is the shares, not the assets held by the company itself. That is precisely why it is meaningful to clearly define in the contract what is being warranted regarding the target company.

In some cases, a so-called exclusive remedy clause is included, stating that "claims relating to this contract shall be limited to those under the indemnification provisions." In such instances, it is necessary to check not only the cap on indemnification, but also whether the cap can be bypassed through a different legal basis for a claim, and whether the intention is to restrict even termination or rescission. It should not be assumed that even intentional misrepresentation can be exempted, and limitations based on public order and morals also become an issue.

What we should aim for is not a contract where responsibilities seemingly disappear, but one where both parties share the exact same understanding of the responsibilities that remain.

Narrow the scope of the representations and warranties before deleting everything.

Before negotiating the cap, let's organize what we will be responsible for. Even if the cap is low, overly broad representations and warranties are prone to breaches.

Depending on the contract, the design may make the seller liable for indemnification even if the seller was unaware of the issue and at fault. It does not necessarily mean "I didn't know, so I don't have to pay." That is precisely why we check limitations such as "to the best of our knowledge," how disclosed matters are handled, and the conditions under which indemnification arises.

For example, "there are no violations of laws and regulations whatsoever" and "except for the matters stated in the disclosure materials, there are no violations of laws and regulations that would have a material adverse effect on the business" guarantee different things. However, it is not a blanket rule that the latter is always acceptable. For matters directly tied to the survival of the business, such as licenses and permits, there is a reason why the buyer would demand a strong guarantee.

If writing "to the best of our knowledge," it determines whether it is limited to the understanding of the representative only, includes the understanding of the finance and human resources heads, or is based on a reasonable investigation. The same standard of knowledge may not be appropriate for a fundamental matter like whether the shares belong to oneself and the details of labor management for all employees.

What percentage of the purchase price is generally considered the maximum compensation limit?

Checking the nature of the materials rather than a uniform "market rate"

The figures provided in the published explanations must be interpreted with an understanding of their specific nature. Examples of contract terms—such as “30% of the transfer consideration” or “two years after settlement”—are distinct from market rates derived from aggregates of actual completed transactions. You cannot determine whether your own contract terms are favorable or unfavorable based solely on the figures in these explanatory examples.

From the publicly available documents reviewed this time, no statistics showing the percentage of compensation caps along with the population size for domestic transactions ranging from 100 million to 2 billion yen were found. When given an explanation like "generally speaking, how much %?", you should check the transaction size, target industry, presence of insurance, and which liability the cap applies to.

Small and Medium Enterprise Agency Contract Sample (As of December 15, 2025 version) - Article 16Also, instead of fixing the ratio, it is a format where the parties enter the numerical value. It notes that if the upper limit is set high, a reason is required, and settings close to 100% should be carefully examined for validity.

Therefore, when a buyer requests a 100% clause, the seller should ask, “Why is full compensation for the sale price necessary to cover this risk?” The seller should not simply dismiss the matter with an explanation like, “It’s the standard contract.” On the other hand, this does not mean that a contract is automatically unfair or invalid merely because it includes a 100% clause.

If the sale price is 1.3 billion yen, what is the difference in the upper limit?

Here is a provisional example in which only the cap applicable to representations and warranties regarding the ordinary course of business is changed.

This is not the amount scheduled for payment. It is the maximum limit if the contract's claim requirements—such as violations, damages, and causality—are met. Nor does it mean that 20% must always be set aside if it is 20%.

Also, it is important whether the 1.3 billion yen is the stock purchase price or the total acquisition cost including the repayment of borrowings, etc. Instead of simply writing "transaction value" as the basis for the indemnification cap, define what amount it includes. If there is additional consideration, also determine whether unpaid earn-outs should be included in the calculation of the cap.

The true burden is hidden in the "exceptions" to the limit.

Even if the compensation limit is stated as 20%, that figure does not necessarily apply to all liabilities.

For example, suppose it is agreed that the limit for standard compensation is 100 million yen and the limit for special compensation is 30 million yen. In this case, the upper limit of the total liability changes depending on whether the special compensation is included within the 100 million yen limit or is in addition to it. We will also clarify that the same damages cannot be claimed twice.

Similarly, it makes a difference whether it is a "total of 100 million yen for all sellers combined" or "100 million yen per seller." To ensure that minority shareholders do not bear liabilities exceeding their own received proceeds, it is necessary to clearly specify the cap for each seller, the allocation based on their shareholdings, and the presence or absence of joint and several liability.

It is not just the general limit that needs to be checked. We must read and cross-reference three things: individual limits, exceptions, and total limits.

With a small deductible, the payment amount changes even for the same figure.

In addition to a compensation cap, contracts sometimes include a mechanism to cut off small claims. This is an area where it is easier to understand by actually doing some calculations rather than just memorizing the English names.

De minimis and basket

De Minimisis the small-sum threshold per item.Basketis the standard for the total amount of applicable damages. The contract also specifies whether multiple related issues are treated as a single claim, or whether damages excluded under the small-claim threshold are added to the total.

In the following hypothetical examples, each amount is established as compensable damages resulting from a breach and represents separate, unrelated matters. Assume the de minimis threshold is 500,000 yen or less per claim, with excluded claims not counting toward the basket, and the basket threshold is 3,000,000 yen.

From here on, the payment amount changes depending on the method of the basket.

Assume the upper limit has not been reached in this example. Even with the same "3 million yen basket," a difference of 3 million yen arises. The Japanese word "deductible" alone does not make it clear whether it applies only to the excess amount or from the very beginning once the limit is exceeded.Article on PE negotiation terminologyPlease also refer to.

Until when will past issues be compensated, and when will the liability finally end?

Here, it is easier to understand if you divide it into three times.the base date of the guaranteed facts, the date the issue is discovered, the final deadline for accepting compensation claimsIt is. These three are not the same day.

A "two-year warranty" does not mean guaranteeing management for two years after the sale.

For example, suppose the contract execution date is October 1, 2026, the settlement date is November 1 of the same year, and it is promised that the representations and warranties are accurate on both dates. Below is a hypothetical example including the dates.

For example, in the case of a representation and warranty stating that "as of the closing date, there are no unpaid wages other than those disclosed," what is investigated is the state of affairs as of the closing date. It does not become excluded just because they are discovered the following year. On the other hand, the seller does not automatically assume responsibility for problems newly created by the buyer after the closing.

However, some representations and warranties cover a specific period in the past, such as "there have been no specified violations for the past three years." Financial statements may be based on a specific settlement date.Rather than assuming there is a single base date for the entire contract, we will check the applicable time point or period for each clause.

When representations and warranties are required as of both the signing date and the closing date, simply notifying the other party of changes that occurred in between does not necessarily release liability automatically. Whether exception disclosures can be updated, whether the buyer can refuse to close, and whether indemnification claims remain even if the closing proceeds are also matters of agreement.

How to divide the years is determined for each type of responsibility.

There is no statutory number of years for the compensation period that applies to all cases.SME Agency Contract Sample Article 16Also, it is a format where the parties determine the billing period. The following is not market statistics, but an organization for considering termination conditions for each type of liability.

Anderson Mori & Tomotsune Commentary (Q2)Also, it distinguishes between the upper limit and period of normal compensation and a separate special compensation. Regarding taxation, it is not enough to just look at "how many years from the sale"; it also determines which fiscal year and transaction are targeted, and who will handle future tax audits.

When the deadline arrives, will the unresolved compensation also be forfeited?

You can have a contract stating that if the prescribed notice is not given by the deadline, no new claims for that standard coverage will be accepted. On the other hand, if the contract keeps claims notified within the deadline alive even after the deadline, handling of those claims will not end even when the deadline arrives.

For example, suppose the notification deadline for standard compensation is set at 24 months from settlement, and in the 23rd month, appropriate notification regarding unpaid overtime prior to settlement is received. If there is an agreement that "notified cases remain active until final resolution," the fact that the amount is finalized or paid in the 25th month or later does not mean that liability ceases just for that reason.

Conversely, if the issue is discovered for the first time in the 25th month, it may be subject to the standard warranty period and notice requirements, and a new claim may not be allowed. However, it is necessary to separately check whether other periods such as for tax matters apply, if there are exceptions for intentional misconduct, or if there are other grounds for a claim.

To answer what sellers want to know: "When can I safely use the proceeds from the sale?"Manage the deadlines for new billing and the settlement of previously notified billing separately.It is necessary. If you also require a lawsuit or similar action within a certain period after notification, that deadline and effect must be clearly defined in the contract.

Specify what will be done during that period.

It is not necessary to make the period for standard compensation the same as that for matters like tax issues that take time to come to light. However, it is also inappropriate to mechanically decide on "generally 2 years" and "7 years for tax matters."

From the buyer's perspective, time is needed to review issues through post-acquisition financial statements and tax filings. From the seller's perspective, they want to avoid remaining indefinitely responsible for the company prior to the sale. These conflicting circumstances are adjusted to match the risks involved.

I will decide the following along with the date.

For example, what if a tax audit starts in the 23rd month after settlement, the compensation period is 24 months, and the tax amount is finalized in the 30th month? Even if it is summarized simply as "claim within 24 months," whether a notice of the start of an audit is sufficient or if it is necessary to indicate a specific amount depends on the wording.

The contractual billing period and the legal statute of limitations are separate issues. For general claims,Article 166 of the Civil CodeThere are regulations, but reading them does not mean you can ignore the short notice period in the contract.

Can I be asked for compensation later for the issue I already reported through DD?

Relying only on the understanding that "since we showed the materials, the buyer must have known" is dangerous.

Making disclosed issues exceptions to representations and warranties and limiting indemnification claims for issues known to the buyer are similar yet distinct mechanisms. When creating a disclosure schedule listing exception items, the corresponding representation and warranty clause, the details of the issue, and related materials are mapped together.

A clause that limits claims if the buyer already knew about the issue is commonly called an anti-sandbagging clause. Conversely, some designs allow claims regardless of the buyer's knowledge. We will also check whose knowledge constitutes the buyer's knowledge, specifically whether it is limited to actual knowledge or includes constructive knowledge (what should have been known).

Merely because the buyer conducted due diligence does not mean it assumed all overlooked issues as a result. On the other hand, just because the seller dumped a large volume of materials into the data room does not automatically mean that all of them were properly disclosed.Role and Procedure of DDIt is necessary to connect the work with contractual disclosures.

What is important here isWhere to route the identified issuesTo agree on which option to choose—lowering the price, resolving the issue prior to closing, having the buyer assume it, or establishing a special indemnity—and to ensure that the burden does not end up without a destination after being excluded from the general representations and warranties.

Can representations and warranties insurance reduce the seller's liability to zero?

Insurance is a strong option. However, purchasing insurance and waiving claims for compensation against the seller are separate agreements.

Nagashima Ohno & Tsunematsu's October 2025 commentaryThis explains the non-recourse type, where claims for compensation against the seller are not permitted, and the buyer claiming insurance proceeds serves as the primary remedy. It is necessary to confirm obtaining insurance and limiting claims against the seller as a package. Even if insurance is attached, if the seller's obligation to compensate remains in the contract, that liability does not automatically disappear.

Insurance purchased by the buyer and insurance purchased by the seller

Explanation of insurance brokerage firm MarshAlso, these two are separate. The seller's version is a mechanism to back up the seller's liability with insurance, and is not a product that eliminates the contractual liability itself with the buyer.

Also, insurance primarily covers unknown breaches of representations and warranties. Issues already identified during due diligence, or areas not sufficiently investigated in the first place, may be excluded. It does not guarantee the achievement of future business plans. Coverage and exclusions will be confirmed based on individual products and underwriting conditions.

Therefore, it is necessary to read the following three side by side.

If the limits, deductibles, exclusions, and payment terms do not align, a burden will remain in the middle. Will you establish that the seller can definitely be held liable when insurance payouts are denied? Or will the buyer bear even that risk? This is the core of non-recourse negotiations.

Insurance is also available for domestic small and medium-sized M&A. For example,Sompo Japan announced the sale of insurance products for buyers in domestic small and medium-sized enterprise M&As in 2020.However, announcements from that time cannot be read as a guarantee of current underwriting conditions or pricing. Even for deals between 100 million and 2 billion yen, it is necessary to present a specific draft contract and the status of due diligence in order to receive an estimate and review.

Turning "I want to lower the upper limit" into a successful negotiation

Just having the seller say, "I don't want to take any more responsibility," doesn't give the buyer peace of mind. Presenting what has been investigated, what remains, and how to handle the remaining issues creates a rationale for price negotiations.

Next is the order of condition organization proposed by our company in this paper.

1. Identify problems before selling. Organize matters that affect price and liability, such as finance, taxation, labor, and stock rights.
2. Align perceptions of risk with the buyer. Review what is known and what remains unconfirmed through the DD.
3. Determine how to handle the identified issue. Select price reflection, resolution before settlement, buyer burden, or special compensation.
4. Design general compensation for unknown risks. Negotiate the subject, limit, small-claim deductible, and period all together.
5. Check the basics and exceptions separately. Consider why a high limit is necessary and whether the exceptions are too broad.
6. Comparing the effectiveness of payment and the restriction of funds. Compare the final terms, including insurance, retention of payment, and escrow.

Instead of deciding beforehand that "up to 20% is fine," considering things one by one makes it a condition that you can explain to the other party.Small and Medium-Sized M&A Guidelines 3rd EditionIt also calls attention to the routine inclusion of indefinite and unlimited representations and warranties, and requests consideration based on the results of due diligence and whether they have been factored into the price.

A high price and light responsibility. Which is more advantageous?

For example, suppose there are the following two proposals. Both are hypothetical examples.

Option A is 20 million yen more expensive. However, what you are taking on for that 20 million yen cannot be seen from the price alone.

Since the cap is not the expected loss, you cannot simply determine superiority based on "price minus compensation cap." We will compare the probability of issues arising, the subjects of claims, insurance, the timing of having free access to cash, and the burden of dealing with disputes after the sale.

The retained amount is also separate from the cap on compensation. Without a limitation specifying that "claims can only be made up to the 50 million yen retained," it is possible for a compensation claim to exceed the retained amount. The same applies to escrow; the deposited amount does not automatically serve as the limit of liability.

Before closing the contract, print it on a single sheet to check.

Even if the final contract is long, a summary can be created for the owner-manager to make a decision.

I would like to avoid signing without being able to answer the items in this table, simply accepting the explanation that "indemnification is a standard clause."

How much you sell a company for and how much liability you bear after the sale are part of the same decision-making process. The cap can be negotiated. The scope and duration of representations and warranties, as well as how insurance is used, can also be negotiated. However, the risks assumed by the other party must be justifiable.

We value organizing both the sale price and the remaining burdens after the sale so that owner-executives can make informed and satisfying decisions. It is important to confirm the validity of specific contractual clauses and the legal scope of claims with an attorney, and to connect the results of financial and tax due diligence to the contract terms.

M&A impacts not only the company, but also your life as an owner-manager. We want to determine the contract terms with an eye not just on "it's over once sold," but on "what kind of life you can lead after the sale."