Significance, characteristics of M&A structures in Japan

Share transfer and public takeover bids. Share transfer involves acquiring control of a target company by purchasing all or part of the shares held by shareholders of the target company. This act essentially constitutes a share purchase agreement between the seller and the buyer. Cross-border share transfers between Japanese and foreign companies, or among foreign companies, are also possible.

The advantage of a share transfer is that the process is relatively simple. Unless there is a change of control clause in the contracts of the target company, the consent of creditors or contractual counterparties – including the individual consent of employees – is not required. By contrast, in the case of business transfers, in principle the consent of creditors and contractual counterparties is required to transfer liabilities and contracts.

A public takeover bid (TOB) is one of the most important methods for acquiring shares of a listed company, a process involving bids made to an unspecified and large number of people outside the market. Since a large number of shares are acquired outside the market, TOB regulations mandate adequate disclosure of information and equal treatment of shareholders (fair selling opportunities). These regulations extend to foreign companies as long as the target shares are subject to TOB regulations in Japan.

Mergers, company splits and business transfers. A merger is an organisational restructuring act where multiple companies combine to form one company.

A company split is an organisational restructuring aimed at dividing all or part of a company’s rights and obligations related to its business and transferring them to another company. In a company split, the divided rights and obligations are comprehensively succeeded by the successor company, or by the newly established company as the legal effect.

The advantage of a company split is that the targeted assets, liabilities and contracts are comprehensively succeeded, eliminating the need for individual consent. Additionally, if the requirements for a qualified company split under tax law are met, there is the benefit of deferring taxation on transfer gains and losses.

A business transfer involves a company transferring all or part of its business to another company. The difference is that in a business transfer, assets and liabilities are individually transferred and succeeded to through contractual transactions, while a merger or a company split involves comprehensive succession.

The advantage of a business transfer is that it allows for the selective acquisition of only part of a company’s operations, making it relatively easy to shield against the risk of contingent liabilities.

Since the definition of “company” under the Companies Act does not include foreign companies, cross-border mergers and company splits with foreign companies are not permitted in Japan.

However, in practice, it is possible to use the method of triangular merger
or triangular split. Business transfers with foreign companies are not restricted by the wording of the Companies Act, allowing cross-border business transfers to be conducted.

Partial share exchange. Partial share exchange, introduced in the amended Companies Act, enacted in March 2021, is an organisational restructuring act where a company acquires the shares of another company in exchange for its own shares to make the acquired company a subsidiary.

Unlike mergers and share exchanges, partial share exchanges can be used for partial acquisition of another company’s shares and is not subject to inspectors’ investigations or other restrictions on contribution-in-kind (contribution of property other than monies).

Tax laws also allow for deferral of taxes on gains and losses from partial share exchange, thereby promoting the use of the partial share exchange. Under the current Companies Act, partial share exchange cannot be used by Godo Kaisha (limited liability companies) or involve foreign companies as parties, but amendments to allow partial share exchange with foreign companies as parties are expected to be proposed soon.

Regulations in cross-border M&A

Overview of laws and regulations. In Japan, laws and regulations applicable to conducting M&A include the Companies Act, the Financial Instruments and Exchange Act, the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Antimonopoly Act), and the Securities Listing Regulations. In cross-border M&A, these are supplemented by the Foreign Exchange and Foreign Trade Act (Foreign Exchange Act). Additionally, if the target company operates in certain businesses, corresponding industry regulations may apply. Here, we detail the Antimonopoly Act and the Foreign Exchange Act.

Antimonopoly Act. Share acquisitions, mergers, company splits and business transfers (business combinations) that substantially restrict competition in any field of trade are prohibited under the Antimonopoly Act and are subject to cease-and-desist orders by the Japan Fair Trade Commission (JFTC).Business combinations meeting certain requirements are subject to prior-notification obligations. The thresholds for the notification obligation vary depending on the type of transaction but commonly include a criterion that the domestic sales of the companies involved and the target company must exceed a certain threshold.

Once a notification has been accepted by the JFTC, the business combination cannot be conducted for 30 days. During this period, the JFTC determines:
(1) Whether the business combination has no issues under the Antimonopoly Law;
(2) Requires further detailed examination; or
(3) Should undergo voluntary procedures to eliminate suspected violations.

In the case of (2), a second review by the JFTC may take six months to a year. In the case of (3), a plan for remedial measures must be submitted and certified by the JFTC as sufficient to eliminate the suspected violation and ensure its reliable implementation, which can take a substantial amount of time.

Foreign Exchange Act. The Foreign Exchange Act mandates prior notification for certain inward direct investments and specified acquisitions by foreign investors. Transactions requiring notification include the acquisition of shares or equity interest in unlisted companies in Japan and the holding of 1% or more of the shares or voting rights in listed companies together with closely related parties. In the case of M&A through share transfers, it is necessary to pay attention to the application of the Foreign Exchange Act.

The most common point of contention is whether the target company operates in a designated industry. The range of designated industries is extensive, and those companies are determined from perspectives of ensuring national security, public order, public safety and the smooth operation of the Japanese economy.

In practice, if it is unclear whether a target company operates in a designated business category, due diligence is conducted to make a determination.

If the company is subject to notification regulations, a prior notification form must be submitted to the Bank of Japan, and the transaction is prohibited for 30 days post-acceptance.

However, if it is determined that the inward direct investment does not compromise national security in terms of the attributes of the foreign investor, the attributes of the issuing company, and the nature and purpose of the investment, the prohibition period may be reduced to about two weeks.

Recent hot topics

Guidelines for Corporate Takeovers (established on 31 August 2023). These guidelines aim to present principles and best practices that should be shared in the economic and social contexts for fair rule formation regarding acquisitions of managerial control of listed companies.

Although not legally binding, it is advisable for parties acquiring Japanese listed companies to comply with these guidelines, and it is expected that the targeted Japanese companies will also act in accordance with the guidelines.

Enactment of the amended Financial Instruments and Exchange Act expanding mandatory public takeover obligations (enacted on 15 May 2024). Significant amendments include expanding the scope of mandatory TOB regulations, reducing the threshold requiring a mandatory TOB from the current one-third (about 33%) to 30%, applying mandatory public takeover regulations to intra-market transactions), clarifying the scope of the large shareholding reporting system, and specifying exemptions.

These amendments are scheduled to be implemented within two years of promulgation.

Expected proposal of amended Company Law allowing partial share exchange M&A with foreign companies as parties. Currently, in Japanese M&A transactions, using partial share exchange to make another company a subsidiary requires that both parties be Japanese companies. The proposed amendment, expected to be discussed during the 2024 fiscal year, would allow M&A transactions with foreign companies also using partial share exchange as a method.