M&A and merger control in Japan

By Hiroshige Nakagawa, Anderson Mori and Tomotsune
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In arrangements which are similar to those in many other countries, when acquiring a company in Japan, it is, under certain circumstances, necessary to make a filing with the competition authorities. In Japan, the relevant authority is the Japan Fair Trade Commission (JFTC). In certain situations, the JFTC has the power to prohibit an acquisition.

Although there are many ways for a foreign enterprises to acquire a Japanese enterprise, at present, most Chinese enterprises taking over a Japanese enterprise do so by means of an acquisition of shares.

Prior to a change in the law at the beginning of 2010, when acquiring a company by way of an acquisition of shares, it was necessary for the acquirer to make a filing only after the shares had been acquired. In comparison with the practice in other countries, this was considered to be a more lenient system. However, since changes to the law made in January 2010, it has been necessary to make a filing before the acquisition. In principle, during the 30-day waiting period it is not possible to carry out the intended merger.

Triggers for filing requirement

Hiroshige Nakagawa
Hiroshige Nakagawa
Anderson Mori and Tomotsune

Unlike in China, in Japan even the acquisition of a minority of a company’s shares can trigger the requirement for a filing. When a holding of the target company’s voting shares exceeds 20%, such a requirement is triggered. A further requirement is triggered when the holding passes the 50% mark. Even a holding of 21% (or 51%) of the voting shares will trigger the requirement to make a filing.

Such percentages are not considered solely from the perspective of the acquirer of shares, but are determined based on the criterion of the “combined business group”.

The term “combined business group” means the group of companies to which the company belongs, i.e. the group comprised of the ultimate parent company located at the apex of operational control on the organization chart, and all of the companies directly or indirectly controlled by that parent.

The criteria for determining a parent and subsidiary relationship are (i) like the usual company law position, who holds the majority of the voting shares; and (ii) who has actual control.

Such combined business groups naturally also include foreign enterprises. The effect of this is that the direct acquisition of shares of a Japanese company by a Chinese company, and the acquisition by a Chinese company of a Chinese company belonging to a Japanese business group, are also covered.

Before the end of 2009, filings were required when the thresholds of 10%, 25% or 50% were exceeded. Since the amendment, the thresholds are when shareholdings of 20% or 50% are exceeded.

Sales turnover criteria

In addition to shareholding thresholds, there are also conditions relating to sales turnover. A filing must be made firstly with respect to the company acquiring the shares, when the total sales turnover in Japan of the combined business group of which the acquirer is a part exceeds JPY20 billion, and secondly, with respect to the target company, when the total sales turnover in Japan of the target company alone and of its subsidiaries exceeds JPY5 billion.

The method for calculating sales turnover in Japan is also strictly defined. The determination of sales turnover is made based on whether the goods or services were actually provided in Japan.

For example, if the Japanese subsidiary of a Chinese company intends to export to a foreign country and makes the sale to a Japanese trading company, the sales turnover from such a transaction is not counted as part of the company’s sales turnover in Japan.

On the other hand, when a Chinese company makes a sale in China, but the ultimate destination of the goods is Japan, the turnover from the sale is to be included in the Chinese company’s sales turnover in Japan.

In order to clarify the criteria and reduce the burden on companies, in principle, the use of the figures recorded on consolidated financial statements is accepted.

Prior to the end of 2009, assets in Japan were also one of the criteria taken into account. Since the amendment, only the sales turnover is Japan is considered.

M&A among Chinese companies

Even in mergers and acquisitions that occur between Chinese enterprises, if there is a company in the combined business group that has sales turnover in Japan, it may be obliged to make a filing.

With the adoption of the business group as the unit, and the inclusion of the amount exported to the Japanese market in the domestic sales turnover figure since the beginning of the year, the possibility of a filing obligation arising has markedly increased. When a Chinese enterprise that has Japan as one of its export destinations carries out a merger or acquisition, it is required to effectively collect information on the group unit and consider whether it has a filing obligation in Japan.

Filing date and waiting period

When a filing related to a share acquisition is made, such an acquisition may not be effected until 30 days after the date on which the filing is accepted. However, when it deems it necessary, the JFTC may shorten this period.

If the JFTC is to issue an order restricting such a share acquisition, it will, in principle, notify the concerned party during the 30-day period (or the shortened period). However, if the JFTC deems it necessary to conduct a more detailed review, it may require the concerned party to submit additional reports or information. If it requires such documents, it will give notice of the contents of the anticipated order 120 days after the date of acceptance of the filing or 90 days after the date of acceptance of all the documents, whichever is later.

In Japanese merger review practice, the prior inquiry system plays an important role. During a prior inquiry, the JFTC will conduct a substantive review. Accordingly, in a combined case involving enterprises with a significant sales turnover in Japan, ample time should be set aside to seek advice from lawyers.

Hiroshige Nakagawa is a partner at Anderson Mori and Tomotsune and chief representative of its Beijing Office


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