M&A in Japan: Key Methods for Acquisition by Share Purchase vs. Business Succession

Mergers and acquisitions (M&A) are pivotal strategic maneuvers for companies seeking growth, diversification, market entry, or operational synergies. In Japan, like in other major economies, a sophisticated legal framework under the Companies Act (Kaisha-hō) and other related laws governs these complex transactions. Broadly, M&A transactions involving Japanese Kabushiki Kaisha (K.K., or joint-stock companies) can be categorized into two main approaches: (1) acquisitions achieved through the purchase of shares, leading to control over the target company, and (2) acquisitions structured as a succession to the target company's business or parts thereof, often involving the integration of assets and liabilities. Understanding the key methods within each of these approaches, their procedural requirements, and their respective legal and practical implications is crucial for any entity contemplating M&A activity in Japan.

Conceptualizing M&A Approaches in Japan

When a company decides to acquire another, the fundamental choice often revolves around whether to acquire the target entity itself (by gaining control of its shares) or to acquire its underlying business operations.

1. Acquisition by Share Purchase (Acquiring the Entity):
   In this approach, the acquirer purchases shares of the target K.K. from its existing shareholders. If a sufficient number of shares are acquired (typically a majority, or even all, for full control), the acquirer gains control over the target company as a going concern. The target company continues to exist as a legal entity, often as a subsidiary of the acquirer. The key advantage is often procedural simplicity in integrating the target as an existing operational unit, though due diligence on all of the target's existing liabilities (known and unknown) is critical.
2. Acquisition by Business Succession (Acquiring the Business/Assets):
   This approach focuses on acquiring the actual business operations, assets, and sometimes specific liabilities of the target, rather than its shares. The target company may continue to exist (perhaps as a shell or with remaining businesses) or may eventually be liquidated. This method allows the acquirer to be more selective about the assets and liabilities it assumes, but the process of transferring individual assets, contracts, and employees can be more complex.

The Japanese Companies Act provides specific legal mechanisms to facilitate transactions under both approaches.

Key Methods for Acquisition by Share Purchase

Several methods can be employed to acquire shares of a Japanese K.K.:

1. Direct Share Purchase from Existing Shareholders (Market or Negotiated Transactions)

• Description: The acquirer directly purchases shares from the target company's existing shareholders.
  • For listed companies, this can involve purchasing shares on the stock exchange (market purchases) or through negotiated block trades. If the acquisition involves purchasing a significant stake in a listed company (generally exceeding one-third of the voting rights through off-market transactions or rapid market accumulation), it may trigger mandatory tender offer (kōkai kaitsuke) rules under the Financial Instruments and Exchange Act.
  • For non-public companies (closely-held K.K.s), acquisitions typically involve direct negotiations and private sale and purchase agreements with the existing shareholders. The target company's articles of incorporation must be carefully reviewed for any share transfer restrictions (jōto seigen), which would require the company's approval for the transfer.
• Outcome: The acquirer becomes a shareholder of the target company. The degree of control depends on the percentage of shares acquired. The target company's legal identity, assets, liabilities, and contracts generally remain unchanged, now under new ownership control.

2. Subscription to Newly Issued Shares by the Target Company (Third-Party Allotment)

• Description: Instead of buying shares from existing shareholders, the acquirer subscribes to newly issued shares directly from the target company through a "third-party allotment" (daisansha wariate). This is a form of capital increase for the target company.
• Procedure: This involves the target company following the procedures for "Issuance of Shares for Subscription" (boshū kabushiki no hakkō tō), as discussed in a previous article. If the issuance is at a "particularly favorable price" or significantly dilutive without adequate justification, specific shareholder approvals (often special resolutions) may be required in the target company.
• Outcome: The acquirer becomes a new shareholder, and the target company receives fresh capital. This method can dilute existing shareholders but can also be a way to inject needed funds or cement a strategic partnership.

3. Share Exchange (Kabushiki Kōkan) (Articles 767-771)

• Description: A share exchange is a statutory procedure where one company (the "wholly owning parent company in share exchange") acquires all the issued shares of another company (the "wholly owned subsidiary company in share exchange"). In return, the shareholders of the target subsidiary receive shares of the acquiring parent company (or cash or other assets from the parent).
• Procedure: This is a formal corporate reorganization that requires:
  • A share exchange agreement between the two companies.
  • Approval by a special resolution of the shareholders' meetings of both companies (though simplified procedures may apply if certain ownership thresholds are met, e.g., a short-form share exchange).
  • Protection procedures for dissenting shareholders (appraisal rights to demand purchase of their shares at fair value) and potentially for creditors of the companies.
• Outcome: The target company becomes a wholly-owned subsidiary of the acquirer. Its shareholders become shareholders of the acquiring parent company (or receive the agreed consideration). This is a common method for creating wholly-owned subsidiaries or integrating companies within a group structure.

4. Share Delivery (Kabushiki Kōfu) (Articles 774-2 to 774-11) - (Introduced in 2019, effective March 2021)

• Description: Share delivery is a newer statutory mechanism designed to facilitate acquisitions where a company (the "acquiring company in share delivery") acquires shares of another company (the "target company") and makes that target company its subsidiary, by delivering its own shares (the acquirer's shares) as consideration to the selling shareholders of the target. Unlike a share exchange which results in 100% ownership, share delivery can be used to acquire a controlling stake that makes the target a subsidiary, without necessarily acquiring all shares.
• Key Features:
  • It is specifically designed for situations where the acquirer issues its own shares as the primary consideration for acquiring shares in the target.
  • The target becomes a subsidiary (more than 50% of voting rights) but not necessarily a wholly-owned one.
  • It provides a statutory framework primarily for the acquiring company to issue its shares for this purpose, including procedures for shareholder approval in the acquiring company if the value of the shares delivered is significant relative to its net assets (triggering a special resolution unless certain exceptions apply).
• Procedure: Involves a "share delivery plan" by the acquiring company, potential shareholder approval in the acquiring company, and the transaction with the target's selling shareholders. The target company itself is not a direct party to the share delivery plan in the same way it is to a share exchange agreement.
• Outcome: The acquirer obtains a subsidiary, and the selling shareholders of the target receive shares of the acquirer. This method provides more flexibility than a share exchange when aiming for less than 100% ownership initially using the acquirer's stock as consideration.

Key Methods for Acquisition by Business Succession

These methods involve the transfer of the business itself, or significant parts of it, rather than just the shares of the entity operating the business.

1. Merger (Gappei) (Articles 748-756 for Absorption-type; Articles 757-761 for Consolidation-type)

• Description: A merger is a statutory procedure where two or more companies combine into a single legal entity.
  • Absorption-type Merger (Kyūshū Gappei): One company (the surviving company) absorbs another company (the dissolving company), with the dissolving company's assets, liabilities, and contractual relationships being comprehensively succeeded to by the surviving company. Shareholders of the dissolving company typically receive shares of the surviving company (or cash/other assets).
  • Consolidation-type Merger (Shinsetsu Gappei): Two or more existing companies dissolve, and a new company is established to succeed to all of their assets, liabilities, and contractual relationships. Shareholders of the dissolving companies receive shares of the newly established company.
• Procedure: Requires a merger agreement, approval by special resolution of the shareholders' meetings of all merging companies (with simplified procedures in certain cases, like short-form mergers), and protection procedures for dissenting shareholders (appraisal rights) and creditors (who can object to the merger).
• Outcome: A single, combined legal entity emerges. This is a complete integration of the involved companies.

2. Company Split (Kaisha Bunkatsu) (Articles 757-766 for Absorption-type; Articles 762-766 for Incorporation-type)

• Description: A company split allows a company to transfer a part or all of its business (including related assets, liabilities, contracts, and employees) to another existing company (Absorption-type Split - Kyūshū Bunkatsu) or to a newly established company (Incorporation-type Split - Shinsetsu Bunkatsu).
  • In an Absorption-type Split, the splitting company transfers a business to an existing successor company. The consideration (often shares of the successor company, or cash) can be delivered to the splitting company itself or directly to its shareholders.
  • In an Incorporation-type Split, the splitting company transfers a business to a newly formed company, and the shares of this new company are typically received by the splitting company or its shareholders.
• Procedure: Requires a split agreement (for absorption-type) or a split plan (for incorporation-type), approval by special resolution of the shareholders' meetings of the relevant companies (splitting company and, for absorption-type, the successor company if significantly impacted), and protection procedures for dissenting shareholders and creditors.
• Outcome: Allows for the transfer of specific business lines or divisions, providing flexibility for corporate restructuring, divestitures, or creation of specialized subsidiaries. The comprehensive succession of rights and obligations related to the transferred business (including employment contracts, generally) is a key feature, distinguishing it from a simple asset sale.

3. Business Transfer (Jigyō Jōto) (Articles 467-470)

• Description: A business transfer involves the sale and purchase of all or a "significant part" of a company's business as a collection of assets and operations. Unlike a company split, a business transfer is fundamentally an asset sale agreement, where individual assets, liabilities, and contracts are specified for transfer.
• "Significant Part": Whether a transfer constitutes a "significant part" of the business, thereby triggering shareholder approval requirements, is a factual determination based on quantitative and qualitative factors.
• Procedure:
  • Requires a business transfer agreement.
  • If a company is transferring all of its business, or a significant part that would materially affect its ability to continue its remaining business, a special resolution of its shareholders' meeting is generally required (Article 467, paragraph 1).
  • If a company is acquiring another company's entire business, shareholder approval in the acquiring company is generally not required unless the consideration paid is very large relative to the acquirer's net assets (a "significant acquisition of business").
  • No Automatic Succession of Contracts/Employees: Unlike mergers or company splits, contracts (including employment contracts) and liabilities do not automatically transfer with the business. Individual consent from counterparties (e.g., customers, suppliers, employees) is typically needed for their transfer to the acquirer. This is a major difference from statutory reorganizations like company splits.
  • Creditor protection procedures are generally not as extensive as in statutory reorganizations, but creditors may have rights under general contract law or specific statutes depending on the circumstances. Dissenting shareholders of the transferring company (if shareholder approval is required) have appraisal rights.
• Outcome: The acquirer obtains the specified business assets and operations. It allows for cherry-picking of assets and liabilities but can be administratively more burdensome due to the need for individual consents for contract transfers.

Key Considerations for M&A in Japan

Regardless of the method chosen, several overarching considerations apply to M&A involving Japanese companies:

• Due Diligence: Thorough legal, financial, and operational due diligence on the target is critical.
• Regulatory Approvals: Depending on the industry and size of the transaction, approvals from regulatory bodies (e.g., Japan Fair Trade Commission for antitrust clearance, relevant industry regulators) may be required.
• Shareholder Approval Thresholds: Understanding the specific shareholder approval requirements (ordinary, special, or even higher for certain actions) for each party is crucial.
• Protection of Minority Shareholders and Creditors: The Companies Act incorporates various mechanisms (appraisal rights for dissenting shareholders, objection procedures for creditors) to protect these stakeholders during M&A.
• Labor and Employment Issues: Transferring employees, particularly in business transfers, requires careful handling of Japanese labor law requirements and consultations with employees or unions.
• Tax Implications: Each M&A method has distinct tax consequences for the companies involved and their shareholders.
• Cultural Integration: Post-merger integration, especially managing cultural differences, is often a key determinant of an M&A's success.

Conclusion

The Japanese Companies Act provides a diverse toolkit for structuring M&A transactions, broadly falling into acquisitions by share purchase or by business succession. Methods like direct share purchases, share exchanges, and the newer share delivery focus on acquiring control of the target entity. In contrast, mergers, company splits, and business transfers facilitate the acquisition and integration of the target's business operations and assets. Each method has its own set of procedures, shareholder and creditor protection mechanisms, and legal consequences. Choosing the most appropriate structure requires a careful analysis of the strategic objectives, the nature of the target, tax considerations, and the desired level of integration. For U.S. companies and their advisors contemplating M&A in Japan, a deep understanding of these different avenues is the first step towards successful transaction planning and execution.