Mergers, Company Splits, Share Exchanges/Transfers, and Share Delivery in Japan: Comprehensive Explanation of Procedures and Points to Note

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read

Corporate reorganizations, such as mergers, company splits, share exchanges, share transfers, and the newer share delivery mechanism, are fundamental tools for strategic realignment, growth, and consolidation in the Japanese corporate landscape. The Japanese Companies Act (Kaisha-hō) provides a detailed and often complex set of procedural rules for these transactions, designed to ensure fairness to shareholders, protection for creditors, and legal certainty. For U.S. companies and legal professionals involved in M&A activities with Japanese Kabushiki Kaisha (K.K., or joint-stock companies), understanding the distinct nature of these reorganization methods and their common procedural milestones is critical. This article offers a comprehensive, albeit high-level, explanation of these key corporate reorganization procedures and the significant points to note.

Overview of Key Corporate Reorganization Methods

The Companies Act provides for several distinct types of statutory corporate reorganizations (soshiki saihen):

  1. Merger (Gappei):
    • Absorption-type Merger (Kyūshū Gappei): One company (the surviving company) absorbs another company (the dissolving company), which ceases to exist. All rights and obligations of the dissolving company are comprehensively succeeded to by the surviving company.
    • Consolidation-type Merger (Shinsetsu Gappei): Two or more existing companies dissolve, and a new company is established to succeed to all of their rights and obligations.
  2. Company Split (Kaisha Bunkatsu):
    • Absorption-type Company Split (Kyūshū Bunkatsu): A company (the splitting company) transfers all or part of its business to another existing company (the succeeding company).
    • Incorporation-type Company Split (Shinsetsu Bunkatsu): A company (the splitting company) transfers all or part of its business to a newly established company.
  3. Share Exchange (Kabushiki Kōkan):
    A procedure whereby one company (the "acquiring wholly-owning parent company") acquires all the issued shares of another company (the "target wholly-owned subsidiary company"), making the target its wholly-owned subsidiary. Shareholders of the target typically receive shares of the parent company as consideration.
  4. Share Transfer (Kabushiki Iten):
    A procedure whereby one or more existing companies establish a new wholly-owning parent company, and all their issued shares are transferred to this new parent company. Shareholders of the original company(ies) receive shares of the new parent company. This is often used to create a holding company structure.
  5. Share Delivery (Kabushiki Kōfu) (Effective from March 2021):
    A newer mechanism where a company (the "acquiring company in share delivery") acquires shares of another company (the "target company") to make it a subsidiary (not necessarily wholly-owned), by delivering its own shares as consideration to the selling shareholders of the target. This focuses on the acquiring company's actions to issue shares for an acquisition.

While each of these methods has unique characteristics and specific statutory provisions, they share a common procedural backbone designed to ensure transparency, shareholder approval, and protection for dissenting stakeholders.

Common Procedural Steps in Corporate Reorganizations

The following steps are generally common to most statutory reorganizations in Japan, although specific details and exceptions may apply to each type.

1. Preparation and Conclusion of a Reorganization Agreement or Plan

  • Absorption-type Reorganizations (Mergers, Splits, Share Exchanges): The companies involved must prepare and conclude a formal reorganization agreement (soshiki saihen keiyaku). This agreement is a legally binding contract that sets out the essential terms of the reorganization, including:
    • Names and addresses of the involved companies.
    • The effective date (kōryoku hassei-bi) of the reorganization.
    • Details of the consideration to be delivered to the shareholders or the company (e.g., shares of the surviving/parent company, cash, other assets), and its allocation.
    • For mergers and company splits, matters concerning the succession of assets, liabilities, and contractual relationships.
    • For share exchanges, provisions regarding the shares of the new wholly-owned subsidiary.
    • Matters concerning share options (shinkabu yoyakuken) of the dissolving/splitting/target company.
    • Other matters stipulated by law or deemed necessary by the parties.
  • Incorporation-type Reorganizations (Mergers, Splits, Share Transfers) and Share Delivery: These reorganizations require the preparation of a reorganization plan (soshiki saihen keikaku or kabushiki kōfu keikaku for share delivery) by the company or companies undertaking the reorganization. This plan details similar essential terms as an agreement but is an internal document adopted by the company setting out the framework of the reorganization.

2. Pre-Reorganization Disclosure of Documents (Prior Disclosure - Jizen Kaiji)

Before the shareholders' meeting to approve the reorganization, the involved companies must make certain documents and information available for inspection by their shareholders and creditors at their head offices (and often branch offices). This prior disclosure generally begins from two weeks before the shareholders' meeting (or earlier in some cases) and continues for six months after the effective date of the reorganization (Articles 782, 794, 801, 803, 815, 774-3 etc.).

The disclosed documents typically include:

  • The reorganization agreement or plan.
  • Documents explaining the terms of the consideration (e.g., reasons for the valuation of shares).
  • Financial statements of the involved companies for recent business years.
  • If shares of another company are delivered as consideration, information about that company.
  • Explanations regarding the distributable amount, if cash or other property is delivered as consideration and it might impact dividend capacity.

The purpose of this prior disclosure is to provide shareholders and creditors with sufficient information to make an informed decision about the proposed reorganization.

3. Approval by Shareholders' Meeting

As a general rule, a corporate reorganization requires approval by a special resolution of the shareholders' meeting of each company involved whose rights or obligations are significantly affected (Articles 783(1), 795(1), 804(1), 774-4 etc., generally requiring approval by two-thirds of the voting rights present at a meeting where shareholders holding a majority of exercisable votes are present).

  • Rationale: Corporate reorganizations are fundamental changes that can significantly alter the nature of a shareholder's investment and the company's structure, thus requiring a high level of shareholder consent.
  • Simplified ("Short-Form" - Ryakushiki) and "Miniature" (Kan-i) Reorganizations:
    • Short-Form Reorganizations (e.g., Article 784(1), 796(1)): If one company already owns 90% or more of the voting rights of another company involved in certain reorganizations (e.g., merger with a subsidiary, share exchange with a subsidiary), the shareholders' meeting of the subsidiary may not be required. The rationale is that the outcome of the vote is already certain.
    • Miniature Reorganizations (e.g., Article 784(2), 796(2)): If the value of the assets or shares being delivered by a company as consideration in certain reorganizations is "small" relative to its net assets (typically not exceeding one-fifth), a shareholders' meeting of that company (the one delivering minor consideration) may not be required, provided its articles of incorporation do not state otherwise. The rationale is that the impact on that company's shareholders is minimal.
      However, even in these simplified cases, if a significant number of shareholders object, a full shareholders' meeting may still be required.

4. Protection of Dissenting Shareholders (Appraisal Rights - Kabushiki Kaitori Seikyūken)

Shareholders who dissent from a proposed reorganization (i.e., they voted against it or were unable to vote) are generally granted appraisal rights – the right to demand that the company purchase their shares at a "fair price" (Articles 785, 797, 806, 774-7 etc.).

  • Procedure: Dissenting shareholders must typically notify the company of their opposition before the shareholders' meeting and then formally demand the purchase of their shares within a specified period after the resolution.
  • Price Determination: The fair price is determined by agreement between the shareholder and the company. If they cannot agree, either party can petition the court to determine the price. The court will consider various factors to arrive at a fair valuation.
  • Purpose: This provides an exit mechanism for shareholders who do not wish to participate in the reorganized entity or who believe the terms are unfair.

5. Protection of Holders of Share Options (Shinkabu Yoyakuken)

If the reorganizing company has outstanding share options, the reorganization agreement or plan must specify how these will be treated (e.g., whether new share options of the succeeding/parent company will be delivered in exchange, or if they will be bought out). Holders of share options may also have rights to demand that the company purchase their options at a fair price if they are treated unfavorably (Articles 787, 808).

6. Creditor Protection Procedures (Saikensha Hogo Tetsuzuki)

Certain corporate reorganizations, particularly mergers and company splits where liabilities are transferred, can affect the interests of the company's creditors. Therefore, the Companies Act often mandates creditor protection procedures (Articles 789, 799, 810).

  • Procedure: Companies involved must generally:
    1. Give public notice in the official gazette (kanpō) and individually notify known creditors of the proposed reorganization and state that creditors may object within a specified period (at least one month).
    2. Disclose their latest balance sheets.
  • Effect of Objection: If a creditor objects and the company fails to provide adequate security, repay the debt, or entrust equivalent property to a trust company for the creditor's benefit, the reorganization cannot proceed (unless the reorganization is unlikely to harm the creditor).
  • When Not Required: These procedures are generally not required for share exchanges, share transfers, or share delivery, as these transactions primarily involve a change in share ownership of the target company, and the target company's assets and liabilities (and thus its ability to pay its own creditors) are not directly transferred to another entity as part of the share transaction itself. However, if these transactions involve a reduction in the stated capital or reserves of a company delivering cash consideration in a manner that impacts its distributable amount, separate creditor protection might be triggered.

7. Effectiveness of the Reorganization and Registration

  • Effective Date (Kōryoku Hassei-bi): The reorganization generally becomes legally effective on the date specified in the reorganization agreement or plan.
  • Registration: Changes in the commercial register (e.g., dissolution of a merged company, establishment of a new company, changes in capital or directors) must be made at the Legal Affairs Bureau within specified timeframes after the effective date. For incorporation-type reorganizations, the registration of the newly established company itself brings it into existence and makes the reorganization effective.

8. Post-Reorganization Disclosure of Documents (Jigo Kaiji)

After the reorganization becomes effective, companies involved must prepare and keep documents containing information about the reorganization (e.g., the effective date, assets and liabilities succeeded to, number of shares delivered) at their head offices for inspection by shareholders and creditors for six months (Articles 791, 801, 801-2, 811, 816-8 etc.).

Key Points to Note for Each Reorganization Type

While the above procedural steps are common, specific considerations apply to each:

  • Mergers: Result in the complete amalgamation of legal entities. Careful attention must be paid to the succession of all rights and obligations, including unknown liabilities of the dissolving company.
  • Company Splits: Allow for the targeted transfer of specific business units. Crucially, employment contracts related to the transferred business generally transfer to the succeeding company unless employees object under specific procedures (Labor Contract Succession Act).
  • Share Exchanges/Transfers: Primarily used to create parent-subsidiary relationships or holding company structures. The focus is on the transfer of shares, with the target company's own legal identity and its assets/liabilities remaining intact (though now under new ultimate ownership).
  • Share Delivery: Provides a more flexible way than a share exchange to make a target a subsidiary using the acquirer's stock as consideration, without necessarily aiming for 100% ownership immediately. The primary procedural burden for share issuance lies with the acquiring company.

Strategic Considerations

Choosing the appropriate reorganization method depends heavily on the strategic goals of the transaction:

  • Full Integration vs. Maintaining Separate Entities: Mergers lead to full integration, while share exchanges/transfers/delivery allow the target to continue as a separate legal entity (subsidiary).
  • Acquiring Specific Businesses vs. Entire Company: Company splits or business transfers (though the latter is not a statutory "reorganization" in the same vein, it's a related M&A tool) are suitable for acquiring specific business lines, while share acquisitions target the entire company.
  • Consideration: The type of consideration (acquirer's shares, cash, etc.) can influence the choice of method and has significant tax and accounting implications.
  • Complexity and Time: Statutory reorganizations can be complex and time-consuming due to shareholder approval and creditor protection requirements. Simplified procedures can sometimes expedite the process.
  • Tax Treatment: Each reorganization method has specific tax consequences under Japanese tax law (e.g., "tax-qualified reorganizations" may allow for deferral of taxation on gains).

Conclusion

The Japanese Companies Act provides a robust, albeit complex, framework for corporate reorganizations such as mergers, company splits, share exchanges, share transfers, and share delivery. These statutory procedures are designed to facilitate strategic corporate restructuring while ensuring adequate disclosure to stakeholders, providing opportunities for shareholder approval, and protecting the rights of dissenting shareholders and creditors. Each method has distinct legal effects, procedural requirements, and strategic implications. Navigating these M&A transactions successfully requires careful planning, thorough due diligence, and a deep understanding of the applicable legal provisions and their practical application. For U.S. companies and their advisors, being well-versed in these Japanese corporate reorganization tools is essential for executing M&A strategies effectively in the Japanese market.