Squeeze-Out of Minority Shareholders in Japan: Methods and Shareholder Protection

Japanese Attorney at Law - Bengoshi L.L.

28 May 2025 • 8 min read

In corporate finance and restructuring, a "squeeze-out" (or "freeze-out") refers to a transaction or series of transactions through which a controlling shareholder or group compels minority shareholders to sell or otherwise relinquish their shares, thereby achieving 100% ownership of the company. While often pursued for legitimate business reasons—such as simplifying corporate structure, eliminating minority shareholder servicing costs, facilitating more agile decision-making, or preparing for a delisting or subsequent reorganization—squeeze-out transactions invariably raise concerns about the fair treatment of minority shareholders. The Japanese Companies Act (Kaisha-hō) provides several statutory mechanisms that can be utilized to effect a squeeze-out, alongside important safeguards designed to protect the interests of the squeezed-out minority.

Purposes of Squeezing Out Minority Shareholders

Controlling shareholders may seek to acquire 100% ownership and squeeze out minority interests for various strategic objectives:

Streamlining Corporate Structure and Decision-Making: Eliminating minority shareholders can simplify corporate governance, reduce administrative burdens associated with servicing numerous small shareholders (e.g., holding shareholders' meetings, distributing notices and dividends), and allow for quicker and more flexible decision-making by the sole owner.
Full Integration after Acquisition: Following a takeover or acquisition where the acquirer has obtained a majority stake but not all shares, a squeeze-out is often the final step to achieve full integration and realize synergies.
Going Private Transactions: A company listed on a stock exchange may decide to go private, and a squeeze-out is a common method to acquire the shares held by public minority shareholders.
Facilitating Reorganizations: Having 100% ownership can simplify subsequent corporate reorganizations, such as mergers or significant asset transfers within a corporate group, without the need for minority shareholder approvals or the provision of appraisal rights at each step.
Preventing Conflicts of Interest and Enhancing Confidentiality: In closely-held or group company scenarios, eliminating outside minority interests can reduce potential conflicts of interest and enhance the ability to manage sensitive business information.

Key Squeeze-Out Mechanisms under the Japanese Companies Act

Japanese law offers several statutory tools that a controlling shareholder can use to achieve a squeeze-out. These methods typically involve either compelling the sale of minority shares or exchanging them for cash or other consideration.

While a standard share exchange or merger involves exchanging shares, these mechanisms can be structured as a "cash-out" transaction for minority shareholders.

Share Exchange (Cash as Consideration - Article 768(1)(ii)): A parent company can effect a share exchange with its subsidiary where the consideration given to the subsidiary's minority shareholders is cash (or other assets of the parent) instead of parent company shares. If the parent already holds a significant majority (e.g., 90% or more), a "short-form" share exchange might be possible, potentially bypassing a shareholder vote at the subsidiary level (Article 784(1)).
Merger (Cash as Consideration - Article 749(1)(ii)): Similarly, in an absorption-type merger, the surviving company can deliver cash to the shareholders of the dissolving (target) company instead of shares.
- Triangular Mergers (Sankaku Gappei): A common structure involves the acquirer setting up a wholly-owned acquisition subsidiary. This subsidiary then merges with the target company, with the target company surviving. The target company's shareholders (including minority shareholders) receive shares of the acquirer's ultimate parent company or, crucially for a squeeze-out, cash provided by the acquirer or its parent. The acquirer's subsidiary is dissolved in the process.

Key Requirement: These reorganizations (share exchange or merger) generally require a special resolution of the shareholders' meeting of the target company (and often the acquiring/surviving company). This means approval by at least two-thirds of the voting rights present at a meeting where shareholders holding a majority of exercisable votes are present.

2. Shares with Call Option on All Shares of a Class (Acquisition of All Shares of a Class Subject to Call - Zembu Shutoku Jōkō-tsuki Shurui Kabushiki) (Article 171-173)

This method involves a company amending its articles of incorporation to convert all its common shares (or a specific class of shares targeted for squeeze-out) into a new class of shares that are callable by the company (i.e., the company has the right to acquire them) upon a resolution of the shareholders' meeting.

Procedure:
1. Amendment of Articles of Incorporation: The company must first amend its articles of incorporation by a special resolution of the shareholders' meeting to create this new class of callable shares and to provide that all existing shares will be converted into this class. This is a significant step and itself requires shareholder approval.
2. Shareholders' Meeting Resolution to Acquire: Subsequently, another special resolution of the shareholders' meeting is required to approve the company's acquisition of all shares of this callable class (Article 171, paragraph 1). The resolution must specify the consideration to be delivered (which would be cash in a squeeze-out scenario) and other terms.
Consideration: The consideration paid to shareholders upon the company calling these shares is typically cash. To achieve a squeeze-out of minority shareholders using this method when the controlling shareholder also holds common stock, the controlling shareholder might receive a different class of non-callable shares as consideration, while minority shareholders receive cash.

3. Consolidation of Shares (Kabushiki Heigō) (Articles 180-182-6)

A share consolidation (reverse stock split) can be used to squeeze out minority shareholders by consolidating shares to such an extent that minority shareholders are left with fractional shares, which are then typically cashed out.

Procedure:
1. Shareholders' Meeting Resolution: A special resolution of the shareholders' meeting is required to approve the share consolidation (Article 180, paragraph 2; Article 309, paragraph 2, item 4). The resolution must specify the consolidation ratio (e.g., consolidating 1,000,000 shares into 1 share), the effective date, and if there are different classes of shares, the details for each class.
2. Treatment of Fractional Shares: If the consolidation ratio results in shareholders holding fractions of a share, the company must sell the aggregate of these fractional shares (or purchase them itself) and distribute the net proceeds to the former fractional shareholders in proportion to their fractions (Article 235, applied mutatis mutandis by Article 182-3).
Squeeze-Out Effect: By setting a very high consolidation ratio, the controlling shareholder can ensure that all minority shareholders end up with only fractional shares, which are then compulsorily cashed out, leaving the controlling shareholder as the sole (or virtually sole) shareholder.

4. Demand for Sale of Shares, etc. by a Special Controlling Shareholder (Tokubetsu Shihai Kabunushi ni yoru Kabushiki-tō Urawatashi Seikyū) (Articles 179-179-10)

This is perhaps the most direct squeeze-out mechanism, introduced to provide a more streamlined process for majority shareholders who already hold a very substantial stake.

Definition of "Special Controlling Shareholder": A shareholder (or a group acting in concert) who holds 90% or more of the total voting rights of the company.
Procedure:
1. Notification to the Company: The special controlling shareholder notifies the target company of its intention to demand the sale of all shares held by the remaining minority shareholders (and all outstanding share options, if any).
2. Board Approval by Target Company: The target company's board of directors must approve this demand (Article 179-3, paragraph 1). If the board disapproves, or if the special controlling shareholder is the company itself (e.g., through treasury stock), this method cannot be used in its simplest form.
3. Notification to Minority Shareholders: The target company then notifies the minority shareholders that the demand has been made and approved, specifying the price offered for their shares and other terms.
4. Acquisition: The special controlling shareholder acquires the minority shares on a specified acquisition date, even without the individual consent of the minority shareholders.
Price: The price offered must be determined by the special controlling shareholder, but minority shareholders have rights to challenge it (see below).
Advantage: This method does not require a shareholders' meeting resolution of the target company if the target's board approves, making it potentially faster and simpler than other methods if the 90% threshold is met.

Protection of Minority Shareholders in Squeeze-Out Transactions

Given the coercive nature of squeeze-out transactions, the Japanese Companies Act incorporates several important protections for minority shareholders to ensure they are treated fairly, primarily concerning the price they receive for their shares.

In many statutory reorganizations that can be used for squeeze-outs (such as cash-out mergers, cash-out share exchanges, acquisition of all shares of a class subject to call, and share consolidations), dissenting minority shareholders are granted appraisal rights.

This allows them to demand that the company purchase their shares at a "fair price."
If the shareholder and the company cannot agree on a fair price, either party can petition a court to determine the price. The court will consider all relevant factors, including the company's asset value, earnings potential, market price (if any), and the terms of the transaction.

When a share consolidation results in fractional shares that are cashed out, shareholders who are dissatisfied with the amount of cash they receive (which is based on the sale or company purchase of the aggregated fractions) can petition a court to determine a fair price for their fractional interests (Article 182-5, applying Article 235, paragraph 2 and Article 234, paragraphs 2 to 5).

3. Price Determination Petition in a Demand by a Special Controlling Shareholder

Minority shareholders who are subject to a squeeze-out by a special controlling shareholder (the 90%+ holder) and are dissatisfied with the price offered can, before the acquisition date, petition a court to determine a fair price for their shares (Article 179-8). The acquisition proceeds at the price initially offered, but if the court later determines a higher fair price, the special controlling shareholder must pay the difference.

4. Injunctions (Sashitome Seikyūken)

Shareholders may be able to seek a court injunction to stop a squeeze-out transaction if:

The transaction violates laws or the articles of incorporation, and shareholders are likely to suffer a disadvantage (e.g., Article 784-2 for mergers, Article 171-3 for acquisition of all shares of a class subject to call, Article 182-2 for share consolidations).
In the case of a demand by a special controlling shareholder, if the price is grossly improper in light of the company's asset condition or if there are other significant violations of law (Article 179-7).
Successfully obtaining an injunction is often challenging, as courts tend to defer to business judgment unless there are clear procedural violations or a grossly unfair price.

5. Lawsuits to Nullify the Transaction (Mukō no Uttae)

After a squeeze-out transaction has become effective, shareholders (or other interested parties) may, within a certain period (typically six months for reorganizations like mergers or share exchanges – Article 828), file a lawsuit to declare the transaction void if there were serious procedural or substantive defects. However, the grounds for nullification are generally quite limited.

Judicial Scrutiny of Fairness and Price

While Japanese courts traditionally showed a degree of deference to prices determined through arm's-length negotiations or by financial advisors, there has been an increasing trend towards more rigorous judicial scrutiny of the "fairness" of the price offered to minority shareholders in squeeze-out transactions, particularly in management buyouts (MBOs) or transactions involving controlling shareholders with potential conflicts of interest. Courts will examine not only the valuation methodology but also the process by which the price was determined, including the independence of any special committees formed to negotiate on behalf of minority shareholders and the adequacy of information disclosure. A landmark Supreme Court decision on July 1, 2016 (Minshu Vol. 70, No. 6, p. 1621, often referred to as the "Jupiter Telecom" case) emphasized the importance of ensuring procedural fairness to secure a fair price in MBOs. This involves considerations such as the establishment of an independent committee, obtaining fairness opinions from independent valuation experts, and ensuring a "market check" or measures to prevent undue pressure on minority shareholders.

Conflicts of Interest and Ensuring Fairness

Squeeze-out transactions inherently involve a conflict of interest between the controlling shareholder (who wants to acquire shares at the lowest possible price) and the minority shareholders (who want the highest possible price). To address this, especially in MBOs or transactions initiated by a controlling parent company:

Establishment of Special Committees: It is increasingly common (and often expected by courts and regulators) for the board of the target company to establish a special committee composed of independent outside directors to negotiate the terms of the squeeze-out with the controlling shareholder and to make a recommendation to minority shareholders.
Independent Financial Advisors and Fairness Opinions: Both the special committee and the controlling shareholder often retain independent financial advisors to provide valuation analyses and fairness opinions.
Transparency and Disclosure: Adequate disclosure of the terms of the transaction, the reasons for it, the valuation methodologies used, and any conflicts of interest is crucial.

Conclusion

Squeezing out minority shareholders is a complex corporate maneuver in Japan, permissible through several statutory mechanisms under the Companies Act. While these tools provide controlling shareholders with pathways to achieve 100% ownership for legitimate business reasons, they are accompanied by significant legal protections for minority shareholders, primarily centered on ensuring they receive a fair price for their shares. Appraisal rights, judicial price determination petitions, and the potential for injunctions serve as key safeguards. Furthermore, Japanese courts and evolving governance practices increasingly emphasize the need for procedural fairness, particularly through the use of independent committees and robust valuation processes, to mitigate conflicts of interest inherent in squeeze-out transactions. For U.S. companies involved in acquiring or managing Japanese entities, a thorough understanding of these squeeze-out mechanisms and the associated shareholder protection measures is vital for structuring transactions effectively and minimizing legal risks.