The Reorganization Plan under Japan's Corporate Reorganization Act: M&A and Restructuring Strategies?

Japan's Corporate Reorganization Act (会社更生法 - Kaisha Kōsei Hō) provides the nation's most intensive and comprehensive court-supervised framework for the rehabilitation of large, financially distressed stock companies (株式会社 - kabushiki kaisha). At the heart of this complex process lies the Reorganization Plan (更生計画 - kōsei keikaku). This is not merely a debt repayment schedule but a multifaceted blueprint for the company's revival, often involving profound operational changes, financial restructuring, and significant corporate reorganization measures, including mergers, acquisitions (M&A), and demergers. This article examines the critical aspects of formulating, proposing, gaining stakeholder approval for, and obtaining court confirmation of a Reorganization Plan, with a particular focus on its capacity to facilitate sophisticated M&A and corporate restructuring strategies.

The Central Role and Objectives of the Reorganization Plan

The Reorganization Plan is the culminating document of the Corporate Reorganization proceedings. It represents the legally binding agreement that will govern the company's future, dictating how the rights of its various stakeholders—including secured creditors, unsecured creditors, and shareholders—will be altered, and how the company itself will be reshaped to achieve sustainable viability. Its objectives are twofold: to ensure the equitable treatment of claims and interests according to their legal priorities, and to implement a strategy that enables the company to continue as a going concern, thereby preserving enterprise value, employment, and often, systemically important business functions. The trustee appointed by the court typically takes the lead in formulating this plan, often after extensive investigations, negotiations with stakeholders, and potentially, the search for a financial sponsor or strategic partner.

Formulation and Key Contents of the Reorganization Plan (更生計画の条項 - Kōsei Keikaku no Jōkō)

The Corporate Reorganization Act outlines both mandatory and permissible provisions for a Reorganization Plan, offering considerable flexibility to tailor solutions to the specific circumstances of the distressed company.

A. Mandatory Provisions (Corporate Reorganization Act, Art. 167(1))
Every Reorganization Plan must, at a minimum, address the following:

1. Modification of Rights of Stakeholders: The plan must clearly define how the rights of reorganization security interest holders (更生担保権者 - kōsei tampo kensha), general reorganization creditors (更生債権者 - kōsei saikensha), and shareholders (株主 - kabunushi) will be modified. This is the core financial restructuring component and can include measures such as principal reductions (haircuts), extensions of repayment terms, adjustments to interest rates, or conversion of debt to equity.
2. Payment of Administrative Expenses and Other Priority Claims: The plan must ensure full payment of administrative expense claims (共益債権 - kyōeki saiken – costs incurred during the reorganization process itself) and other claims that have statutory priority (e.g., certain tax claims, certain labor claims). These claims are generally not subject to impairment under the plan.
3. Company Management: Provisions concerning the company's directors, statutory auditors, executive officers, or (if the plan involves dissolution) liquidators must be included. This often involves the appointment of new management to lead the reorganized entity.
4. Source of Funds for Plan Payments: The plan must specify how the funds required to make payments to creditors and implement other aspects of the reorganization will be procured. Sources can include cash flow from ongoing operations, proceeds from the sale of assets, new financing (e.g., exit financing), or capital contributions from a financial sponsor.
5. Use of Surplus Profits: If the reorganized company is projected to generate profits exceeding what is needed for scheduled plan payments, the plan must outline how such surplus income will be utilized (e.g., for reinvestment in the business, accelerated debt repayment, or distributions to new equity holders).

B. Permissible Provisions (Corporate Reorganization Act, Art. 167(2))
Beyond the mandatory elements, the plan can flexibly incorporate a wide range of other provisions deemed necessary or beneficial for the company's reorganization. This flexibility is key to its utility in complex situations.

C. Principles Governing Modification of Rights (Corporate Reorganization Act, Art. 168)
The modification of stakeholder rights within the plan is governed by strict principles of fairness and equity:

• Fair and Equitable Treatment Among Different Classes (公正かつ衡平な差 - Kōsei katsu Kōhei na Sa) (Art. 168(3)): The plan must establish fair and equitable distinctions in the treatment afforded to different classes of stakeholders. These classes typically include, in descending order of priority: reorganization security interest holders, reorganization creditors with statutory priority, general unsecured reorganization creditors, holders of contractually subordinated reorganization claims (約定劣後更生債権 - yakujō retsugo kōsei saiken), preferred shareholders (if any), and common shareholders. The treatment must reflect their respective legal priorities. This is generally interpreted as a "relative priority" approach, meaning that a higher-ranking class must receive more favorable treatment than a lower-ranking class, but it does not strictly require that higher-ranking classes be paid in full before any value is distributed to lower-ranking classes (unlike a strict "absolute priority rule" sometimes seen in U.S. bankruptcy law). For example, it might be permissible for general unsecured creditors to receive a partial recovery even if secured creditors are not paid 100% of their claim, provided the secured creditors receive the full value of their collateral and their overall treatment is superior. (A Fukuoka High Court decision of December 21, 1981, addressed the less favorable treatment of claims held by a parent company as being consistent with fairness principles in a specific context).
• Equality Within the Same Class (Art. 168(1)): Within any single class of claims or interests, all stakeholders must be treated equally (実質的平等原則 - jisshitsu-teki byōdō gensoku).

D. Maximum Repayment Period (Corporate Reorganization Act, Art. 168(5))
If the plan provides for the repayment of monetary debt in installments, the repayment period generally cannot exceed 15 years from the date the plan confirmation order becomes final and binding. (This was a reduction from a 20-year limit under the pre-2003 law). If the security for a particular reorganization security interest has a shorter useful economic life, that shorter period applies as the maximum repayment term for that specific secured claim.

• This 15-year limitation does not apply if the plan involves the issuance of new corporate bonds (社債 - shasai) to satisfy claims (Art. 168(6)). This allows for the possibility of longer-term bond instruments, including even perpetual bonds, as part of the financial restructuring.

E. Treatment of Tax Claims (租税債権 - Sozei Saiken) (Corporate Reorganization Act, Art. 169)
The plan must also address tax claims that are treated as reorganization claims (as distinct from those tax claims that may qualify as higher-priority administrative expenses). While tax claims can be modified under the plan, substantial modifications (such as significant reductions in principal) generally require the consent of the relevant tax authorities. However, the Act allows the plan to provide for certain measures, such as a grace period for payment (up to three years) or a reduction or waiver of delinquency taxes and interest that accrued within one year of the commencement of the proceedings, by simply hearing the opinion of the tax authority rather than requiring their explicit consent.

F. Extensive Corporate Restructuring Tools (Arts. 174-183-2): M&A and Strategic Reshaping
A hallmark and significant strength of the Corporate Reorganization Act is the extensive array of tools it provides for implementing profound corporate changes directly through the Reorganization Plan. This often allows the company to undertake complex M&A activities and other strategic transformations with greater efficiency and legal certainty than might be possible under standard corporate law procedures, as the confirmed plan can override certain standard Companies Act requirements (particularly regarding shareholder approvals).
The plan can authorize and execute:

• Acquisition by the Company of its Own Shares (Art. 174-2): Useful for capital restructuring or eliminating certain shareholder interests.
• Issuance of New Shares (募集株式の発行 - Boshū Kabushiki no Hakkō) (Art. 175): This is a fundamental tool for raising fresh capital from new investors or financial sponsors, or for implementing debt-for-equity swaps where creditors convert their claims into ownership stakes in the reorganized company.
• Issuance of Share Options (募集新株予約権の発行 - Boshū Shinkabu Yoyakuken no Hakkō) (Art. 176): Can be used to incentivize new management or key employees.
• Issuance of Corporate Bonds (募集社債の発行 - Boshū Shasai no Hakkō) (Art. 177): For refinancing existing debt or raising new long-term capital.
• Debt-for-Equity Swaps (DES) (Art. 177-2): The Act explicitly provides for DES, a common technique where creditors agree to exchange their debt claims for equity in the reorganized company.
• Dissolution (解散 - Kaisan) (Art. 178): Although the primary goal is usually rehabilitation as a going concern, a plan could, in theory, provide for a structured dissolution if that is determined to maximize value for stakeholders.
• Change of Corporate Form (e.g., from a stock company to a limited liability company - 持分会社への組織変更, mochibun gaisha e no soshiki henkō) (Art. 179).
• Mergers (合併 - Gappei) (Arts. 180, 181): The reorganizing company can merge with another entity (e.g., a stronger company acting as a sponsor) as stipulated in the plan.
• Company Splits/Demergers (会社分割 - Kaisha Bunkatsu) (Arts. 182, 182-2): The plan can provide for the company to be split, hiving off certain business units into separate entities or transferring them to other companies.
• Share Exchanges (株式交換 - Kabushiki Kōkan) (Art. 182-3) and Share Transfers (株式移転 - Kabushiki Iten) (Art. 182-4): These tools can be used to create new holding company structures or to facilitate acquisitions.
• Establishment of a New Company (新会社設立 - Shin Kaisha Setsuritsu) (Art. 183): The plan can involve transferring all or part of the debtor's business and assets to a newly established "clean" company, often funded by a sponsor, leaving behind unwanted liabilities in the old company shell.

A common and powerful strategy employed in many large Japanese corporate reorganizations involves a 100% capital reduction (無償減資 - mushō genshi) to wipe out the equity of existing shareholders (particularly if the company is deeply insolvent and their shares have no economic value), immediately followed by the issuance of new shares to a financial sponsor providing essential new funds, or to key creditors as part of a debt-for-equity swap. This effectively results in a change of ownership and a recapitalized company. The courts have upheld such drastic measures as being consistent with the principles of fairness and equity when the underlying financial conditions justify them (e.g., Tokyo High Court, August 24, 1979, affirmed a plan involving such measures).

Proposal of the Reorganization Plan (更生計画案の提出・決議 - Kōsei Keikakuan no Teishutsu/Ketsugi)

The process for bringing a plan forward involves:

• Who Can Propose a Plan (Corporate Reorganization Act, Art. 184):
  • The Reorganization Trustee: Has the primary obligation to prepare and submit a proposed Reorganization Plan to the court (Art. 184(1)). The trustee's plan is usually the central proposal around which discussions revolve.
  • Other Stakeholders: The debtor company itself (acting through any remaining corporate capacity or new management if authority has been partially restored), creditors who have filed reorganization claims or reorganization security interests, and shareholders who have filed their shareholdings also have the right to submit their own competing plans to the court (Art. 184(2)).
• Timing for Submission (Corporate Reorganization Act, Art. 184(3)):
  The court sets a deadline for the submission of any Reorganization Plan(s). This deadline must be within one year from the date of the order commencing the Corporate Reorganization proceedings. The court can grant extensions to this deadline if justified. In practice, for example, the Tokyo District Court often aims for plan submission approximately 9 months after the commencement of proceedings, although in "DIP-type" Corporate Reorganization cases (where incumbent management acts as trustee), the timeline may be accelerated, potentially to around 4 months.
• Liquidating Reorganization Plans (清算的更生計画 - Seisan-teki Kōsei Keikaku) (Corporate Reorganization Act, Art. 185):
  If, during the proceedings, it becomes evident that a reorganization plan based on the continuation of the company's existing business is not feasible or achievable, the court can authorize the trustee to prepare and submit a "liquidating reorganization plan." This type of plan would focus on an orderly winding-down of the company's affairs and the liquidation of its assets, potentially through a structured sale of the entire business as a going concern to an acquirer who might then integrate or liquidate it. Such plans are subject to specific voting requirements (typically requiring higher creditor approval thresholds) and must still ensure that creditors receive no less than they would in a straight bankruptcy proceeding (the liquidation value guarantee).
• No Explicit "Pre-Packaged" Plan Filing Mechanism: Unlike the Civil Rehabilitation Act, the Corporate Reorganization Act does not contain explicit provisions for the submission of a fully pre-negotiated or "pre-packaged" Reorganization Plan concurrently with the initial petition to commence proceedings. The general expectation is that the plan will be developed by the trustee after the commencement of proceedings and following their detailed investigation of the company's affairs. However, significant pre-petition groundwork and negotiations with key stakeholders, including potential sponsors, are common in practice, and these can heavily inform and accelerate the trustee's subsequent plan formulation.

Stakeholder Voting on the Reorganization Plan

Once a Reorganization Plan (or competing plans) has been submitted to the court and deemed ready for consideration, it must be put to a vote by the various classes of affected stakeholders.

• Classification of Claims and Interests for Voting (組分け - Kumiwake) (Corporate Reorganization Act, Art. 196(1)):
  A crucial feature of the voting process in Corporate Reorganization is the classification of claims and interests into distinct groups. Each class typically votes separately on the plan. The Act generally provides for the following classes:
  1. Holders of Reorganization Security Interests (secured creditors).
  2. Reorganization Creditors with Statutory Priority (e.g., certain tax or labor claims not treated as administrative expenses).
  3. General Unsecured Reorganization Creditors.
  4. Holders of Contractually Subordinated Reorganization Claims (if any).
  5. Preferred Shareholders (if the company has issued preferred stock).
  6. Common Shareholders.
     The court has the authority to further subdivide these statutory classes or, in some cases, to combine them if doing so is necessary to ensure that the rights and interests of genuinely distinct groups are fairly represented in the voting process (Art. 196(2)). For example, preferred reorganization creditors and general unsecured reorganization creditors are often grouped into a single voting class in practice.
• Methods of Voting (Corporate Reorganization Act, Art. 189(2)):
  Similar to Civil Rehabilitation, voting on the plan can occur:
  • At a formal meeting of stakeholders (関係人集会 - kankeinin shūkai) convened by the court.
  • By written or approved electronic ballots submitted by stakeholders within a period set by the court, without a physical meeting.
  • Through a combination of these methods, where stakeholders can vote by ballot in advance of or at a formal meeting. This combined approach is frequently used.
• Approval Requirements (Voting Thresholds) (Corporate Reorganization Act, Art. 196(5)):
  For a Reorganization Plan to be considered "approved," it must be accepted by the requisite majority in each voting class whose rights are impaired or affected by the plan. The specific voting thresholds vary by class:
  • Reorganization Creditors (both Preferred and General Unsecured classes): Requires the affirmative vote of creditors holding more than one-half (1/2) of the total amount of voting rights exercised in that class. (Unlike Civil Rehabilitation, there is no separate "majority in number of creditors" requirement for these classes in Corporate Reorganization).
  • Reorganization Security Interest Holders (Secured Creditors): The approval thresholds are higher, reflecting the stronger legal position of secured creditors:
    • For plans that only propose an extension of maturity (期限猶予 - kigen yūyo) for secured claims (without reducing principal or interest): consent from those holding at least two-thirds (2/3) of the total amount of voting rights exercised in that class.
    • For plans that involve a reduction of secured debt principal or interest, or other material modifications of secured rights: consent from those holding at least three-fourths (3/4) of the total amount of voting rights exercised in that class.
    • For "liquidating reorganization plans" (which involve the cessation of business and sale of assets): consent from those holding at least nine-tenths (9/10) of the total amount of voting rights exercised in that class.
  • Shareholders (Preferred and Common): Requires the affirmative vote of shareholders holding a majority of the total voting rights exercised in that class. (However, it is crucial to remember that if the court has determined that the company is hopelessly insolvent to the extent that the shareholders' equity has no economic value, those shareholders may not be entitled to vote on the plan at all, as per Article 166(2) of the Act).
• Adjournment of Meeting if Plan Not Approved (Corporate Reorganization Act, Art. 198):
  If a plan is not approved by a particular class at the initial voting session, the meeting for that class can be adjourned and voting continued to a later date if certain lesser approval thresholds are met (e.g., for general creditors or shareholders, if those in favor represent at least one-third of the voting rights exercised; for secured creditors, if those in favor represent at least one-half of the voting rights exercised). This allows for further negotiation and potential amendments to the plan to try to gain the necessary support.

Court Confirmation of the Reorganization Plan (更生計画の認可 - Kōsei Keikaku no Ninka)

Even if a Reorganization Plan is approved by all necessary classes of stakeholders, it does not become effective until it is formally confirmed by the court.

• Court Review for Confirmation (Corporate Reorganization Act, Art. 199):
  The court will thoroughly review the stakeholder-approved plan to ensure it meets all statutory requirements for confirmation.
• Grounds for Non-Confirmation (Corporate Reorganization Act, Art. 199(2)):
  The court must refuse to confirm the plan if any of the following grounds exist:
  1. The reorganization proceedings or the content of the plan materially violate the law.
  2. The plan is not feasible (i.e., there is no reasonable prospect that it can be successfully implemented).
  3. The stakeholder approval of the plan was obtained by fraudulent or other improper means.
  4. The plan is not fair and equitable (公正かつ衡平であること - kōsei katsu kōhei de aru koto): This is a fundamental test. The plan must treat different classes of claims and interests in a manner that is fair and equitable in light of their respective legal priorities (as discussed under plan content, generally reflecting a "relative priority" standard).
  5. The plan does not satisfy the "best interest of stakeholders" test (often referred to as the liquidation value guarantee): For any class of creditors or shareholders, the plan must provide them with treatment that offers a value at least equal to what they would be likely to receive if the company were liquidated under bankruptcy proceedings. If a class would fare better in a liquidation, the plan generally cannot be confirmed over their objection (unless "cram-down" provisions are successfully invoked).
• "Cram-Down" Provisions (権利保護条項 - Kenri Hogo Jōkō) (Corporate Reorganization Act, Art. 200):
  A very significant feature of the Corporate Reorganization Act is its "cram-down" mechanism. Even if one or more classes of creditors or shareholders dissent and vote against the Reorganization Plan, the court still has the authority to confirm the plan if certain stringent conditions are met. This power is crucial for overcoming potential holdouts by dissenting classes and preventing them from derailing an otherwise viable reorganization that is supported by other key stakeholders.
  To confirm a plan under cram-down, the court must find that the plan provides "fair and equitable protection" for the rights of the dissenting class(es).
  • For a dissenting class of secured creditors, this typically means ensuring that their liens continue on the collateral, or that they receive deferred cash payments totaling at least the present value of their secured claim, or that they are provided with the "indubitable equivalent" of their claim (e.g., through the sale of their collateral with proceeds paid to them, or by allowing them to credit-bid for their collateral) (Art. 200(1)(i)).
  • For a dissenting class of unsecured creditors or shareholders, this usually means they must receive or retain property under the plan with a value, as of the effective date of the plan, that is not less than what they would receive if the company were liquidated under bankruptcy (i.e., the liquidation value guarantee must be met for that class) (Art. 200(1)(ii)).
    The Reorganization Trustee can include such protective clauses in the plan from the outset if dissent from certain classes is anticipated, or the court can modify the plan to insert such clauses as part of the cram-down confirmation (Art. 200(2)).
• Effect of Confirmation Order (Corporate Reorganization Act, Arts. 204, 205):
  • The Reorganization Plan becomes legally effective and binding when the court's confirmation order becomes final and unappealable.
  • It is binding on the debtor company, all reorganization creditors, all reorganization security interest holders, and all shareholders, regardless of whether they individually voted in favor of the plan or even whether they filed a proof of claim or interest (Art. 205).
  • All pre-existing rights of these stakeholders are modified in accordance with the terms of the confirmed plan, and any claims or interests not provided for in the plan are generally extinguished or discharged (Art. 204). This comprehensive discharge is essential for providing the reorganized company with a "fresh start" financially. Unlike in Civil Rehabilitation, there are generally no exceptions for unfiled claims due to lack of fault; the onus is on stakeholders to participate.
  • However, the confirmed plan does not affect the rights of creditors against third-party guarantors or co-obligors of the company, or against those who provided security for the company's debts.

Implementation of the Reorganization Plan (更生計画の遂行 - Kōsei Keikaku no Suikō)

Once confirmed, the Reorganization Trustee is primarily responsible for overseeing and ensuring the implementation of the Reorganization Plan (Corporate Reorganization Act, Art. 209(1)). This involves:

• Making distributions to creditors and other stakeholders as stipulated in the plan.
• Managing the company's ongoing operations in line with the plan's objectives.
• Executing any corporate restructuring measures mandated by the plan, such as mergers, asset sales, demergers, changes to the company's capital structure, or the appointment of new management.
  As previously noted, the Corporate Reorganization Act provides that many of these significant corporate actions can be effected directly through the authority of the confirmed plan, often streamlining or bypassing standard Companies Act procedural requirements (Arts. 210-225).

The Corporate Reorganization proceedings typically remain open and under the trustee's supervision until the court is satisfied that the plan has been substantially performed or that its continued successful performance is reasonably assured. This can often take several years, reflecting the depth and complexity of the restructuring undertaken.

Conclusion

The Reorganization Plan under Japan's Corporate Reorganization Act is a powerful and uniquely flexible instrument designed to achieve the comprehensive turnaround of large, financially distressed stock companies. Its capacity to address the rights of all stakeholders—including secured creditors and shareholders—and to directly implement profound corporate and financial restructuring measures, particularly sophisticated M&A activities and fundamental changes to corporate structure, sets it apart as the preeminent tool for rehabilitating major enterprises in the Japanese legal system. The journey from financial distress to a confirmed Reorganization Plan is intricate and demanding, requiring expert leadership from the Reorganization Trustee, careful navigation of complex legal and financial issues, and the balancing of diverse stakeholder interests under the ultimate authority and supervision of the court. For any business involved with or observing major Japanese corporate restructurings, understanding the unique capabilities and detailed processes associated with the kōsei keikaku is essential.