Introduction
Outline of share delivery
Background
Limitation of share delivery
Comment
Following the amendment to the Companies Act on 11 December 2019 that entered into force on 1 March 2021, share delivery became a new option for M&A transactions in Japan. This article explains its pros and cons.
By using share delivery, Company P can make Company S its subsidiary by delivering its own shares to shareholders of Company S, even when it does not plan to make Company S its wholly-owned subsidiary.
Figure 1: share delivery flowchart
Prior to the Companies Act amendment entering into force, there were only two ways for a stock company to make another company its subsidiary by using the stock company's own shares as consideration. The first option was capital contribution in kind and second option was share exchange. However, these options present the following disadvantages.
Disadvantages of capital contribution in kind
One of the disadvantages of capital contribution in kind is that a stock company is generally required under the Companies Act to request a court to appoint an inspector in order to avoid overestimation of non-cash assets, etc, which are used as consideration for the shares (hereafter simply referred to as assets, etc, contributed in kind).
Another disadvantage is that both subscribers of shares and directors, etc, of a stock company involved in share-related decisions typically must pay the stock company the difference between the actual value of the assets, etc, contributed in kind and their estimated value as determined by the stock company. However, this is only necessary if the actual value of the assets, etc, contributed in kind, which the subscriber provided in order to become a shareholder of the stock company, is substantially less than the estimated value of the assets, etc, contributed in kind.
Disadvantages of share exchange
Share exchange means any exchange of shares whereby a stock company causes all of its issued shares to be acquired by another stock company or limited liability company (LLP). Therefore, this option can be used only if a stock company wishes to make another stock company or LLP its wholly-owned parent company. Furthermore, share exchange cannot be used if the acquiring company or target company is not Japanese.
The Act on Strengthening Industrial Competitiveness (the Act) stipulates some exceptions, and companies who satisfy the requirements under the Act do not have to request a court to appoint an inspector. Furthermore, both subscribers of shares and directors, etc, are not subjected to appointing an inspector (as detailed above). Even so, the complying companies must satisfy additional requirements under the Act, such as obtaining an approval of corporate restructuring plan from the Japanese authority.
Introducing share delivery
Share delivery was introduced in light of the foregoing challenges. Initially, it was intended to cover cases in which Company S would be a non-Japanese company with an organisational model that mirrors that of a Japanese stock company under the Companies Act. However, all non-Japanese companies were later excluded in order to make the share delivery requirement more objective and formal. Share delivery does not present the type of disadvantages that arise from capital contribution in kind and it can be used even when Company P does not plan to make Company S its wholly-owned subsidiary.
In order to use share delivery, Company P must be a Japanese stock company. If Company P is a non-Japanese company that wishes to use share delivery, such a company must first establish a Japanese subsidiary. Share delivery also cannot be used if a company is not a stock company (eg, an LLP).
Share delivery can be used only when Company P holds no more than 50% of total issued shares in Company S and will have more than 50% of total issued shares in Company S after share delivery. In other words, share delivery cannot be used if:
- Company P already holds more than 50% of total issued shares in Company S before share delivery; or
- Company P holds no more than 50% of total issued shares in Company S and will only have no more than 50% of total issued shares in Company S even after share delivery.
In order to use share delivery, Company P is required to take the following procedures under the Companies Act:
- Company P must prepare a share delivery plan. The plan must include the following information:
- trade name and address of Company S;
- minimum number of shares in Company S which will be acquired by Company P through share delivery;
- consideration (shares in Company P must be included in at least a part of consideration);
- description, number and price of the stock option and/or bonds if Company P wishes to acquire a stock option of Company S and/or bonds of Company S with stock acquisition rights;
- deadline of application for the transfer of shares in Company S to be made through share delivery; and
- effective date of share delivery.
- Company P must obtain approval by special resolution(1) of its shareholders at its shareholders meeting, and opposing shareholders of Company P can generally request Company P to purchase their shares in Company P.
- If Company P uses not only its shares but also a certain amount of cash, etc, as consideration for share delivery, a creditor protection procedure is required.
Regarding the shareholders of Company S, the Companies Act does not stipulate any specific procedure for share delivery as outlined above. Each shareholder of Company S will individually decide whether it will file an application for share delivery with Company P. Note that this does not mean that shareholders of Company S are not required to take any internal procedure for the application. For example, if a shareholder of Company S is a stock company with a board of directors and transfers a large number of shares in Company S through share delivery, such a transaction may be deemed as a disposal of important assets, which would require prior approval from the shareholder's board of directors.
The amendment to the Companies Act introduced share delivery as a new option in M&A transactions in Japan and became available from 1 March 2021. It is an option that companies considering M&A transactions in Japan should take note of when forming their M&A transaction schemes.
For further information on this topic please contact Katsuki Matsuura at City-Yuwa Partnersby telephone (+81 3 6212 5500) or email ([email protected]). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.
Endnotes
(1) Special resolution requires the attendance of at least one-half (or more where a higher proportion is required under the articles of incorporation) of the shareholders who are entitled to exercise their votes at a shareholders' meeting and votes of at least two-thirds (or more in the case where a higher proportion is required under the articles of incorporation) of the total votes at the same meeting.