Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Acquisitions and disposals of privately owned companies are often structured through a share acquisition, which is a straightforward sale and purchase of shares of a target company through a transaction between a seller and a buyer. In addition, a share exchange is a structure that may be used to acquire shares of a privately owned company, especially when there are multiple shareholders. A share exchange is a transaction between two companies whereby one company becomes the 100 per cent shareholder of the other company. Under the share exchange, shares of the acquired company are exchanged for the shares of the acquiring company, cash or any other assets.
Acquisitions and disposals of businesses or assets are conducted through a business acquisition or a corporate split. A business acquisition is a straightforward sale and purchase of the business of a company through a transaction between a seller and a buyer. A corporate split is a transaction whereby a company splits off a segment of its business. The split-off business can be transferred to a company to be newly formed as a result of a corporate split (incorporation-type split) or to an existing company (absorption-type split). In a corporate split, shares of the company to which the split business is transferred, cash or other assets are distributed to the transferring company that splits off the business.
There is nothing unique in the transaction process in Japan, which is typically as follows:
- the parties enter into a confidentiality agreement;
- the buyer conducts a due diligence investigation over the target company, or the business or assets to be transferred;
- the parties sometimes enter in to a non-binding or binding memorandum of understanding (MOU); and
- the parties negotiate and enter into a definitive agreement.
The time necessary for the processes of acquisition to be closed and completed varies depending on factors such as scale, complexity or structure; however, it usually takes three to six months for a share transfer to be completed, and if the structure used is a share exchange, business transfer or corporate split, the process usually takes an additional one to two months to be completed.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The most important law regulating and governing private acquisitions and disposals in Japan is the Company Law (Law No.86 of 2005, as amended).
The following laws and regulations are also important:
- the Commercial Registration Law (Law No. 125 of 1963, as amended);
- the Law Concerning Prohibition on Private Monopoly and Preservation of Fair Competition (Law No. 54 of 1947, as amended) (Anti-monopoly Law); and
- the Foreign Exchange and Foreign Trade Law (Law No. 228 of 1949, as amended) (FEFT Law).
Share exchanges and corporate splits are statutory arrangements provided for by the Company Law, which is part of the laws of Japan. Therefore, the agreements or other documents for those transactions are required to satisfy the relevant requirements under, and be governed by, the laws of Japan. Agreements for share acquisitions and business transfers may be governed by the laws of any jurisdiction selected by the parties; however, in most cases, the agreements for those transactions are also governed by the laws of Japan.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Buyers acquire full legal title to shares in a company or a business, or assets. The concept of ‘level of assurance’ does not exist in Japan.
If a company issues share certificates, the shares in such company are transferred by delivery of the share certificates representing the transferred shares. Shares of a company not issuing share certificates are transferred as agreed upon between the seller and the buyer.
In the case of a business acquisition, the business or assets are transferred as agreed between the seller and the buyer; however, a transfer of contracts and liabilities is, in principle, subject to the consent of the counterparties or creditors. In the case of a corporate split, the business or assets are transferred, in principle, by operation of law.
There is a difference between a legal and beneficial title: the holder of legal title owns the shares or the assets, and is registered as the owner thereof, while the holder of beneficial title enjoys financial and other benefits.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
In the case of a share acquisition, a shareholder’s consent is necessary to purchase the shares owned by such shareholder - that is, where there are multiple shareholders, the buyer cannot obtain all the shares unless all the shareholders agree to sell their own shares. However, where a small minority of shareholders refuse to sell their shares, the Company Law allows a shareholder holding 90 per cent or more of shares in a certain company (a target company) to squeeze out the minority shareholders by forcefully purchasing all shares held by such minority shareholders in the target company. This purchase of minority shareholders’ shares may be done with the board approval of the target company and notification to such minority shareholders. By using this system, the squeezing out of the minority shareholders is, at the shortest, completed within approximately 20 days.
In the case of a share exchange, the Company Law authorises the use of straightforward squeeze-outs of minority shareholders through cash-out share exchanges. This transaction generally requires both board approval and supermajority shareholders’ approval (two-thirds or more) of the companies concerned - the shareholders’ approval is not required at the target company if the acquiring company already owns 90 per cent or more of the target company and at the acquiring company, depending on the significance of the transaction. One important caveat is that such squeeze-out transactions are required to be implemented on fair and commercially reasonable terms, otherwise the transactions may be challenged by the minority shareholders through an attempt to cancel the required shareholders’ approval, etc.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
In the case of a business transfer, in principle, the parties may choose the assets and liabilities to be transferred, and any asset or liability can be excluded from the transaction. However, in general, to transfer contracts (including employment contracts) and liabilities, the consent of the counterparty and the creditors, respectively, is required to be obtained.
In the case of a corporate split, in principle, the parties may choose the assets and liabilities to be transferred, and any asset or liability can be excluded from the transaction. The contracts are transferred by operation of law without consent of the counterparties; however, if there is a provision in such contract prohibiting the transfer by corporate split, the party would breach such provision by making the transfer, and would be liable to the other party for the breach. The liabilities are also transferred by operation of law without the consent of the creditors; however, the parties are required to conduct certain creditors’ protection procedures. Under these creditors’ protection procedures, the creditors are entitled to submit objections to the corporate split. Further, employees who are primarily engaged in the transferred business, and whom the parties agreed would be transferred, are transferred by operation of law without their consent. However, employees who are primarily engaged in the transferred business but will not be transferred, and employees who are not primarily engaged in the transferred business but will be transferred, are entitled to certain opt-out rights concerning their non-transfer or transfer, respectively.Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
The Anti-monopoly Law generally prohibits acquisition of shares, acquisition of business or assets by corporate split, or acquisition of all or a substantial part of the seller’s business by business transfer, as a result of which competition in certain fields or trades is substantially restrained.
Business combinations resulting in a foreign investor holding shares of other privately held Japanese companies will generally require a filing with the relevant ministries through the Bank of Japan under the FEFT Law. This filing is made ex post facto in most cases. However, where the target company is engaged in a certain category of business that raises national security or other public interest concerns (eg, military, aerospace, fishery, agriculture), prior notification is required to be filed. Regarding protected business areas among such categories (eg, fishery, agriculture), the prior filing requirement functions as a de facto ban.
In addition, acquisitions of shares, a business or assets in heavily regulated industries are sometimes subject to approval by the relevant authorities. A typical example thereof is the acquisition by a bank of certain businesses, which requires the Financial Supervisory Agency’s approvals.
Other than the above, governmental agencies in Japan cannot influence or restrict the completion of business combinations. It should be noted, however, that in many cases, business combinations require commercial registration with the competent legal affairs bureau. The parties wishing to implement atypical business combinations may encounter objections from the officials of the legal affairs bureau when registering such atypical business combinations, and should therefore consult with the legal affairs bureau in advance.
Are any other third-party consents commonly required?
In cases where a parent company sells its subsidiary via a share acquisition, and the shares of such subsidiary are a substantial part of its assets (ie, the book value of the shares of the subsidiary to be sold exceeds one-fifth of the total assets of the parent company) such share acquisitions are required to be approved by a supermajority resolution of shareholders (which is the resolution adopted by an affirmative vote of at least two-thirds of the votes at a general meeting of shareholders, where the shareholders present at such meeting hold at least a majority (which resolution requirements and quorum requirements can be modified by the articles of incorporation to the extent permitted under the Company Law) of the relevant voting rights). For other cases, no such shareholder approval rights exist in the case of share acquisitions, except for some closed companies where the articles of incorporation of such companies so provide. However, as a matter of course, shareholders have a choice not to sell their own shares.
Share exchanges, corporate splits and business transfers (however, regarding a transferor, only in the case of a transfer of all or a substantial part of its business to another company, or, regarding a transferee, acceptance of all the business of another company) is required to be approved by a super majority resolution of shareholders. In small share exchanges and corporate splits below certain threshold requirements - as well as for shareholders’ approval at a subsidiary in any of those business combinations, implemented with its 90 per cent or more parent company - shareholders’ approval is not required.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?Anti-monopoly Law
Under the Anti-monopoly Law, subject to certain threshold requirements and exceptions, if a company increases its shareholding in another Japanese or foreign company with a certain amount of sales in Japan, and the resulting shareholding ratio exceeds ownership thresholds of 20 per cent or 50 per cent, such company is required to file a prior notification with the Japan Fair Trade Commission, after which there is a 30-day waiting period.
Further, under the Anti-monopoly Law, subject to certain threshold requirements and exceptions, a company accepting a business transfer and a company implementing an absorption type corporate split are required to file a prior notification of such transaction with the Japan Fair Trade Commission, after which there is a 30-day waiting period.FEFT Law
Under the FEFT Law, a foreign investor may be required to file ex post facto reports with the competent ministers through the Bank of Japan when it acquires shares of a Japanese company.Stamp duty and other governmental fees
No stamp duty or other governmental fee is imposed on a share acquisition agreement or share exchange agreement. A stamp duty of ¥40,000 is imposed on a corporate split agreement. Stamp duty on a business transfer agreement varies depending on the price of the business being transferred, with the maximum amount being ¥600,000. A business combination often involves amendment of the company’s commercial registration, which is subject to various registration taxes in amounts depending on the matters attached.