Japanese M&A for Foreign Investors

Transcription

1 177 Japanese M&A for Foreign Investors by MICHI YAMAGAMI & YASUTAKA EMOTO* 1 ABSTRACT For foreign investors wishing to invest in Japan, share acquisition presents one of the simplest and most common means of doing so. There are, however, many sub-categories of M&A to consider, including mergers, corporate splits, statutory share exchanges, statutory share transfers, business transfers and share acquisitions by way of third party allotment. Each of these investment structures can be used independently or in combination with other structures, depending on the objectives of the parties to the transaction. This article sets forth a basic outline of the various M&A structures available to foreign investors wishing to invest in Japan, as well as the key points to consider in developing an efficient investment strategy. I. TYPES OF M&A IN JAPAN a) M&A Structures under the Companies Act 1. Merger A merger is a transaction contemplated under the Companies Act of Japan (Act No. 86 of 2005, as amended; the Companies Act), wherein a company s rights and obligations (including its assets, liabilities, contracts and employees) are comprehensively succeeded to by another company. The Companies Act contemplates two types of merger: (i) a consolidation-type merger, in which two existing companies merge into a newly established company; and (ii) an absorption-type merger, in which an existing company (the so-called dissolving company) merges into another existing company (the so-called surviving company). However, due to the complex procedures, tax and accounting considerations and other factors involved, consolidation-type merger structures are rarely used and absorption-type mergers are generally preferred. In absorption-type mergers, licenses and permits may be succeeded to by the surviving company, depending on the relevant laws and regulations governing such licenses and permits. Due to the considerable time and costs involved in obtaining new licenses and permits, the company with the necessary business licenses and permits tends to be the surviving company in absorption-type mergers. * Michi Yamagami is a Partner at Anderson Mori & Tomotsune. He specialises in corporate law and cross-border (inbound and outbound) M&A transactions. Yasutaka Emoto is a partner at Anderson Mori & Tomotsune. He is principally involved in public and private M&A as well as cross-border (inbound and outbound) M&A transactions, including those involving investments by Japanese companies into Turkey TURKISH COMMERCIAL LAW REVIEW, Vol. 2, No. 2, Winter 2016

2 178 The Turkish Commercial Law Review Volume 2 Issue 2 Winter Corporate Split Overview Types of Corporate Split A corporate split is a transaction stipulated in the Companies Act, wherein all or part of the rights and obligations (including the assets, liabilities, contracts and employees) in respect of a certain business division of a company are comprehensively transferred without the need to undergo the relevant procedures for the individual transfer of each of the rights and obligations, for example by procuring the consent of the counterparties to the contracts to be transferred. There are two types of corporate split under the Companies Act: (i) an incorporation-type corporate split, wherein an existing company transfers a certain division of its business to a newly established company; and (ii) an absorption-type corporate split, wherein an existing company (the so-called transferor company) transfers a certain division of its business to another existing company (the so-called transferee company). An incorporation-type corporate split is often used by companies to spin off business divisions into new subsidiaries. Scope of Transfer The scope of the rights and obligations transferred in a corporate split transaction can be set forth in a corporate split plan or corporate split agreement. All employees who are mainly engaged in the business to be transferred will be transferred together with the business if such employee transfer is specified in the corporate split plan or corporate split agreement. In order to exclude all or some of the employees who are mainly engaged in the transferred business from the proposed transfer, consultation with such employees is necessary to provide them with the opportunity to object to such exclusion. Typically, such objecting employees will be transferred together with the business if their objection is unsuccessful. Whether a transferee company can succeed to the licenses and permits of the transferor company depends on the relevant laws and regulations governing such licenses and permits. Protection of Creditors If the transferor company undertakes a corporate split in the knowledge that the corporate split would be prejudicial to a creditor whose claims against the transferor company are not transferred to the transferee company by virtue of the corporate split, such creditor has the right to demand the satisfaction of its claims from the transferee company to the extent of the value of the assets which are the subject of the transfer. 3. Statutory Share Exchange Overview Comparison with Share Purchase A statutory share exchange (kabushiki kokan) is another transaction contemplated under the Companies Act, and involves a company (the contemplated parent) acquiring all the shares in a target company (the contemplated subsidiary) with the consent of at least two-thirds of the target company s shareholders. The same result can also be achieved if all the shareholders of the target company agree to the transfer of their

3 Japanese M&A for Foreign Investors 179 shares in the target company to the acquiring company, although unanimous consent by the target company s shareholders would obviously pose a higher hurdle than the two-thirds consent requirement under a statutory share exchange. Additionally, even if such unanimous consent is obtained, the share transfer could trigger tender offer rules under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended; the FIEA) if the target company is publicly listed. A statutory share exchange, on the other hand, will not trigger such tender offer rules and thus is more commonly encountered when acquiring a target company with a large number of shareholders. 4. Statutory Share Transfer Overview Comparison with Merger A statutory share transfer (kabushiki iten), as contemplated under the Companies Act, is a transaction wherein an existing company becomes a wholly owned subsidiary (the contemplated subsidiary) of a newly established company (the new company), with all the erstwhile shareholders of the contemplated subsidiary becoming shareholders of the new company. A statutory share transfer is useful for the consolidation of two or more companies through the establishment of a holding company which then becomes the 100% parent of two or more companies in a so-called joint share transfer transaction. The consolidation of two or more companies is also achievable by way of a merger, but a statutory share transfer differs from a merger in that, among other things, each of the parties to the consolidation remains an independent entity after the consolidation. This feature enables the parties to consolidate gradually and moderately, and also respects the individual culture, employment terms and other characteristics of each of the parties. 5. Procedures for M&A Transactions under the Companies Act Procedures Overview Mergers, corporate splits, statutory share exchanges and statutory share transfers generally involve: (i) the passing of a resolution by the respective boards of the relevant parties to approve the relevant transaction; (ii) the execution of a transaction agreement (in the case of absorption-type mergers, absorption-type corporate splits and statutory share exchanges) or a transaction plan (in the case of consolidation-type mergers, incorporationtype corporate splits and statutory share transfers) between the parties; and (iii) the passing of a special shareholders resolution (that is, a resolution approved by no less than two-thirds of shareholders with voting rights present at the relevant shareholders meeting, where the quorum requirement of a majority of shareholders with voting rights has been satisfied) by the respective parties to the transaction. Listed companies in Japan generally take at least two months to complete a shareholders meeting. Accordingly, scheduling is an important consideration in M&A

4 180 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 transactions involving listed companies. In general, however, no shareholders resolution is required to be passed: (a) (in case of a merger) by the surviving company, if the consideration payable to the shareholders of the dissolving company amounts to 20% or less of the total asset value of the surviving company; (b) (in case of a corporate split) (i) by the transferor company if the book value of the assets to be transferred is 20% or less of the total asset value of the transferor company, and (ii) by the transferee company if the consideration payable to the transferor company amounts to 20% or less of the total asset value of the transferee company; and (c) (in case of a statutory share exchange) by the contemplated parent if the book value of the shares of the contemplated subsidiary is 20% or less of the total asset value of the contemplated parent. Additionally, in mergers, corporate splits and statutory share exchanges between a parent company and a subsidiary of which the parent company holds 90% or more of the voting rights, no shareholders resolution approving the transaction is required to be passed by the subsidiary. In case of a merger, all dissolving companies will automatically dissolve upon completion of the merger, and no liquidation procedure is necessary. Consideration In absorption-type mergers, absorption-type corporate splits and statutory share exchanges, the consideration payable to the shareholders of the dissolving company, transferor company and shareholders of the contemplated subsidiary, respectively, can take various forms, including, among others, shares in the surviving company, shares in a foreign entity affiliated with the surviving company and cash. Challenge to M&A Transaction Any challenge to the validity of an M&A structure under the Companies Act by any shareholder or creditor of the relevant parties must be brought by way of a specific form of litigation within six months of the effective date of the transaction. In case of a merger or corporate split, before the effective date of the transaction, the creditors of the relevant parties must be given a period of no less than one month to raise any objection they may have to the transaction. b) Business Transfer 1. Overview Comparison with Corporate Split A business transfer is a transaction based on a contract between two companies, wherein a company transfers all or a part of its business to another company pursuant to a business transfer agreement between the companies. Business transfers differ from corporate splits in that business transfers involve the transfer of certain rights and

5 Japanese M&A for Foreign Investors 181 obligations (including assets, liabilities, contracts and employees), as specified in the relevant business transfer agreement, while corporate splits are transactions under which all rights and obligations in respect of a certain business division are comprehensively transferred, except as otherwise provided for in the relevant corporate split agreement. As such, the legal requirements applicable to a transfer must be satisfied with respect to each of the individual rights and obligations to be transferred, including procuring the consent of the counterparties to the contracts to be transferred. One advantage that business transfers have over mergers, corporate splits and share acquisitions is that transferees under business transfers can avoid the risk of assuming contingent liabilities. This is because the liabilities to be assumed must be specified in the relevant business transfer agreement. In contrast to a corporate split, it is unnecessary to provide creditors with the opportunity to raise objections to a business transfer, because, in the context of a business transfer, the transfer of each of the obligations owed by the transferor to its creditors is subject to the consent of each particular creditor. If the transferor undertakes a business transfer in the knowledge that the business transfer would be prejudicial to a creditor whose claims are not transferred, such creditor has the right to demand the satisfaction of its claims from the transferee to the extent of the value of the assets which are the subject of the transfer. 2. Procedures Overview A business transfer can be undertaken by foreign companies through their subsidiaries or Japan branch offices. There is no statutorily prescribed procedure under Japanese law where a business transfer is undertaken through a Japan branch office and therefore no specific procedures will apply unless required under the relevant foreign laws or specific regulatory requirements. Rather, the entire process of a business transfer will be governed by the terms of the relevant business transfer agreement. In the case of subsidiaries, the Companies Act prescribes for certain procedures to be undertaken in a business transfer, including: (i) the passing of a resolution by the respective boards of the relevant parties to approve the business transfer and (ii) the execution of a business transfer agreement between the parties. In addition, if the transferor transfers all or a substantial part of its business, it must also obtain the approval of its shareholders by way of a special shareholders resolution. Where the transferee proposes to assume the transferor s entire business, the transferee must also obtain the approval of its shareholders by way of a special shareholders resolution. As with the other structures mentioned above, matters of scheduling should be carefully considered if a business transfer involves a listed company. In general, however, no shareholders resolution is required to be passed by the transferor if the book value of the assets to be transferred is 20% or less of the total asset value of the transferor. In the case of a transfer of the entire business of the transferor, no shareholders resolution is required to be passed by the transferee if the consideration payable to the transferor amounts to

6 182 The Turkish Commercial Law Review Volume 2 Issue 2 Winter % or less of the total asset value of the transferee. Additionally, in a business transfer between a parent company and a subsidiary the voting rights of which are 90% or more held by the parent company, no shareholders resolution approving the business transfer is required to be passed by the subsidiary. c) Purchase of Shares 1. Overview The easiest way to gain control of a company is to purchase that company s issued shares from its existing shareholders (that is, a share acquisition). In Japan, share acquisitions are generally more common than asset acquisitions. In a share acquisition transaction, the acquiring company enters into a share purchase agreement with the shareholder(s) of the target company and acquires the shares in the target based on the terms of such agreement. 2. Procedures Overview A share acquisition can be undertaken by foreign companies directly or through their subsidiaries or Japan branch offices. No statutorily prescribed procedures are applicable to share acquisitions under Japanese law and therefore no specific procedures will apply to such transactions unless required under the relevant foreign laws or specific regulatory requirements. Rather, the entire process of a share purchase transaction will be governed by the terms of the relevant share purchase agreement. Where the share transferor is a Japanese company, however, a resolution to approve the transfer would generally have to be passed by the board of the transferor. Additionally, a Japanese transferor would have to pass a special shareholders resolution if (i) it transfers the shares in a subsidiary the book value of which is more than 20% of the total asset value of the transferor, and (ii) the voting rights of the transferor in the subsidiary will fall below 50% of total voting rights in the subsidiary as a result of the transfer. Where the issued shares of a company listed in Japan (or more specifically, a company that is subject to continuing disclosure obligations under the FIEA) is the subject of a share acquisition, tender offer rules under the FIEA may also be triggered. Specifically, the acquirer must make a tender offer to purchase such shares when its total shareholding ratio in the target company exceeds a certain threshold. d) Share Acquisition by Third Party Allotment 1. Overview A Japanese company is permitted to issue and allot new shares to specific persons (a third party allotment). This presents another way, in addition to a share acquisition, in which a foreign company can acquire control of a Japanese company, although share acquisitions are more commonly used.

7 Japanese M&A for Foreign Investors 183 Public companies (Kokai Gaisha), which are defined as companies (including listed companies) that issue shares without restriction, are generally permitted to issue and allot any number of new shares in a third party allotment, if such issuance and allotment is approved by the board and the new shares are not issued on exceptionally favorable terms. However, following the occurrence in Japan of several scandalous equity finance transactions involving the establishment of controlling shareholdings for the purpose of significantly diluting the shareholding of existing shareholders, third party allotments are now subject to stricter regulatory oversight under both stock exchange rules and the Companies Act. 2. Procedures under the Rules of Japanese Stock Exchanges Under the rules of Japanese stock exchanges, a listed company wishing to conduct a third party allotment of shares or stock acquisition rights that results in (i) equity dilution of 25% or more (that is, one or more third party allotments that result in the allottee(s) holding 25% of the shares in the issuer) or (ii) a change in control of the company, must, except in certain special circumstances, first obtain either (a) a shareholders resolution approving the third party allotment or (b) an opinion from a person independent of the company s management concluding that the third party allotment is beneficial for the company and the terms and conditions thereof are fair to the shareholders (other than the allottee). 3. Procedures under the Companies Act Under the Companies Act, a public company (Kokai Gaisha) is, if it conducts a third party allotment that results in a change in control of the company (that is, a third party allotment that results in the allottee holding the majority of voting rights in the company), required to (i) give prior notice thereof to its existing shareholders or make a public announcement of the same and (ii) except in very limited circumstances, pass an ordinary shareholders resolution approving such third party allotment of shares if shareholders holding 10% or more of the total voting rights issue an objection notice in respect of the third party allotment within a prescribed period. These requirements, which were implemented as part of the recent amendments to the Companies Act in 2015, provide a certain degree of control to shareholders over board decisions to issue new shares for the purposes of giving control of a listed company to a third party without passing a shareholders resolution to approve of the issuance. II. M&A STRUCTURES AVAILABLE TO FOREIGN INVESTORS a) Share Acquisition vs. Business Transfer A foreign company that acquires a majority of voting rights in a Japanese company will have control over the business of the Japanese company. The most common and straightforward means of achieving this is to acquire the issued shares of the Japanese company. A business transfer can also be used to achieve the same purpose if the business

8 184 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 to be transferred is not too large. This is because the procedures involved in a business transfer tend to be burdensome if the business to be transferred is too large, taking into account the process involved in transferring the individual rights and obligations in respect of the business, including the procurement of consent from contractual counterparties. Indeed, a business transfer may be preferable in M&A transactions involving small companies, because the transferee generally assumes no contingent liabilities under a business transfer unless such assumption of contingent liabilities is specified in the business transfer agreement. b) Triangular Type of M&A Structure Whether a foreign entity is permitted to be a party to a merger under the Companies Act has been the subject of long-standing debate in Japan. Generally, however, this is considered impermissible, and no such precedent exists. In practice, therefore, a foreign entity wishing to undertake a merger, a corporate split, a statutory share exchange or a statutory share transfer must inevitably utilise a triangular type of M&A structure involving a Japanese subsidiary or affiliate. In an absorption-type merger transaction, for example, consideration payable to shareholders of the dissolving company can take the form of shares in a foreign company. Accordingly, a foreign company can acquire all the shares of a Japanese company in a merger (a so-called triangular merger) by (i) establishing a special purpose company (SPC) in Japan, (ii) directing the SPC to enter into a merger agreement with the target Japanese company, pursuant to which the SPC will be the surviving company and the target is dissolved (thereby effectively making the target a wholly-owned subsidiary of the foreign company), with consideration paid to the shareholders of the target taking the form of shares in the parent foreign company. The end result of this triangular merger is that the shareholders of the target Japanese company will become shareholders in the foreign company. A foreign company can also acquire all the shares in a Japanese company through the use of a so-called triangular share exchange structure, under which (i) an SPC is established in Japan, (ii) a statutory share exchange agreement is entered into between the SPC and the target Japanese company, pursuant to which the SPC becomes the parent company of the target (thereby making the target a wholly-owned subsidiary of the SPC), with consideration paid to the shareholders of the target taking the form of shares in the parent foreign company. The end result of such a triangular share exchange structure is that (a) the shareholders of the target Japanese company will become shareholders in the foreign company and (b) the target and the SPC are merged. There have been, to date, only a few M&A transactions involving the use of triangular M&A in Japan, but these structures remain options to be explored should other structures prove unfeasible for tax, accounting or other reasons.

9 Japanese M&A for Foreign Investors 185 III. ADDITIONAL PROCEDURES AND CONSIDERATIONS a) Anti-Monopoly Act The Anti-Monopoly Act of Japan (Act No. 54 of 1947, as amended; the Anti-Monopoly Act) regulates both the substantive and procedural aspects of mergers in Japan and is administered by the Japan Fair Trade Commission (the JFTC). The Anti-Monopoly Act requires prior notification to be given to the JFTC for business combinations meeting certain thresholds. In the case of share acquisitions, notification is required to be given to the JFTC at least 30 days prior to the effective date of the acquisition if all of the following thresholds are met: (i) the total domestic turnover (that is, the turnover in Japan in the last fiscal year) of the corporate group to which the acquiring entity belongs exceeds JPY 20 billion; (ii) the total domestic turnover of the target company and its subsidiaries exceeds JPY 5 billion; and (iii) the ratio of voting rights held by the acquiring corporate group in the target company will exceed 20% or 50% as a result of the share acquisition. b) FEFTA A foreign investor wishing to acquire shares of a company in Japan is subject to notification/reporting requirements under the Foreign Exchange and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended; the FEFTA). The FEFTA also requires a foreign investor to file a pre-notification with the Minister of Finance and the competent ministers (through the Bank of Japan) if it wishes to acquire the shares of a Japanese company (or, in the case of a listed Japanese company, if it wishes to acquire 10% or more of the total issued shares in the listed company) that engages (either directly or through its subsidiaries or certain kinds of affiliates) in business in certain sensitive industries, such as the arms manufacturing industry. Thereafter, the foreign investor is required to comply with a waiting period, during which the relevant authorities will review the proposed acquisition to determine its permissibility. The waiting period is 30 days by default, but varies on a case-by-case basis. In cases involving acquisition of shares in a Japanese company (or, in the case of a listed Japanese company, 10% or more of the issued shares in the listed company) that does not engage in business in sensitive industries, submission of a post-factum report within 15 days would usually suffice. Certain other industry or entity-specific restrictions also apply to foreign ownership. For example, foreign ownership in broadcasting companies, aviation companies and stock exchanges are subject to certain restrictions under the relevant laws.

10 186 The Turkish Commercial Law Review Volume 2 Issue 2 Winter 2016 IV. CONCLUSION As noted in this article, there are various types of M&A structures in Japan available to foreign investors. We hope this article provides foreign investors with a helpful overview of the key issues to consider when structuring M&A transactions in Japan.