7.M&A
For a company’s growth, developing and selling your own products and services is a typical and fundamental endeavor. However, buying another company or business can be an important strategy as well, in order to acquire existing products or services, or to acquire certain technology, a factory or customers. Private companies in particular will often acquire other companies in order to expand their market share or to increase their product or service lineups. When acquiring a company or business, it is very important to verify the objectives and impact of such an acquisition from a business standpoint, but it is also important to check whether or not the target has any issues from a legal or accounting standpoint. Also, it is necessary to examine what kind of acquisition structure is appropriate considering various issues, such as the proposed time schedule, potential tax problems and the target’s relationships with its business partners. In general, the basic acquisition structures are (1) share purchase, (2) merger, (3) corporate split (kaisha bunkatsu), (4) business (asset) transfer, (5) share exchange (kabushiki koukan), and (6) share transfer (kabushiki iten). Each has its advantages and disadvantages. In addition, you have to determine the valuation, negotiate the terms, incorporate the terms into a written agreement, and complete the closing procedures.
AZX provides support on various aspects of M&A transactions, including legal and accounting due diligence, calculation of the share price or enterprise value, determination of the acquisition structure, procedural advice under Japanese laws such as the Financial Instruments and Exchange Law and the Anti-Monopoly Law, drafting and negotiation of the acquisition documents, and other procedures related to the acquisition. In particular, we can provide advice on both legal and accounting matters. Further, if intellectual property or labor issues arise during the legal or accounting due diligence or consideration of the acquisition structure, we can provide support through specialists within the AZX Group, such as patent lawyers (benrishi) and certified labor specialists (sharoushi).
Q1 (M&A Structures)
M&A exits have increased recently. What kind of M&A structures are there? And what are their advantages and disadvantages?
Broadly speaking, the different structures for M&A are (1) share purchase, (2) business (asset) transfer, (3) merger, (4) share exchange (kabushiki koukan), (5) share transfer (kabushiki iten), and (6) corporate split (kaisha bunkatsu). (A change of control can also be effected by a new share issuance.) These structures can also be combined. As for which structure to choose, you have to weigh the advantages and disadvantages of each structure, after consulting with specialists, such as lawyers, tax advisor (zeirishi) and accountants. From a legal perspective, the main points to consider are (i) whether you will succeed to the business yourself or whether you will control it through a subsidiary, (ii) whether you will succeed to the entire business, including all liabilities, or whether you will succeed to only a portion of the rights and obligations, and (iii) whether you intend to succeed to the entire business without obtaining the consent of each party, or whether you will obtain consents from individual parties.
(Posted: January 27, 2012)
Q2 (Shares Purchase vs. Share Exchange (Kabushiki-Kokan))
Regarding the methods to acquire a target’s shares to make the company a 100% subsidiary, between a share purchase and a share exchange (kabushiki koukan), what are the characteristics of each procedure?
In a share purchase, you must negotiate with each shareholder separately, and each purchase is a separate process. Otherwise the procedures required under the Company Law are simple. But you will need funds to purchase the shares.
On the other hand, in a share exchange (kabushiki koukan), you can acquire 100% of the shares of the target without the consent of each shareholder. So you can avoid a separate negotiation with each shareholder, but you will be subject to certain procedures under the Companies Act, such as a shareholders meeting and prior notice. Also, you can use your own shares as the consideration in the share exchange, so in that case funds are not necessary. In addition, there are restrictions on the ability to void a share exchange, such as the method to make a claim and the time period.
(Posted: January 27, 2012)
Q3 (Share Transfer (Kabushiki-Iten))
What’s the procedure for a share transfer (kabushiki iten)?
A share transfer (kabushiki iten) is a procedure by which an existing company establishes a new company, then the new company acquires all of the outstanding shares of the existing company, and at the same time the new company issues new shares to the shareholders of the existing company, establishing a 100% parent-subsidiary relationship. The end result of the share transfer (kabushiki iten) is that the shareholders of the existing company become the shareholders of the new company, and the existing company becomes the 100% subsidiary of the new company.
A share exchange (kabushiki koukan) is also a procedure to establish a 100% parent-subsidiary relationship, but in that case both are existing companies.
(Posted: January 27, 2012)
Q4 (Merger with Foreign Company)
Is it possible to merge with a foreign corporation?
There is some dispute among scholars, but a “company” under the Companies Act (Article 2, Section 1) as a party in a merger is defined as “a corporation (kabushiki kaisha), a general partnership company (goumei kaisha), a limited partnership company (goushi kaisha) or a limited liability company (goudou kaisha)”, which does not include a foreign corporation. Also, the Legal Affairs Bureau will not accept the registration of a foreign corporation in a merger. Therefore, practically speaking, a foreign corporation cannot merge with a Japanese corporation.
(Posted: January 27, 2012)
Q5 (Antimonopoly Act Issues)
In general, in what cases will the Antimonopoly Act become a problem in M&A?
A share acquisition, a merger, certain types of corporate splits (such as a joint incorporation-type corporate split (kyoudou shinetsu bunkatsu) or a absorption-type corporate split (kyuushuu bunkatsu),) a business (asset) transfer or other business combination (“Business Combination”) that substantially restricts competition in a certain field of trade is prohibited. Whether or not a specific transaction restricts competition is determined on a case-by-case basis. However, in order to ensure the effectiveness of the regulation, a notification must be submitted to the Japan Fair Trade Commission for business combinations of a certain size. In practice, the important issue is to determine whether or not the notification is required.
The specific requirements depend on the type of business combination, but, for example, in the case of a merger, if the total domestic sales of either party or the group to which such party belongs exceeds 20 billion yen, and the total domestic sale of the other party or the group to which such party belongs exceeds 5 billion yen, a notification is required. However, if all of the parties belong to the same group, no notification is required.
(Posted: January 27, 2012)
Q6 (Antimonopoly Issues in Share Purchases)
In buying the shares of another company, in what cases will the procedures under the Antimonopoly Act be required?
Under the Antimonopoly Act, a Business Combination that substantially restricts competition in a certain field of trade is prohibited. Specifically, if (i) the total domestic sales of the acquiror or the group to which it belongs exceeds 20 billion yen, (ii) the total domestic sales of the target and its subsidiaries exceeds 5 billion yen, and (iii) the total percentage of voting rights of the target after the acquisition held by the acquiror and any companies belonging to the same group as the acquiror exceeds 20% or 50% as a result of the transaction, a prior notification to the Japan Fair Trade Commission is required (Antimonopoly Act Article 10, Section 2). Further, until 30 days has passed from the receipt of such notification, the proposed share acquisition cannot be completed (Antimonopoly Act Article 8).
(Posted: January 27, 2012)
Q7 (Past Issuance of Share Certificates)
In due diligence, we received a question about a past share transfer and at the same time about the status of our issued share certificates. We don’t remember issuing share certificates. Is this a problem?
As a condition to an IPO or M&A, it is important to ascertain without doubt who are the shareholders of the company. In order to do so, the circumstances of past transfers are investigated. For companies issuing share certificates, delivery of the certificate is a condition to any valid transfer. If no share certificate is delivered between the parties to a transfer, the transfer is not valid, so it raises an issue as to whether the current shareholder is really a shareholder. Also, even if a share certificate-issuing company does not issue a share certificate, delivery of the certificate is required between the parties to a transfer, so you should be careful. It’s important to understand that the company must follow proper procedures so that this kind of problem does not arise immediately before an IPO or M&A.
Q8 (Unpaid Wages of Employees)
Regarding employees who are part of the business to be transferred, what happens if there are unpaid wages?
In the case of a business (asset) transfer, liabilities that are not listed as assumed in the business (asset) transfer agreement are not transferred. In principle, unpaid wages of the seller are not assumed, but there is a risk of a dispute based on a misunderstanding. Transferring employees must approve the change in their employer. Also, in order to avoid a dispute as to unpaid wages, it should be made clear in the consent document that the acquiror will not succeed to unpaid wages.
(Posted: January 27, 2012)
Q9 (Continued Use of Seller’s Name)
In purchasing a business, what are the risks of continuing to use the name of the service of the seller?
If the acquiror will use the seller’s corporate name, the acquiror will be responsible for the settlement of the liabilities of the seller, unless the acquiror without delay registers in the commercial register or otherwise provides notice that it will not assume such liabilities (Company Act Article 22). Based on the precedent of the application of this rule to the name of membership golf clubs, there is a risk that the acquiror will be responsible for the settlement of liabilities if it continues to use not just the corporate name but also the trade name or service name of the seller.
(Posted: January 27, 2012)