In Japan, a private acquisition usually takes the form of either a share acquisition, which involves purchasing the shares in the company that owns the business, or a business transfer, which involves purchasing the assets and liabilities of the business being acquired. However, mergers and company splits are also widely used for business acquisition purposes. While structuring the deal as a share acquisition is generally considered simpler than business or asset acquisitions, the most appropriate method to use in any particular transaction depends on a number of factors, including commercial and tax considerations, consent requirements, deal process and timing.
Similar to other jurisdictions, auction processes are often used in Japanese deals, with the process generally explained in bid process letters prepared with the help of the seller's financial advisers. Whether nonbinding indicative letters, binding offer letters, or both, are used depends on how the auction process is conducted (for example, whether the process involves a small, selected group of prospective buyers, or a much broader group, how the due diligence process is organized, as well as timeframe and cost considerations).
There are two types of merger available under the Companies Act:
Merger by absorption is by far the most common method used in Japan. A merger will usually proceed by way of an issue of shares in the surviving company to the shareholders of the target company. A merger is often used to rationalize the operations of subsidiary entities. "Cash-out" mergers, involving mergers by absorption, are also allowed under the Companies Act.
With respect to company splits, the Companies Act provides for two types:
In the context of a company split transaction, the legal term for the divesting company (the company undergoing the split) is the "splitting company" and the legal term for the company taking over the assets/liabilities from the splitting company is the "succeeding company." Company splits are often used as an alternative structure to business transfers because they are more efficient from a procedural perspective (as there is no need to obtain third-party or employee consents) as well as from a tax perspective.
There are a number of different forms of business entity and structure available in Japan. The most commonly used are: (i) a joint-stock company, known in Japan as a "Kabushiki Kaisha" (KK), and (ii) a limited liability company, known in Japan as a "Gōdō Kaisha" (GK).
A KK is the most commonly used form of business entity chosen by larger, more established companies for doing business in Japan. It is similar to a US close corporation or, when listed on a stock exchange, is similar to a US public corporation. It is also similar to the German AG corporate form.
An acquisition of shares in a Japanese private company may be implemented by way of private agreement. An acquisition of shares in a company listed on a Japanese stock exchange may trigger certain tender offer requirements under the Financial Instruments and Exchange Act (FIEA) if an acquirer seeks to acquire more than one-third of the company's voting shares in an off-market transaction. A share purchase agreement is usually prepared to record the agreement of the parties over their respective rights, obligations and liabilities in connection with the transaction.
The Companies Act recognizes two types of asset acquisition or business transfer: one that involves the transfer of "all or a substantial part" of a Japanese company's business that requires approval by a special resolution of the shareholders, and one that does not. The distinction between the two different types of transfer is not always clear. For example, a company's sale of a single manufacturing facility, or a single operating division or branch office, may be regarded as a transfer of a "substantial part" of its business. However, the question is usually determined on the basis of an objective assessment of the relative importance of the business sold compared with the company's overall business (e.g., as a proportion of the company's total amount of sales, earnings and workforce). The Companies Act indicates that a transaction would not be deemed a transfer of a "substantial part" of a company's business if the book value of the assets being transferred is not more than one-fifth of the total assets of the seller, and the transaction will therefore be exempted from the special shareholders' resolution requirement if that is the case.