Typical due diligence issues

A key issue to consider during a due diligence exercise in respect of a share acquisition is how the transfer of title to the shares will take place. In Japan, private companies can choose whether or not to issue share certificates under the Companies Act. Where a share acquisition involves a private company that does issue share certificates, transfer of title to the shares will take place by the delivery of share certificates to the buyer. In respect of this type of share acquisition, it is therefore crucial to confirm that the seller has possession of the share certificates through the due diligence process to ensure a smooth closing.

If share certificates are not issued by the target company, then the transfer of title to shares will take place by agreement between the seller and the buyer. The transfer must be registered in the target company's shareholders' register for the buyer to be able to assert its rights as a shareholder against the target company.

Pricing and payment

Foreign exchange control

Cash remittances of more than JPY 30 million into or out of Japan must be reported to the minister of finance (MoF) through the Bank of Japan (BoJ). This reporting obligation is directed at, and applicable to, residents only. In practice, however, where this reporting obligation applies, it is usually the Japanese bank that prepares and files such report on behalf of its customers.

Signing/closing

Is a deposit required?

A deposit is not common in practice as part of a share or asset sale transaction.

Is simultaneous signing/closing common?

Simultaneous and non-simultaneous signing and closing are equally common.

Board and shareholder approvals

Share sale

Board approval by the target company's board of directors may be required where a transfer of shares is restricted under the target company's articles of incorporation and the target company has a board of directors. Such restrictions are fairly common in closely held Japanese companies. If the target company's articles of incorporation include a restriction on share transfer and the target company does not have a board, the transfer of shares will require a shareholders' resolution of the target company.

The approval of the seller's board and the buyer's board will also be required if the sale/purchase of the target's shares constitutes the disposition/acquisition of a "material asset." Further, a special resolution of the seller's shareholders is also required if the following conditions are met:

• The target company is a subsidiary of the seller.
• The seller ceases to hold the majority of voting rights in the target after the sale.
• The book value of the transferred shares in the target constitutes more than one-fifth of the total asset value of the seller.

Asset sale

An asset acquisition requires the approval of the seller's board if the sale constitutes the disposal of a "material asset." Whether or not a transaction involves a material asset will depend on the price of the assets, the proportion of assets being transferred relative to the target's total assets, the purpose of the transaction, the terms and conditions of the transaction, and past practice.

Depending on the significance of the acquisition from the buyer's perspective, board approval may also be required from the buyer.

A special resolution of the seller's shareholders is also required if the transferred assets constitute a material part of the seller's business and the book value constitutes more than one-fifth of the total asset value of the seller.

Where the buyer purchases all of the seller's business, a special resolution of the buyer's shareholders will also be required.

Foreign investors wishing to acquire Japanese assets via a recently established Japanese subsidiary should note that, if the acquisition occurs less than two years after the subsidiary's incorporation, it may be subject to the post-incorporation asset purchase rules of the Companies Act.

The general rule provides that, if a subsidiary that is less than two years old agrees to acquire property under the following conditions then, in addition to a board resolution, a special shareholders' resolution is required to approve the asset acquisition:

• Existing before its incorporation.
• Intended to be used on a continuing basis for purposes of the company's business.
• At a price equal to 20% or more (this percentage may be lowered in the articles of incorporation) of the company's net asset value.

Foreign investment restrictions

Japan has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The mandatory foreign investment review (FIR) regime is targeted at certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Merger control in Japan is mandatory and suspensory.  The types of transactions that may be subject to the regime include mergers, asset/business acquisitions, share acquisitions, and corporate splits. The thresholds for filing are based on the combined worldwide turnover and domestic turnover of the parties involved. The competition authority encourages voluntary consultation for transactions that do not meet the mandatory filing thresholds but may still have an impact on the domestic market. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

In addition to the general FIR regime, thresholds have been established with respect to foreign ownership in certain industries, such as airlines and broadcasting businesses under the respective industry regulations. The rules vary within these industries and should be checked at the time the acquisition is being contemplated.

In certain industries, such as banking, the parties will be required to submit a notification to, or seek consent from, the relevant regulator in relation to an acquisition.

Share sale

Employee consents are not required in a share deal. This is because an acquisition of the shares in a corporate employer will not affect its obligations to its employees since the employing entity will remain the same.

Asset sale

In an asset deal, the seller must obtain the consent of any employee that the buyer proposes to employ. Government guidelines encourage the seller to have sufficient consultation with the transferring employees to obtain informed consent.

A share purchase agreement is not subject to stamp duty in Japan.

The acquisition of assets is generally subject to stamp duty, and may be subject to real property acquisition tax and registration and license tax depending on the target assets.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.