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Structures and applicable law
Types of transaction
How may publicly listed businesses combine?
In mergers and consolidations, there are instances where an acquirer takeover the business or business assets and the current shareholders (typically minority shareholders) leave the business, or an acquirer obtains business while the current shareholders remain as investors. In this chapter, we call the former the acquisition and the latter the consolidation.
The acquisition contains purchase of outstanding shares, which can be basically done through private share purchase, but sometimes is required to be conducted through a mandatory tender offer in accordance with the Financial Instruments and Exchange Act (Act No. 25 of 1948, as amended) (the FIE Act). The cash tender offer sometimes followed by a second-step squeeze-out transaction is a typical case for acquisition. The cash-out merger is also one of acquisition type transaction.
The consolidation contains share exchange, joint share transfer and stock for stock merger. The new scheme, share delivery (kabushiki kofu) has been introduced by amendment of Companies Act (Act No. 86 of 2005, as amended) (the Companies Act) with the effective date of 1 March 2021 aiming to provide acquirers with more flexibility in the use of share considerations in consolidation. While share exchange is available for an acquirer company only to make another company its wholly owned subsidiary by using its own shares as consideration, share delivery enables an acquirer company to make another company its subsidiary by delivering shares as long as the acquirer obtains the majority of voting rights. There are advantages in share delivery over share exchange because the former releases the acquirer company from in-kind contribution regulations, including those with regard to issuance of shares at a preferable price. The shareholders of the targeted company may voluntarily choose whether they transfer their shares or not, therefore, it is worth noting that a mandatory tender offer may be required in accordance with the FIE Act to complete the share delivery.
In this chapter, as typical cases, we will focus on cash tender offer as a typical instance of acquisition, and stock-for-stock merger as a typical case of consolidation.
Statutes and regulations
What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies?
These are:
- Companies Act (Act No. 86 of 2005, as amended);
- Financial Instruments and Exchange law (Act No. 25 of 1948, as amended) (the FIE Act); and
- Act on Strengthening Industrial Competitiveness (Act No. 98 of 2013, as amended).
Cross-border transactions
How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
In the case of a Japanese inbound acquisition, share purchase is one of the more straightforward measures to acquire business. An acquirer that is a foreign entity may appoint itself to be a party to the share purchase transaction, but it is also available to use an acquisition vehicle that is newly established in Japan or the acquirer has already had in Japan. Such an acquisition vehicle established as a company in Japan can conduct cash-out merger, stock-for-stock merger, share exchange, share transfer and share delivery under the Companies Act. While foreign companies themselves cannot use these methods to obtain control of a company, triangular mergers or triangular share exchanges allow foreign parent companies to conduct a merger in Japan through a Japanese subsidiary, where the shares of the foreign parent company are offered to the shareholders of the target company.
The Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended) provides regulations on foreign direct investment (FDI), and the amended FDI regulations effected in 2020 to implement the tougher national security regulations. The Ministry of Finance published the summary of the amended FDI regulations, which is available in its press release of 24 April 2020. The amended FDI requires foreign investors seeking a stake of 1 per cent or more in any Japanese companies engaging the designated business sectors to make a prior-investment notification, after which the related investor basically has to refrain from the investment for the period of 30 days. The amended FDI also introduced the exemption scheme for prior-investment notification for the share purchase of the listed companies. The requirements for and the scope of the exemption depend on (1) the types of investors (eg, qualified financial institutions may enjoy the widest range of exemption with fewer conditions, while state-owned enterprises cannot at all) and (2) into which classification target companies engaging the designated business sectors fall (ie, core sector or non-core sector). The exemption scheme imposes three conditions on foreign investors that enjoy the exemption, including that the investor or its closely related individuals may not become board members of the target company regardless of classification. In the case of a target company within any core sector that is subject to the strictest FDI regulations, the exemption imposes two additional conditions on the investor other than qualified financial institutions: one being to prohibit the investor or its designated person from joining the board of directors or other decision-making committee of the target company in relation to the core business sector. It is an investor’s responsibility to make the necessary surveys and a decision on whether or not a target company engages in the designated business sectors, and, if yes, into which classification the target company falls. The Ministry of Finance published and occasionally updates the classification list for the benefit of foreign investors, where it categorises listed companies into three classifications: non-designated sector, non-core designated sector or core-designated sector, based on its survey.
Sector-specific rules
Are companies in specific industries subject to additional regulations and statutes?
There are a foreign ownership regulations and approval processes that are applicable to specific industries.
Some industry laws, such as the Broadcasting Act (Act No. 132 of 1950), Radio Act (Act No. 131 of 1950) and Civil Aeronautics Act (Act No. 231 of 1952), set upper limits of foreign capitalisation. In the case of the Broadcasting Act, it is one of the disqualifications for a broadcast certificate that foreign shareholders directly or indirectly hold 20 per cent or more of the company’s voting rights. The Broadcasting Act even allows core broadcasters that are listed companies to refuse to make such an entry in its shareholder registry that may cause its own disqualification as a broadcaster.
Some industry laws, such as the Banking Act (Act No. 59 of 1981) and Insurance Business Act (Act No. 105 of 1995), require an approval to be obtained before certain transactions. For instance, the Banking Act requires an acquirer seeking to obtain 20 per cent or more voting rights in a bank to obtain prior approval from the Commissioner of the Financial Services Agency (the FSA). The Banking Act specifies the standard period for assessment to be one month. The applicant may request a preliminary examination prior to making a formal application and it is common for applicants to initiate the process from the preliminary examination. Accordingly, it is advisable to wait at least one month for the preliminary examination and another month for the formal application although the actual time frame varies depending on cases.
The Banking Act also generally requires prior approval for a merger involving a bank as the surviving company or the newly established company.
Transaction agreements
Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements?
In the case of cash tender offer, no agreements are required to complete it. However, in some cases, an acquirer that launches a tender offer may agree with the other investors (ie, concert parties) to acquire shares of a target company in concert, and in other cases, it executes an agreement with a large shareholder to oblige the shareholder to tender its own shares in the tender offer.
In the case of a stock for stock merger, parties to the merger are required to execute a merger agreement as one of merger requirements under the Companies Act.
Filings and disclosure
Filings and fees
Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions?
In the case of a cash tender offer, under the Financial Instruments and Exchange Act (FIE Act), an acquirer is required at the timing to initiate a tender offer, submit a tender offer statement together with supplemental documents (eg, certificate of funds) to the Kanto Local Finance Bureau and provide an explanatory booklet of the tender offer to potential subscriber and to make a public notice, and on the following date of the expiration date of tender offer period, to submit a tender offer report to the Kanto Local Finance Bureau unless the tender offer has been cancelled. The FIE Act also requires a target company to submit an opinion statement to the Kanto Local Finance Bureau.
An acquirer through a tender offer may be subject to FDI regulations that require foreign investors seeking a stake of 1 per cent or more in any Japanese companies engaging the designated business sectors to make a prior-investment notification although the exemption may be available for the acquirer.
Among the other disclosure obligations under the FIE Act, it is important to note that a large volume shareholding report must be filed to the Kanto Local Finance Bureau by an acquirer holding shares of a listed company at the shareholding ratio of 5 per cent or more. Change reports are also required to be filed every time the triggering events happens, including an increase or decrease in the shareholding ratio by 1 per cent or more.
In the case of stock for stock merger, as the offering disclosure, the FIE Act requires an acquirer that is not a listed company to submit in advance a securities registration statement on its shares to be delivered as a consideration to the shareholder of a listed target company. A stamp duty of ¥40,000 is imposed on each merger agreement. A merger agreement must generally be approved by a super-majority resolution of the shareholders’ meeting of both the merging company and merged company, except for cases that are exempted. For the related company (especially a listed company) to fix shareholders to exercise voting rights at the shareholders’ meeting, the company is required to issue a public notice on a certain date when the company will decide who will exercise their voting right based on the then shareholders’ registry. The parties to a merger are also required to make public notice on the details of its merger plan in the creditor protection process. If the merger results in an increase in the stated capital of the surviving company, the application for change in its company registry will require a registration tax calculated by 0.7 per cent of the increase in the amount of the stated capital (not including capital surplus).
The Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Act No. 54 of 1947, as amended) (the Anti-monopoly Act) also requires a prior notification to the Japan Fair Trade Commission (the JFTC) in the case of a certain share acquisition, merger or share transfer. For example, in the case of share acquisitions, the factors to trigger the prior notification are (1) an acquirer group with the total domestic sales of ¥20 billion or more, (2) a target company with the total domestic sales amount of Y5 billion (inclusive of its subsidiary’s domestic sales amount) and (3) as a result of the share acquisition, the voting rights in the target company held by the acquirer group exceeds 20 or 50 per cent. The related transactions may not be affected generally for 30 days after the day that such prior notice was received (the waiting period). A tender offer subject to prior notification may not be completed without clearance by the JFTC.
Information to be disclosed
What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used?
In the case of a cash tender offer, an offeror is required to disclose information on, such as its name and address, purpose of the tender offer, tender offer price and descriptions on the offer in a tender offer statement, an explanatory booklet of the tender offer and a public notice. On the other hand, a target company is required to disclose its opinion as the tender offer in an opinion statement under the FIE Act.
If an acquirer is also a listed company, under the FIE Act, the acquirer is also required to make timely disclosure on a decision to initiate a tender offer and the result of it.
The rules of the stock exchange also provide disclosure rules on a tender offer. If a target company is listed on the Tokyo Stock Exchange, under the rules of Tokyo Stock Exchange (the Rules), the target company is required to make a disclosure on a launch of tender offer soon after it hears the related announcement. Although, under the Rules, disclosure of its opinion on the tender offer can follow after the disclosure on the tender offer launch, in many cases of friendly tender offers, it is usual that a target company discloses its recommendation opinion at the same time. A stock for stock merger may fall within events that trigger an obligation of a company subject to reporting obligation to submit an extraordinary report to the Kanto Local Finance Bureau under the FIE Act. Furthermore, the FIE Act also requires a merging company that is not a listed company, as the offering disclosure, to submit in advance a securities registration statement on its shares to be delivered as a consideration to the shareholder of a target listed company.
In the case of either a cash tender offer or stock for stock merger, a shareholder holding shares of a listed company at a shareholding ratio of 5 per cent or more is required to file a large volume shareholding report under the FIE Act. The large volume shareholding report discloses information on the shareholder, number and shareholding ratio of the shares held by it, details on share transactions made in the last 60 days, the purpose of investment and total amount spent for the currently held shares. If such a shareholder has entered into an important agreement such as a collateral agreement or co-investment agreement with concert parties, this information must also be disclosed. In the case of a cash tender offer, if a shareholder that has submitted a large volume shareholding report enters into a tender agreement with the (prospective) offeror, such an agreement is also interpreted as being an important agreement to trigger a change report where the execution of the tender agreement is disclosed.
Disclosure of substantial shareholdings
What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination?
Under the FIE Act, a large volume shareholding report is required to be filed by a shareholder holding shares of a listed company at the shareholding ratio of 5 per cent or more. In relation to concert parties that agreed to acquire shares in concert with others, for example, through a tender offer, their shareholding ratio is added up in determination of the filing obligation and specified in the large volume shareholding report.
Law stated date
Correct on
Give the date on which the above content is accurate.
The information in this chapter was verified between February and April 2019.
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