Share Transfer vs. Business Transfer: Comparing Procedures, Contracts, Employees and Permits

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When you begin considering an M&A transaction, the choice between "buying the whole company" and "carving out and acquiring only the business" significantly changes the issues you will need to examine and the procedures you will need to follow. Even within the same acquisition, a share transfer and a business transfer rest on fundamentally different premises as to what legally moves to the buyer and what stays with the company.

Which method is more suitable is assessed by considering tax together with the procedures needed to keep the business running. We make an overall judgment by weighing a wide range of issues, including the scope of rights and obligations to be taken over, obtaining the consent of business partners, and the treatment of employees and permits.

Basic Structure: What Is Acquired and How Rights Transfer

A share transfer is a transaction in which the shareholders of the target company transfer the shares they hold to the buyer. The target company continues to exist as the same legal entity, and the purchase price is paid to the shareholders. The substance of the company, such as its assets and liabilities, individual contractual relationships and permits, remains with the target company even though its shareholders change. The buyer controls the company indirectly through the shares; this is different from a transaction in which the buyer directly assumes debts or in which the legal entity itself is transferred.

A business transfer has a different structure. The legal entity of the target company remains with the seller (transferor), and the assets, liabilities, contractual positions, intellectual property rights and other elements that make up the business are individually identified and transferred by agreement with the buyer. Because the consideration is paid to the selling company, the flow of funds differs from a share transfer, where the consideration goes to the existing shareholders. Note that even in a business transfer, the sale of ordinary inventory or goods does not in itself require third-party consent, but transferring a contractual position requires the counterparty's consent under Article 539-2 of the Civil Code.

Item	Share transfer	Business transfer
Subject of transfer	Shares of the target company (the company's assets and liabilities themselves do not move)	Assets, liabilities, contracts and other items making up the business, individually identified
Recipient of consideration	Existing shareholders	Target company (transferor)
Legal entity	Target company continues to exist as is	Transferor and transferee both continue as separate entities
Contractual positions	As a rule, no change (may trigger change of control clauses)	Counterparty consent required (including valid advance consent)
Debts	Debts belonging to the company are maintained comprehensively	Only debts identified as transferred are assumed (exceptions for continued use of trade name and fraudulent transfers)
Employees	Employment contracts continue as is	Individual agreement required for transfer of employment
Permits	Tend to be maintained because the holder company does not change (notifications under industry regulations may be required)	Do not automatically pass to the transferee; new acquisition or a succession procedure under industry regulations is required
Shareholders' meeting resolution	As a rule, not required on the target company side (approval of transfer-restricted shares to be checked separately). On the seller side, a special resolution is required if it qualifies as a transfer of shares of an important subsidiary (Article 467, Paragraph 1, Item 2-2)	A transfer of the entire business (Article 467, Paragraph 1, Item 1), a transfer of an important part of the business (Item 2 of the same paragraph, excluding cases of one-fifth of total assets or less, etc.) and acquisition of an entire business on the buyer side (Item 3 of the same paragraph) require a special resolution as a rule. Exceptions for short-form and simplified procedures

In a share transfer, the consent of contract counterparties is generally not required, but that does not necessarily mean contractual procedures can be skipped entirely. If a major business contract or loan agreement of the target company contains a change of control clause, prior notice to or consent from the counterparty may be required because of the change in shareholder composition, even though the legal entity itself does not change. Failing to obtain consent may lead to termination of the contract or acceleration of debt, so checking the clauses in advance is essential. How to read these clauses in detail is covered in Checkpoints for Reviewing Change of Control Clauses.

Scope of Succession and the Risk of Off-Balance-Sheet Liabilities

In a share transfer, past disputes and liabilities remain with the target company. Although the buyer does not take on the debts directly, if off-balance-sheet or contingent liabilities surface after the acquisition, they directly affect the value of the acquired shares and the subsequent management of the company. Unless risks not discovered before the acquisition are addressed by representations and warranties or indemnification clauses in the contract, the buyer will continue to bear the economic loss. How to conduct the investigation that surfaces these risks is explained in The Purpose, Process and Required Documents of Legal Due Diligence.

In a business transfer, the property, rights and obligations to be transferred can be designated individually, so the buyer can select and take over only the business assets and contracts it needs. As a rule, debts excluded from the transfer do not move to the buyer. However, even if the buyer is free to choose the assets, it cannot be said with certainty that past debts are cut off.

There are important statutory exceptions to this principle. First, if the transferee continues to use the transferor's trade name (continued use of trade name), it is liable to pay the debts arising from the transferor's business (Article 22, Paragraph 1 of the Companies Act). To avoid this, the transferee can register an exemption without delay, or both the transferor and the transferee can give notice without delay that the transferee will not be liable to pay the debts. Exclusion by notice is effective against the creditors who received the notice (Paragraph 2 of the same Article). In addition, if the transferor carries out a business transfer knowing that it will harm the remaining creditors, those remaining creditors may directly demand performance from the transferee up to the value of the property it took over (Article 23-2, Paragraph 1 of the Companies Act). The transferee is not subject to this demand if it did not know the fact that creditors would be harmed, and there is also a provision that the right to demand under this Article cannot be exercised once bankruptcy, rehabilitation or reorganization proceedings have commenced for the transferring company (Paragraph 3 of the same Article). Therefore, the transferor's financial condition and the handling of the trade name must be assessed carefully.

Another point that should not be overlooked is failure to identify everything that is to be transferred. In a business transfer, the contracts, permits, system access rights, parts of business workflows and other items needed for the business are individually listed in the agreement and transferred. Items left off the list do not move to the buyer, which may cause business operations to stall after closing. The design should take into account the difference in nature between a share transfer, which comprehensively maintains the entire company, and a business transfer, which individually identifies and carves out what is transferred.

Procedures for Transferring Contracts, Employees and Permits

The practical steps for taking over contractual positions differ greatly between the two methods. In a share transfer, the target company remains the contracting party, so individual consent from counterparties is generally not required. In a business transfer, on the other hand, the contractual position is transferred to the buyer, so individual consent must be obtained from each counterparty under Article 539-2 of the Civil Code (unless the contract already contains a valid advance consent clause). The more business partners a company has, the longer the negotiation period and the greater the effort required to obtain consents.

There is also a clear difference in the treatment of employees. In a share transfer, the employer, which is the target company, does not change, so individual employment contracts and working conditions are maintained as is. By contrast, when employees are taken over in a business transfer, an agreement to transfer employment must be obtained individually from each employee (Article 625, Paragraph 1 of the Civil Code). It is important not to confuse this with a company split. In a company split, under the Act on the Succession to Labor Contracts upon Company Split, workers who are mainly engaged in the business being split and who are listed in the split plan or similar document are transferred to the successor company through statutory procedures without individual consent. Workers mainly engaged in the business who are omitted from the plan have the right to object and be transferred, and workers listed in the plan even though they are not mainly engaged in the business can object and remain. The law also sets out in detail the notice to workers, prior consultation, and the period for filing written objections. A business transfer has no such statutory succession rules, so not everyone moves over unconditionally, and individual agreement is the premise. A company split is a different reorganization method from a business transfer, and the two cannot be treated as the same comprehensive succession.

The treatment of permits also affects the practical workload. As a rule, permits are granted to the legal entity that holds them. In a share transfer, the legal entity does not change, so permits tend to be maintained, but some industry regulations require notification or prior approval in connection with changes in shareholder composition or officers. In a business transfer, permits granted to the transferor do not automatically pass to the transferee. The transferee must either obtain them anew or, if the governing law provides a procedure for succession to the status (approval or notification), follow that procedure. Just as not all permits automatically transfer even in a merger or company split, whether a succession procedure is available and what its requirements are differ from regulation to regulation, so it is necessary to identify the permits required for business operations and check the legal route for each one individually.

The handling of personal data such as customer information is another issue to keep in mind. When personal data is provided in connection with a business succession such as a business transfer or merger, the provision is deemed under the law not to be a provision to a "third party," and the data can be received without the prior consent of the individuals (Article 27, Paragraph 5, Item 2 of the Act on the Protection of Personal Information (APPI)). However, except where the individual's consent has been obtained in advance or a statutory exception applies (Article 18, Paragraph 3 of the same Act), personal data may not be handled beyond the scope of the purpose of use before the succession (Paragraph 2 of the same Article). If a provision to a third party in a foreign country occurs, the requirements of Article 28 of the same Act must also be checked separately. In a share transfer, the legal entity itself continues, so the issue of provision accompanying an asset transfer, as in a business transfer, is less likely to arise; however, attention should be paid to disclosure procedures in pre-acquisition due diligence and to the fact that the buyer cannot use the target company's data without limit after the acquisition.

Shareholders' Meeting Resolutions and Procedures for Dissenting Shareholders

In a business transfer, a special resolution of the shareholders' meeting is not always required. Article 467, Paragraph 1 of the Companies Act provides that, as a rule, approval of the agreement by a special resolution of the shareholders' meeting (Article 309, Paragraph 2, Item 11 of the Companies Act) is required for a transfer of the entire business (Item 1 of the same paragraph) or a transfer of an important part of the business (Item 2 of the same paragraph). Excluded from "transfer of an important part" are transactions in which the book value of the assets transferred does not exceed one-fifth of total assets (or a lower ratio if so provided in the articles of incorporation). However, assets exceeding 20% of total assets are not automatically deemed important on that basis alone; a substantive assessment of importance in light of the nature of the business is involved. In addition, a buyer acquiring the entire business of another company also requires, as a rule, a special resolution of its shareholders' meeting (Article 467, Paragraph 1, Item 3 of the Companies Act). Acquiring only part of a business does not fall under the approval requirement of Item 3.

There are also systems that allow the approval resolution to be omitted if statutory requirements are met. One is the short-form procedure (Article 468, Paragraph 1 of the Companies Act): if the counterparty to the business transfer is a special controlling company holding 90% or more of the voting rights of all shareholders (or a higher ratio if so provided in the articles of incorporation), the shareholders' meeting resolution of the controlled company can be omitted. However, this does not necessarily mean the counterparty's shareholders' meeting resolution can also be omitted. The other is the simplified procedure (Paragraph 2 of the same Article): when acquiring the entire business of another company, if the total book value of the consideration delivered is one-fifth or less of the acquiring company's net assets (or a lower ratio if so provided in the articles of incorporation), the resolution on the acquiring company's side can be omitted. However, even under the simplified procedure, if shareholders holding a certain number of shares give notice of dissent in accordance with the law, the resolution must be obtained as usual (Paragraph 3 of the same Article).

As for share transfers, if only the shareholders of the target company change, a shareholders' meeting resolution on the target company's side is generally not required. However, when a selling company transfers shares of an important subsidiary, and the book value of the shares transferred exceeds one-fifth of the selling company's total assets (or a lower ratio if so provided in the articles of incorporation) and the selling company will no longer hold a majority of the subsidiary's voting rights after the transfer, a special resolution of the selling company's shareholders' meeting is required (Article 467, Paragraph 1, Item 2-2 of the Companies Act). In addition, if the target company's shares are subject to transfer restrictions, a separate transfer approval procedure by the board of directors or the shareholders' meeting is required in accordance with the articles of incorporation.

Where a shareholders' meeting resolution is required for a business transfer or similar transaction, shareholders who can exercise voting rights must notify their dissent before the meeting and vote against it at the meeting in order to be entitled to demand a buyout. Shareholders who cannot exercise voting rights at that meeting are not required to give such prior notice or vote against, and may demand that their shares be purchased at a fair price (Article 469 of the Companies Act). Where a shareholders' meeting resolution is unnecessary under the simplified procedure, the appraisal right generally does not arise, but under the short-form procedure the minority shareholders' right to demand a buyout is not excluded. There are also statutory exceptions where the appraisal right is excluded, such as when a resolution to dissolve the company is passed at the same time as the resolution approving the transfer of the entire business (Paragraph 1, Item 1 of the same Article). In companies with minority shareholders, it is necessary to prepare for buyout demands as well as choose the procedure.

Checking Tax Treatment and Preparing Documents in Advance

Tax treatment also makes it difficult to say uniformly whether a share transfer or a business transfer is more advantageous. For consumption tax purposes, a share transfer is a non-taxable transaction as a transfer of securities. In a business transfer, on the other hand, inventory, machinery and equipment, goodwill and other items included in the transfer are taxable assets subject to consumption tax (excluding non-taxable assets such as land). If real estate is included in the business transfer, registration and license tax and real estate acquisition tax should also be checked together with any applicable special measures.

The shareholders' tax position also differs depending on whether the shareholder is a corporation or an individual. The tax rate on an individual's capital gains from shares does not change automatically depending on the holding period, but the tax treatment varies depending on how the consideration is received and the transaction structure. If the target company has tax loss carryforwards, in a share transfer the losses remain within the entity, but it must be checked whether usage restrictions apply in connection with control by specified shareholders. In a business transfer, tax loss carryforwards associated with the target business cannot be passed on to the buyer. Because it is difficult to foresee the tax impact through legal analysis alone, calculations should be run in cooperation with a tax accountant before the scheme is finalized. The design of contract clauses is also explained in SPA (Share Purchase Agreement): Indemnification, Price Adjustment and Closing.

To move the comparison of share transfer and business transfer forward smoothly, preparing the following documents at an early stage makes discussions with professionals more concrete.

• List of contracts (counterparty, term, whether there are change of control clauses or anti-assignment clauses)
• List of permits (governing law, holder, availability of succession procedures, whether notification or reacquisition is required)
• List of employees (type of employment, years of service, degree of involvement in the target business)
• List of assets and liabilities (book value, existence of off-balance-sheet or contingent liabilities, status of security interests)
• Shareholder composition (whether a shareholders' meeting resolution is required, whether there are dissenting shareholders, whether there are transfer restrictions)
• Tax calculations (expected consumption tax and real estate-related taxes, tax position by type of shareholder)
• Post-closing transition plan (timing for handing over systems, contracts, permits and employees)

Assembling these documents early makes it possible to grasp procedural obstacles and the time required at an early stage. In particular, obtaining business partners' consent and handling permit procedures greatly affect the workload in a business transfer, so it is advisable to start on them as a priority.

Where to Consult on M&A Schemes

At LegalAgent, for both share transfers and business transfers, we provide end-to-end support covering the organization of the scope of succession, confirmation of whether contracts and permits can be transferred, whether shareholders' meeting procedures are required, and reflecting these points in the share purchase agreement or business transfer agreement. If you share an outline of the transaction size and business, we will sort out the issues of each scheme from the early stage and advise on a course of action.

• M&A Support
• Legal DD a Startup Should Prepare Before Becoming the Sell Side
• What Is Legal Due Diligence? Purpose, Process, Required Documents and Fees

Frequently asked questions

What is the difference between a share transfer and a business transfer?

A share transfer is a transaction to acquire the shares of the target company; its legal personality is maintained as is, and the assets, liabilities and contracts belonging to the company are carried over comprehensively. A business transfer is a transaction that individually specifies and transfers assets, liabilities, contracts and the like, and as a rule, liabilities not included in the transfer are not assumed.

With a share transfer, can the deal proceed without consent under contracts?

Contracts to which the target company is a party do not automatically terminate when the shareholders change, but if a key contract contains a change of control clause, the change in shareholder composition itself may trigger a notification or consent requirement. In a business transfer, the individual consent of the counterparty is required to transfer the contractual position.

How are employees and permits handled in a business transfer?

In a business transfer, individual agreement is required for the transfer of employment when employees are to be taken over, and there is no mechanism, as there is in a company split, whereby employment contracts are carried over without consent. Since permits are as a rule granted to the legal entity in whose name they are held, in a business transfer they do not automatically pass to the transferee, and the transferee may need to obtain them anew or go through a procedure for succession to status under the relevant industry regulations (approval or notification).