How to Choose an M&A Structure: A Legal Perspective for Narrowing Down Share Acquisitions, Business Acquisitions and Reorganizations

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

Once the broad terms with the target company have been agreed and you reach the stage of considering "share transfer or company split?", the first thing to confirm is what will remain with which company after the transaction. The name of a structure alone does not determine the required procedures or contract terms.

In practice, however, the order of consideration runs the other way. You first settle questions such as how much control to acquire, what you want to take over, and whether the consideration will be cash or your own shares, along with issues concerning minority shareholders, permits and licenses, and tax, and only then narrow down the candidate structures. The scope of what is transferred in a share transfer and in a business transfer, and the handling of contracts, employees and permits in each, are compared in The Difference Between a Share Transfer and a Business Transfer.

Six Questions to Confirm First When Choosing a Structure

Before narrowing down the candidates, confirm the following six points.

• The percentage to be acquired (100% or partial)
• The treatment of the target company's legal personality (survives or ceases to exist)
• The scope of assets and liabilities to be excluded from the transfer
• The means of paying consideration (cash or own shares)
• Whether minority shareholders will remain after the transaction
• The management and operational structure after integration

If you debate only "share transfer or business transfer" before these six premises are settled, decisive issues such as debts you do not want to assume and the treatment of minority shareholders get pushed back. For example, if you aim to acquire 100% of a target company with dispersed shareholders and assume only voluntary share transfers, you cannot acquire the shares of shareholders who refuse to sell, and the acquisition ratio may fall short of your goal. In that case, you need to proceed with the analysis including the treatment of minority shareholders described below.

Positioning Share Acquisitions, Business Acquisitions and Reorganizations

M&A methods broadly divide into those that acquire shares and those that acquire a business. For each, there are methods that do not use reorganization procedures under the Companies Act and methods that do.

Method	What is transferred	Recipient of consideration	Treatment of legal personality	Main statutory basis and procedures
Share transfer (negotiated or tender offer)	Issued shares	Existing shareholders	Target company survives	Generally not required on the target company side. For a seller company's sale of shares in a subsidiary of a certain size, Article 467(1)(ii-2); for shares with transfer restrictions, separately confirm transfer approval
Third-party allotment (issuance of new shares, etc.)	New shares or treasury shares	Issuing company	Target company survives	Article 199 et seq. of the Companies Act
Business transfer	Assets, liabilities, contracts, etc. constituting the business, individually identified	Transferor company	Both transferor and transferee survive	Article 467 et seq. of the Companies Act
Absorption-type company split	All or part of the rights and obligations relating to the business	Splitting company	Both splitting company and successor company survive	Article 2(xxix) and Article 757 et seq. of the Companies Act
Incorporation-type company split	All or part of the rights and obligations relating to the business	Splitting company	Splitting company survives and a new company is incorporated	Article 2(xxx) and Article 762 et seq. of the Companies Act
Absorption-type merger	All rights and obligations of the disappearing company	Shareholders of the disappearing company	Disappearing company ceases to exist	Article 2(xxvii) and Article 748 et seq. of the Companies Act
Share exchange	All issued shares of the company that becomes the wholly owned subsidiary	Shareholders of the company that becomes the wholly owned subsidiary	Both survive in a wholly owned parent-subsidiary relationship	Article 2(xxxi) and Article 767 et seq. of the Companies Act
Share transfer (kabushiki iten)	All issued shares	Shareholders of the original company	A newly incorporated wholly owning parent company is formed	Article 2(xxxii) and Article 772 et seq. of the Companies Act
Share delivery (kabushiki kofu)	Shares to the extent necessary to make the company a subsidiary (need not be all issued shares)	Shareholders who transfer their shares	Both survive	Article 2(xxxii-2) and Article 774-2 et seq. of the Companies Act

While a share exchange presupposes making the target a wholly owned subsidiary (100% acquisition), share delivery is a system in which a company acquires shares of another stock company to the extent necessary to make it a subsidiary, delivering its own shares as consideration (Article 2(xxxii-2) and Article 774-2 et seq. of the Companies Act). If you want a certain percentage of minority shareholders to remain in the target company after the acquisition, share delivery is a candidate to consider. However, it is a transaction that makes another Japanese stock company a subsidiary as defined by Ministry of Justice ordinance, and there are requirements such as using the company's own shares for at least part of the consideration. It is not a system that can be used as is to acquire a foreign company or to buy additional shares of a company that is already a subsidiary. The differences in subject matter, consideration and legal personality between a share transfer and a business transfer are compared in a table in The Difference Between a Share Transfer and a Business Transfer.

If you want to acquire only part of the target company's business, in addition to having the target business handed over directly through a business transfer or company split, a method often used in practice is for the seller first to transfer the target business to a new or existing subsidiary through a company split or contribution in kind, and for the buyer then to acquire the shares of that subsidiary. In reorganizations such as company splits, the parties are bound by the statutory required contents of the plan or agreement under the Companies Act, which makes it difficult to include flexible consideration terms such as earn-outs or escrow directly. Whether deferred payment and the like are possible is determined based on whether they conform to the requirements of the statutory agreement or plan and whether they can be adjusted through a separate agreement. Where you want flexibility in designing the consideration, this two-step method is also a candidate.

The Difference Between Universal Succession and Individual Transfer

A business transfer is a method in which rights and obligations constituting the business, such as contracts, debts and employment contracts, are individually identified and transferred to the buyer. Transferring a contractual position requires the consent of the counterparty; releasing the seller through the assumption of debt requires satisfying statutory requirements such as an agreement with or consent of the creditor; and transferring employees requires the consent of each individual employee. In contrast, company splits and mergers are methods of universal succession in which rights and obligations are transferred in a single package.

In a company split, contractual positions relating to the business can, as a rule, be transferred without the counterparty's consent. Employees who are mainly engaged in the business being transferred and whose employment contracts are designated for transfer in the split agreement or plan are transferred under their existing working conditions through statutory procedures. Employees who are mainly engaged in the business but excluded from the transfer can object and demand to be transferred. Conversely, employees who are not mainly engaged in the business but are designated for transfer can object and remain with the splitting company. That said, this means only that individual written consent does not need to be obtained from each person; it does not mean that the procedures themselves can be skipped. Written notice to employees and consultation procedures are mandatory under the Act on the Succession to Labor Contracts upon Company Split, and employees who meet certain requirements have the right to object.

The same applies to creditor protection procedures. In a company split, if there are creditors who will no longer be able to demand performance of obligations from the splitting company after the split, the company must give public notice in the official gazette and individual notice to known creditors, and the period for raising objections may not be less than one month (Article 789(1)(ii) and (2) and Article 810(1)(ii) and (2) of the Companies Act). In splits that involve distributing certain assets to shareholders, the range of creditors covered widens, so check this for each transaction. In some cases individual notice can be omitted by a double public notice that meets the statutory requirements, but individual notice is required for tort creditors in a company split. For creditors on the side of the successor company in an absorption-type company split, the procedure under Article 799 of the Companies Act must be checked separately. Creditors who do not object within the period are deemed to have approved the split, but if an objection is raised, measures such as repayment or provision of security are required (except where there is no risk of harm to the creditor; Article 789(4) and (5) and Article 810(4) and (5) of the Companies Act). Similar procedures apply to creditors of the disappearing company in an absorption-type merger and others (Article 789(1)(i) and Article 810(1)(i) of the Companies Act). Even if the reason for choosing a company split or merger is "to avoid individual consent for contracts and employees," the schedules for creditor protection and procedures under the Act on the Succession to Labor Contracts upon Company Split need to be built into the execution timeline in advance.

The issue of how to separate risks identified in due diligence from what is transferred is designed specifically based on the matters confirmed in Legal Due Diligence.

Dealing with Minority Shareholders and Checking Regulations in Advance

If a transaction proceeds with minority shareholders remaining in the target company, there are situations in which coordination after the acquisition, such as for decisions on important matters, becomes more burdensome than expected. Where you aim for a wholly owned subsidiary (100% acquisition) and cannot obtain voluntary share transfer agreements from all shareholders, the options include a demand for cash-out of shares by a special controlling shareholder holding nine-tenths or more of the voting rights of all shareholders (or a higher percentage if the target company's articles of incorporation so provide), who compulsorily acquires the remaining shares (Article 179 et seq. of the Companies Act), a reverse share split, and the acquisition of class shares subject to wholly call.

A demand for cash-out of shares also requires the target company's approval. Each of these methods has its own procedural requirements, such as ensuring a fair acquisition price, notices and public notices to minority shareholders, and petitions by dissenting shareholders to the court for a price determination. Because the available means differ depending on the shareholder composition and the percentage of voting rights that can be acquired, begin considering the procedures in parallel with structure selection as soon as you learn that the target company has minority shareholders.

Permits and licenses are, as a rule, granted to the corporation that holds them. In methods where the target company's legal personality continues as is, such as share transfers, share exchanges and share delivery, the holder does not change, so permits tend to be easier to maintain. However, some industry-specific laws require notification or approval for a change in shareholder composition itself. On the other hand, where another company takes over the business through a business transfer or company split, check individually whether the governing law contains a provision permitting succession. In industries with no statutory succession provision, the transferee must newly obtain the permit, and the review schedule affects the overall timeline.

If the buyers or investors include foreign corporations or non-residents (including domestic corporations substantially controlled by foreign investors), also check the inward direct investment review system under the Foreign Exchange and Foreign Trade Act. If the target company's business falls within the designated industries published by the Ministry of Finance and the Bank of Japan (including core industries related to national security), prior notification may be required depending on the investor's attributes, the percentage of voting rights to be acquired and the conditions for applying exemptions. After notification, a waiting period (a period during which the transaction may not be executed) generally applies (Ministry of Finance, About the Inward Direct Investment Review System (Japanese)). The Ministry of Finance's published list for listed companies is also only a reference and does not determine whether notification is required. Regardless of whether the company is listed, investors themselves must compare the target business with the details of the transaction.

Consideration of merger control under the Antimonopoly Act is also essential. When carrying out a share acquisition or reorganization above a certain size, prior notification to the Japan Fair Trade Commission may be required. The notification thresholds differ by transaction type. For example, in a share acquisition, notification is required where the total domestic sales of the buyer's combined business group exceed JPY 20 billion, the total domestic sales of the target company and its subsidiaries exceed JPY 5 billion, and the acquiring group's voting rights ratio newly exceeds 20% or 50% (Japan Fair Trade Commission, Notification System for Share Acquisitions (Japanese)). Separate thresholds are set for mergers, company splits and other transactions. Once the transaction type and the scale of sales are settled, check the details of the applicable system individually.

A Structure Memo Lining Up Legal, Tax and Accounting

When comparing structure candidates, placing issues that can be judged from a legal standpoint alone and issues that require tax and accounting review in the same table makes the first discussion with specialists concrete.

Issue	Matters to check on the legal side	Matters to check on the tax and accounting side
Control	Acquisition ratio, presence of minority shareholders, required approval resolutions	Scope of consolidation, applicability of accounting treatment for goodwill, etc.
What is transferred	Whether contracts, permits, litigation and contingent liabilities must be individually identified	Fair value measurement of assets, whether tax loss carryforwards can be succeeded to
Consideration	Cash or shares, recipient of consideration (shareholders or target company)	Whether consumption tax, registration and license tax and real estate acquisition tax arise
Minority shareholders and creditors	Whether appraisal rights and objection procedures are required, and the schedule for public notices and individual notices	Accounting treatment of non-controlling interests
Employees	Whether individual consent is required, whether the Act on the Succession to Labor Contracts upon Company Split applies	Transfer of retirement benefit obligations
Permits and notifications	Whether succession procedures exist, whether competition law and foreign exchange law notifications are required and the waiting periods	Notification costs, impact on the execution schedule

If you fill in this memo for each target company, the people in charge of legal, tax and accounting can approach the analysis sharing the same premises. At the stage of translating the structure into the design of consideration and indemnities, see Indemnities, Price Adjustment and Closing in an SPA (Share Purchase Agreement), and at the stage of putting the structure in writing, see Reviewing an M&A Letter of Intent (LOI). In the early stage of consideration, start by identifying the internal documents corresponding to each row of this table (shareholder composition, list of contracts, list of permits, expected consideration and the range of employees engaged in the target business). Our services from structure selection through to the definitive agreement are described in M&A Support.

Frequently asked questions

Where should we start in deciding an M&A structure?

Rather than choosing from names such as share transfer or company split, first check the issues of control, what is to be succeeded to, consideration, minority shareholders, creditors, employees, permits and licenses, tax, competition law and the post-transaction organization, and then narrow down the candidate structures.

Can a company split be used to carry out an M&A without the consent of employees or contract counterparties?

In a company split, contractual positions can be transferred without the counterparty's consent, and workers mainly engaged in the business being succeeded to are also transferred without their consent; however, public notice and individual notice to creditors with an objection procedure, and the notice and objection procedures for workers under the Act on the Succession to Labor Contracts upon Company Split, are required. It does not mean that consent, notice and objection procedures become entirely unnecessary.

In what cases is a notification to the Japan Fair Trade Commission required in M&A?

Thresholds for total domestic sales and voting rights ratios are set for each type of transaction. In a share acquisition, notification is required where the total domestic sales of the acquiring company side exceed JPY 20 billion, those of the share-issuing company side exceed JPY 5 billion, and the voting rights ratio newly exceeds 20% or 50%. Mergers, company splits and other transactions have separate thresholds, so these are checked individually once the type of transaction is settled.