Proposal of M&A Scheme
M&A methods include stock transfer, business transfer, and company split, etc. In our experience, about 70% of M&A cases are stock transfer (including third-party allotment of shares), 20% are business transfer, and 10% are reorganization actions such as company split and stock exchange. Therefore, since most cases involve stock transfers and business transfers, we would like to first review these methods.
Share Transfer as a M&A Technique
A stock transfer is the purchase and sale of outstanding shares of stock, and is made by agreement between the seller and the buyer. The agreement can be made orally, of course, but since it may be impossible to prove that the transaction took place in the event of a dispute later, a share transfer agreement is usually prepared and signed. In addition, for companies issuing share certificates, delivery of the share certificates is an effective requirement (Article 128, Paragraph 1 of the Companies Act), so delivery of the share certificates (including simplified delivery and delivery by way of transfer of possession) is made at the same time as payment of the purchase price. If share certificates have not been issued, it is necessary to request the issuing company to prepare share certificates prior to closing.
Many small and medium-sized companies have a clause in their articles of incorporation restricting the transfer of shares. This means that any transfer of shares requires the approval of the company’s board of directors. In order to prevent people who are unknown to the company or undesirable to the company from becoming shareholders, small and medium-sized companies require the approval of the company (a resolution of approval by the board of directors) for the transfer of shares and do not permit the transfer of shares without the approval of the board of directors. If a shareholder of a company with such transfer restrictions wishes to transfer shares of the company, he/she is required to request approval of the transfer of shares (Article 136 of the Companies Act), but if the company’s management wishes to transfer shares, it must prepare in advance a request for approval of transfer and a directors’ resolution (minutes of a board meeting) regarding approval of transfer and the company will then hand them over to the other party at the time of closing. In addition, when shares are transferred, the shareholders’ register must be rewritten (Article 130, Paragraph 1). Since registration in the shareholders’ register is a requirement for opposition in relation to the company, the buyer will not be treated as a shareholder by the company if the shares are not registered in the shareholders’ register. Thus, the preparation of a share transfer agreement, approval of the transfer by the board of directors (in a restricted transfer company), and reregistration of the shareholder register are necessary procedures for a share transfer.
Third Party Allotment of Shares as a M&A Technique
A capital increase through third-party allotment is similar in nature to a share transfer in that a third party receives an allotment of shares and becomes a shareholder of the company, thereby controlling the management of the company. While a stock transfer involves the transfer of shares that have already been issued, a capital increase through third-party allotment involves the issuance of new share certificates, which are then acquired by the new management. In the case of a stock transfer, the proceeds of the stock transfer are paid to the previous shareholders, and the proceeds of the stock transfer are not used as working capital thereafter. If a happy retirement of the company’s management is being contemplated, the company’s management needs to acquire the funds for the acquisition itself, so the share transfer procedure is used. If the third party acquiring the company wishes to retain the acquisition funds and use them to operate the company or rehabilitate its business, it is necessary for the company to retain the funds from the capital increase through a third-party allocation of new shares. In some cases, both a share transfer and a third-party allotment may be conducted at the same time.
For a third-party allotment, the following procedures are required: a resolution of the general shareholders meeting regarding the issuance of new shares (since most small and medium-sized companies are classified as nonpublic companies with transfer restrictions, a special resolution of the general shareholders meeting is required for a third-party allotment) (Article 199, Paragraph 2 and Article 309, Paragraph 2, Item 5 of the Companies Act), subscription for shares (Article 203 of the Companies Act), allocation ( The following procedures are required: subscription (Article 203 of the Companies Act), allotment (Article 204 of the Companies Act), payment (Article 208 of the Companies Act), and registration in the shareholders’ register. However, when transferring a company through M&A, there is usually only one subscriber, so by preparing a general subscription agreement, the procedures of subscription and allocation of shares can be omitted (Article 205, Paragraph 1 of the Companies Act).
Business Transfer as a M&A Technique
Business transfers are another important option in M&A. If the new owner (transferee company) acquires control of the company from the former management through a stock transfer (in most cases, 100% of the outstanding shares), the company becomes a subsidiary of the new owner (transferee company), and the stock transferee acquires the entire transferred company in its original form. The transferee company will be a subsidiary of the new owner (the transferee company). In principle, the transferee company is not liable to the acquired subsidiary beyond the amount of its investment (purchase price) due to the limited liability of its shareholders, but in practice, the parent company is usually responsible for the operation of the subsidiary. Even if the transferee company has off-balance-sheet liabilities, or if court or other legal problems arise, the parent company is expected to take responsibility for resolving them. Thus, in principle, in a stock transfer, it is not possible to select the business and risks of the target company at the time of acquisition (of course, it is often possible to block such risks by simultaneously implementing reorganization or other methods).
In contrast, in the method of business transfer, the business to be transferred can be determined by the seller and the buyer through negotiation, so that all or only some of the company’s business may be transferred. It is also possible to succeed only all or part of the assets and only necessary liabilities. However, it should be understood that the procedures for transferring individual assets and liabilities in a business transfer agreement (e.g., fulfilling the requirements for counterclaims for transferring receivables, obtaining the consent of business partners with whom the company has a contractual relationship to succeed to a contractual position, etc.) are more complicated, and the procedures may take more time and money.
When transferring all or a significant part of a company’s business, a special resolution of a general meeting of shareholders (requiring the attendance of shareholders holding a majority of the total number of shares issued and the consent of shareholders holding two-thirds of the shares held by the attending shareholders) is required (Article 467, Paragraph 1, Item 1 and Item 2; Article 309, Paragraph 2, Item 11).
When transferring a business, it is necessary to prepare a business transfer agreement and clearly specify the assets to be transferred and the liabilities to be succeeded. In particular, with regard to the succession of liabilities, it is not clear whether some liabilities, such as liability for defects of products sold previously, will be succeeded to or not, so it is necessary to clearly stipulate in the business transfer agreement by itemizing the liabilities to be succeeded to or not.
In addition, since the assets to be transferred must meet the requirements for each asset, it is necessary to go through the following procedures: transfer registration for real estate, transfer of possession for movable assets, countermeasures against assignment of claims for nominated claims, change of registered name for registered intellectual property rights such as patents, and change of registration with the Land Transport Bureau for motor vehicles. For registered intellectual property rights, such as patents, it is necessary to change the name of the registered owner. In addition, when transferring a contractual position, such as a contractual relationship with a business partner, individual consent from the business partner is required. In addition, as for contracts with employees, employment contracts will be terminated and new employment contracts will be concluded with the successor company, so it will be necessary to obtain the consent of each employee individually for the transfer of employee status.
Reorganization as a M&A Technique
There are several methods of reorganization, such as company split, share exchange, share transfer, and merger. A company split is a method of transferring a business division of a company and is similar in nature to a business transfer. However, because it is a reorganization act, it is often used because it is a simple procedure that does not require the consent of individual business partners.
Mergers are advantageous in that they are a comprehensive method of succeeding to a company and do not require the delivery of cash consideration (for example, in the case of a merger, shares of the surviving company are delivered to shareholders of the dissolving company, allowing the surviving company to acquire another company without incurring any cash outlay), but they are also advantageous in that the assets of the succeeding company are not transferred to the surviving company. ) However, if the assets of the succeeding company are not clearly defined, it may take on unexpected risks, such as the existence of off-balance-sheet liabilities.
Absorption-type demerger and incorporation-type demerger in M&A
An absorption-type split is a method in which the business division of the company conducting the split (splitting company) is transferred to the company receiving the split (successor company in an absorption-type split), while an incorporation-type split is a method in which the business division of the splitting company is transferred to a new company to be established. In an absorption-type split or incorporation-type split, the company’s assets, liabilities, employment contracts, and other rights and obligations are transferred to the successor company or the newly established company.
An absorption-type split is similar to a business transfer in that the business division of the split company is transferred to another company (the successor company). However, while a business transfer is a transfer of individual rights and requires the transfer of rights and obligations with respect to individual assets and liabilities, an absorption-type split or incorporation-type split is a comprehensive transfer associated with an act of reorganization, and thus does not require the transfer of individual assets or the fulfillment of countervailing requirements. (Of course, procedures for changes such as registration of real estate and registration of changes in intellectual property rights are required.)
In the case of an absorption-type demerger, the business division of the demerged company is transferred from the demerging company to the succeeding company, and the succeeding company pays cash to the demerged company as consideration. For example, Company A with assets of 300 million and liabilities of 200 million may transfer almost all of its assets and liabilities to Company B for 100 million yen, and Company B may pay Company A 100 million yen. In this case, Company B can refuse to succeed to the assets and liabilities that it does not favor in the absorption-type company split agreement with Company A, and Company A can use the funds paid by Company B to liquidate its remaining liabilities and then dissolve the company, thereby distributing the remaining assets to its shareholders.
In a company split, it is possible to specify in the split agreement which assets and liabilities are to be succeeded to, so that, for example, if Company A transfers important assets to Company B, the remaining creditors of Company A may be disadvantaged because they will not be able to collect their debts. Similarly, a creditor who had a claim against Company A and whose debt is succeeded by Company B will demand payment of the debt from Company B instead of Company A. If Company B does not have sufficient assets, the creditor may not be able to collect the debt. Therefore, in a company split, a creditor objection procedure is stipulated, whereby known creditors must be individually notified of the company split, and creditors who object must be required to pay their debts or provide security. These procedures are called creditor protection procedures. In the case of a company split, the creditor protection procedure, in which all creditors are individually notified of the details of the company split, would be too burdensome and would be an obstacle to the company split.
On the other hand, a company that makes electronic public notices via the Internet can avoid giving individual notice to creditors by posting the details of the company split on its website. Whether or not an electronic public notice has been made is confirmed by an investigation by an electronic public notice investigation company. The results of the investigation by the electronic public notice research company are required for registration of the company split. When conducting a company split, it is convenient to change the method of public notice (from the Official Gazette to electronic public notice) in advance by amending the Articles of Incorporation. However, if electronic public notice is used, a summary of financial results must also be posted on the website (not in the official gazette). Some insolvent companies do not want their business partners to know their financial position by posting a summary of financial results on their website, so it is necessary to consider in advance whether to use the electronic public notice method or individual notification to creditors.
In the event of a company split, the employment contractual relationship of the employees of the relevant business unit will be transferred to the successor company or the newly established company without their individual consent. From the employee’s point of view, this may harm his or her employment contractual status, since he or she is now an employee of a different company as a result of the company split, even though he or she was formerly a member of Company A. Therefore, the “Law Concerning Succession to Labor Contracts upon Company Split” stipulates that notification and consultation with the employees to be transferred must be conducted, and consideration must be given to ensure that the employees’ status is not unilaterally infringed.
Mergers as a M&A Technique
A merger is an act of reorganization in which two or more companies become one company. In the case of a merger, a merger agreement must be prepared and signed by both parties (companies), and a special resolution of a general shareholders’ meeting must be obtained for both merging companies (however, a special resolution of a general shareholders’ meeting of the surviving company is not required for a simplified merger) because the merger will have a significant impact on the shareholders of both companies. Shareholders who oppose the merger can demand that the company purchase their shares by voting against the merger resolution at the general shareholders’ meeting. There are two types of mergers: absorption mergers and incorporation mergers.
Merger by absorption
In an absorption-type merger, the surviving company (Company A) comprehensively assumes the assets, liabilities, and other rights of the absorbed company (Company B), and the absorbed company (Company B) ceases to exist. The shareholders of the absorbed company (Company B) will usually receive shares of the surviving company (Company A), but may also receive money or other assets. If shares of the surviving company (Company A) are delivered to the shareholders of the absorbed company (Company B), the shareholders of the absorbed company (Company B) will become shareholders of the surviving company (Company A). The amount of shares of Company A to be delivered to the shareholders of Company B will be determined by the merger ratio. In this case, the former shareholders of Company A and the shareholders of Company B will own the same percentage of shares of Company A (50% each) (merger of equals).
Upon the merger, Company A will comprehensively take over all of Company B’s assets, liabilities, and all other rights and interests. In addition, since it is sufficient for Company A to deliver shares of Company A to the shareholders of Company B, no cash outlay is required unlike in a share acquisition or business transfer (cash may be delivered to the shareholders of the dissolving company, Company B, but this is not considered to be a common practice). Therefore, in large-scale overseas M&A, the method of merger without cash outlay is often chosen. Also, if Company A is a listed company and Company B is an unlisted company, the shareholders of Company B will be able to acquire liquid shares of Company A through the merger, which will increase the possibility of redemption and may be a favorable outcome for the shareholders of Company B. However, if the unlisted company is larger than the listed company, the shareholders of the unlisted company may be able to acquire listed shares without going through the listing process, which may be judged as a backdoor listing, and the listed company may be delisted.
Merger by incorporation
In a merger by incorporation, a new company (newly incorporated company) (Company C) is established and all assets, liabilities, and other rights of Companies A and B are transferred to the newly incorporated company (Company C). The shareholders of Company A and Company B will become shareholders of Company C. The amount of shares to be issued to the shareholders of Company A and Company B will be determined by the merger ratio. As a result of the merger, both Company A and Company B (referred to as the dissolving company in the merger) will be dissolved.
Share Exchange as a M&A Technique
A share exchange is a procedure whereby shares of Company B (the company that will become a wholly owned subsidiary of Company A as a result of the share exchange) are exchanged for shares of Company A (the company that will become the wholly owning parent company of Company B as a result of the share exchange). Through the share exchange, shareholders of Company B receive shares of Company A (shares of Company A are delivered in exchange for shares of Company B) and become shareholders of Company A. Also, since the shares of Company B held by the shareholders of Company B are transferred to Company A, Company A acquires all of the outstanding shares of Company B and becomes the wholly owning parent company of Company B. As a result of the share exchange, Company A becomes the wholly owning parent company of Company B.
As a result of the share exchange, both the shareholders of Company A and the shareholders of Company B who received the shares of Company A become shareholders of Company A. The amount of shares of Company A to be delivered to the shareholders of Company B (share exchange ratio) will be determined through discussions based on the financial conditions of Company A and Company B.
In the case of a share exchange, as in the case of a merger, Company A can make Company B into its wholly owned subsidiary without any cash outlay. In addition, the shareholders of Company B also have the advantage of being able to redeem their shares through a gain in price or by selling them on the market if the shares are liquid, for example, if Company A is a publicly traded company.
In the case of a share exchange, it is also necessary to prepare a share exchange agreement (Article 767 of the Companies Act) and obtain special resolutions of shareholders’ meetings at both stock companies, except in the case of a simplified share exchange. The same procedures as those for mergers apply to share purchase demands made to dissenting shareholders and creditor objection procedures.
Share Transfer as a M&A Technique
A share transfer is a procedure whereby a company that becomes a wholly owned subsidiary (Company B) establishes a wholly owning parent company (Company A), either alone or jointly, and transfers shares of the wholly owned subsidiary (Company B) to the wholly owning parent company (Company A), and shares issued by the wholly owning parent company at the time of establishment to shareholders of the wholly owned subsidiary (Company B). As a result of the share transfer, the newly established company (Company A) becomes the wholly owning parent company of Company B, and the shareholders of Company B who previously held shares of Company B become shareholders of Company A. A share transfer is a procedure for establishing a wholly owning parent company and is used to establish a holding company or to create a new corporate group by hanging several companies under the holding company.