The Mergers & Acquisitions Review: Japan

Overview of M&A activity

M&A transactions constitute an important part of corporate activities in Japan. In 2020, Japanese companies were involved – whether domestic, inbound or outbound – in 3,730 M&A transactions according to Recof's analysis, representing a decrease of 8.8 per cent from 2019.2 As in other countries and areas, the covid-19 pandemic has negatively affected the M&A market in Japan in 2020, with the number of transactions decreasing for the first time in nine years.

i Domestic transactions in 2020

The number of domestic M&A transactions in the Japanese market in 2020 was 2,944, resulting in a decrease of 1.9 per cent from the previous year. The aggregate transaction value was approximately US$33 billion,3 amounting to a decrease of 43.9 per cent from 2019.4

ii Covid-19's impact on the Japanese market in 2020 and recovery in 2021

The covid-19 pandemic has significantly impacted the Japanese M&A market, as it has elsewhere in the world. The Japanese government first declared a national state of emergency on 27 April 2020, which lasted until 25 May 2020; subsequently, additional and 'quasi' states of emergency were repeatedly declared on a prefectural basis. The pandemic has caused a significant number of ongoing M&A transactions to be suspended or abandoned, and likely deterred many others from being currently pursued. As a result, the aggregate transaction value in the first half of 2020 decreased approximately 59 per cent from the previous year, contrary to the continuous expansion of the M&A market in the year prior to the onset of the pandemic. The outbound M&A market has been the most negatively affected component sector; the aggregate transaction value has decreased more than 76 per cent from the first half of the previous year.5 However, the Japanese M&A market seems to have already recovered in 2021. The numbers and transaction volume from January to September 2021 are 3,153 and US$144 billion, respectively, which is the highest number and the second highest transaction volume to date for the same period.6

General introduction to the legal framework for M&A

It is generally stated in Japan that an M&A transaction is defined as a transaction where control of a target company is transferred, regardless of transactional form. In this regard, M&A transactions can generally be grouped into three categories: (1) stock transfers; (2) business transfers; and (3) statutory mergers and other corporate restructuring transactions.

i Stock transfers

This structure is the most frequently utilised in Japanese M&A deals and the most well known. A stock transfer agreement, or stock sale and purchase agreement (SPA), is based on an agreement regarding the transfer of the stock in a target company between a seller and a buyer and generally is governed by the Civil Code and Companies Act of Japan. No formality including a stock transfer form is required for an SPA to be effective, and recent transactions using an SPA have been negotiated with reference to deal styles employed in the US market; provided, however, that the perfection of the transfer of the stock in the target company requires the change of the stockholder's name in the records of the target company from the seller to the buyer. Although stock acquisitions in the United States can include a feature where the target company newly issues shares that give the buyer (who subscribes for these newly issued shares pursuant to a share subscription agreement) a control right with respect to the target company, in Japan the use of a share subscription agreement is generally regarded as being a different category from SPA transactions, as share subscriptions are governed by the Companies Act, not by the Civil Code.

In Japan, an ordinary resolution at a general shareholders' meeting requires a simple majority for approval and a special resolution requires two-thirds. In order for a buyer to acquire one-third or more of the outstanding shares of a listed target company, the buyer is obligated to make a tender offer or use the takeover bid (TOB) procedures contained in the Financial Instruments and Exchange Act, known as a 'mandatory TOB procedure'. If a buyer intends to purchase two-thirds or more of the outstanding shares of a listed target company through the TOB procedure, the buyer is obligated to purchase all shares tendered and offered by the shareholders of the listed company, even if the buyer expressly announces an upper limit of the number of shares that the buyer intends to purchase (referred to as the 'mandatory obligation to purchase all of the offered shares in the TOB procedure').

ii Business transfers

A business transfer agreement (which is governed by the Companies Act) was often utilised in Japan so that a buyer succeeds to a transferred business of a seller. However, for the business transfer to be perfected, any and all registrations, licences, permissions, etc., have to be perfected in light of any and all assets (including real estate, intellectual property rights, licences, permissions, etc.), and the process for the closing of a business transfer is, therefore, very tedious and time-consuming.

A company split agreement entails a transferring company (namely, the seller) splitting a portion of its business following a resolution adopted at a general shareholders' meeting, and the split business is automatically transferred to a succeeding company (namely, the buyer). For its simplicity and efficiency as compared to a business transfer, this arrangement is preferred and often used in current practice.

iii Statutory mergers and other corporate restructuring transactions

This category includes: (1) statutory mergers; (2) stock exchanges; and (3) stock transfers.

A statutory merger in Japan is equivalent to that seen in the United States and European countries. In a statutory merger, generally speaking, the disappearing company is merged into the surviving company, as a result of which those two companies will be integrated into one merged company. Tax and accounting impacts usually determine which company (namely, buyer or seller) is the disappearing company and which is the surviving company.

A stock exchange agreement is a very efficient and straightforward transaction so that a target company automatically becomes a wholly owned subsidiary of a buyer if both the target and the buyer obtain a special resolution (i.e., two-thirds approval) at a general shareholders' meeting. In this process, no mandatory requirements relating to the TOB procedure are necessary even if the target is a listed company.

A stock transfer is a unique process under the Companies Act and is not a simple transfer of stock (or shares) of a target company. The process was originally introduced for a company to newly incorporate a new parent company to be a holding company that wholly owns the existing independent companies. However, in the context of M&A transactions, a stock transfer is utilised in a situation where two companies intend to integrate their businesses in an umbrella structure of one holding company; namely, if shareholders of the two companies adopt a resolution at a general shareholders' meeting approving the joint stock transfer agreement, a joint holding company will be newly established and the two existing companies will be wholly owned subsidiaries of the joint holding company as sister companies. As it may not be clear which company from the two companies is the buyer (or the target) and this ambiguity is preferred in Japanese business society, consequently this structure has been used in various deals in the Japanese market where the transaction was intended to act as an integration of equals rather than being considered a takeover of one company by another.

Developments in corporate and takeover law and their impact

i Significant recent statutory amendments and proposals

First, while cash-out mergers were legally possible in Japan, this transaction type requires numerous technical procedures, including special approval at a general shareholders' meeting and court procedures, for such a merger to be effective. The Companies Act was amended in 2014 (effective as of 1 May 2015) so that a shareholder holding 90 per cent or more of the target company can force the other shareholders to sell their shares in the target to the acquirer with the approval of the target's board of directors. As a result, in many cash-out transactions of publicly held companies where bidders seek to obtain all of the outstanding shares of the target, bidders have stated in their TOB announcement that they would seek to exercise this right if they were able to acquire 90 per cent or more of the target's outstanding shares through the tender offer.

Second, although bidders are legally allowed to use shares as consideration in Japanese tender offers, in practice, only cash has been so far utilised in almost all cases as the offered consideration because of certain procedural obstacles in the Companies Act (see the following paragraph) and the resultant tax treatment (namely, a capital gains tax is imposed on the selling shareholders and carrying-over is not permitted). An amendment to the Act on Strengthening Industrial Competitiveness (ASIC) is expected to eliminate this procedural process and to enable a Japanese stock company to use its own shares as consideration in a tender offer to acquire more than 50 per cent of a target company's (including foreign target companies') voting shares more easily.

Third, the Companies Act was amended in 2019 to further promote corporate governance reforms. Most of the provisions effected by such amendment came into force in March 2021 including, among other things, requiring listed companies to: (1) appoint outside directors; and (2) determine and publicly disclose their remuneration policies. Furthermore, the amended Act has established share delivery. Prior to the 2019 amendment, under the Companies Act, if an acquiror desired to use its own shares as consideration for shares of the target company, the acquiror either needed to use a stock exchange (see Section II.iii) or an investment in kind, though a stock exchange requires the purchaser to acquire all shares of the target company, and an investment in kind requires valuation of shares of the target company by a third-party inspector. Further, liability to the shareholders of the target company and directors of the purchaser was imposed under the Companies Act prior to the amendment; these persons have to compensate any monetary shortfall between the valuation of the target shares used in the transaction and the actual valuation thereof. By using the share delivery method permitted following effectiveness of the 2019 amendment, a purchaser can use its own shares as consideration without the risks discussed earlier, for example, to effect a partial acquisition to make the target company (excluding a foreign company, however) a subsidiary, instead of a wholly owned subsidiary.

Fourth, amendments to Foreign Exchange and Foreign Trade Act in 2019 and 2020 began to apply fully from June 2020. These amendments are intended to strengthen regulations on inward foreign direct investments, typically an acquisition of shares or equities in Japanese entities from Japanese individuals or entities by foreign entities, but the government has endeavoured to strike a balance so as to not unnecessarily impede inbound investments. Inbound investment into certain business sectors (designated sectors) relating to national security requires prior filing with the Minister of Finance and other competent ministers for the designated sectors and a 30-day waiting period (which may be extended up to five months, but also can be shortened to 14 days). In addition, the amendments expand actions with respect to inward foreign direct investment that require prior ministerial filing and approval, including when: (1) more than 1 per cent of a listed company's shares is to be acquired (previously the acquisition threshold was 10 per cent); (2) foreign investors or their related persons are sought to be appointed as a director or a corporate statutory auditor at a general shareholders' meeting; and (3) a resolution is to be submitted and considered at a general shareholders' meeting for the company to commence business, or transfer or relinquish its existing business, in one of the designated sectors.

ii Recent legal and commercial developments involving listed companies affecting M&A transactions

Fair M&A Guidelines

The Ministry of Economy, Trade and Industry (METI) formulated the 'Fair M&A Guidelines: Enhancing Corporate Value and Securing Shareholders' Interests' (Fair M&A Guidelines) in June 2019. The Fair M&A Guidelines present ideal rules for management buyout transactions and the acquisition of controlled companies by controlling shareholders where issues with respect to structural conflicts of interest and information asymmetries typically exist. Most importantly, the Fair M&A Guidelines propose fairness-ensuring measures such as: (1) establishment of an independent special committee; (2) independent expert advice from external advisers (e.g., valuation report of a targeted share); (3) market checks; (4) establishment of a majority-of-minorities rule; (5) enhancement of the disclosure of information to minority shareholders; and (6) elimination of coerciveness (provision of an opportunity to appropriately decide whether to tender shares in response to the tender offer). In practice, most of these measures were generally considered or utilised in Japan M&A transactions prior to METI's issuance of the Fair M&A Guidelines. However, the Fair M&A Guidelines did officially introduce some procedures and concepts not so widely practised. In particular, the Fair M&A Guidelines suggest: (1) establishing an independent special committee as soon as possible upon receipt of specific acquisition offer from a potential acquiror; (2) having financial advisers and legal advisers from whom the special committee can seek professional advice; and (3) confirming the rationality of the business plan and its preparation process, as business plans can vary from being optimistic to conservative, though it is used in valuating shares with the discounted cash flow method.

Corporate Governance Code

The Tokyo Stock Exchange adopted Japan's Corporate Governance Code (CGC) in 2015, with amendments in 2018 and 2021, in response to the increasing globalisation of the world economy and growing expectations for established rules of conduct for directors of Japanese listed companies. The CGC takes a 'comply or explain' approach; namely, listed companies are not required to comply with each principle set out in the Code, but they are required to explain the reason if they do not comply with any of the Code's principles. Although the CGC is just 'soft law' and is not legally required to be complied with nor enforceable by the courts, listed companies are obligated to comply with the CGC to continue their listing on the Exchange; as a result, adherence to the CGC has become an established custom by listed companies and it is expected that the courts would recognise the CGC principles as appropriate rules of conduct applicable to directors of all Japanese listed companies.

The CGC's most recent amendment became effective as of 11 June 2021. Notably, this amendment establishes high-level corporate governance standards that are to apply in connection with the planned changes of the Exchange's market sections. The amendment includes standards seeking to enhance the functions of a board of directors (such as by having companies in the new 'prime' market have their board of directors be comprised of at least one-third outside directors as well as establish management appointment committees and renumeration committees); ensuring diversity for key employees; and implementing measures for sustainability issues, among other concepts.

Practical Guidelines for Business Reorganization – for Changes to Business Portfolio and Organizations

In July 2020, METI released 'Practical Guidelines for Business Reorganization – for Changes to Business Portfolio and Organizations',7 with the purpose of sustainable development and achieving mid- or long-term increase of corporate value by facilitating business reorganisations and providing further guidelines for corporate governance. These Practical Guidelines propose methods to determine an appropriate business portfolio; to monitor the business portfolio at board of directors' meetings; and to engage in conversation with investors.

Recently, Japanese conglomerates have begun to engage in carve-out M&A transactions to unlock corporate value and rationalise their operations, and these Practical Guidelines are expected to further facilitate this trend. For example, in 2021, Hitachi announced that it would sell its listed subsidiary, Hitachi Metals, to a business consortium led by Bain Capital, and Takeda Pharmaceutical sold its subsidiary, Takeda Consumer Healthcare, to The Blackstone Group.

Stewardship Code

The Council of Experts on the Stewardship Code, a council body set up by the Financial Services Agency (FSA), provided Japan's Stewardship Code (JSC) in February 2014 and updated it in May 2017 as a measure of corporate governance reform. The JSC encourages institutional investors to act for the realisation of high-quality corporate governance to increase corporate value and develop sustainably, and to ensure mid- or long-term investment return for the clients and beneficiaries of institutional investors. The underlying philosophy of the JSC is to promote awareness of the fiduciary responsibilities that institutional investors owe to their investor clients and to seek to encourage institutional investors to engage in dialogues with their investee listed companies to enhance the mid- and long-term return on their investments. The JSC also adopts a 'comply or explain' approach, and expects institutional investors to voluntarily adopt principles and follow its suggested guidelines. However, there have been concerns as to whether such dialogues continue to be insubstantial and that institutional investors do not fully understand their compliance with the JSC. In response, the FSA further updated the JSC in March 2020 to provide that institutional investors must have constructive 'purposeful dialogues' (engagement) aiming to stimulate the sustainable growth of the company and to share awareness and when such dialogues are made on sustainability related issues, the institutional investors must be mindful of mid- and long-term sustainability, including ESG (environmental, social and governance) factors; the JSC is applicable to financial investors for assets in addition to investments in shares of listed companies; disclosure of institutional investors must be improved to promote constructive dialogues; and proxy-advisory firms, pension management consultants and other advisers must improve their service quality through the establishment of policies, including having a policy addressing conflicts of interest.

Listed companies have been making changes partially in response to the JSC as well. The number of listed companies with defensive protections against hostile takeovers is continuously decreasing. At peak in 2008, 569 listed companies had takeover defence measures in place (approximately 24 per cent of all listed companies). This has since declined to 311 listed companies (approximately 8 per cent of all listed companies) as of April 2020.8 In addition, there were five hostile takeovers launched against listed companies in 2019, the second highest number on record. Only one of these five has been successful, however, and it is still difficult in Japan to successfully take over a listed company if management opposes the transaction. See Section V.i, where one unsuccessful hostile takeover is discussed.

Act on Strengthening Industrial Competitiveness

An amendment to the ASIC enables a listed company to electronically hold a shareholders' meeting subject to approval of the METI and the Ministry of Justice. This amendment is expected to (1) make it easier for shareholders, including those in remote areas, to attend meetings, (2) reduce operating costs without the need to prepare a physical venue, and (3) reduce risks of infectious diseases, including covid-19, and other risks without the need for shareholders, directors and other participants to gather in person.

Foreign involvement in M&A transactions

i Inbound transactions

Although the number of inbound transactions in Japan where foreign buyers, whether strategic or financial, acquire Japanese target companies is not as numerous as either purely domestic or outbound transactions, because many traditional Japanese companies are having difficulties increasing their return on equity (ROE) and others are facing challenges to their survival without injections of capital or other support, recently inbound transactions have grown steadily. In general, ROE of most Japanese companies has been low and although there was a sign of improvement during the term of the previous government led by Prime Minister Shinzo Abe, it seems that ROE levels are now comparable to post-2012. In 2020, 229 inbound transactions were reported, which represented an approximate 12.6 per cent decrease from 2019.9 Among notable inbound transactions announced in 2020 was the acquisition of Arm Limited, from Softbank Group, by NVIDIA, for approximately US$40 billion. Approximately 90 inbound transactions, the largest number in 2020, have been made by US purchasers in 2020, and approximately 45 inbound transactions, the second largest in 2020, have been effected by purchasers from China, including Hong Kong.10

ii Outbound transactions

Because of the continuous shrinking of the Japanese market caused by the aging society and declining population, Japanese (particularly, listed) companies are obliged to seek to expand their businesses overseas, as domestic organic growth can no longer be expected in most sectors. Many Japanese companies have expressly announced that they intend to seek to engage in outbound M&A transactions and to increase their investment into foreign markets. However, the covid-19 pandemic negatively affected the Japanese outbound M&A market. In 2020, the number of outbound M&A transactions was 557, which was a decrease of approximately 32.6 per cent from the previous year. The acquisition of Speedway, the third largest US convenience store operator, by Seven & I Holdings is the largest acquisition (approximately US$22 billion) among outbound transactions by Japanese companies in 2020. The aggregate transaction value of outbound deals has decreased approximately 32.6 per cent from the previous year. The largest number of outbound transactions, approximately 190 transactions, have been destined to the United States, the second largest number of outbound transactions, approximately 32 transactions, have been to the United Kingdom, and the third largest number of outbound transactions, approximately 28 transactions, have been to China (including Hong Kong).11

On the other hand, the acquisition of a foreign company can be operationally and culturally challenging for any purchaser, whether Japanese, US or European. Consequently, it has been reported that many Japanese companies that executed acquisitions in outbound M&A transactions have struggled during the period following post-merger integration, and several companies have had to write off significant amounts of goodwill in their acquisitions under International Financial Reporting Standards. In response, METI established a study group of Japanese companies' M&A transactions overseas, and released a report in March 2018, reflecting various issues and providing suggestions and also some guidelines for Japanese companies in conducting outbound M&A deals. Nevertheless, despite these operational and other issues, the increasing trend of outbound M&A transactions is expected to continue as Japanese companies (are obliged to) seek to increase their growth and future prospects.

Significant transactions, key trends and hot industries

i Significant transaction: employee buyout of Unizo Holdings

The unsuccessful hostile takeover commenced against Unizo Holdings (Unizo) was historic, and resulted in the first employee buyout (EBO) of a listed Japanese company. In July 2019, HIS, a listed tourist company, commenced a tender offer for the shares of Unizo, a real estate business company, without obtaining Unizo's consent. As this was happening, other potential bidders began suggesting interest. Ultimately, Unizo rejected HIS's proposal on a number of grounds, including that the proposal would undermine Unizo's corporate value and that the tender offer price was not adequate. Additionally, Unizo had conducted a market check (recall that this is one of METI's Fair M&A Guidelines points), and found that Fortress, a US investment fund and a subsidiary of Softbank Group, proposed a competing offer that was superior, with a tender offer price that was the highest among prices proposed by potential candidates and having made statements to the effect that Fortress highly regards Unizo's management policy and will be supportive of the completion of Unizo's mid-term business plan ahead of schedule. Fortress then commenced a tender offer for Unizo's shares, as a white knight to fend off HIS, with Unizo's prior consent. However, Unizo changed its position from approving Fortress's tender offer bid to withholding its opinion regarding whether or not it recommends that shareholders tender their shares into Fortress's tender offer, stating that it cannot be denied that Fortress will pursue a substantial breakup of the company by seeking to sell business lines or assets, or both. At this time, Unizo also announced that it had received and rejected a proposal whose tender offer price was higher than Fortress's from one of the largest global investment managers. (Unizo later disclosed that the bidder was Blackstone.) Additionally, Unizo announced that it had adopted a basic policy for evaluating acquisition proposals from bidders. Under the basic policy, Unizo said it would examine an acquisition proposal, take into account the two following fundamental points and determine its position. The points Unizo would use in examining proposals were said to be: (1) whether the proposal secures the common interests of shareholders; namely, tender offer price; and (2) whether the proposal maintains or increases corporate value.

In connection with the second point of this policy, Unizo clarified that it placed high value on ensuring the employment of employees, as they are important stakeholders that are the source of its value, and that it is necessary that an acquisition proposal contain a structure that ensures the continued employment of Unizo's employees and ensures that Unizo continues to be a company where employees find their jobs rewarding. When applying its basic policy and employee treatment requirements to the Blackstone proposal, Unizo determined that the proposal from Blackstone would not contribute to Unizo's corporate value as it did not contain sufficiently specific elements on the treatment of employees. Even following this rejection, Unizo and Blackstone continued successive negotiations, although Unizo never changed its recommendation to shareholders or otherwise approved the Blackstone proposal. At this point, Chitocea Investment, a subsidiary of Chitocea, whose shareholders mostly consist of employees of the Unizo group, made its tender offer proposal which was the highest among the various proposals with equity and financial support by Lone Star as a sponsor, and Unizo approved this offer. Finally, the Chitocea Investment TOB was completed successfully, and Unizo was delisted from the Tokyo Stock Exchange in June 2020. As a result, an EBO transaction of a listed company was closed for the first time in the Japanese market.

This complicated and lengthy series of events in relation to Unizo is unique and unprecedented in Japan's hostile takeover history. Three buyers publicly proposed acquisition offers, one being a white knight at one time, though, in the end, the white knight was rejected and the fourth buyer, incorporated by the target company's employees with financing from another foreign investment fund sponsor, conducted and completed the successful winning offer.

ii Significant transactions of successful hostile TOB: Maeda Road/Ootoya

There were successful hostile takeovers, targeting Maeda Road Construction and Ootoya. In January 2020, Maeda Corporation, a construction company, commenced a tender offer against Maeda Road Construction (Maeda Road), a road construction company, with a tender offer price that represented an approximate 50 per cent premium to the market price immediately before commencement. Maeda Corporation already held approximately 25 per cent of the shares of Maeda Road, without obtaining Maeda Road's board's approval. Maeda Road immediately published its opposition statement. Then, Maeda Road planned to pay a special dividend aggregating US$535 million as an anti-hostile takeover measure, which amounted to approximately 80 per cent of its cash and deposits, to make itself less attractive as a target and cause Maeda Corporation to withdraw its tender offer. However, this tactic did not prevent the takeover, and Maeda Corporation ultimately acquired approximately 51 per cent of Maeda Road's shares.

Ootoya is a relatively small restaurant company with locations in Japan and overseas, and it became the target of another Japanese restaurant company operating nationwide, Colowide. Colowide had taken a stake of approximately 19 per cent of Ootoya's shares. In July 2020, Colowide commenced a tender offer against Ootoya with a high premium of 46 per cent to its then market price. Ootoya quickly published an opposition statement and also announced a transaction, establishing a business alignment with a food delivery company, Oisix, to show shareholders their combined capability to strengthen Ootoya's corporate value. Colowide found that it was unlikely that tendered shares would reach the lower limit of 26 per cent (this number was set to ensure that if the tender offer was successful, it would result in Colowide's owning 45 per cent or more in the target, including shares Colowide already owned), then it decreased its lower limit to 21 per cent and extended the tender offer period for two more weeks. In the end, Colowide's TOB ended successfully in October 2020, and Colowide owned approximately 46.77 per cent of Ootoya.

iii Significant transactions of anti-takeover defence: Shibaura Machine, Nippo and Japan Asia Group

The reform of corporate governance in Japan has led to a considerable decrease in shares held for policy purposes (and not held for investment purposes), including cross-shareholdings, and an increase in shares held by institutional investors adopting the JSC. Shareholders now are seeking higher ROE in, or higher dividends from, the companies in which they invest. These changes in shareholder type and focus appear to be increasing opportunities for acquirors to complete successful unsolicited tender offers, and also seem to have changed the common consensus regarding directors' duties when responding to unsolicited tender offers. Among others, there are three notable transactions involving unsolicited tender offers and the responses made by Shibaura Machine, Nippo and Japan Asia Group.

Target CompanyUnsolicited or hostile bidderShareholders' resolution for anti-takeover measuresResult of takeoverRemarks
Shibaura Machine (FKA Toshiba Machine)City Index EleventhApproved by shareholders' resolution Unsuccessful
NippoFreesia MacrossApproved by shareholders' resolutionUnsuccessfulCourt rejected enjoining a poison pill
Japan Asia GroupCity Index EleventhNot approved by shareholders' resolutionSuccessfulCourt enjoined a poison pill

In 2020, City Index Eleventh notified Shibaura Machine of its unsolicited tender offer. In response, Shibaura Machine adopted a poison pill and obtained a shareholders' resolution of a majority of its shareholders for the poison pill. City Index Eleventh then withdraw its tender offer.

In 2021, lower courts issued notable decisions on anti-takeover measures taken by target companies in two unsolicited tender offers, and the market has paid significant attention to these cases: Japan Asia Group targeted by City Index Eleventh, and Nippo targeted by Freesia Macross. In both cases, shares of the target companies are listed, the putative acquirors commenced unsolicited tender offers, and the target companies adopted or activated anti-takeover measures to issue new stock options to shareholders (where the stock options issued to the acquirors are structured so that they are virtually non-exercisable), and both acquirors filed for an injunction against such issuance. The courts expressed different opinions – one ordered an injunction against Japan Asia's action, but another refused to do so with respect to Nippo's defensive response. The fact that Nippo's anti-takeover measure had been approved by a majority of its shareholders and it was activated by its board, while Japan Asia Group had adopted and activated its anti-takeover measure and only through its board without shareholder approval, is generally considered to have made the difference. Japan Asia Group gave up on the anti-takeover measure, which resulted in City Index Eleventh succeeding in its tender offer. These cases may demonstrate the need to have shareholders' approved takeover defences in place to defend against unsolicited tender offers, and conversely that companies without such measures in place may be more susceptible to unsolicited tender offers.

iv Significant transaction of counter TOB: Shimachu

A unique tender offer occurred in 2020 involving Nitori and Shimachu. Initially, in October 2020, DCM Holdings (DCMHD) announced its tender offer for Shimachu and Shimachu announced its approval of the tender offer. However, abruptly, Nitori then announced its intention to commence a TOB for Shimachu at a 30 per cent premium to DCHMD's announced offer price and commenced negotiations with Shimachu. Finally, Shimachu withheld its approval for DCMHD's tender offer and Nitori and Shimachu reached an agreement, stating that both parties can expect synergies from their business integration, and Shimachu approved Nitori's TOB. In response, DCMHD did not increase its TOB price. Nitori's TOB was successful, and this transaction is notable in being one of the few successful counter tender offers.

v Significant transaction: Sakura General REIT

Although this transaction involves listed J-REITs rather than commercial operating companies, as of the end of May 2019, Star Asia Group, through Star Asia Investment Corporation, a J-REIT, was trying to take over Sakura General REIT Investment Corporation, another J-REIT, in a hostile transaction by seeking to convene a unitholders' meeting of the target so as to consider resolutions that would effect the takeover. This was the first hostile takeover of a J-REIT in the market. Specifically, Star Asia Group called a unitholders' meeting with the permission of the FSA, at which the cancellation of the existing asset management contract and the approval of a new asset management contract was on the agenda. Sakura General REIT Investment Corporation, however, convened a unitholders' meeting to obtain an approval resolution for a merger with Mirai Corporation, a white knight. Ultimately, Star Asia's proposals were approved, while Sakura General's proposals were not even put to vote because the meeting could not be held because of the lack of a quorum.

vi Key trend: activists' involvement in TOBs

Recently, in Japan, activists have become more involved in TOBs, both from friendly and hostile approaches. In the Unizo saga, Elliott Management, which was Unizo's largest shareholder, requested Unizo to seriously consider the offer proposed by Blackstone and warned that it would take action if Unizo's management did not discharge their duty of care. Elliott Management seemed to assume that because Blackstone's proposed price was high, that was the determinative factor to approve the offer. However, after Chitocea Investment increased its tender offer price from ¥5,700 to ¥6,000, Elliot Management entered into a tender agreement with Chitocea and actually tendered its shares into Chitocea's tender offer.

In a separate matter, Itochu, a large trading company, planned to commence a TOB for FamilyMart, a convenience store operator and franchisor, with the price of ¥2,600 for FamilyMart's shares. Itochu and its affiliate already owned 50 per cent of the shares of FamilyMart. With the impact of covid-19 on FamilyMart's business, though, Itochu actually launched its offer with a ¥2,300 share price offer and with a lower limit of 10 per cent. While FamilyMart has approved the TOB by Itochu, it did not recommend that its shareholders tender into the TOB because the offer price was not sufficiently high that a recommendation to tender could be made. Itochu was publicly requested to raise its offer to ¥2,600, in reliance on the argument that Itochu's valuation underestimated FamilyMart's corporate value, by RMB Capital, an activist investor holding positions in both Itochu and FamilyMart. RMB Capital's position was disregarded, and Itochu maintained its price. Itochu ultimately successfully completed its offer for FamilyMart because its lower limit of 10 per cent was sufficiently low to achieve.

Based on the events in the Unizo and FamilyMart transactions, regardless of whether an approach is friendly or hostile, both acquirer and target companies must pay attention to activists as well as be accountable to their shareholders, providing clear, reasonable explanations of their respective positions regarding the proposed transaction. Needless to say, activists have high levels of interest in the tender offer price, and they scrutinise share value of the target company. Even if a tender offer price is made at a premium to market price, if the premium is not in their view significant, they are capable of quickly injecting themselves into the transaction, seeking to drive up the price and otherwise stir things up. Tender offerors, therefore, now must carefully evaluate share value and fix the TOB price to forestall others from interfering or prevailing over their plans.

vii Hot industry: bank and food supermarket

The Japanese government actively has encouraged regional banks to reorganise and combine themselves, facilitating such transactions with a special act for exemption of application of competition law on integration among regional banks; subsidies to be paid for such integration; and a premium interest rate granted by the Bank of Japan to regional banks that integrate. With this background, in September 2021, SBI Securities announced its unsolicited TOB for Shinsei Bank. In response, Shinsei Bank has decided to adopt a poison pill as a takeover defence subject to a resolution of a shareholders' meeting. It is acknowledged that SBI Securities seeks to make Shinsei Bank its subsidiary, and then is expected to utilise Shinsei Bank as a vehicle for its plan to establish Japan's fourth megabank through integrations with regional banks. The Japanese government owns approximately 20 per cent of the shares of Shinsei Bank, and thus its action or intention likely will be key to whether or not SBI Securities' hostile tender offer succeeds.

In addition, the covid-19 pandemic has increased food supermarkets' sales volumes, though such increase may not be lasting as the Japanese population is shrinking. Nevertheless, this situation is accelerating the reorganisation of Japan's retail industry. In August 2021, H2O Retailing and Kansai Super Market announced a business integration in which Kansai Super Market will be a subsidiary of H2O Retailing subject to the approving resolution of a shareholders' meeting. However, prior to this announcement, OK Corporation had proposed an unsolicited tender offer to Kansai Super Market and, following that announcement, reiterated its proposed tender offer again, subject to approval by management of Kansai Super Market.

Financing of M&A: main sources and developments

Historically, cash was almost the only M&A consideration in Japan, and so an acquiror needs to have cash to consummate its transactions (although changes in Japanese tax law may result in greater use of share delivery, as discussed elsewhere herein). Theoretically, when seeking to use cash, an acquiror should be able to take advantage of equity financing and loan financing. However, if a listed company uses equity financing, issuance of new shares is strictly regulated under the Financial Instruments and Exchange Act, and accordingly loan financing has been more preferable and more often utilised.

Japan's three largest banks (Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group) are the main sources of loan financing, but because of the Bank of Japan's zero interest rate policy, regional banks endeavour to gain new business by offering favourable terms on leverage buyout financing.

Employment law

Historically, regular employees were employed for an indefinite period and an employer may not legally terminate employees at will in Japan. The cases where a Japanese employer may terminate an employee are strictly restricted. Unless there are reasonable grounds with respect to seeking to terminate employees, such as their violation of a disciplinary rule, the following four criteria must be satisfied:

  1. necessity of reducing the number of employees;
  2. necessity of dismissal as the method of reducing personnel (instead of relocation of employees, solicitation of voluntary retirement, or other measures);
  3. appropriateness of the procedures for determining which employees will be dismissed; and
  4. appropriateness of the termination procedures.

These criteria also apply even in the case of a M&A transaction. As such, companies have rarely sought to make substantial reductions in force following completion of a M&A transaction in Japan.

Tax law

i Restriction on loss on transfer

An amendment to the Order for the Enforcement of the Corporation Tax Act was effected in April 2020. A company acquiring a majority of shares of a foreign company may create 'loss on transfer' by receiving dividends from the company and selling the shares later at a lowered market value because of the payout of dividends. This arrangement has been widely utilised for international tax planning by taking advantage of such created 'loss on transfer'. Under the amended Order for the Enforcement of the Corporation Tax Act, the book value of the shares will be decreased by the amount of such dividend of 10 per cent of its book value or more, to the extent not included in taxable income, which does not allow companies to create 'loss on transfer'.

ii Deferral on capital gain in share delivery

A share delivery (see Section III.i) allows an acquiror to retain its cash reserves and to instead use its shares as the purchase consideration, and enables shareholders of a target company to obtain shares of the acquiror so as to enjoy the synergy to be created resulting from the M&A transaction. Accordingly, a share delivery may have advantages over a traditional all-cash M&A transaction. Tax reform in 2021 allows transferors of shares to defer capital gain in a share delivery, and this is now a permanent measure. This tax reform has removed what has been considered one of the largest obstacles in Japan to share-consideration M&A transactions. It is expected that a share delivery will facilitate efficient organisational restructuring of a business in consideration for shares of a new buyer and thereby assist in the increase of corporate value, and that these transactions can contribute to the enhancement of competitiveness of Japanese companies.

However, (1) in order for such tax reform to apply to a share delivery, the acquiror's shares must account for at least 80 per cent of the entire consideration paid to the selling shareholders, and (2) such deferral on capital gain will be applied only to the relevant share consideration (not applied to other consideration, such as cash, that may be part of the purchase price paid).

iii Lack of capital gain deferral on business transfers to third parties

With the tax reform mentioned in Section VIII.ii, most desired tax reform has been put into place in Japan in connection with M&A transactions. However, a remaining area of potential tax reform is tax deferral on business transfers to a third party. Due to the aging population, the smooth business transfers of small- and mid-sized companies from one ownership generation to another is critical. The capital gain tax rate in respect of shares is 20 per cent in Japan, and this is thought to hinder share transfers to third parties. Tax deferral on business succession has already been established, but this deferral has strict criteria, such as the successor needs to be a representative of the company. Hence, this deferral has not been widely applied in situations where a business owner desires to transfer its shares to a third party, such as a private equity fund. As a consequence, the FSA has made a request to adopt tax deferral to business transfers to a third party, although legislation implementing such tax deferral has not been adopted yet.

Competition law

As initially mentioned in Section V.vii, an act came into force in November 2020, under which Japanese competition law no longer applies to the combination of regional banks if they obtain approval of their service continuation plan from the FSA. This act is intended to encourage regional banks to combine, whether by way of share acquisition, merger or company split.

Other developments in Japan's competition law include amendments in December 2019 of the business combination guidelines issued by the Japan Fair Trade Commission (JFTC). Notably as part of these amendments, the JFTC clarified its views on markets and business combinations involving digital platforms and provided guidance on the views the JFTC would use when conducting reviews of transactions involving these businesses.


The current key changing factor in the M&A market in Japan, like elsewhere, remains covid-19. As mentioned in Section I.ii, the M&A market in Japan has already recovered from the depression caused by covid-19 in 2021; one positive impact of the pandemic is that it seems to have resulted in increased efforts to accelerate digitalisation, the delay of which has arguably contributed to Japan's relatively low labour productivity in comparison with foreign countries. Another effect of the covid-19 crisis on M&A transactions involving Japanese companies continues to be the potential reconsideration by companies of their various business portfolios and operations, the result of which may cause many to seek to realign, restructure and consolidate their businesses by disposing or demerging non-core or underperforming operations. Prospective acquirers in these transactions have been and are now assisted by the government's continued easing monetary policy approach.

In a related manner, a number of Japan's business sectors have an overabundance of participants, such as regional banking, and some market consolidation seems likely and is being encouraged by the authorities. The SBI Securities-Shinsei Bank transaction discussed in Section V.vii may be a sign of increased activity as a result of this encouragement.

In September 2021, Fumio Kishida was elected Prime Minister of Japan, and during the election process he raised the possibility on some occasions of a tax increase on income resulting from financial activities. The likelihood of this tax change remains uncertain, however, as it remains subject to political pressures.

In June 2021, the Prime Minister's Office of Japan announced it would start to consider the creation and use of special purpose acquisition companies (SPACs), and the discussions regarding SPACs are beginning, which are intended to lead to the facilitation of SPACs under Japanese laws and regulations. The Tokyo Stock Exchange has established a research committee on the SPAC market, seeking to analyse SPACs in the United States and other countries and to discuss issues relating to the establishment of a SPAC market in Japan. The discussions on SPACs have just started, but if the SPAC market is established in Japan in the future, it can be expected that there will be significant interest in this transactional structure, generating and attracting both market participants and legal practitioners.


1 Masakazu Iwakura, Gyo Toda and Makiko Yamamoto are partners and Junya Horiki is a senior associate at TMI Associates. They would like to thank Vincent Tritto, a foreign attorney at TMI Associates, for his assistance.

2 Recof, 'M&A Trend of Japanese Companies in January to December 2020' (

3 On an assumed exchange rate of US$1 = ¥100. The same applies hereinafter.

4 Recof, 'M&A Trend of Japanese Companies in January to December 2020' (

5 Recof, 'M&A Trend of Japanese Companies in January to June 2020' (

6 Recof, 'M&A January to September, 3153 transaction highest, transaction volume exceeds US$140 billion the second highest' (

8 Recof, 'Status of Defensive Protections against Hostile Takeovers' (

9 Recof, 'M&A Trend of Japanese Companies in January to December 2020' (

10 ibid.

11 ibid.

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