The Mergers & Acquisitions Review: Japan

Overview of M&A activity

M&A transactions constitute an important part of corporate activities in Japan. In 2019, Japanese companies were involved – whether domestic, inbound or outbound – in 4,088 M&A transactions according to Recof's analysis, representing an increase of approximately 6.2 per cent from 2018.2

i Domestic transactions in 2019

Since 2017, a record high number of domestic M&A transactions in the Japanese market has been achieved in three consecutive years; the figure for 2019 was 3,000. The aggregate transaction value exceeded $60 billion3 for the first time in 12 years.4 (See Section IV for a discussion regarding inbound and outbound M&A transactions.)

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

The covid-19 pandemic has significantly impacted the M&A market, as it has elsewhere in the world. The Japanese government declared a state of emergency on 27 April, 2020, which lasted until 25 May 2020. The pandemic has caused a significant number of ongoing M&A transactions to be suspended or abandoned. 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 By the end of summer 2020, the M&A market had not yet recovered, though domestic activity is showing some signs of resurgence. In July 2020, the number of domestic M&A deals was approximately 300, a small decrease of only 1.6 per cent from July 2019.6 Nevertheless, M&A players are continuing to monitor the situation carefully.


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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 is basically governed by the Civil Code and Companies Act of Japan. No formality including a stock transfer form is required for a SPA to be effective, and recent transactions using a 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 which 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, in order 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 in order for a company to newly incorporate a new parent company to be a holding company which 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 (such as the combination of Nippon Shokubai and Sanyo Chemical Industries announced in 2019, in which the two companies are to be merged by each becoming a wholly owned subsidiary of a new parent company).

Strategies to increase transparency and predictability

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Developments in corporate and takeover law and their impact

i Significant recent statutory amendments and proposals

First, while cash-out mergers have been 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 relatively recently 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 gain tax is imposed on the selling shareholders and carrying-over is not permitted). An amendment to the Act on Strengthening Industrial Competitiveness effected in January 2020 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 (including foreign target companies)'s 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 will come into force by June 2021 including, among other things, requiring listed companies to: (1) appoint outside directors; (2) determine and publicly disclose their remuneration policies; and (3) electronically provide their business and other reports as well as the agenda of general shareholders' meetings. 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 in order 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 minister 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 MBO 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 advisors (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 practiced. 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 advisors and legal advisors 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 an amendment thereto in 2018, 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.

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 in order to increase corporate value and develop sustainably, and in order 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 in order to promote constructive dialogues; and proxy-advisory firms, pension management consultants and other advisors 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 377 listed companies (approximately 10 per cent of all listed companies) as of April 2019. 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 listed companies if management opposes the transaction. See Section V.i, where one unsuccessful hostile takeover is discussed.

Us antitrust enforcement: the year in review

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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 2019, 262 inbound transactions were reported, which represented an approximate 1.2 per cent increase from 2018.7 Among notable inbound transactions announced in 2019 was the acquisition of a dry-eye drug business, from Takeda Pharmaceutical, by Novartis, a Swiss drug-maker, for approximately US$5.84 billion. Approximately 130 inbound transactions, the largest number ever, have been made by US purchasers in 2019, and approximately 50 inbound transactions, the second largest, have been effected by purchasers from China, including Hong Kong.8

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. In 2019, the number of outbound M&A transactions was approximately 830, a record high. The acquisition of Carlton & United Breweries, the largest Australian brewer, by Asahi Group Holdings is the largest acquisition (approximately ¥1,200 billion) among outbound transactions by Japanese companies in 2019. The aggregate transaction value of outbound deals has decreased 43.5 percent from the previous year. This is partly because the 2018 acquisition of Shire plc by Takeda Pharmaceutical, which was the largest acquisition by a Japanese company in market history in terms of purchase price (approximately £46 billion), significantly increased the aggregate transaction value in the previous year. The largest number of outbound transactions, approximately 240 transactions, have been destined to the United States, and the second largest number of outbound transactions, approximately 60 transactions, have been to Singapore.9

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 which 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 transactions: employee buyout of Unizo Holdings

The unsuccessful hostile takeover against Unizo Holdings 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 Holdings, 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. 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 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, and Unizo approved this offer. Finally, the Chitocea Investment TOB was completed successfully, and Unizo has been delisted from Tokyo Stock Exchange. 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 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, conducted and completed the successful winning offer.

ii Significant transactions: 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. 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, and then tried to find a white knight, although it did not succeed in doing so. 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, in order 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. The special dividend merely ended up in reducing Maeda Road's liquid assets and did not act as a deterrent to a determined acquiror.

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, and firstly submitted a shareholder proposal for the appointment of directors. This proposal was rejected at Ootoya's annual general shareholders' meeting, but it did attract more than 40 per cent of Ootoya's voting rights being in favour. Thereafter, in July 2020 immediately after the AGM, Colowide commenced a tender offer against Ootoya with a high premium of 46 per cent to its immediately before market price. Like Maeda Road when it was faced with a hostile potential acquiror, Ootoya quickly published an opposition statement and also announced a transaction, establishing a business alignment with a food delivery company, Oisix, in order 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 announced that 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 currently owns approximately 46.77 per cent of Ootoya.

iii Significant transactions: 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 in order 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 due to the lack of a quorum. It was thought that Sakura General's counter proposal was not attractive to unitholders and that unitholders lost trust in management of Sakura General since Sakura General's net asset value had been in decline. Thereafter, a merger of Sakura General into Star Asia Investment Corporation was approved at Sakura General's unitholders' meeting, and the merger took effect in August 2020.

iv 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 has 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 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 since 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 since 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 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 in order to forestall others from interfering or prevailing over their plans.

Financing of m&a: main sources and developments

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Employment law

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Tax law

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 due to the payout of dividends. This arrangement has been widely utilised for international tax avoidance by taking advantage of such created 'loss on transfer'. Under the amended the 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'.

Competition law

A special act will come into force in November 2020, under which Japanese competition law will not apply 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 new key changing factor in the M&A market in Japan, like elsewhere, is covid-19. While the pandemic has once significantly slowed down activity in Japan's M&A market, it is expected to accelerate digitalisation, the delay of which has arguably contributed to Japan's relatively low labour productivity in comparison with foreign countries. Another expected effect of the covid-19 crisis on M&A transactions involving Japanese companies is the potential reconsideration by these 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 will be assisted by the current easing monetary policy environment.

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 may even be encouraged by the authorities. In September 2020, Yoshihide Suga was elected Prime Minister, and he suggested in a press conference during the election process that there were too many regional banks and that facilitation of a realignment of regional banks would be one option. As a transactional matter, this sort of consolidation is now easier to be accomplished, given the special act to the competition law (see Section IX), and it may be that reorganisation of regional banking will occur through combination transactions. With these various drivers, the trends represented by recent transactional activity, and the challenges posed by demographics, Japan's M&A market activity seems likely to be robust, raising new issues and requiring new solutions, going forward.


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

2 Recof, 'M&A Trend of Japanese Companies in January to December 2019' (

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 2019' (

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

6 Recof, 'Market Overview-monthly M&A status-' (

7 Recof, 'M&A Trend of Japanese Companies in January to December 2019' (

8 Recof, 'M&A Trend of Japanese Companies in January to December 2019' (

9 Recof, 'M&A Trend of Japanese Companies in January to December 2019' (

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