Steps in a Japanese merger

Autumnal flowers floating in drinking bowl in a Kyoto temple.

This article outlines the steps required to complete a Japanese absorptive merger involving one company (below the ‘Surviving Company’) taking over the assets and liabilities of a liquidating company (below the ‘Ceasing Company’ and collectively with the Surviving Company the ‘Companies’) under a process defined by the Japanese Corporate Law (the ‘JCL’).

Please see this article for more background to legal aspects of Japanese mergers and this article for an overview of merger taxation.  The website of the Japanese Judicial Scriveners Association also gives more detail about merger procedures (link in Japanese) on their website (link in Japanese).

Note that the precise steps required in any merger transaction will depend on the facts and circumstances of each specific case. Comprehensive Japanese legal advice should always be taken at an early stage in planning any merger or other corporate reorganisation transaction.

Steps in the merger process

The key initial step in a merger is the conclusion of a contract whose contents includes terms proscribed under the JCL (the ‘Merger Contract’).  This step must be followed by approval of the Merger Contract  at  shareholder’s meetings of each of the Companies, by the carrying out of procedures to ensure protection of creditor rights, responding to demands to buy out the shares or share option rights of objecting shareholders, reporting (where required) to the Fair Trade Commission (in Japanese the ‘公正取引委員会’ or ‘kousei torihiki iin kai’ and below the ‘FTC’) and then finally by registration of the merger.

Conclusion of the Merger Contract

The first step in the merger process is the execution of a Merger Contract between the participating Companies. This contract must include terms specifically designated in the JCL including the amount and type of consideration paid to the shareholders of the Ceasing Company and the effective date of the merger (below the ‘Merger Day’) – JCL article 749.

In order for the merger to be legally effective the Merger Contract must include these and other items specifically defined in the JCL.  An example of a absorptive merger contract can be found at this link (in Japanese) and of a merger involving establishment of a new company at this link (in Japanese).  The contents of this contract will be examined in more detail in a later article.

Approval of the Merger Contract at shareholder meetings

The Merger Contract must be approved further to a special resolution at shareholder’s meetings of each of the Ceasing and Surviving Companies and prior to the Merger Day (JCL article 783, 795, 309-2).

Under the JCL such a resolution requires the presence at the shareholder’s meeting of shareholders holding sufficient shares to make up a majority of the voting rights of the company concerned.  Passing the resolution then requires the support of at least two thirds of the shareholders attending the meeting.

The JCL allows companies to hold abbreviated shareholders meeting, however such meetings require stricter conditions for resolutions to be passed. Procedures for holding an abbreviated shareholders meeting will also be discussed in a later article.

Procedures to protect creditor rights

In order to protect the rights of creditors of the merging Companies, notification of the merger must be made in the Japanese ‘Public Gazette’ (in Japanese the ‘官報’ or ‘kanpu’ – an internet link to the Japanese only Public Gazette web-site can be found here) by the Ceasing and Surviving companies for a specified period.  Known creditors must be advised of the merger on an individual basis (JCL articles 789, 799). Note however if allowed in the articles of association of a company, it is possible for notification to be make abbreviated notification to creditors through advertisements in a daily paper newspaper.

Note however that creditors who have not been notified of the merger or who object to the merger, but procedures under the JCL allow for repayment or such creditors or the provision of collateral to them and the merger can proceed provided it can be shown that no harm would be done to them.

Creditors have a one-month period post notification to object to the merger.

Objecting shareholder’s rights

Where a portion of shareholder’ of each of the Companies object to a merger otherwise approved by shareholder’s resolution, the JCL includes procedures to allow the Companies to purchase shares from the objecting shareholders (JCL articles 785, 797 and under articles 785-3,4 and 797-3,4).

Both the Ceasing and Surviving companies are obliged to give notification of the merger to their shareholders at least 20 days before the Merger Day. Where shareholders object to the merger after the receipt of such notification, such objecting shareholders can request to the company that their shares are purchased over a period from the day 20 days before the Merger Day to the day before the Merger Day.

Holders of share option rights (in Japanese ‘新株予約権’ or ‘shinkabu yoyaku ken’) in the Ceasing Company objecting to the merger can also require the Ceasing Company purchase the share option rights.   Under JCL article 787-3,4 the Ceasing Company has to give notice of the merger  to persons holding such rights at least 20 days prior to the Merger Day. Holders of share option rights who receive such a notification can, over the period 20 days prior to the Merger Day to the day prior to the Merger Day, demand that the share option rights be purchased by the company.

Prior disclosure of merger documentation

In order to allow shareholders and creditors to judge the appropriateness of the terms of the merger, the Ceasing and Surviving companies must make available the Merger Contract and other specified documentation related to the merger at the head office of each of the companies concerned (JCL 782, 794). These materials must be so made available from the earliest of out of all the days specified below to a date six months after the Merger Day.

  • A day two weeks prior to the earlier of the two shareholders’ meetings of the Companies approving the merger

  • Of the two dates on which each of the Companies made notification to or reported to creditors as part of the procedures for creditor protection, the earlier date

  • Of the two dates on which each of the Companies made notification to or reported to shareholders concerning the merger, the earlier date

  • Of the two dates on which each of the Companies made notification to or reported concerning the merger to holders of share option rights, the earlier date

Reporting to the Fair Trade Commission

Where, of the Companies participating in the merger, at least one company has more than JPY100 million in assets and another more than JPY10 million in assets, reporting to the Fair Trade Commission is required prior to the merger. Note however that such reporting is generally not required for parent subsidiary mergers nor for mergers between brother and sister companies.

The Fair Trade Commission website includes a comprehensive English language template explaining the content of the application at this link.  Global Competition Review’s Asia Pacific Anti-trust Review also has extensive background on anti-monopoly aspects of Japanese corporate reorganisations.

Reporting under the ‘Financial Products and Transactions Law’

Depending on the scale of the merger, reporting may be required under this law.

Collection of share and share option right certificates

Where the Ceasing Company has issued share certificates (in Japanese ‘株券’ or ‘kabu ken’) it is required to collect the certificates so issued (JCL 219). One month prior to the Merger Day the Ceasing Company should give notice to the shareholders or any pledgees of the shares certificates that their presentation is required. Similar procedures are required with respect to share option rights.

Notification to pledgees of registered shares and of registered Share Option Rights

The Ceasing company must give notification to pledgees of registered shares or share option rights that the assets subject to such a pledge will change.  Such notification has to be given at least 20 days prior to the Merger Day JCL article 783-5,6.

Registration of the merger

Within two weeks from the Merger Day representatives of the Surviving Company must register the changes to the Surviving Company and the dissolution of the Ceasing Company (JCL  article 921).  The website of the Japanese Ministry of Justice includes useful information on corporate registration processes (link in Japanese).

Post merger documentation disclosure

For a period from six months from the Merger Day the Surviving Company must make available at its head office documentation showing the procedures undertaken in the merger and the rights and obligations transferred from the Ceasing Company (JCL article 801-1,3).

Revisions to registered ownership

The registered ownership of bank accounts, real estate and other assets and liabilities of the Ceasing Company should be re-registered in the name of the Surviving Company.

Changes to the Merger Date

Sometimes it is necessary to defer or accelerate the Merger Day as a result of changes in procedures or similar matters.  The Merger Day is an item in the Merger Contract, so in principle is a contractual matter subject to agreement between the parties involved and can be changed by mutual agreement under contract provided proper procedures for the merger are followed (JCL article 790-1).  Notification should be made of any change prior to the earlier of original or revised day (JCL article 790-2).

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