Shareholder and creditor protection in Japanese mergers

The eves of 'Kinkakuji' or the 'Temple of the Golden Pavillion' in Kyoto, rebuilt after its destruction through arson by a Buddhist acolyte in 1950 as described in the book by Yukio Mishima of the same name.

The Japanese Corporate Law (‘JCL’) includes measures allowing creditors or shareholders of the Ceasing or Surviving Companies in a Japanese merger to object to the merger along with mechanisms allowing the companies involved to resolve such objections.  This article describes these measures in more detail.

Procedures for the protection of creditors

Under JCL articles 789-2 and 799-2 the Ceasing and Surviving Companies of a merger are required to make a Public Announcement (in Japanese a ‘公告’ or  ‘koukoku’) in the Japanese Official Gazette (in Japanese the ‘官報’ or ‘kanpou’ – link in Japanese) which states that creditors of the company concerned have a specified period of time to object to the merger.

Such notification must also be made to known creditors on an individual basis, although as discussed below alternative approaches to this notification can be taken when the number of creditors involved is unreasonably large.

These notifications must be made at least one month or more prior to the merger and the following items have to be included in the Public Announcement or notification concerned:

  • whether an absorptive merger
  • the address and commercial registration number of the counterparty company or companies involved in the merger
  • details of the financial reports of each merging company
  • that creditors have a set period over which they can raise an objection to the merger

Note that in practice in order to meet the requirement relating to financial information above, the place of display of the most recent completed balance sheet of the company is normally specified in the notification.

Under JCL articles 789-3, 799-3 it is possible to specify in a company’s articles of association (in Japanese ‘定款’ or ‘teikan’) that, as an alternative to notifying known creditors individually, notification be made in a daily newspaper (albeit at greater expense) rather than the Official Gazette. This may be an appropriate approach for companies with a very large number of creditors, such as a bank or other financial institution. Note of course that if the articles of association of a company do not already specifity that such notification to creditors is permitted appropriate steps would have to be taken to moodify the articles prior to adopting this approach to creditor notification.

Procedures for an objecting creditor

Under JCL articles 789-5, 799-5 when a creditor raises an objection to the merger in the period permitted for such an objection, one of the following alternative measures can be taken to resolve the objection:

  • the creditor can be repaid
  • appropriate collateral can be provided to the creditor to secure his obligation
  • sufficient assets are placed into trust as required for the purposes of repaying the creditor

Note that the merger procedures can still proceed in circumstances where sufficient collateral has already been provided to a creditor and hence when there is no concern that the creditor’s rights should be harmed.

The above procedures to satisfy objecting creditors rights should be completed prior to the day before the effective date of the merger (JCL article 750-6).

Shareholder protection

Under JCL articles 785-1, 5 and JCL 797-1, 5 certain shareholders objecting to a merger transaction can require the company concerned to purchase their shares.  Such a demand can be made over a period  twenty days prior to the effective date of the merger.

Also certain holders of Share Option Rights (in Japanese ‘新株予約権’ or ‘shinkabu yoyaku ken’) in the Ceasing Company can receive monetary compensation for the value  of the rights or alternatively be allotted Share Option Rights over shares in the Surviving Company.  Under JCL 787-1,5 holders of such rights wanting monetary compensation can, in the period twenty days prior to the merger day up to the day prior to the merger day, require that such rights be purchased by their issuer.

The scope of shareholders and holders of Share Option Rights with a right to require the purchase of the rights concerned are discussed in more detail below.

Objecting Shareholders

Any of the shareholders who objected to the merger can exercise rights to require the repurchase of their shares under JCL articles 785-2 and 797-2.

Under the JCL articles 785-3,4 and 797-3,4 the Ceasing and Surviving Companies must either issue a Public Announcement or give Notification (in Japanese ‘通知’ or ‘tsuuchi’) to their shareholders informing their shareholders of the merger at least twenty days prior to the effective date of the merger.  Public Announcement is appropriate for Public Companies (in Japanese ‘公開会社’ – link in Japanese – or ‘koukai kaisha’ where such companies are defined in JCL article 2-5 to exclude companies with limitations on the transferability of their shares) or for companies where the Merger Contract has been approved at a General Meeting of Shareholders (in Japanese ‘株主総会’or ‘kabunushi soukai’).  Shareholders who are opposed to the merger can require the purchase of their shares from a day twenty days prior to the day of the merger up to a day prior to the merger.

In circumstances where a General Meeting of Shareholder’s to approve the merger is still to be held then shareholders who can exercise voting rights at such a meeting but who are opposed to the merger must give notification of their objection to the merger in advance of the meeting in order to exercise rights to require purchase of their shares (JCL articles 785-2, 797-2).

Where a company has received an appropriately qualified objection to the merger from its shareholders the company may either reflect the objection in revised terms to the merger or, alternatively, not so reflect them and instead purchase the shares of the objecting shareholders at a Fair Value (in Japanese ‘公正な価格’ or ‘kousei na kakaku’) based on the assets of the company or consideration of all other important factors.  This article discusses litigation around Fair Price in the context of a minority squeeze out while the section on shareholder distributions discusses the tax impact of a company purchasing its own shares.

The agreement of the company is required in order to allow an objecting shareholder to withdraw a demand for the purchase of their shares once the demand has been made (JCL articles 785-6, 797-6).  Note that this is a change from the position under the former Japanese Corporate Law, where no limitation existed over rights to withdraw such a demand.

Demands to purchase share option rights

In principle the holders of Share Option Rights in the Ceasing Company can require the purchase of such rights.  However JCL article 787-1 also allows the allocation of Share Option Rights in the Surviving Company to holders of such rights in the Ceasing Company, with such allocation being reflected in the merger terms.

The Ceasing Company has to make a Public Announcement or give Notification to holders of its Share Option Rights concerning the merger at least twenty days prior to the day of the merger under JPL articles 787-3, 4 and objecting holders of such rights can require their purchase in the period 20 days prior to the merger day up to the date prior to the merger day (JCL articles 787-5).   The Ceasing Company is required to pay a Fair Price for such rights and, as is the case for shares, once a demand for their purchase has been made it cannot be withdrawn without the agreement of the Ceasing Company.

Procedures relating to employees and workers

In a merger, unlike in a corporate split, all of the employment contracts and hence rights of workers at the Ceasing Company carry over to the Surviving Company.  Hence a merger does not include any special procedure for the protection of worker rights.


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