Don't Fail! Understanding the Laws for Successful 'Individual M&A

Many of you may have heard the term “M&A” (Mergers and Acquisitions). In recent years, there has been an increasing trend in “individual M&A”, which are smaller-scale M&As.

Individual M&A refers to the buying and selling of companies or businesses at relatively low prices. It is often touted as a chance to become a “side-job CEO” as it is affordable even for businessmen with savings. However, there are points to be careful about in these transactions.

In this article, we will explain the laws and procedures related to individual M&A for those who are considering conducting one.

What is Personal M&A?

Personal M&A refers to M&A transactions that occur between individuals, typically involving small amounts ranging from several million yen to about ten million yen. With the increase in M&A matching sites, such personal M&As are also on the rise. Previously, small businesses that had no choice but to close down due to a lack of successors can now transfer their companies or businesses through personal M&A, allowing them to be inherited. For the buyer, there are benefits such as being able to start a business with less risk than starting a new one.

For information on Site M&A and App M&A, please refer to the following articles.

https://monolith.law/corporate/site-buying-ma[ja]

https://monolith.law/corporate/app-ma-contract[ja]

How to Find Cases

Individual M&A cases can be found on M&A matching sites and through M&A brokerage firms. By registering your desired acquisition and sale conditions on an M&A matching site, you will receive cases that match your criteria. Some sites also offer support from experts.

Additionally, the ‘Business Succession Support Centers’ established by the Small and Medium Enterprise Agency in each prefecture provide matching support for small and medium-sized enterprises and small-scale business operators. However, while many of the cases handled at these centers are small-scale M&A cases, they are not specifically for individuals. Therefore, it is recommended to communicate in advance that you are an individual and consult whether matching is possible.

Process of Personal M&A

The process of conducting a personal M&A is as follows:

• Finding a counterpart through matching sites or brokerage firms
• Signing a non-disclosure agreement and conducting an interview
• Signing a basic agreement
• Conducting due diligence
• Negotiating terms
• Signing the final contract and settlement

Among these, the creation of non-disclosure agreements, basic agreements, final contracts, and due diligence requires knowledge of various laws. Therefore, it is essential to seek the assistance of an experienced attorney.

What are the Laws Related to Personal M&A?

What laws should you be aware of when conducting personal M&A? While it may vary depending on your and the other party’s industry, the basic laws involved are listed below.

Japanese Companies Act (会社法)

When conducting M&A involving companies, transactions must be carried out based on the Japanese Companies Act. This law stipulates the procedures required for M&A (mergers, splits, stock exchanges/transfers, business transfers). Here, we will explain about stock transfers and business transfers, which are often used in personal M&A.

In the Case of Stock Transfers

Stock transfers involve the transfer of management rights by a shareholder transferring their shares to a buyer. When conducting a stock transfer, under the Japanese Companies Act, you need to:

• (In the case of restricted transfer shares) Request approval for share transfer
• Hold a board of directors meeting or a general shareholders meeting
• Conclude a share transfer agreement
• Rewrite the shareholder register

Please note that if the company being transferred is a stock-issuing company, the delivery of stock certificates is required. Whether or not it is a stock-issuing company can be confirmed in the registry certificate.

In the Case of Business Transfers

Business transfers involve the transfer of all or part of a company’s business. The Japanese Companies Act stipulates when a special resolution of a general shareholders meeting is required and when it is not necessary for a business transfer. Also, Article 21 of the Japanese Companies Act prohibits competition from the company that transferred the business. The transferring company must not conduct the same business within the same municipality and adjacent municipalities for 20 years from the transfer date (extendable up to 30 years by special agreement). These details can also be included in the business transfer agreement.

Note that if a sole proprietor conducts a business transfer, tax-related procedures are required.

Japanese Tax Law (税法)

When a sole proprietor conducts M&A, since a sole proprietor is not a company, the Japanese Companies Act does not apply. Instead, procedures under the Japanese Tax Law are required.

The party transferring the business must submit the following to the tax office:

• (If transferring the entire business) Notification of commencement/termination of individual business
• (If you have declared blue tax return and want to cancel it) Notification of cancellation of income tax blue tax return
• (If you were a taxable business for consumption tax) Business termination notification
• (If you want to reduce the estimated tax amount) Application for reduction of estimated tax amount for income tax and reconstruction special income tax

If the party receiving the business is an individual, the following must be submitted to the tax office:

• Notification of commencement/termination of individual business
• (If you want to declare blue tax return) Application for approval of income tax blue tax return
• (If you want to make a family member a dedicated blue business worker) Notification regarding salary for dedicated blue business worker
• If the party receiving the business is a corporation, different procedures are required, but they are omitted here.

Others

In addition to the above, laws that may apply include the Japanese Antimonopoly Act (独占禁止法), Labor Law (労働法), Financial Instruments and Exchange Act (金融商品取引法), Act on Enhancement of Industrial Competitiveness (産業競争力強化法), and Civil Rehabilitation Act (民事再生法). Also, depending on the company subject to M&A, and the industry of the seller and buyer, other laws may apply.

Summary

Individual M&A is a small-scale M&A, but the related laws are as diverse as those of general M&A. It may be difficult for an individual to grasp all of these and proceed with the transaction without any trouble. In particular, proceeding without expert advice on the creation of various contracts and due diligence may lead to unexpected problems.

If you are considering an individual M&A, it is reassuring to consult with a lawyer who handles many individual M&As as early as possible.