Company Mergers in Japanese Corporate Law: Types and Required Procedures

In the pursuit of sustained growth and enhanced competitiveness, corporate restructuring is an indispensable strategic option. Among various restructuring methods, company mergers serve as a powerful tool to integrate multiple businesses, creating new business opportunities and improving management efficiency. Mergers involve not just the consolidation of two or more corporate entities, but also the reorganization of business operations, assets, liabilities, and most importantly, human resources, which can significantly impact the future of a company through crucial legal procedures.

This article delves into company mergers under Japanese Corporate Law, focusing on their types, detailed procedures, the protection of rights for shareholders and creditors, and an overview of simplified mergers and short-form mergers that streamline the process. Japanese Corporate Law sets forth stringent regulations concerning mergers, and a precise understanding and adherence to these legal requirements are vital for a successful merger. Mergers can serve as a powerful tool to achieve a wide range of strategic goals, such as business expansion, creation of synergies, cost reduction, strengthening market competitiveness, or reorganization within a corporate group. For instance, according to Article 749, Paragraph 1, Item 2 of the Japanese Corporate Law, it is permissible to issue shares as consideration for a merger, thereby enabling business expansion while minimizing the burden of fundraising.

While this comprehensive succession of rights and obligations offers the significant advantage of avoiding the hassle of individual asset transfers and contract assignments, it also has the potential to significantly affect stakeholders such as shareholders and creditors. Therefore, Japanese Corporate Law mandates detailed procedures aimed at protecting these stakeholders while ensuring the efficiency of mergers. This article aims to serve as a practical guide for shareholders, executives, and legal departments considering mergers under Japanese Corporate Law. Although the merger process is complex and involves various legal aspects, through this explanation, we hope to clarify the overall picture and the points to consider at each stage, thereby assisting in your strategic decision-making.

What is a Company Merger in Japan?

A company merger in Japan is a method of organizational restructuring where multiple companies legally become one entity. Under Japanese Corporate Law, mergers are primarily classified into two forms: “absorption merger” and “consolidation merger.”

The Definition and Purpose of Mergers Under Japanese Corporate Law

A merger in Japan refers to the process by which two or more companies combine through a contract to integrate into a single corporate entity. In this process, all rights and obligations of the dissolving company are comprehensively transferred to the surviving company or to a newly established company [Japanese Companies Act, Article 2, Paragraphs 27 and 28]. The objectives of mergers are diverse, ranging from expanding business scale, acquiring market share, eliminating competitors, acquiring technology and know-how, creating synergies through the efficient use of management resources, reorganizing within a corporate group, to rescuing financially troubled companies. In particular, when mergers are conducted using shares as consideration, there is an economic benefit of being able to expand the business without the need for fundraising, thus at a lower cost.

The comprehensive transfer of rights and obligations in a merger streamlines the process by eliminating the need for individual contract transfers or asset conveyances. However, this efficiency comes with the potential downside of unexpectedly affecting the rights of creditors and shareholders. Consequently, Japanese corporate law imposes strict procedures aimed at protecting all stakeholders, especially creditors and minority shareholders, while enjoying the convenience of this comprehensive transfer. This ensures the legal effectiveness of the merger and the trust of the related parties, promoting the sustainable development of companies.

Two Types of Mergers Defined Under Japanese Corporate Law

Japanese Corporate Law clearly distinguishes between two types of mergers: “absorption mergers” and “consolidation mergers.” Each type of merger carries significant differences in their legal structures and practical implications.

Merger by Absorption Under Japanese Corporate Law (Article 2, Paragraph 27)

Mergers by absorption are a method in which the surviving company inherits all rights and obligations of the company that ceases to exist post-merger. For instance, if Company A absorbs Company B, Company A becomes the surviving entity, while Company B’s corporate status is extinguished, transferring all its assets, liabilities, contractual relationships, and licenses to Company A. The advantages of this form include the fact that the surviving company maintains its existing corporate status, which generally eliminates the need for reacquiring licenses or renegotiating contracts. Additionally, if the surviving company is publicly traded, there is a high likelihood that its listing status will be preserved. Specifically, the surviving company will hold not only its original licenses but also those of the dissolved company. For the shareholders of the dissolved company, it is possible to provide compensation in the form of shares, bonds of the surviving company, or cash. The variety of compensation options offers flexibility in financing and reduces barriers to executing the merger.  

Consolidation through New Company Establishment (Japanese Company Law Article 2, Paragraph 28)

Consolidation through new company establishment is a method where two or more companies dissolve through a merger, and a newly established company succeeds all the rights and obligations of the dissolved companies. For example, if Company A and Company B consolidate to form a new company, both Company A and Company B will dissolve their corporate entities, and the newly established Company C will inherit all their rights and obligations. A key personalityistic of this form is that all parties involved dissolve, which tends to emphasize the fairness of the management integration. However, since the new company acquires a new corporate entity, the licenses and permits held by the dissolved companies are not automatically transferred, and the new company must obtain them anew. Even in a consolidation through new company establishment, it is legally possible to issue cash as merger consideration. However, since the new company is established through the merger, it is not typically expected to hold cash at the time of establishment, and in practice, issuing shares as consideration is common. Therefore, while cash payment is not excluded from the system, it is practically challenging. In consolidations through new company establishment, it is legally possible to include cash as consideration, but since the new company often does not hold cash at the time of establishment, issuing shares or bonds is the common practice. In the case of publicly listed companies, the new company must go through the listing procedures again. Consolidation through new company establishment provides an opportunity to build a new corporate culture and organizational structure from scratch, but it also tends to increase the complexity, time, and cost of the procedures.  

The choice between absorption merger and consolidation through new company establishment should be made after considering the strategic goals of the company, the existing legal and business conditions, and the impact on shareholders and creditors. In particular, practical aspects such as the succession of licenses and the maintenance of public listing are directly connected to the continuity of the business after the merger, requiring careful consideration.

Comparison of Absorption Mergers and Consolidation Mergers Under Japanese Corporate Law

Concluding a Merger Agreement Under Japanese Corporate Law

The first crucial step in the merger process is the conclusion of a merger agreement between the merging companies. This contract establishes the basic terms of the merger and forms the foundation for all subsequent legal procedures.

Legal Requirements for a Merger Agreement

Article 748 of the Japanese Companies Act stipulates that “a company may merge with another company, and in such a case, the merging companies must conclude a merger agreement,” clearly indicating that the conclusion of a merger agreement is a legal requirement for mergers. This contract legally binds the agreement between the parties involved in the merger and directly affects the success of the merger and its subsequent legal effects. A merger agreement is an essential document for establishing the legal foundation of a merger and clarifying the rights and obligations of the parties involved. Its stringent legal requirements ensure the transparency and certainty of the merger and play a role in preventing future disputes.

Contents of a Merger Agreement

The merger agreement must include statutory provisions as defined by the Japanese Companies Act. These provisions are crucial for clarifying the terms of the merger and ensuring that stakeholders such as shareholders and creditors can accurately understand the details of the merger.

In the case of an absorption-type merger agreement, Article 749, Paragraph 1 of the Japanese Companies Act requires the following items to be specified:

• The trade names and addresses of the surviving company and the dissolving company in the absorption merger
• Details of the consideration to be provided by the surviving company to the shareholders of the dissolving company in the absorption merger (such as shares, bonds, cash, etc.)
• Details of the consideration to be provided by the surviving company to the warrant holders of the dissolving company in the absorption merger
• The effective date of the merger

In the case of a consolidation-type merger agreement, Article 753, Paragraph 1 of the Japanese Companies Act requires the following items to be specified:

• The purpose, trade name, location of the head office, total number of shares that can be issued, and other matters prescribed in the articles of incorporation of the new company established by the consolidation merger
• Details concerning the officers of the new company established by the consolidation merger, such as the directors and auditors at the time of establishment
• Details of the consideration to be provided by the new company established by the consolidation merger to the shareholders of the dissolving company (such as shares, bonds, etc.)
• The effective date of the merger

In addition to these statutory provisions, the contract may also include optional provisions agreed upon by the parties involved. The contents of the contract are typically written in specific article format, with each item organized as “Article 1,” “Article 2,” and so on.

Preparation of Preliminary Disclosure Documents

After concluding the merger agreement, the parties involved are obligated to prepare preliminary disclosure documents containing important information about the merger at their head offices (Articles 782, 794, and 803, Paragraph 1 of the Japanese Companies Act). These documents must be available from six months before the effective date of the merger until six months after the effective date (for the dissolving company in an absorption merger, until the effective date), and shareholders and creditors can request to view or obtain copies of these documents during business hours at any time.

The preliminary disclosure documents include the contents of the merger agreement, matters concerning the fairness of the merger consideration, matters related to the financial statements of the merging companies, and information on significant property disposals or debt incurrences that occurred after the end of the last fiscal year. The purpose of this system is to disclose in advance the impact of the merger on shareholders and creditors, allowing them to thoroughly review the details of the merger and, if necessary, exercise their rights such as the demand for share repurchase by dissenting shareholders or the objection procedures by creditors. Preliminary disclosure plays an extremely important role in ensuring transparency in merger procedures and promoting informed decision-making among stakeholders.

Shareholder Meeting Approval Under Japanese Corporate Law

Mergers fundamentally alter a company’s organizational structure and financial status, significantly impacting shareholder rights. Therefore, under Japanese Corporate Law, a resolution of approval by the shareholder meeting is mandated for merger contracts.

In the case of an absorption merger, both the surviving company and the company being absorbed must receive approval for the merger contract through a resolution by the shareholder meeting, generally before the day preceding the effective date of the merger. Similarly, for a consolidation merger, the companies that will cease to exist must obtain approval for the consolidation merger contract through a resolution by their respective shareholder meetings.

This shareholder meeting resolution is not a standard one but requires a more stringent ‘special resolution.’ A special resolution is one where shareholders holding a majority of the voting rights must be present, and at least two-thirds of the votes of the attending shareholders must be in favor (Article 309, Paragraph 2, Item 12 of the Japanese Companies Act). This is an important protective measure to reflect the will of a larger number of shareholders, as mergers have a significant impact on the shareholders’ invested capital and future profits.

In certain situations, even more stringent resolution requirements may be imposed. For example, when the merger consideration to be given to the shareholders of the disappearing company consists of shares with transfer restrictions or interests in a partnership company, a special resolution by the shareholder meeting or consent of all shareholders may be necessary. These provisions adjust the level of shareholder protection according to the specific details of the merger, preventing shareholders from suffering disadvantages. Shareholder meeting approval is an essential process to ensure the legal validity of a merger and to secure the consent of the shareholders.

Dissenting Shareholders’ Right to Demand Share Repurchase Under Japanese Corporate Law

Shareholders who oppose a merger have the right to demand that the company repurchase their shares at a fair price. This is an important system designed to protect shareholders from fundamental changes to the company, such as mergers.

Purpose and Requirements for Exercising the Share Repurchase Right

Under Japanese Corporate Law, in the event of a merger or similar restructuring, dissenting shareholders have the right to demand that the company repurchases their shares at a fair price (the share repurchase right). The purpose of this right is to protect shareholders by providing them with an opportunity to recover their invested capital when the company undergoes essential organizational changes, especially mergers that significantly alter the company’s financial status and greatly impact the existing shareholders’ position. This allows shareholders to exit the company at a reasonable price without being forced to comply with organizational changes that go against their will.

The “dissenting shareholders” who can exercise the share repurchase right are, in principle, those who notify the company of their opposition to the merger prior to the shareholders’ meeting approving the merger and those who vote against the merger at the shareholders’ meeting. Shareholders who are unable to exercise their voting rights at the shareholders’ meeting are also considered dissenting shareholders. The company must notify or announce the merger to the shareholders within two weeks after the resolution of the shareholders’ meeting (in the case of a new merger) or at least 20 days before the effective date (in the case of an absorption merger). Shareholders must submit a written document to the company, specifying the type and number of shares, within 20 days from the date of this notification or announcement to make a share repurchase request. The share repurchase request can only be withdrawn with the company’s consent.

Introduction to Judicial Precedents Regarding the ‘Fair Price’

One of the major points of contention in the share repurchase right is the calculation of the ‘fair price.’ Although Japanese Corporate Law stipulates the repurchase at a ‘fair price,’ the specific method of calculation is not explicitly stated. Therefore, if shareholders and the company cannot agree on the price, the courts are petitioned to determine the price. The courts have ruled that it is appropriate to calculate the price by considering the objective value that the shares would have had without the merger (the so-called ‘but-for price’), while appropriately reflecting the synergistic effects of the merger.

A representative judicial precedent regarding the interpretation of ‘fair price’ is the case of the share repurchase price determination between Rakuten and TBS. On March 5, 2010, the Tokyo District Court determined the repurchase price of the shares in question to be 1,294 yen per share. This decision had a significant impact on business practices concerning the calculation of ‘fair price’ in organizational restructurings such as mergers and stock exchanges, not only in terms of procedural fairness but also in how much the synergistic effects resulting from the merger should be reflected in the price. The court’s decision included the perspective that shareholders should benefit from the increased corporate value brought about by the merger, not just based on the pre-merger market price. Companies need to take these judicial trends into account when determining the merger consideration.

Creditor Objection Procedures Under Japanese Corporate Law

When a company undergoes a merger, the obligations of the dissolved company are inherited by the surviving or newly established company. This change of debtor can potentially impact the creditors’ ability to collect their claims. Therefore, Japanese Corporate Law mandates procedures to protect the interests of creditors.

The Necessity and Process of Creditor Protection Procedures Under Japanese Corporate Law

Under Japanese Corporate Law, when a merger takes place, if there are affected creditors, the law requires the implementation of ‘creditor protection procedures’ to notify these creditors about the reorganization and provide them with an opportunity to object. This is to consider the possibility that the merger could worsen the debtor’s financial situation and disadvantage the creditors.

The specific steps of the creditor protection procedures are as follows:

1. Public Notice: The merging companies must publish a notice in the Official Gazette, stating the intent to merge, the trade name and address of the counterpart company, matters related to the company’s financial documents, and that creditors have a certain period (not less than one month) to state their objections.
2. Individual Notification: In addition to the public notice in the Official Gazette, the company must individually notify ‘creditors known to the company’ of the same matters. This includes creditors with small claims, so in practice, it is necessary to thoroughly review the entire list of creditors and notify them without omission. Individual notification requires consideration of the time needed for the notice to reach the creditors, including the mailing period.
3. Settlement with Creditors: If a creditor objects, the company must either settle the claim, provide adequate security, or entrust sufficient assets to a trust company or similar entity with the purpose of allowing the creditor to receive payment. However, if it is determined that the merger will not harm the creditor, this is not required, although such determinations are rare in practice. If the creditor does not object within the period, the merger is deemed to have been approved by the creditor.

These creditor protection procedures must be completed by the effective date of the merger.

The Impact of Non-Compliance with Objection Procedures on the Effectiveness of Mergers Under Japanese Corporate Law

If creditor protection procedures are not properly executed, a merger may become invalid. Article 828, Paragraph 2 of the Japanese Companies Act stipulates that within six months from the date the merger takes effect, those who were shareholders of the concerned company, bankruptcy trustees, or creditors who did not approve the absorption merger at the time the effect occurred, may file a lawsuit.

Failure to perform creditor protection procedures is considered a significant flaw that severely undermines the legal stability of a merger. This is a powerful legal measure to prevent the unjust infringement of creditors’ rights, and companies must prioritize creditor protection procedures from the planning stages of a merger, ensuring their thorough execution. If procedural deficiencies are discovered, not only may the merger be invalidated, but it can also lead to a loss of trust from stakeholders and substantial claims for damages, posing a significant risk to management.

Introduction to Case Law on Creditor Protection in Japan

The scope and interpretation of creditor protection procedures are significantly informed by case law. For instance, there has been much debate regarding the range of “creditors that a company can be aware of” who are subject to creditor protection procedures, and the impact that procedural defects may have on the effectiveness of a merger.

The Tokyo District Court has made decisions suggesting that inadequacies in the creditor objection procedures during a merger can be grounds for invalidating the merger. In particular, creditors who are considered “creditors that a company can be aware of” but did not receive a notice to file an objection have been recognized as having the right to file a lawsuit to invalidate the merger. These precedents emphasize the importance of companies not only formally conducting creditor protection procedures but also substantively ensuring that all “creditors that a company can be aware of” are properly notified and given the opportunity to raise objections. Merger managers in Japanese companies must pay close attention to these case law developments and strive to properly implement creditor protection procedures.

The Effective Date and Registration of Mergers Under Japanese Corporate Law

A merger in Japan comes into legal effect after a series of processes including the conclusion of a merger agreement, approval by the shareholders’ meeting, and creditor protection procedures. The effective date of the merger and the accompanying registration procedures represent a crucial phase that signifies the completion of the merger.

Effective Date of the Merger

The effective date of a merger is stipulated in the merger agreement. In the case of an absorption merger, the surviving company inherits all rights and obligations of the absorbed company on the effective date specified in the merger agreement. Although it is possible to change this effective date by mutual agreement of the companies involved, any change must be publicly announced before the day preceding the original effective date.

On the other hand, in the case of a consolidation merger, the newly established company inherits the rights and obligations of the disappearing companies on the day of its establishment. Since the establishment of the new company is formalized through its registration (according to Article 49 of the Japanese Companies Act), the date of registration for the new company is the effective date of the merger in a consolidation merger.

An important point to note is that if the creditor objection procedures have not been completed by the effective date, or if the merger is aborted, the merger does not come into effect. This provision balances the need for legal stability in mergers and the protection of creditors.

Registration Procedures for Mergers

After the merger takes effect, the companies involved must complete the prescribed registration procedures. This registration is essential to assert the effects of the merger against third parties.

In an absorption merger, the surviving company must perform the change registration due to the merger, and the dissolved company must complete the dissolution registration at the location of their respective head offices within two weeks after the effective date. The dissolution of the absorbed company cannot be opposed by third parties until after the merger registration is completed. This indicates that the effective date of the merger and the effective date of the registration can differ. For example, if the property of the dissolved company is transferred to a third party after the effective date, the surviving company cannot oppose the acquisition by the third party unless the registration is completed, even if the third party acted in bad faith.

In the case of a consolidation merger, the merger takes effect with the registration of the establishment of the new company. The newly established company must complete its establishment registration at the location of its head office within two weeks after meeting the required conditions. At the same time, the dissolution registration of the companies that disappear due to the consolidation merger is also necessary. For the transfer of rights such as real estate, a separate property registration must be performed after the merger registration.

Provision of Post-Merger Disclosure Documents

Even after the merger takes effect, the company has an obligation to disclose information related to the merger. The surviving company (in an absorption merger) or the new company (in a consolidation merger) must promptly provide post-merger disclosure documents detailing important matters related to the merger at their head office after the effective date. These documents, which are kept for six months from the effective date, include the date the merger took effect, the progress of the share buyback requests from dissenting shareholders and creditor objection procedures, matters concerning the inherited significant rights and obligations, items disclosed in the pre-merger documents, and the date of the change registration. This post-merger disclosure serves as an important source of information for stakeholders to verify the results of the merger and to ensure that the merger procedures were conducted lawfully, thereby ensuring transparency in the merger process and strengthening corporate governance.

Simplified and Short-Form Mergers Under Japanese Corporate Law

Japanese Corporate Law provides a system that allows for the simplification of certain merger procedures when specific requirements are met. This system is designed to reduce procedural burdens and enable swift organizational restructuring when the impact on the merging companies and their shareholders is deemed limited.

Overview and Requirements of Simplified Mergers

A simplified merger is a system that allows the surviving company in an absorption merger to omit the approval resolution of the shareholders’ meeting. This applies when the impact on the shareholders of the surviving company due to the merger is considered minor.

The main requirements for a simplified merger are stipulated in Article 796, Paragraph 2 of the Japanese Companies Act. It is applicable when the total book value of the consideration provided by the surviving company to the shareholders of the absorbed company does not exceed one-fifth of the net assets of the surviving company (the articles of incorporation may set a lower ratio). This provision permits the omission of time-consuming and costly approval procedures at the shareholders’ meeting when the merger is considered to have a limited impact on the financial situation and shareholder composition of the surviving company. This enhances management flexibility and enables rapid decision-making.

However, even in a simplified merger, there are exceptions where approval at the shareholders’ meeting cannot be omitted if the merger could disadvantage the shareholders of the surviving company. For example, if the merger consideration consists of shares with transfer restrictions or if the merger would result in the shareholders of the surviving company bearing liability.

A short-form merger is a system that allows the absorbed company in an absorption merger to omit the approval resolution of the shareholders’ meeting. This applies when the surviving company is the “special controlling company” of the absorbed company.

A “special controlling company,” as defined in Article 796, Paragraph 1 of the Japanese Companies Act, is when the surviving company holds more than 90% of the total voting rights of the shareholders of the absorbed company. In such a controlling relationship, the decision to approve the merger at the shareholders’ meeting of the absorbed company is effectively determined by the will of the surviving company, making the holding of the shareholders’ meeting practically unnecessary. Therefore, the procedure for approval by the shareholders’ meeting on the absorbed company’s side is permitted to be omitted.

Short-form mergers significantly contribute to the simplification and acceleration of procedures, especially in group organizational restructuring. However, the protection of minority shareholders remains important. Even in a short-form merger, minority shareholders opposing the merger can exercise their “share buyback request rights” to demand that the company purchase their shares at a fair price. Furthermore, if the merger violates laws or the articles of incorporation, or if the merger consideration is significantly unfair, shareholders of the absorbed company are allowed to file a claim to stop the merger. These protective measures ensure that the rights of minority shareholders are not unjustly infringed upon as procedural simplifications advance.

Summary

Company mergers under Japanese Corporate Law are an extremely important legal mechanism for corporate growth strategies and organizational restructuring. The two main forms, absorption mergers and consolidation mergers, each have different legal effects and practical impacts, and should be carefully selected according to the strategic goals of the company. From the conclusion of the merger agreement to the approval of the shareholders’ meeting, the exercise of dissenting shareholders’ rights to demand the purchase of shares, creditor objection procedures, and up to the effectiveness and registration, it is essential to comply with the strict requirements of Japanese Corporate Law at each stage. Any deficiencies in these procedures could lead to serious consequences such as the invalidity of the merger, thus meticulous planning and execution are required.

In particular, practical issues such as the calculation of a ‘fair price’ for merger consideration and the scope of ‘creditors that the company can know’ in creditor protection procedures, where interpretations may diverge, are areas where Japanese case law provides important guidance. Simplified procedures such as simplified mergers and short-form mergers streamline the merger process under specific requirements, yet the legal obligations to protect minority shareholders and creditors are still strictly applied.

Monolith Law Office has a wealth of experience in mergers under Japanese Corporate Law and has provided strategic advice and practical support to numerous clients. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to explain Japan’s complex legal system from an international perspective and propose accurate solutions to the challenges our clients face. We offer specialized support at every stage of the merger process, from legal review of mergers, drafting of contracts, negotiations with shareholders and creditors, to registration procedures, contributing to the achievement of your business goals. The sources used in this report can be found