Advantages and Contractual Process of 'Share Transfer', a Simple Scheme in M&A

There are various schemes involved in M&A, including company splits, mergers, and share transfers. In this article, we will discuss the ‘share transfer’ scheme, which accounts for a large proportion of domestic M&A in Japan, including its advantages and disadvantages.

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What is a Stock Transfer?

In M&A, a stock transfer refers to the process where the shareholders of the target company sell their shares to the acquiring company, thereby transferring the management rights. Shareholders can receive the consideration for the stock transfer in cash. Compared to other M&A schemes, the procedure is simpler, which is why stock transfers are often chosen in M&A of small and medium-sized enterprises.

Methods of Stock Transfer

There are three main methods of stock transfer: ‘Public Tender Offer (TOB)’, ‘Market Purchase’, and ‘Over-the-Counter Transaction’.

Public Tender Offer (TOB)

A Public Tender Offer, also known as a TOB (Take-Over Bid), is a method of purchasing a large amount of stock without going through a stock exchange by announcing the details of the purchase (purchase period, purchase price, number of shares). According to the Japanese Financial Instruments and Exchange Act, if the ownership ratio of stock certificates, etc., exceeds one-third after the purchase, it must be done through a public tender offer (one-third rule). The purchase price offered in a TOB is often set higher than the market trading price in order to purchase more shares.

There are two types of TOBs: friendly TOBs and hostile TOBs. A friendly TOB refers to a case where the management of the target company agrees, while a hostile TOB refers to a case where the management of the target company opposes. There are various countermeasures against hostile TOBs, such as poison pills and golden parachutes.

Market Purchase

A Market Purchase is a method of buying up shares on a stock exchange when the target company is a listed company. However, since placing a large number of buy orders is likely to raise the stock price, it is rarely done with the aim of acquiring more than half of the shares.

Over-the-Counter Transaction

An Over-the-Counter Transaction refers to trading outside the market, and in the case of unlisted companies, only over-the-counter transactions are possible. If the parties agree, they can freely set the trading conditions such as price.

Benefits of Share Transfer

The main benefits for the transferor company are as follows:

• The company can continue to exist as it is
• Shareholders can convert their shares into cash

On the other hand, the benefits for the transferee company include the following:

• They can generally inherit licenses and contracts
• The procedures are simpler compared to other schemes

In the case of share transfers, licenses and contracts can be inherited in most cases. However, it is important to note that some basic transaction contracts and lease contracts may include clauses stating that the contract will be terminated if the major shareholder changes. In practice, even if such a clause exists, it does not necessarily mean that the contract will be terminated. Depending on the creditworthiness of the new shareholder, there are many cases where the contract can be continued.

Disadvantages of Stock Transfer

If the transferring company does not have many shareholders, it would be ideal. However, if there are many shareholders, it takes time and effort to consolidate the shares.

Furthermore, for the receiving company, there is a disadvantage that they must also take over liabilities and off-balance-sheet debts. Therefore, it is necessary to conduct due diligence carefully in advance.

Things to Check Before Transferring Shares

When transferring shares, it is important to check the following points.

Whether Share Certificates Have Been Issued

If the company has issued share certificates, it is necessary to go through the procedure of handing over the share certificates when transferring shares. For companies established before the enforcement of the Japanese Companies Act (May 2006 in the Gregorian calendar), unless there is a provision in the articles of incorporation stating that share certificates will not be issued, it is a company that issues share certificates. Conversely, for companies established after May 2006, if there is no provision in the articles of incorporation stating that share certificates will be issued, it is a company that does not issue share certificates.

In the case of a company that does not issue share certificates, it is possible to transfer rights by concluding a share transfer agreement and changing the name in the shareholder register. However, in the case of a company that issues share certificates, it is necessary to be aware that rights cannot be transferred unless the share certificates are handed over.

Whether There Are Restrictions on the Transfer of Shares

If there are restrictions on the transfer of the shares to be transferred, it is necessary to make a request for approval of the share transfer and obtain approval. Whether or not there are restrictions on the transfer of shares can be confirmed in the articles of incorporation or the certificate of registered information.

Flow of Share Transfer

Share transfers through bilateral transactions can be carried out with the agreement of the transferor and the transferee. However, in order to make it effective and enforceable against third parties, it is necessary to go through procedures based on the Japanese Companies Act. Here, we explain the general flow of share transfers through bilateral transactions.

Request for Share Transfer Approval (In case of share transfer restrictions)

When intending to transfer restricted shares, the shareholder must submit a request for transfer approval to the company and obtain approval. The request for transfer approval should include the following:

• Type and number of shares to be transferred
• Address, name or title of the transferee

Share Transfer Approval (In case of share transfer restrictions)

In the case of a company with a board of directors, the board approves the share transfer. Even if it is a company with a board of directors, it can be done at the general meeting of shareholders if stipulated in the articles of incorporation. In the case of a company without a board of directors, approval is obtained at the general meeting of shareholders. Once approval or disapproval is decided, the company will notify the requester.

Please note that if no notification is made within two weeks from the date of the transfer approval request (which can be shortened by the articles of incorporation), the company is deemed to have approved the transfer under the Japanese Companies Act.

Conclusion of Share Transfer Agreement

If the transfer approval is granted, a share transfer agreement is concluded. Before concluding a share transfer agreement, it is necessary to conduct due diligence to understand the risks.

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Rewriting of Shareholder Register

The transferor and the transferee make a request to the company to rewrite the shareholder register. In the case of a company that does not issue share certificates, the transferee can request the issuance of a certificate of registered matters. As mentioned above, in the case of a company that issues share certificates, the transfer of shares does not take effect unless the share certificates are delivered, so it is necessary to deliver the share certificates.

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Summary

While the transfer of shares is a simpler procedure compared to other M&A schemes, specialized knowledge in legal and tax matters is indispensable for smooth progress. If you are considering a share transfer, it is advisable to first consult with a lawyer who has extensive experience.