In our previous column, we explained some human resources issues in Japanese companies, which investors are likely to face when they engage in M&A transactions. In this column, we explain a typical bid process undertaken by a seller to sell the business of a kabushiki kaisha (“KK”), when there are two or more potential buyers. Relating to the bid process, we also provide a short overview of legal liquidation procedures because special rules for M&A apply to the transactions under such procedures.
2. Bid Process
There are various share purchase methods for M&A in Japan, and bid processes are also used. There are no special laws which regulate bid processes. The process consists of delivering a process letter, providing the information package and first bid (the selection of the candidates by the seller). After that, due diligence will be conducted and the second bid will be done. Otherwise, due diligence will be conducted first by potential buyers at the same time as they make their bid, and only a first bid will be accepted, with no second round. Finally, a definitive agreement will be executed after negotiating the details of the terms and conditions with the potential buyer who won the bid. While the particulars of a bid process will depend on the situation of each case, we provide an the overview of a typical bid process below.
(1) Delivering a Process letter
In the bid process, we usually prepare a process letter, which explains the procedure in a bid process, the scheme of the transaction and the overview of its schedule. The seller’s financial advisor usually prepares it in consultation with the seller.
(2) Providing Information Package
The information package typically includes relevant information about the target KK such as the target’s businesses, financial condition, business plan and, in some cases, a draft of the definitive agreement. This document includes some confidential information and a potential buyer who wishes to obtain the information package must execute an NDA with the seller before receiving this information package.
In rare cases, in order to handle strictly confidential matters, a non-name sheet (“teaser”) will be prepared for the deal before executing the NDA and providing the information package. This teaser includes the basic outline of the target KK, and confidential information is omitted by the seller.
(3) Bid and Due Diligence
Basically, for a first bid, the bidders will analyze the information package to discern the risks of the financial condition and propose a bidding price. After the first bid, a few bidders will be selected by the seller to go forward to the due diligence stage and the second bid.
After the first bid, the bidders passing the first bid will conduct due diligence, including more than just financial matters, to evaluate the value of the target company or business and analyze the risks. In this phase, the bidders will review voluminous materials concerning legal, finance and tax affairs to detect deal breaking points and expected risks. Then, based on the result of the due diligence, the bidders will tender their final bidding price and their comments regarding the draft agreement (if any) for their second bid.
In the second bid, the seller will choose a purchaser and then negotiate the terms and conditions of the definitive agreement in detail with it, including the representations and warranties, covenants and indemnification clause (in some cases, the terms and conditions are discussed between the seller and each of the bidders before the seller’s selection of the purchaser).
3. Special Rules for M&As in Legal Liquidation
M&A is not only a way to increase business profits but it is also sometimes a part of the legal liquidation proceedings of a financially endangered KK. Such a KK has the option to sell their businesses to a third party through an M&A transaction as an assignment of the business (not a share purchase transaction), in order to distribute the proceeds to its creditors and then to liquidate the KK. Bid processes are also used in such cases, and basically the process is very similar to the above, although the speed of the process is very important in the legal liquidation phase. In this section, we will provide some insights into the bid process when used in a legal liquidation proceeding.
(1) Overview of Legal Liquidation
The Civil Rehabilitation Act and the Corporate Reorganization Act are the acts which govern legal liquidation proceedings for business revitalization. These Acts both govern similar situations, but the regulations under these laws are different.
|(a) Rights of Representation and Rights Pertaining to Administration and Disposition
A KK which undergoes a restructuring under the Civil Rehabilitation Act continues to hold the right to carry out its business and rights pertaining to the administration and disposition of its property except for certain matters which require the approval of the supervisor (kantoku-iin) or permission from the court.
On the other hand, a KK loses the right to manage its business and rights pertaining to the administration and disposition of its property if it undergoes a restructuring under the Corporate Reorganization Act. The trustee (kanzainin) appointed by the court has these rights.
(b) Involvement of Supervisor and Trustee
For proceedings under both Acts, a commencement order of proceedings must be issued by a competent court. Under the Civil Rehabilitation Act, one or more of supervisors will be appointed by the court to supervise the KK. On the other hand, in proceedings under the Corporate Reorganization Act, the court will appoint one or more trustees and, as explained above, the trustee holds the right to manage the business and rights pertaining to the administration and disposition of the KK’s property. There is no supervisor to supervise the conduct of the trustee or the KK. The supervisor and the trustee are supervised by the courts and there are some acts (including business transfer) for which permission from the court is required under both the Civil Rehabilitation Act and the Corporate Reorganization Act.
(2) Schemes for M&A in Legal Liquidation
There are some schemes to conduct M&A in legal liquidation, and in practice, business transfer and company split are typically used.
|(a) Business Transfer
There are some differences in the requirements between the Civil Rehabilitation Act and the Corporate Reorganization Act in order to conduct a business transfer (including transfer of a subsidiary) while undergoing rehabilitation procedures. The requirements of each are set forth below.
|(i) Civil Rehabilitation Act
Under the Civil Rehabilitation Act, a business transfer can be conducted via a rehabilitation plan approved in a creditors meeting, or by obtaining permission from the court after opinion hearings of known creditors and the labor union if the transferred business includes all of the businesses of the KK or a significant part of its business without the a rehabilitation plan.
Under the Companies Act, if the transferred business is all of the businesses of the KK or a significant part of the business, a special resolution at a shareholders meeting is required in general. This special resolution is not required if the KK obtains the permission from the court in lieu of approval based on a resolution at a shareholders meeting, when the KK is unable to pay its debts in full with its property and a business transfer is necessary for the continuation of the business, under the Civil Rehabilitation Act.
(ii) Corporate Reorganization Act
Under the Corporate Reorganization Act, a business transfer can be conducted via a reorganization plan which has been confirmed at a creditors meeting. In addition, similar to the rehabilitation proceedings under the Civil Rehabilitation Act, a business transfer can be conducted without a reorganization plan by obtaining permission from the court after opinion hearings of known creditors and the labor union if the transferred business is all of the businesses of the KK or a significant part of the businesses. However, unlike in a rehabilitation proceeding under the Civil Rehabilitation Act, the trustee must give public notice or send notice to shareholders prior to the business transfer and the court cannot grant permission in certain cases such as where the shareholders who hold voting rights which account for more than one-third of the voting rights object to the business transfer.
Even if the transferred business is all of the businesses of the KK or a significant part of the business and the transfer is to be undertaken, a special resolution at the shareholders meeting under the Companies Act is not required.
|In addition to above, a purchaser of a transferred business needs to obtain the employees’ consents if the employees are transferred (tenseki) to the purchaser. Requirements for the perfection of title to each asset (including registration of real estate) should also be fulfilled.
(b) Company Split
|(i) Civil Rehabilitation Act
Under the Civil Rehabilitation Act, there are no special regulations for a company split. However, in practice, company splits require the permission of the Tokyo District Court because a company split is similar to a business transfer (which requires permission under the Act) from the perspective that the business will be carved out from the business entity.
Under the Companies Act, a special resolution at a shareholders meeting is generally required for company splits.
(ii) Corporate Reorganization Act
Under the Corporate Reorganization Act, a company split can be conducted via a reorganization plan confirmed at a stakeholders meeting. A company split cannot be conducted without a reorganization plan, unlike a business transfer.
A special resolution at a shareholders meeting under the Companies Act is not required.
|In a business transfer, the purchaser succeeds to individual rights and obligations of the seller. On the other hand, in a company split, the successor company comprehensively succeeds to the rights and obligations of the business (in accordance with the provisions of the split contract). However, since the succession to labor contracts has a significant impact on employees, the protection of employees, including notice to them and discussion with them, is required under the Act on the Succession to Labor Contracts upon Company Split and the Act Revising a Portion of the Commercial Code, Etc. (Act No. 90 of 2000). Care should also be taken to the requirements of these acts.
(3) Selecting Sponsor (Pre-Packaged Style)
In some situations, endangered KKs will select a sponsor to revive their business before filing the legal liquidation (“Pre-Packaged Style”), and this selection is similar to the usual bid process. In the legal liquidation, obtaining the maximum assistance from the sponsor is not the only concern. The speed of the process is also very important to avoid undermining the value of the business. The Pre-Packaged Style has some merits, such as avoiding disruption to relations with trading partners due to the credibility of the sponsor. However, even in the Pre-Packaged Style, new sponsors may appear and propose terms and conditions more advantageous for the KK than the previous sponsors, once the rehabilitation or reorganization proceedings commence. In such cases, there is a possibility that the court will request that the KK undergo the selection process for the sponsor again from scratch. Therefore, when becoming a sponsor in the Pre-Packaged Style, it is advisable to include some deal protection clause in the sponsor agreement.
This is the end of our series of columns for foreign investors to get some insights into M&A in Japan. We thank Amidas Partners for giving us an opportunity to write this series of columns, and it would please us greatly if our columns are of any assistance when you consider an M&A transaction in Japan.
University of Southern California Gould School of Law (LL.M., 2016/Graduate Certificates in Business Law and Entertainment Law) University of California, Davis, School of Law (LL.M., 2015) Keio University (LL.B., 2000)
The International Comparative Legal Guide to: Mergers & Acquisitions 2010 (Japan Chapter), etc.
Areas of Practice:
M&A, Joint Ventures, Startups & Venture Capital, Corporate Governance, Robotics/Artificial Intelligence, Personal Data & Privacy/Big Data, etc.
Kyoto University (LL.B., 2013)