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M&A in Japan for Foreign Investors
Part 1: The Basic Features of Japanese Companies
By Hidetoshi Matsumura and Taisuke Ueno| Nishimura & Asahi
12/Jul/2017

1. Introduction

Welcome to the first of a series of columns in which we hope to introduce prospective foreign investors to the basics of M&A in Japan. This series of columns will hopefully give you an overall understanding of what to expect when performing M&A transactions in Japan and cover the M&A practice which has changed since the amendment of the Companies Act of Japan became effective as of May 1, 2015. In this first column, we will lay out the basic features of Japanese companies.

2. Forms of Companies

In Japan, the most common type of target company in an M&A transaction is one structured as a kabushiki kaisha (“KK”) or, on some rare occasions, a godo kaisha (“GK”).

(1) Kabushiki Kaisha

A KK is a joint-stock corporation, and it is the most common type of legal entity in Japan. Like shareholders of similar companies in other jurisdictions, the shareholders’ liability in relation to debts of the KK is limited to the funds they have invested in the KK as consideration for their shares in the KK. All companies whose shares are listed on stock exchanges in Japan (such as the Tokyo Stock Exchange) are KKs because being a KK is one of the requirements for a company to obtain permission for listing.

A KK must meet various legal requirements in terms of company structure (explained more fully below). However, a KK may issue various classes of shares each with different rights attached thereto. For example:

  (a) shares with preferential rights to dividends (preferred shares) of surplus profit, etc.;
  (b) shares in which a call option is granted to the KK to re-purchase the shares; and
  (c) shares that enable the shareholders of such class of shares to elect the directors of the KK.


The issuance of different classes of shares offers the KK flexibility in the design of the company structure. Start-up companies in Japan often issue different classes of shares as this allows them to attract investors who have different levels of risk allowance and expected return. The different features of each class of shares issued must be stipulated in the articles of incorporation (teikan) and, in order to amend the articles of incorporation, a special resolution of a shareholders meeting (two thirds or more of the votes of shareholders present at the meeting, as a general rule) is required. Therefore, with respect to listed companies, due to the stock exchange regulations and the difficulty in obtaining the required special majority from dispersed shareholders, listed companies typically only issue common shares and, rarely, preference shares without voting rights.

(2) Godo Kaisha

A GK is another form of limited liability company in Japan – but unlike KKs, GKs do not issue “shares” and do not have “shareholders”. Instead, a GK issues mochibun (translated as “equity interest” or “membership”) to the investors who make capital contributions to the GK and who are then termed sha’in (translated as “partners” or “members”).

The GK form of entity was introduced in 2006 but has not become as popular as the KK form. Similar to shareholder liability in KKs, partner liability in GKs is limited to the funds the partner has invested into the GK as his/her mochibun (equity interest) and the amount (if any) of the unpaid price of his/her mochibun. Compared to KKs, however, GKs have greater freedom in self-governance. For example:

  (a) there are no legal requirements in terms of company structure (for example, unlike a KK, a GK may choose not to appoint any directors or company auditors because, as a general rule, the partners execute the business of the GK);
  (b) each partner has only one vote (as a general rule), however, the number of each partner’s votes can be altered by stating such number in the articles of incorporation, and the number can be designated without regard to how much they have invested in the company; and
  (c) partners cannot transfer their membership interests to third parties without the approval of all the other partners (as a general rule), however, the articles of incorporation can state, for example, that such approval is not required or that the other members have a right of first refusal.


3. Listed Companies and Non-listed Companies

When taking part in M&A in Japan, in regard to KKs, it is essential to distinguish between listed companies and non-listed companies. (Please note that, while the Companies Act stipulates two categories of KK, public companies (kokai-gaisha) and non-public companies (hi-kokai-gaisha), this categorization is irrelevant to whether or not the shares of such KK are listed. See further the discussion in Section (2)(b) below.) This is because the acquisition of a company listed on a Japanese stock exchange is, in general, subject to various additional regulations, such as regulations regarding mandatory takeover bids (TOB), obligations to report major shareholders, regulations regarding insider trading, and mandatory disclosure (these regulations will be explained in more detail in future columns). Apart from these regulations, there are two key differences between listed companies and non-listed companies, as explained below.

(1) Issuance of Share Certificates

The rules regarding the issuance of share certificates vary depending on whether the KK’s shares are listed or non-listed.

  (a) Listed Companies

As noted above, only KKs may be listed. However, listed KKs may have both listed and non-listed shares, and a listed KK is required to list at least its common shares. Upon becoming listed, the all of share certificates already issued by the KK, if any, must be void and the KK cannot issue additional share certificates after that, regardless of type, and regardless of whether or not the shares would be listed or non-listed shares. The result of these requirements is that listed KKs do not issue share certificates for any types of shares.

  (b) Non-listed Companies

Unlike listed KKs, non-listed KKs may elect whether or not to issue share certificates for their shares. In general, non-listed KKs cannot issue share certificates unless the articles of incorporation provide that the KK is a “Company Issuing Share Certificates.” However, KKs established prior to the enactment of the current Companies Act (May 1, 2006), may be a “Company Issuing Share Certificates” despite the fact that the articles of incorporation do not expressly state that the KK is a “Company Issuing Share Certificates.” Whether or not a KK is a “Company Issuing Share Certificates” can be checked by referring to the commercial registration (toki) of the KK, which can be obtained at the relevant governmental registration office for a small fee.

As a general rule, a “Company Issuing Share Certificates” must issue share certificates for all classes of its shares, including common shares. However, if the “Company Issuing Share Certificates” has restrictions on transferring shares (see the discussion in (2) below) that apply to all classes of its shares then such KK may elect to not issue share certificates for any class of its shares until requested to do so by its shareholders.

If a KK is a “Company Issuing Share Certificates” (in which case, as noted above, it will be a non-listed KK) then the share certificates of the shares to be transferred must be delivered to the acquirer for the share transfer to be effective. Therefore, as a practical matter, it is crucial that the location of the physical share certificates be ascertained prior to performing a transfer of shares of a “Company Issuing Share Certificates.”


(2) Restrictions on Share Transfers

There are two key rules regarding the transfer of KK shares. They are:

  (a) Rule 1: No restrictions may be placed on the transfer of listed shares.

As KKs must list at least their common shares, the consequence of this rule is that common shares of listed companies in Japan are free from transfer restrictions imposed by the listed KK. The listing of other classes of shares (if any) of a listed KK is optional. However, listed shares must be free from transfer restrictions imposed by the listed KK.

  (b) Rule 2: Non-listed shares may, at the option of the issuing KK, be subject to transfer restrictions.

This rule applies to (i) all shares of non-listed KKs and (ii) non-listed shares of listed KKs. However, any transfer restrictions must be expressly included in the articles of incorporation of the KK. Such restrictions commonly include making the transfer of any class of shares subject to approval by shareholders, the board of directors, or by a representative director of the KK. (Please note that a “non-public company” (hi-kokai-gaisha) under the Companies Act means a KK that issues one or more classes of shares all of which have the above-mentioned restriction, and a “public company” (kokai-gaisha) means a KK that does not.)

In practice, most non-listed shares in Japan are subject to such transfer restrictions. Therefore, when acquiring non-listed shares of KKs, regardless as to whether the KK is listed or non-listed, it is necessary to check the articles of incorporation and to follow the relevant procedures set out in the articles to obtain approval for the transfer of each class of share.

4. Procedure for Incorporation of a KK

A foreign investor would be required to incorporate a new company in Japan if (i) the foreign investor wishes to establish a subsidiary in Japan without acquiring an existing company, or if (ii) an investor wishes to establish a new entity as part of an M&A scheme. A KK may be incorporated if at least one incorporator (hokkinin) subscribes to at least one share of the KK for at least one yen. In typical M&A cases, only an incorporator will subscribe for the first issued shares (hokki-setsuritsu). The procedures for incorporation of a KK in which only an incorporator subscribes are explained in brief below.

Step 1: The articles of incorporation must be executed by the incorporator and notarized by a notary public.

Step 2: The incorporator subscribes for one or more of the shares to be issued by the KK at the time of incorporation, makes the subscription payment for such shares, and performs certain other actions as required under the Companies Act.

Step 3: At least one director (torishimariyaku) who will represent the KK must be appointed by the incorporator.

If the company structure is not complex, it will usually take one to two weeks to complete Steps 1 to 3 above after the receipt of all necessary information by the incorporating agent (i.e., a Japanese lawyer or judicial scrivener).

Step 4: As a final step, the representative director is required to file an application for commercial registration (toki) of the new KK with the relevant governmental registration office. This commercial registration is usually completed in about a week and the date of registration is deemed to occur as of the date of the application.

Unless the newly incorporated KK is intended to operate in a special industry sector, such as banking or insurance, no other special government approvals or licenses are necessary.

5. Internal Structure of a KK

The Companies Act was enacted in 2006 with the idea that it would set out only the minimum internal structures of a KK, and that each KK would be granted freedom under these rules, although not as much as a GK, in designing its own internal structure.

(1) Mandatory Requirements

Based on that idea, the mandatory internal structures of a KK required by law are:

  (a) a shareholders meeting (kabunushi-sokai); and
  (b) at least one director (torishimariyaku).


As a general rule, the term of office of directors expires at the end of the general shareholders meeting for the last business year ending within two years of the date of appointment. A non-public company, however, may extend such period to a maximum of ten years by its article of incorporation.

(2) Typical Structure

A KK may also choose to have a board of directors (torishimariyaku-kai), company auditor(s) (kansayaku), a board of company auditors (kansayaku-kai), and an accounting auditor (kaikeikansanin), etc. – but it is not mandatory for a KK to have any of these organs. However, if the KK does choose to have one or more of these organs, they must be provided for in its articles of incorporation. The most common KK basic internal structure is: a representative director, a shareholders meeting, a board of directors comprising three or more directors, and a company auditor.

  (a) Representative Director

A key position in the corporate governance structure of a KK is the “representative director” (daihyo-torishimariyaku). Representative directors are selected from among the directors of a KK. If a KK chooses to establish a board of directors, then the board of directors must appoint the representative director(s) from among its directors by a board resolution. On the other hand, if the KK has not established a board of directors, each director (or the sole director in the case of a single director KK) has the power to represent the company (as a general rule). However, the KK may appoint one or more representative directors from among the directors (i) pursuant to its articles of incorporation, or (ii) through the appointment by directors from among themselves pursuant to the provisions of its articles of incorporation, or (iii) by resolution of a shareholders meeting.

As stated before, the formation of a KK is completed upon the registration of incorporation. Registration previously required that at least one of the directors who represent a KK (if no representative directors are appointed, then at least one of the directors; if representative directors are appointed, then at least one of the representative directors) shall be a resident of Japan. However, this requirement was abolished as of March 16, 2015. Therefore, presently all of directors of a KK can be foreign persons who are not residents in Japan.

The difference between the power of the board of directors and the representative directors is that, in principle, the execution of important functions of the KK, for example, decisions on financing and corporate strategy, are determined by the board of directors (if a KK chooses to establish a board of directors) or the majority of the directors (if a KK has not established a board of directors and has appointed two or more directors) whereas representative directors make decisions regarding the execution of daily operations of the KK.

  (b) Shareholders Meeting

The shareholders meeting has the power to make fundamental decisions for the KK described in the Companies Act and the KK’s articles of incorporation. There are two types. A general shareholders meeting must be held during a certain period of time after the end of each business year. Extraordinary shareholders meetings may be held from time to time as necessary. These fundamental decisions include:

  (i) appointment and dismissal of directors and company auditors;
(ii) amendment of the articles of incorporation;
(iii) determination of remuneration for directors and company auditors;
(iv) dividends of surplus profit; and
(v) mergers, company splits, stock for stock exchanges, share transfers and business transfers.


As a general rule, the voting powers of shareholders are proportional to the numbers of shares they hold (i.e., each shareholder has one voting right per one share), and resolutions of shareholders meetings must be passed by a majority of the votes of the shareholders present at a meeting. However, for especially important matters, such as (b) and (d) above, a special resolution of a shareholders meeting (two thirds or more of the votes of shareholders present at the meeting, as a general rule) is required.

A KK may stipulate the location where its shareholders meetings are to be held in its articles of incorporation and, if it does so, then the KK must hold its shareholders meetings at such location. However, it is possible to hold the same shareholders meeting simultaneously at separate venues, provided that the main venue (or stipulated venue in the case where the shareholders meeting location is stipulated in the articles of incorporation) and all other venues are interconnected via video-conference.

Shareholders of a KK are allowed to cast their votes by proxy. In addition, a KK may allow its shareholders to exercise their voting rights in writing or through electronic or magnetic means without actually attending the meeting (if a KK has 1,000 or more shareholders, a KK is required to allow them to exercise their voting rights in writing). Furthermore, if and only if all shareholders with voting rights agree in writing, or by means of electronic recording, to a proposal which would normally require resolution at a shareholders meeting, such proposal is deemed to have been approved by a resolution of the shareholders meeting. Otherwise, shareholders meetings must be held in person, and a KK may not hold a shareholders meeting by, for example, electronic means or by exchange of e-mails.

  (c) Board of Directors

In order to establish a board of directors, the shareholders meeting must appoint three or more directors. As explained in (a) above, the board of directors must also appoint at least one representative director from among its directors by a board resolution.

Most companies hold their board meetings at their principal place of business, but there are no restrictions as to where a board meeting must be held under the Companies Act. It may be held outside Japan, or via video-conference or telephone-conference, so long as all directors agree to such arrangements. (As discussed above in Section 5(2)(b), the same does not apply when holding a shareholders meeting; as a general rule, a shareholders meeting must be held in person unless the very specific exception set out in the last paragraph in Section 5(2)(b) above applies.) However, Directors are not allowed to cast a vote by proxy, unlike shareholders at shareholders meetings. A board meeting must be held at least once every 3 months. In general, if so provided in the articles of incorporation, a proposal which would normally need to be resolved at a board meeting to be approved can be deemed to have been approved by a resolution of the board of directors if all directors express their intention to agree to such proposal in writing or by means of electronic recording.

  (d) Company Auditor

A company auditor generally has the duty to audit the directors’ performance of their duties. A company auditor must be appointed by resolution at a shareholders meeting. The term of office for company auditors expires at the end of the general shareholders meeting for the last business year ending within four years of the date of appointment, as a general rule. As with directors, a non-public company, however, may extend, such period to a maximum of ten years by its articles of incorporation. Even if a KK appoints multiple company auditors, each company auditor may exercise his or her authority solely and independently. In addition to the company auditors, large companies meeting certain criteria must appoint a financial auditor.


(3) Other Corporate Governance Structures

The Companies Act provides for other corporate structures in order to enhance corporate governance. In the first structure, the important organ for governance is the board of company auditors, which shall consist of three or more company auditors, half or more of whom shall be external company auditors. Most of listed companies in Japan adopt this structure.

In the second structure, instead of the company auditors and the board of company auditors, a KK may have three committees: nominating, audit, and compensation. This structure was founded based upon corporate governance in United States. In this structure one or more of the representative officers, who are appointed by the board of directors, execute the operations of the KK. The board of the directors of this type of companies decides basic management policy.

In the third structure, which occupies a position between the first and the second, the KK has an audit and supervisory committee comprised of three or more of directors, half or more of whom shall be outside directors, instead of the company auditors and the board of company auditors. This type of company has become more common over time, as this structure was created by the amendment of the Companies Act, which became effective as of May 1, 2015.

6. Conclusion

The main corporate form that foreign investors are likely to deal with in M&A in Japan is the KK. There are various rules governing the internal regulation of KKs, but these rules are not overly complex and should not, in themselves, discourage potential investors from acquiring Japanese companies. On the contrary, the basic features of Japanese companies are well organized and easily understood, making investment in Japanese companies an attractive proposition. The most popular methods for foreign investors to implement M&A transactions are to purchase shares in a KK: (1) buying shares from existing shareholders, or (2) buying newly-issued shares or treasury shares from the share-issuing KK. In the following columns, we will lay out procedures and regulations of these methods.

About Author

  • Hidetoshi Matsumura
    Associate
    Nishimura & Asahi

Education:
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)

Publications:
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.

About Author

  • Taisuke Ueno
    Associate
    Nishimura & Asahi

Education:
Kyoto University (LL.B., 2013)

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