M&A in Japan for Foreign Investors
Part 5: Human Resources Issues
By Hidetoshi Matsumura and Taisuke Ueno| Nishimura & Asahi

1. Introduction

In our previous column, we explained the mechanics of squeeze out methods in Japan which are used to squeeze out minority shareholders in exchange for cash. This column outlines some human resources issues in companies of Japan, which investors are likely to face when they engage in M&A transactions, including during due diligence review and in carrying out post-merger restructuring.

2. Labor Contracts

(1) Outline

If investors plan to carry out a restructuring of the companies they acquire, they need to be aware that there are a number of laws which pertain to the protection of workers in Japan and which restrict an employer’s right to terminate or alter the employment of its employees. These include the Labor Standards Act of Japan (the “LSA”), which sets the minimum standards of working conditions, and the Labor Contract Act of Japan (the “LCA”), which establishes the basic terms concerning labor contracts. Below, we focus on some topics in which investors may be interested.

(2) Dismissals, and the Expiration of Fixed-Term Labor Contracts

The LSA, as a general rule, requires 30 days’ advance notice for an employer to dismiss an employee (or the payment of the average wages that the workers would earn in working for a period of not less than 30 days, in lieu of such notice). Further, the LCA provides that a dismissal shall, if it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, be treated as an abuse of rights, and be invalid.

In Japan, it is generally difficult to dismiss employees once they are hired for an indefinite term, due to the doctrine of an employer’s “abuse of its right to dismiss,” which has been developed by judicial precedents of Japanese courts, and which restricts employers from dismissing their employees unless employers have objectively reasonable grounds for dismissal. This concept was subsequently incorporated into the LSA by amendment and have been transferred to the LCA.

“Objectively reasonable grounds” for dismissal, according to case law, can be generally summarized as follows:

  (a) the employee’s inability, or a lack or loss of the skills or qualifications required for his or her job, such as exceptionally unsatisfactory job performance ratings, and the loss of occupational ability resulting from an injury or sickness;
  (b) breach of the disciplinary rules;
  (c) a business necessity of the company, such as rationalization or a downturn in business; or
  (d) a request for a dismissal based on a union shop agreement.

The reasons for dismissal generally must be so serious that the employer cannot be expected to continue to maintain the employment relationship with the employee.

With respect to (c) above, the court decisions have regarded the following four items as the requirements for dismissal due to rationalization or adjustment of the size of the work force; however, there has been an increase in the number of the decisions which regard the four items only as persuasive factors, to be comprehensively considered when a court makes a decision:

  (a) a necessity to reduce the number of employees, including a serious economic depression;
  (b) a necessity to select dismissal instead of other available measures, including redeployment, secondment, solicitations of voluntary retirement, and temporary layoffs;
  (c) appropriateness of the selection of the persons to be dismissed; and
  (d) appropriateness of the procedure for dismissal, including an explanation to the workers of the need for the dismissal and the conditions thereof, and consultation with them in good faith.

The doctrine of “abuse of the right to dismiss” has been applied by analogy to the expiration of certain fixed-term labor contracts in Japanese judicial precedents. This concept has been subsequently incorporated into the LCA by the amendment. Under the LCA, if (a) a fixed-term labor contract falls under any of the following items, (b) a worker applies for a renewal of the fixed-term labor contract (or a worker applies for the conclusion of another fixed-term labor contract without delay after the contract term expires), and (c) the employer’s refusal to accept an application lacks objectively reasonable grounds, and is not found to be appropriate in general societal terms, it is deemed that the employer accepts the application, with the same labor conditions as the contents of the prior fixed-term labor contract:

  (i) the fixed-term labor contract has been repeatedly renewed in the past, and it is found that terminating the fixed-term labor contract by not renewing it when the contract term expires is, in general societal terms, equivalent to the act of terminating a labor contract without a fixed term by expressing the intention to fire a worker who has concluded a labor contract without a fixed term; and
  (ii) it is found that there are reasonable grounds upon which the worker expects the fixed-term labor contract to be renewed, when the fixed-term labor contract expires.

(3) Redeployment, Secondment, and Employment Transfers

A redeployment (haiten) involves relocating a worker within the company, and the worker’s job duties and physical place of work may change for a considerable period. A secondment (shukko) is where a person remains a worker of the company he has been working for up to the commencement of the secondment, but actually carries out his work thereafter at another company, usually for a certain period. An employment transfer (tenseki) is where a worker’s contract between the worker and the transferor is terminated, because the worker and the transferee enter into a new employment contract.

In cases where an employer requires an employee to accept a secondment, if such order is found to be an abuse of right in light of the circumstances, including the necessity for such temporary transfer, the circumstances pertaining to the selection of the worker to be seconded, or any other circumstances, such order shall be invalid.

(4) Change of Working Conditions

An employer normally cannot change the working conditions constituting the contents of a labor contract in a manner disadvantageous to the employee. However, an employer can legally do so by changing the rules of employment in the following ways:

  (a) reaching an agreement with the worker; or
  (b) informing the worker of the changed rules of employment, and the change to the rules of employment is reasonable in light of the extent of the disadvantage to be incurred by the worker, the need for changing the working conditions, the appropriateness of the contents of the changed rules of employment, the status of negotiations with a labor union or the like, or any other circumstances pertaining to the change to the rules of employment (however, this shall not apply to any portion of the labor contract which the worker and the employer had agreed on as being the working conditions that are not to be changed by any change to the rules of employment).

3. Working Hours

(1) Unpaid Overtime Work

Under the LSA, although working hours must not exceed 40 hours per week or 8 hours per day, excluding rest periods, as a general rule, an employer is permitted to extend working hours, or have work performed on rest days, by either entering into an agreement with a union organized by a majority of the workers at the workplace concerned (in the case where such a union exists), or with a person representing a majority of the workers (in cases where no such union exists), and filing with the competent Labor Standards Supervision Office. The LSA provides that if an employer extends the working hours by such an agreement for overtime work, the employer shall pay premium wages for work during such overtime hours; however, due diligence review regarding the target company during the M&A process sometimes reveals that the target company does not pay wages for overtime work accurately.

(2) Supervisors and Managers

The regulation on working hours and wages discussed above is not applicable to supervisors and managers. Personnel must satisfy the following requirements, which have been developed by the judicial precedents of Japanese courts, in order to be deemed supervisors or managers:

  (a) the personnel must be involved in important matters regarding the business management of the enterprise, including labor management;
  (b) the personnel must have discretion to manage his or her own work hours; and
  (c) the personnel must be treated as a supervisor or manager in terms of salary and bonuses.

However, due diligence review regarding the target company during the M&A process sometimes reveals that the target company has treated persons who do not satisfy the above requirements as supervisors or management, and has not paid premium wages to them. In such cases, there is a risk that the target company would potentially be liable for unpaid wages.

(3) Discretionary Working System

The LSA establishes a system called the “discretionary working system.” Under the LSA’s discretionary working system, employers may pay workers who fall under category (a) or (b) below according to a predetermined number of hours, instead of the actual working hours (although, with respect to (b), a resolution of a committee comprised of the employer and the representatives of workers passed by a majority of four-fifths or more of its members is necessary):

  (a) certain work, specified in the Ordinance for Enforcement of the LSA, which requires specific specialties; or
  (b) work related to corporate management-related planning, research, and analysis.

However, some cases have been reported where this discretionary working system was applied to persons who did not engage in work falling under one of the above categories. In such cases, there is a risk that such a target company could be potentially liable for unpaid wages.

4. Current Topics

(1) Work Style Reform

Work style reforms have been proposed, and a bill pertaining to work style reform is expected to be submitted to the national Diet. The discussed purpose of these work style reforms is to enable every worker to have the hope of a better future, and to build a society where everyone can choose from among various work styles to build their own future. The salient points of the work style reforms are stated below, and it is advisable for investors to pay attention to the progress of these work style reforms.

  (a) Providing Equal Payment for Equal Work

Considering that there are many workers who do not regularly work full time hours in Japan, the purpose of the introduction of “equal pay for equal work” regulations is to eliminate the irrational gap in the working conditions of regular vs. non-regular workers (such as wage and benefit disparity), in order to enable non-regular workers to be fairly evaluated and to work with higher motivation.

  (b) Regulatory Limits on Overtime Work

Considering that workers in Japan have long working hours compared to European countries, and the practice of long working hours make it difficult for workers to ensure their health and balance their work with family life, which has led to a declining birthrate, prevention of women’s career formation, and lack of men’s participation in household affairs, the purpose of the introduction of a regulatory limit on overtime work is to improve the work-life balance of employees. This reform would set a general regulatory limit (45 hours per month, 360 hours per year) that cannot be exceeded, even if there is an agreement between labor and management as to temporary and special situations.

  (c) Sophisticated Professional System

Alongside these reforms, a “sophisticated professional system” has also been proposed. The sophisticated professional system serves to exempt employees engaged in certain work (where professional knowledge is necessary, and the working time is not strongly associated with professional achievement) from the regulations on overtime work, only under certain conditions (including salary level). The purpose of the introduction of the sophisticated professional system is to permit various flexible work styles for such employment.

(2) Strategic Advisors and Senior Advisors

As a unique Japanese practice, some officers (e.g., CEOs) continue to work at companies as strategic advisors (komon) and senior advisors (sodanyaku) after the retirement from their positions. Concerns have been raised during some corporate scandals that strategic advisors and senior advisors may have some influence on corporate management although they are not appointed by shareholders. However, it is currently considered that the appropriateness of this Japanese practice should be judged on a case-by-case basis, because the role of strategic advisors and senior advisors varies among companies, and companies could benefit from them through their business activities, etc. To respond to this situation, a voluntary disclosure system was established in the Tokyo Stock Exchange to disclose the names, positions, and assignments, etc., with respect to strategic advisors and senior advisors who were previously representative directors or CEOs.

5. Visa and Status of Residence

If foreign investors might want to dispatch their personnel to a target company as directors, or persons holding some important position within the target, after an M&A transaction is completed, such personnel needs to obtain appropriate visas and statuses of residence for Japan. The main visas and statuses of residence related to investment in Japan, and the activities authorized in Japan for each of them, are listed below:

  (a) Investor/Business Manager: Activities to commence the operation of international trade or other businesses, to invest in international trade or other businesses, and to operate or manage those businesses, or to operate or manage international trade or other businesses on behalf of foreigners who have begun such an operation or have invested in such businesses.
  (b) Legal/Accounting Services: Activities to engage in legal or accounting business which must be carried out by registered foreign lawyers or certified public accountants, or those with other legal qualifications.
  (c) Engineer: Activities to engage in services which require technology and/or knowledge pertinent to physical science, engineering, or other natural science fields, based on a contract with a public or private organization in Japan.
  (d) Specialist in Humanities/International Services: Activities to engage in services which require knowledge pertinent to jurisprudence, economics, sociology, or other human science fields, or to engage in services which require specific ways of thought or sensitivity based on experience with foreign culture, based on a contract with a public or private organization in Japan.
  (e) Intra-company Transferee: Activities on the part of an employee who is transferred to a business office in Japan for a limited period of time, from a business office of the same entity established in a foreign country, by a public or private organization which has a head office, branch office, or other business office in Japan, and who engages at this business office in the activities described above under the "Engineer" or "Specialist in Humanities/International Services" headings.
  (f) Skilled Labor: Activities to engage in services which require industrial techniques or skills belonging to special fields, based on a contract with a public or private organization in Japan.

The rules for obtaining appropriate visas and statuses of residence are somewhat complicated, and therefore, it is advisable for foreign investors to consult with their own advisors.

6. Conclusion

It is necessary for investors to understand that there are a number of laws which pertain to protection of workers, and also that there may be a risk that target companies have not complied with such laws. A violation of the labor laws may lead to a necessity for dramatic change of working policies, and there is a possibility that target companies shall be held potentially liable for unpaid wages. In order to deal with such risk, it is advisable to carry out due diligence on target companies by retaining professional advisors.

About Author

  • Hidetoshi Matsumura
    Nishimura & Asahi

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.

About Author

  • Taisuke Ueno
    Nishimura & Asahi

Kyoto University (LL.B., 2013)

About Amidas Partners, Inc.