Despite the recent inflationary trends, changes in the financing market and the current wars in Ukraine and Gaza, we have continued to see a steady growth in the energy and infrastructure M&A market in Japan.

Against the backdrop of an accelerating global trend toward decarbonisation, many developers and utility companies have been keen to develop or acquire renewable energy projects in Japan. In 2021, Japan’s biggest oil refiner, ENEOS Corporation, completed its historic acquisition of a major renewable developer, Japan Renewable Energy from Goldman Sachs and GIC. The deal, valued at approximately JPY200 billion, marked a historic milestone, and since then, it has been regarded as a benchmark for valuations in the Japanese energy market, with subsequent transactions maintaining relatively high valuations.

Having said that, it is also true that the recent inflationary trends, disruption in global supply chains and the extraordinarily weak JPY have brought adverse impacts on the development and operation of energy and infrastructure projects. This challenging environment might potentially affect M&A activities in these sectors in the near future.

Start-up companies are typically incorporated in Japan if their main business is expected to be conducted in Japan. The two most common types of business entities chosen by entrepreneurs establishing a business in Japan are kabushiki kaisha (KK) and godo kaisha (GK).

For a KK, it typically takes at least one to two weeks to prepare documents for incorporation, notarise the articles of incorporation, and make an application for commercial registration. For a GK, the time required may be shortened by a few days because notarisation of the articles of incorporation is not required for a GK. If the initial promoter, director or member is a foreign company or individual, there may be additional time required to prepare and gather necessary documents. The commercial registration usually takes less than one week to complete from the day of the application, and the day when the application was initially accepted by the local Legal Affairs Bureau retroactively becomes the day of incorporation.

KK must have at least JPY1 of initial capital.

The two most common types of business entities chosen by entrepreneurs establishing a business in Japan are KK and GK because of the limited liability protection they provide to all of their shareholders and members. KK is similar to a corporation in the United States and the most traditional type of business entity. GK was newly introduced in 2006 under the Companies Act, modelled on overseas limited liability companies. While it is common to choose GK for an SPC for project development and financing, entrepreneurs choose KK to begin their new start-up business. This is because only shares of KK (and not membership interests of GK) can be publicly traded on a Japanese stock exchange, and KK is the entity suitable for raising outside capital from multiple investors. An investment limited partnership, a vehicle used by many venture capitalists in Japan, cannot invest in GK under law.

Providers of early-stage financing to a start-up company include local venture capital firms such as incubators and seed accelerators, and angel investors. Start-up companies may also seek early-stage financing through loans from government-sponsored financial institutions (such as Japan Finance Corporation). Crowdfunding is not the main source of early-stage financing, but is also available in Japan.

Providers of early-stage financing typically have their own template documentation for financing, but angel investors sometimes invest in common shares without formal documentation to save administrative burden and costs. Early-stage financing is typically made through common shares or preferred shares, or convertible bonds or equity. Convertible equity in Japan uses an equity instrument called share acquisition rights, and there is a well-known seed-round convertible equity instrument called J-KISS, published by Coral Capital.

Home country venture capital is available to start-up companies in Japan, and typical sources of venture capital include:

• venture capital funds;
• corporate venture capital (CVC) funds;
• government-sponsored venture capital funds (such as Japan Investment Corporation (JIC) and the Organisation for Small & Medium Enterprises and Regional Innovation, Japan (SMRJ)); and
• strategic investors.

Moreover, in recent years, private equity funds have begun providing financing to start-up companies.

Foreign venture capital firms are also providing financing in Japan, especially due to the difficulties in providing financing to China amid the geopolitical tension between the USA and China. Also, the Japanese government has been actively promoting foreign investments into Japanese start-up companies. The amount of investment by foreign VC firms has increased by 70% in the first half of 2024 as compared to the first half of 2023, which accounts for approximately 20% of the amount of investments made by venture capital firms (including domestic firms) in Japan during that period.

While there is no single standard documentation used in venture capital investments, standard practices and documentation for venture capital investments are well developed in Japan. Also, the Ministry of Economy, Trade and Industry (METI) has published several guidelines and reports regarding venture capital transactions in Japan, including the “Guidelines on Business Collaboration with Start-Ups and Investment in Start-Ups” and a report that provides a sample term sheet with commentaries.

Typically, there are two types of VC investment agreements in Japan: a share subscription agreement and a shareholders’ agreement. The shareholders’ agreement is sometimes divided into a shareholders’ agreement among major shareholders setting out, among others, governance rights and rules and rights regarding share transfers, and a distribution agreement among all shareholders setting out rules of distribution of proceeds upon a deemed liquidation event and drag-along rights.

While there are cases where Japanese subsidiaries of foreign companies change their corporate form from GK to KK or vice versa, it is not common for start-up companies to change their corporate entity form because most start-up companies are incorporated as KK at the outset and GK is not typically used for start-up companies that raise outside capital from multiple investors.

Although not so common, there are cases where Japanese start-up companies choose to go through a corporate inversion process to incorporate a parent company in a foreign jurisdiction (such as in the USA) before conducting an IPO in such jurisdiction. There are also cases where a company incorporated in a foreign jurisdiction undergoes a corporate inversion transaction and becomes a Japanese company prior to conducting an IPO in Japan.

Historically, founders of start-up companies preferred IPOs, and the prevalent liquidity event was to take the company public. According to a report published by METI, approximately 70% of exits between 2017 and 2019 were made through IPOs. However, we have seen a growing trend of exit through M&A transactions. The Japanese government is actively working to facilitate M&A sales for start-up companies. For example, in 2023, the government has expanded the existing tax incentive for companies that invest in start-ups to cover M&A deals. Companies that acquire more than half of the voting shares of start-up companies can, subject to certain conditions, deduct 25% of the acquisition cost from their taxable income.

A dual-track process is not prevalent among Japanese start-up companies yet due to limited M&A opportunities as compared to the United States, but could be considered by start-up companies where M&A is a viable option. For example, Paidy Inc, a Japanese online deferred payment service provider, underwent a dual-track process, and was eventually acquired by PayPal Holdings, Inc.

Most companies are likely to pursue a listing on a Japanese stock exchange if their main business is conducted in Japan. However, recently, some but still a small number of Japanese companies have pursued a listing on NASDAQ, such as MEDIROM Healthcare Technologies in the healthcare sector and TOYO Co., Ltd., a manufacturer of solar power panels. One of the reasons is that NASDAQ’s listing standard requires less time to prepare for an IPO (around 18 months), whereas companies must prepare for at least three years in order to conduct an IPO on a Japanese stock exchange.

If a company is listed on a Japanese stock exchange, an acquirer may take the company private by initiating a tender offer and subsequently conducting a squeeze-out transaction available under the Companies Act of Japan. If a company is listed on a foreign stock exchange, in addition to the Japanese law requirements, the feasibility of such a take-private transaction under the foreign stock exchange rules must be examined and there may be additional complexity to the transaction. That said, it is not common for Japanese companies to list on exchanges outside the USA and Japan, and take-private transactions are feasible even if the company is listed on the stock exchanges of both jurisdictions.

In addition, it may be practically difficult for a Japanese acquirer to offer stock consideration in such a transaction if most of the shareholders of the target company are foreign shareholders.

As explained in 3.1 IPO v Sale, M&A opportunities in Japan are limited for start-up companies compared to jurisdictions such as the United States. Therefore, a bilateral negotiation seems to be more common unless the company is confident in attracting multiple acquirer candidates.

A typical transaction structure would be a share sale and purchase. As the major shareholders usually have drag-along rights, this structure is selected even if the company has a number of VC investors.

While the acquisition could be implemented through statutory corporate reorganisation procedures such as a merger or share exchange (ie, a statutory procedure in which a company acquires 100% of the shares in another company), they are not widely used. One of the reasons may be because the Companies Act requires certain statutory creditor protection procedures as well as disclosures, and a merger or share exchange agreement is not as flexible as a share purchase agreement. There may also be negative tax consequences for the target company if the merger or share exchange does not qualify as a tax-qualified merger or share exchange.

The current trend is to sell the entire company rather than to sell only a controlling interest. Because many acquirers are strategic buyers, they prefer to acquire 100% of the company; however, in some cases, key management and employees may be eligible to own equity in the company after the transaction.

While a stock-for-stock transaction or a combination of stock and cash consideration is possible in Japan, most transactions are all-cash deals due to investors’ and management’s appetite to receive cash. In some cases, key management of the target company may be given the opportunity to reinvest the cash they received in the target company or the holding company.

Managing founders with significant shareholding are typically expected to stand behind representations and warranties regarding the target company. If any breach or inaccuracy of the representations and warranties is discovered after the closing, they must indemnify the acquirer, subject to certain limitations under the acquisition agreement. Representations and warranties of VC investors are subject to negotiation between the investors and the acquirer. VC investors would argue to only stand behind their own fundamental representations and warranties, such as ownership of shares.

In some cases, an escrow or hold-back mechanism is utilised to secure potential indemnity obligations. While representations and warranties insurance has been used by Japanese companies in cross-border M&A, historically, it had not been widely used in domestic M&A, partly because there was no insurance company capable of providing the insurance based on a Japanese language due diligence report and transaction documents. However, insurance companies have recently started to actively provide W&I insurance in Japan based on Japanese language documents. As a result, representations and warranties insurance is becoming more and more common in Japanese deals although it is still not as popular as in the USA and Europe.

Spin-offs and carve-out transactions are getting more and more common options in the energy and infrastructure space in Japan. In recent years, many developers have been keen to pursue and maximise the scale of development as well as synergies between two or more different partners who can bring together different capabilities and resources in this challenging market environment with both high potential and risks. In such context, it is becoming popular for major developers and investors to transfer a part of their businesses into a separate company and form a joint venture or platform with another partner(s) in order to further expand and diversify their investment in energy and infrastructure assets.

In the case of tax-qualified spin-offs, taxation on the dividend (or deemed dividend) at the divesting company’s shareholder level will not apply, and the capital gains tax at the divesting company level will be deferred.

The specific requirements depend on the structure of the spin-off, but for spin-offs where the divesting company will not hold any shares in the spun-off company, the main requirements are generally:

• Shareholders of the divesting company must only receive shares issued by the spun-off company.
• No single party may hold more than 50% of the divesting company before the spin-off, nor is any party expected to hold more than 50% of the spun-off company afterward.
• The spun-off company’s operations must remain unchanged after the spin-off in terms of assets, directors, and employees.

In addition, to facilitate business carve-outs through spin-offs, the 2023 tax reform introduced provisions for partial spin-offs (where the divesting company retains some ownership in the spun-off company). Under certain conditions, taxation on the dividend (or deemed dividend) at the shareholder level will not apply, and the capital gains tax at the divesting company level will be deferred.

It would be technically possible to conduct a spin-off immediately followed by a business combination. However, in order for spin-offs where the divesting company will not hold any shares in the spun-off company to qualify as a tax-qualified spin-off, no person may own 50% or more of the spin-off company after the transaction. Therefore, for example, if the spun-off company is acquired by a third party immediately after the spin-off, and this acquisition was planned at the time of the spin-off, the spin-off will not be considered a tax-qualified spin-off.

There is no typical timing for a spin-off. The parties are not required to obtain a ruling from a tax authority before finalising a spin-off. However, if the divesting company is publicly listed, the spun-off company’s shares would generally be listed to ensure shareholder liquidity. In such cases, the entire process, including the preparation period for the IPO of the spun-off company’s shares, may take more than two years to complete.

It is not so common to acquire a stake in a public company in our jurisdiction prior to making an offer. However, acquirers sometimes acquire a stake in a target in order to make a shareholder proposal to the target and exercise other shareholder rights.

The Financial Instrument and Exchange Act of Japan (FIEA) imposes a reporting requirement on holders of more than 5% of the shares of a listed Japanese company. The reporting must be made to the relevant local finance bureau (zaimu-kyoku) within five business days of the 5% threshold being exceeded. Following the initial reporting, the shareholder must file an amendment whenever there is an increase or decrease in its shareholding ratio by 1% or more, or a change to the name, address or other material information in the previous reporting.

In addition, if a foreign investor acquires 1% or more of the total issued shares of a listed company in Japan, the foreign direct investment regulations apply. The foreign investor is required to make a prior notification and obtain approval before the transaction is completed.

Buyers need to state the purpose of the acquisition and the buyer’s plan regarding the company on the large shareholding report and the prior notification under the foreign direct investment regulations.

There is no “put up or shut up” requirement under Japanese law.

The FIEA mandates that buyers acquiring shares in listed companies must conduct a tender offer if their off-market purchase would result in owning more than one-third of the company’s total voting rights. An amendment effective from May 2026 will extend this requirement to on-market trades and lower the threshold for mandatory tender offers from one-third to 30%.

The most common structure for an acquisition of a public company is a two-step transaction consisting of a tender offer, followed by a squeeze-out. A one-step merger is not common, as it would necessitate a revaluation of the transferred assets for tax purposes, resulting in taxable income being recognised based on the difference between the book value and the fair value.

Cash transactions are typical in the energy and infrastructure industry. Cash is permissible in not only tender offers but also merger transactions. There is not a minimum price requirement for a takeover/business combination.

Offer conditions are strictly regulated, with the FIEA setting out the limited list of permitted conditions. Financing cannot be an offer condition.

In a friendly deal, although not very common, it would be possible to enter into an agreement with the target company which contains interim covenants, addressing issues identified during due diligence, and co-operating in obtaining necessary governmental approval and financing.

Tender offerors can set a minimum threshold, which is usually set at two-thirds in a 100% acquisition to ensure adoption of a special resolution at a shareholders meeting that is required to consummate the squeeze-out following the tender offer.

If an offeror acquires 90% or more of a listed company’s voting rights, they can use a statutory call option under the Companies Act to squeeze out minority shareholders. This requires board approval, which the 90% shareholder can control, but not shareholder approval.

If the offeror secures at least two-thirds of the voting rights but less than 90%, they can still squeeze out minority shareholders through methods requiring a two-thirds super-majority shareholder approval. Common methods include a short-form cash merger or a reverse stock split (kabushiki heigou), with the latter being more prevalent. In a reverse stock split, minority shareholders would end up with fractional shares, which would then be cashed out.

The offeror must submit equity and debt commitment letters to the regulator as evidence of financing, which will be publicly disclosed together with the registration statement at the commencement of the tender offer. Financing cannot be an offer condition.

A target company may agree to certain deal protection measures such as break-up fees, no-talk and no-shop provisions, and a matching right upon thorough negotiations.

In cases where a target remains listed after a tender offer, the tender offeror and the target sometimes enter into an agreement regarding the target’s governance. To the extent permitted by applicable laws and regulations, this agreement may allow the tender offeror to dispatch directors to the target and grant the tender offeror certain veto rights (such as matters requiring prior approval by the tender offeror).

Typically, an offeror will enter into a tender offer agreement with the principal shareholder when announcing the tender offer. The irrevocable commitment under the tender offer agreement is considered a contractual obligation.

Depending on the cases, it is relatively common for an out clause to be stipulated under the tender offer agreement.

The FIEA requires that a party launching a tender offer submit a tender offer registration statement (koukai kaitsuke todokede-sho, or TORS) and relevant documents to the Kanto Local Finance Bureau (KLFB). Although the FIEA does not expressly require the bidder to obtain approval from the KLFB before commencing a tender offer, it is standard practice to consult with the KLFB, have the TORS reviewed by it, and obtain a sign-off of the KLFB before commencing a tender offer. Although it is usually the KLFB with which bidders directly communicate, the Financial Services Agency (FSA) works together with the KLFB (often behind the scenes) and is also involved in the pre-consultation process.

Under the FIEA, the tender offer period can be set between 20 to 60 business days. The tender offer period would typically be 30 business days (although the statutory minimum is 20 business days, it is customary to open the tender offer for 30 days for take-private transactions).

An extension of the preceding tender offer period is possible. For example, if the price is changed within ten business days before the end of the tender offer period, the FIEA requires the submission of an amended registration statement and an extension of the tender offer period.

The tender offeror can extend the tender offer period up to 60 business days if regulatory/antitrust approvals will not likely be obtained prior to the end of the tender offer period.

If obtaining antitrust clearance is expected to take a significant amount of time, a pre-announcement type of tender offer is typically used. In cases where the clearance process is expected to be short and procedural, it is common to obtain the clearance after the tender offer has commenced.

Business in the electricity sphere in Japan is regulated depending on its type of business, and the business is roughly divided into three categories: (i) power generation, (ii) power transmission and distribution, and (iii) retail.

• Power generation is regulated through a filing system, meaning that businesses can operate as long as the necessary information is filed.
• Power transmission and distribution are regulated by a licensing system and are operated as regional monopolies, with Japan divided into ten regions.
• Retail is regulated as a registered business, allowing operations to commence once the required information is submitted and the business is officially registered.

The gas industry is similarly regulated, as follows:

• Gas production is subject to filing.
• Gas pipeline operations require a license.
• Gas retail requires business registration.

In addition, specific permits and licenses are required for energy power generation. In particular, to participate in the feed-in-tariff and feed-in-premium programmes, a business plan must be certified by the Minister of Economy, Trade and Industry. Certification is granted once the necessary information is submitted, provided the power generation project meets certain criteria. However, for certain projects, such as large-scale solar power generation, a bidding process is required, and the project must pass this process.

The Financial Services Agency (FSA) administers securities regulations under the Japanese securities regulations (the Financial Instruments and Exchange Act), including regulations involving tender offers, public offerings and proxy solicitations.

The Ministry of Finance (MOF), the Ministry of Economy, Trade and Industry (METI), and other relevant ministries regulate cross-border transactions under the Foreign Exchange and Foreign Trade Act (FEFTA), including inward/outward investments.

Tokyo Stock Exchange, Inc (TSE) and other stock exchanges oversee transactions involving a listed company.

In Japan, there are generally no restrictions on foreign companies investing in Japanese companies or establishing Japanese subsidiaries within the country, with the exception of certain specific limitations on foreign investment under laws such as the Civil Aeronautics Act, Radio Act, or Broadcasting Act. However, the Foreign Exchange and Foreign Trade Act (FEFTA) does impose certain regulations.

The FEFTA requires prior notification for “inward direct investments” by foreign investors in certain circumstances. The definition of “inward direct investments” includes activities such as acquiring shares, setting up a new company, or lending money under specific conditions. This requirement applies if a Japanese company or its subsidiary is involved, or plans to be involved, in a business that falls within a “designated industry”. Investors must submit an advance notification to the Minister of Finance and the minister responsible for the relevant industry through the Bank of Japan. This notification must be made within six months prior to the planned investment date.

Once the notification is submitted, the proposed investment or related activities cannot proceed until 30 days have passed from the date of notification. This 30-day waiting period can be shortened if the investment is assessed and found not to pose any significant issues.

It is important to note that industries such as electricity and gas are categorised as designated industries. Therefore, when considering investments in energy sectors in Japan, it is necessary to check whether the investment falls under the definition of inward direct investment and if the target company operates within a designated industry.

In addition to the foreign investment restrictions mentioned in 7.3 Restrictions on Foreign Investments, the FEFTA also regulates export control. The FEFTA requires prior approval by the METI for the export of certain cargos and technologies with a potential for military application listed in the relevant government ordinances. The exporter should be careful about whether the subject product triggers a prior approval because the list also includes items that do not apparently seem to be related to weapons or defence industry depending on its specification. Also, the FEFTA has a catch-all regulation that allows cargos and technologies not specifically listed under the FEFTA to be subject to approval by the METI if it is highly likely that they are used to develop or manufacture weapons.

Under the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (AMA), the parties must file a notification to the Japan Fair Trade Commission (JFTC) and obtain the clearance prior to the closing for certain M&A transactions. The thresholds for the filing requirement are different according to the types of transaction structures, but in the case of an acquisition of shares, an acquisition of more than 20% or 50% of the target’s voting rights will trigger the prior notification obligation if an acquirer group has aggregated domestic sales of more than JPY20 billion and a target company group has aggregated domestic sales of more than JPY5 billion. If JFTC finds no issues from the competition law perspective, it will give a clearance notice during the 30-day waiting period. If it requires a more detailed review, a second-phase review will commence. The maximum period for the second-phase review is either (i) 120 days or (ii) 90 days from the completion of the submission of all additional materials requested by the JFTC, whichever is the longest.

In May 2023, JFTC published “Guidelines concerning the Activities of Enterprises toward the Realization of a Green Society under the AMA”, which is based on the concept that the corporate activities toward the realisation of a green society are unlikely to pose issues under the competition law in many cases. In terms of the antitrust filing, these guidelines show supposed cases involving M&As or business alliances regarding businesses aiming at reduction of greenhouse gas as examples not causing substantial issues from the competition law viewpoint even if such transactions do not meet the safe harbour criteria that are used in the review process by JFTC.

Doctrine of Anti Abuse of Employee Dismissal

Under Japanese labour law, an employer may not dismiss its employees unless there is an objectively reasonable ground and the dismissal is considered appropriate in general societal terms. Whether the dismissal is valid depends on concrete circumstances in each individual case, but a purchaser should note that employee dismissals are generally difficult in Japan and employee dismissals upon M&A transactions may be invalid under this doctrine.

Labour Union

Although there is no legal system equivalent to the works council in Japan, employees of a company may form a labour union. If a labour union has executed a collective agreement with the company, the purchaser should examine whether the union has a pre-consultation right or any other provisions that may affect the successful implementation of the contemplated transaction.

Company Split and Labour Contracts Succession Act

In a company split transaction, the contracts, including employment contracts, specified in the company split agreement will be automatically transferred to the succeeding company under the operation of law without the counterparties’ individual consent. However, even if the parties agree to transfer the employment contracts of employees who mainly engage in the businesses that will remain in the split company after the company split, such employees may object to the transfer of their contracts in the company split to stay their status as employees in the split company. The Labor Contracts Succession Act of Japan requires a split company to explain certain details of the company split and make notification to its employees regarding such objection procedure.

There is no requirement for approval by a central bank (other than payment reporting which is normally handled by banks) that applies to M&A transactions. As discussed in 7.3 Restrictions on Foreign Investments, there is a requirement for pre-transaction and post-transaction reporting in relation to foreign investment that needs to be made via the Bank of Japan.

Given that many renewable power plants (especially solar power plants) were rapidly developed all over Japan by numerous developers, we have seen more and more cases where developers have failed to comply with relevant regulations or have caused a material adverse impact on the local environment.

To ensure better engagement with local stakeholders, developers are now required to take effective measures to give advance notice to local residents about their plan to develop renewable power plants. Especially, from 1 April 2024 onwards, developers of renewable power plants with the size over a certain threshold subject to the governmental subsidy (the FIT or FIP programme) are required to hold a briefing session to explain comprehensive parameters of the projects to local residents living within a certain distance from the project site. This requirement will also come into play at the timing of acquisition/M&A transactions of such projects and even the change of control in any developer who is developing or operating such projects, and therefore, it will certainly have a material impact on the M&A practice in this sector.

In an amicable transaction, a public company may disclose any information in the due diligence process given that the company has executed an NDA with the bidders. However, if a bidder has obtained any non-public material information, in principle, the bidder may not purchase the shares of the target company unless the company officially makes public such information in advance under the insider trading regulations in Japan. The Fair Disclosure Rule under the FIEA will not apply if the purchaser and the target company have executed an NDA which restricts the purchaser from selling or purchasing the shares of the target company.

A target company does not necessarily have to disclose the same information to all bidders, but limiting the scope of due diligence only against certain bidders (eg, a hostile bidder making a bona fide offer) without any reasonable ground may cause the risk of the violation of fiduciary duty of the directors depending on the circumstances. In addition, from a competition law perspective, it is common for a target company to share certain sensitive information only with a “clean team” of bidders who are not in charge of the business operation and such arrangement helps to avoid the risk of gun-jumping regulations.

Under the Personal Information Protection Act of Japan, personal information cannot be transferred to a third party without the consent of the subject individual. However, when a business is succeeded through mergers, company splits, business transfers, etc, and personal data related to such transferred business is provided to a third party, the recipient of such data is not considered a third party to whom the provision of personal information is prohibited.

In practice, it is often necessary to provide materials that include personal data (such as employee lists and key customer information) upon the request by the purchaser in the due diligence process. In such cases, it is interpreted that the target company may provide personal data pursuant to the exemption above, provided that the purchaser and the target company execute a confidentiality agreement.

In launching a tender offer bid, the acquiror must file a tender offer registration statement with a local financial bureau, which will be publicly available online and make a certain press release.

Even if a listed company receives a bid proposal from a potential acquiror, there is no legal requirement for the potential acquiror or the target company to disclose the fact regarding such proposal. In the event that the information about such bid proposal is leaked or made public by the potential acquiror, the target company will likely need to make a concise announcement as to whether it is true that the bid proposal was made and the company is considering such offer, taking into account the status of its consideration. Under the insider trading regulation, if a potential bidder recognises the fact that another third-party entity has decided to commence certain accumulation of shares, such potential bidder cannot launch a tender offer unless the fact of such third party’s decision has been publicly disclosed. Hence, the tender offeror needs to disclose in its tender offer registration statement the information on the other entity’s bid offer if there is a non-public competitive bid offer from another entity.

In the case of a stock-for-stock M&A where the acquiror’s shares are issued as consideration, the acquirer must file a securities registration statement (or a securities notification if the value of the issued shares is less than JPY 100 million). The waiting period for the securities registration statement is, in principle, 15 days after filing. If the target company is a listed company on the Tokyo Stock Exchange, the shares provided as consideration will be distributed to the shareholders of such listed company, which will require a technical listing for such shares to become listed. In this case, a preliminary review by the TSE is necessary prior to the issuance of the shares. Additionally, the acquiror will be subject to the continuous disclosure obligation, such as annual securities reports, under the FIEA and the TSE listing regulations. However, as we have ever seen few precedents of a stock-for-stock M&A in which a foreign company issues its shares to be listed on the TSE, the feasibility of such transaction scheme will need to be carefully examined.

When conducting a statutory corporate reorganisation (eg, merger), the parties must prepare certain pre-closing disclosure documents to provide information to their stakeholders, such as shareholders and creditors. These pre-closing disclosures must include the financial statements of the parties. However, a foreign corporation cannot be party to a statutory corporate reorganisation but may issue its shares as consideration in certain transactions, such as a triangular merger. In the case of the acquisition of the business or shares of a non-listed company without statutory corporate reorganisation activities, there is generally no requirement for public disclosure of the acquiror’s financial statements.

When acquiring shares of a listed company, regardless of whether the consideration is cash or shares, the acquiring company must disclose its financial statements in the tender offer registration statement. If the tender offeror is a foreign company, these financial statements do not need to be prepared in accordance with IFRS or Japanese GAAP but can be prepared in accordance with the GAAP of its own jurisdiction, provided that the differences in such accounting principles are explained. If the acquirer is a newly established special purpose company (SPC) created for the tender offer, it may not have finished its first fiscal year, in which case the financial statements do not need to be disclosed in the registration statement.

Under the Companies Act of Japan, a statutory organisational restructuring generally requires the approval of the statutory agreement or plan at a shareholders’ meeting and prior disclosure of the information as to such transaction including the contents of the statutory agreement or plan. In practice, a separate definitive agreement is often executed as well as a simple-form statutory agreement or plan. However, it is not common practice to disclose the entire contents of such separate definitive agreements.

In the case of share acquisitions through a tender offer, it is required to disclose a summary of the key terms of material agreements relating to the transaction. For provisions that are critical to shareholders’ decisions (such as conditions precedent to the transaction, fiduciary-out clauses and other deal protection provisions), the local financial bureau requests a certain level of disclosure.

Under the Companies Act of Japan, directors have a duty of care and a duty of loyalty to the company. When directors make a business judgement, the court will not find a violation of the duty of care as long as (i) there are no unreasonable errors due to negligence in the process of recognising relevant facts that form the basis of their decisions and (ii) the reasoning process and the contents of the decision-making based on those facts are not significantly unreasonable. This rule is called the “business judgement rule”, which is generally applicable to decisions in relation to M&A transactions.

In the Fair M&A Guidelines provided by METI in 2019, it is recommended to establish a special committee to ensure the fairness of transactions that involve structural conflicts of interest, such as MBOs and acquisitions of subsidiary companies by controlling shareholders. In practice, it is common to set up an independent special committee for such types of transactions.

For other M&A transactions, the necessity of a special committee should be considered on a case-by-case basis, depending on factors such as the degree of conflict of interest, the need to supplement the independence of the board of directors, and the high necessity of providing explanations to the market. For example, in cases where the fairness of transaction terms is critical to shareholder interests, such as cash-out proposals, or when considering the adoption of defensive measures against a hostile bidder, it is understood that the establishment of a special committee is meaningful.

The board of directors is expected not only to express their opinion regarding an acquisition proposal but also to actively engage in negotiations to ensure the shareholders’ interests. To maintain the board’s independence from the acquirer, a special committee may be established. Negotiations can be conducted by the board of directors/management based on recommendations from the special committee while, in some cases, the special committee is granted authority to directly negotiate with the potential bidder.

In the event of a going private transaction through a tender offer or statutory corporate reorganisation, shareholders who oppose the purchase price can exercise their appraisal right and file a petition with the court for a payment of fair price. For transactions between independent third parties, the court generally supports the agreed purchase price as fair value. On the other hand, for transactions involving structural conflicts of interest, such as MBOs and acquisitions of subsidiary companies by controlling shareholders, the court will examine whether measures to ensure fairness were exerted. If the court finds such measures not taken, it will determine a fair price.

It is practically common for the target company to retain its financial adviser (FA) and legal adviser (LA). If a special committee is established, the committee may also use its own FA and LA. In transactions involving a conflict-of-interest issue, it is not rare to obtain a fairness opinion from an independent third-party valuation firm. However, unlike in some other jurisdictions, Japan does not have statutory regulations governing the issuers or issuance processes of fairness opinions. Also, it would be difficult to say that there is a well-established common understanding regarding the definition of “fairness” in fairness opinions or the procedures that should be followed in their issuance. As a result, further legal developments are needed to allow stakeholders of a target company to pursue remedies against third-party valuation firms that issue inappropriate fairness opinions.