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A Q&A on Mergers & Acquisitions in Japan with Shigeki Tatsuno

Posted: 24th December 2021 13:11
Have there been any recent regulatory changes or interesting developments?
Certain revisions to the Companies Act came into effect on March 1, 2021. Among these revisions is the introduction of a “Share Delivery” transaction structure to facilitate corporate acquisitions by way of stock exchanges in Japan. The Share Delivery scheme enables a Japanese stock corporation (the “Acquirer”) to acquire stocks in another domestic stock corporation (the “Target”) in a manner that makes the Target a subsidiary of the Acquirer following the acquisition, and to pay its own stocks to the Target’s stockholders as consideration. With the introduction of the Share Delivery scheme, there are now expectations of a marked increase in the number of stock-for-stock acquisitions.
June 2021 also saw revisions to Japan’s Corporate Governance Code, which sets out the key principles for effective governance of listed companies in Japan (the “Code”). Broadly, the Code has been revised with the following objectives (among others).
  • Improvement of board performance - the revised Code requires disclosure of the skill sets of every director and engagement of independent outside directors with appropriate management experience
  • Enhancement of corporate diversity - to encourage diversity in terms of the age, experience, gender and other characteristics of executives and board members, the revised Code requires companies to determine their needs and strategy, identify personnel who meet these requirements, and disclose their workplace diversity data;
  • Enhancement of sustainability – the revised Code requires companies to formulate and disclose their basic policies on sustainability initiatives, and to take a proactive (as opposed to a reactive) approach to sustainability and ESG-related issues;
  • Protection of minority shareholders - the revised Code provides specific guidance for the protection of minority shareholders, such as guidance on the procedures for examining transactions that conflict with the interests of minority shareholders; and
  • Strengthening audit reliability, internal controls and risk management – the revised Code requires, among others, internal audit departments to report directly to the board of directors and board of auditors.
How has the COVID-19 pandemic impacted the M&A landscape in your jurisdiction?
Covid-19 has had a dramatic effect on society on a global scale. One consequence is that result of this is the virtualization of life and work. But an equally pronounced impact of the pandemic is its effect on businesses, with many companies being jolted into rapid adjustments to enhance their efficiency or, in some cases, to stay afloat. M&A has been a key tool for companies to carve-out their non-core businesses, even profitable ones, from their core operations, to facilitate organizational and operational focus. Accordingly, Covid-19 has been a key stimulus of M&A activity in Japan, and indeed globally.
M&A activity has also been driven by the loose monetary policy adopted by many central banks around the world. The ensuing liquidity from such policy has trickled down into financial institutions and investment funds. This has resulted in increased activity by foreign investment funds in Japan to acquire Japanese companies or the carved non-core businesses that they have carved out. An example is the recent sale by Shiseido of its personal care business to CVC partners
The way transactions are approached has shifted significantly since the emergence of COVID-19. Will any of these changes outlast the pandemic?
Covid-19 has made it difficult for companies to hold in-person meetings and conduct site visits, particularly in the context of cross-border M&A transactions. To overcome these difficulties, many have turned to virtual means of conducting such activities. As a result, Zoom, Teams and other video-conferencing platforms have become an essential part of the way transactions are conducted. In terms of performing due diligence, virtual reality headsets, which provide virtual viewing experiences, are now increasingly popular for virtual site visits. It is unclear whether the conduct of these activities will revert to the way they were before the breakout of the pandemic, but some have argued for certain activities (such as virtual meetings) to stay.
Globally, 2021 is shaping up to be the biggest year in history for M&A activity. What are the main factors driving this growth?
As noted above, globally, Covid-19 has set off a rise in the volume of M&A activity. As a result, the number of M&A transactions has hit a new record in 2021.
How is the current financial market impacting the way deals are being structured?
There is currently considerable liquidity in the financial markets. A direct result of this is that commercial banks are now eager to provide M&A financing, thus enabling many M&A transactions to be conducted via debt-financing. Nevertheless, many dealmakers are keeping a close watch on movements in the financial markets, including possible changes in the policies of major central banks, particularly the expected tapering of monetary policy by the U.S. federal reserve and the dampening effect it may have on the volume of M&A transactions.
Which industries or jurisdictions currently provide the best opportunities?
With the aging population in Japan, policymakers are promoting greater interest in Japanese start-ups involving the latest technologies, such as the internet of things (IoT), artificial intelligence (AI) and financial technology (FinTech), in hopes of leveraging them to enhance productivity and economic growth in various industries. As the Japanese government is expected to introduce more initiatives in the coming years to incentivise investments in these areas, they present opportunities for foreign investors.
Investments in the Healthcare technology sector have been particularly favoured in recent years by both domestic and overseas companies in view of the aging demographics that many countries are experiencing. Opportunities in this sector have been abundant, what with the continued rise in the number of local “med-tech” start-ups and the recent inclination of large domestic companies, such as Hitachi, to spin off some of their ancillary medical technology divisions to focus on their core businesses.
Beyond the domestic market, Japanese companies in recent years have been particularly focused on emerging markets, including Southeast Asia, where sizable and young demographics provide an attractive counterpoint to Japan's shrinking population. The flourishing tech ecosystem that is emerging from the Southeast Asian region is also drawing venture capital from Japan. With that said, the legal, commercial and political systems differ significantly from country to country within Southeast Asia, and care needs to be taken in navigating the potential pitfalls presented by the diversity of systems.
How important is local knowledge when conducting cross-border M&A and what other considerations need to be factored in?
Many M&A transactions do not close or, even if closed, ultimately fail for unsuccessful integration of the target into the acquirer group, due to failure to recognize and address differences in corporate culture.
Ideally, senior executives with a deep understanding of the acquirer’s culture should be involved in the M&A process from the start, to familiarize themselves with the corporate culture of the target company, and to draw up pragmatic plans for the manner in which the acquirer’s corporate philosophy can be introduced to the target to create synergistic outcomes.
A successful and efficient integration process is also often dependent on key persons at the target company. It is therefore important, even as early as the due diligence stage, for the acquirer to identify personnel capable of contributing to a smooth integration and successful future operations. The acquirer should as soon as practicable after identifying such personnel, induce them to stay with the target company through reassurance or discussion of future incentives. 
Placing key persons from the acquirer within the target company would also enable the acquirer to win over the target’s employees through the establishment of rapport between the acquirer and the management team of the Japanese target. Respect towards the target's employees is also essential.
In the context of Japan, it is also worth mentioning that the corporate de-merger mechanism under the Companies Act of Japan is different from the spin-off scheme available under U.S. law. As noted above, many companies in Japan are carving out non-core businesses from their operations. To do so, many utilize the de-merger mechanism. In this regard, acquirers should be aware that the Employment Contracts Succession Act applies to de-mergers. What this means is that employees mainly engaged in transferred or carved-out businesses have the right, if they so wish, to be transferred together with the de-merged business, even if their employment contracts fall outside the scope of the de-merger agreement. This is one of the several ways in which the de-merger mechanism in Japan differs from the spin-off scheme in the U.S., and consultation with legal counsel is essential when acquiring a carved-out business in Japan.
What steps can be taken to help maximise deal value?
In recent transactions, a substantial portion of a company’s value can often be found in its intellectual properties (“IPs”) and other intangible assets. Where ownership of such assets belongs to a company’s employees, the value of the company could be significantly affected if the relevant employees leave the company. One way of dealing with this problem is for companies to establish the rule that works created in the course of employment belong to the company. Alternatively, a company could do its best to retain those employees who own IPs that are key to the company’s operation and value.
Currently, what are the biggest stumbling blocks to closing M&A transactions?
Antitrust clearance is often seen as a stumbling block to closing, particularly in multi-jurisdictional M&A transactions. Depending on the jurisdiction involved, the clearance time needed could sometimes be prohibitively long. This creates a lot of deal uncertainty.
Foreign investment restrictions also present hurdles to closing. Recently, many countries have expanded the scope and stringency of their foreign investment regime. For example, stricter rules on foreign investments have had the effect of restricting or even prohibiting investments in the technology sector, widely regarded as critical to a country’s infrastructure, in certain countries. However, foreign investment regulations may sometimes be too complex, broad and/or fluid, and this causes significant uncertainty in cross-border M&A transactions in certain sectors.
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
Japan seems to have kept the pandemic in control, and restrictions on businesses are therefore expected to be further lifted. Assuming a global improvement in pandemic control, it is anticipated that 2022 will witness even greater levels of domestic and cross-border M&A activity. Japanese businesses will also continue to be targeted for acquisition by foreign companies and funds for their technology. At the same time, Japanese companies are expected to seek targets and markets of value abroad.
In terms of the change we hope to see, there has been growing focus on ESG and SDG investing, and more and more companies are under pressure to take environmental, social and other sustainability issues into consideration in their investments and activities. Companies are increasingly accountable to their shareholders on these issues and have to keep them in mind in all the activities they undertake. This is an important development and we hope to see companies taking a more serious view of matters of sustainability. One example is the issue of human rights. There is currently no equivalent of the UK Modern Slavery Act in Japan, and we expect to see change in this in the near future. 
Shigeki Tatsuno has a thorough knowledge in M&A, Joint Venture and cross-border transactions. In addition, he regularly advises a number of venture companies and PE funds, and engages in general corporate matters, including IP transactions, broadly.

Shigeki Tatsuno can be contacted on +81-3-6775-1098 or by email at

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