Bk Japan Maguide 2010

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Guide to Mergers and Acquisitions

Japan

2010 edition


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DISCLAIMERIt should be noted that the material in this book is designed to provide general information only. It is not offered as advice on anyparticular matter, whether it be legal, procedural or other, and should not be taken as such. The authors expressly disclaim allliability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon thewhole or any part of the contents of this book. No reader should act or refrain from acting on the basis of any matter contained

in it without seeking specific professional advice on the particular facts and circumstances at issue.

This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.


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Guide to Mergers and Acquisitions: Japan

Table of Contents

INTRODUCTION..............................................................................................1Policy Environment ..................................................................................2

Legal Environment ...................................................................................3

Investment Overview ................................................................................4

TYPES OF TRANSACTIONS ........................................................................5Share Acquisitions ...................................................................................5

Asset Acquisitions ....................................................................................6

Corporate Spinoffs ...................................................................................8

Mergers ....................................................................................................8

Joint Ventures ..........................................................................................9

Share Versus Asset Acquisition ...............................................................9

Share Acquisition .......................................................................... 9

Asset Acquisition ........................................................................10

Foreign Ownership Restrictions .................................................10

REGULATORY CONSENTS AND APPROVALS ....................................12Foreign Investment Restrictions ............................................................ 12

Share Acquisitions ......................................................................12

Offshore Share Acquisitions .......................................................13

Asset Acquisitions ......................................................................14

Mergers ......................................................................................14

Changes of Business Purposes .................................................14

Exchange Controls .....................................................................15Competition Law ....................................................................................15

FTC Review .................................................................................15

Restrictions on Financial Institutions ........................................16

Reporting and Approval Requirements under

the Anti-Monopoly Act ...........................................................................17

Share Acquisitions ......................................................................17

Business and Asset Acquisitions ...............................................18


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Mergers ......................................................................................18

Spinoffs .......................................................................................19

Joint share transfer ....................................................................21

Securities Law Issues ............................................................................22

Public Offerings ..........................................................................22

Private Placements ....................................................................23

Secondary Offerings ...................................................................23

Private Secondary Offering ........................................................23

Reporting Requirements ............................................................24

Specific Industry Regulation ..................................................................25COMPANIES ACT REQUIREMENTS .......................................................26

Acquisitions of New Shares ...................................................................26

Acquisitions of Existing Shares ..............................................................27

Asset Acquisitions ..................................................................................28

Asset Acquisition by Newly Incorporated Japanese Subsidiary ............ 29

Mergers ..................................................................................................29

NON-STATUTORY CONSENTS AND APPROVALS ............................31Third Party Consents .............................................................................31

Business Licences..................................................................................31

TAXATION ISSUES .......................................................................................32Asset Acquisitions .................................................................................32

Basic Principles ..........................................................................32

Capital Gains Tax Implications ...................................................32

Corporate Tax Implications ........................................................32Purchaser Considerations .......................................................... 33

Vendor Considerations ...............................................................33

Valuation Methods ......................................................................33

Goodwill ......................................................................................34

Retirement Reserve ...................................................................35

Material Future Liability .............................................................35
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Transfer and Other Taxes ........................................................... 35

Tax Disadvantages of a Business Transfer ................................ 36

Special Treatment for Corporate Reorganisations .................... 36

Triangular Mergers ................................................................................41

Share Acquisitions .................................................................................44

Valuation Methods ......................................................................44

Mergers ..................................................................................................45

Corporate Group Taxation Regime ............................................. 47

EMPLOYMENT ISSUES ..............................................................................49

Share Acquisitions .................................................................................49Asset Acquisitions ..................................................................................49

Termination and Rehire .............................................................. 50

Transfer of Employment Contract .............................................. 51

Mergers ......................................................................................51

Corporate Spinoffs .....................................................................52

Consultation with the Union .......................................................53

Pensions .....................................................................................54Health Insurance Associations...................................................55

Social Insurance .........................................................................55

Protection of Employees Privacy ............................................... 55

DOCUMENTATION AND DUE DILIGENCE ...........................................57Language and Style ................................................................................57

Preliminary Agreement - Memorandum of Understanding/

Letter of Intent .......................................................................................57

Due Diligence .........................................................................................58

Legal Issues ................................................................................58

Public Searches ..........................................................................58

Process .......................................................................................59

Acquisition Agreement ...........................................................................60

Representations and Warranties ...........................................................61

Closing ....................................................................................................62


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PUBLIC COMPANY CONSIDERATIONS ................................................63Elimination of Share Certificates for Public Companies ......................63

Acquisition of a Substantial Shareholding .............................................63

The 5 Percent Rule .....................................................................63

Insider Trading ...........................................................................65

Takeovers Code...........................................................................67

TOB Process ...............................................................................67

TOB Agent ...................................................................................69

Reply by Target Company ........................................................... 69

Fairness Opinions .......................................................................70Mandatory Offer Obligation ........................................................70

Prohibited Transactions Rapid Acquisitions .................................... 71

Announcements ..........................................................................71

Acquisitions and Disposals by Listed Companies .................................71

General Disclosure Obligations .................................................72

Specific Disclosure Obligations ..................................................72

Securities Law Obligations .........................................................72

Listing Rules ...............................................................................72

Types of Transaction ..............................................................................74

Disclosure and Approval Requirements ................................................74

Connected Transactions ........................................................................74

Stock Exchange Listing Rules ................................................................75

Compulsory Acquisition of a Minority Shareholding .............................75

APPENDIX A - OWNERSHIP THRESHOLDS IN JAPAN ..................77Ownership Percentage (Voting Rights)

APPENDIX B - JAPANESE TOB PROCESS ..........................................78

GLOSSARY ......................................................................................................79

BAKER & MCKENZIE OFFICES WORLDWIDE................................81


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INTRODUCTION

Historically, the level of mergers and acquisitions (M&A) has beencomparatively low in Japan. The last decade, however, has seensignificant developments in the Japanese M&A market.

First, the volume of M&A transactions has increased enormouslypeaking at over 2,500 transactions in 2006, five times the volumecompared to 1996. The biggest driver of this increase has beenin-country transactions, i.e., transactions between Japanesecorporations. The volume of inbound transactions also rose duringthis period but fell sharply following the global financial crisis (GFC).The GFC, however, triggered a wave of outbound transactions asJapanese corporations took advantage of comparatively robustbalance sheets, lower prices and less competition for offshore assetsto expand their presence in overseas markets.

Second, private equity funds, both domestic and foreign, becamesignificant players in the M&A market driving the growth of the buy-

out industry and acquisition finance in Japan. The development of thisindustry, in turn, saw the development of public-to-private transactions.

Third, the decade saw a series of major corporate law reforms,making it possible to implement a range of new M&A transactionstructures such as triangular mergers, and prompting several high-profile corporate takeover attempts and a wave of poison pill plans.New squeeze out structures made possible by the introduction of classshares under the Companies Act also are credited with driving thegrowth of going-private transactions from the latter part of 2006.

The year 2009 was challenging for the Japanese M&A market withdeal volume down nearly 20 percent compared to the previous yearand well off the 2006 peak. Deal sizes also declined with total dealvalue in 2009 falling 43 percent from the previous year to below the10 trillion line for the first time in six years.

The outlook for 2010 is mixed but the market is expected to improve asthe economic recovery progresses.


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Policy Environment

Japanese government policy has been to encourage and facilitateM&A as a means of restructuring the corporate sector and generallyto help reshape the economy.

The pace of corporate law reform in Japan has rapidly accelerated inrecent years. The changes made to corporate law have been describedas some of the most significant legal reforms implemented in Japanspost-war history.

Major changes include the introduction of stock swaps betweenJapanese corporations and new rules easing procedural restrictionson corporate spinoffs, the streamlining of rules for issuing newshares, the easing of restrictions on treasury stock, and theintroduction of new stock subscription options and class shares.

Many of the changes are expected to facilitate corporate restructuringin Japan, by reducing legal barriers to M&A as well as venture capitaland private equity investments.

On 1 May 2006, the Companies Act, which replaced the corporatesection of the Japanese Commercial Code, came into effect. TheCompanies Act is a single, consolidated code of company law thatalso introduces a number of changes to corporate law in Japan.For example, new types of corporate forms are now available underJapanese law, as well as new rules concerning corporate governanceand class shares. The Companies Act also includes provisions dealing

with M&A that came into effect in May 2007. These provisions relateto minority squeeze outs and the acquisition of Japanese corporationsusing shares in foreign companies (i.e., cash-out mergers involvingmergers by absorption, absorption spinoffs and stock swaps).

The Securities and Exchange Act was also amended quite substantiallyin 2006 and 2007. Renamed the Financial Instruments and ExchangeAct (FIEA), it took effect from 30 September 2007. While the Securitiesand Exchange Act covered only securities transactions, the new FIEAdeals with transactions involving financial products generally. The


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amendments also significantly changed the regulations relating totakeover bids.

Foreign investment restrictions and other related regulations havealso been greatly relaxed in recent years. Prior notification of directinvestment is no longer required in respect of liberalised or non-sensitive sectors.

The Government has also relaxed antitrust restrictions on M&Aactivity (but see the competition law section for new pre-merger filingrequirements under the Anti-Monopoly Act).

Legal Environment

The Japanese legal system is a civil law system modeled principally onGerman and French law. Some specialised legislation, such as FIEA, ismodelled on US law.

The primary sources of Japanese law are codes and statutes. Keycodes and statutes applicable to M&A include the Companies Act,the FIEA and the Anti-Monopoly Act. Foreign investment is subject tocertain reporting and, in limited instances, approval procedures underthe Foreign Exchange and Foreign Trade Act (FEFTA).

As in many civil law jurisdictions, in most cases the primarycodes and statutes set out only the broad legal principles. Theseare supplemented, to some extent, by case law and subordinatelegislation.

However, for cultural and other reasons, the level of commerciallitigation is relatively low in Japan and in many cases there is not anextensive body of case law upon which to rely. Consequently, Japaneselaw remains ambiguous in many areas.

Subordinate legislation may take the form of cabinet orders,enforcement orders, ministerial orders and other rules formulated bygovernment agencies. Though these regulations articulate the law to

some extent, considerable discretion is often vested with the agencycharged with administering the relevant law.


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Investment Overview

Japan is the worlds second largest economy. In the past few years,specific sectors that have experienced significant M&A and investmentactivity include financial services, including insurance and securitiesbrokerage, telecommunications, vehicle manufacture, retail andinformation technology.

In addition to these sectors, it is anticipated that areas such asthe pharmaceutical industry and real estate development will alsoexperience increasing investment.


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Share Acquisitions of Listed Companies

If the company is a listed company, depending on the level of control

sought, the acquisition may involve one or a combination of several

different types of transaction including:

The purchase of existing stock on- or off-market;

The purchase of stock subscription options on- or off-market;

The purchase of stock from a major stockholder or stockholders;

The issue of new shares; and/or

A stock swap (kabushiki kokan) or stock transfer (kabushiki iten).

More detailed information regarding takeovers of Japanese listed

companies is set out in the section on Acquisition of a Substantial

Shareholding.

Appendix A sets out a brief summary of the consequences of differentlevels of share ownership.

Asset Acquisitions

The Companies Act recognises two types of business transfer: onethat involves the transfer of all or substantially all of a Japanesecompanys business and one that does not.

In both cases, if the transaction involves the disposition or acquisitionof important property, board approval is required by either thevendor or the purchaser or, in some cases, by both parties. Whethera transaction involves important property or not will be determinedbased on the price of the assets, the proportion of the assets relativeto the companys total assets, the purpose of the transaction, theterms and conditions of the transaction, and past practice.


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In addition, a business transfer involving all or substantially all of aJapanese companys business will be subject to a special resolution of

the vendors shareholders. A special resolution is adopted by a two-thirds majority vote of the shareholders present at a general meetingof shareholders attended by shareholders holding more than one-half of the total shareholder voting rights of shareholders who areeligible to exercise voting rights at a general meeting of shareholders.A company can change this threshold in the companys articles ofincorporation. If the business transfer involves the transfer of all of theJapanese companys business, a special resolution of the purchasers

shareholders will also be required.

The distinction between the two different types of business transfer isnot always clear. For example, a sale by a company of a single plant,operating division or branch office may be regarded as a transfer ofsubstantially all of its business. However, the question is usuallydetermined on the basis of an objective assessment of the relativeimportance of the business sold compared with the companys overall

business (e.g., as a proportion of the companys total amount of sales,earnings and workforce). However, the Companies Act makes it clearthat, if the value of the assets is less than one-fifth of the total assetsof the vendor (or such lower threshold as may be stipulated in thearticles of incorporation), a shareholders resolution is not required.

In practice, many purchasers tend to proceed cautiously when anasset acquisition is involved. It is common for purchasers to interpretthe scope of the business transfer provisions widely and to insist on

a special shareholders resolution by the vendors shareholders (i.e.,interpreting the transaction as involving a transfer of substantiallyall of the vendors business) to avoid violating the Companies Actwhen the value of the assets is more than one-fifth of the total assetsof the vendor. However, an asset transfer involving only receivablesor securities for investment will be classified as an asset acquisitionthat does not involve a business transfer, even if the total value of theassets sold is relatively high.


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Corporate Spinoffs

The Companies Act provides for the easing of certain proceduralrestrictions that would otherwise apply to corporate spinoffs wherethe sole consideration offered for the assets of a Japanese company isnew shares in another Japanese company. From May 2007, any kind ofproperty, including cash, has been allowed.

Mergers

There are two types of merger available under the Companies Act: Merger by absorption, where the acquirer takes over all of the

assets and liabilities of the target company and the target companyis dissolved; and

Merger by incorporation, where the assets and liabilities of bothparties are acquired by a newly incorporated third party and bothparties are dissolved.

Merger by absorption is by far the most common method used inJapan.

A merger will usually proceed by way of an issue of shares in thesurviving company to the shareholders of the target company. Amerger is often used to rationalise the operations of subsidiaryentities. Cash-out mergers, involving mergers by absorption, cameinto effect in May 2007 under the Companies Act.

The Companies Act does not currently permit mergers directlybetween foreign corporations and Japanese corporations. However,there are provisions under the Companies Act, which came into effectin May 2007, that permit acquisitions of Japanese corporations usingshares in foreign companies (so called triangular mergers). Subject tocertain Japanese tax law requirements, triangular mergers can takeplace by way of an allocation of the foreign companys shares ownedby its Japanese subsidiary (the surviving company) to the shareholders

of the target company (the dissolving company).


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Joint Ventures

Commercial considerations will dictate whether a transaction will be a100-percent acquisition or a joint venture. For example, a joint ventureis often preferred where access to local distribution networks andmarketing know-how is sought, where the market is highly regulatedor where the market is dominated by a small number of powerfulplayers. In the case of an incorporated joint venture, the constitution ofthe company is drafted or amended to provide for issues of particularimportance to the co-venturers to be determined by a special majority,

restrictions on share transfers, and the resolution of any deadlock thatmay arise between the co-venturers.

Share Versus Asset Acquisition

Share Acquisition

Advantages for Vendor

The sale of the shares of the target company involves the divestitureof the target, together with all the liabilities, including contingentliabilities. Under an asset acquisition, the vendor retains all liabilitiesnot assumed by the purchaser.

A sale of shares is often simpler than a sale of assets. In an assetsale, it is necessary to separately deal with each category of asset andliability. Contracts must be individually assigned to the purchaser and,

where necessary, third party consents obtained.

Advantages for Purchaser

A purchase of shares is often simpler and less expensive.

A purchase of shares is not subject to any consumption tax or otherindirect/transfer taxes, and will not trigger any real property tax orregistration tax liability.1

1 Note that the issuance of any share certificates is subject to stamp duty.


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Any net losses, reserves and other allowances of the target arepreserved.

The consent of transferring employees is not required.2 Under an assetacquisition, the parties must obtain the consent to the transaction ofthe employees who will be transferred by the transaction.

Asset Acquisition

Advantages for vendor

The vendor may more easily select which assets it wishes to divest(and the vendor may find it desirable to retain the corporate entity inorder to utilise tax losses).

Advantages for purchaser

The purchaser can be more precise about the extent of liabilitiesbeing assumed. This is particularly important where there is concern

relating to contingent or undisclosed liabilities of the company forwhich adequate provision cannot be made at the time of purchase.

The purchaser can depreciate the assets acquired, including goodwill(subject to statutory limits on what can be treated as goodwill and theperiod over which it can be depreciated).

Foreign Ownership Restrictions

Thresholds have been established with respect to foreign ownershipin certain industries. These rules vary for individual companies withinthese industries and should be checked at the time an acquisition iscontemplated.

2 If the target company has a labour union, the transaction may be subject to acontractual or other commitment to give prior notice to or to consult with or evenseek the consent of the union.


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The major industries to which these rules apply include the following.

Telecommunications - Foreign investors are permitted to acquire 100percent of the shares of all Japanese telecommunications companies,except for Nippon Telegraph and Telephone East Corporation (NTT-East), Nippon Telegraph and Telephone West Corporation (NTT-West),and Nippon Telegraph and Telephone Corporation (NTT, being theholding company of NTT-East and NTT-West). Less than one-third ofall of the voting rights of NTT may be foreign owned and NTT-East andNTT-West are required to be owned by NTT.

Airlines - Foreign investors are permitted to acquire 33.3 percent of allvoting rights of Japanese airline companies.

Broadcasting - Foreign investors are permitted to acquire lessthan 20 percent of all voting rights in general broadcasting andcommunications companies and other similar companies. Theregulations relating to broadcasting such as cable, satellite andsimilar companies are technical and fluctuate more than other

regulations, and it is wise to confirm these restrictions prior to anysubstantial acquisition in such entities.

Foreign individuals and companies may still invest in the abovecompanies beyond the maximum levels detailed above. However, theywill not be able to be registered as shareholders and will therefore notbe afforded the usual rights given to shareholders (e.g., voting rightsand dividend rights).


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REGULATORY CONSENTS AND APPROVALS

Foreign Investment Restrictions

Foreign investment in Japanese companies and businesses isregulated under the FEFTA.

Certain reporting or approval requirements may apply to direct inwardinvestments depending:

On the jurisdiction in which the investor is located (i.e., whether it

is an approved country or not);

The industry in which the target company or business operates(i.e., whether the industry in question is a regulated industry ornon-regulated industry); or

In the case of asset acquisitions, the nature of the particular assetinvolved.

Share Acquisitions

General case - A foreign investor, typically a foreign corporation, willbe required to file an after-the-fact report with the Minister of Finance(MOF) and other relevant Ministers through the Bank of Japan (BOJ)within 15 days after the acquisition if, as a result of the acquisition,either:

The investor itself holds any issued shares of a non-listed

company; or

The investor and any related companies in aggregate hold 10percent or more of the issued shares in a listed company.

The filing of this report is generally regarded as a mere formality anddoes not require extensive disclosure of information.

Exceptional case - A foreign investor that purchases any shares in a

company in Japan will be required to file a notification with the MOF


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and any other relevant Ministers through the BOJ within three monthsprior to the acquisition, and file a report with the MOF and any other

relevant Ministers through the BOJ no later than 30 days after theacquisition if either:

The investor is located in a jurisdiction that is not included in theMOF list of designated jurisdictions; or

The target company is engaged in business in a regulated industry.

Regulated industries include telecommunications (i.e., involving

telecommunications carriers required to be registered under Article9 of the Telecommunications Business Act), agriculture, fisheries,petroleum, leather goods, aerospace, nuclear power, gunpowder andarmaments industries.

Offshore Share Acquisitions

A foreign investor that acquires shares in a non-listed company fromanother foreign investor is not required to file a prior notification or

after-the-fact report regarding the acquisition.

A foreign investor that acquires shares in a listed company fromanother foreign investor will also not be required to file a priornotification or after-the-fact report regarding the acquisition if, as aresult of the acquisition, it and any related companies hold less than10 percent of the listed companys issued shares. However, a foreigninvestor that proposes to acquire 10 percent or more of the issued

shares of a listed company (including shares held by any relatedcompanies) will be required to comply with:

The exceptional case filing obligations outlined above if the foreigninvestor disposing of the shares previously filed a prior notificationunder the FEFTA; or

The general case filing obligation outlined above if the originalacquisition was not subject to a prior notification requirement.


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If the foreign investor disposing of the shares previously filed a priornotification under the FEFTA, that foreign investor will be required to

file an after-the-fact report with the MOF. This requirement applies todisposals of shares in non-listed as well as listed companies.

Asset Acquisitions

If a foreign investor acquires assets directly from a Japanese vendor,the acquisition will be subject to certain reporting requirementsunder the FEFTA. The reporting requirements differ depending on

the particular asset involved. For example, subject to certain limitedexceptions, non-residents must report acquisitions of real propertylocated within Japan to the MOF through the BOJ within 20 days afterthe acquisition. Personal property, other than gold bullion, is generallyexempt from these requirements.

Mergers

The Companies Act does not currently provide for mergers between

foreign corporations and Japanese companies. A foreign investorcan only participate in a merger, as the acquiring party, through awholly owned or controlled Japanese subsidiary. If a foreign investorproposes to establish a new company in Japan with a view to acquiringthe assets of a Japanese company through a merger, the acquisitionof shares in the new company will be subject to the reportingrequirements and restrictions that apply under the FEFTA for shareacquisitions (see above). As noted above, however, there are provisions

of the Companies Act which permit acquisitions of Japanesecorporations using shares in foreign companies.

Changes of Business Purposes

A change of a foreign-held companys business purposes will alsotrigger a FEFTA prior notification requirement if that change relates toa regulated industry. A change not relating to a regulated industry is

not subject to any prior notification or reporting requirement.


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Exchange Controls

One of the stated aims of the FEFTA is to subject foreign exchangeand foreign trade to the minimum necessary controls and regulation.In keeping with this aim, capital flows relevant to mergers andacquisitions in Japan are largely free of government controls.

However, cash remittances of more than 30 million into or out ofJapan must be reported to the MOF. This reporting obligation falls onresidents only. In practice, however, the Japanese bank involved inthe transaction will usually prepare and file a report on its customers

behalf.

The repatriation of profits and dividends by branch and subsidiaryforms is unrestricted in Japan. Bond issues, whether overseas byJapanese residents or by foreign residents in Japan, do not requiregovernment approval. However, issues involving amounts of 1 billionor more are subject to an after-the-fact reporting requirement.

Competition LawThe Anti-Monopoly Act prohibits M&A if, as a result, competition inany particular field or trade may be substantially restrained or suchmerger or acquisition involves unfair trade practices. To make thisprohibition effective, the Anti-Monopoly Act imposes certain reportingor approval requirements on certain M&A transactions.

Broadly speaking, relatively large transactions involving business

transfers, asset acquisitions, mergers and corporate spinoffs aresubject to prior notification to the Fair Trade Commission (FTC).However, share acquisitions are subject to a prior notification filingonly where the business is of a significant size.

FTC Review

The FTC may review a direct or indirect acquisition of a Japanesecompany or business, and has the power to order the parties to a


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transaction to take a range of remedial steps including the divestitureor transfer of a business in order to restore competition.

In conjunction with the recent amendments regarding the introductionof a leniency program under the Anti-Monopoly Act, the FTC releasednew guidelines regarding mergers and acquisitions titled OperationalGuidelines in Anti-Monopoly Act Regarding Test of Combinationof Enterprises. As the title suggests, the guidelines outline thecircumstances in which a proposed merger or acquisition may or maynot be regarded as substantially restraining competition in a particular

market. The guidelines outline FTC policy with respect to theinterpretation of the amended Anti-Monopoly Act as it applies to M&A.The guidelines are not binding on the FTC in respect of any decisionmade in relation to a specific case.

The guidelines refer to the Herfindahl-Herschmann Index (HHI)which is calculated as the sum of the squared market share of eachcompany in a particular field of trade. The HHI increment derived froma business combination can be calculated by doubling the multiplied

value of each market share of the company group, if it only concernstwo parties.

The guidelines specifically state that a share acquisition, assetacquisition (including a business transfer) or merger is unlikely to bedeemed to have an anti-competitive effect where:

The HHI after the business combination is not more than 1,500;

The HHI after the business combination is more than 1,500 but notmore than 2,500 while the HHI increment does not exceed 250; or

The HHI after the business combination is more than 2,500, whilethe HHI increment does not exceed 150.

Restrictions on Financial Institutions

The Anti-Monopoly Act prohibits banks from owning more than 5

percent and insurance companies from acquiring more than 10percent of the issued voting shares of any Japanese company. The


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prohibition applies whether the acquirer bank or insurance company is

incorporated in Japan or overseas. However, this prohibition does not

apply where prior permission is obtained from the FTC or where theacquisition falls within the scope of certain exemptions (e.g., pursuant

to the exercise of security rights), provided under the Anti-Monopoly

Act.

Reporting and Approval Requirements under

the Anti-Monopoly Act

Share Acquisitions

The acquiring company must file a prior-notification with the FTC no

later than 30 days before the proposed date of the acquisition where

the target company is a Japanese company or a foreign company

and:

Thetotalamountofdomesticsales3 of the acquiring company

(whether a domestic or foreign company) and the other companies

in the combined group of companies4exceeds20billion;

ThetotalamountofdomesticsalesinJapanofthetargetcompany

anditssubsidiariesexceeds5billion;and

Asaresultoftheacquisition,theaggregatepercentageofthetotal

voting shares of the target company held by the acquiring company

and the other companies in the combined group of companies

exceeds 20 percent or 50 percent.An acquisition of shares on incorporation of a wholly owned subsidiary

is not subject to this reporting requirement.

3 The phrase total amount of domestic sales means the sum of the domestic sales of

all of the companies that belong to the combined group companies.

4 The phrase combined group of companies means a group that consists of a company

and its subsidiaries and the ultimate parent company of the company, if any, and

the subsidiaries of the ultimate parent company (excluding that company and its

subsidiaries).


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Business and Asset Acquisitions

The acquiring company must file a notification with the FTC no laterthan 30 days before the proposed date of the acquisition where thetarget business or assets are owned by a Japanese company or by aforeign company, and:

The total amount of domestic sales of the acquiring company(whether domestic or foreign) and the other companies in thecombined group of companies exceeds 20 billion;

In the case of an acquisition of the companys entire business, thecompanys total amount of domestic sales exceeds 3 billion; and

In the case of an acquisition of a material part of the companysbusiness or all or a material part of the fixed assets the companyuses in its business, the total amount of domestic sales related tothe target business or fixed assets exceeds 3 billion.

The parties to a transaction that is subject to a prior notification filing

are prohibited from effecting the transaction for a period of 30 daysafter the filing. However, the FTC has the power to shorten the waitingperiod.

An asset transfer between a parent company and a subsidiary orbetween two or more subsidiaries of the same parent is not subject tothe foregoing prior notification requirement.

Mergers

Both parties to a merger must file a notification with the FTC nolater than 30 days before the proposed date of the merger where themerger is between Japanese companies or foreign companies and:

The total amount of the domestic sales of the combined group ofcompanies to which one company belongs exceeds 20 billion; and

The total amount of domestic sales of the combined group of

companies to which another related company belongs exceeds5 billion.


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A merger between a parent company and a subsidiary or between twoor more subsidiaries of the same parent is not subject to the foregoing

prior notification requirement.

The parties to a transaction that is subject to a prior notification filingare prohibited from effecting the transaction for a period of 30 daysafter the filing. However, the FTC has the power to shorten the waitingperiod.

Spinoffs

In spinoffs involving multiple transferors, all parties (i.e., including thetransferee entity), must file a notification with the FTC no later than 30days before the proposed date of the spinoff where certain thresholdsare met. The applicable thresholds are summarised in the followingtable.

Summary of FTC Filing Thresholds for Spinoffs InvolvingJapanese Companies

Joint New Company Spinoff[ involves two or more Japanese companies transferring business to a

newly established company (NewCo) ]

(a) (b)

All business of a transferor companyis transferred to NewCo

+

Total amount of domestic sales ofthe combined group of companiesto which that transferor company

belongs exceeds 20 billion

A material part of the business of atransferor company is transferred

to NewCo

+Total amount of domestic sales ofthat business exceeds 10 billion

and and


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All businessof another

transferorcompany is

transferred toNewCo

+Total amount ofdomestic salesof a combined

group of

companiesto which thattransferorcompanybelongs

exceeds 5billion

or

Material partof business

of anothertransferorcompany istransferredto NewCo

+Total amountof domesticsales of that

businessexceeds 3billion

All businessof another

transferorcompany istransferredto NewCo

+Total amountof domesticsales of thecombined

group ofcompaniesto which that

transferorcompanybelongs

exceeds 5billion

or

Material partof business

of anothertransferorcompany istransferredto NewCo


businessexceeds 3billion

Absorption Spinoff

(involves two or more Japanese companies transferring business to anexisting company (Transferee Company))

(a) (b)

One company transfers to TransfereeCompany either:

One company transfers toTransferee Company either:

All of itsbusiness

+

Total amount ofdomestic salesof the combined

group ofcompanies

to which thatcompany

belongs toexceeds

20 billion

or

Materialpart of itsbusiness


businessexceeds

10 billion

All of itsbusiness

+

Total amountof domesticsales of thecombinedgroup of

companiesto which that

companybelongs to

exceeds5 billion

or A materialpart of itsbusiness


businessexceeds 3

billion


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and and

Total amount of domestic sales ofthe combined group of companiesto which the Transferee Company


Total amount of domestic sales ofthe combined group of companiesto which the Transferee Company


In the case of a joint new company spinoff (kyodo shinsetsu bunkatsu)or an absorption spinoff (kyushu bunkatsu) involving two or moreforeign companies transferring all or a part of their businesses to a

Japanese company, the above conditions apply except that referencesto total assets and total sales should be read as references to totaldomestic sales (i.e., sales turnover in Japan).

A spinoff between a parent company and a subsidiary or between twoor more subsidiaries of the same parent is not subject to the foregoingprior notification requirement.

The parties to a transaction that is subject to a prior notification filing

are prohibited from effecting the transaction for a period of 30 daysafter the filing. However, the FTC has the power to shorten the waitingperiod.

Joint share transfer

In the case of a joint share transfer, all parties must file a notificationwith the FTC no later than 30 days before the proposed date ofthe joint share transfer where the joint share transfer is between

Japanese companies or foreign companies, and:

The total amount of the domestic sales of the combined group ofcompanies to which any one of the companies belongs exceeds 20billion; and

The total amount of the domestic sales of the combined group ofcompanies to which another related company belongs exceeds 5billion.


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The parties to a transaction that is subject to a prior notification filingare prohibited from effecting the transaction for a period of 30 days

after the filing. However, the FTC has the power to shorten the waitingperiod.

Securities Law Issues

The FIEA regulations relating to securities transactions are complex.The filing and reporting requirements under the FIEA are summarisedbelow.

Public Offerings

Under the FIEA, the rules applicable to an issuer will depend onwhether securities being offered are to be issued (primary offerings)or have already been issued (secondary offerings). In the case of aprimary offering, if an offering constitutes a public offering and theaggregate total amount of the offering is 100 million or more, asecurities registration statement must be filed by the issuer with therelevant Local Finance Bureau. Certain secondary offerings which aredeemed to be a primary offering under the FIEA will be subject to theregulations applied to public offerings due to amendments to the FIEA,effective from 1 April 2010.

A public offering in relation to shares includes:

An offering of new shares for subscription to 50 or more persons byany company that is not a public company (defined below); and

An offering of new shares for subscription to any number ofpersons by a public company.

A public company in this context means a company that has fileda securities registration statement for the offering of shares or acompany whose shares are publicly traded on an exchange market inJapan or held by 500 or more shareholders.


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Private Placements

The exemptions from the public offering regime for shares that areapplicable only to a company which is not a public company involve:

Anofferingofnewsharesforsubscriptiontolessthan50persons

by a company which is not a public company (small private

placement);

Anofferingofnewsharesforsubscriptiontoqualifiedinstitutional

investors with certain resale restrictions by a company which is not

apubliccompany;and Anofferingofnewsharesforsubscriptiontoprofessionalinvestors

with certain resale restrictions by a company which is not a public

company.

Secondary Offerings

Amendments were made to the FIEA in 2009 in relation to the

regulation of secondary offerings of already issued shares. Thisamendment came into effect from 1 April 2010.

A secondary offering of already issued shares (excluding shares

with regard to which disclosures have already been made) must be

reported by filing a securities registration statement with the relevant

Local Finance Bureau unless the offering is within the category of a

Private Secondary Offering (see below) or unless the aggregate total

amount of the sale is less than 100 million.

Private Secondary Offering

Private Secondary Offerings are:

Asecondaryofferingofalreadyissuedsharesforsubscriptionto

lessthan50persons;

Asecondaryofferingofalreadyissuedsharesforsubscriptionto

qualifiedinstitutionalinvestorswithcertainresalerestrictions;or


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A secondary offering of already issued shares for subscription toprofessional investors with certain resale restrictions.

Reporting Requirements

In the case of a public offering if the total amount of the offeringis greater than 10 million but less than 100 million the issuingcompany must submit a securities notice to the relevant LocalFinance Bureau prior to the offering. If the total amount of theoffering is 100 million or more, the issuing company must, in

principle, file a securities registration statement with the relevantLocal Finance Bureau generally at least 15 days prior to the offering.Once a securities registration statement is filed in relation to a publicoffering, the company that filed the securities registration statementis required to file securities reports on an annual and semi-annualbasis (unless certain limited exemptions are applicable). From thefiscal year starting on and after 1 April 2008, companies listed on anexchange market in Japan will be required to file securities reports on

a quarterly basis.In the case of a secondary offering (except a Private SecondaryOffering), if the total amount of the sale is greater than 10 million butless than 100 million, the issuing company must submit a securitiesnotice to the relevant Local Finance Bureau only if the shares have notbeen disclosed (i.e., the issuer is not a public company). If the totalamount of the sale is 100 million or more, the issuing company mustfile a securities registration statement in the case of shares that have

not been disclosed.

In the case of a corporate spinoff, merger, stock swap or stock transfertransaction involving the exchange of non-publicly disclosed shareswith shareholders who have publicly disclosed shares, the companyproposing to issue or dispose of the non-publicly disclosed shares isgenerally required to file a securities registration statement prior tothe commencement of the transaction.


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Specific Industry Regulation

In certain industries, the relevant regulatory authority may have tobe notified and in some instances its consent or approval sought inrelation to an acquisition or merger. For example:

Telecommunications - In the case of a transfer of the whole of atelecommunications business, a merger or a corporate break-up of atelecommunications carrier, an after-the-fact notice must be providedwithout delay to the Minister of Internal Affairs and Communications.

Securities Dealers - In the case of M&A involving securities dealers (inthe case of a share acquisition, only where a majority of shares is to beacquired), an after-the-fact notice must be provided without delay tothe relevant Local Finance Bureau. In the case of acquiring 20 percentor more of the voting rights in a securities dealer, an after-the-factnotice must be made without delay to the competent Local FinanceBureau.

Banks - M&A involving banks are subject to the approval of theCommissioner of the Financial Services Agency. In the case of anacquisition of more than 5 percent of the voting rights in a bank, anafter-the-fact notice must be made within five days to the relevantLocal Finance Bureau, and acquiring 20 percent or more of the votingrights in a bank is subject to the approval of the Commissioner of theFinancial Services Agency.


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COMPANIES ACT REQUIREMENTS

The types of corporate approvals (i.e., board and shareholderapprovals) required under the Companies Act depend on the nature ofthe transaction involved.

Acquisitions of New Shares

In general if a person is to acquire new shares from the targetcompany, the target company will need to determine whether the

issuance in relation to the new shares involves: An issuance on a pro rata basis: see section titled Rights Offering

below;

An issuance to specific parties. In this case, shareholder approvalby the target company is required unless:

the target is a company that does not restrict any transfer ofany class of shares. (However, if the issue of new shares is at

a particularly favourable price, shareholders approval will berequired. See section on Particularly Favourable Price below.); or

the shareholders meeting of the target delegates the issue tothe board of directors or the directors; and

A public placement: See section titled Public Offerings above

Rights Offering - Under the new Companies Act, shareholders in a

company do not automatically have preemptive rights unless thecompany grants such rights to shareholders. When a company issuesnew shares to existing shareholders on a pro rata basis, the companywill grant preemptive rights to all shareholders. If the target companyis a company that does not restrict any transfer of any class of shares,board approval is sufficient to grant preemptive rights. If this is not thecase, a special resolution of the shareholders of the target companyis required unless the articles of incorporation of the target company

allow the target company to approve the granting of preemptive rightsby a board resolution or a directors resolution.


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Increase of Authorised Capital - Shareholder approval by the targetcompany is required, if the proposed issue requires a revision of the

targets authorised capital by amending the articles of incorporationof the target. If the target is a company that does not restrict anytransfer of any class of shares, the target company must issue sharesequivalent to at least one-quarter or more of its increased authorisedcapital.

Particularly Favourable Price - If the acquisition involves the issue ofnew shares at a particularly favourable price to any person, including

existing shareholders, the Companies Act requires that the issue beapproved by a special resolution of the shareholders of the targetcompany, even if the target is a company with no restriction on sharetransfers. A special resolution is not required if the issuance is madeto all of the existing shareholders on a pro rata basis (i.e., a rightsoffering) by a company that does not restrict the transfer of any classof shares. A particularly favourable price means a subscription priceregarded as particularly low compared to a fair issue price. A fair issue

price is generally regarded as the best price that the issuing companyand existing shareholders might expect to get for the purposes ofattracting additional capital funds. While there is no settled law inthis area, there are guidelines to the effect that, in respect of publiccompanies, a subscription price set approximately 10 percent belowmarket value does not constitute a particularly favourable price. Inthe case of a closed company, a special resolution of shareholders isrequired for the issuance of new shares, even if the acquisition does

not involve the issue of new shares at a particularly favourable price.

Acquisitions of Existing Shares

Board approval by the target companys board of directors may berequired where a transfer of shares is restricted under the targetcompanys articles of incorporation and the target company has aboard of directors. Such restrictions are fairly common in closely heldJapanese companies. If the target companys articles of incorporation

include a restriction on share transfer and the target company does


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not hold a board meeting, then the transfer of shares will require ashareholders resolution of the target company.

The approval of the vendors board and the purchasers board will alsobe required if the sale/purchase of the targets shares constitutes thedisposition/acquisition of important property (see the discussionbelow).

Asset Acquisitions

Vendor board approval will be required if the transaction involvesthe disposition of important property. This term is not definedin the Companies Act. Judicial precedent on the subject of whatconstitutes important property provides that the question shouldbe comprehensively analysed based on: the price of the assets; theproportion of the assets relative to the companys total assets; thepurpose for which the company acquired the assets; the terms andconditions of disposal of the assets; and past practice.

Vendor shareholder approval will be required if the transactioninvolves the sale of all or a substantial part of the vendors business.The transaction must be approved by a special resolution ofshareholders. If the value of the assets is less than one-fifth of thetotal assets of the vendor, a shareholders resolution is not required.This threshold may be lowered in the articles of incorporation.

Purchaser board approval will be required where the transactioninvolves the acquisition of important property or the financing of thetransaction involves a large sum of money.

Purchaser shareholder approval will be required if the transactioninvolves the purchase of all of the vendors business. The transactionmust be approved by a special resolution of shareholders. If the valueof the business is less than one-fifth of the net asset value of thepurchaser, a shareholders resolution is not required. This thresholdmay be lowered in the articles of incorporation.


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If a party owns 90 percent or more of the shares of the other party(described as a special controlling relationship), the approval of the

controlled companys shareholders will not be required.

Asset Acquisition by Newly Incorporated Japanese

Subsidiary

Foreign investors that wish to acquire Japanese assets througha recently established Japanese subsidiary should note that ifthe acquisition occurs less than two years after the subsidiarys

incorporation, it may be subject to the post-incorporation assetpurchase (jigo setsuritsu) rules of the Companies Act.

The general rule is that where a company that is less than two yearsold agrees to acquire property:

Existing before its incorporation;

Intended to be used on a continuing basis for purposes of the

companys business; and At a price equal to more than 20 percent (this percentage may be

lowered in the articles of incorporation) of the companys net assetvalue;

Then a shareholders resolution is required to approve the assetacquisition. However, unlike the situation which operated previouslyunder the Commercial Code, under the Companies Act an appraisal by

a court-appointed inspector is no longer required.

Mergers

A merger requires the approval of the board of directors andshareholders of both the acquirer and the target. However, if thetotal amount of the total number of shares issued by the acquiringcompany upon the merger multiplied by the net asset value pershare of the acquiring company and the total book value of bonds orany other assets issued by the acquiring company upon the merger


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does not exceed one-fifth (which may be lowered by the articles ofincorporation of the acquiring company) of the net asset value of the

acquiring company, and there is no objection by any shareholder of theacquiring company holding a certain number of shares (as providedin the relevant ministerial decree), then the approval of the acquiringcompanys shareholders is not required (known as a simplifiedmerger).

Nonetheless, even if these conditions are met, the approval of theacquiring companys shareholders will be required if the acquiring

company assumes a net loss after the merger or the acquirer is acompany where the transfer of shares is restricted and issues anyshares upon the merger.

If a party owns 90 percent or more of the shares of the other party(described as a special controlling relationship), the approval of thecontrolled companys shareholders will not be required (a short-formmerger).

Both the acquirer and the target must publish public notices regardingthe merger to allow their creditors the opportunity to object to theproposed merger.


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NON-STATUTORY CONSENTS AND APPROVALS

Third Party Consents

A transfer of business assets or change in control of a businesswill trigger requirements for consents or approvals from creditors,landlords, debenture holders, mortgagees and other third parties.

By contrast, a share acquisition will usually not require the consentor approval of third parties. However, depending on the terms of

agreements to which the target company is a party, if there is a changeof control, the acquisition may trigger notice requirements or even thetermination of certain contracts.

In a merger, the rights and obligations of the target company transferautomatically to the surviving entity. However, it may be necessary forthe surviving company to perfect its rights under certain contracts(e.g., by giving the other party notice). In addition, a merger may alsotrigger change of control type provisions in the companys third party

contracts.

Business Licences

Many business licences in Japan are non-transferable. In an assetacquisition, the acquirer will therefore often have to reapply for thenecessary licence, consent or permit required to carry on business inJapan.

Even in a share acquisition, the acquirer may find that while there isno requirement to reapply, it will be necessary to provide the licensingauthority with the same information that the vendor was required toprovide when it originally applied for the licence.


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TAXATION ISSUES

Asset Acquisitions

Basic Principles

An asset transfer is a cash transaction that is a taxable transactionfor Japanese tax purposes. This type of transaction is also outsidethe scope of the qualified reorganisation rules discussed below.Accordingly, asset transfer transactions usually cannot be structured

as tax-free reorganisations.

Capital Gains Tax Implications

Any gain from a sale of assets is taxable to the vendor under theCorporation Tax Act. Correspondingly, any built-in gain in thetransferred assets will be mandatorily recognised and taxed to thetransferor. If there is no built-in gain in the assets to be transferred

generally, no negative income tax consequences should arise. TheNational Tax Administration (NTA) will generally assume that apurchase price negotiated at arms length represents fair marketvalue but it will scrutinise a related-party transaction. Relatedparties transferring business assets should ensure that there isdocumentation proving that they have employed standard valuationmethods.

Corporate Tax ImplicationsUnder normal circumstances, the corporation transferring its assetswill incur a corporate tax liability corresponding to the capital gainrealised by the disposal of appreciated assets. The purchaser of theassets will be in a tax neutral position in terms of corporate incometax, although indirect taxes may be imposed for an acquisition ofassets depending on the nature of the assets (see the Transfer andOther Taxes section).


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However, if the asset transfer amount is below fair market value, thenthe transferor is required to recognise the difference between the

fair market value and the consideration for the asset transfer as anon-deductible donation and the transferee is required to recognisethe difference as a taxable gift gain. On the other hand, if the assettransfer amount exceeds the fair market value, then the transferor isrequired to recognise the difference between the fair market value andthe consideration for the asset transfer as a taxable gift gain and thetransferee is required to recognise the difference as a non-deductibledonation. Accordingly, a purchase below fair market value creates the

risk of double taxation.

Purchaser Considerations

For the purchaser, the purchase price of each asset serves as the costbasis for depreciation/amortisation and all other purposes.

Vendor Considerations

For the vendor, the difference between the vendors cost base inrelation to the assets sold and the price received for those assets istreated as a taxable capital gain. Should the vendor use the proceedsof the sale to purchase similar assets, it may defer taxes on the gainsrealised, if certain conditions provided under the tax laws are met.The provisions controlling such deferrals are similar to the like-kindexchange provisions of the US Internal Revenue Code.

Valuation Methods

Although Japanese tax law does not compulsorily require thatcorporations employ specific valuation methods, the followingmethods, singly or in combination, are most accepted by the NTA.

Book Value Method - The business is valued by aggregating the valueof each asset according to the vendors book value. This method is notused for assets that have appreciated (e.g., real estate and marketable

securities).


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Revaluation Method-The business is valued by aggregating the currentfair market value of each asset.

Aggregate Valuation Method- The business is valued as a whole,without individually appraising the assets. Under this method,the value of existing contractual relations can be included amongcorporate assets. This method is generally favoured where the buyerintends to continue the business on an as is basis.

Profit Return Method- The business is valued according to itsanticipated profitability.

The discount cash flow method of valuing a business may or may notbe accepted for Japanese tax purposes. This method is more likely tobe accepted in an asset acquisition involving unrelated parties. Wherethe parties are related, the use of this method may be subject toscrutiny in the event of a tax audit.

Goodwill

Under the Companies Act, goodwill may be recognised only in theevent of a merger, a business transfer, spinoff, investment in kind,share exchange and share transfer.

Under Japanese tax law, the purchaser can recognise goodwill that isthe difference between the fair market value and the net asset valueonly in the event of a non-qualified merger, non-qualified spinoff,non-qualified investment in kind and business transfer. If the fair

market value is below the net asset value, the purchaser is requiredto recognise the difference as negative goodwill. On the other hand,if the fair market value exceeds the net asset value, the purchaseris required to recognise the difference as goodwill. The purchaser ispermitted to depreciate acquired goodwill ratably over a period of fiveyears. Note that the transferee cannot recognise the goodwill unlessthe main assets and liabilities of the business unit are transferred tothe transferee.


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Retirement Reserve

Under Japanese tax law, the retirement reserve can be transferredonly in the event of a non-qualified merger, non-qualified spinoff,non-qualified investment in kind and business transfer if the followingconditions are met under Article 62-8(2)(i) of the Japanese CorporationTax Act.

The amount of the retirement reserve being transferred must becomputed in light of generally accepted accounting principles anda specified computation schedule, and a part of the corporate tax

return form must be filed when the tax return is filed.

The transferee must assume the retirement payment obligationspromising to reflect the employees service periods and performance,etc. when they were providing services to the transferor.

The business transfer should be that of an identifiable/independentbusiness unit in light of the definition of business unit underArticle 467 of the Companies Act.

The main assets and liability of the business unit must betransferred to a transferee.

Material Future Liability

Under Japanese tax law, if the purchaser assumes any materialfuture liability that will be paid within three years of the transaction,that material future liability can be transferred and recognised at the

transferee level as a short-term material liability adjustment account.A short-term material liability adjustment account can be recognisedonly if the amount is more than 20 percent of the total transferredassets amount.

Transfer and Other Taxes

Real property acquisition tax is assessed on acquisitions of buildings

at the rate of 3 percent (residential buildings) or 4 percent (otherbuildings) of the appraisal value based on a fixed assets tax and


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acquisitions of land at the rate of 3 percent of the appraisal valuebased on a fixed assets tax (or half of the appraisal value based on a

fixed assets tax in the case of residential land).

Japanese registration and licence tax is assessed on acquisitions ofreal property at the rate of 2 percent (except for acquisitions of landwhich are assessed at the rate of 1 percent, 1.3 percent on or after 1April 2011, 1.5 percent on or after 1 April 2012, and 2 percent on orafter 1 April 2013) of the appraisal value based on a fixed assets tax.

The transfer of ownership of any other registrable assets acquired

from the vendor, such as registrable intellectual property, will alsotrigger the registration and licence tax.

Japanese stamp duty is assessed on agreements for the acquisition ofbusiness assets, including real property, intellectual property rights,etc., that are prepared and executed in Japan.

Stamp duty rates are progressive and are assessed on the amount ofthe purchase price stated in the agreement. The maximum amount of

stamp duty payable is 600,000 on an agreement involving a purchaseprice of more than 5 billion.

Tax Disadvantages of a Business Transfer

In general, net loss carryovers held by the vendor cannot be transferredto the purchaser of business assets. This general prohibition on thetransfer of net losses constitutes an important tax disadvantage for

business transfers. In addition, consumption tax (similar to VAT) willbe imposed at a 5 percent rate on the transfer of taxable assets (suchas inventories and fixed assets, both tangible and intangible assets).No consumption tax liability will arise if, instead of acquiring assets, apurchaser acquires shares in the entity holding the assets.

Special Treatment for Corporate Reorganisations

Rules for tax-free corporate reorganisations were introduced by

amendments made to Japanese tax laws in 2001. These tax-freereorganisation rules cover corporate spinoffs, mergers, contributions-


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in-kind, includingpost facto contributions-in-kind.5 However these2001 rules did not cover business transfers, share exchanges and

share transfers. Under the 2006 tax reforms, new tax rules forshare exchanges and share transfers were introduced. Although theCompanies Act came into effect in May 2006, the enforcement of thenew triangular mergers rules were postponed for one year. Under the2007 tax reforms, the conditions for tax qualified reorganisations, etc.were modified accordingly.

5 However, under the proposed draft 2010 tax legislation amendments, qualifiedpostfacto contributions-in-kind will be abolished.

Requirements for Tax-Free Reorganisation

Type 1 Type 2 Type 3

100 % GroupReorganisation

GroupReorganisation(more than50% but lessthan 100%)

JointBusiness TypeReorganisation

Requirement 1No cashtransaction

No cash payment can be made

Requirement 2Transfer ofEmployees

N/A At least 80 % of the employeesinvolved in the divested businessof the transferor corporation mustbe engaged in the business of thetransferee corporation.

Requirement 3Business

Continuity

N/A The divested business of thetransferor corporation must be

assumed and the transfereecorporation must be expected tocontinue the divested business evenafter the reorganisation.

Requirement 4Assumption ofMain Assets/Liabilities

The main assets and liabilities ofthe business to be divested mustbe transferred to the transfereecorporation.


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Requirement 5Business

Relatedness

N/A N/A The divestedbusiness and the

business assumed(meaning anyof the businessin which thetransfereecorporationengages) must berelated to eachother.

Requirement 6Business Scaleor Participationin Management

N/A N/A The amountof sales, orthe number ofemployees of thedivested businessor the businessassumed, mustnot exceed asize of five times

that of the other;or one of thespecified officersof the transferorcorporation(meaning amanaging directoror above or aperson involved inmanagement who

is of equivalentrank) and oneof the certainmanaging officersof the transfereecorporationmust be themanaging officersof the transfereecorporation after

the reorganisation.


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Requirement 7Continuity of

ShareholdingRelationship

Continue grouprelationship

Continue grouprelationship

The shares heldby shareholders

who promiseto continue tohold all sharesdelivered throughthe reorganisationmust representat least 80 % ofthe shares issuedby the transferor

corporation.*This does notapply if thereare 50 or moreshareholders.

Qualified reorganisations are where assets must compulsorily betransferred on a carryover basis (i.e., tax deferral is possible).

Non-qualified reorganisations are where assets must be

transferred at fair market value.Certain qualified corporate reorganisations, including corporatespinoffs recognised under the Companies Act, are eligible for specialtax treatment. Subject to the satisfaction of certain requirementsrelating to group reorganisations or the establishment of jointventures, the vendor may compulsorily defer tax on capital gainsresulting from the qualified reorganisation. In addition, thepreservation of accumulated tax losses may be possible if additional

conditions are met.6 Tax loss preservation is eligible only for mergersand certain merger equivalent corporate spinoffs (i.e., those whichinvolve the spun-off company being liquidated immediately after thecorporate spinoff7). The structuring of a transaction as a corporatespinoff rather than an ordinary asset acquisition may enable thevendor to take advantage of this special treatment.

6 Under the proposed draft 2010 tax legislation amendments, these conditions will bereviewed and possibly relaxed for certain types of transactions.

7 However, under the proposed draft 2010 tax legislation amendments, this type ofmerger equivalent corporate spinoff will be abolished.


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The criteria for a qualified group reorganisation, such as a merger,are relatively broad compared to those for the establishment of a joint

venture. Specifically, a merger of group companies with a 100 percentshareholding relationship can be categorised as a qualified corporatereorganisation as long as the transaction does not involve cash(i.e., no cash or cash equivalent payment is made as considerationfor the reorganisation). In the case of a qualified reorganisation, itis mandatory that the transfer be at book value, even if the businessunits subject to the corporate spinoff have appreciated in value.

Comparative Tax Summary of an Asset Transfer anda Corporate Spinoff

Corporate Spinoff Asset Transfer

Nature oftransaction

Cashless transaction Cash transaction

Capital gaintaxation

If a qualified corporatereorganisation is made,

no capital gains taxationoccurs for the vendor.

The qualified statusis easily maintainedin the case of a groupreorganisation.

If any built-in gain exists inthe assets to be transferred,

capital gains taxation arisesfor the vendor.

If no built-in gain exists, abook value transfer may bepossible.

Consumptiontax

No consumption taxapplies

Certain taxable assets aresubject to consumption tax,

but in the case of a businesstransfer between groupcompanies, no group-wideoutstanding consumption taxliability would arise.

Transfer ofretirementreserve

Not a taxable event If certain conditions aremet, the retirement reservecan be transferred to thetransferee.


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Preservationof tax

loss carryforwards

Possible in the case ofa merger equivalent

corporate spinoffs, ifcertain conditions are met

Not possible

Stamp duty The corporate spinoffagreement is subject tostamp duty at the flat rateof 40,000 per document.

The asset transferagreement is subject tostamp duty at the maximumduty rate of 600,000.

If no amount is referred to inthe agreement and there are

no other documents that arecharacterised as part of theagreement, the duty is a flatrate of 200.

Corporateregistrationand licencetax

Applicable if the amountof capital is increased byx 1.5/1000 (the portionthat exceeds the capitalof the absorbed companyis increased by x 7/1000).However, if the capitalis not increased by atleast this amount, thena flat rate of 30,000 isapplicable.

No tax liability

Registrationand licencetax for realestates and/or intangibles

Reduced rate may beavailable

Standard rate applies

Triangular Mergers

New rules for triangular mergers came into effect as part of theCompanies Act in May 2007. These rules are designed to allow moreflexibility for corporations carrying out M&A transactions and to


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enable acquiring companies to acquire a target corporation in Japanvia a triangular merger.

Prior to the 2007 reforms, for a reorganisation to be tax-qualified, theconsideration given to the shareholders of the target company had tobe that of a surviving subsidiary. A cross-border triangular mergerdid not qualify as a non-taxable corporate reorganisation becausethe consideration was in the form of shares from a foreign parentcompany, resulting in the liquidated company being taxed on anygains it made on the transfer of its assets to the surviving company.

Moreover, the shareholders of the liquidated company were taxedon their capital gains or losses and on deemed dividends from theirshares in the dissolved company.

As a result of the 2007 reforms, a corporation in a triangular mergermay exchange the stock of its parent company for shares of a targetcompany, as shown in Figure 1.

Figure 1: Triangular Merger

Under the new rules, a corporate reorganisation in which shares of theparent corporation (domestic or foreign) are exchanged by a Japaneseacquiring corporation solely for the shares of a Japanese targetcorporation will be treated as tax qualified only if:

The parent directly owns, and will continue to own, 100 percent of

the shares of the Japanese acquiring corporation prior to and afterthe reorganisation; and

Shareholders

of Parent Co.

Parent Co.

Acquiring Co. Acquired Co.

Shareholders of

Acquired Co.

Surviving Co.

Parent Co.

Shareholders

of Parent Co.

Triangular

Merger

100%

Shares in

Parent Co.

100%

Assets

Shareholders

of Acquired Co.


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Any one of the other requirements for a tax qualified reorganisationare met (e.g., the continuity of business test).

Under 2007 tax reforms, if shares of a foreign parent are issued to anon-resident shareholder of the target Japanese corporation, the non-resident shareholder, upon receiving the new shares, will be subjectto capital gains taxation based on the application of Japanese tax lawsand any relevant income tax treaty. A non-resident will be subject toJapanese taxation if:

The non-resident has owned 25 percent or more of the Japanese

target company within the past three years and disposes of 5percent or more of such shares in any taxable year; and

The non-resident is resident in a country that has not concludeda tax treaty with Japan or the relevant tax treaty does not exemptcapital gains taxation in Japan upon a share transfer.

The treatment described above is not applicable if shares areattributable to a permanent establishment (PE) in Japan of the

relevant non-resident shareholders. In such cases, the capital gain isdeferred until the shares are no longer maintained by the PE in Japan,in which case there is a deemed transfer of shares by the non-residentshareholder subject to taxation.

In a triangular merger, an acquiring company will transfer the stockof the parent company to shareholders of the target in exchange forshares of a target company. Under the 2007 tax reforms, the acquiring

company will be required to recognise any built-in gain or loss ofthe parents shares held on or before the date of the reorganisationcontract.

The 2007 tax reforms also expand the definition of the businessrelevancy test to be met for the reorganisation between parties with 50percent or less equity relationship. Pursuant to the amendment, thebusiness includes preparatory activities, such as market research oradvertising.


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Share Acquisitions

Where the target corporation issues new shares to the purchaser,there will be no gain to the target corporation since the fundsreceived are considered a contribution to capital (or alternativelyit is characterised as a kind of capital transaction that is neutralfor Japanese corporate tax purposes). However, if the purchasersubscribes to newly issued shares at a particularly favourable price,at a discount of 10 percent or more of the market price, the discountwill constitute a taxable gift gain to the purchaser. This rule applies

even if the purchaser has a taxable presence in Japan. However, giftincome may be exempt from Japanese tax under the operation ofsome double tax treaties.

Gains on sales of existing shares will be taxable to the vendor underthe Corporation Tax Act. However, if the vendor is a non-resident,capital gains from the sale of such shares may be exempt fromJapanese tax under some double tax treaties. The anti-avoidancerules described above in relation to assets generally also apply to

share acquisitions.

Special tax measures apply to certain stock swaps (i.e., those thatinvolve the creation of a holding company) and stock transfers (i.e.,those involving the creation of a wholly owned subsidiary) recognisedunder the Companies Act. Under these measures, subject to thesatisfaction of certain requirements, tax on capital gains thatshareholders earn as a result of a stock swap or stock transfer is

deferred until such time as they on-sell the shares. For the purposesof these measures, capital gains are calculated based on thedifference between the book value and the fair market value of theshares transferred.

Valuation Methods

The net asset value of the targets shares will generally be fairmarket value for Japanese tax purposes. This approach is generally


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the preferred valuation method in Japan as it provides a relativelyobjective and verifiable valuation of the shares.

Where the price of the shares exceeds the net asset value, the excesscan be attributed to a control premium. In some cases, the acquisitionof a control premium is recognised for Japanese tax purposes andnot treated as a donation. However, restrictions apply to subsequentdownward adjustments of the control premium portion.

Purchaser and Vendor Considerations

Ordinarily, the vendor will be liable for taxable gains. However, asnoted above, the purchaser may also incur a tax liability if it acquiresthe shares at a particularly favourable price such that the discount isregarded as a gift gain.

Where the parties are unrelated, the NTA will ordinarily assume thateach will bargain in its own best interest and that an arms lengthprice will result.

The chief tax advantage to the purchaser is that any net carryforwardloss, reserves and other allowances of the target corporation arepreserved, whereas they are gener

Bk Japan Maguide 2010

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Transcript of Bk Japan Maguide 2010