It has been uncommon for Japanese companies to use their own stock as a form of acquisition consideration, mainly because the Companies Act in Japan has restrictions on these transactions. However, changes to the law will relax these restrictions and expand opportunities for Japanese companies to use their stock as acquisition consideration. Given that Takeda Pharmaceutical Co recently announced a plan to acquire Shire plc for cash and stock, it is a good time to consider the current and future environment for stock-for-stock transactions by Japanese companies.
1. Stock-for-stock transactions under the Companies Act in Japan
A typical stock-for-stock transaction under the Companies Act in Japan is a corporate restructuring such as a merger or share exchange (kabushiki koukan), both of which can be used only for purposes of acquiring all shares or the entire business of the target company. Also, such corporate restructurings are available only for transactions between Japanese companies, and they cannot be used for an acquisition of a foreign company by a Japanese company.
It is theoretically possible for a Japanese firm (acquiror) to issue new shares or dispose of treasury shares as consideration for the shares of another company (target company) as a part of a stock-for-stock transaction. However, that transaction would be deemed a ‘contribution-in-kind (genbutsu shusshi)’ under the Companies Act in Japan, and the Companies Act imposes strict restrictions on contributions-in-kind, including a requirement to investigate the value of the contributed assets by a third-party inspector and an obligation on the issuer’s directors or subscriber to compensate the difference between the fair value of the contributed assets and the value as set out in the share issuance plan. Thus, there are practical hurdles for a Japanese company to utilise a ‘contribution-in-kind’ as a stock-for-stock transaction.
There are only a few precedents where a Japanese company has acquired a foreign company for stock, such as Kyocera’s acquisition of AVX Corporation (US), DeNA’s acquisition of ngmoco (US) and GCA Savvian’s acquisition of Altium (UK), but those transactions adopted a quite complicated structure to deal with the restrictions under the Companies Act as discussed above. On the other hand, most acquisitions by a Japanese company of a foreign business were conducted for cash rather than stock.
2. Special measures to enhance stock-for-stock transaction
In 2011, the Act on Special Measures concerning Industrial Revitalization and Innovation of Industrial Activities (which was subsequently replaced with the Act on Strengthening Industrial Competitiveness (the ‘Special Act’) in 2014) was amended to relax some restrictions on contributions-in-kind under the Companies Act. The Special Act, for purpose of enhancing M&A and other businesses of Japanese companies, allows special treatment for transactions in accordance with a plan that is approved by the relevant governmental authority (an ‘Approved Plan’). The amendment in 2011 enabled Japanese companies to conduct an exchange offer (in both domestic and cross-border transactions), which is a tender offer bid using stock as consideration, by lifting the above-mentioned restrictions under the Companies Act. However, exchange offers have not been actually used by any Japanese company, because the available transaction scheme is limited to a tender offer bid, and domestically speaking, shareholders who receive the acquiror’s shares were not eligible for tax deferral because the tax regime was not changed together with the Special Act.
3. Latest amendment to the Special Act
In May 2018, the Japanese Diet passed an amendment to the Special Act that expands the scope of transactions in which a Japanese company can use its stock as consideration. The amendment is expected to take effect in the summer of 2018. After this amendment, the restrictions on contributions-in-kind under the Companies Act will not apply to a transaction that satisfies, in summary, the following conditions:
- approval of the acquisition plan is obtained from the respective governmental authority;
- shares in the target company are acquired by the acquiror ‘through transfer’;
- the acquiror issues new shares (or disposes of treasury shares) in consideration for the shares in the target company; and
- the transaction is either to make the target company a ‘relevant business party (kankei jigyousha)’, which is a similar concept to a subsidiary, or to purchase shares in a target company which is already a ‘relevant business party’ of the acquiror.
By utilising this new regime under the amended Special Act (the ‘New Regime’), a Japanese company can use stock as consideration in an acquisition of a foreign company. Regarding requirement (2) above, the New Regime has expanded eligible transactions to share transactions generally (not limited to tender offer bids), which is generally understood to include an acquisition using the scheme of arrangement under the laws of the UK. Regarding requirement (3) above, the New Regime is available (a) both for all-stock transactions and part-stock transactions and/or (b) for transactions in which ADRs representing the acquiror’s shares (listed on stock exchange outside Japan) are to be given to the shareholders of the target company as consideration. Thus, the New Regime can be a useful tool for acquisition of a foreign company by a Japanese company.
It should be noted, however, that while the regulations on contributions-in-kind are to be relaxed for stock-for-stock transactions under the New Regime, there remain some burdens to doing these transactions. Firstly, there is the requirement to obtain approval from the respective governmental authority, as the New Regime is only available for a transaction in accordance with an Approved Plan. In order to obtain such approval, it is generally understood that it will take one to two months for prior consultation with the authority and then it would need additional one month between the formal application and grant of approval (i.e. two to three months in total). Secondly, the acquiror needs to obtain shareholder approval by a super-majority (i.e. two-thirds) vote, unless the amount obtained by multiplying the per-share net asset value by the number of shares to be issued in connection with the transaction is no more than one-fifth of the total net asset value of the acquiror. Also, if such a super-majority shareholder vote is required, dissenting shareholders of the acquiror will have appraisal rights, by which they can demand the acquiror to purchase their shares at fair value.
In addition, the tax regime will also be amended to allow the deferral of capital gains tax on the target company’s shareholders who receive the acquiror’s shares as consideration. However, the scope of such tax deferral is narrower than the scope permitted for stock-for-stock deals. For example, part-cash and part-stock transactions are allowed as stock-for-stock transactions under the New Regime, but the tax deferral is available only for all-stock transactions. The requirements for such tax deferral must be carefully reviewed in connection with Japanese domestic transactions, in which there would be many target company shareholders who are either Japanese residents or Japanese companies. On the other hand, the Japanese tax regime might not matter in cross-border deals, in which both the target company and the target company’s shareholders are located outside Japan (in this case, it would be required to consider the applicable foreign tax regime).
Japanese companies have a strong appetite for acquisitions of foreign companies. Although we still need to carefully review how the stock-for-stock transactions under the New Regime will work in practice in connection with acquisitions governed by foreign laws, we would hope that there will be more opportunities for Japanese companies to use stock-for-stock transactions for cross-border transactions under the New Regime.