Acquiring Japanese private companies: key points for European dealmakers

1. Choose the right acquisition structure

There are three principal routes into a Japanese target, and the choice has significant downstream consequences.

Share acquisition (kabushiki jōto) is the most common route for both full buyouts and partial/minority investments in a ‘joint stock company’ (Kabushiki Kaisha or KK). The target’s legal personality, licences and employment relationships continue unaffected — the buyer simply steps into the existing shareholder’s position. Contractual relationships also continue unaffected unless there is any change of control restriction. This structural simplicity makes it the default choice for most foreign buyers. A similar route is used to acquire a ‘limited liability company’ (Godo Kaisha or GK) which is a simpler form of corporate entity commonly used in Japan. In such case, the target stake is called a ‘membership interest’ (mochibun).

For partial (minority) acquisitions, there are two common paths: purchasing existing shares from current shareholders or subscribing for newly issued shares (daisansha wariate zōshi), which injects capital into the company and dilutes existing shareholders. Either way, a shareholders’ agreement will typically govern board representation, information rights, veto rights over key decisions and exit mechanisms.

Asset transfer (jigyō jōto) allows a buyer to acquire selected assets, contracts and liabilities constituting a business as a going concern, rather than the corporate entity itself. This can be attractive where the buyer wants to leave certain liabilities behind, but it comes at a cost: contracts generally require individual counterparty consent to transfer, and — critically — employees must individually consent to move to the buyer, since Japanese law has no equivalent to the EU’s automatic-transfer (TUPE-style) regime for asset deals.

Mergers and company splits (gappei / kaisha bunkatsu) are statutory reorganisation tools used more often for post-acquisition integration than for the initial acquisition itself, but they are worth considering early if a multi-step structure is contemplated. They also require certain statutory procedures, such as creditors protection procedures, which can be time consuming and are not required in case of share acquisitions.

2. Commercial Registry

The Registry Information Provision Service (tōki jōhō teikyō sābisu, www.touki.or.jp) is the online Japanese language portal through which Japan’s Commercial Registry (shōgyō tōki) — maintained by the Ministry of Justice — can be searched in real time. The Registry is the authoritative public record of key corporate information, including legal name, registered address, date of incorporation, corporate purpose, paid-in capital, share structure and identity of directors.

The Registry further shows restrictions on share transfers in the articles of incorporation (teikan) for a KK (see below), and members for a GK.

A direct request to the company would be required to access the shareholder register of a KK, and the articles of incorporation and financial information for a KK and a GK.

Registry searches are often supplemented with information from commercial providers such as Teikoku Databank (www.tdb.co.jp) or Tokyo Shoko Research (www.tsr-net.co.jp). These can provide more information (usually in Japanese) about the target, including financial information, main customers and suppliers, relationship banks and personal information about directors.

3. Share transfer restrictions

Majority of unlisted KKs are ‘companies with share transfer restrictions’ (kabushiki jōto seigen kaisha) under their articles of incorporation. This means any transfer of shares requires the approval of the board of directors, or in some cases, the general meeting of shareholders before it is effective against the company.

For a 100% acquisition, this is usually a formality that simply needs to be in the closing checklist. For minority or partial acquisitions, however, it can function as a practical control point — the board or the general meeting of shareholders effectively retaining a veto over who joins the cap table.

The articles of incorporation should be further checked for other matters such as whether any physical share certificate has been issued, in which case physical delivery of the certificate will be required for transfer. Any shareholders’ agreement should be examined for rights of first refusal or pre-emption rights held by other shareholders, which can affect deal certainty.

As regards GKs, transferring membership interests requires unanimous consent of all other members unless the articles of incorporation provide otherwise.

4. Due diligence: points that may differ from European practice

A few areas tend to warrant particular attention in Japanese private companies:

• Labour liabilities. Japan’s employee protection regime makes workforce issues a frequent source of latent liability, including unfunded or underfunded retirement benefit obligations (taishokukin) and historical unpaid overtime up to a three-year limit (‘service overtime’ / sābisu zangyō).
• Real property. Many companies hold real estate directly. Registry searches are straightforward (while you need to use the online Japanese language portal), but underlying leases and tenancy arrangements can be more complex than they first appear.
• Corporate housekeeping. Family-run or founder-led companies may have less formal governance records than European equivalents.

5. Regulatory approvals

FEFTA prior notification. The Foreign Exchange and Foreign Trade Act (FEFTA) requires foreign investors to consider a prior notification filing (administered through the Bank of Japan on behalf of the relevant ministries) before acquiring shares or a business in certain ‘designated’ or ‘core’ sectors — broadly, those touching national security, public order, public safety, and related areas such as defence, energy and utilities infrastructure, telecommunications and cybersecurity. For unlisted companies in a designated sector, there is generally no minimum shareholding threshold that exempts the filing, and closing must wait until the review period (typically up to 30 days, though it can be shortened depending on the sector or extended by up to 5 months) has run. Identifying whether the target’s business falls within such a regulated sector should be one of the first steps in any deal — the scope of regulated sectors has expanded over recent years.

Sector-specific consents. Regulated industries may require their own change-of-control approvals or notifications, separate from and in addition to FEFTA.

Antitrust (JFTC) merger control. A notification to the Japan Fair Trade Commission is required where:

• the acquirer group’s domestic turnover exceeds JPY 20 billion (approx. EUR 109 million); and
• the domestic turnover of the target and its subsidiaries (if any) exceeds JPY 5 billion (approx. EUR 27 million).

These thresholds mean that many mid-market cross-border deals involving a large foreign acquirer and a modest-sized Japanese target will be caught. Acquisition of minority stakes can also trigger filing obligations in certain circumstances. The process and waiting periods are broadly comparable in concept to EU and UK merger control.

6. Employment considerations on acquisitions

Employment considerations are one of the key points of divergence between share and asset deals. In a share acquisition, employment relationships are entirely unaffected — the employing entity does not change, so no individual consents are needed. This also applies to mergers and company splits.

In an asset transfer, by contrast, each affected employee’s individual consent is generally required for their employment to move to the buyer. Where changes to employee terms (such as bonus structures, retirement benefit schemes and working-hour rules) are planned, careful sequencing will be required, since Japanese law restricts the ability to unilaterally worsen employment conditions. No equivalent to the EU’s automatic-transfer (TUPE-style) regime for asset deals exists in Japan.

7. Tax snapshot

Share acquisitions generally do not attract consumption tax on the transfer itself, though stamp duty considerations can arise if hard copy transaction documents are executed. Business transfers, by contrast, attract consumption tax (currently 10%) on the taxable portion of transferred assets, as well as registration and real estate acquisition taxes where property (land or building) is included.

Cross-border structuring — including the jurisdiction of the acquisition vehicle and withholding tax on future dividends or exit proceeds — is best addressed with tax advisers at the outset.

8. Process and practical notes

• Timeline. A straightforward private company share acquisition can often run from letter of intent to closing in roughly two to four months, excluding any FEFTA or antitrust review periods, which can add 30 days or more. The corporate governance process including decision-making by the Japanese seller, which may be time consuming and/or complicated, should also be considered at the outset.
• Language. Even where the deal teams work comfortably in English, data rooms, management presentations and historical corporate records are often predominantly in Japanese, and definitive documents may be prepared bilingually. Translation time and cost should be factored into the timeline from the start.
• Governing law. While cross-border deals sometimes use English law and London arbitration, many Japanese sellers will prefer Japanese law and Japanese court jurisdiction. This is frequently a live negotiation point rather than a foregone conclusion.
• Relationship dynamics. For owner-managed companies in particular, sellers often weigh cultural fit, employee succession, and preservation of the business and its name alongside the price. These considerations can shape deal structure and negotiation as much as the financial terms.
• W&I insurance and risk allocation. The Japanese warranty and indemnity insurance market is less mature than in Europe, though growing. When it comes to mid-cap market, escrows and purchase price holdbacks remain more common risk-allocation tools than insurance.