Acquisitions of Companies in Japan

June 4, 2020

Since Abenomics was launched in 2013, Prime Minister Shinzo Abe’s economic policies represented by monetary easing, fiscal stimulus, and structural reforms, the Japanese economy was revived from Japan’s so-called ‘lost decades’ and millions of jobs were created.

Along with the economic recovery, M&A activities have increased year-on-year for the past eight years since 2012. This is largely due to significant increases in mid-size in-in deals where Japanese companies acquire domestic corporations. This trend is expected to continue as aging management teams and business successions are on the top issues to be addressed to keep existing employees on payroll and to sustain business partners’ business activities.

Japan’s M&A market has also seen an uprising trend in increases in out-in deals where foreign companies acquire Japanese companies though the total number of such transactions is still small compared to the number of in-in and in-out deals.

Japanese companies

Accounting standards

Many SMEs in Japan use the tax method of accounting for bookkeeping purposes. Therefore, the conversion to accrual basis financial statements is necessary to capture an appropriate view of the company’s financial positions and quality of earnings during the due diligence process. IFRS has been adopted mainly by large public corporations for the comparability of financial statements and many other corporations, both listed and unlisted, still apply the J-GAAP accounting method for bookkeeping. Under J-GAAP, the amortization of goodwill is required every year, which will have an impact on companies’ earnings.

Cultural differences

Japan is a very unique country in terms of cultures and personality traits. The key to successfully closing transactions especially with Japanese businesses is to take time and build a relationship and trust from the initiation of acquisition talks with counterparts. Internal consensus building before making a decision is an important business process for Japanese companies but often perceived by foreign companies as slow and indecisive. Knowing and understanding those characteristics before planning an acquisition reduces the risks of miscommunications in reaching an agreement and post-merger integration failure.

Traditional Japanese companies

Legal procedures

During the due diligence process, buyers of small and medium well-established family-owned businesses in Japan often find legal issues. A common issue is identified when companies issue physical share certificates. When the shares of those companies have been inherited or transferred in the past from the original or subsequent shareholders, physical share certificates might not have been physically transferred or might have been lost. If share inheritances or transfers happened multiple times in the past and the register of shareholders was not properly maintained and updated, it may be difficult to identify current shareholders legitimately. The absence of stock purchase agreements is also a commonly identified issue during legal due diligence.

Employment system

The lifetime employment system, which guarantees employees job security until retirement, has long been workplace tradition and a fundamental part of Japan’s working environment since the economic expansion periods. It was the driver of the post-war economic growth when mass productions of reasonable high-quality goods were the market needs. Under this system, a pay raise was based on the length of services or seniority rather than merit. These traditional workplace practices are still seen at traditional companies but a gradual shift to more flexible employment and a focus on job mobility has changed hiring practices.

Start-up companies

Start-up environment

Compared to the U.S., Europe, and Southeast Asia, most start-up companies in Japan are domestic-oriented due to language barriers, and the products or services provided by them are not tailored to fit the needs of foreign customers to expand globally. This is illustrated by the number of unicorn companies, only a few Japanese companies are on the list. For Japanese startups, the key to propel rapid growth and amplify business value will be to enhance the international market competitiveness, which should bring more risk capital into the Japanese start-up market.

Compliance with labor law

There are various types of labor laws that companies need to comply with. Examples of those are Labor Standards Act, Industrial Safety and Health Act, Minimum Wage Act, Labor Contracts Act, Equal Employment Opportunity Act, Child Care and Family Care Leave Act.Due to the labor force shortage often seen at startups and rapidly growing businesses in nature, labor management may not be a priority for management, and compliance to various labor laws may be neglected. One of the issues in labor management startups often face is overtime. Under the labor law in Japan, overtime working hours incurred over each employees’ regular working hours must be compensated by companies. Some companies choose to enter into an employment contract which includes fixed overtime allowances as part of salary on top of base salary. Stimulating fixed overtime allowances in a contract does not mean that companies are discharged of the obligations to keep track of work hours and compensating for overtime hours in excess of the fixed overtime hours stipulated in the employment contract; companies are still required to pay salaries for such overtime hours.

The current COVID-19 situation has forced Japan’s society and the change-resistant culture to change drastically; WFH practice widely accepted by corporations and employees, the virtual shift to web conferences and online classes, the abolishment of traditional hanko seals and the move to digital signatures, etc.

After having seen the failures of the central government to respond to the crisis promptly, many people now desire a strong and bold leader that can act quickly and make appropriate and timely decisions. So too in the business world.