CONTENTS
- 1. Mergers and Acquisitions (M&A) | Explanation of the Basic Concept
- 2. Mergers and Acquisitions | The Concept and Need for Acquisitions
- - Corporate Acquisition Process
- - Due Diligence Checklist
- 3. Mergers and Acquisitions | Concept and Necessity of Corporate Mergers
- - Corporate Merger Process
- 4. Mergers and Acquisitions | The Difference Between a Corporate Acquisition and a Merger
- - Comparison of the Advantages and Disadvantages of a Corporate Acquisition and a Corporate Merger
- - Selection Strategy by Corporate Situation
- 5. Mergers and Acquisitions | Key M&A Legal and Practical Issues That Companies May Be Curious About
1. Mergers and Acquisitions (M&A) | Explanation of the Basic Concept
A merger and acquisition (M&A) refers to a series of legal actions in which one company acquires the shares or assets of another company, or two companies combine into one to integrate the corporations.
This goes beyond simply expanding the size of a company and is used as a key strategic means of securing management control, entering new businesses, expanding market dominance, and acquiring talent and technology.
In this way, it becomes an important means of supplementing what is lacking and maximizing future growth potential.
It also provides an opportunity to gain a competitive advantage in the market through rapid entry into new business areas.
For mergers and acquisitions, advance preparation and management of the process are most important, and in particular, in the course of acquiring another company or absorbing part of one, a thorough understanding and command of the relevant statutes is required.
The company should establish a foundation that can prevent legal risks and disputes in advance and respond promptly to legal issues that may arise.
2. Mergers and Acquisitions | The Concept and Need for Acquisitions
An acquisition means that one company secures the management control or a certain stake of another company and effectively governs that company.
Acquisition methods include share acquisition and asset acquisition; in the case of a share acquisition, the existing corporation is maintained as is, while an asset acquisition allows for the selective succession of assets and liabilities.
An acquisition is carried out for purposes such as entering new business areas, securing talent and technology, keeping competitors in check, and improving the acquiring company's performance and increasing its asset value, and it is also used in particular as a means of improving a company's governance structure or for restructuring.
Since the acquisition process involves numerous legal procedures such as a shareholders' meeting resolution, disclosure, conclusion of an acquisition agreement, and due diligence, advance review plays a critical role.
Corporate Acquisition Process
The corporate acquisition process generally proceeds in the following order: preliminary review, due diligence, execution of the main agreement, and transfer of rights.
In the preliminary review stage, the target company's financial structure, management environment, and litigation risks are examined, and the intent to sell and the acquisition terms are discussed.
In the due diligence process, a comprehensive review is conducted across accounting, tax, legal, human resources, intellectual property, and fair trade risks. A review of risks relating to undisclosed liabilities, litigation disputes, and breach of contract is particularly important.
In the main agreement, the acquisition price, transaction terms, representations and warranties, penalty clauses, and conditions precedent are discussed and specified.
Finally, the acquisition process is concluded through payment of the balance and the transfer of rights.
Due Diligence Checklist
When conducting due diligence, which is one part of the corporate acquisition process, a careful review across all areas, including legal risk, finance, tax, human resources, business rights, and major contracts, is required, and it is advisable to prepare a comprehensive checklist for this purpose.
Below, the due diligence checklist is organized by item.
▶Legal
Documents related to the appointment and dismissal of the representative director, officers, and auditor
Corporate establishment/permits, business licenses, and various other permits and registration certificates
Whether there is litigation, an administrative disposition, or a Fair Trade Commission investigation
Major contracts (supply contracts, service contracts, lease contracts, license contracts)
Status of security interests (mortgages to secure maximum amount, pledges, provisional attachments, provisional injunctions)
Intellectual property rights (patent, trademark, copyright, and design right registration certificates)
Whether personal information protection laws are complied with (personal information processing policy, consent forms)
▶Finance
Liabilities, loans, provisional payments, and details of security interests
Asset status (real estate, tangible assets, investment assets, inventory assets)
Transaction records with major financial institutions and loan agreements
Status of accounts receivable, accounts payable, and overdue receivables and payables
Goodwill and intangible asset valuation data
Transaction records with affiliates and specially related persons
▶Tax
Tax investigation history and collected tax amounts
Additional tax, overdue tax amounts, and details of tax under provisional attachment
Tax risks related to provisional payments and assets unrelated to business
Whether transfer pricing and international tax issues exist
Details of applied tax credits and tax reductions
▶Human Resources and Labor
Whether there are unpaid wages or unpaid severance pay
Status of working hours, holidays, and annual leave management
Collective agreements, union activities, and whether an employee representative has been appointed
Status of enrollment in the four major insurances and whether there are arrears
Details of incentives and stock options paid to key personnel
Key officer contracts and whether there are dismissal and non-competition clauses
3. Mergers and Acquisitions | Concept and Necessity of Corporate Mergers
A corporate merger occurs when two or more legal entities combine into a single entity. It includes consolidation (in which all existing companies are dissolved and a newly established entity is created) and absorption (a surviving company combined with a dissolving company).
Mergers are actively used for purposes such as expanding business areas, avoiding duplicate investment, improving management efficiency, acquiring competitors, and obtaining tax benefits.
They are frequently employed as a strategic means for internal restructuring, strengthening management control over subsidiaries, and increasing market share. A merger is accompanied by a special resolution of the general meeting of shareholders, creditor protection procedures, preparation of a merger agreement, and reporting procedures under the Commercial Act and the Monopoly Regulation and Fair Trade Act.
Corporate Merger Process
A corporate merger follows the legal procedures below.
1. Basic merger consultation and decision-making: Resolution of the board of directors and consultation between both companies
2. Execution of the merger agreement : Specifying the purpose of the merger, terms, plan for issuance of new shares, merger date, and similar matters
3. Special resolution of the general meeting of shareholders: Approval by at least two-thirds of the total number of issued shares is required at the general meeting of shareholders
4. Creditor protection procedures : Receipt of objections for one month after public notice
5. Business combination report: Reporting and review when certain sales or asset thresholds are exceeded
6. Merger registration and corporate integration: Absorption into the surviving company or establishment of a newly created entity
4. Mergers and Acquisitions | The Difference Between a Corporate Acquisition and a Merger
Both corporate acquisitions and mergers involve a change in the external corporate governance structure, but their legal form and effects differ.
Corporate acquisition: The legal status of the existing entity is maintained, and the acquirer gains management control by purchasing shares or assets.
Corporate merger: One company is dissolved, or both companies are dissolved and a newly created company is established, integrating the corporate personalities.
The legal differences include the requirements for resolution of the general meeting of shareholders, creditor protection procedures, business combination reporting, the method of tax treatment, and whether the liabilities and litigation of the acquired company are assumed. In practice, the flexibility of an acquisition and the procedural transparency of a merger are each assessed as having their own advantages and disadvantages.
Comparison of the Advantages and Disadvantages of a Corporate Acquisition and a Corporate Merger
| Category | Corporate Acquisition | Corporate Merger |
|---|---|---|
| Concept | The existing company is kept in place, and the acquirer purchases the company's shares to secure controlling rights | Two or more companies are combined into one, integrating the corporate personalities |
| Advantages | The procedure can be relatively quick and simplified The acquired entity's independence is maintained, allowing the existing business base to be used The scope of acquisition (shares/assets) can be adjusted, allowing a flexible acquisition structure to be designed It can be used for management control strategies such as a hostile M&A | Integration of corporate personalities secures management efficiency and stability of management control Liabilities and litigation are also collectively succeeded through the merger, making legal organization easier Unifying the corporate personality simplifies tax, accounting, and governance An effect of improving the trust of partners and financial institutions |
| Disadvantages | Where the acquired entity's existing liabilities and legal disputes are not assumed, residual risk may remain Whether major business partners and employees consent is a variable | Complex procedures such as a special resolution of the general meeting of shareholders and creditor protection procedures are required Calculation of the merger ratio and exercise of appraisal rights may create a cost burden Concern over the loss of the merged entity's brand value and organizational culture |
Selection Strategy by Corporate Situation
A company that wishes to purchase only assets and minimize legal liability may consider a corporate acquisition, which makes it possible to secure only the necessary business assets without succeeding to liabilities, litigation, or contractual relationships.
In addition, a company that intends to stabilize management control over the long term and integrate the entity may consider a corporate merger, which can extinguish the corporate personality of the merged entity and secure operational efficiency.
5. Mergers and Acquisitions | Key M&A Legal and Practical Issues That Companies May Be Curious About
The following summarizes the main M&A legal and practical issues that companies may be curious about.
Whether existing employees, employment contracts, and collective agreements are succeeded after a merger or acquisition
When a company acquires or absorbs an acquired company, the existing employees' employment contracts are automatically succeeded, and existing collective agreements also remain in effect.
In particular, the working conditions, welfare benefits, and dismissal procedure provisions under the collective agreement apply to the merged entity as they are, so they may conflict with the acquiring company's wage structure or personnel policy. Prior due diligence is therefore essential.
Key clauses that must be included in a merger or acquisition agreement
An M&A agreement should specify not only the basic acquisition terms but also representations and warranties, penalties, conditions precedent, confidentiality, non-competition, succession of litigation and liabilities, transfer of intellectual property, and even the post-merger integration (PMI) plan.
Omitting these may expose the parties to risks such as unexpected litigation, management control disputes, tax collection, and leakage of trade secrets later on.
Matters that must be checked in due diligence
Rather than reviewing only the financial statements, one should carefully verify undisclosed liabilities, the status of litigation and disputes, registration of intellectual property rights and infringement disputes, risks of violating the Monopoly Regulation and Fair Trade Act, violations of the Fair Transactions in Subcontracting Act, the status of permits and licenses, contracts with major business partners, and employment contracts.
In the case of a business transfer in particular, whether permits and licenses can be transferred must also be verified.
Strategies for defending management control after a merger or acquisition
The acquired company's existing management, minority shareholders, or hostile investors may attempt shareholder rights disputes or acts that interfere with management control.
To prepare for this, defensive strategies should be established, such as issuing new shares, issuing non-voting shares, securing friendly shareholdings, and setting requirements for a special resolution of the general meeting of shareholders.
Tax risks that may arise after a merger or acquisition
In the case of the merged entity, issues may arise regarding the limit on the carryforward deduction of the merged entity's losses, asset revaluation tax, capital gains tax, acquisition tax, and gift tax.
In particular, in the case of an asset purchase acquisition, the acquisition tax burden, whether merger gains are taxable, and even value-added tax issues on subsequent transactions must be closely reviewed.
Business combination reporting requirements under the Monopoly Regulation and Fair Trade Act and the risk of violation
Under the Monopoly Regulation and Fair Trade Act, a merger or acquisition above a certain scale is subject to a business combination reporting obligation, and a violation may result in a penalty surcharge and a merger prohibition order.
Whether the transaction is subject to reporting, the possibility of a simplified review, and whether prior consultation is necessary must be verified.
The rights relationship concerning the acquired company's technology and intellectual property after a merger or acquisition
Before the acquisition, one must verify the registration status, ownership attribution, and absence of rights infringement disputes for intellectual property such as patents, trademarks, designs, copyrights, and trade secrets.
In particular, whether nondisclosure agreements (NDAs) entered into with partners and employees and the intellectual property attribution clauses in employment contracts exist is also a key item to check.
The possibility of maintaining business partners and contractual relationships after a merger or acquisition
If major business partners refuse to do business or change the terms after a merger or acquisition, risks of suspended contract performance or claims for damages may arise.
The clauses in contracts with major business partners regarding assignment and whether the contract is maintained upon a merger must be reviewed and discussed in advance.
