An interview withTokyo International Law Office discussing M&A in Japan

This article is an extract from GTDT Market Intelligence M&A 2022. Click here for the full guide.


Mikiharu Mori is the managing partner and founding partner of Tokyo International Law Office (TKI). He focuses on inbound and outbound cross-border M&A transactions and disputes, as well as general corporate across a range of sectors. Mikiharu was selected as a leading lawyer and notable practitioner by the IFLR1000. He was recently a finalist in the ALB Japan Awards 2020 as Dealmaker of the Year and as Managing Partner of the Year in 2021. Mikiharu is qualified in Japan and New York, and speaks Japanese and English. He is also registered as a Japan Commercial Arbitration Association (JCAA) panel arbitrator.

Kotaro Okada is one of the founding members of TKI. He focuses on inbound and outbound cross-border M&A transactions, joint ventures, data compliance and general corporate across a range of sectors. Kotaro is qualified in Japan and New York, and speaks Japanese and English. He is also registered as a JCAA panel arbitrator. He was recently a finalist in the ALB Japan Awards 2021 as Young Lawyer of the Year.

Tomo Greer is an associate with a focus on inbound and outbound cross-border M&A transactions across various industries. She has taken key roles in various complex multijurisdictional deals, including on a deal nominated as M&A Deal of the Year in the ALB Japan Awards 2021. She is qualified as a barrister and solicitor in New Zealand.


1 What trends are you seeing in overall activity levels for mergers and acquisitions in your jurisdiction during the past year or so?

The Japanese M&A market has been volatile since covid-19. Though activity levels are resuming, the make-up of the market (ie, the ratio of inbound to outbound deals, as well as the industries and sectors dominating the market) has significantly shifted.

Prior to covid-19, the Japanese M&A market had been on a record-breaking streak. In 2019, Japanese companies completed 4,000 deals. Cross-border deals held a notable portion, with a quarter of the closed deals being cross-border. By value, however, cross-border deals made up around 67 per cent of the total value of M&A deals in 2019.

Unsurprisingly, we saw a slight decline in deal activity in 2020. From the second half of 2020, domestic deals bounced back quicker than cross-border deals. The uneven recovery was likely attributed to Japan Inc’s unique way of business in valuing physical presence and personal relationships. And with borders closed throughout 2020, international dealmaking was largely limited to those that had already been in the pipeline prior to the pandemic. Combined with the inability to travel abroad to conduct negotiations and site-visits with foreign targets and investors, cross-border deals in 2020 decreased by around 40 per cent from the previous year.

Despite new variants causing on-and-off restrictions on businesses domestically, and despite border restrictions remaining, 2021 was another record-breaking year for the Japanese M&A market. Japanese companies closed a total of 4,280 deals worth just over $100 billion. However, 80 per cent of the M&A deals were domestic, and the share of cross-border deals decreased to a mere 20 per cent. Regarding the share of cross-border deals, inbound deals and outbound deals have switched places, with the majority of cross-border deals now being inbound deals by foreign investors into Japan. Though a few megadeals spiked the by-value measure, outbound deals by Japanese companies remain the only activity yet to resume to pre-pandemic levels.

A plateau on the number of outbound deals continued in the first half of 2022. Though border restrictions on business travel have been eased, the issue has been exacerbated by a weaker yen and an eery feeling of concern about an oncoming recession. This has likely put Japanese companies in cash-saving mode, causing a temporary halt in the growth of outbound deals. The pessimistic outlook is that this trend will continue into the second half of 2022 and beyond. In the current economic climate, the companies that can afford the risk of expanding abroad are limited to large conglomerates with cash reserves. However, Japan Inc cannot afford to ignore investment opportunities abroad for much longer. A shrinking population causing reductions in domestic demand and labour shortages means tapping into foreign markets remains crucial for Japan’s economic prosperity. We will likely see outbound deals resume out of necessity, even with a weaker yen.

2 Which sectors have been particularly active or stagnant? What are the underlying reasons for these activity levels? What size are typical transactions?

Japan has long been known as an industrial powerhouse boasting world-class advanced manufacturing and R&D, its economic pillars being automotive, consumer electronics, semiconductors and other heavy industries. In recent years, we have seen Japanese companies in the hardware and machinery sectors expanding into software and technology. In line with the market trend, M&A deals in the IT, technology and digital services sector continued to grow in size and number throughout 2021 and for the first half of 2022. Around 60 per cent of deals in 2021 were conducted by sellers in the non-manufacturing sector.

Take the examples of Hitachi’s acquisition of software engineering company GlobalLogic and Panasonic’s acquisition of supply chain software company Blue Yonder. The two deals – valued at $9.5 billion and $7.1 billion, respectively – were in the top five biggest deals in Japan for 2021, and symbolise a new era of digitalisation and strategic expansion for the two companies that have traditionally been associated with consumer electronics and industrials. Notably, Hitachi simultaneously divested its metal unit Hitachi Metals to Bain Capital for $7.5 billion – also one of the biggest deals for 2021.

Despite this trend, activity in the industrial sector still dominates the M&A market in Japan. Between January and June 2022, the industrial sector accounted for 33.6 per cent of the total M&A deal activity by value, closely followed by the technology sector at 28.5 per cent.

While megadeals such as these make headlines, the M&A deal sizes vary. We are seeing many small-to-medium sized deals as a result of the pernicious succession issues faced by Japan Inc. (Japan’s succession crisis is detailed in question 6.)

3 What were the recent keynote deals? What made them so significant?

The above-mentioned acquisitions of foreign software companies by Hitachi and Panasonic, and Hitachi’s simultaneous divestment of Hitachi Metals to Bain, were significant – not only because of their size, but the motivations behind the deals epitomise the issues and challenges Japan Inc faces as a whole. This being the need to fast-track digitalisation, urgently expand into foreign markets, strategically find new avenues for business, and restructure and carve-out non-core (or sometimes core) assets.

Another big deal by value in 2021 was MUFG Union Bank, Mitsubishi UFJ Financial Group’s group company, which was carved-out and sold to US Bancorp (USB). The cash and stock deal also saw Mitsubishi UFJ Financial acquiring a 2.9 per cent stake in USB in return, the fifth largest bank in the US. Mitsubishi UFJ Financial Group’s strategy in expanding its business overseas is necessitated by Japan’s shrinking population and notoriously low interest rates.

In 2022, the largest M&A deal by a Japanese company to date is Sony’s strategic ¥414 billion acquisition of Bungie through its US subsidiary, Sony Interactive Entertainment. Sony is the owner of PlayStation, and Bungie is famous for its video games Halo and Destiny. A decade ago, the gaming market was centred around the companies’ hardware, including gaming devices such as PlayStation and Xbox. In recent years, software has become the core of business models, as demand for playing games on personal devices has increased. This deal not only illustrates the above-mentioned trend of Japanese companies putting more emphasis on software, but shows Sony’s strategy to expand into the ‘metaverse’ and its commitment to remain competitive in the global gaming market.

4 In your experience, what consideration do shareholders in a target tend to prefer? Are mergers and acquisitions in your jurisdiction primarily cash or share transactions? Are shareholders generally willing to accept shares issued by a foreign acquirer?

While cash deals are more common, cash and share transactions also occur. This may be because of the culture of Japanese companies to hoard cash. Recent corporate governance reforms have encouraged Japanese companies to better utilise their idle cash stockpiles for M&As to maximise shareholder returns.

In 2021, the Companies Act was amended so that stock consideration can be used through the share delivery mechanism. This method allows the acquirer to acquire all or part of a target company’s shares by delivering the acquirer’s shares to the other company’s shareholders. This share delivery mechanism is limited to acquisitions between Japanese companies. The amendment’s impact on M&A practice is yet to be seen.

5 How has the legal and regulatory landscape for mergers and acquisitions changed during the past few years in your jurisdiction?

The two most crucial considerations and potential regulatory roadblocks for cross-border M&As in Japan are the Foreign Exchange and Foreign Trade Act (the Forex Act) and the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade Act (the Antimonopoly Act). The former requires foreign direct investment (FDI) in certain industries and circumstances to make a prior or post-facto notification to the government. Until recently, the Forex Act rarely presented an obstacle to most transacting parties, and its main effect was as a procedural nuisance. While the government has the power to suspend, modify and rescind FDI, since it implemented prior notification requirements, as far as is known, the government has blocked only one FDI. However, covid-19 accelerated protectionist attitudes towards FDI, and like many other jurisdictions, the landscape is shifting to increase scrutiny and restrictions placed on FDI.

In 2020, the Japanese government added the medicine and medical equipment sectors to the list of protected businesses under the Forex Act. Additionally, FDI now includes investments not only through share acquisition or subscription to new shares in Japanese companies, but also those through other activities of foreign shareholders, including exercising their vote at shareholder meetings; appointing or removing a director; and making proposals that have a material impact on the management of the company. The definition of FDI that captures shareholder actions in appointing directors or suggesting agenda items at shareholder meetings could negatively impact and discourage FDI, especially for activist funds considering Japan.

The 2020 amendments also introduced new exemptions for investors who meet certain requirements. One criterion for exemption includes cases where a foreign shareholder will not access non-public technical and sensitive information regarding the target company’s business.

Taking advantage of this exemption to the Forex Act, Chinese tech giant Tencent Holdings acquired 3.65 per cent of Rakuten Group Inc in March 2021. Prior to closing, Rakuten believed that no prior filing would be required under the Forex Act. However, a few days before closing the transaction, Rakuten announced that closing may be delayed because of procedures required under the Forex Act. No prior filing was required in the end, and the fact that such a politically sensitive transaction was able to close without needing to submit a prior notification or being outright blocked shows the potential loopholes in the Forex Act. It highlights differences between the rigid foreign investment control regulations of other jurisdictions such as CFIUS in the US. There is a stark contrast between that of the Japanese government in this instance, and the CFIUS handling of Tencent and ByteDance.

Nevertheless, the frenzy caused by Rakuten’s sudden announcement served as a cautionary tale to many companies that may have previously been under the impression that the Forex Act rarely serves as a roadblock. As a result, we are seeing more companies initiating pre-consultations with the Bank of Japan to prevent surprises down the road. We advise foreign investors to carefully structure their investment and engage experienced Japanese consultants when investing in Japanese listed or private companies.

6 Describe recent developments in the commercial landscape. Are buyers from outside your jurisdiction common?

The current commercial landscape and deal activity in Japan are shaped by many factors, but three phenomena, which reinforce one another, are especially notable: corporate governance reforms putting pressure on Japanese conglomerates to review their portfolios and carve-out businesses; a succession crisis causing a boom in succession M&A for small-to-medium sized businesses (SMEs); and the warming of Japan Inc to foreign investors, especially private equity (PE) buyers.

The succession issue is driven by the combination of a shrinking population (in 2022, the rate of decrease was 0.51 per cent; the 11th consecutive year of population decrease) and an educated younger generation flocking to Tokyo rather than taking over family businesses. This has resulted in many elderly businesses owners having no successor. This is no small issue as the average age of a CEO in Japan is 60, and the over-60s make up the largest group of business owners in Japan. Government data shows more than 40,000 SMEs are looking for a successor, which indicates the succession M&A boom will continue to encourage foreign investments, especially by PE, into Japan.

The availability of high-yielding business assets as a result of large conglomerate restructuring and elderly business owners looking to PE have resulted in a warming of Japan Inc to foreign PE buyers and a rapid increase in the number of foreign PE buyers entering the Japanese market. Attitudes towards foreign PE were previously chilly, which is unsurprising for Japanese companies that for centuries have run business based on passive institutional investors, and favour consensus over radical change. But the dynamism, digitalisation expertise and global network that PE can grant access to Japanese companies have never been more attractive to Japanese companies looking to sell or restructure their operations.

Against this backdrop, 2021 saw the value of foreign PE transactions increase 2.7 times over the previous year, with 165 cases totalling ¥2.1 trillion. While the number of foreign PE investments accounted for 38.7 per cent of all PE deals in Japan for 2021, by value it accounted for 80 per cent of the total PE deals in Japan. As regards carve-out deals, the first half of 2022 saw 12 such deals; six buyers were Japanese companies and six were foreign. In a similar fashion to the trend for PE buyers, foreign-buyer transactions accounted for 99 per cent of all carve-out deals in terms of value. These figures highlight a truth: foreign buyers are crucial to the livelihood – and are the driving force – of the biggest trends in the Japanese M&A market.

7 Are shareholder activists part of the corporate scene? How have they influenced M&A?

The corporate environment in Japan has been slow to adapt to shareholder activism. The traditional view that companies are run for all stakeholders and not just shareholders, and the large number of cross-shareholdings among Japanese conglomerates are some of the causes. Business decisions have often been consensus-driven, with little deviation from a group approach.

Since former Prime Minister Shinzo Abe’s reforms of the Corporate Governance and Stewardship Codes in 2014 and 2015 respectively, there has been a slow but steady decline in cross-shareholdings among public companies. This has brought a decrease in entrenched and management-friendly shareholders. Indeed, with this changing of the guard, shareholders are increasingly engaging with their investee companies through dialogue with management or proxy voting. Japan has seen an increase in shareholder proposals at general meetings. Activist shareholders have made demands on a myriad of matters including transparency, share buybacks, increased dividends and the removal of directors. Attitudes towards shareholders are changing and an awareness is growing the need for management to engage in constructive dialogue with shareholders.

The numbers show shifting attitudes. In 2013, prior to the corporate governance reforms, there were only 14 activist demands made to Japanese companies. As of June 2022, there have been 36 demands.

Especially notable throughout 2020 and 2021 were the events concerning Toshiba. Effissimo Capital Management, Toshiba’s largest shareholder with a stake of approximately 10 per cent, requested that the company conduct an independent investigation into alleged voting irregularities at the company’s 2020 annual general meeting. The investigation revealed that Toshiba had colluded with officials from the Ministry of Trade to pressure foreign investors to support company management in a key vote. Such tactics involved using the recently amended Forex Act (described in question 5) to restrict foreign investment. Even before the report was published, Toshiba’s chief executive resigned. In the past, it would have been unthinkable for a foreign fund to embed itself so deeply in matters concerning the company’s management: especially one that was highly political.

Another interesting development accompanying the recent trend of environmental, social and governance (ESG) evolving from being a mere afterthought for Japanese companies to something that deserves serious consideration is the increased activist demands related to climate change. In 2021, there were only four activist demands that called for climate-change related action; from January to June 2022, there have been 10 climate-related demands made. We see this trend continuing as Japanese companies are pressured by the government, their shareholders and other stakeholders to explain their climate strategy and make concrete plans for sustainable growth. This could result in heavy emitters divesting subsidiaries that would prevent them from reaching their carbon-neutral goals, thus an increase in M&A deals borne of ESG goals. The increase in climate-related demands is also telling of activist shareholders being driven by increasing corporate value in the long term, rather than being incentivised to cut costs and increase shareholder returns in the short term.

8 Take us through the typical stages of a transaction in your jurisdiction.

The process is not markedly different from that in other economies. Initial contact may be made by the company itself (through networks of friendly C-suite members) or through an intermediary such as an investment bank. The first step would be to sign a non-disclosure agreement and move to preliminary information disclosure (eg, disclosure of the past two to three years of financial records). Preliminary valuations are then conducted, a letter of intent is signed and the parties move to due diligence.

The scope and level of due diligence conducted is not dissimilar to that of other jurisdictions and depends entirely on the buyer’s risk appetite, the nature of the target and the transaction size. Documents are commonly uploaded in a VDR. Legal advisers prepare interim and final due diligence reports and conduct interviews and Q&A sessions with the target company’s management and employees. Prior to covid-19, due diligence documents were usually paper-based and interviews were conducted in person; however, covid-19 accelerated the trend of digitalising the entire due diligence process, and with the exception of site visits, most of the process is now conducted online.

At some point between commencing negotiations and conducting due diligence, it is crucial for transacting parties to consider whether they would be required to make prior notifications to the Bank of Japan under the Forex Act or the Japan Fair Trade Commission (JFTC) under the Antimonopoly Act.

In the case of the former, if a prior notification is required and submitted, the investor must wait 30 days to close the investment after the Bank of Japan’s acceptance of the application. In practice, however, the waiting period is normally shortened to two weeks from the acceptance in accordance with the relevant ordinance.

Similarly, if a prior notification is required under the Antimonopoly Act, there is a 30-day waiting period from the time the notification is accepted by the JFTC. This may, at the Commission’s discretion, be shortened if in the application it is clear that the transaction would not raise any competition concerns.

9 Are there any legal or commercial changes anticipated in the near future that will materially affect practice or activity in your jurisdiction?

While mandatory human rights due diligence regimes exist in many jurisdictions, most notably the EU, Japan has not implemented a similar regime.

However, following the military coup in Myanmar and Kirin’s widely publicised exit from its joint venture with Myanmar Economic Holdings, which is overseen by Myanmar’s military commander-in-chief, Japan Inc was painfully reminded of the importance of conducting human rights due diligence. While many companies voluntarily conduct human rights due diligence, it is still a far from common practice when conducting M&As in Japan.

In August 2022, the Ministry of Economy, Trade and Industry (METI) finally established its guidelines for corporations to conduct human rights due diligence. Its guidelines only call for Japanese companies to voluntarily conduct human rights due diligence and ensure there are no human rights violations in supply chains. In practice, Japanese companies tend to comply with calls for voluntary compliance, and we will likely see human rights due diligence becoming common practice. METI has also indicated that a mandatory regime could be implemented in the future.

10 What does the future hold? What activity levels do you expect for the next year? Which sectors will be the most active? Do you foresee any particular geopolitical or macroeconomic developments that will affect deal sizes and activity?

We expect that the overall levels of activity will continue to rise for the rest of 2022 and 2023. However, as noted in question 1, a weaker yen and concerns of a recession will likely inhibit the growth of outbound M&A deals in the near future. Conversely for inbound deals, the weak yen, reliably low-interest rates and the fact that Japan Inc is warming to foreign PE investors will continue to encourage foreign investors into Japan.

We will likely see more M&A activity by heavy carbon emitters, energy companies and environmental innovators alike, as the pressure on Japan Inc to quickly decarbonise has been made more urgent by the government’s goal to be carbon-neutral by 2050. In 2021, we saw ENEOS Holding, a Japanese petroleum and metals conglomerate and the largest oil wholesaler in Japan, acquire Japan Renewable Energy Corporation for ¥200 billion. It simultaneously sold shares in its listed subsidiary NIPPO, the biggest roadbuilder in Japan, with the aim of taking it private to focus on carbon-reducing its business. Mitsubishi Heavy Industries, a company historically focused on the oil and gas industry, has strategically acquired several US venture companies as part of its ambitious efforts to become greener.

Other large emitters will likely follow suit by acquiring subsidiaries that will help their decarbonisation strategy and carving out subsidiaries with a high carbon footprint. Mitsubishi Chemicals, a company whose business ranges from petrochemicals to industrial gases, appointed its first non-Japanese CEO in 2021, who stated that “there will be no sacred cows” when it comes to carving out its subsidiaries that cannot meet its sustainability goals.

Large conglomerates will also continue to review their portfolios and, combined with increased shareholder activism, pressures will increase. This will invite foreign and domestic acquirers alike to take over high-yielding assets, resulting in increased carve-out activity.


The Inside Track

What factors make mergers and acquisitions practice in your jurisdiction unique?

Compared with other Asian jurisdictions, especially those in developing ones, Japan is very much open for investment – in theory. Yet cultural and language obstacles remain, making negotiations between Japanese and foreign companies difficult. Strict corporate approval procedures, such as rigidly scheduled board meetings, can become time-consuming. Understanding the business protocols of Japanese companies is important.

What three things should a client consider when choosing counsel for a complex transaction in your jurisdiction?

Clients should not go for the traditional passive, extremely legal detail-focused lawyers. For cross-border deals, they should look to lawyers who are global and experienced in cross-border deals, and with an acute understanding of business, not just legal issues.

What is the most interesting or unusual matter you have recently worked on, and why?

In line with the trend of the increased presence of activist shareholders in Japan, Tokyo International Law Office acted as counsel to Daiho, an engineering and construction company, in its capital and business alliance with Aso Cement. Aso Cement was the ‘white knight’ in response to prominent activist Yoshiaki Murakami’s (famous founder of the Murakami Fund) gradual efforts to take majority control of Daiho. Our managing partner Mikiharu served as chairman of the special committee established to consider appropriate anti-takeover measures and the future direction of the company. Daiho dodged Murakami’s offers and became a subsidiary of Aso Cement.

Murakami is the most prominent and active activist shareholder in Japan, who is well-known for his mission to make activist demands and attempts to takeover companies in inefficient industries that are saturated with players. The Japanese construction industry is one of those industries. Daiho’s capital alliance with Aso was significant because there had not been any M&A in the construction industry in recent years. Interestingly, the deal will bring operational efficiencies, addressing some of Murakami’s original concerns.

We foresee that as activist shareholders and hostile takeovers become more prominent in Japan, there will be more Japanese companies engaging legal counsel on anti-takeover measures.

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