Concerning the “Triangular Merger” Legislation
April 10 (Tuesday) 2007
The issue of "triangular mergers" has surfaced as a part of the new corporate law. Based on the expectations that related tax systems will be developed in the coming month of May, the likelihood that "triangular merger" legislation will be established is becoming high. "Triangular mergers" refer to the legally recognized method, which was established based on the regulations of Japan's corporate law, of foreign enterprises using subsidiaries when acquiring Japanese enterprises. It is called a "triangular merger" because it involves the foreign enterprises which are acquiring, the subsidiaries which act as the direct acquiring agent, and the Japanese enterprises which are being acquired. Under this legislation, it would become possible for foreign enterprises to acquire Japanese enterprises by rewriting the name of the stock even without the use of direct cash. It is has significant meaning in that it will promote foreign enterprise investment into Japan.
There is an extensive background to this issue. As the Japanese economy ages and matures it is becoming increasingly necessary to have constructive stimulation from overseas in order to maintain vitality. As Japanese society ages the household savings rate continues to drop which leads to a trend of insufficient capital. High quality and long-term investment capital from overseas is necessary to rectify this situation. This does not refer to short-term speculative investment, but rather long-term direct investment that in many cases takes the form of investment in to business activity from foreign enterprises with an interest in the Japanese market. Japan is an industrial state with a high density of industry buildup, and as such this kind of investment is often in the form of merger and acquisitions (M&A) of existing Japanese enterprises. This is not only a capital investment, but also the infusion of new technology and business techniques and human resources, and in this way helps to energize a maturing Japanese economy in various different forms.
The activities of Japanese enterprises have internationalized since the era of high economic growth, and these enterprises have pursued investment such as aggressive M&As around the world. These investment activities are only accelerating, but for these strategies to be accepted around the world the Japanese economy itself must also be opened up to outside investment. This opinion has been stressed for many years primarily in the industrial arena such as in the Federation of Economic Organizations (Keidanren), and about a decade ago the legal authorities roused themselves and endeavored to improve the legal system to make M&As from overseas smooth. This was the "triangular merger" legislation, and it was supposed to be instituted in May of last year when the new corporate law system was introduced. However, a succession of scandals in the capital market such as the Livedoor problem came to light, and the discussion over merger legislation was disrupted so that the decision regarding the "triangular merger" portion of the corporate law was put off for a year.
Within the process of the Japanese economy undergoing rapid structural change, in recent years M&As, in many different industries and regardless of company size, have been actively pursued among domestic Japanese enterprises. These movements have garnered general interest towards company restructuring, while at the same time have brought a heightened sense of fear and menace regarding acquisitions among management executives. With this as a backdrop, within the last couple of years the Federation of Economic Organizations (Keidanren) has suddenly adopted a cautious stance while legal authorities were also unable to ignore the situation, and the introduction of related legislation and enforcement regulations has been met with slight difficulty.
There has been strong objection to the "triangular merger" legislation from a portion of the business world, as well as objection to the installment of related tax systems that would support the "triangular merger" legislation. There have even been extreme assertions regarding this legislation, such as demands that special resolutions of stockholders be held in the enterprises to be acquired. These special resolutions would require a two-thirds approval of all of the stockholders, and in the case of hundreds of thousands of stockholders this demand is, as a matter of practice, impossible. As might be expected, these kinds of extreme demands have been withdrawn during the course of debate.
On the other hand, if the existing income tax law – which levies taxes when the stock name is changed to the acquiring enterprise – is not changed into a delay tax system – which would levy taxes when there is actual profit from moves such as the selling of stocks – then "triangular mergers" from stock name changes will not function. As this delayed tax system was being installed, a section of the Japanese business world that feared acquisitions set qualification requirements for foreign subsidiaries striving for M&As in Japan at such extreme levels that the M&A law was unable to function. In other words, the process of installing legal systems was not an easy one. However, these problems were overcome so that a degree of the acquisition law was made effective by the end of March, and with the expectation that necessary legal revisions will be made, the "triangular merger" legislation is predicted to be implemented on May 1.
The establishment of the "triangular merger" legislation will usher in significant institutional opportunities for foreign investment in Japan, and promises to contribute to the vitality of the Japanese economy. Asian powers such as China and India, as well as many other Asian countries such as South Korea and Singapore are promoting the adoption of business resources from high-caliber foreign enterprises as a basic strategy for long-term development. Upon reflection, it must be said that while Japan has enjoyed a degree of progress, it is greatly lagging behind in terms of these current global trends. I believe that it would behoove my fellow Japanese citizens to be aware of the importance of reforming our constitutional nature and acquiring a new vigor through actively adopting excellent business resources from overseas.