Business Acquisition in Japan: Key Legal Aspects

Published on October 31, 2025 and written by Cyril Jarnias

In Japan’s dynamic and ever-evolving economic landscape, business transfer represents a crucial step that can determine a company’s long-term viability and future success. Governed by rigorous regulations, the business succession process in Japan involves not only financial and strategic considerations but also a deep understanding of the specific legal aspects that frame these transactions.

From data protection laws to employee obligations, each stage of the transfer requires meticulous attention to ensure a smooth transition compliant with local legislation. This article aims to explore the essential legal details one must know to safely navigate this complex landscape, providing business leaders and decision-makers with the keys to successfully execute a transfer process within an appropriate legal framework.

Understanding the Legal Framework for Business Transfers in Japan

Key Laws and Regulations

• Companies Act: Defines the procedures and conditions for share transfers (Article 127) and business transfers (Article 467). Notably, a special resolution at the general shareholders’ meeting or approval by the board of directors may be required.
• Business Transfer Act: Covers individual regulations and licensing issues applicable to specific sectors.
• Tax Code: Establishes taxation rules, such as capital gains tax on transfers and corporate tax, depending on whether shares or business operations are transferred.

Key Procedures and Required Steps

In Case of Share Transfer

• Request approval according to the articles of incorporation.
• Approval by the board of directors or general shareholders’ meeting.
• Procedure for changing share ownership.
• Tax filing (20.315% for individuals, approximately 34% for corporations).

In Case of Business Transfer

• Clarify the scope of business activities to be sold and establish a list of assets and liabilities.
• Negotiations with the buyer and contract conclusion (business transfer agreement).
• Obtain approval through a special resolution at the general shareholders’ meeting.
• Procedures for transferring licenses and contracts.

For both cases, a confidentiality agreement, due diligence, and the formation of a final agreement are conducted.

Disclosure Obligations and Interaction with Regulatory Authorities

For listed companies, filing in securities reports, etc., is necessary. Additionally, for certain sectors, notification to supervisory authorities or obtaining licenses is mandatory. This aims to ensure transparency and protect stakeholders.

Unlisted Companies vs. Listed Companies

Unlisted companies may use a simple and quick process between the concerned parties, but for listed companies, complexity increases due to their size, and strict information disclosure obligations are often imposed. Attention must also be paid to fair value assessment.

Impact of International Treaties

Japan is a party to multilateral investment agreements (BITs) and offers foreign investors guarantees of treatment at a certain level. However, in areas important for national security, verification under the Foreign Exchange and Foreign Trade Act may be required.

Recent Trends

Recently, the Japanese government has promoted flexible corporate restructuring as a measure to support the growth of mergers and acquisitions (M&A), as well as the introduction of new schemes like the share offering system. Concurrently, corporate governance reforms have been emphasized to improve transparency. Furthermore, interpretations in new court rulings leading to an extension of the scope of non-compete obligations have drawn attention.

Essential Steps of Due Diligence in the Japanese Context

Due diligence is an important process when companies make investments or acquisitions, and it’s necessary to consider the legal and cultural aspects specific to Japan. Here is an explanation of the important steps of due diligence in the Japanese context, the specific differences compared to other jurisdictions, as well as the legal aspects related to business transactions unique to Japan.

Verification of Regulatory Obligations

In Japan, due diligence is not mandatory, requiring companies to act autonomously. Unlike other countries like those in Europe, there are no clear standards established by law. Therefore, it’s important for Japanese companies to base their approach on international standards like OECD guidelines while developing their own risk assessment methods. This process also requires an understanding of laws and regulations specific to the company or sector involved.

Verification of Intellectual Property Rights

Intellectual property (IP) protection is also an important element of due diligence. In Japan, there are strict laws concerning various intellectual creations such as patents and copyrights. Thus, in the case of a merger or acquisition, it’s necessary to properly verify the IP assets held by the target company and their valuation, to identify risks related to misuse or infringement in advance. Additionally, expert advice (lawyers or IP consultants) is required in this process.

Analysis of Employment Contracts and Union Relations

In Japan, the importance of relations with employment contracts and unions is also emphasized. Understanding the content of employment contracts and working conditions with employees, as well as assessing potential problems in advance (such as layoffs or wage arrears), is essential. Moreover, it’s necessary to consider the daily operational management style unique to Japan, such as collectivism, which includes feedback received from employees.

Assessment of Potential Litigation Risks

Regarding litigation risks, these have influence on both domestic and international markets in Japan. Therefore, it’s essential to learn from similar cases that have occurred in the past. For example, leading companies have adopted human rights due diligence methods as a measure against human rights problems arising from poor supply chain management. Through this type of information collection and analysis, it’s necessary to determine the degree of impact on one’s own operations and implement measures to avoid losses.

Understanding Corporate Culture and Communication Protocols

Finally, why is understanding Japan’s unique corporate culture and communication style important? In most cases, succeeding in the Japanese market requires building a relationship of trust (wa). With this in mind, the ability to plan a transparent communication strategy with clients and partners is highly valuable. It’s necessary to pay attention to an approach different from other countries—starting with ceremonial greetings and extending to punctuality. By learning from past examples conducted both in Japan and abroad (such as human rights measures implemented by Ajinomoto Co., Inc. or Kao Corporation), it’s possible to develop a highly practical and specific approach. It is the deepening and caution at each step that leads to the discovery of new business opportunities.

Drafting and Negotiating the Sales Agreement in Japan

Process of Creating Business Purchase and Sale Contracts in Japan and Points of Attention

Important Steps for Contract Drafting

1. Clarification of Transaction Content
   • Between the seller and buyer, specific agreements on the subject of the sale and transaction conditions (price, delivery timelines, payment terms, etc.) are established.
   • Discussions are recorded as notes and used during contract drafting.
2. Design of Contract Clauses
   • Necessary elements include:
     • Party information
     • Subject of the sale (product names and quantities)
     • Price and payment method
     • Timing of ownership transfer (usually “upon delivery” or “upon completion of payment”)
     • Quality warranty clauses such as liability for hidden defects
     • Provisions regarding damages or late payment penalties.
3. Legal Verification
   • Legal review by a lawyer or expert is recommended to eliminate any unfair content or legal defects.
   • It’s also important to verify the application of Japanese Commercial Code, Article 526, and Civil Code, Article 570 (liability for hidden defects).
4. Signature and Seal
   • Contract conclusion requires a signature or seal. Even for electronic contracts, a digital signature agreed upon by both parties is acceptable.

Stakeholders and Roles

• Lawyer: Prevents legal gaps and advises on setting favorable terms. Essential for large-scale transactions.
• Notary: Used in notary offices to enhance contract effectiveness through notarized deeds.
• Other Experts: Provide advice on specific requirements related to industry characteristics, such as handling transportation costs.

Negotiation and Cultural Impact

In Japan, a cooperative attitude is more valued than direct confrontation, tending towards harmonious negotiation aimed at mutual benefit, under the spirit of wa. Informal meals or receptions can also be a means to build trust relationships. However, care must be taken not to overuse this approach.

Contract Enforceability and Risk Management

1. Ensure Validity:
   • An agreement between parties expressing their will along with concrete and clear statements are necessary in the text.
2. Risk Management:
   • In case of non-performance, include risk mitigation measures such as late penalty claims or provisions on exercising termination rights.

Dispute Resolution Mechanism

1. Initial Response: May include clauses obligating resolution efforts through consultation between parties (example: “amicable resolution”).
2. Arbitration and Mediation: Use of out-of-court dispute resolution mechanisms. If speed is a priority, recourse to arbitration may be considered.
3. Litigation: Mention of competent courts. In many cases, the “Tokyo District Court” is designated.

Throughout this process, considering not only Japan-specific legal standards but also business practices leads to success.

Tax and Regulatory Considerations When Selling a Japanese Business

Key Tax Mechanisms in Japanese Business Transfers

When transferring a business, taxes vary depending on capital gains taxation and the form of transaction. Here are the main points.

1. In Case of Share Transfer

• For individual shareholders, an income tax of 15%, a special reconstruction income tax of 0.315%, and a resident tax of 5%, totaling 20.315%, apply and are taxed separately. These taxes are not added to other income but calculated separately.
• For corporate shareholders, capital gains on share sales are subject to corporate tax (with an effective rate of approximately 30 to 40%). In this case, it’s comprehensive taxation, added to other profits for calculation.

2. In Case of Business Transfer

• Companies are subject to corporate tax (effective rate of 30 to 40%), consumption tax, as well as various indirect costs such as stamp duties and registration related to real estate acquisition.
• Certain assets like land and securities are tax-exempt, but others are generally taxable.

3. Tax Verification Process

If the transaction price significantly deviates from market price, additional assessments or adjustment measures may be required. Moreover, a special adjustment measure for high incomes (implementation in 2025) has been introduced.

Local Regulations and Permit Requirements

In Japan, it may be necessary to obtain required approvals from authorities like the Financial Services Agency or the Ministry of Economy, Trade and Industry. For example, for large-scale mergers and acquisitions, approval procedures are required under competition laws and the Foreign Exchange and Foreign Trade Act. Additionally, additional licensing conditions may apply depending on the acquired company’s business sector. Therefore, particular attention must be paid to preliminary due diligence work.

Impact on Timeline and Structure

Multiple approval processes can lengthen the transaction duration. Moreover, it’s essential to mutually adjust international obligations by utilizing tax treaties (e.g., double taxation prevention clauses). On this point, the need for consultations with experts increases.

Requirement Comparison: Local Companies vs. Foreign Companies

Element	Local Companies	Foreign Companies
Income Reporting	Unified treatment possible in Japan	Home country standards + consideration of timing
Dependence on Double Taxation Prevention Measures	Low	High