Share Transfer or Business Transfer? Two Ways to Buy a Business in Japan

There are two ordinary ways for an individual to buy a business in Japan: buy the shares of the company that runs it, or buy the business itself out of the company.

Economically they can look similar. Legally they are different transactions, and the difference falls almost entirely on the buyer.

The question underneath it is always the same: what comes with the deal, and what stays behind?

Japan's SME Agency puts it in those terms in its guidelines on small and medium-sized M&A — a share transfer is procedurally simpler but carries a comparatively higher risk of off-balance-sheet and contingent liabilities, while a business transfer lets the parties choose what is transferred but requires each item to be transferred individually.

The comparison in one table

What a share transfer actually does

You acquire the shares from the existing shareholders. If the seller holds all of them and you buy all of them, you become the sole shareholder.

The point to hold on to is that the company itself does not change. Its assets, its contracts, its employment relationships and its borrowings all stay where they were, because the party to all of them is the company and the company is the same company.

That continuity is the main attraction. Nothing has to be re-papered, and the business keeps running through the transaction.

It is also the main risk. Whatever was already inside the company is still inside it: unpaid overtime, a historical breach of contract, a latent damages claim. If any of it crystallises after closing, it hits the value of what you now own.

What a business transfer actually does

The seller transfers the assets and contracts that make up a particular business to the buyer.

For a buyer, the attraction is selection. You take what you want and, in principle, leave the liabilities you do not.

It suits the case where the seller runs two businesses and you want one of them.

But you are not acquiring a legal entity, so every component has to be moved:

• customer and supplier contracts
• the lease
• intellectual property
• employment relationships
• licences
• real property and equipment

Each of those is its own transfer, with its own consent requirements and its own ways of failing.

Share transfer: the trade-offs

In favour

• the business continues without interruption
• assets and contracts generally do not have to be transferred one by one
• the structure is straightforward to explain and to execute

Against

• historical liabilities and latent risks remain inside the company
• the seller's title to all of the shares has to be verified
• change-of-control clauses in key contracts need checking
• pre-closing legal due diligence carries more weight

Business transfer: the trade-offs

In favour

• you choose the assets and operations you take
• liabilities not assumed are, in principle, left behind
• the business can be separated from the seller's other activities

Against

• contracts and assets must be individually transferred
• counterparty consents are often required
• employees have to be dealt with individually
• licences may not carry across
• under the Companies Act, certain business transfers require shareholder approval and other corporate procedures

"Avoid the liabilities, use a business transfer" is too quick

Buyers often reason that since the worry is undisclosed historical debt, a business transfer solves it.

There is something in that: choosing what you assume does separate the risk more cleanly than a share transfer.

But if the value of the business is in its customer contracts, its licences and its people, and those cannot be moved across cleanly, then you have not bought the business at all. You have bought some assets and an introduction.

The real trade is this: a business transfer cuts the liabilities at the cost of having to reconnect, one by one, every relationship the business is made of.

Which should an individual buyer choose?

There is no general answer. The structure follows the facts of the business.

• A long-established company with many contracts, employees and licences, acquired whole → a share transfer is often easier to execute
• Only one part of the seller's company is wanted → a business transfer is the candidate
• Significant risk of historical liabilities → reconsider the structure, including a business transfer
• A licence that would be difficult to obtain afresh → a share transfer may preserve it

Tax treatment also differs between the two, and it is worth putting the question to a tax accountant before the structure is fixed rather than after.

The structure can be revisited — in both directions

A deal that starts as a share transfer can move to a business transfer when due diligence turns up a significant off-balance-sheet exposure. A deal that starts as a business transfer can move the other way when it turns out that the key contracts and the licence cannot be transferred.

So the structure is not settled for good at the first meeting. How findings feed back into the deal is set out in turning due diligence findings into deal terms.

In short

A share transfer changes the shareholder and leaves the company intact, so the business continues smoothly and the company's past continues with it.

A business transfer lets you choose what you acquire, at the price of transferring contracts, assets, employees and licences individually.

Even in a small acquisition, the right question is not which is simpler. It is what you want to inherit, and what you would rather leave behind.

Primary sources

• SME Agency, Guidelines for Small and Medium-sized M&A (3rd edition) (Japanese)
• e-Gov, Companies Act, Article 467 and following (business transfers) (Japanese)