Acquiring a Japanese Company: M&A Process, Due Diligence and FEFTA

Foreign companies acquire Japanese companies mainly through a share transfer or a business transfer. The process runs from selecting candidates through a basic agreement, due diligence and the definitive agreement to closing. For foreign investors, it is important to establish early on whether prior notification is required under the Foreign Exchange and Foreign Trade Act (外為法, FEFTA) and whether permits and licenses can be carried over.

Share transfer vs business transfer

In a share transfer, the buyer purchases the target’s shares from the seller and takes over the company as a whole. In a business transfer, the buyer selects and purchases the assets, contracts, employees and other elements of a specific business from the target company.

Features of a share transfer

The procedure is relatively simple, and the business can be taken over without interruption. On the other hand, past tax and labor problems and off-balance-sheet liabilities also stay with the company. For this reason, due diligence tends to be more detailed. Many unlisted Japanese companies provide in their articles of incorporation that share transfers require the company’s approval.

Features of a business transfer

Because the buyer can choose what to take over, it is easier to leave behind unwanted assets and liabilities. However, it requires transfer procedures for each asset, re-signing of contracts and the consent of employees. On the seller’s side, transferring all or a material part of the business requires a special resolution of the general meeting of shareholders. This resolution is not needed if the book value of the assets transferred does not exceed one-fifth of total assets (or any lower proportion set in the articles of incorporation).

The M&A process

1. Clarify the purpose and conditions of the acquisition and search for candidate companies
2. Sign a non-disclosure agreement (NDA) and receive an information memorandum
3. Carry out an initial evaluation and sign a basic agreement (LOI or MOU)
4. Conduct due diligence
5. Negotiate price and terms and sign the definitive agreement (share purchase agreement or business transfer agreement)
6. Complete filings under FEFTA, the Antimonopoly Act and other laws and observe the waiting periods
7. Closing (payment of the price and transfer of shares or assets)
8. Post-merger integration (PMI) and the various registrations and notifications

The basic agreement sets out an indicative price, the timetable, the period of exclusive negotiation and similar matters. It is common for terms such as price to be non-binding, with only the confidentiality and exclusivity clauses legally binding. The final price is set in light of the due diligence findings.

Where filings under FEFTA or the Antimonopoly Act are required, the transaction cannot be executed until the waiting period ends. The definitive agreement usually makes completion of these filings a condition precedent to closing.

Types of due diligence and what they cover

Due diligence (DD) is the process by which the buyer engages professionals to investigate the target company. The findings are reflected in price adjustments and in contract terms such as representations and warranties and indemnities.

The Small and Medium Enterprise Agency’s SME M&A Guidelines also describe DD as an important process through which the acquirer obtains a basis for its decisions. In small deals, DD may be limited to reviewing tax returns and interviewing the owner-manager. The scope is set according to the size and risk of the deal.

FEFTA prior notification and post-transaction reporting

A foreign investor’s acquisition of shares in a Japanese company constitutes inward direct investment under FEFTA. Depending on the target’s business sector and the proportion acquired, either prior notification or a post-transaction report is required.

Designated business sectors include weapons, aircraft, nuclear power, space, electricity, telecommunications and semiconductors. The 30-day waiting period may be shortened if no concerns are identified, and it may be extended if the review takes longer.

The 2026 amendment to FEFTA

An act amending FEFTA to overhaul the inward direct investment screening system was enacted on May 29, 2026 and promulgated on June 5. According to the Ministry of Finance, its pillars include bringing “indirect acquisitions”, such as another foreign investor gaining control of a foreign company that holds shares in a Japanese company, within the scope of regulation, and making explicit that measures to mitigate risk are matters to be included in prior notifications. The effective date is to be set by Cabinet Order within one year of promulgation, except for certain provisions. As the specific criteria will be determined by Cabinet and ministerial orders, check the latest practice for each transaction. An overview of the system is given in Inward direct investment under FEFTA: prior notification and post-transaction reports.

Antimonopoly Act notification

Large acquisitions also require notification to the Japan Fair Trade Commission. For share acquisitions, this applies, for example, where the total domestic sales of the buyer’s corporate group exceed ¥20 billion and the total domestic sales of the target and its subsidiaries exceed ¥5 billion. Notification is required when the buyer’s voting rights cross 20% or 50%. In principle, shares cannot be acquired for 30 days after the notification is accepted.

Carrying over permits and Japan-specific checks

The treatment of permits and licenses varies greatly with the acquisition method.

• Share transfer: the company holding the permits does not change, so in principle they can continue to be used. However, some permits require notification of changes in officers or shareholders.
• Business transfer: permits are granted to the company, not to the business, so in principle the buyer must obtain them anew. There may be a period during which the business cannot operate until they are obtained.
• Where the law provides a succession mechanism: in the construction industry, for example, since October 1, 2020 a license can be carried over if approval is obtained before a business transfer or similar transaction.

When buying a company whose business depends on its permits, check during DD the list of permits, their requirements and whether they can be carried over. Also check whether contracts with counterparties contain clauses allowing termination upon a change of shareholder.

Points to check in Japanese SMEs

• Whether the shareholder register matches the actual shareholders, and whether past share transfers lacked any required procedures such as company approval.
• Whether bank borrowings carry a personal guarantee from the owner-manager. If so, discuss with the lender how this will be handled after the acquisition.
• How much is likely to be paid out in retirement benefits to officers and employees.
• Whether real estate or equipment is held in the owner-manager’s personal name rather than the company’s.
• Whether key business relationships depend on the owner-manager’s personal network, and how long a handover period should be.

These points are hard to see from the financial statements alone. Investigate them by combining interviews with the owner-manager and reviews of contracts and registrations.

Procedures required after closing

• If officers change, apply for registration within two weeks of the change.
• If officers are seconded from overseas, status of residence procedures are required. For details, see Business Manager visa: application documents, processing time and renewal.
• File change notifications with the tax office and other authorities, notify financial institutions and submit change notifications for permits and licenses.
• If transactions with the parent company begin, put pricing rules in place. Please also see Transfer pricing basics.

How TIMOA can help

Acquiring a Japanese company requires designing the choice of method, DD, FEFTA and other filings, the carry-over of permits and post-acquisition integration as one continuous process. Following the 2026 amendment to FEFTA, indirect acquisitions are set to be brought within the scope of regulation.

Working with partner attorneys, certified public accountants, certified tax accountants, labor and social security attorneys and administrative scriveners, TIMOA coordinates everything from evaluating candidates through DD and filings to post-closing procedures, in Japanese, Chinese and English. For details, see our M&A, Succession & Exit services.