1. Overview: Forming a JV by Carving Out an Existing Business

As a recent trend in joint venture (JV) practice in Japan, it has become common to create a JV in a carve-out M&A transaction by carving out an existing business to a company and transferring the shares in the company to a JV partner. This article focuses on this structure, including from the perspective of a foreign JV partner.

The Companies Act of Japan provides for two types of company splits ("kaisha bunkatsu"): (i) absorption-type (transfer to an existing company) and (ii) incorporation-type (transfer to a newly established company upon taking effect). In JV transactions especially regarding regulated businesses, absorption-type splits are often preferred because, in this case, a new company is usually incorporated in advance and then a target business is transferred from one party, allowing time to obtain or succeed to required licenses/permits, thereby enabling a smoother transition. This article therefore assumes an absorption-type split environment.

2. Statutory Company Splits

A statutory company split enables a Japanese company to transfer all or part of its business (including assets, liabilities, contracts, IP, and employees) to another Japanese company. Unlike a typical business transfer ("jigyo joto"), a statutory company split generally occurs by operation of law without individual counterparty or employee consents; however, explicit counterparty consent is required if the contract to be transferred provides that a company split triggers termination or requires consent.

Implementing a company split requires various statutory steps, including:

• Execution of a company split agreement specifying the assets (including shares in subsidiaries), liabilities, contracts, and employees to be transferred
• Employee transfer procedures (e.g., individual consultations/notifications and union notice)
• Required pre-transaction disclosure
• Creditor protection procedures (e.g., public notice and an opportunity to object)
• Shareholder notices and appraisal-right procedures (if applicable)
• Approval by shareholders’ meeting (if required)
• Required post-transaction disclosure
• Post-effective registrations (e.g., commercial registration and registrations for IP/real estate, as applicable)

3. Shareholders Agreement for a JV

The shareholders agreement to be entered into by the JV shareholders would typically include provisions that govern the following matters:

• Governance matters (right to appoint directors/officers, veto rights, matters requiring consultation)
• Business matters (shareholders’ operational roles, ancillary agreements)
• Restrictions on share transfers by the JV shareholders (rights of first refusal, put/call options, tag-along and drag-along rights)
• Termination of the JV (achievement of the JV’s purpose, deadlock)

4. Practical Notes for Foreign-Involved JVs

Points to note include:

• Antitrust and foreign investment filings (including Japanese and foreign laws) may be required.
• Where foreign shares/equity are transferred by a company split, shares/equity transfer agreements (which are separate from company split agreement) and labor compliance under local laws may be required.
• For contracts governed by foreign law that does not recognize company splits, counterparty consent may still be required.

Accordingly, when considering a company split as a JV structuring tool, parties should agree early on the scope of the business to be carved out, any regulatory/licensing implications, foreign law "consent gaps," and employee communication plans, and then align the split timetable with the overall JV signing and closing schedule.