Ayuko Nemento and Makoto Ohsugi of Sonderhoff & Einsel participated in The Art of Deal Making: Using External Expertise Effectively

Foreword by Andrew Chilvers

For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.

If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.

These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.

Ayuko Nemento and Makoto Ohsugi discussed The Art of Deal Making: Using External Expertise Effectively as part of the Employment chapter.

What advice can you offer international clients on harmonising employment practices and culture following a merger or acquisition in your jurisdiction?

The major issue that often arises in a merger or acquisition in Japan is difficulty in restructuring the labour force of the target Japanese entity. Japanese employment law is very protective of the employee when compared to other jurisdictions. Dismissal of employees requires “cause” in Japan, which means that at-will employment does not exist and legitimate grounds for dismissal are required. For example, the mere lack of ability or poor performance are not deemed as legitimate grounds, and the company is required to give the employee an opportunity to improve his/her performance. Further, the change of shareholders is not cause for dismissal nor does it allow for change of employment conditions. Therefore, a foreign investor should expect to retain most (if not all) of the target’s employees – Japanese companies are often resistant to deals where a foreign investor is going to perform significant restructuring. If the investor plans on restructuring the company and determines that certain employees should be terminated, the investor should consider severance packages for such employees as it will likely be difficult to terminate their employment contracts after closing.

Do you have a best practice for incorporating collective bargaining agreements, employee benefits and pension scheme provision into the deal making process?

As mentioned above, M&A deals do not allow for a change of employment conditions, such as a change of collective bargaining agreements, employment benefits, and pension scheme provisions. Therefore, after the closing of a merger, there are often two employment conditions: those of the acquiring company and those of the target. Given the difference in employment conditions, the post-merger integration (PMI) process is substantially important to harmonise these employment conditions. Therefore, a key best practice for a foreign buyer during the due diligence process is to carefully review the Japanese target company’s employment conditions so that the buyer can prepare for the PMI process and understand which employment conditions could potentially be changed or not.

Generally, existing collective bargaining agreements, employee benefits and pension schemes of the Japanese target company cannot be changed post-merger to the detriment of the employees, so if through due diligence the foreign buyer, for example, discovers employee benefits that it considers excessive, it should try to reflect such high costs in the purchase price of the target company. Otherwise, the buyer would only be able to recognise such unexpected costs during or after the PMI process is completed.

For example, where the target company has its own retirement allowance scheme that the buyer would like to abolish, but the buyer does not address this issue prior to closing in the SPA, it will be practically difficult for the buyer to abolish the scheme after closing because it would need to obtain each employee’s consent for it. Further, to obtain the employee’s consent, the buyer would generally have to pay out the retirement allowance of the employees of the target company, which would result in additional costs. In this regard, the buyer needs to consider and reflect such additional costs into the purchase price of the target.

Incentivisation and retention of senior management is important to ensure stability and continuity post-deal. Any examples in which you have achieved this effectively?

Given the lack of labour mobility and seniority-based labour system in Japan when compared with other countries, there is less need for incentivisation, such as retention agreements in M&A deals as most senior management are expected to remain in the company even if it is purchased by a foreign entity. However, post-closing covenants and conditions, such as “key person” provisions, are often used to ensure that certain key individuals remain in the company for a certain period of time after closing, and, if not, a certain additional payment would not be received or a liquidated damages amount would be imposed.

Top Tips – To Keep Your People Happy During The M&A Process

• Understand that although the decision process for Japanese companies may be slow, once a decision is made, a smooth and efficient transition process can be expected. Realistic schedules for closing a deal need to be set as Japanese companies operate on a consensus basis and often a substantial amount of time is focused on due diligence and documentation.
• When negotiating the deal terms, focus on communicating with the deal “coordinator” – the individual who arranges meetings, circulation of documents, etc. Although this person generally isn’t the decision maker, working closely with them will help obtain quicker responses and decisions on key issues.
• Retain a local attorney or advisor early in the negotiation process who can explain business and cultural differences between Japan and the buyer’s jurisdiction to avoid any misunderstandings. Many Japanese companies are sensitive to foreign buyers and investments and a culturally appropriate approach is essential.


Contributing Advisors