This Cross-Border Joint Venture and Strategic Alliance Guide (Japan) discusses relevant law and practice related to the formation and operation of cross-border joint ventures, including corporate and contractual joint ventures, in Japan. For other jurisdictions see the Cross-Border Joint Venture and Strategic Alliance Resource Kit.
Structures
What are the standard forms of joint ventures / strategic alliances and common features of each?
In Japan, joint ventures (JV) take one of two forms:
- Corporate JVs, in an equity-based structure
- Contractual JVs, which are based on contractual relationships
Equity-Based Structure
A corporate JV is a joint venture involving an independent legal entity (i.e., a company). This is the standard and most common form of JV in Japan.
Under the Companies Act (Act No. 86 of 2005, as amended), there are two types of companies to be used in a corporate JV:
- Stock company (Kabushiki Kaisha) (KK)
- Limited liability company (Godo Kaisha) (GK)
KK
The KK is the most commonly used vehicle for a corporate JV. This is because it is the most prevalent corporate structure in Japan and therefore, the structure most people are familiar with.
The main features of a KK are as follows:
- The liabilities of shareholders in a KK are limited to the amount of their contributions to the KK.
- KKs are required to hold shareholders' meetings and must have at least one director.
- The decisions of a KK are generally made by its board of directors (if the KK does not have the board of directors, a majority of the directors).
- Profits are required to be distributed to each shareholder in proportion to the amount of the shareholder's contribution (except for class shares).
- KKs can be listed on Japanese stock exchanges.
GK
The GK is sometimes also used as a JV entity, especially for joint ventures of a smaller size. This is because GKs are more flexible and cheaper to incorporate, govern, and operate.
The main features of a GK are as follows:
- The liabilities of equity holders in a GK are limited to the amount of their contributions to the GK.
- The decisions of a GK are made by the GK's equity holders themselves.
- Profits in a GK can be distributed to its equity holders in such proportion as provided for in the GK's articles of incorporation, regardless of the equity holders' contribution ratio.
- GKs cannot be listed on Japanese stock exchanges.
Contractual Relationship
Contractual JVs, which involve joint ventures without an independent legal entity, are used for forming JVs in limited cases. Contractual JVs can be formed under the following structures:
- General Partnership (Kumiai), under the Civil Code (Act No. 89 of 1896, as amended)
- Limited Liability Partnership (Yugen Sekinin Jigyo Kumiai) (LLP), under the Limited Liability Partnership Act (Act No. 40 of 2005, as amended; the LLP Act)
General Partnership
Contractual JVs can be formed by way of a partnership agreement. Under the Civil Code, a partnership agreement becomes effective when each of the parties promises to engage in joint business by making a contribution to such business.
The main features of a general partnership are as follows:
- All partners bear unlimited liability.
- The general partnership's business is managed based on decisions made by a majority of the partners, unless otherwise provided for in the partnership agreement.
- The partnership's profits and losses are allocated to the partners in proportion to the amount of each partner's contribution to the partnership, unless otherwise provided for in the partnership agreement.
LLP
The LLP structure has been available in Japan since 2005. An LLP is a partnership formed by partners who wish to limit their liability. An LLP is established by way of an LLP agreement, which must provide that each party will:
- Make a capital contribution to the LLP –and–
- Jointly conduct business activities with the objective of generating profits
Other features of an LLP include the following:
- All partners bear only limited liability.
- At least one of the partners in an LLP must be an individual domiciled in Japan or a legal entity with its head office or principal office located in Japan.
- The business of the LLP is managed by way of unanimous decisions of all partners, unless otherwise provided for in the LLP agreement.
- The LLP's profits and losses are allocated to the partners in proportion to the amount of each partner's contribution to the LLP, unless otherwise provided for in the LLP agreement.
- Certain information in the LLP agreement, including the name of the LLP, the business to be conducted by the LLP, and the names and addresses of the LLP's members must be stated in the LLP's commercial register.
What are some of the key corporate governance, tax, regulatory, and timing considerations that could impact the choice of structure?
The following elements may affect the choice of JV structure:
- Segregation of JV from JV members
- Limitation of liability
- Size, prevalence, and familiarity
- Flexibility of organization
- Cost of incorporation and operation
- Tax considerations
Equity-Based Structure vs. Contractual Relationship
Corporate JVs are typically chosen as the JV structure when the preference is to separate the assets, debts, employees, and other aspects of the JV from those of its members.
On the other hand, contractual JVs are chosen if tax considerations are paramount. Specifically, tax is imposed at both the entity level and the member level in the case of corporate JVs, but is only imposed at the member level in case of contractual JVs.
Equity-Based Structure: KK vs. GK
If JV members in a corporate JV contemplate a certain size of business and prefer to have a prevalent and familiar entity structure, establishing the JV as a KK would be recommended.
If, however, the JV members prefer a structure that enables flexible governance, the GK would be recommended.
Contractual JV: LLP vs. General Partnership
JV members who wish to limit their liability should opt for the corporate JV route. Should they prefer the contractual JV structure for any reason, the LLP should be selected for purposes of limiting liability.
All the partners in an LLP are required to be involved the LLP's business. By contrast, the partners of a general partnership may entrust the partnership's business operations to certain members.
Can a joint venture or strategic alliance be formed for any purpose?
Equity-Based Structure
Corporate JVs can be formed for any legal commercial purpose as long as such purpose is substantive and objectively defined.
Contractual Relationship
General partnerships can be formed for any purpose that is not illegal or against public policy.
LLPs can be formed for any legal commercial purpose that is not against public policy or for undue purposes of avoiding liability. That said, LLPs cannot conduct certain businesses (1) in respect of which it is inappropriate to limit partners' liability to their respective contributions, such as the businesses of legal or accounting service providers, and (2) that may result in unfair damage being caused to the LLPs' creditors, such as the businesses of horse or bicycle racing.
Are there any forms of joint ventures or strategic alliances that are more typically used in certain industries (such as real estate, pharmaceutical, or technology)? Why are such forms favored?
Corporate JVs, especially those formed under a KK, are the preferred JV structure in Japan and are generally used across industries. In some cases, governmental permits or licenses will not be granted to contractual JVs for the conduct of certain businesses, such as the real estate and pharmaceutical businesses.
Contractual JVs in the form of general partnerships are, however, not uncommon in the construction industry, particularly when construction companies undertake large and complicated construction work, such as public infrastructure projects. Contractual JVs are more advantageous in such projects because contractual JVs can be formed on a project-by-project basis and can easily be dissolved upon completion of the relevant project. Additionally, no tax is imposed at the JV level.
Contractual JVs are also formed in the entertainment industry for purposes of producing entertainment content, such as animation works, movies, and TV programs. Broadcasting companies, advertising companies, publishing companies, and film distributors commonly use a contractual JV structure to allocate the risks associated with the production of entertainment content.
Are there any industries that would not permit or would not be conducive to a joint venture or strategic alliance?
There is no industry in Japan where the formation or operation of JVs is entirely prohibited. There are, however, some restrictions on the participation of foreign members in JVs in certain industries such as aviation, telecommunications, and broadcasting. See Foreign Members/Partners below.
There are also certain restrictions on the formation of JVs in light of antitrust regulations. See Regulatory Environment below.
How is a joint venture or strategic alliance structured to minimize potential liability? Are there instances where parties to a venture or alliance may knowingly choose a vehicle without limited liability and, if so, why would such party make that choice?
Equity-Based Structure
A corporate JV is an entity independent and separate from its members. In a corporate JV, members' liabilities are limited to the amount they have invested in the entity. Additionally, the JV agreement would usually set forth the risk allocation between, and the liability limits of, the members.
Contractual Relationship
Partners in a general partnership are subject to unlimited liability (i.e., the creditors of the general partnership may collect their debts not only from the assets of general partnership but also from the assets of the partners themselves). Liabilities as between the partners can, however, be limited in under the terms of the partnership agreement.
Regardless of this element of unlimited liability, general partnerships are chosen as the JV vehicle in some situations for various reasons, including reasons of tax.
The partners in an LLP have limited liability (that is to say, the creditors of an LLP may only collect their debt from the LLP's assets, and not from the partners' own assets). The LLP agreement between the partners would usually provide for the scope of the respective partners' liability
Statutory Framework
What is the applicable statutory framework for each structure discussed above?
Equity-Based Structure
Corporate JVs are regulated under the Companies Act. Matters such as JV formation, election of directors and corporate auditors, decision-making process, distribution of dividends, and reorganization (among others) must be conducted in compliance with the Companies Act.
Contractual Relationship
The Civil Code provides the basic framework for general partnerships and covers such matters as partnership formation, rights and obligations of members, partnership decision-making process, allocation of profits and losses, and partnership withdrawal and dissolution.
The LLP Act provides the basic framework for LLPs and covers matters such as LLP formation and registration, rights and obligations of LLP members, LLP decisionmaking process, distribution of dividends, and partnership withdrawal, dissolution, and liquidation.
Are there statutory or other limits on the duration of a joint venture or strategic alliance?
Equity-Based Structure
There is no limitation on the lifespan of corporate JVs. Nevertheless, corporate JVs will be subject to such provisions in the articles of incorporation or JV agreement that provide for a specific JV term or events of termination.
Contractual Relationship
Similarly, contractual JVs are not subject to any lifespan limits. As with corporate JVs, however, contractual JVs are subject to provisions in the relevant partnership agreement or LLP agreement regarding JV term or events of termination.
Although the LLP Act requires the term of an LLP to be provided under the LLP agreement, LLP members are free to choose the length of the LLP's term, and can also extend the original term of the LLP at any time through amendments to the partnership agreement.
Do joint ventures or strategic alliances have to be registered with any federal or local body?
No registration with any administrative authority is required for either corporate JVs or contractual JVs other than registration of information for purposes of the commercial register regarding KKs, GKs and LLPs.
Regulatory Environment
Are joint ventures or strategic relationships specifically regulated?
There is no regulation in Japan that applies specifically to JVs. As stated above, however, the formation and operation of corporate JVs and contractual JVs must be carried out in accordance with the Companies Act, the Civil Code, and the LLP Act (as applicable).
In addition, there are some regulations of general application that affect all business vehicles (including JVs). These regulations include the following:
Foreign Investment Regulations
The Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended; the FEFTA) places certain restrictions on the participation of foreign members in JVs in certain industries. The FEFTA may also require foreign members in a JV to file prior or post-factum notifications with the Minister of Finance and the competent minister (through the Bank of Japan). See Foreign Members/Partners below.
Additionally, there are some industry-based regulations that restrict foreign members from investing in a JV in specific industries, such as the aviation, telecommunications, and broadcasting industries.
Antimonopoly Regulations
Under the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Act No. 54 of 1947, as amended; the Antimonopoly Act), JVs that substantially restrict competition in a particular field of trade are prohibited.
Further, the Antimonopoly Act requires the formation of a JV by any of the following routes to be notified in advance to the Japan Fair Trade Commission (JFTC), if certain thresholds are met:
- Share transfer
- Merger
- Company split
- Share transfers by multiple companies
- Business transfer
Share Transfer
Notification of formation of a JV by way of share transfer is required if both:
- The total domestic sales revenue of the company acquiring shares in the JV company exceeds Japanese Yen (JPY) 20 billion, and the total domestic sales revenue of the JV company exceeds JPY5 billion.
- The shareholding ratio of the acquiring company in the JV after the share transfer exceeds a 20% or 50% threshold.
For this purpose, "total domestic sales revenue" means the aggregate of:
- Revenue generated from domestic sales (that is, the amount of
products and services provided domestically) by a company
–and– - Revenue generated from the domestic sales of the corporate group to which the company belongs (that is, the company's subsidiaries, the company's parent company that is not a subsidiary of another company, and the subsidiaries of the parent company)
Merger
Notification of formation of a JV by way of merger is required if both:
- Total domestic sales revenue of any of the JV members exceeds JPY20 billion, and the total domestic sales revenue of another JV member exceeds JPY5 billion.
- The parties to the merger are not within the same corporate group.
Joint Incorporation-Type Company Split
Notification of formation of a JV by way of a joint incorporation-type company split is required if:
- Total domestic sales revenue of a JV member that will transfer
the whole of its business to the JV (a full transfer company)
exceeds JPY20 billion, and the total domestic sales revenue of
another JV member that will also be a full transfer company exceeds
JPY5 billion.
–or– - Total domestic sales revenue of a JV member that qualifies as a
full transfer company exceeds JPY20 billion, and the domestic sales
revenue of the relevant business of another JV member that will
transfer a substantial part of its business to the JV (a partial
transfer company) exceeds JPY3 billion.
–or– - Total domestic sales revenue of a JV member that qualifies as a
full transfer company exceeds JPY5 billion, and the domestic sales
revenue of the relevant business of another JV member that
qualifies as a partial transfer company exceeds JPY10
billion.
–or– - The domestic sales revenue of the relevant business of a JV member that qualifies as a partial transfer company exceeds JPY10 billion, and the domestic sales revenue of the relevant business of another JV member that will transfer part of its business to the JV exceeds JPY3 billion. –and–
- The parties to the joint incorporation-type company split are not in the same corporate group.
Absorption-Type Company Split
Notification of formation of a JV by way of an absorptiontype company split is required if:
- Total domestic sales revenue of a splitting company that
qualifies as a full transfer company exceeds JPY20
billion, and the total domestic sales revenue of the successor
company exceeds JPY5 billion.
–or– - Total domestic sales revenue of a splitting company that is
qualifies as a full transfer company exceeds JPY5 billion, and the
total domestic sales revenue of the successor company exceeds JPY20
billion.
–or– - The domestic sales revenue of the relevant business of a
splitting company that qualifies as a partial transfer company
exceeds JPY10 billion, and the total domestic sales revenue of the
successor company exceeds JPY5 billion.
–or– - The domestic sales revenue of the relevant business of a splitting company that qualifies as a partial transfer company exceeds JPY3 billion, and the total domestic sales revenue of the successor company exceeds JPY20 billion. –and–
- The parties to the absorption-type company split are not in the same corporate group.
Share Transfer by Multiple Companies
Notification of formation of a JV by way of share transfers by multiple companies is required if both:
- Total domestic sales revenue of any JV member exceeds JPY20 billion, and the total domestic sales revenue of another JV member exceeds JPY5 billion.
- The parties to the share transfers are not in the same corporate group.
Business Transfer
Notification of formation of a JV by way of a business transfer is required if:
- Total domestic sales revenue of a company to which any business
is assigned (the assignee company) exceeds JPY20 billion, and the
assignee company succeeds to the entire business of the assignor
company whose domestic sales revenue exceeds JPY3 billion.
–or– - Total domestic sales revenue of the assignee company exceeds JPY20 billion, and the assignee company succeeds to a substantial part of the business or the whole or a substantial part of the fixed assets used for the business of the assignor company (where the domestic sales revenue attributable to the business or fixed assets being transferred exceeds JPY3 billion). –and–
- The parties to the business transfer are not in the same corporate group.
Are there any antitrust matters to be considered in forming a joint venture or strategic alliance?
Antimonopoly Act
The Antimonopoly Act prohibits unfair business practices and acts that substantially restrict competition in a particular field of trade.
The JFTC has the power under the Antimonopoly Act to issue a cease-and-desist order against a JV if the JFTC determines that the establishment of a JV constitutes an unfair business practice or substantially restricts competition in a particular field of trade. The JFTC has established two guidelines for determining whether a JV substantially restricts competition in a particular field of trade:
- Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination (Business Combination Guideline)
- Guidelines Concerning Joint Research and Development under the Antimonopoly Act (R&D Guideline)
Business Combination Guideline
The Business Combination Guideline provides a safe harbor rule the applicability of which is based on the HerfindahlHirschman Index (HHI). The HHI is in principle calculated by summing the squared market share of each business operator. Specifically, the safe harbor rule for horizontal business combinations under the Business Combination Guideline applies where:
- The HHI after the establishment of a JV is 1,500 or less.
- The HHI after the establishment of a JV is more than 1,500 but does not exceed 2,500, and the increase in the HHI is 250 or less.
- The HHI after the establishment of a JV is more than 2,500, and the increase in the HHI is 150 or less.
The JFTC will determine, in cases where a JV does not fall under the safe harbor rule, whether the establishment of the JV will substantially restrict competition in a particular field of trade, taking into consideration the following factors:
- Market position of the JV and its group companies, as well as the circumstances surrounding its competitors
- Conditions surrounding the JV's transactions, such as the possibility of the JV knowing the business terms of its competitors, past market share, and past price movements
- Whether foreign importers operate or are likely to operate in the market
- Existence of barriers to entry
- Existence of competitive pressures from contiguous markets
- Existence of competitive pressure from those who demand such products/services
- Comprehensive business capability
- Efficiency of the JV's business and the economic circumstances of the JV and its group companies
- Business condition of the JV and its group companies
- Scale of industry area
R&D Guideline
The R&D Guideline, which applies to JVs performing joint research and development, regulates:
- Substantial restrictions on competition in the product and technology markets
- Any private monopoly with respect to technology
- Agreements on the performance of joint research and development (R&D)
In determining whether substantial restrictions on competition exist, the JFTC will consider whether the establishment of a JV substantially restricts competition, taking into account the following factors:
- Number of participants in the market and their respective market share
- Nature of the research being conducted
- Necessity of joint R&D
- Duration and scope of the joint R&D
The R&D Guideline also provides, in respect of private monopolies, that joint R&D may be deemed to create a private monopoly with respect to technology if all of the following occur:
- Total market share of the participants is substantially high.
- Joint R&D is performed for the purpose of developing a technology that is essential for the business of the participants in the joint R&D
- Any participant excluded from the joint R&D would face difficulty in conducting its business due to such exclusion and may thereby be excluded from the market.
Additionally, the R&D Guideline categorizes agreements on joint R&D into the following:
- Arrangements that in principle do not constitute unfair business practices (such as, for example, the prohibition of participants from conducting independent research in the same areas as those in the joint R&D for the duration of the joint R&D)
- Arrangements that could constitute unfair business practices (such as, for example, the prohibition of participants from introducing a technology similar to the technology that is being researched under the joint R&D beyond the scope necessary for the joint R&D)
- Arrangements that are at high risk of constituting unfair business practices (such as, for example, the prohibition of participants from conducting independent research in the same area as those in the joint R&D after termination of the joint R&D)
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Originally Published by Lexis Nexis
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