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Japan: Employee protection in M&A

Yuta Mizuno

Amendments to the rules concerning the treatment of employees under certain types of corporate reorganisations came into force in Japan on September 1 2016.

One amendment concerns the splitting of a company, a scheme provided under the Companies Act. Under this scheme, a company can, in principle, transfer its business to another company without obtaining the consent of the counterparties for contracts relating to the transferring business, including employment contracts. However, for employee protection, the Act on the Succession to Labour Contracts upon Company Split and its related laws and regulations (collectively, the Act) stipulate certain requirements that companies must satisfy before effecting a company split. A company must, for example, individually consult with, and give prior notification to, employees.

The amendment expands the class of employees with whom the companies should individually consult to include employees who are not engaged in the transferring business, but whose labour contracts are to be transferred under the company split. (Previously, companies were only required to individually consult with employees engaged in the transferring business).

The amendment has also clarified that, before effecting the company split, the required procedures under the Act should be conducted, even with employees who agree to the transfer of their labour contracts to the transferee company.

In addition to the amendments, guidelines have been established. These relate to the treatment of employees upon a so-called business transfer. This is a basic scheme used to transfer a business, under which all individual consents of the counterparties of the contracts to be transferred are obtained.

In addition to the requirement for companies to obtain the consents of all the employees to be transferred, under the new guidelines companies must also:

  • sufficiently explain the business transfer to, and consult with, employees before obtaining their consent; and
  • consult with the labour union to which most employees belong.

Com panies considering M&A transactions with Japanese companies should keep these amendments in mind, as well as the newly-established rules. This is because the treatment of employees influenced by the transactions may have changed, depending on the contemplated structure of the M&A transactions.

Yuta Mizuno

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