Employment and Labour Issues

Employment and labour issues

Employment and labour laws in Japan can give rise to unexpected difficulties. The well-known `lifetime employment system' in Japan is supported by court decisions that essentially prevent a company from discharging an employee if there is any possible way to retain him or her. Even where an employer has the legal right to discharge an employee at will, court decisions have held that a company 'abuses' that right if it discharges an employee without compelling reason. Accordingly, reductions in employees must be negotiated and tend to be costly in terms of time and severance payments.

Most labour unions in Japan are company unions (consisting only of employees of the company), and normally enjoy relations with management that are friendly and non-confrontational relative to labour-management relations in North America and Europe. However, in recent years a new financial industry union has appeared (the Foreign Banks Union), which consists of the employees of a number of foreign-based commercial banks and conducts its affairs in a more aggressive style akin to unions in the west.

An acquisition structured as a stock purchase or merger generally leaves the target company subject to existing employment obligations and labour contracts. If the transaction is structured as a partial asset acquisition, however, the acquiror is generally free to hire whom it chooses and start labour relations with a clean slate. Although Japanese labour laws prohibit an employer from interfering with employees' efforts to form or join a labour union, it is permissible to take proactive steps to encourage employees to feel it is unnecessary to organize. With this in mind, some sophisticated foreign acquirors have prepared benefit packages, including memberships in employee 'clubs' and other perquisites, to preempt the formation of a union by voluntarily providing the main benefits normally obtained by unions in Japan.

Intellectual property

Laws and administrative process with respect to intellectual property in Japan differ significantly from those of other countries. These include differences in the types of rights that are recognized, in the allocation of rights between originators and the registrant who files an application with regulatory authorities, in the types of protections that are available, the scope of rights that may be granted to a licensee, and the ability of licensors and licensees to take action to protect such rights. For companies considering an acquisition in an industry in which patent, copyright or trade mark rights are significant, it is essential to understand these differences and to take effective measures to preserve the company's ability to use and protect its intellectual property.

Anti-monopoly law

In certain cases, mergers and acquisitions are subject to approval by the Fair Trade Commission under the Anti-Monopoly Law (AML). Several recent developments have altered the filing requirements and structural restrictions imposed by the AML.

In December 1997, new amendments to Section 9 of the AML came into effect relaxing the longstanding ban on holding companies. Before these amendments, holding companies were completely prohibited in Japan as a matter of competition policy - a vestige of efforts undertaken in the immediate post-war period to prevent the reemergence of the powerful zaibatsu conglomerates. The ban on holding companies imposed constraints and inefficiencies on the corporate structures that could be employed in M&A activity, as well as in other types of corporate transactions. While the amended AML continues to impose certain restrictions on financial holding companies and holding companies that own multiple `leading companies' in related or different fields of business, foreign acquirors are now generally able to employ holding companies in structuring corporate transactions in Japan.

In addition, a proposal approved by the Cabinet on February 24 1998 and now pending before the Diet would eliminate filing requirements with the Fair Trade Commission for certain mergers between small- and mid-sized companies. This proposed amendment would exempt from filing requirements mergers between two companies where one company has assets of not more than Y10 billion (US$80 million) and the second company has assets of not more than Y1 billion. The amendment also exempts mergers between a parent company and its subsidiary, and between two subsidiaries of the same parent company.

Documentation and due diligence

Japanese companies typically do not conduct domestic transactions with extensive documentation setting forth representations and warranties, covenants, indemnities, termination rights and the like. Nor do they undertake systematic due diligence of legal and business information before consummating a transaction. Within the confines of Japanese society, corporations tend to be willing to rely on the spectre of shame and public opprobrium to motivate counterparties to