Medical M&A: Stock Transfer vs. Business Transfer – Practical Application

In medical institution M&A, particularly for business succession of clinics and small to medium-sized medical corporations, the choice of transfer method is extremely important. There are broadly two types of transfer methods: “stock transfer” and “business transfer,” each with its own merits, demerits, and numerous specific issues for medical institutions. The choice of method significantly impacts many factors that determine the success or failure of M&A, such as taxation, licenses and permits, debt assumption, and even successor issues. This article, from the perspective of experts well-versed in the practical aspects of medical M&A, explains the concrete differences between stock transfer and business transfer, their respective merits and demerits, and specific considerations for medical institutions, focusing on their practical application. We hope this will be of assistance to medical corporation directors, clinic presidents, and all those considering M&A in their decision-making.

What is a Stock Transfer in Medical M&A

A stock transfer is a transaction where all or part of the issued shares (or equity interests) of the transferring company (or membership rights for medical corporations) are transferred to the acquiring company. Through this, the acquiring company inherits the legal personality of the transferring company as is. In the case of medical corporations, it strictly takes the form of transferring “equity interests” or succeeding “membership rights,” but it is generally understood within a similar framework to stock transfer.

Key Merits of Stock Transfer

• Easy Transfer of Licenses and Permits: For medical corporations, licenses and permits such as clinic establishment permits are tied to the legal personality. Therefore, in a stock transfer where the legal personality is inherited as is, the re-acquisition of individual licenses and permits or name change procedures are generally not required. This can be considered one of the biggest advantages of medical M&A compared to business transfer.
• Maintenance of Contractual Relationships: Existing contractual relationships, such as medical fee receivables, lease agreements, and employment contracts with employees, can generally be inherited as they are. This allows for the smooth maintenance of business continuity.
• Reduced Risk of Off-Balance Sheet Liabilities (Limited): Even if there are liabilities not recognized by the transferring party (off-balance sheet liabilities), since the legal personality is inherited in its entirety, the acquiring party generally inherits them. However, by conducting thorough due diligence (DD), it is possible to identify these risks in advance and reflect them in price negotiations.

Key Demerits of Stock Transfer

• Comprehensive Assumption of Undesired Liabilities: Unlike a business transfer, all rights and obligations of the transferring company (including not only assets but also liabilities) are comprehensively inherited. There is a risk of inheriting contingent liabilities that the transferring party is unaware of, or past tax risks.
• Complexity Due to Changes in Shareholder (Member) Structure: In the case of medical corporations, changes in membership may involve amendments to the articles of incorporation or regulations, and in some cases, approval from the competent authority may be required. Furthermore, for medical corporations with equity interests, tax issues such as the valuation of equity interests, inheritance and gift taxes, and capital gains tax tend to become complex.
• Impact on Employees: While employment contracts are generally inherited, the psychological impact on employees due to changes in the representative director or officers cannot be ignored.

What is a Business Transfer in Medical M&A

A business transfer is a transaction where the acquiring company selectively inherits part or all of the business activities of the transferring company on an individual basis. Assets to be transferred (equipment, medical fee receivables, contracts, employees, etc.) and liabilities are individually selected and a contract is concluded. The legal personality is not inherited.

Key Merits of Business Transfer

• Ability to Select Assets and Liabilities to Inherit: The acquiring company can individually select the assets (equipment, medical fee receivables, employees, etc.) and liabilities (loans, etc.) of the transferring company’s business that it wishes to inherit. This allows for the separation of unwanted liabilities and risks, enabling the commencement of business in a clean state.
• Avoidance of Off-Balance Sheet Liability Risk: Since assets and liabilities are inherited individually, the risk of inheriting off-balance sheet liabilities or contingent liabilities that the transferring company is unaware of is generally avoided.
• Re-acquisition/Name Change Procedures for Licenses and Permits: Since licenses and permits are tied to the legal personality, in a business transfer, the acquiring company must individually re-acquire or change the name on licenses and permits (such as clinic establishment permits). These procedures can affect the business succession schedule.

Key Demerits of Business Transfer

• Re-acquisition/Name Change Procedures for Licenses and Permits Required: As mentioned above, in a business transfer of a medical institution, re-acquiring or changing the name on licenses and permits is essential. This takes time and effort, and the risk of a business gap period may need to be considered.
• Re-execution of Contracts Required: For individual contracts, such as the transfer of medical fee receivables, the assumption of lease agreements, and the transfer of employment contracts with employees, re-contracting or obtaining consent from the acquiring company, the transferring company, and in some cases, third parties (employees, business partners, etc.) is necessary.
• Complexity of Administrative Procedures: Compared to a stock transfer, administrative procedures such as identifying, valuing, and contracting individual assets and liabilities, and obtaining licenses and permits, tend to be more complex.

Specific Considerations in Medical Corporation M&A

In M&A of medical corporations, in addition to general M&A issues, there are numerous specific considerations unique to medical law. Fully understanding these and selecting the appropriate method is key to smooth business succession.

1. Medical Corporation System and Membership Rights/Equity Interests

Japanese medical corporations are generally either社団医療法人 (social medical corporations, operated by general meetings of members, board of directors, etc.) which are required to be non-profit, or fund-based medical corporations with equity interests (dividends to shareholders are limited). The M&A scheme and tax treatment vary significantly depending on which form it takes.

• Social Medical Corporation (Non-Equity Interest): The focus is on the transfer of membership rights. Substantial management rights are transferred through changes in the representative director or directors and resolutions of the general meeting of members. Notification and approval from the competent authority (prefectural government, etc.) are often required, making advice from experts familiar with the medical corporation system indispensable.
• Medical Corporation with Equity Interests: Issues include the valuation of equity interests and the capital gains tax associated with their transfer, as well as taxes related to inheritance and gifts. The valuation of equity interests requires specialized knowledge and forms the basis of price negotiations in M&A. Furthermore, if individuals acquire equity interests, the possibility of future commercialization (corporatization) of the medical corporation needs to be considered, but there are many hurdles to realization under the current legal system.

2. Fund Repayment and Special Donations

In fund-based medical corporations, the repayment of funds and special donations (contributions to the medical corporation) may be considerations in M&A. If the transferring party seeks repayment of contributed funds, it depends on the financial status of the medical corporation and the provisions of its articles of incorporation. There are also cases where the acquiring party makes a special donation to the medical corporation to facilitate business succession. Since the tax treatment of these matters can also be complex, collaboration with experts is essential.

3. Handling of Licenses, Designations, and Notifications

The operation of medical institutions requires numerous licenses, designations, and notifications, such as clinic establishment permits, insurance medical institution designations, and notifications for various facility standards. How these are handled varies greatly depending on the M&A method.

• In Case of Stock Transfer: As a general rule, since the legal personality is inherited, re-acquisition or name change of individual licenses and permits is not required. However, it is necessary to confirm whether the acquiring party meets the requirements, and some procedures may be necessary in certain cases.
• In Case of Business Transfer: The acquiring party must individually undertake procedures for acquiring or changing the name on licenses and permits. In particular, insurance medical institution designation, specialist physician certification, and acquisition of facility standards may take time to review, potentially affecting business continuity.

4. Transfer of Medical Fee Receivables and Liabilities

Medical fee receivables are important assets in M&A. In a stock transfer, they are inherited along with the legal personality. In a business transfer, an individual receivables transfer agreement is required.

On the other hand, the handling of liabilities is also important. The extent to which the transferring company’s liabilities, such as loans, accrued expenses, and lease obligations, are inherited is a crucial point in M&A negotiations. While a stock transfer generally inherits all liabilities, a business transfer allows for individual selection. If the goal is to avoid the risk of off-balance sheet liabilities, a business transfer tends to be advantageous, but it increases the effort required for individual contract conclusion and licensing procedures.

Capital Gains Tax and Tax Strategy

In M&A of medical institutions, capital gains tax is an important issue for the transferring party (especially individual shareholders and members). The tax treatment varies significantly depending on the chosen method.

In Case of Stock Transfer: When shares (or equity interests) of a transferring company are transferred, the consideration is generally taxed as capital gains for the shareholders (or members) of the transferring company. Since the income tax rate (progressive taxation) applies, the higher the transfer price, the greater the tax burden tends to be. In particular, for medical corporations with equity interests, high taxes may arise depending on the valuation of the equity interests. Tax burdens may be reduced through the utilization of schemes such as the “Small and Medium Enterprise Management Enhancement Tax System,” but the requirements for applying the system must be met.

In Case of Business Transfer: The consideration for a business transfer generally accrues to the transferring company (medical corporation) and is subject to corporate tax. If the transferring company is dissolved and liquidated, income tax (or corporate tax) is levied on the portion distributed to shareholders (members) upon distribution of residual assets. The corporate tax rate (23.2% to 37.0%*) may be lower than individual income tax rates, potentially reducing the tax burden in some cases. However, the tax treatment can become complex depending on the scope of the business being transferred and the valuation of individual assets and liabilities.

*Corporate tax rates vary depending on the amount of capital, etc.

Regardless of the chosen method, it is extremely important to consult thoroughly with experts such as tax accountants before executing the M&A and to formulate a tax strategy. It is necessary to consider measures to reduce capital gains tax and the optimal scheme based on future business plans.

Regional Medical Care System and the Role of M&A

In recent years, the promotion of the regional medical care system has become an urgent issue. The differentiation and collaboration of medical functions, and the reorganization and integration of hospital beds are progressing, and M&A of medical institutions is attracting attention as an effective means to realize this regional medical care system. Cases where medical institutions struggling with a lack of successors choose M&A to maintain and develop essential medical functions in the region are increasing.

For example, a clinic specializing in a particular field can provide more comprehensive medical services by collaborating and integrating with a hospital responsible for the community-based integrated care system. Furthermore, improvements in operational efficiency and enhancement of medical quality through the introduction of new technologies and medical practices can be expected.

In selecting an M&A method, it is important to consider from the perspective of which medical functions to inherit and how to link them to achieve the objectives of the regional medical care system. Strategic M&A is required not only for business succession but also to enhance the sustainability of regional medical care.

M&A Decision-Making Process: Steps and Precautions

M&A of medical institutions requires a careful and planned process. Generally, it proceeds in the following steps. Collaboration with experts at each step leads to the smooth realization of M&A.

1. Setting M&A Objectives and Conditions: Clarify the basic direction, such as why M&A is being conducted, what kind of medical institution/business is desired to be inherited, the target transfer price, and the succession period.
2. Consultation and Commissioning of Experts: Select and consult with experts appropriate for your company’s situation, such as M&A brokerage firms, lawyers, tax accountants, and certified public accountants. It is important to choose experts with a proven track record in medical M&A.
3. Search and Selection of Candidates: Search for medical institutions willing to transfer or acquire through experts. Once a suitable candidate is found, conclude a Non-Disclosure Agreement (NDA) and begin detailed information exchange.
4. Initial Evaluation and Expression of Intent: Grasp the overview of the candidate and, if there is an intention for M&A, proceed with negotiations towards concluding a Letter of Intent (LOI). At this stage, the direction of the transfer method (stock transfer or business transfer) is also considered.
5. Due Diligence (DD): Conduct a detailed investigation of the status of the target medical institution from multiple perspectives, including legal, tax, financial, labor, and medical legal aspects. Identify off-balance sheet liabilities and potential risks here.
6. Conclusion of Final Agreement: Based on the DD results, finalize the final transfer conditions (price, transfer method, assets/liabilities to be inherited, etc.) and conclude the M&A agreement (stock transfer agreement or business transfer agreement).
7. Closing and Post-Merger Integration: Based on the agreement, proceed with payment of consideration, transfer of assets/shares, and procedures for transferring licenses and permits. Subsequently, proceed with the integration process of both organizations as PMI (Post Merger Integration).

M&A of medical institutions, unlike general corporate acquisitions, requires consideration from a broader perspective, including the quality of medical care, impact on patients, and contribution to regional medical care. Understanding the merits and demerits of both stock transfer and business transfer and choosing the method that best aligns with your institution’s situation and future vision is the first step towards a successful M&A. At M&A Medical, our specialized team of experts in the medical industry provides meticulous support for your institution’s business succession and M&A. Please feel free to contact us for an initial consultation.