Options for Medical Corporation Mergers: Differentiating Between Absorption and Consolidation Mergers

In the management of medical corporations, M&A (Mergers and Acquisitions) is a viable option for purposes such as expanding business scale, consolidating management resources, and resolving issues of successor absence. Mergers between medical corporations, in particular, can go beyond mere organizational restructuring and contribute to the maintenance and improvement of regional healthcare. However, medical corporation mergers have two methods: “absorption merger” and “consolidation merger,” each with its own advantages, disadvantages, and applicable legal regulations. The choice of method significantly impacts the complexity of procedures, tax treatment, and the future organizational structure, making careful consideration based on specialized knowledge essential. This article, aimed at chairpersons, directors, and staff considering medical corporation mergers, explains the characteristics of absorption and consolidation mergers, key points for differentiation, and specific issues unique to the healthcare industry, based on trends observed in case studies.

There are broadly two methods for mergers between medical corporations: “absorption merger” and “consolidation merger.” The choice of method is determined by the purpose of the merger, the situation of the involved medical corporations, and the desired future organizational structure. Understanding the basic mechanisms and characteristics of each method is the first step toward an appropriate merger strategy.

An absorption merger is a method where one medical corporation (the surviving corporation) inherits all rights and obligations of another medical corporation (the dissolved corporation), and the dissolved corporation is dissolved. For example, if Medical Corporation A absorbs Medical Corporation B, Medical Corporation A survives, Medical Corporation B is dissolved, and all its assets, rights, and obligations are transferred to Medical Corporation A. This method often involves relatively simple procedures and is suitable when wishing to maintain the existing corporate status of a medical corporation. It tends to be chosen for corporations with similar medical specialties or services, or when one corporation is brought under the umbrella of another. The surviving corporation’s medical corporation number, licenses, and permits are inherited as is. However, since all liabilities of the dissolved corporation are also inherited, careful investigation through due diligence (DD) is crucial.

On the other hand, a consolidation merger is a method where two or more medical corporations dissolve and establish a new medical corporation that inherits all their rights and obligations. For instance, if Medical Corporation A and Medical Corporation B merge to establish a new Medical Corporation C, both A and B dissolve, and all their assets, rights, and obligations are transferred to the newly established Medical Corporation C. This method is effective when aiming to create a completely new organizational structure or when wishing to change the type of medical corporation through the merger (e.g., from a corporate medical organization to a foundation medical organization, or vice versa). It also provides an opportunity to reorganize the entity from scratch by consolidating complex rights and obligations associated with the merger. However, consolidation mergers tend to be more procedurally complex than absorption mergers. Since procedures for establishing a new medical corporation are required, it may take more time and effort for establishment approval, registration, and other administrative processes. Furthermore, claims for medical fees, various permits, and designations held by the pre-merger medical corporations generally cease to exist and typically need to be reacquired or reapplied for by the newly established corporation.

Absorption and consolidation mergers have distinct characteristics, and the suitability of each method largely depends on the merger’s objectives and the intentions of the stakeholders. Here, we compare the two and explain the criteria for selection.

Firstly, in terms of procedural simplicity, absorption mergers are generally considered simpler than consolidation mergers. In an absorption merger, one of the existing corporate statuses of a medical corporation survives, saving the effort of obtaining new establishment approval and registration. The primary procedures involve only the dissolution registration of the dissolved corporation and the amendment registration of the surviving corporation (e.g., change of purpose). In contrast, a consolidation merger requires the dissolution of two or more medical corporations and the establishment of a new medical corporation, making the process from merger approval to establishment more complex. The number of administrative procedure steps, such as applications for establishment approval and registration, tends to increase.

Secondly, regarding the inheritance of the medical corporation status, in an absorption merger, the corporate status of the surviving medical corporation is inherited as is. This means that claims for medical fees, various designations (e.g., medical insurance provider, workers’ compensation designated medical institution), facility standards, and permits are generally inherited without change, offering significant advantages for business continuity. Conversely, in a consolidation merger, the pre-merger medical corporations dissolve, and their rights and obligations are comprehensively inherited by the newly established corporation. In this process, various designations and permits generally become invalid and typically require reapplication and acquisition by the new corporation. This can affect the billing of medical fees and future business development, necessitating careful consideration.

Tax treatment also differs between the two methods. Generally, if recognized as a qualified merger (meeting certain requirements), both absorption and consolidation mergers may be eligible for tax preferential measures such as deferral of tax on unrealized gains (book-value carryforward) and deferral of tax on capital gains for shareholders (investors). However, the requirements are complex, and expert judgment is indispensable for individual cases. Furthermore, for medical corporations, the presence or absence of equity interests (for equity-based medical corporations) and the presence or absence of funds can further complicate tax treatment. In particular, for directors or shareholders holding equity interests, the occurrence and amount of capital gains tax resulting from the merger are significant concerns.

Comparison Table: Key Differences Between Absorption and Consolidation Mergers

Mergers of medical corporations involve numerous specific legal and tax issues that differ from those of for-profit companies. In particular, the presence or absence of equity interests (in equity-based medical corporations), the presence or absence of funds, and the composition of members (investors) significantly impact merger procedures and tax treatment, requiring thorough prior understanding.

Equity Interests refer to the property rights held by investors in an equity-based medical corporation. Mergers may lead to the extinction of these equity interests or changes in their value, directly affecting the calculation of merger consideration and the existence and amount of capital gains tax. In an absorption merger, the tax implications differ depending on whether the equity interests are inherited by the surviving corporation or if monetary compensation or other assets are paid as merger consideration. Similarly, in a consolidation merger, complex considerations are necessary depending on how the equity interests in the newly established corporation are structured or whether it transitions to a non-equity-based medical corporation.

Funds refer to assets contributed as funds in a corporate medical organization. How these funds are handled during a merger (e.g., carried over to the surviving corporation, returned, or established in the new corporation) affects the merger agreement and tax treatment. The return of funds generally requires a resolution from the general meeting of members or a similar body, and tax implications on the returned amount must also be considered.

Member Changes refer to changes in the members (investors) of a medical corporation. A merger often serves as an opportunity to significantly alter the composition of members. Particularly in cases of mergers due to the absence of a successor, how to settle the equity interests and rights of the current director and current members and transfer them to new members (e.g., successors or personnel from the acquiring medical corporation) becomes a critical issue. Approval procedures at the general meeting of members and board of directors, as well as amendments to the articles of incorporation, are necessary, requiring careful procedures for each merger.

The treatment of these issues varies greatly depending on the type of medical corporation (corporate or foundation, equity-based or non-equity-based), the current articles of incorporation, the member composition, and the situation of the merging corporations. Detailed due diligence by experts and clear provisions regarding these matters in the merger agreement are key to preventing future troubles.

Medical corporation mergers require specific procedures under the Medical Care Act, such as notifications to administrative bodies and handling of permits, compared to typical corporate mergers. Here, we explain the general flow of merger procedures and particularly important points to note.

The general flow of merger procedures begins with deciding the basic merger policy, concluding the merger agreement, and obtaining approval resolutions from the general meetings of members (or equivalent bodies) of both corporations. Subsequently, an application for merger approval (or notification) is submitted to the relevant administrative authority (e.g., prefectural governor) by the effective date of the merger (usually the registration date). Once the merger is approved and the effective date arrives, registration procedures (dissolution registration, establishment registration, or amendment registration) are carried out to complete the merger.

Merger Procedure Step Flow

1. Decision of Basic Policy & Conclusion of Merger Agreement: The purpose, consideration, surviving/dissolved corporation (or new corporation), and method of payment for the merger are concretely decided, and a merger agreement is drafted.
2. Approval Resolution at General Meeting of Members, etc.: The content of the merger agreement is approved by the general meetings of members (or equivalent bodies) of both corporations.
3. Application for Approval (or Notification) to Administrative Authority: An application for merger approval is submitted to the relevant administrative authority. The merger agreement, minutes of the general meeting of members’ approval, inventory of assets, and balance sheets are attached.
4. Public Notice in Official Gazette & Demand for Objections: A public notice of the merger is made, giving creditors an opportunity to raise objections.
5. Effectiveness of Merger: The merger becomes effective through registration.
6. Registration Procedures: Dissolution registration of the dissolved corporation and amendment registration of the surviving corporation (or establishment registration of the new corporation) are performed.
7. Notification to Administrative Authority: After the merger is completed, notification of the merger completion is promptly submitted to the administrative authority.

Handling of Permits and Designations
As mentioned earlier, in an absorption merger, the medical corporation license, licenses for each medical specialty, and various designations (medical insurance provider, workers’ compensation designation, etc.) of the surviving corporation are generally inherited as is. However, if the merger results in changes to facility standards or staffing standards, for example, a notification of change or, in some cases, a re-designation application may be required. In a consolidation merger, all permits and designations generally become invalid, requiring a new application for establishment approval, followed by applications for licenses for each medical specialty and various designations. This affects the billing of medical fees and administrative guidance/audits, making prior planning crucial to avoid disruptions in post-merger business operations.

Handling of Medical Fees
A merger changes the creditor (medical corporation) of medical fee claims. In an absorption merger, the claims are inherited by the surviving corporation, while in a consolidation merger, they are inherited by the newly established corporation. Procedures for billing and receiving medical fees, as well as the settlement of outstanding amounts, must be clearly defined in the merger agreement. Furthermore, future trends in medical fee revisions are important factors in evaluating the advantages and disadvantages of the merger.

Medical corporation mergers not only consolidate organizations but also significantly impact subsequent organizational management and the regional healthcare delivery system. To achieve merger objectives and establish a sustainable management foundation, designing the post-merger organizational management structure and considering collaboration with the local community are essential strategies.

In post-merger organizational management, the integration of management philosophies and cultures of both corporations is paramount. In particular, maintaining the motivation of healthcare professionals, ensuring smooth communication, and standardizing service levels for patients are factors that determine the success or failure of the merger. The roles of the director, hospital director, and heads of each department must be clarified, and a decision-making process within the new organizational structure must be established. Furthermore, personnel transfers and adjustments in staffing due to the merger should be carried out with careful explanation and consideration.

Impact of Merger on Regional Healthcare
Mergers of medical corporations can have a direct impact on the regional healthcare delivery system. For example, while the merger of large medical institutions with multiple specialties may lead to the consolidation of previously overlapping medical services and increased efficiency, it could also result in reduced access to certain medical specialties in some areas. However, positive effects can also be expected, such as the strengthening of the management base, leading to the introduction of advanced medical equipment and the recruitment of specialized personnel, enabling the provision of advanced medical care that was previously difficult, or contributing to the strengthening of the emergency medical system. From the perspective of realizing regional healthcare visions, mergers can be important options. When considering a merger, taking into account not only one’s own corporation but also the overall regional healthcare needs and collaboration with other medical institutions will lead to the development of a better healthcare delivery system.

Handling of Business Tax and Capital Gains Tax
Attention must also be paid to the handling of business tax in medical corporation mergers. For non-equity-based medical corporations, corporate tax is exempt, but business tax is taxable. If the business content or location changes due to the merger, it may affect the taxable base or tax rate of business tax. Furthermore, in mergers of equity-based medical corporations, if it is deemed a transfer of equity interests, capital gains tax may arise for the merging parties (investors). This tax is levied on the amount obtained from the merger consideration (money or other assets received) minus the acquisition cost of the equity interests, and this amount can be substantial. By meeting the requirements for a qualified merger, it may be possible to defer or exempt this capital gains tax, but such determinations are highly specialized. M&A Medical, in collaboration with affiliated tax accountants, proposes optimal solutions for such complex tax issues.

Medical corporation mergers can be highly effective management strategies for sustainable organizational development and contribution to regional healthcare. However, the considerations are diverse, including the choice between absorption and consolidation mergers, the handling of equity interests and funds, member changes, inheritance of permits, and tax-related issues. Appropriate advice based on specialized knowledge and experience is indispensable for these complex challenges. At M&A Medical, our team of specialists familiar with the healthcare industry provides meticulous support, from planning the optimal merger scheme to execution, by carefully listening to our clients’ situations. Please feel free to discuss your corporation’s challenges during a free consultation.