Medical M&A: Practical Differences Between Share Transfers and Business Transfers

M&A and business succession for medical institutions are becoming indispensable options not only for organizational restructuring but also for maintaining and developing regional healthcare and resolving successor issues. Particularly in the acquisition and sale of medical corporations and clinics, “share transfers” and “business transfers” are primarily considered as transaction methods. However, each has distinct advantages, disadvantages, and significantly different tax and legal procedures. This article, from the perspective of experts well-versed in the practical aspects of medical M&A, explains how to differentiate between these two methods, focusing on the specific issues unique to medical corporations, and provides concrete criteria and points to consider. We hope this will be helpful in considering which method is suitable for your institution’s situation or the best option for the medical institution being acquired.

Share transfers and business transfers used in M&A for medical institutions proceed with different approaches. A share transfer is a method where the acquiring party obtains the shares of a parent company, such as a medical corporation, thereby comprehensively taking over the entire organization. This offers the advantage of seamlessly inheriting the medical corporation’s licenses, medical fee receivables, and contractual relationships. On the other hand, a business transfer involves the acquiring party acquiring specific business assets (clinic facilities, personnel, know-how, some contracts, etc.) carved out from the transferring medical corporation. While this method offers flexibility in choosing which assets and liabilities to inherit, procedures such as re-acquiring licenses and re-establishing contracts tend to be more complex. The choice of method is determined by comprehensively considering factors such as the transferring medical corporation’s organizational structure, its debt situation, the transferability of licenses, and tax implications.

A share transfer in a medical corporation involves transferring the management rights of the medical corporation itself, which offers many advantages for smoothly inheriting the medical institution’s business activities. Since rights and obligations such as licenses, designations, and notifications are generally inherited comprehensively, the effort required for individual procedures is significantly reduced. Furthermore, medical fee receivables and patient contracts are also inherited as they are, making it easier to maintain business continuity. However, share transfers also have points to be cautious about. If the transferring medical corporation has off-balance-sheet liabilities or contingent liabilities, there is a risk that these will also be inherited by the acquiring party. Therefore, it is extremely important to conduct thorough due diligence (DD) to identify potential risks in advance. In particular, medical corporations have unique issues different from general corporations, such as the existence of equity stakes, approval from the general meeting of members, and the refund of funds. In medical corporations with equity stakes, the valuation and transfer procedures of these stakes often become complex, and approval from the general meeting of members is also required. Additionally, procedures related to changes in members (shareholders) need to be confirmed. For fund contribution-type medical corporations, refund procedures for funds may also affect the succession. Considering these complex procedures and potential risks, the support of experts (lawyers, tax accountants, M&A consultants) will be indispensable.

Points to Note in Share Transfers

• Inheritance of Licenses and Designations: Generally inherited comprehensively, reducing procedural burden.
• Risk of Off-Balance-Sheet and Contingent Liabilities: Thorough risk identification through due diligence is essential.
• Valuation and Transfer of Equity Stakes: In medical corporations with equity stakes, valuation and procedures may become complex.
• Approval of General Meeting of Members: Often required as a procedural step under medical corporation law.
• Refund of Funds: For fund contribution-type medical corporations, refund procedures may impact succession.

A business transfer involves carving out specific business assets (clinic facilities, personnel, some contracts, know-how, etc.) from the transferring medical corporation and having the acquiring party individually acquire them. The biggest advantage of this method is that the acquiring party can freely choose the assets and liabilities to inherit, thus avoiding the inheritance of unnecessary liabilities or risky contracts. It is also possible for the transferring party to transfer only a part of its business while maintaining its corporate status. However, business transfers often require re-acquiring or re-establishing licenses, designations, and notifications individually, making the procedures cumbersome. For example, in the succession of a clinic, re-application for opening permits to the public health center and designation as a medical institution to the regional bureau of health and welfare may be necessary. Changes in the clinic name or medical specialties may also need to be considered. Furthermore, decisions on whether to inherit employee employment contracts individually are necessary, and legal procedures related to labor contract succession (such as a notice of labor contract succession) may be required. The transfer of medical fee receivables may also require individual consent and procedures, necessitating careful consideration to ensure business continuity. From a tax perspective, the transferring party will incur taxes on capital gains (business tax, corporate tax, income tax, etc.), and the acquiring party will recognize gains or losses based on the acquisition cost of individual assets and liabilities. Therefore, it is important to simulate the tax implications in advance. Especially when the transferring party is a medical corporation, income from a business transfer is generally taxed as capital gains, but confirmation with experts regarding the calculation method and tax rates is essential.

Points to Note in Business Transfers

• Re-acquisition of Licenses and Designations: Individual applications and notifications are required, leading to a significant procedural burden.
• Selection of Assets and Liabilities: The scope of inheritance can be limited, but contractual relationships need to be rebuilt.
• Employee Employment: Procedures for inheriting or re-establishing individual employment contracts arise.
• Transfer of Medical Fee Receivables: Coordination with relevant parties and individual consent may be required.
• Tax Implications: Both the transferring and acquiring parties will face taxation based on the valuation of acquired assets and liabilities.

Below is a comparison table of the main differences between share transfers and business transfers. The more suitable method depends on the individual situation and objectives.

Taxation in medical M&A differs significantly depending on whether it is a share transfer or a business transfer. In the case of a share transfer, the portion of the transfer price exceeding the value of the equity stake in the medical corporation is generally taxed as capital gains. For medical corporations with equity stakes, their valuation is a crucial issue. On the other hand, for medical corporations without equity stakes (NPO type), it may be treated as a refund of investment in the corporation or a dividend from the corporation, rather than an actual transfer of stakes, leading to complex tax relationships. There are also cases where a portion of the transfer price is considered a “deemed dividend” and is taxed as dividend income. In the case of a business transfer, the transferring party will be taxed on the difference between the book value and the transfer price of the transferred business assets (transfer gain) through business tax, corporate tax (or income tax). For the acquiring party, the acquisition cost of each acquired asset (building, equipment, intangible assets, etc.) will be determined based on market value, which will affect future taxes through depreciation, etc. In particular, the transfer of medical fee receivables and fixed assets such as medical equipment requires expert judgment regarding their valuation and tax implications. Changes in the external environment, such as the progress of regional medical plans and revisions to medical fee schedules, can also affect M&A tax strategies. Therefore, it is extremely important to obtain detailed tax simulations and advice from experts (tax accountants) before executing an M&A, including considering schemes to reduce the tax burden on capital gains and the possibility of utilizing business succession tax systems, to avoid future troubles.

In M&A for medical institutions, especially in the transfer or acquisition of clinics, the handling of opening permits from public health centers, designation as a medical institution by the regional bureau of health and welfare, and various other notifications and designations (such as designated medical institutions for workers’ compensation, public expense medical institutions, etc.) is extremely important. In the case of a share transfer, since the corporate status of the medical corporation is inherited as is, these licenses and designations are also generally inherited comprehensively. However, depending on changes in the corporate name, location, or representative after the transfer, some amendment notifications or name change procedures may be required. On the other hand, in a business transfer, the acquiring party must re-obtain these licenses and designations. This generally involves the acquiring party “newly becoming the opener” or “newly receiving the designation,” rather than the concept of “succession of the opener’s status” or “transfer of designation.” Specifically, applications for opening permits to the public health center, applications for designation as a medical institution to the regional bureau of health and welfare, and other related notifications must be made under the name of the acquiring party. This process includes examination periods, preparation of necessary documents, and sometimes facility requirement checks, thus requiring sufficient time. In particular, in areas where regulations on new openings and increases in bed capacity are being strengthened from the perspective of regional medical plans, the possibility of difficulty in obtaining opening permits should be considered. It is important to meticulously plan the timing of the M&A execution and the acquisition of these licenses and designations to avoid any business gaps. We recommend designing a smooth succession process in collaboration with experts (administrative scriveners, M&A consultants).

Due to its complexity and high level of specialization, achieving success in medical M&A without expert support is extremely difficult. The issues to consider are diverse, including the specific legal regulations for medical corporations, handling of equity stakes and funds, succession of medical fee receivables, transfer of various licenses and designations, and complex tax procedures. Regardless of whether a share transfer or a business transfer is chosen, it is necessary to accurately understand the advantages and disadvantages of each and select the optimal method in light of your institution’s situation and M&A objectives. Furthermore, conducting thorough due diligence to identify and assess potential risks such as off-balance-sheet and contingent liabilities in advance is a crucial factor that influences the success or failure of M&A. M&A Medical (operated by CentralMedience Inc.) is an M&A support organization specializing in the medical industry, and we handle all inquiries regarding medical M&A from directors of medical corporations, clinic directors, and those in charge of medical succession. Our experienced team of experts will carefully listen to your institution’s situation and provide comprehensive support, from considering share transfer and business transfer options to due diligence, contract negotiation, and closing. If you have any questions or concerns regarding M&A, please feel free to contact us for a free consultation. We will propose the best M&A strategy to pave the way for your institution’s future.