📖 Approx. 11 min
In the management of medical corporations, mergers are sometimes considered for various objectives such as expanding business scale, improving operational efficiency, or resolving succession issues. In particular, organizational restructuring can be a crucial management strategy for promoting regional healthcare visions and enhancing adaptability to fee schedule revisions. There are broadly two types of medical corporation mergers: “absorption mergers” and “consolidation mergers (new entity mergers),” each with significantly different legal requirements, procedures, and practical impacts. This article provides a detailed explanation, from the overview of these two merger types to specific points of attention, while considering issues unique to medical corporations, to offer information that can aid your corporation’s M&A and business succession strategy.
Basics of Medical Corporation Mergers: Overview of Absorption and Consolidation Mergers
Medical corporation mergers are significant organizational restructuring activities that require approval from the prefectural governor or the Minister of Health, Labour and Welfare, based on Article 55 of the Medical Care Act. Merger types are broadly categorized into “absorption mergers,” where an existing corporation absorbs another, and “consolidation mergers,” where multiple corporations dissolve and a new single corporation is established. The choice of merger type should be carefully considered based on the merger’s objectives, the scale of the involved corporations, their financial status, and future management strategies. Generally, absorption mergers are often chosen due to simpler procedures, while consolidation mergers can be an effective means when aiming to refresh organizational culture and management systems through the merger.
When considering a merger of medical corporations, it is necessary to consider not only the integration of corporate status but also the public interest aspects such as maintaining and improving the healthcare provision system and contributing to regional healthcare. Furthermore, practical aspects such as strengthening adaptability to fee schedule revisions, maintaining or acquiring specific facility standards, or securing and retaining healthcare professionals like doctors and nurses are also important factors that influence the success or failure of a merger.
| Item | Absorption Merger | Consolidation Merger |
|---|---|---|
| Continuation of Corporate Status | The corporate status of the surviving corporation continues, and the dissolved corporation is dissolved. | All corporations are dissolved, and a new corporation is established. |
| Establishment Procedures | No new corporation establishment procedures are required. | New corporation establishment procedures are required. |
| Succession of Licenses and Permits | Generally inherited by the surviving corporation, but notification of changes or re-acquisition may be necessary in some cases. | All licenses and permits must be re-acquired by the new corporation. |
| Complexity of Procedures | Relatively simpler compared to consolidation mergers. | Tends to be more complex due to the establishment of a new corporation. |
| Costs | Relatively low cost. | Tends to be higher due to new corporation establishment fees, permit re-acquisition costs, etc. |
| Organizational Culture | The culture of the surviving corporation tends to remain strong; integration can be a challenge. | Easier to build a new organizational culture. |
| Advantages | Simplified procedures, maintenance of existing credibility and track record, cost reduction. | Overhaul of organization and management system, debt restructuring, a fresh start. |
| Disadvantages | Succession of dissolved corporation’s debts and risks, difficulty in organizational integration. | Increased procedural complexity, higher costs, risk of re-acquiring licenses and permits, reset of existing credibility and track record. |
Advantages, Disadvantages, and Practical Considerations of Absorption Mergers
Absorption mergers are one of the most commonly chosen forms among medical corporations considering a merger. Its greatest advantage is that the corporate status of the surviving corporation continues after the merger, allowing for relatively smooth business continuation. The assets, liabilities, and contractual relationships (medical service contracts, lease agreements, employment contracts, etc.) of the dissolved corporation are comprehensively succeeded by the surviving corporation. This makes it possible to suppress the effort and significant costs associated with establishing a new corporation. Furthermore, procedures for changes to licenses and permits, such as existing medical institution establishment permits and some facility standards, also tend to be simplified compared to consolidation mergers.
However, absorption mergers also have disadvantages. Since any potential liabilities, hidden debts, or past issues of the dissolved corporation are inherited by the surviving corporation, prior due diligence (detailed investigation) is extremely important. Additionally, the possibility of friction among staff and disruption of work processes due to the integration of corporations with different organizational cultures must be considered. Especially in the medical industry, where the working styles and values of professionals such as doctors and nurses are diverse, the planning and execution of PMI (Post Merger Integration) are key to success.
Specific considerations unique to medical corporations include, in the case of mergers between corporations with equity interests, the valuation of the equity interests of the dissolved corporation and their conversion into equity interests of the surviving corporation, or payment in cash, becoming an issue. This valuation is complex, and an appropriate valuation by experts is essential. Furthermore, when a non-equity interest corporation (fund contribution type) is involved, it is necessary to confirm how the obligation to refund the fund will be handled. The composition of shareholders (voting rights holders under the Medical Care Act) will also change, so it must be clearly defined in the merger agreement and approved by the articles of incorporation amendment. Moreover, while facility standards for medical fee remuneration are often inherited by the surviving corporation, in cases of complex facility standards or significant changes in bed capacity or functions due to the merger, prior consultation with the relevant regional bureau of health and welfare, notification of changes, or in some cases, re-acquisition may be necessary.
Advantages, Disadvantages, and Practical Considerations of Consolidation Mergers
Consolidation mergers involve the dissolution of all participating medical corporations and the establishment of a single new medical corporation. The greatest advantage of this merger type is that all corporations can start from scratch. This allows for the construction of an ideal organizational design and business strategy at the time of the merger, without being bound by existing organizational culture or management systems. For example, it can be an effective option when aiming to sort out the debts and potential risks of each pre-merger corporation and start anew on a clean slate, or when intending to provide entirely new medical services that maximize the strengths of multiple corporations.
On the other hand, consolidation mergers tend to be more complex and costly than absorption mergers. Establishing a new corporation requires a wide range of legal and administrative procedures, including drafting new articles of incorporation, appointing directors, applying for administrative approval, and registration procedures. Furthermore, as a new corporation, all licenses and permits, such as hospital and clinic establishment permits, must be re-acquired. Consequently, facility standards for medical fee remuneration will generally need to be re-acquired from the beginning. This means that the risk of difficulty in calculating medical fees temporarily, and the possibility of not being able to acquire high-level facility standards that were previously attainable, must be considered.
Specific issues unique to medical corporations include the need to decide at the time of the merger agreement whether the new corporation will be of the “equity interest type” or the “non-equity interest type (fund contribution type).” Particularly, if the pre-merger corporations were of the equity interest type, the equity interests will be extinguished by the merger. Therefore, careful consideration must be given to whether to allocate equity interests of the new corporation or provide monetary compensation as consideration, and expert advice is indispensable from the perspective of capital gains tax.
Key Issues in Medical Corporation Mergers: Handling of Equity Interests and Funds
Importance of Equity Interests and Funds in Medical Corporation Mergers
One of the most complex and important issues in medical corporation mergers is the handling of “equity interests” in corporations with equity interests and “funds” in non-equity interest corporations (fund contribution type). Appropriate valuation and processing of these are essential not only for adjusting the interests of the merging parties but also for ensuring tax implications and legal consistency.
- Valuation and Consideration for Equity Interests: In mergers involving corporations with equity interests, the value of the equity interests of the dissolving corporation must be appropriately assessed, and it must be decided whether to allocate equity interests of the surviving or new corporation or to provide monetary compensation as consideration. This valuation requires comprehensive consideration of real estate, medical equipment, intangible assets (brand value, service area), etc., and objective valuation by experts such as certified public accountants and tax accountants is indispensable.
- Obligation to Refund Funds: In mergers involving fund contribution type medical corporations, the issue is how the obligation to refund funds will be succeeded or how the funds of the dissolved corporation will be handled. Generally, funds are carried over to the surviving or new corporation after the merger and are handled according to the refund conditions stipulated in the articles of incorporation.
- Capital Gains Tax: When equity interests or monetary compensation are received, capital gains tax may arise for individual equity holders. Tax special provisions may apply in some cases, but it is important to consult with a tax accountant based on the individual circumstances.
- Change of Shareholders and Corporate Management: The composition of shareholders (voting rights holders under the Medical Care Act) may change significantly due to the merger. It is required to clearly define the qualifications and appointment methods of shareholders in the articles of incorporation of the post-merger corporation and to establish a smooth corporate management system.
The treatment of business tax after the merger is also an important consideration. Medical corporations are generally exempt from tax, but some profit-making businesses are subject to taxation. If the business scale or revenue structure changes due to the merger, it may affect the calculation method of business tax and the tax liability. Therefore, it is recommended to consult with a tax accountant in advance and establish an appropriate tax plan.
Specific Flow of Merger Procedures and Points under the Medical Care Act
The merger procedures for medical corporations are characterized by the requirement for administrative approval under the Medical Care Act, which differs from general corporate mergers. The main steps are outlined below, but details may vary depending on the specific circumstances and the competent administrative agency, making collaboration with experts indispensable.
- Merger Consideration and Basic Agreement: Consider the purpose of the merger, the type (absorption or consolidation), the target corporations, the merger date, etc., and form a basic agreement among stakeholders. At this stage, initial information gathering is conducted to understand the financial status, legal risks, and facility standards for medical fee remuneration of each corporation.
- Conducting Due Diligence: Conduct comprehensive and detailed investigations covering financial, legal, tax, labor, business, and medical-related aspects (medical fee remuneration, licenses and permits, suitability for regional healthcare vision) of the target corporations. This allows for an accurate assessment of the risks and opportunities associated with the merger.
- Conclusion of Merger Agreement: Based on the results of due diligence, conclude a merger agreement that includes the merger terms, consideration, merger date, and the content of the articles of incorporation for the surviving or new corporation.
- Approval at Shareholder Meeting: Obtain approval for the merger agreement at the shareholder meeting of each medical corporation. Under the Medical Care Act, approval of the merger agreement requires the assent of two-thirds or more of the voting rights of the shareholders.
- Creditor Protection Procedures: As the merger may adversely affect creditors, provide creditors with an opportunity to raise objections through public notices in the Official Gazette and individual notifications. For creditors who raise objections, protective measures such as payment, provision of collateral, or trust must be taken.
- Application for Administrative Approval: Submit an application for merger approval to the competent prefectural governor or the Minister of Health, Labour and Welfare, along with numerous supporting documents, including the merger agreement, minutes of the shareholder meeting, inventory of assets, balance sheet, business plan, and consent letters for director appointments. Explanations regarding the impact of the merger on the regional healthcare vision may also be requested at this stage.
- Merger Registration: After administrative approval is granted, proceed with the merger registration at the Legal Affairs Bureau. In the case of an absorption merger, a change of registration for the surviving corporation and a dissolution registration for the dissolved corporation are required. In the case of a consolidation merger, a establishment registration for the new corporation and dissolution registrations for each corporation are necessary.
- License and Permit Change/Re-acquisition Procedures: Carry out procedures for notification of changes or re-acquisition of hospital/clinic establishment permits, various medical licenses and permits, insurance medical institution designations, long-term care insurance service provider designations, etc. Facility standards for medical fee remuneration, in particular, may require re-evaluation based on the post-merger healthcare provision system.
These procedures are highly specialized and require prior consultation and coordination with administrative agencies. Therefore, collaborating with experts in each field, such as M&A intermediaries, lawyers, tax accountants, and administrative scriveners, is key to achieving a smooth merger.
Utilizing Experts and Prior Preparation for Merger Success
To ensure the success of a medical corporation merger, extensive specialized knowledge and practical experience are indispensable. Especially considering the regulations unique to the Medical Care Act, the complex handling of equity interests and funds, and the impact on the medical fee remuneration system, it is extremely important to form a team of experts, including M&A intermediaries, lawyers, tax accountants, certified public accountants, and administrative scriveners, and to work in close collaboration.
M&A intermediaries coordinate the entire M&A process, from searching for merger partners to negotiation, scheme construction, and closing. Lawyers provide support in legal aspects such as drafting the merger agreement, legal due diligence, and creditor protection procedures. Tax accountants and certified public accountants are responsible for financial due diligence, business valuation, analysis of tax implications, and accounting treatment, and also provide advice on post-merger tax planning. Administrative scriveners support the preparation of application documents for administrative approval and procedures for changing licenses and permits.
Prior preparation for a merger includes, first and foremost, establishing clear objectives and strategies for the merger. Sharing a vision of why the merger is taking place, what synergy effects are expected from the merger, and what kind of medical services the post-merger corporation will provide is essential for gaining the understanding and cooperation of all stakeholders involved. Furthermore, a post-merger integration (PMI) plan should also be developed early on. A concrete roadmap is needed to minimize friction arising from the integration of corporations with different organizational cultures and to build an efficient and high-quality healthcare provision system while maintaining employee motivation.
From the perspective of regional healthcare visions, it is recommended to thoroughly consider the impact of the merger on regional healthcare and, if necessary, to consult in advance with the regional healthcare planning departments. In cases of mergers involving changes or restructuring of bed functions, collaboration with administrative bodies is particularly important. By utilizing experts and appropriately managing these complex processes, a merger can become a powerful means to achieve your corporation’s sustainable growth and contribution to regional healthcare.
Medical corporation mergers are management decisions that require significant time and specialized knowledge due to their complexity. However, with proper planning and expert support, they hold the potential to greatly advance your corporation’s future. At M&A Medical, we leverage our extensive knowledge and network specialized in the medical industry to provide total support from merger consideration to execution for your corporation. If you have any questions or specific consultations regarding mergers, please feel free to use our free consultation service. We will propose the optimal M&A strategy tailored to your corporation’s situation.
Consult M&A Medical for Medical Succession
M&A Medical is a specialized M&A and business succession support service for medical institutions. As an M&A support institution certified by the Small and Medium Enterprise Agency, we support everything from the transfer of clinics and medical corporations struggling with a lack of successors to strategic acquisitions on a success fee basis.
- Initial consultation and preliminary assessment are free.
- No upfront or monthly fees (success fee only).
- Strict confidentiality (proceeds under NDA).
- Services available nationwide in all 47 prefectures and for all medical specialties.
Please consult us early, even in the initial stages of consideration, for inquiries such as “I just want to know the market price,” “I have no successor,” or “I am considering joining a group.”