2.0 Merger and Transfer of Undertakings
2.1 Merger and Labor Law
In the event of merger, a corporation as a subject of merger (merged corporation) disappears in the legal sense, and its right and duties are automatically transferred as a whole to another already existing or newly established corporation that acquires the merged corporation. Employment contracts of the employees of the merged corporation are also succeeded by the other corporation, whether the employees give consent or not. This is also true with a collective bargaining agreement.
It is to be noted that the employer's right to discharge its employees is generally restricted under the abuse of right doctrine in Japan. Sometimes redundancy may arise from organizational restructuring as a result of merger. However, the employer may not freely discharge redundant employees. Under the case law, even when there is business necessity for the employer to carry out reduction-in-force, it must make reasonable endeavor to avoid dismissals, select employees to be discharged in a fair manner, and consult workers or trade unions in order to obtain their understanding(2).
In addition, it is often necessary for the new employer to change the contents of the employment contracts of the succeeded employees in order to adjust them to the new environment or to unify the working conditions of the succeeded employees and incumbent employees. Where a trade union exists, concluding a new collective bargaining agreement is one of the most important measures. However, in such cases as when a minority union does not agree with the change, revision of work rules is another practical alternative. Case law provides that, although obtaining employees' or union's consent is a basic principle, an employer may unilaterally change working conditions by revising work rules, if such change is reasonable in light of such factors as the necessity of such change, contents of new working conditions, and the employer's effort to obtain the majority of worker's understanding(3).
2.2 Transfer of Undertakings and Labor Law
Transfer of undertakings is a measure to assign rights and duties that constitute an undertaking as a business organization to another entity. Unlike merger, the assignment of right and duties in this case does not automatically take place, but is carried out as the performance of a transfer contract. Also, the transferor does not always cease to exist, especially in the event of partial transfer.
One of the legal issues arising from a transfer of business undertakings is whether an employee of the transferor has a right to refuse to become a subject of transfer, that is to say, to refuse to become the transferee's employee. This issue has been debated, especially in cases involving partial transfer. Many courts have answered this question affirmatively, relying on Article 625 of the Civil Code(4). This article provides that the employer may not transfer its rights under the employment contract to another employer without the employee's consent.
Another issue is whether the transferor and transferee may exclude some of the employees from the subject of transfer. This issue will become particularly important if the transferor is to be dissolved as a result of the transfer, and the remaining employees are to be discharged. In EU countries, the so-called acquired rights directive (Council Directive 77/187) provides that the rights and duties of the transferor under an employment contract are automatically and mandatorily assigned to the transferee. In Japan, however, there is no such statute. Thus, a number of lower court decisions have held that it is up to the parties to the transfer contract (i.e., transferor and transferee corporations) to decide whether employment relationship is to be included as a subject of transfer(5).
Nevertheless, in cases where there is substantial identity between the transferor and transferee, some courts have held that the transferee may not refuse the succession of employment relationship. In effect, these rulings relied on the doctrine of piercing corporate veil, although only a few courts referred to it explicitly(6). Also, in cases where the contract of the transfer of undertakings does not contain a clear provision that includes employment relationship as a subject of transfer, courts have sometimes found an implied agreement to that effect(7).
3.0 Division of Corporation and Labor Contract Succession Law
3.1 Division of Corporation under the Commercial Code
As stated before, the amendment to the Commercial Code in May 2000 introduced a new scheme of business reorganization called the division of corporation(8). Under this scheme, a corporation (transferor) divides itself into two or more business undertakings and automatically assigns at least one of them to another corporation (transferee). For example, a corporation that has a hotel department and a railroad department may divide itself and transfer the hotel department to another corporation. The transferee may be a new corporation that is established through a resolution of the shareholders' meeting of the transferor (Chart 1), or an already existing corporation (Chart 2). In the former case, the division of corporation is carried out according to a division plan, which is to be adopted in the shareholders' meeting. In the latter case, the division is carried out according to a division contract between the transferor and transferee, which is also to be adopted in the shareholders' meeting of both corporations.
In both cases, the rights and duties that constitute the undertakings to be divided are assigned to the transferee as a result of the adoption of the division plan or contract by the shareholders' meeting. The division plan or division contract determines which rights and duties are to be assigned to the transferee. Like merger, this assignment takes effect automatically, i.e., without any contractual arrangement to assign rights and duties. Although the debtors may change as a result of such assignment, the consent of the transferor's creditors is not necessary. Instead, the transferor corporation shall disclose the contents of the division plan or contract and take certain procedures to protect its creditors, such as giving them an opportunity to file an objection or providing payments or collaterals to those who have filed the objection. The assignment takes effect when, after such procedures are completed, the fact of the division is registered.
When the Diet discussed the bill to amend the Commercial Code, one criticism was that such a scheme would be used to discard an unprofitable department and the employer could easily discharge employees working therein. Thus, the amended Commercial Code requires the transferor and transferee to demonstrate that both corporations are financially competent to perform the obligations they will assume after the division. This presupposes that each corporation will not fall into the state of insolvency as a result of the division. To this extent, the amendment provides for a safety valve to prevent discarding an unprofitable department.
3.2 Labor Contract Succession Law
3.2.1 Necessity of Legislation
Under the amended Commercial Code, the transferor corporation, with the agreement of the transferee corporation (if the transferee already exists), may freely determine through the division plan or contract which rights and duties are to be succeeded by the transferee, so long as the subject of transfer constitutes an undertaking as a business organization. Since the Code does not exclude employment relationship from the coverage of this scheme, the transferor employer can determine freely which employees are to be assigned to the transferee. Moreover, since Article 625 of the Civil Code, which requires the employer to obtain the consent of its employees in the event of transfer of employment contract, does not necessarily apply to such automatic succession as merger and division of corporation, an employee whom the transferor determined to transfer does not have a right to refuse the transfer.
Thus, under the amended Commercial Code alone, an employee of the transferor who has been engaging in the work of the department to be split off will not be able to move to the transferee even if he/she wants to, if the division plan or contract excludes him/her as a subject of transfer. The disadvantage of exclusion from transfer would become serious when such an employee has been working mainly in the department to be split off. On the other hand, an employee who has been working in such a department will be forced to move to the transferee if the division plan or contract includes him/her as a subject of transfer. The disadvantage resulting from such forced transfer becomes serious when such an employee has been working in the department only ancillarily or in an ancillary capacity, e.g., only one day a week in the department while working in another department for the rest of the workweek.
In this sense, the amended Commercial Code will cause problems in terms of the protection of workers. This is one of the main reasons why the Labor Contract Succession Law was enacted at the same time as the amendment of the Commercial Code. This legislation was mostly based on the proposal in the report prepared by the study group on labor relations law relating to business reorganization(9). This group was established by the Ministry of Labor (now Ministry of Health, Labor and Welfare) in 1999 as an advisory board, headed by Professor Kazuo Sugeno of the University of Tokyo.
3.2.2 Succession of Individual Employment Contract
In order to avoid serious disadvantages to employees involved in the division of corporation, the Labor Contract Succession Law has several provisions regarding the employee's rights to request the transfer of employment contract and to refuse forced transfer. The contents of these rights are as follows (Chart 3):
a. Inclusion in the transfer (Article 4)
As regards employees who have been engaging mainly in the work of the department to be split off and are excluded under the division plan or contract from the subject of transfer, they have the right to file an objection to such exclusion. If this objection is filed in a timely manner, their employment contract shall be automatically and mandatorily assigned to the transferee. On the other hand, such employees do not have the right to exclude themselves from the transfer (Article 3).
This treatment is based on the idea that the disadvantage of employees who have been engaging mainly in the work of the department to be split off is particularly serious when they are excluded from the transfer, since they will be separated from the work in which they have been mainly engaged. On the other hand, the disadvantage of such employees as a result of automatic transfer is not so serious since they can continue to work in a substantially similar organization and the contents of their employment contract remain unchanged after the transfer(10).
b. Exclusion from the transfer (Article 5)
As regards employees who have been engaging only ancillarily in the work of the department to be split off and yet are included under the division plan or contract in the subject of transfer, they have the right to file an objection to such inclusion. If this objection is filed in a timely manner, their employment contract shall be automatically and mandatorily excluded from the transfer and they continue to belong to the transferor. The Law granted the right to object to the employees who have been engaging only ancillarily in the work of the department to be split off, because the disadvantage to such employees is quite serious if they will be separated from the work in which they have been mainly engaged.
It is to be noted that employees who have not at all been engaging in the work of the department to be split off shall not be subject to the scheme of the division of corporation. Thus, the division plan or contract may not provide for the transfer of such employees, and the consent of such employees is necessary under Article 625 of the Civil Code, if the transferor wants them to be moved to the transferee(11).
c. Advance notice to employees
In order to provide employees who may be affected by the division with an opportunity to ponder and file an objection, it is necessary to notify them whether they are included in or excluded from the subject of transfer in the division plan or contract. Therefore, the Labor Contract Succession Law requires the transferor employer to give notice to its employees regarding their treatment at least two weeks before the shareholders' meeting that determines the adoption of the division plan or contract (Article 2).
d. Criteria to determine the scope of automatic transfer
Several issues remain unaddressed by the Law itself. Among them, the most important one is how to determine whether an employee has been engaging mainly or only ancillarily in the work of the department to be split off. In December 2000, the Ministry of Labor promulgated a guideline regarding the enforcement of the Labor Contract Succession Law(12). While this guideline contains a number of items, such as the working conditions that must be maintained after the transfer, the criterion for distinguishing between mainly and only ancillarily regarding the employees engaged in the work of the department to be spit off is as follows:
Whether an employee has been engaging in the work of the department to be split off mainly or only ancillarily shall be determined at the time of the making of the division plan or contract. However, even when an employee is mainly engaging in the work of the department to be split off at that time, such an employee shall not be deemed to be working mainly in such department, if his/her work is only temporary (e.g., because of training) and it is clear that the employee at issue will not be engaging in the work of such department when his/her work is completed. Also, even when an employee is not working mainly in the department to be divided at the time of the making of the division plan or contract, such an employee shall still be deemed to be working mainly in such department, if it is clear that such an employee will be engaging in the work of such department and is working in another department only temporarily.
In the event that an employee is engaging in the work of the department to be split off as well as in the work of other departments, whether the employee is engaging in the work of the former department mainly or only ancillarily is determined in light of the totality of circumstances, including how much time such an employee has spent for the work of the department to be split off, the role that the employee has been playing in respective departments, and so forth.
With respect to an employee who is working in an administrative department in charge of general affairs, human resource management, accounting, and financial management in banking, if such an employee is exclusively working for the department to be split off, he/she shall be deemed to be engaging mainly in the work of that department. When such an employee is also working for another department at the same time, his/her status shall be determined according to the totality of circumstances as stated above. When it cannot be determined under the totality of circumstances whether such employee is engaging in the work of the department to be split off mainly or only ancillarily, he/she shall be deemed to be engaging mainly in the work of that department, if the majority of transferor's employees (except for the employees at issue) are to be transferred to the transferee, unless extraordinary circumstances apply.
Finally, if the transferor changes, before making a division plan, the job or workplace of the employee who is clearly supposed to be transferred or not to be transferred to the transferee in light of his/her past job history with an intention to exclude such employee from the transferee or transferor, the determination shall be made on the basis of his/her past job history.
e. Effect of transfer
Since the division of corporation is a scheme to carry out automatic succession as in the case of a merger, the transferee succeeds the rights and duties that constitute the business undertaking as a subject of transfer with their contents unchanged. Therefore, when the employment contract of an employee is succeeded by the transferee, his/her working conditions under the contract remain intact. The guideline of the Ministry of Labor clarifies this by stating that both the transferor and transferee shall not unilaterally change the working conditions adversely because of the division of corporation. As regards the change of working conditions before or after the division for reasons other than the division itself, basic principles under the law of employment contract or collective labor relations apply, as stated before regarding merger. Thus, although the consent of individual employees or trade unions is basically necessary for such change, there may be certain exceptions under the case law doctrine of reasonable modification of work rules. Also, the guideline confirms that the transferor and transferee shall not discharge their employees just because of the division of corporation.
Another issue is the scope of working conditions to which the transferee is supposed to succeed. So long as the conditions have become the contents of the employment contract through an explicit document such as the work rules or an implied agreement under Article 92 of the Civil Code, there are few problems about succession. This is also the case with fringe benefits that employees are entitled to receive under the employment contract. Meanwhile, difficulty arises with respect to benefits, the conditions of which are provided under social security legislation. Basically, the treatment of such benefits is determined under each statute. However, if an employer has made a promise under the employment contract to make arrangements to implement such benefits, its promise will become the contents of the contract and therefore shall be succeeded by the transferee.
3.2.3 Succession of Collective Bargaining Agreement and Related Matters
a. Succession of collective bargaining agreement
With respect to collective labor relations, an important issue concerns the effect of the division of corporation on a collective bargaining agreement. Here again, a number of problems will arise if there is no special legislation other than the amended Commercial Code. Among other things, if the division plan or contract provides that the employment contracts of trade union members shall be assigned to the transferee, but that their collective bargaining agreement shall not, the union members will not enjoy the protection under the collective agreement regarding working conditions(13).
Thus, there is a need for legislation to provide for the succession of a collective bargaining agreement. However, if such legislation provides merely for the automatic transfer of a collective agreement, employees who remain with the transferor will be excluded from its coverage and lose its protection. Therefore, the Labor Contract Succession Law provides that when the employment contacts of the members of a trade union are succeeded by the transferee, it shall be deemed that a collective bargaining agreement which has the same contents is concluded between the transferee and the trade union (Article 6 (3)). Due to such a provision, trade union members can enjoy the normative effect of collective agreements under Article 16 of the Trade Union Law, whether they remain with the transferor or are assigned to the transferee.
As a result of this regulation, there may be cases where the transferee has two or more collective bargaining agreements with different trade unions so that members of each union are subject to different working conditions. Similar situations will occur in the event of merger, however, and the unification of working conditions may be achieved through the conclusion of new collective agreements or the unilateral revision of work rules under the reasonableness doctrine.
b. Partial transfer
Another question is whether it is possible to divide the contents of a collective bargaining agreement and transfer a portion of its contents. Although it is doubtful or at least not clearly possible to do so under the amended Commercial Code, there are situations where such partial transfer is appropriate. For example, suppose a collective agreement provides that a trade union has a right to use for union activities two company rooms, and these rooms are located in two buildings, which turn out to belong to the transferor and transferee respectively. In such a case, it would be a better arrangement that the transferor and the transferee respectively owe a duty to rent out the room located in the building that they own.
For these reasons, the Labor Contract Succession Law provides that a division plan or agreement may include stipulations regarding the transfer of a part of a collective bargaining agreement (other than clauses providing for working conditions), and that in such a case the transferee succeeds to the agreement according to the division plan or contract (Article 6 (2)).
c. Advance notice to trade unions
Trade unions that have a collective bargaining agreement with the transferor have a keen interest in the treatment of their agreement in the case of transfer, and there may be a necessity to consult the transferor with respect to the partial transfer as stated above. Thus, as in the case of employees, the Labor Contract Succession Law requires the transferor to give notice to such unions at least two weeks before the shareholders' meeting that determines the division plan or contract regarding the treatment of collective agreements (Article 2). Although the law itself requires such notice only with respect to unions that have a collective agreement with the transferor, the guideline issued by the Ministry of Labor recommends that the notice be given to all the unions, the members of which are employed by the transferor.
3.2.4 Worker-Management Consultation in the Case of Division of Corporation
a. Individual consultation
A number of issues were debated when the Diet discussed the bill for the amendment of the Commercial Code and the Labor Contract Succession Law. Those issues include whether an employee shall have the right to file objection when he/she is included in the subject of transfer, and whether a trade union or affected workers shall have the right to joint consultation in the course of the division of corporation. As to the former issue, it turned out that, as stated before, only the employees who have ancillarily engaged in the work of the department to be split off shall have the right to file objection to the transfer. As regards the latter issue, however, the bills were amended by the Diet to provide for two types of consultation.
First, the amended Commercial Code provides that the transferor employer shall consult in advance its employees who are engaging in the work of the department to be split off. This is to give such employees an opportunity to express their voice regarding their status in the event of a division. Thus, it is individual employees that the employer shall consult, and the subject of this consultation is basically limited to the status and working conditions of such individual employees in the event of the division. However, a trade union may request a consultation if it has obtained the delegations of its members. If the transferor commits a substantial violation of this duty, there is the likelihood that a court will declare the division of corporation itself null and void, although the standing for such action is limited to shareholders, directors, auditors, and creditors (including employees, such as those who have claims for unpaid wages or severance allowances) who do not consent to the division(14).
b. Collective consultation
Furthermore, the Labor Contract Succession Law provides that the transferor corporation should endeavor to obtain the understanding and cooperation of its employees (Article 7). Although the text of this provision is ambiguous, the Enforcement Ordinance of the Labor Contract Succession Law clarifies the contents of the transferor's duty, providing that the transferor should endeavor to obtain the understanding and cooperation of its employees through consultation with a trade union that organizes the majority of employees in each workplace or a person representing majority of the employees if no such union exists, or by measures that are equivalent to such consultation (Article 4).
Unlike the consultation under the amended Commercial Code, this consultation is collective in nature, since the purpose of this provision is to encourage the transferor to hear the voice of workers regarding the implementation of the division of corporation. Thus, the scope of this consultation is wider than that of the individual consultation. For example, this consultation may cover such matters as the background and reason for the division of corporation, the criteria to decide whether the transferor's employees are engaging in the work of the department to be split off mainly or only ancillarily, the treatment of collective bargaining agreements, and so on. Also, according to the guideline of the Ministry of Labor, this collective consultation should begin before the individual consultation, and may continue afterwards if necessity arises. Still, since this duty to consult is merely a duty to endeavor, no legal effect is directly given to the violation of this duty.
The amended Commercial Code and the Labor Contract Succession Law will take effect on April 1, 2001. A newspaper article reported that a large number of major corporations are considering to utilize the scheme of the division of corporation(15). In fact, several major corporations are preparing for the division, including Mizuho Holdings, which was established in 2000 as a result of the merger of Nihon Kogyo Bank, Daiichi Kangyo Bank, and Fuji Bank. In order to implement the division of corporation smoothly, the treatment of labor relations, whether individual or collective, is quite important. Thus, it is necessary for companies not only to be familiar with the contents of the Labor Contract Succession Law as well as the related ordinance and guideline, but also to conduct consultations in good faith with their employees or trade unions.
Also, the Labor Contract Succession Law does not contain provisions regarding the protection of workers in the event of merger and transfer of undertakings other than the division of corporation. It is because there is no substantial disadvantage to workers (especially in the case of a merger) or case law has provided substantial protection as stated before (especially in the case of transfer). Still, when the Diet passed the law, relevant committees in the Upper and Lower Houses made a resolution that further research and examination should be conducted regarding the necessity for the protection of workers in these types of business reorganization. Thus, it is necessary to pay attention to further developments on this issue*.
(1) Its formal name is Kaisha no Bunkatsu ni Tomonau Rodo Keiyaku no Shokei tou ni kansuru Houritsu (Law Relating to Succession of Labor Contract and Other Matters in the Event of Division of Corporation), Law no. 103 of 2000.
(2) See generally Kazuo Sugeno, Japanese Labor Law 407-410 (Leo Kanowitz trans. 1992).
(3) See, e.g., Sato v. Daishi Ginko K.K., 710 rodo Hanrei 12 (Sup.Ct. Feb. 28, 1997).
(4) E.g., Umemura v. Maruko K.K., 881 Hanrei Taimuzu 151 (Nara Dist.Ct. Katsuragi Branch, Jun. 18, 1992).
(5) E.g., Ito v. Ibaraki Shohisha Kurabu, 628 rodo Hanrei 12 (Osaka Dist.Ct., Mar. 22, 1993).
(6) E.g., Matsuyama Seikatsu Kyodo Kumiai v. Nakagawa, 18 Rodo Kankei Minji Saiban Reishu 890 (Takamatsu High Ct., Sep. 6, 1967).
(7) E.g., Yamaguchi v. Shin Kansai Tsushin Shisutemuzu K.K., 668 rodo Hanrei 48 (Osaka Dist. Ct. Aug. 5, 1992).
(8) See generally Masahiro Maeda, Kaisha Bunkatsu ni Kakaru Shoho To no Ichibu Kaisei ni Tsuite (Partial Amendment of the Commercial Code Regarding Division of Corporation), 1182 Jurisuto 2 (2000).
(9) Kigyo Soshiki Henko ni Kakaru Rodo Kankei Hosei to Kenkyu Kai Hokoku (2000).
(10) As stated later, working conditions of such employees may be changed unilaterally by their new employer after the division through the revision of work rules. But such unilateral change may take place regardless of the division of corporation, and there are certain restrictions on such revision based on the reasonableness doctrine established by case law.
(11) Takashi Araki, Gappei, Eigyo Joto, Kaisha Bunkatsu to Rodo Kankei (Merger, Transfer of Undertakings, and Division of Corporation in the Context of Labor Relations), 1182 Jurisuto 16 (2000).
(12) Rodo Sho Kokuji, No. 127, Dec. 27, 2000.
(13) According to Article 16 of the Trade Union Law, an individual employment contract shall not violate the provisions of a collective bargaining agreement.
(14) Koji Harada, Kaisha Bunkatsu Hosei no Sosetsu ni Tsuite (Chu) (Establishment of Legal Schemes for Division of Corporation (2)), 1565 Shoji Homu 10 (2000).
(15) Nihon Keizai Shinbun, Jan. 5, 2001, at 1.
* The author would like to thank Ms. Vai Io Lo for her helpful comments on the manuscript of this article.
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