We expect these amendments to have a substantial impact on foreign direct investment in Japan. Foreign investors will need to closely review the structure of investment and the targeted business to minimise the risk of delays and to comply with the new rules.
The new Japanese regime comes at a time when other jurisdictions have recently announced stronger screening of foreign investment in response to COVID-19 (see our previous client alert for more details).
For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.
The Act for Amendment of the Foreign Exchange and Foreign Trade Act ("Amendment") was enacted on 22 November 2019, and with the relevant rules and regulations, came into effect on 8 May 2020. Comprehensive implementation of the Amendment and the relevant rules and regulations will begin on 7 June 2020.
Overview of the Amendment
Under the Foreign Exchange and Foreign Trade Act, several types of foreign direct investment, including share acquisition, are required to notify to the Minister of Finance and the competent minister responsible for the targeted business.
Under the previous rules, foreign investors were required to submit prior notification or post-close reporting for an acquisition of 10% or more shares (including shares already held by such foreign investor directly or indirectly) in a Japanese listed company. Whether prior notification or post-close reporting would be required basically depended on the targeted business.
When a target company (including its subsidiaries, the same applies hereinafter) was engaged in a restricted business sector designated in the relevant rules and regulations ("Designated Business Sector"), foreign investors were required to submit prior notification. The Designated Business Sectors consisted of 21 business sectors (which contained 155 sub-sectors), including weapons, aircrafts, nuclear facilities, broadcasting and agriculture. When a target company was not engaged in a Designated Business Sector, only post-close reporting was required for an acquisition of 10% or more shares.
With regard to acquisition of shares or equity in an unlisted company, when a target company was engaged in a Designated Business Sector, prior notification was required. When a target company was not engaged, post-close reporting was required for acquisition of 10% or more shares.
New prior notification thresholds for acquisition of shares in a listed company
The Amendment changed the prior notification thresholds for the acquisition of shares in a Japanese listed company. After the start of full implementation of the Amendment, an acquisition of 1% or more shares (including shares already held by such foreign investor directly or indirectly) in a listed company that is engaged in a Designated Business Sector is subject to screening and prior notification.
When a target company does not conduct business activities in a Designated Business Sector, post-close reporting is required only for acquisition of 10% or more shares, which is the same as under the previous rules.
For investor's reference, the Ministry of Finance has disclosed on its website the list of classifications of listed companies ("List") indicating that each listed company conducts business activities: (i) only in non-Designated Business Sectors; (ii) in Designated Business Sectors other than the core business sectors; or (iii) in the core business sectors. The core business sectors will be discussed further below. When foreign investors acquire 10% or more shares in a company categorized into (i) above, only post-close reporting is required.
Please note that the notification/reporting thresholds in relation to acquisition of shares or equity in an unlisted company remains unchanged.
Exemptions for share acquisition
The Amendment introduced the exemption system for prior notification for an acquisition of shares or equity by foreign investors in terms of the Designated Business Sectors.
In relation to the new exemption system, the government designated core business sectors as critical industries among the Designated Business Sectors. The core business sectors currently consist of 12 sectors, which are weapons, aircrafts, nuclear facilities, space, dual-use technologies, cybersecurity, electricity, gas, telecommunications, water supply, railway and oil. Moreover, in response to the COVID-19 pandemic, the government plans to include the medicine and medical equipment sector to be among the core business sectors.
As mentioned above, the Ministry of Finance has published the List. With regard to the companies categorized in (iii) above, the List published on May 8 includes 518 companies, such as major electronics manufacturers, telecommunication companies and trading companies.
The exemption system does not apply in principle to foreign investors controlled by the foreign governments, such as state-owned companies. However, Sovereign Wealth Funds (SWFs) and Public Pension Funds that are deemed to pose no risk to national security may be eligible for the same exemption as for general foreign investors if accredited by the authorities. Also, this system is subject only to share acquisition, not to other types of investment, including business transfer.
Acquisition of shares in a listed company
When an investor is a foreign financial institution that complies with the Exemption Condition*, such investor is exempted from prior notification for an acquisition of 1% or more shares in a listed company that conducts business activities in Designated Business Sectors. Only post-close reporting is required for the acquisition of 10% or more shares in such company.
With regard to general foreign investors other than foreign financial institutions, general foreign investors that comply with the Exemption Conditions are exempted from prior notification for an acquisition of 1% or more shares in a company that operates business activities in Designated Business Sectors other than the core business sectors, and only post-close reporting is required. When general investors comply with the Exemption Conditions on Core Sectors' Business Activities** as well as the Exemption Conditions*, prior notification is required only for the acquisition of 10% or more shares in a company that operates in the core business sectors.
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Foreign Investors
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Scope
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Foreign financial institutions
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Designated Business Sectors other than core business sectors
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- Prior notification is exempted for investors that comply with the Exemption Conditions.
- Post-close reporting is required for acquisition of 10% or more share.
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Core business sectors
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General investors (including SWFs and public pension funds accredited by the authority)
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Designated Business Sectors other than core business sectors
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- Prior notification is exempted for investors that comply with the Exemption Conditions.
- Post-close reporting is required for acquisition of 1% or more share.
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Core business sectors
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- Prior notification is required for acquisition of 10% or more shares for investors that comply with the Exemption Conditions on Core Sectors' Business Activities as well as the Exemption Conditions.
- Post-close reporting is required for acquisition of 1% or more shares (less than 10%).
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State-owned enterprises
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Designated Business Sectors other than core business sectors
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No exemption is applicable (prior notification is required).
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Acquisition of shares or equity in an unlisted company
Investors that comply with the Exemption Conditions are exempted from prior notification for an acquisition of shares or equity in a company that conducts business activities in Designated Business Sectors other than the core business sectors, and only post-close reporting is required. Prior notification is required for an acquisition of shares or equity in a company that operates in the core business sectors.
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Scope
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| Designated Business Sectors other than core business sectors |
- Prior notification is exempted for investors that comply with the Exemption Conditions.
- Post-close reporting is required.
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| Core business sectors |
No exemption is applicable (prior notification is required). |
*Exemption Conditions
- Investors or their closely-related persons will not become board members of the investee company.
- Investors will not propose to the general shareholders' meeting the transfer or disposition of investee company's business activities in the Designated Business Sectors.
- Investors will not access non-public information about the investee company's technology in relation to business activities in the Designated Business Sectors.
With regard to a) and b) above, when investors need to do a) and/or b) due to any reasons caused after the completion of acquisition, they can do after prior notification and approval from the relevant ministers.
** Exemption Conditions on Core Sectors' Business Activities
- Regarding business activities in core sectors, investors will not attend the investee companies' executive board or committees that make important decisions in these activities.
- Regarding business activities in core sectors, investors will not make written proposals to the executive board of the investee companies or board members requiring their responses and/or actions by certain deadlines.
