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This article is written by Riya Dubey who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions)  from Lawsikho.

Introduction

Japan is a new financial powerhouse globally and is the world’s biggest source of Foreign Direct Investment in the last few years with an outflow of approximately US$ 220 billion each year. However, due to the covid-19 pandemic, FDI flow had declined globally. According to the “World Investment Report, 2020” by UNCTAD, the FDI inflow of Japan remained low at US$ 14.5 billion. Multinational companies of Japan have also suffered a lot due to pandemics and the investors are postponing their plans to do investment. 

Still, Japan is the most attractive market for investors to invest in since it is the 3rd largest economy globally and has strong domestic demand. Here, we are going to discuss the latest amendment in the FDI of Japan.

Amendments in Foreign Direct Investment laws of Japan

The Foreign Exchange Act of Japan was first enacted in 1949 and is applied to all foreign trade between Japan and other countries which involves the movement of funds, goods and services, and also includes the transaction of foreign currency between residents. The Act has been amended four times since 1949 and the latest in 2019. 

On May 8, 2020 (but upon expiry of 30 days grace period, i.e., June 7, 2020) a “Foreign Investor” who wants to do any investment or activity which constitutes “Foreign Direct Investment” will be required with the approval of the Japanese government to acquire even 1 per cent of the outstanding voting rights or the issuing of shares in a publicly-traded “Designated Company, unless the “Share Purchase Exemption” applies on it.

The Foreign Exchange and Foreign Trade Amendment Act has made few key legislative changes. They are:

  1. Change in the shareholder threshold for some reviewable FDI from 10% to 1%.
  2. Change is made in the definition of “Foreign Investor”.
  3. Foreign Investor has to rely on the “share purchase exemption”.
  4. Change is made by expanding the government authority’s power to-
    Provide information to some friendly foreign governments;
    Interfere in the completed transaction or activity which failed to give an advanced notification.

Key terms-

  • Designated Company: 

It means any entity that is engaged in any Designated Business Sector including a Core Sector.

  • Designated Business Sector: 

It means the general business activities which are listed in the table below into different categories. 

  • Core Sector: 

It is said to be a subset of a Designated Business Sector and the list of the same is provided in the table below and is divided into different categories.

  • Foreign Investor: 

It means any individual or entity that is not a resident of Japan, and an organized company of Japan in which 50 % or more of the voting rights are controlled or owned by a non-resident of Japan.

Business activities subject to new amendments in FDI

The table below provides the list of business activities that are subject to new amendments in foreign direct investment:

Category 1: Nation Security

S. No.

Designated Business Sector

Core Sector

1.

Weapons 

All 

2.

Aircrafts 

All 

3.

Space 

All 

4.

Nuclear Facilities

All 

5.

Dual-use technologies i.e., businesses that are subject to export control regulations of Japan including software, engineering, and manufacturing)

All 

6.

Cybersecurity 

Related to cyber security services, software for inputting the Japanese language,

Service provider for critical infrastructure, service provider for handling personal and sensitive information of more than one million persons.

 

Category 2: Infrastructure

S. No.

Designated Business Sector

Core Sector

 

Electric power

Includes electricity transmission and its distribution, electricity generation utilities with a maximum generation capacity of 50,000 kilowatts.

2.

Gas 

Includes gas pipeline service providers, gas manufacturers, and liquefied petroleum gas companies with storage facilities or core cylinder filling stations. 

3.

Telecommunications

Includes carriers that provide service to multiple municipalities.

4.

Water 

Includes water supply companies supplying more than 50,000 people or bulk water supply companies with the capacity to supply over 25,000 cubic meters per day.

5.

Railway 

Includes railway service companies operating public facilities

6.

Oil 

Includes oil refineries, storage businesses, or crude oil or natural gas production business. 

 

Category 3: Public safety

S. No. 

Designated Business Sector

Core Sector

 

Heating supply

N/A

2.

Broadcasting 

N/A

3.

Public transportation 

N/A

4.

Biological products 

N/A

5.

Security service 

N/A

 

Category 4: Smooth management of the Japanese economy

S. No. 

Designated Business Sector

Core Sector

1.

Agriculture 

N/A

2. 

Leather 

N/A

3. 

Air transportation 

N/A

4. 

Marine transportation 

N/A

 

Exemptions

Exemptions for share purchase:

Depending upon the few things one can get exemption i.e. acquisition of shares without the approval of the Japanese government. The criteria are:

  1. Number of shares being acquired;
  2. Who is the Foreign Investor;
  3. Whether Foreign Investor agrees to limitations in its shareholding rights;
  4. The business activities of the company, whose shares Foreign Investors wants to purchase; and
  5. The past of regulatory compliance of the Foreign Investor.

Depending upon these it is decided whether or not Foreign Investor will get covered under a “Blanket Exemption” or “Regulatory Exemption”.

Criteria for Blanket Exemption:

The benefit of Blanket Exemption is made available to certain Foreign Investors only. Such Foreign Financial Institutions has to be high-frequency traders and should be registered under Japan’s Financial Services Agency, security firms, banks, insurance companies, asset management companies, trust companies, and registered investment trusts that come under the financial regulations of Japan and has to agree with certain conditions stated below:

  1. It (including all closely related persons) will have to agree for not becoming a board member of the Designated Company;
  2. It will have to agree for not proposing the transfer or disposition of the business activities at a shareholder’s meeting relating with a Designated Business Sector.
  3. It will have to agree for not getting access to non-public information about the technology used by Designated Company in a Designated Business Sector.

The third condition does not get breached if the Designated Company itself provided access to non-public information.

When there is a share purchase of one or more per cent in a Publicly Traded Designated Company 

Then under a Blanket Exemption, there is no need for Foreign Investors to get the approval of the Japanese government for acquiring shares with no upper limit even when the publicly traded Designated Company is dealing with a Core Sector. 

However, for purchasing 10% or more voting rights or issued shares under Blanket Exemption then a Foreign Investor has to file a notification on post-acquisition to the Ministry of Finance and Ministry of economic seeing the industry in which Designated Company works. 

Private Designated Company

In the case of a Private Designated Company, the Blanket Exemption does not apply and according to the new amendment, there is no difference between the treatment of financial institutional investors and ordinary investors in the case of a Private Designated Company.

Criteria for getting Regular Exemption:

All Foreign Investor can avail of Regular Exemption except persona non grata. Foreign Investors who are not registered under Japan Financial Service Agency can use a Regular Exemption. This exemption can even be used by sovereign wealth funds and public pension funds but for this Foreign Investors should have signed MoU with the Ministry of Finance that the investment made by them is only for economic return and there is no intervention from Japan government for this. 

Since these MoUs are not provided publicly, therefore, the Designated Company dealing with Foreign Investors will have to get comfort from the Foreign Investor that there is no need for Japanese government approval for the proposed transaction. The exemption is provided depending on the Core Sector in which the Designated Company is involved.

In case of purchase of 1% or more of a Publicly Traded Designated Company engaged in only Non-Core Sector

Then under a Regular Exemption, a Foreign Investor can acquire without any upper limit of such Designated Company without getting the approval of the Japanese government till Foreign Investors agree with all the conditions of General Exemption. However, for this Foreign Investors has to file notification on post-acquisition to the Ministry of Finance and Ministry of economic seeing the industry in which Designated Company works. 

In case of purchase of 1% or more of a Publicly Traded Designated Company engaged in Core Sector

Then under the Regular Exemption, a Foreign Investor can acquire up to 10% without getting the approval from Japanese government till the Foreign Investor agrees with all the conditions of General Exemption in addition to the following two conditions:

  1. That it will not be a part of any committee that takes the necessary and important decision  of such Designated Company;
  2. That it will not make any written proposal that makes it mandatory to respond in the certain time limit to the Board of Directors of such Designated Company.

Here also a Foreign has to file notification on post-acquisition to the Ministry of Finance and Ministry of economic seeing the industry in which Designated Company works. 

Private Designated Company

In case of purchase of shares of a Private Designated Company- then as per the amendment Foreign Investor even if purchases one share or more shares, then he has to fulfil following requirements:

  • If the Designated Company is involved in Core Sector then Foreign Investor has to take the approval from the Japanese Government and also have to file a notice of post-acquisition to the Finance Ministry and the Japanese Economic Ministry seeing that industry in which that Designated Company works;
  • If the Designated Company is not involved in Core Sector, then there is no need to take approval from the Japanese Government as long as Foreign Investor agrees to:
  1. The conditions of the General Exemption;
  2. File a notice of post-acquisition to the Finance Ministry and the Japanese Economic Ministry seeing that industry in which that Designated Company works.
  • If it is not a Designated Company and Foreign Investor wants to purchase 10% or more of the share of the company, then he has to only file a notice of post-acquisition to the Finance Ministry.

Criteria for Persona Non Grata

No relief is given to companies that are under the control of foreign government (except with whom MoU has been signed by the Finance Ministry). Therefore, Foreign Investor has to take the approval of the Japanese Government to purchase

  1. 1% or more of the issued shares of Public Designated Company; or
  2. Any number of shares if it is of the Private Designated Company.

And any Foreign Investor must get approval from the Japanese Government for purchasing equity in any amount stated above if that has been sanctioned due to-

  1. Violation of the FDI Act and in case of persona non grata it will get expired after 5 years from the sanction imposed; or
  2. Not compiling with the guidance given by the Japanese Government for the Blank Exemption or the Regular Exemption and if it’s a case of persona non grata then it cannot be cured.

Approval of the Japanese Government and Notification Filing:

  • For Approval Filings

To get approval for the share purchase of a Designated Company then the filing is submitted to the Finance Ministry and the Japanese Economic Ministry under which the Designated Company works. There is no fee for filing. The approval filing should be filed within 6 months of the proposed acquisition, and it shall be decided within 30 days. The decision will be taken by both ministries together. Only one approval filing can be done for the acquisitions that will be done in 6 months from the submission date. The details of the filing are not made publically available.

The information that the filing contains are as follows:

  1. The object of the acquisition;
  2. Participation in the management related to the acquisition;
  3. Change in the size of the business of the Designated Business Sector after acquisition;
  4. The parent company or persons who influence the business decisions of the Foreign Investor.

The decision taken by the ministries will be notified to the Foreign Investor but not the rationale behind the decision.

  • Notice Filing

A similar notice filing has to be submitted to the Finance Ministry and the Japanese Economic Ministry under which the Designated Company works. In 45 days from the closing of share purchase, the filing of the notice should be done. There is no fee for filing notice and it is not made available to the public.

  • Punishment

If the Foreign Investors fails to comply with the FDI Act then it can lead to imprisonment for up to 3 years or a penalty of up to JPY 1,000,000 and if the investment is done is above JPY 1,000,000 then the fine can be up to three times of the investment done.

Conclusion

Now, a Foreign Investor has to be very careful while dealing with share purchase transactions with any Japanese company. Foreign investors must check if any industry-specific requirements can impact the transaction.

FDI in areas related to national security, public infrastructure and safety, and certain other industries are subject to the prior notification obligation. Japan has tightened its regulations for foreign direct investment and now for acquiring even 1% of shares there is the need to get government approval if it is not getting covered under shareholder’s Exemptions.

Reference

 

 


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