New regulations on foreign investors’ acquisition of Japanese companies
September 2017 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
September 2017 Issue
On 17 May 2017, the Japanese Diet passed an amendment to the Foreign Exchange and Foreign Trade Act (FEFTA), which will come into effect in or before May 2018. The amendment places a new pattern of transferring shares in unlisted Japanese companies under screening by the Japanese government. The amendment also strengthens the criminal penalties for the transaction of technology and goods in breach of the FEFTA, as well as introduces new administrative measures to counter breaches.
New enactment on foreign investor’s acquisition of shares in Japanese companies
Article 26(1) of the FEFTA will be amended to expand the scope of “foreign investors”. Under the current law, a “foreign investor” is defined as any person who makes an “inward direct investment, etc.”, as specified in Article 26(2), and falls within the categories set out in Article 26(1). Under the amendment, any person who makes a “specified acquisition”, as defined in Article 26(3), is also included in the definition of “foreign investor”, insofar as the person falls within the same categories in Article 26(1). Article 26(3) defines the term “specified acquisition” as the transfer of shares in an unlisted Japanese company from one foreign investor to another. It follows that, such transfer of shares, which has not been subject to advance screening by the Japanese government, will also be subject to an advance notification requirement.
Under the current law, the principle for inward foreign direct investment under the FEFTA is the post-reporting system, under which a foreign investor has the obligation to report to the Minister of Finance and the relevant ministers the content and the time of making the investment only after it has been made. Exceptionally, however, inward direct investment to certain business sectors is subject to the obligation of advance notification and to screening by the relevant ministers. The business sectors are identified by the relevant cabinet order, ministerial order and public notice of the cabinet office. They include not only those related to national security, public order, public health and safety, but also businesses, such as those in agriculture, forestry and fisheries, the oil industry, leather and leather product manufacturing, and air and water transport, which are listed in Organisation for Economic Co-operation and Development (OECD) codes of liberalisation of capital movements to avoid potentially material adverse effects on the Japanese domestic economy.
Inward direct investment to these businesses is subject to the requirement of advance notification, and shall not be made until the expiration of 30 days from the date of receipt of the notification by the relevant ministers. However, this period may be shortened upon the finding of the relevant ministers that the relevant investment does not, in fact, require examination. Under the current practice of direct inward investment, the review period is generally shortened to 14 days, unless the Ministry of Finance or relevant ministry notifies otherwise, in which case the review period can be extended to four months (and in certain circumstances, up to a maximum of five months) from the filing date. While the rationale of the advance notification and screening system is that inward direct investment should be subject to restrictions only in exceptional cases, in practical terms, this is effectively equivalent to an approval system, in the sense that the relevant inward direct investment cannot be made if it does not pass the screening by the relevant ministers. That is, if the relevant ministers conclude the existence of one of the circumstances listed below, with respect to a notified inward direct investment, they may recommend, after obtaining the opinion of the Council for Customs and Foreign Exchange, that the person who submitted the notification modifies, or even discontinues, the proposed investment. If the person who receives this recommendation does not accept the recommendation or fails to give notice of acceptance or non-acceptance within 10 days from the date of its receipt, the relevant ministers may then order modifications to or the discontinuation of the proposed investment, within a specific time period. The conditions for the relevant ministers to exercise their power to make a recommendation are the existence of the possibility of “impairment of national security”, “disturbance of the maintenance of public order” or “significant adverse effect to the smooth management of the Japanese economy”. To date, there has only been one case in which the discontinuance of a proposed investment by a foreign investor was recommended.
The amendment also introduces the requirements of advance notification and screening to specified acquisitions, with the same statutory timeframes as those for inward direct investment (Article 28). The cabinet order designating the business sectors that are subject to these requirements with respect to specified acquisitions has not been proposed. Likewise, the cabinet order concerning the shortening of the review period for specified acquisitions is yet to be proposed, but it is reasonably expected that the practice of inward direct investment will be generally adopted for specified acquisitions. The amended law also sets out the power of the relevant ministers to recommend the modification or discontinuance of the proposed investment.
It should be noted that the amendment, which introduces additional restrictions on inward foreign direct investment, carefully avoids possible inconsistencies with international investment agreements (IIAs) Japan has concluded. It does so by: (i) providing that the relevant ministers may recommend the modification or discontinuation of the proposed investment, only with respect to “specified acquisitions pertaining to national security”; and (ii) limiting the scope of the “specified acquisitions pertaining to national security” to specific acquisitions that are not subject to IIA obligations concerning the restrictions on inward direct investment (Article 28(3)). This underscores the need for a careful examination of the “lists of non-conforming measures” attached to Japanese IIAs that provide obligations with respect to the establishment, acquisition and expansion of investments. The lists of non-conforming measures exclude specified domestic regulatory measures or business sectors/activities from the scope of application of certain IIA obligations, and are divided into the following two categories: the non-conforming measures with so-called “ratchet obligations”, which requires an amendment to any non-conforming measure not to decrease the conformity of the measure with the relevant obligations as it existed immediately before the amendment; and the non-conforming measures that are not subject to such obligations. The caveat in Article 28(3) will not apply to business sectors, sub-sectors or activities covered by the reservation without the ratchet obligations.
The amendment also introduces a new administrative measure in which the government may issue an order to sell or take other measures on the shares in Japanese companies that foreign investors have acquired in breach of regulations on direct inward investments or specified acquisitions (Article 29).
Strengthened criminal penalties
The amendment strengthens criminal penalties on the import and export and the transaction of technology in breach of the FEFTA. For example, the maximum monetary penalty for the import and export and the transaction of technology related to weapons of mass destruction is the higher of ¥1bn or five times the amount exported by breaching corporations, and the higher of ¥30m or five times the amount exported by breaching individuals.
New administrative measures to counter breaches of the FEFTA
The amendment introduces new administrative measures to strengthen controls over the import and export of goods that threaten Japanese national security. Even under the existing FEFTA, the Minister of Economy, Trade and Industry may order the breaching person not to import or export for a period of up to three years. However, the existing FEFTA does not authorise the Minister to order such breaching natural person not to engage in import or export as a director or similar position of another company, nor to order the directors or employees of such breaching corporate or natural person not to engage in the business that caused the breach. The amendment newly authorises these administrative measures while the authorised maximum period of the prohibition order on imports and exports will be extended from one year to three years, with respect to the import from and export to North Korea in breach of the FEFTA. Furthermore, the amendment authorises the Japanese government to inspect agencies and other related parties, in addition to banks, importers and exporters (the inspection of which is authorised by the existing FEFTA) for the purposes of enforcing the FEFTA.
In recent years, there have been growing concerns over divulgence of Japanese technology and goods that potentially affect national security. With this background, the amendment was introduced with a view to ensuring the effectiveness of necessary import and export control of technology and goods. In this context, it should be noted that the Japanese government broadened the objective of cargo inspections to enforce not only the list control but also catch-all control in June 2017, with the aim of countering North Korea’s nuclear and missile activities. In light of the current geopolitical climate, further attention must be paid to the implementation and application of the FEFTA.
Tomoko Ishikawa is an associate professor at Nagoya University and Masaki Yukawa is an associate at Mori Hamada & Matsumoto. Professor Ishikawa can be contacted by email: firstname.lastname@example.org. Mr Yukawa can be contacted on +81 3 6266 8764 or by email: email@example.com.
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