Article

The CFIUS “White List” Class of 2020: Potential Takeaways for Japan

Kokusai Shoji Homu (International Business Law and Practice)

September 2020
Reprinted with permission. This article was originally published in Japanese by Kokusai Shoji Homu, Vol. 48, No. 9 (2020).

It is fair to say that 2020 has been a challenging year for non-U.S. investments in U.S. companies involving cutting-edge technologies, high-profile industries, or large quantities of personal data. Earlier this year, the U.S. Department of the Treasury announced new regulations to “modernize” the process for reviewing certain foreign investment transactions and the authority of the Committee on Foreign Investment in the United States (“CFIUS”), an interagency committee charged with identifying and mitigating national security concerns associated with foreign investments in U.S. companies.[1]

These new CFIUS regulations, effective as of February 2020, implement the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which introduced novel and (for many foreign investors) significant features, such as mandatory CFIUS filing requirements for some transactions, reviews of certain “non-controlling” investments and real estate transactions, stricter penalties for non-compliance, and filing fees of up to $300,000. As a result, non-U.S. investors who had never been concerned about CFIUS now have to consider whether they are required to seek CFIUS approval before closing a transaction, should voluntarily submit to a CFIUS review, or should structure their investment to minimize CFIUS risk.

At the same time, however, under the recent changes to the CFIUS regulations there is also a new class of investors that is experiencing some relief. These are the so-called “white list” of excepted investors with sufficient ties to “excepted foreign states” and who are exempt from the most significant effects of the new CFIUS rules, including the mandatory filing requirements and the expanded scope of CFIUS’s jurisdiction over certain non-controlling investments. The initial excepted foreign states—Australia, Canada, and the United Kingdom—are, not surprisingly, close U.S. allies with deep, long-standing partnerships with the United States in the areas of defense, defense industry, sensitive programs, intelligence sharing, and trade policy. This has led investors from other close U.S. allies, including Japan, which is the third-largest source of foreign direct investment (“FDI”) into the United States, behind the United Kingdom and Canada (Australia is thirteenth),[2] to question what steps are needed to join the list of CFIUS excepted foreign states, and how this might play out in the coming years.

This article examines the CFIUS rules surrounding excepted investor status, including the requirement that an excepted foreign state must have adopted a “robust” foreign investment review process aimed at analyzing national security risks and cooperating with the United States. We also discuss the current excepted foreign states and their respective investment review processes, including recent changes that may relate to maintaining their white list status. Finally, we outline the recent changes that Japan has made to its foreign investment review regime, as well as other factors that may be relevant to Japan’s prospects of becoming an excepted foreign state in the future.

I. The CFIUS Excepted Investor Rules

Prior to FIRRMA, CFIUS’s scope of review—“covered transactions”—was limited to transactions that could result in “control” of a U.S. business by a foreign person.  The nationality of the foreign person did not affect whether a transaction was “covered,” though CFIUS considered the nationality of the foreign person—in particular, its connections to a foreign government—in assessing the risk of a covered transaction to U.S. national security. Post-FIRRMA, “control” transactions are still covered, and for these transactions, the nationality of the foreign person does not affect whether CFIUS can review the transaction.

The new CFIUS rules implementing FIRRMA expanded CFIUS’s scope of review to include certain non-controlling “covered investments” in U.S. businesses involving critical technologies, critical infrastructure, and sensitive personal data (the so-called “TID U.S. businesses”).[3]  Some investments in TID U.S. businesses now trigger mandatory CFIUS filings, which the parties must submit to CFIUS at least 30 days prior to closing the transaction.[4]  The new rules also give CFIUS expanded power to review “covered real estate transactions,” including purchases or leases of undeveloped land, if the real estate in question is within a certain proximity to sensitive U.S. military and government sites.[5] 

In connection with this expanded scope of review, FIRRMA directed CFIUS to develop regulations that would limit the application of these new covered investments and real estate transactions to certain categories of foreign persons, taking into account the foreign person’s connection to a foreign country or government. FIRRMA did not specify whether this should be, in effect, a “white list” or a “black list.” The new CFIUS regulations implement a relatively narrow “white list” approach that provides exemptions for qualifying investors from excepted foreign countries, but far from a blanket exemption for all investors from such countries. 

The excepted investor status exempts qualifying investors from aspects of these TID U.S. business and real estate rules. This provides excepted investors a significant advantage over non-excepted investors when pursuing more sensitive investments in the United States. As explained in more detail below, however, the excepted investor criteria are complex and, at least for now, only apply to investors from just three excepted foreign states—Australia, Canada, and the United Kingdom.

A. What Are the Advantages of Being an Excepted Investor?

First, excepted investors are exempt from CFIUS jurisdiction over non-controlling covered investments in TID U.S. businesses, and from CFIUS’s expanded jurisdiction over covered real estate transactions. In other words, excepted investors’ transactions are only CFIUS covered transactions if they could result in control of a U.S. business, as was the case pre-FIRRMA. Because the CFIUS regulations define control broadly, this is not a free pass for excepted investors, but it does exclude them from some of the most significant effects of FIRRMA.

Second, excepted investors are exempt from mandatory CFIUS filings, placing them in the voluntary filing regime that applied to all CFIUS-covered transactions pre-FIRRMA. Currently, parties to a transaction in the United States must submit a mandatory CFIUS filing at least 30 days prior to closing in two scenarios:

(1)   The acquisition of a 25% or greater interest in a TID U.S. business by an investor in which a foreign government holds at least a 49% interest; and

(2)   A covered transaction involving any U.S. business that produces or develops critical technologies used in or designed specifically for one or more of 27 industries identified in the CFIUS regulations.[6]

In the first scenario, the mandatory filing requirement does not apply if the foreign government in question is the government of an excepted foreign state. This is true even if the foreign investor does not otherwise meet the criteria of an excepted investor. Excepted investors are also exempt from the mandatory filing requirement in the second scenario involving U.S. critical technologies companies.

B. What Are the Criteria for an Excepted Investor?

To qualify as an excepted investor, the non-U.S. party to a transaction must be either (1) a foreign national of an excepted foreign state, and not a dual-national from a non-excepted foreign state, (2) a government of an excepted foreign state, or (3) an entity that meets each of the following conditions with respect to both itself and each of its parents:[7]

  • Organization/Principal Place of Business: The entity must be organized under the laws of, and have its principal place of business in, the United States or an excepted foreign state.
  • Board of Directors: 75% or more of the members of the board of directors or governing body and 75% or more of any observers of the board of directors or governing body are either U.S. nationals or persons who are nationals of one or more excepted foreign states (and not also nationals of any non-excepted foreign state).
  • Nationality of Significant Owners/Shareholders: Any foreign persons who individually or as a group hold 10% or more of the voting interest, rights to 10% or more of profits, or 10% or more of the assets (upon dissolution) of an entity, or that could otherwise control such entity (for CFIUS purposes), must be (i) exclusively a national of one or more excepted foreign states; (ii) a foreign government of an excepted foreign state; or (iii) a foreign entity organized under the laws of an excepted foreign state and that has its principal place of business in an excepted foreign state or the United States.
  • Minimum Excepted Ownership: For a privately held entity or an entity publicly traded on an exchange outside the United States that is not in an excepted foreign state, at least 80% of its voting interest, profit interest, or interest in its assets (upon dissolution) must be held individually or in the aggregate by persons each of whom either is not a foreign person or qualifies as (i), (ii) or (iii) in the preceding bullet. For an entity publicly traded on an exchange in the United States or an excepted foreign state, the threshold is only a majority of the entity’s interests.

For at least three years after a transaction closes, an excepted investor must continue to meet these criteria with respect to its place of organization/nationality, principal place of business, and board of directors, and otherwise be in compliance with applicable CFIUS regulations to maintain its excepted investor status with respect to the transaction. In addition, neither the investor nor any of its parents, nor any entity of which the investor is a parent, can be on the U.S. Department of Commerce Unverified List or Entity List at the time the agreement establishing the material terms of the transaction is signed.

Another significant component of the excepted investor criteria is a history of compliance with U.S. laws and regulations, including applicable CFIUS regulations. Specifically, an investor is disqualified from excepted investor status for a period of five years if it:

  • Receives written notice from CFIUS that it made a material misstatement or omission in a CFIUS filing or made a false certification to CFIUS, or that it has violated a material provision of a CFIUS mitigation agreement, condition, or order;
  • Is the subject of an order from the President to block or unwind a transaction;
  • Has been fined for or entered into a settlement agreement for violations of U.S. sanctions laws;
  • Receives written notice of debarment from the U.S. Department of State Directorate of Defense Trade Controls;
  • Has been a respondent or party in a final order from the U.S. Department of Commerce regarding violations of U.S. export control laws;
  • Receives a final decision from the U.S. Department of Energy imposing a fine for violations of the Atomic Energy Act; or
  • Has been convicted of, or entered into a deferred prosecution agreement or non-prosecution agreement, with the U.S. Department of Justice for any felony in the United States.    
C. What Is the Process for Designating Excepted Foreign States?

To designate a country as an excepted foreign state, the regulations require a two-part test: CFIUS must first determine that the country is an “eligible foreign state,” and then determine that the country has a robust foreign investment review regime that includes cooperation with the United States.

At the time the new CFIUS rules became effective in February 2020, only the first of these two criteria was effective; i.e., that CFIUS determine that a country is an “eligible foreign state.”  Neither FIRRMA nor the CFIUS regulations identifies any specific criteria for determining whether a country is an eligible foreign state; this is a “behind the curtain” U.S. government process. Based on the legislative history and stated goals of FIRRMA and the initial list of such countries, however, it appears this process is meant to identify close allies of the United States with effective cooperation on national security and foreign investment goals and mechanisms, and on trade policy more generally.

In its comments to the new rules, the U.S. Department of the Treasury stated that CFIUS had initially selected Australia, Canada, and United Kingdom as eligible foreign states “due to aspects of their robust intelligence-sharing and defense industrial base integration mechanisms with the United States,” which includes these countries’ participation (along with New Zealand) in the “Five Eyes” intelligence sharing program.[8] Treasury also noted that expansive application of excepted foreign states designation would carry potentially significant implications for U.S. national security. Consequently, CFIUS initially identified only a limited number of eligible foreign states with the possibility of expanding the list in the future. The regulations give the CFIUS member agencies full discretion to make this determination. There is no application or appeals process, nor is there a formal oversight function by any other part of the U.S. government.

Beginning in February 2022, however, excepted foreign states—including the three countries currently on this list—must meet the second test. CFIUS must make a determination that each eligible foreign state “has established and is effectively utilizing a robust process to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security.”[9] 

CFIUS has published factors that it will consider in making this determination, which include:

  • Authority to Review Transactions: The extent to which the foreign state possesses legal authority to review foreign investment transactions regardless of whether the parties involved are publicly traded, privately held, or state-owned entities;
  • Scope of Transactions Subject to Review: The extent to which the foreign state has in place and effectively utilizes a review mechanism for foreign investment transactions that is cross-sectoral and includes the defense industrial base, advanced technology, dual-use and military goods, network technologies, and critical infrastructure of the foreign state;
  • Enforcement Authority: Whether the foreign state possesses the legal authority to impose conditions on, prevent, or, if already consummated, unwind, foreign investment transactions to protect its national security, and the extent to which the foreign state has effectively utilized such authority;
  • Scope of Information Considered: Whether the foreign state has the legal authority to obtain information concerning, and conducts a comprehensive analysis of (1) the ultimate beneficial owners of the parties to a foreign investment transaction; (2) the persons with key rights relating to important matters affecting the parties to a foreign investment transaction; and (3) the national security risk posed by the parties to a foreign investment transaction;
  • Confidentiality: The extent to which the foreign state maintains the confidentiality of sensitive commercial information provided by the parties to transactions reviewed by the national security investment review regime of the foreign state;
  • Compliance Monitoring and Enforcement: The extent to which the foreign state monitors and enforces compliance by parties to a foreign investment transaction with conditions the foreign state has imposed on such transaction;
  • Monitoring of Non-Notified Transactions. The extent to which the foreign state monitors and identifies foreign investment transactions for which the parties to such foreign investment transactions did not notify the foreign state government authorities;
  • National Security Cooperation with the United States: Whether the foreign state has in effect an arrangement with the U.S. government to safeguard national security as it pertains to foreign investment that includes confidentiality and classification requirements regarding sensitive information shared by the U.S. government with the foreign state;
  • Information Sharing: Whether the foreign state possesses the legal authority to share with the U.S. government information important to national security analysis of foreign investment, to the extent necessary for national security purposes, and subject to appropriate confidentiality and classification requirements; and
  • Other Factors: Such other factors as CFIUS may deem to be appropriate regarding a foreign state’s processes related to reviewing foreign investments for national security risks, generally or in connection with a specific foreign state, including the national security interests of the United States.[10]

CFIUS can rescind a country’s status as an excepted foreign state at any time. In other words, excepted foreign state status is not permanent, and the U.S. government may seek to use this process as leverage to encourage continued engagement and cooperation on national security and other matters. If a country loses its excepted foreign state status at any point, investors from that country would not be required to make retroactive CFIUS filings for transactions that have already closed, but it would eliminate their excepted investor status for future transactions.

II. The 2020 “White List” Countries

The factors that CFIUS has stated it will use to determine whether a foreign state has a “robust process” to analyze foreign investment risks provide some general guidelines for countries looking to join (or remain on) the excepted foreign state list. It is also instructive to review briefly the current foreign investment risk review processes that the current white list countries have in place, and upcoming changes they have announced.

A. Australia[11]

Australia regulates inbound FDI under the Foreign Acquisitions and Takeovers Act of 1975 (“FATA”), which underwent a significant overhaul in 2015, to determine whether an investment or covered action made or proposed by a foreign investor is in the national interest. FATA and its implementing regulations establish and authorize the Australian Foreign Investment Review Board (“FIRB”) to review certain investments/acquisitions made by foreign persons. Based on the results of such review, Australia’s Treasurer has the power to determine whether a transaction is contrary to the national interest and prohibit or unwind the transaction if necessary.

A number of factors determine which transactions require notification to the FIRB or are otherwise subject to review. Generally, the Australian inbound foreign investment regime distinguishes between “significant actions” and “notifiable actions” undertaken by a foreign investor. Significant actions generally require both a change in control of the entity and that a monetary threshold be met, although certain actions involving Australian land and/or agribusinesses do not require a change in control.[12] Although there are no mandatory notification or approval requirements for significant actions, they are subject to FIRB review and the Treasurer has the power to prohibit or unwind them if they are determined to be contrary to the national interest.  

When the value of an investment exceeds certain other applicable monetary thresholds, the transaction is considered a notifiable action and is subject to mandatory notification requirements prior to closing. These monetary thresholds depend on factors such as whether the transaction involves Australian land and/or agribusinesses, and whether the foreign investor is controlled by a foreign government, or is from a country that is a party to a free trade agreement with Australia.

In June 2020, the Australian government announced significant reforms planned for its foreign investment review framework that are similar in many ways to the CFIUS reforms under FIRRMA.[13] These planned reforms include a new “national security” test—in addition to the existing national interest test—that would enable the Treasurer to review and impose conditions on foreign acquisitions of a direct interest in an Australian business on national security grounds, regardless of the underlying value of the transaction. The Treasurer would also be able to “call in” non-notified transactions based on national security concerns. The reforms also include mandatory FIRB notification requirements for (1) acquisitions of a direct interest in a “sensitive national security business,” and (2) a business or entity owned by a foreign person that starts to carry on a “sensitive national security business.” Although the Australian government has yet to define what will constitute a sensitive national security business, many expect this new classification to include telecommunications, energy, technology, defense manufacturing, water, data storage, shipping, transportation, and other industries considered critical to Australia’s national security. Additional reforms were also proposed to strengthen the Treasurer’s and the FIRB’s compliance and enforcement powers, and to implement stronger penalties for non-compliance. The legislation outlining these reforms is expected to be introduced in July 2020, and if passed, would become effective on January 1, 2021.

 B. Canada[14]

Like the United States, Canada has a longstanding process for reviewing FDI. Specifically, Canada conducts foreign investment reviews under the auspices of the Investment Canada Act (ICA). Traditionally, investment scrutiny under the ICA has focused on whether a given investment provides a “net benefit” to Canada, which unlike CFIUS looks at factors in addition to national security. Like the pre-FIRRMA CFIUS regime, the ICA applies to transactions in which a foreign investor will obtain “control” of a Canadian business. The ICA also includes mandatory filing and approval requirements for transactions exceeding certain financial thresholds, which vary depending on factors such as whether the investor is a state-owned enterprise, whether the investor is from a trade agreement or World Trade Organization member country, and whether the target company is a “cultural business” (e.g., media, television, radio, music, or publishing companies).[15]

In line with recent changes to CFIUS and other foreign investment review regimes around the world, Canada has recently placed less emphasis on “net benefit” reviews and instead has been increasingly focusing its efforts on national security-based reviews. Under these national security reviews, the Canadian government has the authority to review transactions where there are “reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security,” regardless of whether the transaction involves “control” or meets the financial thresholds discussed above.[16]  Similar to CFIUS reviews, Canadian national security reviews to date have focused on transactions involving the defense industry, sensitive technologies, critical infrastructure, and intelligence-related matters.

Similar to determinations made at the end of the CFIUS process, determinations under Canadian national security reviews may include blocking a proposed transaction, permitting the closing of the transaction if certain conditions are met, or requiring the investor to unwind the transaction if it has already closed.

C. United Kingdom

Unlike the organized CFIUS body in the United States, the United Kingdom does not have a dedicated standing governmental body to review foreign investment on national security grounds. Instead, it primarily scrutinizes foreign investment on an ad hoc basis under limited powers given in the Enterprise Act of 2002 (as amended). This limited review process may soon be revamped, however, as the United Kingdom is considering adopting an enhanced review process that would encompass additional threats to national security.[17]

As currently constituted, the UK Competition & Markets Authority (“CMA”) has the power to review certain mergers and acquisitions from an antitrust perspective if the following criteria are satisfied:

  • Two or more enterprises “cease to be distinct” by being brought under “common ownership or control” (i.e., there is a merger, acquisition or any other transaction which changes the control structure of an undertaking); and
  • One or more of the following occurs:
    • The target’s UK turnover exceeds £70m (the “turnover test”); or
    • The combined entity has a share of supply of at least 25% of the sale or purchase of the relevant goods or services in the United Kingdom or a substantial part of it (the “share of supply test”); or
    • If the target is active in the military or dual-use, multi-purpose computing hardware, or quantum technology sectors:
      • The threshold amount for the turnover test is £1m; and
      • The target has an existing share of supply of at least 25%.

The Enterprise Act also allows for additional scrutiny for mergers and acquisitions which meet the criteria above, and have the potential to raise broader public interest concerns. In these public interest reviews, the Secretary of State[18] can intervene in a merger by issuing a Public Interest Intervention Notice (“PIIN”) to the CMA, on a matter that the CMA refers or on his own initiative.  Public interest includes national security grounds, as well as media and financial sectors. In circumstances where a PIIN is in force, the Secretary of State also has the power to make an order preventing any “pre-emptive” actions by the parties that would impede the Secretary of State’s ability to protect national security while the PIIN outcome is pending.

In the event of an EU merger filing, the Secretary of State may issue a European Intervention Notice on various “legitimate interest” grounds, including public security grounds, which reserves the decision back to the CMA (in which case the PIIN provisions above would be available). This mechanism will no longer be available after the end of the Brexit Transition Period, which is currently December 31, 2020.

Even if neither the UK nor EU merger control regimes apply, the Secretary of State may still issue a special public intervention notice on national security grounds if (1) at least one of the parties performs business in the United Kingdom; and (2) the merger involves a former or current government contractor (which includes indirect contractors) who has or has had access to confidential defense-related information.

Under the proposed new formal investment review regime, national security-related considerations would be removed from the public interest considerations in the UK merger control regime described above. National security reviews would operate separately and be conducted at the Cabinet level, similar to how CFIUS reviews are conducted in the United States. Public interest reviews on other grounds (i.e., media plurality and financial stability) would remain within the scope of the merger control regime. Importantly, the proposed revamped national security reviews would apply to a range of “trigger events” such as threshold equity acquisitions, and the acquisition of significant influence or control.

III. Regulation of Foreign Direct Investment in Japan

Next, we turn to a review of Japan’s FDI review regime, including recently enacted changes, in light of the factors identified by CFIUS that it will take into consideration when granting or renewing a country’s status as an excepted foreign state.

Japan has the authority to review FDI transactions pursuant to the Foreign Exchange and Foreign Trade Act (Gaitamehō or the “Act”), which was most recently amended in November 2019, with the amendments coming into effect on May 8, 2020, and being fully implemented on June 7, 2020. The Act covers a variety of transactions or actions undertaken by a foreign investor,[19] including, but not limited to, (1) acquiring shares of a private company (other than an acquisition from another foreign investor),[20] (2) acquiring more than 1% of the shares or voting rights of a public company, [21] (3) consenting to substantive changes to a company’s business purpose, (4) establishing a branch office in Japan, or (5) extending a loan exceeding a specified amount with a maturity of more than one year.

In connection with any of the foregoing transactions, if the foreign investor is not from any of over 160 countries listed in the Appended Table 1 of the Order on Inward Direct Investment—or if the foreign investor is an Iran-related party,[22] even if it is from any of the listed countries—or if the target company or any of its specified subsidiaries engages in a business related to any of the designated business sectors discussed below (a “Designated Business”), the foreign investor is required to notify the Bank of Japan. The Bank of Japan coordinates review of the transaction by the Ministry of Finance and other relevant ministries at least 30 days prior to completing the transaction.

With respect to acquiring more than 1% of the shares or voting rights of a public company, there is a blanket exemption from this filing requirement for certain foreign financial institutions licensed by or registered with a foreign or Japanese regulatory authority for conducting financial businesses, provided that all of the following “Exemption Conditions” are complied with:

(1)   the foreign financial institution and its closely related persons must not become board members of the target or any of its subsidiaries located in Japan that engage in a Designated Business or any parent companies located in Japan of the target or such subsidiaries;

(2)   the foreign financial institution propose, or have another shareholder propose, to a shareholder meeting of the target any transfer or abolition of any Designated Business that the target or any of its subsidiaries may be engaged in (including mergers or similar transactions and transfers of such subsidiaries); and

(3)   the foreign financial institution must not access non-public technology information regarding any Designated Business that the target or any of its subsidiaries may be engaged in.

Further, the blanket exemption does not apply if (i) the foreign financial institution has a record of being subject to sanctions or certain administrative actions due to violations of the Act or is a state-owned enterprise that has not been accredited by the authorities (the “Eligibility Condition”), or (ii) the FDI is intended for the purpose of taking any action that would make it difficult to continue the stable implementation of any Designated Business (the “General Condition”).  If an investor utilizes the blanket exemption, it would still need to file a post-investment report in the event its ownership interest in the target equals or exceeds 10%.[23] 

An exemption to the pre-transaction filing requirement for investments in a company that engages in any Designated Business also applies to the acquisition of shares of a private company and to the acquisition of more than 1% of the shares or voting rights of a public company by a foreign investor that is not a foreign financial institution, subject to the following conditions:

  • If the target (including any of its subsidiaries) engages in a Designated Business (but not in any of the “Core Businesses” discussed below), the exemption only applies if the investor has satisfied the Exemption Conditions, the Eligibility Condition and the General  Condition.
  • If the target (including any of its subsidiaries) engages in any of the Core Businesses, then in addition to satisfying the Exemption Conditions, the Eligibility Condition and the General Condition, the exemption only applies if (1) the target is a public company and the investor’s shareholding or voting right ratio following the transaction is less than 10%, (2) the investor does not attend, or have a designated person attend, any committee that makes important decisions regarding any Core Business, and (3) the investor does not make any written proposals to the board, or to a committee or any members thereof authorized to make important decisions regarding any Core Business, requiring them to respond or take action by a particular deadline.

Foreign investors who are subject to this more general exemption must make a post-investment report in the event the target is (i) a private company, or (ii) a public company and the foreign investor’s shareholding or voting rights ratio in the target exceeds 1%.[24]

The Designated Businesses are comprised of over 150 business sectors related to national security, public order, public safety, and the smooth operation of the Japanese economy that are prescribed under the public notice by the authorities. The Core Businesses are a subset of the Designated Businesses that are deemed highly likely to be related to national security. The Core Businesses include businesses that involve, among others, weapons, aircraft, nuclear facilities, space, dual-use technologies, cybersecurity, electricity, gas, telecommunications, water supply, railway and oil. The list of the Core Businesses also includes certain prescribed businesses creating specifically designed programs to deal with the sensitive personal information of more than one million people (subject to the prescribed exceptions). Thus, the scope of the Core Businesses is generally in line with the scope of critical technologies, critical infrastructure and sensitive personal data businesses that make up the three categories of TID U.S. businesses that are subject to increased scrutiny by CFIUS. The Ministry of Finance has publicly announced a list, for informational purposes only, of all Japanese public companies categorized into three groups: those engaged in non-Designated Businesses; those engaged in Designated Businesses other than the Core Businesses; and those engaged in the Core Businesses.[25]

The prior notification to the Bank of Japan must include detailed information about the foreign investor, including its ultimate parent companies and other parties that have influence over its business policies and other aspects of its governance. Factors to be considered in the screening of a particular foreign investor include its capital structure, beneficial ownership, business relationships, and its plans and track record of behavior relating to the investment, including the degree of potential direct or indirect influence by a foreign government or other related parties of the foreign investor.[26] The prior notification must also include information regarding the proposed transaction and the target company and its business activities. Similar to the CFIUS regime, under the National Public Officers Act, Japanese government officials have a general obligation of confidentiality with respect to information that has come to their knowledge in the course of their duties, which should cover any information provided in connection with the review of foreign investment transactions under the Act.

Following the completion of its review, the Japanese government is empowered to block any transaction that is not approved, although that power appears rarely to have been used. While the Japanese government has a prior consultation process that potential investors often avail themselves of and that can often have the effect of weeding out problematic transactions before they ever become public, there has only been one instance where the government has publicly refused to approve a transaction subject to prior notification. That non-approved transaction was a 2008 proposal by the Children’s Investment Fund, a U.K.-based fund, to increase its 9.9% stake in Japan’s Electric Power Development Co, Ltd. to greater than 10%.

In addition, like CFIUS, the Japanese government has the power to impose conditions on transactions in connection with its permission or approval under the Act or an order based on the Act and to unwind transactions that either have not been notified or that violate any of the government’s conditions, although these powers do not appear to have been used in the past based on publicly available information. Finally, the Japanese government has the ability to monitor transactions and can order the unwinding of transactions or impose conditions retroactively if the transactions were not properly notified. Under the Act, there is a separate obligation of certain relevant parties to a transaction  (e.g., the transferor of the shares) to file a post-closing notification, and such post-closing notifications can also serve as a method of notifying the Japanese government of transactions that should have been the subject of a required prior notification but were not.

Regarding the subject of security cooperation and information sharing, while we are not aware of any publicly acknowledged formal arrangement between the United States and Japan that specifically relates to national security as it pertains to FDI, a new provision was added to the Act in the recent amendments that explicitly permits the Ministry of Finance and other relevant ministries to share information obtained in the course of its review of FDI transactions in Japan with corresponding agencies of foreign countries, such as CFIUS, subject to the prescribed conditions. Such amendment is directly on point with the CFIUS factor regarding information sharing described above and strongly suggestive of Japan’s intention and willingness to engage in broader national security cooperation in the context of its review of FDI transactions.

IV.    Conclusion

The foregoing Japanese FDI regime would appear to meet most, and perhaps even all, of the factors that CFIUS has stated it will use to evaluate whether a potential excepted foreign state has a “robust” process to analyze foreign investment risks.  In particular, the Japanese government’s authority to review foreign investment transactions, the scope of the transactions subject to its review, its authority to enforce its decisions, the scope of information considered, its confidentiality obligations, and its monitoring and enforcement of transactions all appear to be analogous to the current CFIUS regime. Additionally, the Japanese government has the ability to share information obtained in its review of FDI transactions with its counterpart agencies in other countries.

CFIUS’s grant of excepted foreign state status to additional countries may not occur before February 2022, which would allow such additional designations to coincide with the implementation of the second requirement of the excepted foreign state test—namely, for such states to have a robust foreign investment review regime. The U.S. Department of the Treasury noted in identifying the current three “eligible foreign states”—the first requirement of the excepted foreign state test—that these states have robust intelligence-sharing and defense industrial base integration mechanisms with the United States. These specific characteristics, and related unstated characteristics, are unique to these countries, and CFIUS may well not be willing to determine other countries to be “eligible” before the requirement to meet the test for a robust foreign investment review regime is effective.

That said, Japan’s status as an important source of FDI into the United States—right behind two of the countries that have already been granted such status—and Japan’s long-standing role as an important U.S. ally and trading partner would appear to be strong incentives for the U.S. government to grant such status to Japan. Japan’s recent changes to strengthen its FDI review regime should only serve to strengthen the justification for adding Japan to the excepted foreign state ranks.


[1] See Foreign Investment 2020 (Part 5): Final CFIUS Rules Announced”.

[2] SeeDirect Investment by Country and Industry, 2018”, published by the United States Department of Commerce, Bureau of Economic Analysis.

[3] See Foreign Investment 2020 (Part 3): CFIUS Spotlight on ‘TID’ U.S. Businesses”.

[4] SeeForeign Investment 2020 (Part 4): Who’s In, Who’s Out, and Why It Matters”.

[5] See Foreign Investment 2020 (Part 2): Proposed Regulations Would Expand CFIUS Review of Real Estate Transactions, Provide More Certainty for the Investment Community”.

[6] On May 20, 2020, the U.S. Department of the Treasury issued proposed rules that would replace the “industries” prong of this mandatory filing requirement with criteria based on U.S. export control authorizations.

[7] A “parent” in this context means any entity or person that (1) holds or will hold, directly or indirectly, at least 50% of the outstanding voting interest in the entity or the right to at least 50% of the profits (or assets, in the event of dissolution) of the entity, or (2) the general partner (GP), managing member, or equivalent of the entity. Thus, in the investment fund context, not only would a fund need to meet all of these criteria, but so would its GP and any entity with a greater than 50% interest in the GP or the fund.

[8] See Office of Investment Security, Department of the Treasury, Provisions Pertaining to Certain Investments in the United States by Foreign Persons, 85 Fed. Reg. 3,112 (Jan. 17, 2020).

[9] See 31 C.F.R. § 800.1001.

[10] See “Factors for Determinations Under § 800.1001(a) / § 802.1001(a)”.

[11] This summary of Australia’s foreign investment review regime is based on public sources and is for comparison purposes only. Morrison & Foerster is not admitted to practice in Australia.

[12] See Guidance Note 35, “Significant actions and notifiable actions”.               

[13] See Australia Government, Department of the Treasury, “Foreign Investment Reforms”.

[14] This summary of Canada’s foreign investment review regime is based on public sources and is for comparison purposes only. Morrison & Foerster LLP is not admitted to practice in Canada.

[15] See Investment Canada Act, “Thresholds for Review”.

[16] See Investment Canada Act, “Investments Injurious to National Security,” Part IV.1, Section 25.2(1).

[17] See White Paper with proposals for a national security review regime published by the UK government on 24 July 2018 National Security and Investment – A consultation on proposed legislative reforms”.

[18] The Secretary of State for Business, Energy and Industrial Strategy has the power to intervene in all public interest cases, except mergers in the media, broadcasting, digital and telecoms sectors, in which the Secretary of State for Digital, Culture, Media and Sport can intervene.

[19] Defined as an individual who is a non-resident or a juridical person or other organization established pursuant to foreign laws and regulations, or a juridical person or other organization having its principal office in a foreign state, as well as other prescribed organizations deemed to be the equivalent of such juridical persons or other organizations (e.g., the subsidiaries of such juridical persons or other organizations).

[20] Acquisition shares or equities of a private company from another foreign investor is categorized as a “specified acquisition”, which is subject to regulations under the Act that are similar to but different from those for foreign direct investment.

[21] When calculating shareholding and voting rights ratios, the Act requires that shares and voting rights deemed to be beneficially held by the foreign investor (e.g., shares and voting rights owned by the foreign investor’s closely related parties, etc.) also be included.

[22] Iran-related party is defined as the Iranian government, any individual who is a citizen of Iran, any juridical person or other organization established pursuant to Iranian laws and regulations (including any branch office, satellite office or other office located in a foreign country), any branch office, satellite office or other office located in Iran of a juridical person or other organization having its principal office somewhere other than Iran, or any party substantially controlled by any of the foregoing parties.

[23] The foreign investors are also subject to a post-investment report obligation each time its shareholding or voting rights ratio is further increased.

[24] In addition, the foreign investors are also subject to post-investment report obligation each time when the shareholding or voting rights ratio crosses 3% or 10%, and any further increase.  In addition, if a foreign investor is a state-owned enterprise that has been accredited by the authorities, it may be only subject to additional post-report obligation each time when its shareholding or voting rights ratio in the target crosses the designated percentage in the accreditation that is less than 10% (if any) or 10%, and any further increase. 

[25] The list, dated as of June 5, 2020, is available in Japanese only. However, the list is for informational purposes only. Each foreign investor is still responsible for confirming which of the three groups a targeted public company actually falls under in relation to its investment.

[26] The Ministry of Finance publicly announced those factors as “Factors to be considered in authorities’ screening of foreign direct investment” in Japanese; and in English.

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