Mitsutoshi Uchida, Fumihiko Hori, and Shotaro Maruyama
Mergers + Acquisitions | Japan, Mergers + Acquisitions, and National Security, CFIUS, Sanctions + Export Controls
On May 27, 2019, the Japanese government published amended rules that aim to tighten the regulatory requirements applicable to foreign direct investment (tai nai chokusetsu toshi or FDI) under the Foreign Exchange and Foreign Trade Act of Japan (gaitame ho, or the “Act”). Specifically, while the FDI regime requires a Foreign Investor to file its transaction with the Japanese authorities before investing in a Japanese target company engaged in a “restricted business,” the amended rules will add businesses related to the information and communications technology sector to the prescribed types of “restricted businesses.” The obligation to complete a prior filing in respect of investment in a Japanese company that is engaged in a “restricted business” under the widened scope will apply to transactions taking place on or after August 31, 2019.
This client alert provides an overview of the FDI regime in Japan and the latest amendments to tighten the regulations.
OVERVIEW OF THE FDI REGIME IN JAPAN
Under the Act, the definition of FDI covers various types of transactions or actions related to investment in a Japanese company by a Foreign Investor, including the acquisition of shares (as discussed in detail below), consenting to making substantive changes to its business scope, establishment of a branch office and making a loan of a certain size with a maturity exceeding one year.
Foreign Investors undertaking FDI must submit, subject to limited exceptions, either (a) a prior filing subject to substantive review by the relevant authorities or (b) a post-investment report which is not subject to such substantive review. The flowchart below illustrates whether a prior filing or a post-investment report is required in connection with an acquisition of shares (including a subscription for newly issued shares or a secondary purchase of shares).
(1) 10% ownership test: The ownership ratio is calculated by dividing (a) the total number of shares of the Japanese target company to be held by the Foreign Investor and its affiliates (including any other Foreign Investor that has agreed to jointly exercise voting rights in respect of the Japanese target company) after the transaction, by (b) the total number of shares issued by the Japanese target company after the transaction.
An investment manager that has been delegated complete authority to make investments and to exercise voting and other shareholder rights (i.e., the investment manager’s client cannot exercise any such rights) is effectively deemed to be an owner of shares in a Japanese listed company.
(2) A prior filing will be required under any of the following circumstances:
(a) Nationality test: The nationality of the Foreign Investor is not Japanese or the location of the Foreign Investor is neither Japan nor a white-listed country (the Japanese government has designated approximately 160 countries as white-listed countries).
(b) Iran test: The contemplated transaction involves an acquisition of shares in an entity engaged in certain critical businesses by an Iran-related party that requires prior approval from the Japanese government.
(c) Business Type test: Any of (i) the Japanese target company in which the Foreign Investor intends to invest, (ii) its Japanese subsidiaries, or (iii) a Japanese joint venture company in which the Japanese target company or its Japanese subsidiary splits ownership equally with a single joint venture partner (collectively, the “Japanese Target Entities”) are engaged in any of the prescribed types of “restricted businesses.” The types of restricted businesses currently cover industries related to weapons, aircraft, space, nuclear power, agriculture, forestry, fishery, infrastructure and other industries that are of importance primarily in light of national security.
(3) Specified Acquisition: Under the Act, although acquiring shares in a non-listed Japanese company from another Foreign Investor constitutes a “Specified Acquisition” (tokutei shutoku) that is not classed as FDI, such a Specified Acquisition is subject to a similar regime. A prior filing will be required for a Specified Acquisition of any Japanese company if any Japanese Target Entity is engaged in any of the prescribed types of “restricted businesses,” which are critical business activities in relation to national security. As addressed below, the amended rules also widen the scope of the prescribed types of “restricted businesses” for the purpose of a Specified Acquisition.
PROCEDURE FOR PRIOR FILING OF FDI AND SPECIFIED ACQUISITIONS
Filings with regard to FDI and Specified Acquisitions must be submitted through the Bank of Japan to the Minister of Finance and any other Minister(s) having jurisdiction over the relevant types of businesses engaged in by the Japanese target company (collectively, the “Relevant Ministers”). A prior filing must be made no earlier than six months before closing of the transaction (i.e., the date of acquisition of the relevant shares). There is no filing fee.
When a prior filing is made, the Foreign Investor may not consummate the contemplated transaction for a 30‑day period (the “Waiting Period”). While the Waiting Period may be shortened to 14 days, it may be extended to a maximum of five months if the Relevant Ministers decide that they need more time to complete the review, such as in cases where there are national security concerns in respect of the contemplated transaction.
In terms of a practical approach, where the Foreign Investor making a prior filing is aware of any potential issue which may not be resolved within the initial 30‑day Waiting Period, the Foreign Investor may want to conduct an informal consultation with the Relevant Ministers to resolve the potential issue and mitigate the risk of the Waiting Period being extended.
In light of the above, it is strongly recommended to confirm at an early stage whether the contemplated transaction would trigger the requirement for a prior filing. It is also important to determine if it may have any issues which could cause the Waiting Period to be extended because completing a prior filing and the following Waiting Period are very likely to impact the deal timeline and even the feasibility of the contemplated transaction.
RECENT AMENDMENTS AND PRACTICAL NOTES
The amended rules published by the Japanese government on May 27, 2019 widen the scope of the types of “restricted businesses” to include several types of businesses related to the information and communications technology sector (the “New Restricted ICT Businesses”). The Japanese government, just like the governments of the United States and several European countries, has recognized the importance of regulating investments and related actions by Foreign Investors in Japanese companies involved in the information and communications technology sector from a national security perspective.
The widened scope will become effective on August 1, 2019, but the obligation to complete a prior filing in respect of investment in a Japanese target company engaged in any of the New Restricted ICT Businesses will apply to transactions taking place on or after August 31, 2019.
New Restricted ICT Businesses
In the original Japanese:
Manufacture of integrated circuits
Manufacture of semiconductor memory media
Manufacture of optical discs and magnetic tapes and discs
Manufacture of electronic circuit mounting boards
Manufacture of wired communication equipment
Manufacture of mobile phones and personal handy-phone system phones
Manufacture of radio communication equipment
Manufacture of computers, except personal computers
Manufacture of personal computers
Manufacture of external storage
Wired broadcasting and telephony
Custom development of software
Regional telecommunications, except wired broadcasting and telephony
Long distance telecommunications
Other fixed telecommunications
Internet use support
A Foreign Investor considering investing in Japan, especially in the information and communications technology sector, should be well advised on the FDI regime in Japan and carefully consider the possible requirement to complete a prior filing and the potential impact that could have on the contemplated transaction.
 Public Notice Specifying Business Types Pursuant to the Provisions of Article 3, Paragraph (4) of the Order on Foreign Direct Investment (Public Notice of the Cabinet Office, etc. No. 1 of 2014), as amended by the public notice dated May 27, 2019.
 “Foreign Investor” means (a) an individual who is a non-resident of Japan; (b) an entity established pursuant to a foreign law or having a principal office in a foreign state; (c) a Japanese company in which the total sum of (x) the number of votes held directly by persons as set forth in (a) and/or (b) above, and (y) the number of votes held indirectly through a prescribed company of which the number of votes held by persons as set forth in (a) and/or (b) above make up 50% or more voting rights (with minor technical exceptions); or (d) a Japanese entity in which persons as set forth in (a) above constitute either the majority of all of the officers or the majority of the officers having representative authority.
 In August 2017, the Japanese government publicly announced factors to be considered in the FDI review, which include:
 Figure 1 is subject to prescribed technical exceptions.
 The “restricted businesses” are set out in the Public Notice Specifying Business Types Pursuant to the Provisions of Article 3, Paragraph (1) and Article 4, Paragraph (3) of the Order on Foreign Direct Investment (Public Notice of the Cabinet Office, etc. No. 3 of 2017), as amended by the public notice dated May 27, 2019.
 Some of the New Restricted ICT Businesses are already included as “restricted businesses” for the purposes of the FDI regime if they are subject to registration requirements under Article 9 of the Telecommunications Business Act. After the amended rules become effective, investments in these businesses will require a prior filing regardless of whether such businesses are subject to the registration requirements under that act.
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