Introduction
Outline of FDI regulation in Japan
Amendments to FEFTA and related public notice up to 2020
2021 amendment to related public notice
Comment
When a non-Japanese company or investor proceeds with an M&A transaction in Japan, one of the most important regulations is the Foreign Exchange and Foreign Trade Act (FEFTA), which regulates foreign direct investment (FDI) in Japan. The FEFTA was recently amended and a related public notice was issued (for further details, please see "Scheduling M&A transactions: practical considerations regarding FDI").
On 5 October 2021, the related public notice was amended, and the scope of the specified types of business under the FEFTA was increased. This article outlines the latest amendment regarding the specified types of business.
Outline of FDI regulation in Japan
When a foreign investor proceeds with inward direct investment under the FEFTA (eg, a business transfer, merger, company split or certain types of share transfer), it must generally submit a prior notification or a subsequent report to the authorities. Prior notification under the FEFTA is generally required if:
- the foreign investor is not a national of a designated country under the FEFTA;
- the target's business is a specified type of business under the FEFTA; or
- the prospective transaction concerns Iran.
In many cases, the main issue is whether a target's business constitutes a specified type of business, the determination of which can be difficult and time consuming.
Amendments to FEFTA and related public notice up to 2020
In recent years, the government has made multiple amendments to the FEFTA and the related public notice. A timeline of the major recent amendments up to 2020 is as follows:
- 27 May 2019 – the related public notice was amended and the scope of the specified types of business was increased to include businesses relating to information processing (including several types of software business) and businesses relating to information communication services;
- 29 November 2019 – the FEFTA was amended to expand the definition of "inward direct investment"; and
- 15 June 2020 – the related public notice was amended and the scope of the specified types of business was increased to include certain types of pharmaceutical and medical device manufacturing businesses.
The above amendments expanded the scope of the subject matter of prior notification under the FEFTA.
2021 amendment to related public notice
On 5 October 2021, the related public notice was amended, and the scope of the specified types of business was increased again.
The following types of business were added to the specified types of business:
- metal mining businesses (including operation of resource survey vessels and surveying), manufacturing businesses, repair businesses and software businesses relating to equipment used for the purpose of metal mining businesses (eg, resource survey vessels and probe machines, and equipment for ships and excavators), and mineral composition analysis businesses relating to 34 types of important mineral resources such as rare earths (1); and
- construction businesses relating to port and harbor facilities on the Specified Remote Islands(2) to enable the smooth operation of ships surveying important mineral resources.
The government explains that this amendment is necessary in order to ensure a stable supply of critical mineral resources such as rare earths and to overcome supply chain vulnerabilities, which are an important issue for economic security in Japan. The second type of business listed above was added in order to enable the smooth operation of ships that conduct surveys of important mineral resources.
This amendment applies to transactions on and after 4 November 2021.
The FDI regulations have been amended frequently in recent years. A timeline of recent amendments is as follows:(3)
- 2002 – partial amendments to the FEFTA:
- in response to the terrorist attacks in the United States, to strengthen countermeasures against terrorist financing, including making mandatory the effort provisions relating to identification (enforced on 6 January 2003); and
- improving the provisions that serve as the basis for the provision of information by relevant ministries and agencies (enforced on 7 May 2002);
- 2003 – partial amendment to the FEFTA, which allowed the imposition of restrictions on payments, capital transactions, service transactions and import/export transactions of goods based on a cabinet decision when specifically necessary for the maintenance of peace and security of Japan (enforced on 26 February 2004);
- 2017 – partial amendments to the FEFTA (enforced on 1 October 2017), which strengthened regulations on inward direct investment, including:
- the establishment of a system to order foreign investors that have made inward direct investments without notification to sell their shares with respect to investments relating to national security; and
- making the action of foreign investors that acquired unlisted shares from other foreign investors subject to the prior notification system with examination;
- 2019 – partial amendments to the FEFTA, as set out above;
- 2020 – amendment of the related public notice, as set out above; and
- 2021 – amendment of the related public notice, as set out above.
Non-Japanese companies or investors that proceed with M&A transactions in Japan should keep an eye on the amendments to the FEFTA and the related public notice hereafter.
For further information on this topic please contact Katsuki Matsuura at City-Yuwa Partnersby telephone (+81 3 6212 5500) or email ([email protected]). The City-Yuwa Partners website can be accessed at www.city-yuwa.com.
Endnotes
(1) Manganese ore, nickel ore, chrome ore, tungsten ore, molybdenum ore, cobalt ore, niobium ore, tantalum ore, antimony ore, lithium ore, boron ore, titanium ore, vanadium ore, strontium ore, rare earth ore, platinum group ore, beryllium ore, gallium ore, germanium ore, selenium ore lithium ore, titanium ore, vanadium ore, strontium ore, rare earth ore, platinum group ore, beryllium ore, gallium ore, germanium ore, selenium ore, zirconium ore, indium ore, tellurium ore, caesium ore, barium ore, hafnium ore, rhenium ore, thallium ore, lead ore, graphite ore, fluorine ore (limited to those combined with metallic elements), magnesium ore, silicon ore and magnesium ore.
(2) As of the date of this article, Okinotori-shima and Minamitori-shima. The "Specified Remote Islands" are defined as remote islands located far away from mainland Japan which are important activity bases due to the existence of natural resources and are particularly necessary to develop facilities that will serve as activity bases under the related cabinet order.
(3) For further information, please see the Ministry of Finance's website.