In brief: foreign investment review procedure in Japan

Procedure

What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?

The Foreign Exchange and Trade Act (FEFTA) sets out prior notification thresholds regarding certain investments based on the attributes of the foreign investor, the nature of the business conducted by the target company and number of shares (voting rights) to be acquired (ie, no less than 1 per cent of shares or voting rights in a listed company and any number of shares in a non-listed company).

As long as the intended investment falls under any of the categories indicated above, the filing of a prior notification is mandatory and there are no exemptions based on turnover, asset size, purchase price or enterprise value.

What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

When required, the prior notification application must be submitted by the investor via the Bank of Japan to the Minister of Finance and the minister of the competent authority which has jurisdiction over the target company’s businesses. No filing fees apply. The application includes, in addition to basic facts regarding the investor, target company and transaction and information regarding the investor’s beneficial owners.  

Once the filing is complete, the notification is forwarded via the Bank of Japan to the relevant competent authorities for deliberation. As long as it is determined that the intended investment does not pose any critical national security issues or concerns, the investor is notified of the clearance, which may sometimes be contingent upon certain conditions (eg, a pledge not to be involved in the decision-making process in connection with the target business for a certain period of time). During the review process, the investors are frequently interviewed or asked to answer written queries regarding the attributes of the investor and the target company's businesses. 

Even if prior notification is not required and a post-facto report is sufficient under the FEFTA, such report is submitted via the Bank of Japan. The competent authorities do not have the power to intervene in the transaction unless the intended investment falls under one of the categories requiring prior notification. 

Which party is responsible for securing approval?

The foreign investor is responsible for securing approval. The FEFTA does not specifically provide for communications with the target companies in the course of the examinations.

However, in practice, since a large portion of questionnaires requested by the competent authorities during the review process require confirmation of the target company, it is advisable to enlist its cooperation. In addition, the competent authorities may, at times, pose questions directly to the target company.

How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

Under the FEFTA, investments may not be executed for the 30 days following the filing of the prior notification (the prohibition period). However, in cases which do not fall under the category of ‘inward direct investment, etc. that would cause damage to national security, etc.’ this period is reduced to two weeks; the foreign investor filing the notification enjoys the benefit of the reduced period without having to submit a specific request for the reduction of review period. In addition, if the period may be shortened from a national security perspective, it could be reduced even further.

On the other hand, the prohibition period may be legally extended for up to five months if ‘there is a hindrance recognized in terms of safety, etc.’. 

In practice, if the review process is not completed within the prohibition period, the foreign investor is required to withdraw the notification and resubmit it once the review is completed (clearance will be issued promptly after resubmission). Such interim review period can extend beyond one or two months.

Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

The foreign investor may not execute the foreign investment until the date specified in the clearance notice received after filing the notification.

If the transaction is executed before the clearance is granted, the investor would be subject to criminal penalties and an order to return the acquired shares or take other necessary action designated by the competent authorities. Furthermore, the foreign investor will not be able to benefit from the exemptions in subsequent transactions.

Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

Before filing the prior notification, the investor may request a brief review by the Bank of Japan regarding the formalities of the notification form.

Separately, foreign investors may (and, in practice, do) engage in consultations with the competent authority having jurisdiction over the designated businesses before the official filing. When conducting prior consultation, the competent authority verifies the attributes of the investor as well as the governance and handling of the target business following the investment through an exchange of questionnaires and interviews. In certain cases (where the investment price is particularly high or the target company operates a business that is considered a core businessamong the businesses subject to prior notification), it is advisable to allow sufficient time for the prior consultations in order to secure the grant of the clearance in a timely manner.

When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

Lobbying and any other efforts to obtain informal clearance are not common in Japan. In general, only the information indicated in the notification and answers to the official queries from the competent authorities are subject to review by the competent authorities when contemplating the clearance as well as shortening the prohibition period under the FEFTA and its regulations. 

Therefore, when filing applications and negotiating with the authorities, potential foreign investors usually engage lawyers with expertise in the field to act as their representatives vis-à-vis such authorities.

What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

In the event that a prior notification is not filed with respect to a foreign investment that was originally subject thereto, after receiving the opinion of the Council on Customs, Tariff, Foreign Exchange and other Transactions, the competent authority may issue an order to return the acquired shares or take other necessary measures.

If it is determined that a prior notification was originally required but not submitted, a case investigation form should be filed, together with the required notification form and, following the examination by the competent authority, a clearance must be obtained in order to execute the investment.