First-step analysis: Legal and regulatory framework for financial services M&A in Japan

Legal and regulatory framework

What primary laws govern financial services M&A transactions in your jurisdiction?

The Banking Law (Law No. 59 of 1981) and the Financial Instruments and Exchange Law (Law No. 25 of 1948) regulate banking and financial instruments, including broker/dealer and asset management. The Insurance Business Law (Law No. 105 of 1995) regulates the insurance sector and the Payment Services Law (Law No. 59 of 2009) regulates payment services such as fund transfer services and cryptoasset exchange services.

Other laws that are generally applicable (albeit sometimes controversially), to M&A transactions in the financial services area include the Foreign Exchange and Foreign Trade Law (Law No. 228 of 1949), which regulates investment in Japanese companies by foreign investors, and the Law Concerning the Prohibition of Private Monopolization and Maintenance of Fair Trade (Law No. 54 of 1947).

What regulatory consents, notifications and filings are required for a financial services M&A transaction? Should the parties anticipate any typical financial, social or other concessions?

A person who holds more than 5 per cent of the voting rights in a bank or an insurance company (foreign or domestic) must submit a report on its major shareholding to the Financial Services Agency (FSA) within five business days of acquiring such stakes. In addition, prior approval from the FSA is required for holding 15 per cent or more (for strategic investments) or 20 per cent or more (for non-strategic investments) of voting rights in a bank or insurance company. Prior approval from the FSA is also required for mergers and company splits in which a bank or an insurance company becomes a party.

On the contrary, no special authorisation from the FSA is required for mergers and company splits involving other types of financial institutions (eg, securities companies, asset managers, cryptoasset exchanges and fund transfer service providers), while the financial institution and/or the new major shareholder are required to notify the name and certain information of the new major shareholder.

Are there any restrictions on the types of entities and individuals that can wholly or partly own financial institutions in your jurisdiction?

Authorisation from the FSA is required for any legal person to become a major shareholder of a bank or an insurance company (ie, hold voting rights in a bank or insurance company amounting to 15 per cent or more, or 20 per cent or more, depending on the specific circumstances of the case).

As part of the authorisation process, the FSA examines whether the sound and appropriate operation of the bank or insurance company’s services can be carried out even after the change of the major shareholder, considering the financial status of the new major shareholder, the purpose of the acquisition, or any other relevant details. Additionally, the FSA assesses whether the system pertaining to the holding of voting rights of the new major shareholder is unlikely to impair the sound and appropriate management of the bank or insurance company’s services. Furthermore, the FSA evaluates whether the acquirer has a sufficient understanding of the public nature of banking or insurance services and possesses sufficient social credibility.

The FSA may, when and to the extent necessary for ensuring sound and appropriate management of the business of a bank, in light of the condition of the business or property of a major shareholder of bank that holds more than 50 per cent of total voting rights (controlling shareholder of bank), request such controlling shareholder to submit an improvement plan for the sound management of the bank or take other measures. This means that the FSA is able to request a controlling shareholder of bank to inject new capital.

Are there any restrictions on who can be a director or officer of a financial institution in your jurisdiction?

There are no domicile requirements that apply to directors or employees of financial institutions. However, a full-time director of a bank or insurance company must meet criteria that aimed at demonstrating that they are ‘fit and proper’ for the relevant role.

As to the requirement to be ‘fit’, a full-time director must possess sufficient knowledge and experience to understand and comply with any applicable laws and regulations, as well as the regulator’s expectations as outlined in their supervisory guidelines. This includes expertise in compliance, risk management and overall business management of the financial institution.

As to the requirement to be ‘proper’, a full-time director must have no affiliations with organised crime groups, must not have been convicted of financial services crimes (or, indeed, imprisoned for any crime), must not have caused any other financial institution to face an administrative order or failure and must not have received a dismissal order from the relevant regulator.

What are the primary liabilities, legal duties and responsibilities of directors and officers in the context of financial services M&A transactions?

Directors of a company owe a fiduciary duty to the company itself (rather than to shareholders themselves, as is the case in some jurisdictions) as outlined under the Companies Act. In the context of an M&A transaction, the director’s decisions regarding the transaction are evaluated based on the business judgment rule. Under the business judgment rule, a director is not considered to have breached their fiduciary duty unless they make an intentional mistake or a grossly unreasonable decision in the process of gathering and analysing information.

What foreign investment restrictions and other domestic regulatory issues arise for acquirers based outside your jurisdiction?

According to the Foreign Exchange and Foreign Trade Act (FEFTA), foreign investors must provide prior notification to the Ministry of Finance when acquiring 1 per cent or more of shares in a listed Japanese company or any shares in a non-listed Japanese company, especially if the company is involved in security-related activities or has been designated by the Ministry of Finance or other authorities due to potential economic risks. Although financial services are typically not included in this category, certain financial institutions engaged in activities such as software development and information processing, may still be required to submit prior notifications and undergo review by the relevant authorities.

However, foreign investors are exempt from prior notification if the following conditions apply to the investment:

• Investors or their closely-related persons will not become board members of the target company.
• Investors will not propose to the general shareholders’ meeting the transfer or disposition of the target company’s business activities in the designated business sectors.
• Investors will not access non-public information about the target company’s technology related to business activities in the designated business sectors.

Nonetheless, even if exempt from prior notification, regulated financial institutions will still be required to submit a post-investment notification for investments acquiring 10 per cent or more of shares.

As for general foreign investors (except for those with a record of sanctions due to violation of the FEFTA and certain state-owned enterprises), if the three conditions listed above are satisfied, the relevant investment is also exempt from prior notification. This is unless the target company operates in a core business sector and the investor acquires 10 per cent or more of the shares. Furthermore, for investments in core business sector, the following additional conditions must be met for the investment to be exempt from prior notification:

• Regarding business activities in core sectors, investors will not attend the target company’s executive board or committees that make important decisions in these activities.
• Regarding business activities in core sectors, investors will not make proposals, in a written form, to the executive board of the target company or its board members requiring their responses and/or actions by certain deadlines.

With respect to post-investment notifications, even if the above conditions are satisfied, post-investment notifications are required for acquisitions of 1 per cent or more of shares.

What competition law and merger control issues arise in financial services M&A transactions in your jurisdiction?

According to the Antimonopoly Act, if an acquirer’s consolidated annual sales in Japan exceed ¥20 billion, they must notify the Japanese Fair Trade Commission at least 30 days before their shareholding in a Japanese target company surpasses the thresholds of 20 per cent and 50 per cent, provided that the target has consolidated annual sales in Japan exceeding ¥5 billion.

The FSA has stated its aim of encouraging the mergers of regional banks to improve the banking system’s efficiency and stability. However, the Antimonopoly Act poses a challenge for proposed mergers of regional banks that operate within the same area such mergers could risk creating local, potentially anti-competitive concentrations of regional banks. To address this issue, a special law was enacted in 2020, allowing regional bank mergers to be treated as exceptions under the Antimonopoly Act for 10 years, provided that the relevant merger receives approval from the FSA.