Overview

Japan’s Cabinet approved and submitted to the Diet a bill (the Bill) to amend the Foreign Exchange and Foreign Trade Act (FEFTA) which would introduce new controls on foreign investment on October 18, 2019. The government has stated that the purpose of the Bill is to take appropriate measures against foreign investments that could threaten Japan’s national security while promoting foreign investments that contribute to sound development of Japan’s economy. If the Bill is passed before the end of the extraordinary session of the Diet in December 2019, the new rules will enter into force in the first half of 2020.

This alert provides an overview of the new rules currently proposed by the government. While the Bill includes several key amendments, this alert focuses on the proposed rules pertaining to pre-filing requirements for foreign investments. It should be noted that the details of the proposed rules have yet to be confirmed as the cabinet order to implement the new rules have yet to be published.

Lower threshold for foreign investments in Japanese listed companies subject to pre-filing requirements

FEFTA generally requires pre-filings with the relevant ministries via the Bank of Japan for foreign investments in certain business sectors relating to national security, public order, public safety, and the so-called “smooth operation” of the Japan’s economy (the Restricted Business Sectors). A recent amendment to FEFTA expanded the scope of the Restricted Business Sectors, adding certain sectors relating to information and communication technology (for more details, please see here).

For foreign investments in Japanese listed companies in the Restricted Business Sectors, the current rules require pre-filings only when the foreign investor intends to acquire 10% or more of the total issued shares of the Japanese listed company. Under the proposed rules, the threshold will be changed to 1% or more of total issued shares or total voting rights of Japanese listed companies in the Restricted Business Sectors. The government announced that they will publish certain lists of Japanese listed companies to specify those Japanese listed companies which fall within the Restricted Business Sectors.

Pre-filing exemptions

To respond to market concerns that the proposed rules could negatively affect the flow of foreign direct investment, the government intends to introduce certain pre-filing exemptions. While the scope and conditions of the pre-filing exemptions will be specified by cabinet order, the government has explained that (i) proprietary trading by foreign securities firms and (ii) transactions by foreign banks, insurance companies, and asset management companies could generally be exempted from pre-filings under FEFTA. However, according to the government, certain investors controlled by foreign governments may not be entitled to such exemptions. Also, in order to be eligible for such pre-filing exemptions, foreign investors will be required to comply with certain requirements which will be specified in the cabinet order. The government explains that the following requirements will apply:

  1. that the foreign investor or its closely-related person will not be appointed as an officer of the Japanese company;
  2. that the foreign investor will not propose the transfer or abolishment of a material business of the Japanese company; and
  3. that the foreign investor will have no access to confidential technologies relating to national security, etc.

Further, foreign investments in certain business sectors involving significant national security risks (e.g., weapons manufacturing, nuclear power, electric power, telecommunications) will not be eligible for a pre-filing exemption. The government announced that they will publish a list of Japanese listed companies which are subject to pre-filings under FEFTA with further indication of those that are not subject to any pre-filing exemption.

Operational items for Japanese companies resulting in pre-filing requirements

Under the proposed rules, if foreign investors (for Japanese listed companies, foreign investors having 1% or more of the total voting rights of such listed companies) intend to consent to certain items having a significant impact on the operation of Japanese companies in the Restricted Business Sectors, such consent will be subject to pre-filings under FEFTA. While the list of such items subject to pre-filings will be specified in the cabinet order, the government has stated that the following will be included:

  1. that the foreign investor or its closely-related person is appointed as an officer of the Japanese company; and
  2. the transfer or abolishment of a material business of the Japanese company.

Foreign investments through partnerships

For foreign investments in the Restricted Business Sectors through partnerships under the Civil Code (nin-i kumiai), limited partnerships for investment (toushi jigyo yugen sekinin kumiai), or similar partnerships formed under foreign laws, the current rules require each foreign partner to submit pre-filings respectively. However, under the new rules, a single pre-filing under the name of the partnership will be sufficient if (i) 50% or more of the total investment amount to the partnership comes from foreign investors or (ii) the majority of operating partners or general partners of the partnership consists of foreign investors.

Next steps

It remains unclear whether the Bill will be passed at the Diet as proposed by the government. If the Bill is passed, the cabinet order to implement the new rules will follow, which provide us with more visibility into the details of the new rules.