Japan's Ministry of Finance (MOF), together with ministries responsible for specific industry sectors, reviews foreign direct investments (FDI) under the Foreign Exchange and Foreign Trade Act (FEFTA).

2019's FEFTA amendments expanded the scope of FDI review, lowered the filing threshold (by expanding the filings required), and introduced exemptions (which in practice reduce the filings required).

Recent updates

• The MOF updated its list of public companies that preliminarily classifies those companies' businesses as among those operating in "non-core sectors," "core sectors," or "undesignated sectors." The list is to be reviewed and updated periodically, with the most recent update in November of 2021. However, as before, filers cannot rely on this list and must perform their own analysis
• Business sectors relating to critical minerals, including rare earth, were added to "core sectors." Those business sectors include: (i) metal mining; manufacturing, repair/maintenance of software for devices or products used for metal mining; and component analysis services for minerals; and (ii) the construction services business for improving or maintaining port facilities on designated remote islands to ensure the smooth operation of mineral exploration vessels
• FEFTA was amended to deem certain transactions relating to crypto-assets "capital transactions" subject to prior approval to enhance the effectiveness of economic sanctions against Russia

Who files

Depending on the type of business in which the target entity is engaged, FEFTA requires a "foreign investor" to submit a prior notification and/or a post-transaction filing through the Bank of Japan to the MOF and relevant ministries. Foreign investors include:

• Individuals who do not reside in Japan, termed "non-residents"
• Entities or other groups established under laws or regulations of, or having their principal offices in, foreign countries
• Entities in which an individual or entity described above holds 50 percent or more of the total voting rights
• Partnerships operating in the investment business of which 50 percent or more of the total capital has been contributed by foreign entities, foreign groups or non-residents, or the majority of general partners are non-residents
• Entities in which the majority of directors or representative directors are non-residents

Types of deals reviewed

The MOF and Japan's ministries with jurisdiction over the target entity's business review two types of transactions: designated acquisitions and inward direct investments.

• A designated acquisition is a transaction where a foreign investor acquires any shares (even one share) of a non-listed company from another foreign investor.
• An inward direct investment is defined to include transactions, among other things, where a foreign investor:
• Acquires one percent (1 percent) or more of a listed target entity's outstanding shares or total voting rights
• Acquires any shares (even one share) of an unlisted target entity from a resident shareholder
• Consents to material changes to the business purposes of an unlisted target company, regardless of ownership percentage, or a listed target company where the foreign investor owns one-third or more of the target company's total voting rights
• Consents to shareholder meeting proposals to nominate that foreign investor or certain related parties to the board or certain other extraordinary transactions such as a sale of the company, regardless of ownership percentage for an unlisted target company and when holding 1 percent or more of the voting rights for a listed target company
• Obtains proxy voting authority at an unlisted company, or such authority equivalent to 10 percent or more of the total voting rights of a listed company
• Acquires the right to exercise 1 percent or more of a listed company's voting rights
• Obtains the agreement of other foreign investors to jointly exercise their respective beneficially owned voting rights, where the aggregate beneficially owned voting rights across all relevant foreign investors account for 10 percent or more of the total voting rights of a listed company
• Lends to a Japanese company more than ¥100 million, where the company's debt to the foreign investor accounts for more than 50 percent of the company's debt
• Purchases corporate bonds which meets certain criteria, including that they amount to more than ¥100 million and account for more than 50 percent of the company's debt

Scope of the review

Foreign investors are required to make a prior notification and/or a post-transaction filing through the Bank of Japan to the MOF and relevant ministries with respect to certain inward direct investments.

Prior notification filings may be required depending on whether the target entity is engaged in designated industries or the characteristics of the foreign investor (including nationality, location (including region)) and whether the investor qualifies for exemptive relief).

A foreign investor who has obtained a prior notification filing approval for any inward direct investments is required to make a post-transaction filing within 45 days of the completion of the transaction.

A foreign investor is required to submit a prior notification filing with regard to a designated acquisition if the target company is engaged in designated industries. Post-transaction filings are not required for a designated acquisition unless the foreign investor claimed an exemption from prior notification filings for its stock acquisition.

Review process timeline

Foreign investors must make their prior notification filings within the six-month period prior to the completion of the transaction. In other words, approvals are valid for six months from the date on which the filings were officially received by the BOJ.

By default, transactions subject to a prior notification filing cannot be closed until the expiration of a 30-calendar-day waiting period from the date on which MOF and the ministry having jurisdiction over the transaction received the filing. However, the waiting period may be shortened to two weeks. Nevertheless, the MOF and the relevant ministries can extend the waiting period up to five months if necessary for the review.

If the MOF and the relevant ministry find the transaction under review problematic in terms of national security, they may recommend that the foreign investor change the content of the transaction or discontinue the transaction after consultation with the Council on Customs, Tariff, Foreign Exchange and other Transactions. The foreign investor must notify the MOF and the relevant ministry of whether it will accept the recommendation within ten days after receiving such recommendation. If the foreign investor does not provide notice or refuses to accept the recommendation, the MOF and the relevant ministries may order a modification of the content of the transaction or its termination before the expiration date of the waiting period.

How foreign investors can protect themselves

Exemption scheme for prior notifications

The 2020 FEFTA Amendment introduced exemptions from the prior notification filings otherwise required for stock purchases. Foreign investors are categorized into three types under the exemptions from the prior notification filings: foreign financial institutions; general investors; and non-qualified foreign investors. The coverage of the exemption differs depending on the type of foreign investor involved. All of the exemptions are subject to the requirement that the foreign investor comply with the following three exemption conditions:

• The foreign investor and its closely related persons will not serve on the board of the target company as directors or audit & supervisory board members
• The foreign investor will not make proposals at shareholders' meetings to dispose of material businesses in designated industries
• The foreign investor will not access sensitive confidential technologies that are related to the target company's business in designated industries

Decision on whether to make a prior notification filing

In principle, the applicability of a designated industry is determined based on the issuer's actual business. In practice, however, a filer makes the classification judgment based on publicly available information, such as company websites and commercial registries, as well as input from the issuer, if possible.

To help such assessment, foreign investors may refer to the MOF list of public companies discussed above, designating businesses as being involved in "non-core sectors," "core sectors" or "undesignated sectors."

Practical tip

For investors who wish to make flexible and speedy investments in response to market trends, such as investment funds, it is worth considering making a prior notification filing a bit more frequently than every six months for possible investments in a target company.

Sometimes, after making a prior notification, filers receive questions regarding their own business, intended transactions with the issuer, etc. from the ministries, and may be asked to make covenants in a filing relating to possible transactions. There is, however, room to negotiate the language of the proposed covenants, and filers can suggest changes to the ministries.

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