National security reviews 2018: A global perspective
What's inside
A guide to navigating the rules for investing in countries that require national security approval
Navigating national security reviews worldwide
As governments in various countries tighten their grip on national security reviews of foreign direct investment, the need for better assessment and calibration of the associated regulatory risk in cross-border transactions is greater than ever before
Nowhere is this trend more evident than in the United States, with the August passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), which expanded the range of transactions that are subject to review by the Committee on Foreign Investment in the United States (CFIUS), and the more recent release of a pilot program under FIRRMA that instituted mandatory declarations for a broad range of transactions and put in place penalties—up to the full value of the transaction—for failure to comply. With CFIUS set to clamp down still further in coming months, CFIUS compliance is rapidly moving to the very top of the due diligence list for cross-border transactions involving US businesses.
The US is far from alone. As you will read in the pages that follow, the European Union, United Kingdom, Germany, France, China and other nations are also incrementally ratcheting up their reviews. In the UK, for instance, the government is proposing radical new legislation to allow it to intervene in cases that raise potential national security concerns. The UK government itself estimates that, under the new law, approximately 50 cases a year may end up with some form of remedy to address such concerns. In France, the new PACTE law is likely to strengthen the sanctions mechanism, extend the list of sectors subject to review and introduce some transparency into the process through annual reporting on a no-name basis of reviewed cases.
The pages that follow offer a common-sense guide to investing in major jurisdictions, a snapshot of recent regulatory changes in each, and guidance on making sound investment decisions in a time fraught with regulatory uncertainty.
United States
Deals are generally approved, but a new law increases the number and types of deals reviewed.
New legislation has been proposed to expand the scope of French national security reviews, especially in the technology sector, and to strengthen the powers of French authorities to impose sanctions
Deals are generally not blocked by the Italian government. However, in connection with the clearance process, conditions may be imposed that can have a significant impact on the investment
New amendments potentially require foreign investors to disclose information about beneficiaries, beneficial owners and controlling persons as part of pre-clearance
China is attempting to implement a more structured and comprehensive system to keep a closer eye on economic deals that might have security implications
In response to the increasing complexity of foreign investment, FEFTA was amended to place new restrictions on Designated Acquisitions, from October 2017 onward, which are equivalent to those placed on Inward Direct Investments.
Under the Foreign Exchange and Foreign Trade Act (FEFTA), the Ministry of Finance (MOF) and the relevant ministries with jurisdiction over the transaction matter review foreign investments, including acquisitions of Japanese businesses by foreign persons or businesses. The Ministry of Economy, Trade and Industry (METI) also enforces FEFTA.
WHO FILES
FEFTA requires a "Foreign Investor" to submit an advance notice or a post-transaction filing depending on the type of the business in which the target entity is engaged or the nationality of the Foreign Investor, through the Bank of Japan to MOF and relevant ministries. Foreign Investors include:
Any individual who is a non-resident of Japan
Any entity established pursuant to foreign laws, or other entities having their principal office in a foreign country
Any entity in which 50 percent or more of the voting rights are held by an individual or entity described above
Any entity in which the majority of directors or the representative directors of the entity are individuals who are non-residents of Japan
TYPES OF DEALS REVIEWED
The MOF and the relevant ministries review two types of transactions: Inward Direct Investments and Designated Acquisitions.
An Inward Direct Investment includes, among others, the acquisition by a Foreign Investor of shares of a Japanese unlisted company (including initial incorporation) from resident shareholders, as well as the acquisition by a Foreign Investor of shares of a Japanese listed company, resulting in the Foreign Investor's holding of 10 percent or more of the listed company's shares. An Inward Direct Investment also includes a Foreign Investor's lending to a Japanese company, and a Foreign Investor's purchase of company bonds of a Japanese company if and so long as the amount and term thereof exceeds a certain threshold. There are a few more variations of the transaction that fall into Inward Direct Investments.
A Designated Acquisition is a transaction where a Foreign Investor acquires shares of a non-listed company from other Foreign Investors.
With respect to Inward Direct Investments, almost all transactions (with some statutory exceptions) require post-transaction filings, unless advance notice as described below is required. Transactions requiring advance notice are subject to review and approval by the MOF and the relevant ministries. Investment from certain countries or in certain designated industries (e.g., airplanes, weapons, nuclear power, agriculture, forestry and fisheries, and the oil industry) are designated as transactions that may affect national security, public order or public safety of Japan, or may have a significant adverse effect on the Japanese economy, and consequently require advance notice filings. Regarding Designated Acquisitions, a Foreign Investor is required to submit advance notice if the target company is engaged in the business related to Japan's national security (i.e., the target company falls in a designated industry such as airplanes, weapons and nuclear power). Post-transaction filings are not required for a Designated Acquisition.
SCOPE OF THE REVIEW
For reviews of Inward Direct Investments and Designated Acquisitions that require advance notice, the MOF, METI and the relevant ministries issued a public announcement in August 2017 clarifying the factors to consider. The factors include:
Whether the production base and technology infrastructure in Japan can be maintained vis-à-vis Japan's security-related industries
Whether outflow of sensitive technology important for security can be prevented
Whether public activities during peacetime and emergency can be maintained
Whether public safety can be maintained
How the attributes of the financial plan and past investment behaviors of the Foreign Investors and their affiliates look, etc.
TRENDS IN THE REVIEW PROCESS
The ministries have approved almost all of the notified transactions in the past. The only known case where a transaction was blocked was in 2008 when a foreign investment fund planned to acquire 20 percent of the shares of a power company, which had a nuclear power plant. In response to the advance notice made by the fund, the MOF and METI recommended that the acquisition not be allowed, because of the perceived risk that the transaction might disturb the maintenance of the public order in Japan. However, because the fund did not follow the recommendation, the MOF and METI ordered the fund to discontinue the acquisition. The fund did not appeal the order.
Before October 1, 2017, only Inward Direct Investment transactions were reviewed.
However, in response to the increasing complexity of foreign investment, FEFTA was amended to place new restrictions on Designated Acquisitions, from October 2017 onward, which are equivalent to those placed on Inward Direct Investments. In addition, the amended FEFTA has also introduced enforcement measures for the breach of those restrictions. For example, if a Foreign Investor does not give advance notice as required by FEFTA or does not obey the recommendation or orders issued by the MOF and the relevant ministries, the ministries are authorized to order the disposal of shares obtained in the transaction.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Although there is no specific provision regarding the procedures for mitigation measures in FEFTA and related laws or orders, the MOF and the relevant ministries are allowed to require mitigation measures, which are assumed to be negotiated with the Foreign Investor. That said, Foreign Investors can proactively propose and negotiate mitigation measures with the ministries in charge.
REVIEW PROCESS TIMELINE
A Foreign Investor who has made an advance notice filing cannot close the transaction until the expiration of 30 calendar days from the date the MOF and the ministry having jurisdiction over the transaction received the notification. However, for certain transactions, such as greenfield transactions and roll-over transactions, the waiting period is usually shortened to two weeks. The MOF and the relevant ministries can extend the waiting period up to five months, if it is necessary for the review.
If the MOF and the ministry with jurisdiction find the reviewed transaction problematic in terms of national security, they can recommend that the Foreign Investor change the content of the transaction or discontinue the transaction after hearing opinions of the Council on Customs, Tariff, Foreign Exchange and other Transactions. The Foreign Investor after receiving such recommendation must notify the MOF and the ministry with jurisdiction of whether it will accept the recommendation within ten days.
If the Foreign Investor does not provide notice or refuses to accept the recommendation, the MOF and the relevant ministries may order the modification of the content of the transaction or its discontinuance before the expiration date of the waiting period.
OUTCOMES
- Almost all deals are approved
- The October 2017 FEFTA Amendment introduced new restrictions to transfer of shares in non-listed companies from a Foreign Investor to another Foreign Investor (i.e., out-out transfer)
- The October 2017 FEFTA Amendment also introduced an enforcement mechanism addressing the breach of the restriction thereunder, which was not available before the amendment
- Although almost all deals continue to be approved and there is no apparent change to enforcement practice, Japan might join the global trend of aggressive enforcement
