Japan’s Ministry of Finance (MOF) and its ministries with jurisdiction over the target entity’s business review foreign direct investments under the Foreign Exchange and Foreign Trade Act (FEFTA).
Japan enacted an amendment to the FEFTA on November 29, 2019. When the amendment came into force on June 7, 2020, it expanded the scope of foreign direct investment review, lowered the threshold for screening the purchase of listed companies’ shares to acquisitions at 1 percent or more, and introduced a new prior notification exemption scheme for share acquisitions.
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 wherein a foreign investor acquires shares of a non-listed company from other foreign investors.
Acquires a listed target entity’s shares, after which the foreign investor “beneficially owns” 1 percent or more of the listed target entity’s outstanding shares. (The 2020 FEFTA Amendment reduced the threshold from 10 percent to 1 percent.) “Beneficial ownership” means the possession of voting rights by the foreign investor, collectively with its “special related persons,” through shares held directly by any such persons, shares that any such person has been granted authority to manage on a discretionary basis and shares with respect to which any such person has been granted a voting proxy. “Special related persons” means that certain direct and indirect subsidiaries and certain direct and indirect parent companies of the foreign investor, the officers and directors of the foreign investor and those direct and indirect subsidiary and parent entities to which this definition applies, entities of which the officers and directors of clause constitute a majority of the officers and directors where the foreign investor is an individual, the foreign investor’s spouse and direct blood relatives; where the foreign investor is a government, administrative body, public body or the like, governments, administrative bodies and public bodies and the like of the same country or region as the foreign investor; and where other non-residents who have agreed to exercise voting rights together with the foreign investor and the “special related persons” of such other non-residents. The direct and indirect subsidiary and parent entities to which this applies are defined as entities in which the foreign investor directly holds 50 percent or more of the voting rights, entities that the entities of (1) directly hold 50 percent or more of the voting rights in; (2) entities that directly hold 50 percent or more of the voting rights in the foreign investor; (3) entities that directly hold less than 50 percent of the voting rights in the foreign investor individually but, in the aggregate with the direct holdings of entities that such entity directly holds 50 percent or more of the voting rights in, directly hold 50 percent or more of the voting rights in the foreign investor; (4) entities that directly hold 50 percent or more of the voting rights of entities described in (2) or (3); (5) entities that the entities described in (5) directly hold 50 percent or more of the voting rights of; (6) entities that the entities of (5) or (6) directly hold 50 percent or more of the voting rights of; (7) entities that the entities of (3) directly hold 50 percent or more of the voting rights of; and (8) entities that the entities of (3) or (8) directly hold 50 percent or more of the voting rights of.
Acquires voting rights of a listed target entity, after which the foreign investor beneficially owns 1 percent or more of the listed target entity’s total voting rights. (This threshold will be less than 1 percent of outstanding shares to the extent that there are shareholders holding odd lots.)
Acquires shares of an unlisted target entity, including at incorporation, from resident shareholders.
Consents to material changes to the business purposes of an unlisted target company at any beneficial ownership level, or a listed target company where the foreign investor’s beneficial ownership accounts for one-third or more of the target company’s total voting rights.
Consents to shareholder meeting proposals that are defined to have a material impact on the target Japanese company’s business in the regulations, specifically including (among other things) the appointment of a foreign investor or a foreign investor’s “closely related person” as a director or an audit & supervisory board member; the transfer or disposal of the entirety of the business; a merger in which the target Japanese company is not the surviving company; or dissolution of the company for an unlisted target company at any beneficial ownership level, or for a listed target entity, where the foreign investor’s beneficial ownership accounts for 1 percent or more of the total voting rights of the target company.
Obtains proxy voting authority wherein the target company is publicly listed and the aggregate voting rights beneficially owned by the foreign investor after obtaining such proxies equals or exceeds 10 percent of the total voting rights, or the target company is not publicly listed. This applies only where the proxy is not held by the target company or any of its officers or directors; the agenda items with respect to which proxy voting authority is granted may grant the proxy holder control over the management of the target company or material influence over the management of the target company; and the proxyholder solicited the proxy.
Acquires the right to cause voting rights to be exercised with respect to listed companies, after which acquisition such foreign investor’s total voting rights beneficially owned equals or exceeds 1 percent of the total voting rights.
Obtains the agreement of other foreign investors to jointly exercise their respective beneficially owned voting rights of a publicly listed company, where the aggregate beneficially owned voting rights across all relevant foreign investors account for 10 percent or more of the total voting rights of the publicly listed company.
Lends to a Japanese company where both the amount owed to the foreign investor exceeds JPY 100 million and the aggregate amounts owed including corporate bonds held by the foreign investor exceed 50 percent of the target company’s debt.
Purchases corporate bonds that meet all of the following criteria: The bonds are issued to the specific foreign investor; the redemption date is more than one year in the future; the balance due on the bonds exceeds JPY 100 million; and the aggregate of the balance due on the bonds and under other loans made by the foreign investor accounts for more than 50 percent of the target company’s debt.
Source:
https://www.whitecase.com/insight-our-thinking/foreign-direct-investment-reviews-2021-japan
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