Japan: Navigating foreign direct investment rules when you are contemplating a corporate reorganization

Japan’s Foreign Exchange and Foreign Trade Act (FEFTA) provides the framework for regulating foreign direct investments into Japan. FEFTA requires foreign investors to submit pre-transaction notifications to the ministries that regulate certain business sectors in Japan before acquiring equity, changing a shareholder in a reorganization or taking certain other corporate actions. The notifications are filed through the Bank of Japan. 

Where a Foreign Parent is contemplating a corporate reorganization involving a Regulated Japanese Subsidiary, a pre-transaction notification with the Bank of Japan may be necessary under certain circumstances. You must submit a pre-transaction notification under FEFTA if you meet both parts of a two-part test: (i) the Regulated Japanese Subsidiary is engaged in one of the Designated Business Sectors (defined below) and (ii) the Foreign Parent is taking a Regulated Action (defined below) involving a Regulated Japanese Subsidiary.

Designated Business Sectors

The current list of Designated Business Sectors consists mainly of the following: 

(i)  Highly Sensitive Sectors: weapons, aircraft, nuclear facilities, space and dual-use technology
(ii) Sensitive Sectors: electricity, gas, telecommunications, software, data processing, information processing devices, water supply, railway, oil, biopharmaceutical, specially-controlled medical devices
(iii) Less Sensitive Sectors: heat supply, broadcasting, public transportation, biological chemicals, security services, agriculture, leather manufacturing, air transportation and maritime transportation

Among the Designated Business Sectors, the Highly Sensitive Sectors and certain businesses of the Sensitive Sectors which specialize in certain areas or which exceed a certain size/value are classified as “Core Business Sectors” under FEFTA.

Foreign Parent and regulated actions

In the context of a multinational corporate reorganization involving a Foreign Parent and a Regulated Japanese Subsidiary engaged in one or more Designated Business Sectors, the following corporate actions, among others, would be treated as Regulated Actions:

• A Foreign Parent acquires shares or voting rights in the Regulated Japanese Subsidiary from the Regulated Japanese Subsidiary itself, a Japanese resident or another foreign investor.
• A Foreign Parent acquires the business from a Japanese resident (eg, business transfer, demerger or merger, each as defined under Japan’s Companies Act) from a Japanese resident (including a Japanese branch of a foreign entity).
• A Foreign Parent exercises shareholder voting rights to approve certain corporate actions, such as a substantial change in the Regulated Japanese Subsidiary’s business purposes or a business transfer or demerger or proposals to liquidate the Regulated Japanese Subsidiary or discontinue one of its business lines.

A Foreign Parent considering a reorganization involving a Regulated Japanese Subsidiary should confirm well ahead of the reorganization implementation date whether a pre-transaction notification is required under FEFTA and factor this into its planning. 

Determining whether a Regulated Japanese Subsidiary is engaged in the Designated Business Sectors is highly fact specific.

Determining whether a Regulated Japanese Subsidiary is engaged in the Designated Business Sectors is highly fact specific. Because these sectors are defined broadly, we recommend working with legal counsel and the business teams to understand whether the Japanese business could be implicated, and then approaching the relevant ministries on an informal basis to understand the position the ministries are likely to take. This approach is especially important where the Regulated Japanese Subsidiary may be engaged in business activities ancillary to its principal business (which is not regulated) where the ancillary business activities technically fall within a Designated Business Sector.

Pre-transaction Notification

There is a 30-calendar-day waiting period for transactions that require a pre-transaction notification under FEFTA once the formal notification is made. 

It is common practice to share the draft notification with the relevant ministries in advance of the formal filing. Once filed, the waiting period is frequently shortened to two weeks. However, in some cases this waiting period can be extended up to five months if a relevant ministry decides that there is a need for a more comprehensive review, which usually involves additional queries and document requests about the nature of the business and the contemplated transaction. 

The approval is effective for six months from the date of approval. If the transaction (ie, the reorganization) does not occur within six months, the Foreign Parent would need to file anew its pre-transaction notification to the Bank of Japan. However, if the material facts related to the transaction have not changed since the previous filing, it is likely that the examination by the relevant ministry would be relatively quick.

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Welcome to Crossroads – ICR Insights

Crossroads – ICR Insights is our series of short-read articles designed to assist organizations considering an international corporate reorganization (ICR). Each country-specific, solutions-based brief will answer a key consideration during a global transaction such as carveouts, spinoffs, acquisitions and dispositions, pre- and post-acquisition integration, or legal entity rationalization. Visit Crossroads – ICR Insights to view the entire collection or sign up to be notified of new postings. Have an idea of a topic or interested in discussing further? Email ICRCrossroads@dlapiper.com.