Prior Notification by foreign investors

Inward Direct Investment Regulations under the Foreign Exchange and Foreign Trade Law require foreign investors to submit prior notification when conducting certain activities, such as direct investment in Japanese companies operating in designated industries (Article 27 of the Foreign Exchange and Foreign Trade Law). 

If, as a result of the examination, there is a risk of undermining national security, etc., the minister concerned may issue a recommendation or order to change or discontinue the investment. <Prior Notification>.

On the other hand, there is a system under which prior notification is exempted on the premise that specific standards are complied with (Article 27-2 of the Foreign Exchange and Foreign Trade Control Law). <Exemption from Prior Notification>

 

What is a foreign investor 

Foreign investors are mainly the following persons. Even a Japanese subsidiary may be included in the definition of “foreign investor.

  • Individuals who are non-residents (non-residents)
  • Corporations established under foreign laws and regulations (foreign corporations)
  • A Japanese corporation in which 50% or more of the voting rights are held directly or indirectly by a non-resident individual or foreign corporation (foreign corporation)
  • A partnership in which certain foreign investors constitute a majority of the managing partners (Foreign Affiliated Fund)
  • Non-residents constitute a majority of its officers or representative officers (majority of officers and representative officers are non-residents)

 

What is inward direct investment 

Inward direct investment requiring prior notification mainly refers to the following cases.

Type

Contents

Threshold

No.1

Acquisition of shares or equity interest in an unlisted company

None

No.2

Transfer of shares or equity interest in an unlisted company owned before becoming a non-resident to another foreign investor

None

No.3

Acquisition of shares of a listed company, etc.

Together with closely related parties, shareholding ratio of 1% or more; no procedure required if less than 1%.

No.4

Acquisition of voting rights in listed companies, etc.

Together with a closely related party, the ratio of voting rights held is 1% or more; if it is less than 1%, no procedures are required.

No.5

Consent to substantially change the business purpose of a Japanese company

<In the case of a listed company, etc.>

1/3 or more together with closely related parties; no procedure required if less than 1/3

<In the case of unlisted companies>

None

Consent for proposals relating to the election of directors or corporate auditors

<In the case of listed companies, etc>

The ratio of voting rights held by the closely related parties together is 1% or more; if it is less than 1%, no procedure is required.

<For unlisted companies> None

Consent for proposals relating to business transfers, etc.

<In the case of listed companies, etc.

The ratio of voting rights held by the closely related party is 1% or more; if it is less than 1%, no procedure is required.

<For unlisted companies> None

No. 6

Establishment of a branch in Japan

None

No.7

Loan to a Japanese company for a term longer than 1 year

None

Specified acquisition

Acquisition of shares or equity interests in unlisted companies from foreign investors.

None

(NIBEN Frontier, January/February 2024, Inbound Practice Introduction to Foreign Investment Regulations under the Foreign Exchange and Foreign Trade Control Law Shintaro Okawa Simplified version of Fig. 5)

 

What are the Designated Industry and Core Industry?

 

Designated industry

  • If a company operates in any one of the business categories that require Prior Notification, it is subject to Prior Notification. If a subsidiary of the investee company operates in a designated industry, it is also subject to Prior Notification.
  • Designated industries are those designated in the public notice as related to national security and public order. They are not necessarily limited to businesses with technology that can be converted to military use but include a wide range of industries such as medical care, electric power, telecommunications, software manufacturing, information processing services, and Internet support.
  • The scope is not clear, especially in the case of IT-related companies. For example, an IT software company that sells applications to other companies may fall under the category of software manufacturing; an IT company that handles third-party information or provides support services related to the Internet may fall under the category of information processing service business or Internet use support business (NIBEN Frontier Okawa, above).
  • Types of business requiring prior notification
    • Manufacturing of weapons, aircraft (including unmanned aerial vehicles), space exploration, and nuclear power related industries, as well as repair and software related to these industries
    • Manufacturing of general-purpose products that can be used for military purposes
    • Manufacturing industries related to pharmaceuticals for infectious diseases and highly controlled medical devices
    • Metal mining and smelting related to important mineral resources, and construction related to the development of port facilities on specified isolated islands
    • Import of fertilizers (potassium chloride, etc.)
    • Manufacturing of permanent magnets, manufacturing of materials, manufacturing of machine tools and industrial robots, etc.
    • Manufacturing of semiconductor manufacturing equipment, etc.
    • Manufacturing of storage batteries and materials
    • Ship parts (engines, etc.) manufacturing
    • Metal 3D printer manufacturing and metal powder manufacturing
    • Cyber security-related industries (information processing-related equipment, parts, and software manufacturing industries, information service-related industries)
    • Infrastructure-related industries (electric power, gas, telecommunications, water supply, railroad, oil, heat supply, broadcasting, and passenger transport)
    • Security services, agriculture, forestry, and fisheries, leather products manufacturing, air transportation, and marine transportation

Core Industry

  • According to NIBEN Frontier Okawa, the Ministry of Finance’s List of Listed Companies is only a reference material, and reliance on it is risky. Information such as the applicability of listing regulations cannot be determined from the outside, and it is impossible to create a perfect list from the outside.

 

Flow of Prior Notification

    • Preparation of Prior Notification documents
    • Submission
    • Examination
    • Execution of investment, etc.
    • Submission of the execution report
  • When investing in an industry subject to Prior Notification, Prior Notification must be submitted to the Minister of Finance and the minister having jurisdiction over the business through the Bank of Japan within six months before the transaction.
  • In principle, foreign investors are prohibited from conducting such transactions for 30 days from receipt of the notification. However, the prohibition period may be reduced to two weeks for less sensitive transactions. After the prohibition period, if the foreign investor is permitted to conduct the relevant transaction, they may acquire the shares, etc.
  • The foreign investor is responsible for making the Prior Notification or subsequent report, but if the foreign investor is a non-resident, a resident agent is responsible for making the report.
  • When a foreign investor who has filed Prior Notification acquires or disposes of shares, it is required to report to the Minister of Finance, etc., via the Bank of Japan within 45 days.

 

Prior Notification Exemption System

When a foreign investor, inward direct investment, and designated industry falls under the cases requiring prior notification, if the following requirements are met, the prior notification will be exempted and an ex post facto report will be required.

 

  1. When the investee is a listed company
    • Other than core industries
      • If a foreign investor (excluding foreign financial institutions) acquires 1% or more of the shares of a listed company operating in a designated industry other than the core industry, the foreign investor is in principle exempted from prior notification if it meets the exemption criteria described below(*1).
    • Core Industry
      • If an investor acquires 1% to 10% of the shares of a listed company operating in a core industry, the investor is in principle exempted from prior notification if the investor satisfies the exemption criteria(*1) plus additional criteria(*2).

2. When the investee is a nonlisted company

    • Other than core industries
      • For inward direct investment in unlisted companies, the Prior Notification exemption system is available for designated industries other than core industries, regardless of the investment ratio, by complying with the exemption criteria(*1).
    • Core Industry
      • In the case of core industry sectors, the use of the Prior Notification exemption is not available.

(*1) Exemption criteria

      • The foreign investor or its related persons must not serve as a director, etc., of the issuing company.
      • No proposal for transferring or abolishing a business in a designated industry must be submitted to a general shareholders meeting.
      • Not to access undisclosed technical information related to the business in the designated industry.

(*2) Additional criteria

      • Do not participate in committees with significant decision-making authority concerning the core business.
      • Do not make written proposals to the board of directors, etc., with a deadline for a response or action regarding a business in the core industry.

 

 

 

Examples of cases requiring prior notification

  • A foreign corporation establishes an operating company (unlisted) in Japan for an application with a closed chat function. If the company has a closed chat function, it is required to file a notification under the Telecommunications Business Law. Telecommunications business falls under the designated industry category. Furthermore, if the company provides telecommunications services etc., across multiple cities, towns, and villages, it falls under the core industry category. The prior notification exemption system is not available for investments in core industries by unlisted companies.
  • Company A, which operates a tutoring school (unlisted), has a subsidiary, Japan Company a, which develops software. Company A’s subsidiary’s software development business falls under the designated business category. Since the purpose is to strengthen management involvement and does not comply with the exemption criteria, the prior notification exemption system cannot be used.
  • An individual investor residing in a foreign country acquires one share (including fractional shares) or more in an unlisted Japanese company that manufactures advanced materials subject to export control. Since this is an investment by an individual residing in a foreign country in the core industry of an unlisted company, the prior notification exemption system is not available regardless of the investment ratio.

 

Ex-post Reporting

  • When a foreign investor who has filed a Prior Notification acquires shares, it is required to report to the Minister of Finance, etc. within 45 days (execution report).
  • In following cases where the Prior Notification is not required, submitting an after-the-fact report is mandatory. 
    • the investee’s business does not include any business in a designated industry. 
    • the investee is using an exemption system from prior notification.

Summary

There are three points to consider: whether the investment is from a foreign investor, whether it is a domestic direct investment, and whether the investee’s business is a designated or core business.

Please note that the scope of the designated business/core business is broad, and its contents are unclear.