The Foreign Investment Regulation Review: Japan
Japan's foreign investment regulations are broadly divided into regulations based on the Foreign Exchange and Foreign Trade Act (the Forex Act) and regulations based on individual laws.
Although the Forex Act stipulates that foreign investors are free to make inward foreign direct investments without interference from authorities, it requires prior notification for investments in limited sectors that are considered to be of serious concern from the perspective of Japanese national security and requires ex post facto reporting for certain other inward foreign direct investments.
In recent years, with the progress of IT technology, cybersecurity-related businesses have a significant impact on national security. The Forex Act was therefore revised in November 2019 to regulate investments that may impair national security, in light of the trend of tightening foreign investment regulations that had preceded in Europe and the United States. The revised Forex Act has been fully enforced since June 2020.
Under the revised Forex Act, the standard for prior notification required for foreign investors to acquire shares in a listed company operating in a designated industry was reduced from 10 per cent to 1 per cent and a prior notification exemption system was introduced.
Foreign investments are also regulated by multiple individual laws. For example, the Radio Act, the Broadcasting Act, the Act on Nippon Telegraph and Telephone Corporation, the Freight Forwarding Business Act, the Aviation Law, the Ship Act and the Mining Act all prohibit foreign investors from acquiring more than a specified percentage of shares in Japanese companies or specific rights (or both), and restrict the entry of foreign investors by uniform regulations that are not subject to screening by the authorities.
Year in review
In keeping with global trends, Japan introduced a series of amendments to the Forex Act between 2019 and 2020 to address mounting concerns over perceived threats to national security.
In August 2019, Japan expanded its list of regulated sectors requiring pre-notification screening to include:
- the manufacturing of computing equipment and related components (including integrated circuits, flash memory storage media and mobile telephones);
- the manufacturing of information processing software; and
- telecommunication services (mobile and fixed lines) and internet support services.
In October 2019, the second amendment took effect, expanding the range of regulated investment activities to include:
- the ownership of voting rights;
- the grant of a public or private company proxy;
- two or more foreign investors that own 10 per cent or more of shares or voting rights in a Japanese listed company entering into a shareholders' agreement; and
- listed Japanese companies that engage in one of the regulated industries cited under the Forex Act.
The third amendment, in June 2020, lowered the threshold for mandatory, pre-screening notification of acquisitions in listed Japanese companies that are engaged in designated 'sensitive sectors' (designated for national security reasons) from 10 per cent to 1 per cent. Under the new rule, any foreign investor that contemplates an acquisition of 1 per cent or more of shares or voting rights in Japanese listed companies must now notify the Bank of Japan (BOJ) prior to making the investment. However, to counteract the effects of broadening the screening base of prior notifications, the government introduced two types of exemption, both designed to minimise disruption to inbound foreign investment and keep the number of review cases manageable.
The blanket exemption covers foreign financial institutions irrespective of the target business sector or the level of share ownership, provided investors satisfy certain conditions including:
- investors and their closely related persons2 being precluded from becoming board members or from gaining access to the target company's non-public technological information; and
- investors being precluded from proposing to transfer or dispose of the target company's businesses at the general shareholders' meeting.
Foreign securities houses, banks, insurance companies, asset management firms, trust companies, registered investment trusts and registered high-frequency traders who are already bound by financial regulatory laws in Japan or other jurisdictions would be eligible under the 'blanket' exemption. The regular exemption is available to all other foreign investors, unless the target business is deemed to be a 'core' business that is sensitive to national security, such as:
- nuclear reactors;
- space, dual-use technologies;
- oil; and
- utilities such as electricity, gas, telecommunications and water supply.
Foreign investors that acquire up to 10 per cent of shares or voting rights and wish to file for regular exemption for investing in any of the 'core' sectors must satisfy two additional conditions:
- refrain from becoming members of committees in the target company that are responsible for material business decisions; and
- refrain from making written proposals to the executive board of the target company or board companies requiring response or action by a certain date.
No regular exemption is available for acquisitions of more than 10 per cent of shares. Regular exemption is also unavailable for state-owned enterprises unless they have been accredited by the Japanese government (i.e., sovereign wealth funds (SWFs)).
At present, a total of 715 listed companies qualify as being in 'core' sectors, with more than half of approximately 3,883 listed companies operating in 'designated' sectors with national security implications.3
Some important announcements have been made in relation to foreign investment regulations since the revised Forex Act was fully brought into force in June 2020.
First, in February 2020, the government introduced a moratorium for ex post facto reporting obligations for foreign investments. If a foreign investor cannot file a required report due to unavoidable circumstances that have arisen from the covid-19 pandemic, the reporting obligation is postponed. The investor must file the report without delay after the relevant circumstances come to an end.
In May 2020, the Ministry of Finance announced 'Factors to be considered in authorities' screening of prior notification for Inward Direct Investment and Specified Acquisition under the Foreign Exchange and Foreign Trade Act.'4
Finally, in June 2020, in light of the covid-19 pandemic, the government added advanced manufacture of pharmaceuticals for infectious diseases and the manufacture of highly controlled medical devices to the list of 'core businesses' among 'designated businesses' that are deemed critical to national security under the Forex Act.
Foreign investment regime
The purpose of the Forex Act is to enable the proper development of foreign transactions and the maintenance of peace and security in Japan, and in the international community, by implementing the minimum necessary management and coordination for foreign transactions, thereby contributing to the sound development of the Japanese economy based on the freedom of foreign exchange, foreign trade and other foreign transactions.
For this management and coordination, when foreign investors intend to make inward foreign direct investments, the Minister of Finance and the minister in charge of the target business oblige foreign investors to notify them with information of the transaction in advance, to examine whether the transaction will 'impair national security', 'impede the maintenance of public order', 'interfere with the protection of public safety' or have a 'significant adverse effect on the smooth operation of the Japanese economy'.
Additionally, for certain transactions, ex post reports are required.
ii Laws and regulations
Foreign investment in Japan is regulated by the Forex Act and its supplemental regulations, ministerial ordinances, and notices. There are also industry-specific laws that regulate investments by foreign nationals by setting an upper limit on the ratio of shares that may be held by foreign nationals, including:
- the Broadcast Act;
- the Radio Act;
- the Civil Aeronautics Act;
- the Consigned Freight Forwarding Business Act;
- the Mining Act;
- the Ship Act; and
- the Act on Nippon Telegraph and Telephone Corporations.
Under the Forex Act, the competent authorities are the Minister of Finance, who is responsible for approving all capital transactions and foreign direct investments excluding trade, and the Minister of Economy, Trade and Industry, who is responsible for authorising trade, services and all trade-related transactions such as settlements of trade payments and compensation. The BOJ also plays an administrative role in accepting notifications in both hard copy and digital format, and compiling statements of balance of payments.
The determination of core sectors, or the designation of sectors deemed to be in the national security interest, falls on the Minister of Finance and relevant ministries. For instance:
- the Prime Minister: security services;
- the Minister of Finance and Prime Minister: central banking;
- the Minister of Interior Affairs and Communications: telecommunications, radio, application and contents providers, and internet service support providers;
- the Minister of Health, Labour and Welfare: pharmaceuticals and water supplies;
- the Minister of Agriculture, Forestry and Fisheries: farming and fishing cooperatives;
- the Minister of Economy, Trade and Industry: weaponry (apart from transportation of weaponry), aircrafts, satellites, rockets, mining, oils, leather goods, manufacturing of personal computers, electricity and software production; and
- the Minister of Land, Infrastructure, Transport and Tourism: railways, shipping and freight forwarding.
The Forex Act captures 'inward direct investments' or other types of transactions by a 'foreign investor', including greenfield investments such as establishing a branch, factory or representative office in Japan.
'Foreign investors' are defined as:
- non-resident individuals;
- corporations, partnerships, associations or other entities established in foreign jurisdictions or having their principal offices in foreign countries;
- companies where at least 50 per cent of voting rights is directly or indirectly held by those listed in items (a) or (b);
- partnerships that run investment businesses or limited investment partnerships or other entities (including foreign unions) where at least 50 per cent of the investment amount is held by non-residents, or where at least 50 per cent of the managing members are non-residents; and
- corporations, partnerships, associations or other entities in Japan in which the majority of either the officers (i.e., directors or similar) or the representative officers are non-resident individuals.
'Inward direct investments' by foreign investors captured by the Forex Act are defined as:
- the acquisition of 1 per cent or more of shares or voting rights of listed companies;
- the acquisition of shares or equity of unlisted companies from persons who are not foreign investors;
- the transfer of shares or equity from non-resident individuals to foreign investors (where non-resident individuals acquired such shares or equity after 1 December 1980 while being resident in Japan);
- consent of foreign investors being required for (1) a substantial change of the business purpose of domestic companies (if they are listed companies, this is limited to cases where foreign investors hold at least one-third of the voting rights in those companies); (2) proposals for the appointment of directors or auditors (nomination of the foreign investor itself or its closely-related persons); and (3) proposals such as the transfer of the entire business. In the case of (2) or (3), if the company in question is a listed company, this is limited to cases where foreign investors hold at least 1 per cent of voting rights in those companies;
- establishing a branch, factory or other establishment (excluding a representative office) in Japan, or substantially changing the business type or objectives of a branch, factory or other business office (excluding those businesses engaged in banking, foreign insurance, gas, electricity, certain types of securities, investment management, foreign trusts and fund transfers);
- the lending of money exceeding ¥100 million to domestic corporations for a term exceeding one year, where the total loan principal and the amount of bonds issued by domestic corporations to the lending foreign investors exceed 50 per cent of the amount of debt of the domestic corporations;
- succession of businesses by transfer of businesses from resident corporations, absorption-type split and merger (excluding cases (a) to (c) above);
- the acquisition of private placement bonds exceeding ¥100 million issued by Japanese corporations where the period until the redemption date is more than one year, and the total loan principal and the amount of bonds issued by the domestic corporations to the foreign investor exceed 50 per cent of the amount of debt of the domestic corporation(s);
- the acquisition of investment securities issued by corporations established based on special laws, such as the BOJ;
- discretionary investments in the shares of listed companies where the actual investment ratio or the ratio of the actual voting rights are 1 per cent or more (in this case, the investment ratio and the ratio of voting rights include those owned by foreign investors who are closely related to the discretionary managers);
- the acceptance of the appointment to represent persons in exercising the voting rights of domestic companies directly held by the persons where such acceptance of appointment falls under the items (1) or (2) and is limited to the cases under items (3), (4) and (5): (1) acceptance of the appointment to exercise voting rights for listed companies and the ratio of the actual voting rights after the acceptance is 10 per cent or more (in this case, the ratio of voting rights includes those owned by foreign investors who are closely related to the persons accepting such appointment); (2) acceptance of the appointment to exercise voting rights for unlisted companies, which is entrusted by persons other than foreign investors who directly hold the voting rights; (3) where the person to be entrusted is someone other than the company or its officers; (4) where the proposal on which the person to be entrusted intends to exercise voting rights through the acceptance relates to the 'election or removal of directors', 'shortening the term of office of directors', 'amendment of articles of association', 'assignment of businesses', 'dissolution of the company' or 'merger agreements'; and (5) where those who accept the appointment solicit to have themselves exercise the voting rights;
- the acquisition of the right to exercise voting rights where the ratio of the actual voting rights of the acquirer after the acquisition is 1 per cent or more (in this case, the ratio of voting rights includes those owned by foreign investors who are closely related to the acquirer);
- delegating the voting rights of domestic unlisted companies acquired when an individual is a resident to a foreign investor after the individual has become a non-resident (this is limited to the cases under items (3), (4) and (5) of (k) above); and
- obtaining the consent of other non-resident individuals or corporations that hold the actual voting rights of listed companies in jointly exercising the voting rights of listed companies, where the aggregate ratio of the actual voting rights of the acquirer of the consent and the other party is 10 per cent or more (in this case, the ratio of voting rights includes the actual voting rights of foreign investors that are closely related to the acquirer of the consent and the other party).
iv Voluntary screening
Filing is mandatory barring certain exceptions.5 The Ministry of Finance and other relevant ministries are generally open to voluntary, pre-filing consultation if there are any substantive inquiries.
A foreign investor that makes an investment needs to submit either a prior notification before making the investment or an ex post report after the foreign investment has been made, unless certain exceptions apply. All notifications are submitted to the BOJ through which the competent government ministries will be notified. The notifying party is the foreign investor intending to make the acquisition.
If the target of the foreign investment or any of its direct or indirect subsidiaries or joint ventures is engaged in a specified-regulated business industry that is deemed sensitive to public order, public safety or national security, a pre-closing notification must be filed with the BOJ. In addition, if the nationality or location of a foreign investor is a country other than Japan and the 163 countries and regions listed in Attached Table 1 of the Order on Inward Direct Investment, or if an Iranian-related person acquires shares in a specific industry, a prior notification is also required. Pre-closing notifications must be filed within six months before the intended closing date and the transaction cannot be implemented for a suspensory period of 30 days after the acceptance of the application by the BOJ. The suspensory waiting period may be shortened to as little as two weeks, or in certain cases, four business days from the acceptance of the application.
The suspensory period may be extended to up to five months if the proposed investment raises national security concerns, requiring further scrutiny by the Custom and Foreign Exchange Advisory Panel. The notification will be reviewed by the relevant ministries. The authority may require hearings, written responses to requests for information or the submission of additional documents, or both.
Foreign institutional low-risk investors that comply with certain conditions are exempt from the requirement to notify the transaction before closing. For example, foreign securities houses, banks, insurance companies, asset management firms, trust companies, registered investment trusts and registered high-frequency traders are eligible for this blanket exemption, provided that they comply with certain conditions. These exemptions for foreign financial institutions are applicable irrespective of the target business sector, including core sectors. Core sectors are certain businesses within designated businesses that are considered to be particularly sensitive, such as armoury, aircrafts, nuclear power, space development, dual-use technologies, cybersecurity, electricity, gas, telecommunication, water supply, railway services and oil.
Other foreign investors (companies, SWFs and public pension funds accredited by the Minister of Finance) can also be eligible for an exemption if they meet the conditions listed below.
Investors need to comply with three conditions to benefit from exemption:
- investors or their closely related persons must not become board members of the target company;
- investors must not propose the transfer or sale of important businesses of the target company to the general shareholders' meeting while they hold a stake in the target company; and
- investors must not access non-public information about the target company's technology that could impact national security.
However, foreign investors, including SWFs and public pension funds, seeking exemption from pre-closing reviews for an investment of up to 10 per cent of the shares of a business in a core sector must comply with two additional conditions:
- investors must not become members of the target company's committees responsible for making important decisions in business activities; and
- investors must not make proposals, in a written form, to the executive board of the target company or its board members, requiring their responses or actions, or both, by certain deadlines.
Stock purchases by persons who have been punished for violating the Forex Act and state-owned enterprises (excluding accredited SWFs and public pension funds) are not eligible for the exemption. The accreditation criteria by the Japanese government for SWFs and public pension funds are as follows:
- investment activities only concern economic returns; and
- investment decisions are made independently of their governments.
If the following three conditions are met and, the day after a foreign investor underwrites the shares the foreign investor's investment ratio or voting rights ratio combined with closely related parties exceeds 10 per cent, an ex post report is required:
- the nationality or location of a foreign investor is Japan or one of the 163 countries and regions listed in Attached Table 1 of the Order on Inward Direct Investment;
- the business operated by the investee does not include businesses belonging to the designated sectors or the prior notification exemption system has been applied; or
- the foreign investment is not performed by Iranian officials.
A post-closing report must be submitted within 45 days (or within 30 days for certain investments) of closing of the transaction to the BOJ using a prescribed form.6 The notification form is reasonably detailed, requiring information about the foreign investor, the seller, the proposed transaction, and the Japanese target company and its business activities. Unlike the forms of some other counties, no extensive narrative explanations are needed. There is no need to notarise or legalise such forms. Unlike the pre-closing notification, the authorities will neither approve nor reject transactions that have been filed under the post-closing regime. We understand that post-closing reports are used mostly for the purpose of statistical analysis of foreign investments.
If relevant ministers find that a foreign investment is likely to compromise national security, they may order the foreign investor to restructure the transaction or withdraw from the investment. If the foreign investor does not follow the order (or completes the investment without filing a mandatory notification), relevant ministers may order the foreign investor to dispose of all or part of the shares or equity acquired through the investment or take other necessary measures.
Implementing a transaction prior to obtaining clearance may result in criminal penalties for the individuals responsible. The level of penalties varies depending on the details of the infringement, but the maximum penalty is either imprisonment of up to three years, or a fine (of up to ¥1 million or three times the amount of the investment, or both).
The Forex Act allows applicants to object to or re-examine the decision issued by the competent minister by filing a petition or requesting a re-examination.7 Once the petition is accepted, the investor will receive reasonable advance notice for a public hearing to take place. If the investor is still dissatisfied with the outcome, the case may be brought to court.
Implementing a transaction prior to obtaining clearance may result in criminal penalties for the individuals responsible. The level of penalty varies depending on the infringement, but the maximum penalty is either imprisonment of up to three years, or a fine (of up to ¥1 million or three times the amount of the investment, or both).
vi Prohibition and mitigation
Neither the review process nor the final decision of the relevant authorities is public. Statistical information of the number of transactions annually subject to review is not available.
To date, the Japanese government has only prohibited one foreign investment under the Forex Act, when it ordered The Children's Investment Fund (TCI) to cease its planned acquisition of up to 20 per cent of shares in the Japanese electricity supplier, J-Power, in 2008. Although TCI pledged to abstain from voting on matters that pertain to the operation of nuclear power plants or electricity facilities, the failure to substantiate the pledge with a legally binding commitment gave rise to suspicions that the fund may exert a degree of influence over J-Power management to the detriment of energy security. Moreover, as TCI had presented J-Power with numerical targets without means to achieve them to enhance shareholder returns, there were concerns that spending on infrastructure and maintenance may be compromised in an effort to achieve the targets. Following the recommendation from the advisory panel, the government ordered TCI to cease its investment in J-Power, citing potential disruption in energy security. TCI did not appeal the decision.
i Prohibited sectors
There are no sectors in which foreign investment is expressly forbidden.
ii Restricted sectors
Restricted sectors are as follows: broadcasting, radio, telecommunications (Ministry of Internal Affairs), aviation, consigned freight forwarding, domestic shipping (Ministry of Land, Infrastructure, Transport and Tourism) and mining (Ministry of Economy, Trade and Industry).8
As mentioned above, businesses within the designated sectors under the Forex Act (e.g., weaponry, aircrafts, nuclear facilities, space, dual-use technologies, electricity, gas, telecommunications, water supply, railway, oil, heat supply, broadcasting, public transportation, biological chemicals, security services, agriculture, forestry, fisheries, leather manufacture, air transportation and maritime transportation) are subject to screening by the Minister of Finance and the ministers in charge of each business under the notification system.
Individual laws enforce uniform foreign capital regulation that does not depend on screening by the authorities. For example, the Radio Act and the Broadcasting Act stipulate that a person who has a licence for a broadcasting station can refuse to transfer the name of the shareholder list if the voting rights of foreigners are one-fifth or more. In addition, the Aviation Act, and the Nippon Telegraph and Telephone Corporation Act stipulate that if the voting rights of foreigners of the target company are one-third or more, the transfer of the name of the shareholder list can be refused.
Typical transactional structures
i Corporate law residency requirements
Foreign investors can acquire business presence in Japan by establishing an overseas representative office; a branch; or a subsidiary. Foreign companies generally set up branches and subsidiaries for conducting business in Japan, as representative offices are not permitted to engage in sales activities. Although branches and subsidiaries require registration with the Legal Affairs Bureau, there is no need to register a representative office because it does not have legal status under the Companies Act. Although a branch or a subsidiary may be headed by a non-resident representative director, for branch offices, at least one of the representatives must be a Japanese resident. The legal requirement for subsidiaries to have at least one representative to be domiciled in Japan has been removed; in practice, the post is usually occupied by a Japanese resident at the outset to receive funds and open corporate bank accounts.
ii Rules pertaining to takeover bids by foreign companies
Although there are detailed takeover rules for non-residents (e.g., takeover bids by non-residents are accepted as long as an individual who is either domiciled in Japan or with an office in the country is appointed as agent of the offeror to undertake related administrative tasks such as filing notifications), in principle, both foreign and Japanese companies abide by the same rules.
However, if the takeover bid is structured as a share acquisition, the transaction will be subject to notification rules and capital restrictions under the Forex Act and other commercial laws.
iii Notable differences between an asset purchase and share purchase by a foreign investor
A share purchase is the transfer of shares from the shareholder to the purchaser conferring control of the company to the purchaser. An asset or business acquisition, however, involves purchasing the seller's business, in whole or in part. Although a share purchase has certain advantages such as the automatic transfer of existing permits and licenses, the drawback is the assumption of off-balance-sheet liabilities for the acquirer. Respectively, although cherry-picking is possible in asset purchases, transfer of permits and licences is not automatic, and the foreign investor may be obliged to convene a general meeting of shareholders to acquire a business in its entirety or a business that is integral to the overall operation.
Under foreign investment rules, an acquisition of 1 per cent or more of shares in a listed company or one or more shares in an unlisted company would constitute direct inward investment and be subject to pre-closing notification rules. Acquisition of a business by a foreign investor from an entity resident in Japan (limited to corporations) would also be subject to the same rules.
For share acquisitions, inward direct investments are exempt from pre-closing notification rules unless the transaction involves companies active in national security-related sectors. The same exemption from prior notification also applies to share acquisitions in unlisted companies for acquisitions of up to 10 per cent of voting rights (including those by closely related parties). The transactions would, however, still be subject to post-closing notifications. There are no such exemptions available in asset or business acquisitions.
iv The possibility to enter into joint ventures (with or without a domestic partner)
A sole foreign investor that establishes subsidiaries or other forms of legal entities in Japan may face substantial cost and associated risks. The investor must develop its own network of contacts with government agencies and, depending on the nature of the business, it may not be permitted to take a solo stake in domestic businesses. In such cases, the foreign investor may consider joining forces with a domestic partner.
Joint ventures enable partners to pool shared resources such as technology, patents, brands, infrastructure, knowledge and networks. Japanese laws and regulations (particularly those governing foreign investment) may be avoided. Joint venture partners can also leverage their respective customer bases. By taking advantage of these arrangements, foreign investors can ensure their projects will get off to a quick start. However, the risks associated with joint ventures include potential breach of sensitive commercial information, the inevitable conflict of interest between the partners and the added layer complexity within the reporting structure, causing bottlenecks in decision-making.
v Other corporate structures for ownership
A foreign, non-resident investor may also take a direct stake in voluntary partnerships whose membership includes Japanese companies. For example, a foreign investor may join forces with another partner to engage in cooperative partnerships or participate in syndicate funds.
In terms of reporting obligations, for share acquisitions that constitute inward direct investment, the revised Forex Act stipulates that investment limited liability partnerships must submit pre- and post-notifications under their respective names (not under the names of its members). To qualify for exemption, the partnership must be a 'Specified Partnership'; that is, a voluntary partnership, investment limited liability partnership or other types of partnership established under foreign laws and regulations. The partnership must also have a foreign investment ratio of more than 50 per cent or have a foreign investor as a general partner for executing day to day business.
Partnerships outside the scope of 'Specified Partnership' are exempt from pre-closing notification obligations under the Forex Act for both the partnership and its members. Conversely, investment funds formed under foreign laws and regulations sharing the same properties as 'Specified Partnerships' are subject to pre-closing notification rules. Foreign funds outside the scope of 'Specified Partnership' but that satisfy the definition of corporate entity, or other bodies established under foreign laws and regulations, also carry the same reporting obligations.
Other strategic considerations
The formalistic nature of Japanese forex filing obligations means that mandatory filings may be avoided if foreign entities are able to alter their transaction structure to avoid making direct share acquisitions in Japanese entities. However, as regulators evaluate each transaction in substantive terms, making obvious superficial changes to the transaction structure may result in regulatory intervention. Foreign investors are therefore advised to avoid making deliberate changes to corporate or transaction structures as a way of circumventing mandatory filing obligations if the substance of the deal is likely to attract regulatory scrutiny in the country.
Japan's foreign investment regime is a stand-alone regime that is separate from the merger control regime.
According to reports in June 2021, the government is considering legislation regarding foreign investments in Japanese companies with important technologies, such as nuclear power and defence. If the government determines that there is a national security issue in changing the business activities after the investment, the government can request foreign investors to sell their shares.
In addition, in relation to the violation of the foreign capital regulation of the Broadcasting Act by Fuji Media Holdings, the government stated that it was considering amending the Broadcasting Act to strengthen screening under the regulation.
In March 2021, the new foreign investment regime was put to the test when the Chinese technology conglomerate, Tencent, acquired 3.6 per cent stake in Rakuten – the Japanese e-commerce operator and wireless carrier – without official scrutiny, prior to the very first US–Japan summit under the new President Biden administration. Tencent's capital tie-up with Rakuten qualified under the regular exemption, having been considered a straightforward equity investment without material involvement in management decisions. However, given that Tencent is one of eight Chinese app companies currently banned under the executive order signed by President Trump in January 2021 as part of an initiative to prevent technology leaks to Chinese conglomerates, the transaction came to the immediate attention of the US government. Post-transaction, the only recourse available to the Japanese government is to continue monitoring Tencent's conduct as an investor to ensure its compliance with terms of the exemption, such as not gaining access to Rakuten's customer data.
1 Kaori Yamada is a partner and Hitoshi Nakajima is an associate at Freshfields Bruckhaus Deringer.
2 A closely-related person is anyone who is in an economic or familial relationship with the foreign investor on permanent basis or any other equivalent relationship. Non-exhaustive examples include corporations in which the foreign investor owns more than 50 per cent of voting stock, spouse, or if the foreign investor is a government body or any other governmental organisation of that country.
3 On the basis of 'the List of Applicability of Prior Notification of Inward Direct Investment, etc. on Japanese Listed Companies, under the Foreign Exchange and Foreign Trade Act' published by the Ministry of Finance on 7 July 2021. https://www.mof.go.jp/policy/international_policy/gaitame_kawase/fdi/list.xlsx.
4 Please refer to the following link for the English version of the publication: https://www.mof.go.jp/english/international_policy/fdi/gaitamehou_20200508.htm.
5 Examples include changing business purpose if the purpose is not one specified as designated sectors requiring pre-notification.
6 The relevant forms can be downloaded from BOJ's website page on procedures related to the Forex Act (Pre-closing notification: https://www.boj.or.jp/about/services/tame/t-down.htm/, Post-closing reports: https://www.boj.or.jp/about/services/tame/t-redown2014.htm/).
7 Forex Act, Chapter VII-2.