Advance notification for inward direct investment, etc.

Advance Notification or Ex Post Facto Reporting under the Foreign Exchange and Foreign Trade Act

The Foreign Exchange and Foreign Trade Law (hereinafter referred to as the “Foreign Exchange Law”) requires the submission of an advance notification or an ex-post facto report when a foreign investor conducts an act that constitutes an inward direct investment, such as the acquisition of shares of a domestic company, in order to examine whether the act may threaten the security of Japan.

What is a Foreign Investor?

A foreign investor is defined in the Foreign Exchange Law as (1) a non-resident individual, (2) a corporation or other organization established under foreign law or having its principal office in a foreign country, (3) a subsidiary of a person listed in (1) or (2), or (4) a non-resident individual occupys the majority posts of either a director or an officer with representative authority of legal entities(Article 26, Paragraph 1 of the Foreign Exchange and Foreign Trade Control Law). It is relatively easy to understand that non-resident individuals in (1) and foreign corporations in (2) fall under the category of foreign investors. Even a Japanese corporation established in Japan, if a nonresident individual or foreign corporation owns 50% or more of its voting rights, it is a subsidiary of a foreign person or foreign corporation according to (3) and thus falls under the category of “foreign investor”. In addition, if a nonresident holds a majority of the officers or representative directors, the company is also considered a “foreign investor” according to (4). Therefore, it should be noted that even if a company is established in Japan as its governing law of incorporation, it may be required to file a notification or report under the Foreign Exchange and Foreign Trade Law as a “foreign investor” if it falls under either (3) or (4). On the other hand, for example, when a foreigner residing in Japan intends to establish a company, no notification under the Foreign Exchange and Foreign Trade Law is required.

What is inward direct investment?

Inward direct investment is an investment by a foreign investor that has substantial influence over the management of a domestic company. Specifically, inward direct investment includes the following (Article 26, Paragraph 2 of the Foreign Exchange Law).
1 Acquisition of shares or voting rights in a domestic listed company in which the investment ratio or the ratio of voting rights is 1% or more.
2 Acquisition of shares or equity interests in a domestic unlisted company. However, this excludes the acquisition of outstanding shares or equity interests by transfer from another foreign investor.
3 The transfer of unlisted domestic shares or equity interests acquired by an individual while he/she is a resident to a foreign investor after he/she becomes a non-resident.
4 The foreign investor consent to  (i) the substantial change o the business purpose of a domestic company (in the case of a listed company, etc., only if the foreign investor holds more than one-third of the total voting rights) or (ii) a proposal for the election of directors or corporate auditors, or (iii) a proposal for the transfer, etc. of the entire business (for (ii) and (iii), in the case of a listed company, limited to cases where the foreign investor holds 1% or more of the total voting rights)
5 Establishment of a branch office, factory, or other business office, excluding a representative office, in Japan, or an implementational change in its type or business purpose, by a foreign investor that is a nonresident individual or a foreign corporation.
6 The loan of money to a domestic corporation for a period exceeding one year, and the balance of the loan of money from the said foreign investor to the said domestic corporation after the said loan exceeds an amount equivalent to 100 million yen, and the total amount of the outstanding balance of the loan from the foreign investor to the domestic corporation and the amount of bonds issued by the domestic corporation owned by the foreign investor after the said loan exceeds the amount equivalent to 50% of the amount determined as the amount of liabilities of the domestic corporation after the said loan.
7 Taking over a business from a resident (juridical person only), absorption-type demerger, or merger.
8 Acquisition of corporate bonds issued by a domestic company, the term of which is longer than one year from the date of acquisition to the date of redemption of the principal, and the offering of which is made to specific foreign investors, provided that (i) the amount of corporate bonds of the domestic company held by the foreign investor after the acquisition of the said corporate bonds exceeds the amount equivalent to 100 million yen; and (iii) the sum of the balance of the bonds of the relevant domestic company owned by the foreign investor after the acquisition and the balance of the loan of money from the foreign investor to the relevant domestic company exceeds an amount equal to 50% of the amount determined as the amount of liabilities of the relevant domestic company after the acquisition of the said bonds, both of which must be satisfied.
9 Acquisition of investment securities issued by a Japanese person established under a special law, such as the Bank of Japan.
10 Discretionary investment in shares of listed companies, etc., in which the investment ratio on a real shareholding basis or the ratio of voting rights on a real holding, etc. basis is 1% or more (The investment ratio and voting right ratio include those held by foreign investors who are closely related to the relevant discretionary investment manager.).
11 Acceptance of proxy voting (acceptance of authority to represent another directly owned by the other in the exercise of the voting rights of a domestic company), which falls under either a or b below:
　(a) The acceptance of the proxy’s exercise of voting rights in connection with the voting rights of a listed company, etc., where the ratio of voting rights based on the beneficial ownership of the proxy after the acceptance of the proxy’s exercise of voting rights is 10% or more (including voting rights based on beneficial ownership of foreign investors who are closely related to the relevant assignee).
　(b) The appointment is made by a foreign investor other than another foreign investor, if the appointment relates to the voting rights of a non-listed company,and the conditions of the following are satisfied (1) (2) (3) .
　(1) Where the person accepting the mandate is other than the company concerned or an officer thereof.
　(2) When the proposal for which the voting right is to be exercised by using the authority obtained by the acceptance of office falls under any of the following items.
　　　　①Election or dismissal of a director
　　　　② Shortening of the term of office of a director
　　　　③ Amendment of the articles of incorporation (pertaining to a change in the purpose)
　　　　④ Amendment of the articles of incorporation (pertaining to the issuance of shares with veto rights)
　　　　⑤ Transfer of business, etc.
　　　　⑥ Dissolution of the company
　　　　⑦ Absorption-type merger agreement, etc.
　　　　⑧ Merger by incorporation, etc.
　(3) Involving the solicitation of the person accepting the assignment to have himself/herself represented in the exercise of voting rights.
12 An acquisition of the authority to exercise voting rights, etc., where the ratio of voting rights based on the acquirer’s beneficial ownership after such acquisition is 1% or more (including voting rights beneficially owned by foreign investors who are closely related to the acquirer).
13 Delegation of the voting rights in an unlisted company in Japan acquired by an individual while the individual was a resident, to a foreign investor to exercise such voting rights by proxy after becoming a non-resident (acceptance of exercise of voting rights by proxy), which falls under both (1) and (2) in 11 above.
14 Acquiring the consent of other non-resident individuals or corporations, etc. who hold voting rights of beneficial ownership in a listed company, etc. to jointly exercise the voting rights of beneficial ownership of the listed company, etc. (acquisition of consent to exercise voting rights jointy), where the ratio of voting rights based on beneficial ownership is 10% or more, which is the sum of the number of voting rights held by the consent acquirer and the number of voting rights held by the other party to the consent acquisition(Including the voting rights beneficially owned by the foreign investor who is a closely related party of the acquiring company and the foreign investor who is a closely related party of the counterparty of the acquiring company).
The acquisition of shares of a listed company was previously defined on the basis of the number of shares, but due to the diversification of forms of investment, the Foreign Exchange Law was amended in September 2019 to define it on the basis of voting rights. In addition, whereas previously the acquisition of shares or voting rights in a listed company was subject to notification under the Foreign Exchange Law if the acquisition would result in 10% or more after the acquisition, the May 2020 amendment makes such acquisition subject to notification if the acquisition would result in 1% or more after the acquisition.
Investments falling under the above are defined as inward direct investment and require advance notification or ex-post reporting under the Foreign Exchange Law. A familiar example of an inward direct investment is the establishment of a company in which a foreign national or foreign corporation invests 1% or more of the capital. Whether an advance notification is required or an after-the-fact report is sufficient depends on the type of business operated by the investee. In many cases, the acquisition of shares in an unlisted company constitutes an inward direct investment, since even one share constitutes an inward direct investment.

Advance Notification

Whether to submit an advance notification or an after-the-fact report depends on the type of business operated by the investee. If the business operated by the investee includes a business that falls under an advance notification type, an advance notification must be submitted.

Amendments in August 2019

Under the Foreign Exchange and Foreign Trade Law advance to the 2019 amendments, the business sectors that require advance notification are: the “manufacture of arms, aircraft, nuclear power, space-related and general-purpose goods that can be converted to military use” related to national security; “electricity, gas, heat supply, communication, broadcasting, water supply, railroad, passenger transport”; “biological product manufacturing, security services”; “agriculture, forestry and fisheries, oil, leather related, air transportation, and marine transportation” industries. However, in August 2019, the scope of industries subject to advance notification was expanded to include information processing-related and information and telecommunications industries, in light of the need to ensure cybersecurity in recent years and to appropriately prevent the outflow of security-critical technology and other situations that could have a serious impact on Japan’s national security. Specifically, the following industries will be subject to advance notification: integrated circuit manufacturing; semiconductor memory media manufacturing; optical disk, magnetic disk, and magnetic tape manufacturing; electronic circuit mounting board manufacturing; wired communications machinery and equipment manufacturing; cell phone and PHS phone manufacturing; wireless communications; computer equipment manufacturing; and information processing machinery and equipment manufacturing. The following new industries have been added to the list of designated industries: the manufacture of machinery and apparatus for wire communications, the manufacture of electronic computers, the manufacture of personal computers, the manufacture of external storage devices, contract software development, embedded software, packaged software, cable broadcasting and telephone services, and information processing services. The scope of the designated industries has been expanded to include regional telecommunications, long-distance telecommunications, other fixed-line telecommunications, mobile telecommunications, and Internet usage support. The purpose of the law revision is to prevent the outflow of semiconductor and IT technology. For this reason, industries such as semiconductor memory, cell phones, and personal computers are designated as industries subject to advance notification. In addition, contract software development, embedded software, and packaged software (the above three categories fall under the “software industry” in the Japanese Standard Industrial Classification), and information processing services (fall under the “software industry” in the Japanese Standard Industrial Classification) and  Internet use support industry (falls under “Internet ancillary service industry” according to the Japan Standard Industrial Classification)are also designated as industries that are subject to advance notification. Note that even companies outside the IT industry may fall under this category if they develop software. Specifically, the type of business that falls under this category will be determined based on the description of the type of business in the Japan Standard Industrial Classification.

Contracted development software industry	Business establishments that create computer programs and conduct research, analysis, advice, etc. on the creation of such programs, and that collectively conduct all of these activities on behalf of customers.
Embedded software business	Business establishments that create software that is embedded in information and telecommunications machinery and equipment, transportation machinery and equipment, and household electrical appliances, etc., to realize the functions of the equipment.
Packaged software industry	Business establishments that create packaged computer programs and provide research, analysis, advice, etc. related to the creation of such programs.
Information processing services business	Business establishments that provide outsourced information processing services using computers, etc. (including cases where customers operate the computers themselves), data entry services, etc.
Internet usage support business	Business establishments that provide support services necessary for using the Internet, mainly through the Internet.

Amendments in May 2020

In May 2020, the classification method of business categories requiring advance notification was also changed. The 155 designated business categories that were designated as requiring advance notification prior to the revision of the Foreign Exchange and Foreign Trade Law are now classified as (1) core business categories, which are required to undergo a focused examination as business categories with a high risk of undermining national security among the designated business categories, (2) business categories excluding core business categories from the 155 designated business categories, and (3) business categories other than the 155 designated business categories, with core Core industries are subject to more rigorous pre-screening. Core industries include all sectors of the manufacturing of arms, aircraft, space, nuclear power, and general-purpose products that can be converted to military use, as well as certain sectors of the cyber security-related, electric power, gas, telecommunications, water supply, railroad, and petroleum industries. Among the aforementioned investments that fall under the category of inward direct investment, the reduction of the numerical value of acquisition of shares and voting rights of listed companies, etc. that fall under inward direct investment, etc. to 1% (previously 10%), the addition of the acts of consent for the appointment of directors and the transfer or abolition of a significant business to inward direct investment, etc., and the addition of the transfer of a business from a resident to inward direct investment, etc., were added at that time.

Amendments in June 2020

In June 2020, with the purpose of maintaining the domestic manufacturing base of the medical industry, which is important for the lives and health of the people due to the spread of the new type of coronavirus, the manufacturing industry related to pharmaceutical products for infectious diseases (including pharmaceutical intermediates) and the manufacturing industry related to highly controlled medical devices (including accessories and parts) were also added to the core industries, include heat supply, broadcasting, passenger transport, biological product manufacturing, security, agriculture, forestry, fisheries, leather-related, air transport, and marine transport.

Obligation of foreign investors to notify by national government or location

In addition to cases where the business purpose of the investee is in an industry subject to advance notification, advance notification is also required when the nationality or location of the foreign investor is outside of Japan and the approximately 160 countries and regions listed in Appendix I of the Order on Inward Direct Investment, etc., or when the acquisition of shares in a specific industry is conducted by an Iranian-related person.

Exemption system for advance notification

On the other hand, from the perspective of promoting foreign investment and reducing the burden on foreign investors, an exemption system from advance notification has been introduced. The exemption system from advance notification was newly introduced with the 2020 amendment. For example, foreign financial institutions that are investors are comprehensively exempted from advance notification if they meet certain exemption criteria. In the case of certain inward direct investments, such as the acquisition of shares or voting rights by foreign general investors who do not fall under the category of those who have violated the Foreign Exchange Law in the past or other certain persons specified by a Cabinet Order, and in the case of designated industries other than core industries, advance notification will be exempted if the exempt criteria are met, and in the case of core industries, if the investor also complies with the additional criteria, the investor is exempted from advance notification for acquisitions of less than 10% of the shares. The exemption criteria to be met by investors who are exempted are: (1) the foreign investor itself or a closely related person does not serve as a director, (2) the foreign investor does not propose the transfer or abolition of a business in the designated industry to the general shareholders meeting, and (3) the foreign investor does not access non-public technical information related to a business in the designated industry. The additional criteria for core business types to be exempted from advance notification are (1) not voluntarily participating in a committee with significant decision-making authority regarding a business in the core business type, and (2) not making a written proposal regarding a business in the core business type, requesting a response or action by a deadline to the board of directors, etc.

Preparation of advance notification

When investing in an industry that falls under the category of an advance notification, an advance notification shall be submitted to the Minister of Finance and the minister having authority over the business through the Bank of Japan within six months prior to the relevant transaction. The notification is made using the attached Form 1, “Notification of Acquisition of Equity Interests (and Voting Rights), etc.”. If the acquisition is of shares, cross out the word “equity” by drawing a line over it. Conversely, if the acquisition is of equity, cross out the word “shares”. The number of copies to be submitted is the number of ministers concerned plus two. The notification should include the name, address, nature of business, and legal basis for being the filer. It will also state the name of the company issuing the shares or equity, the address of its head office, the business purpose in its articles of incorporation, the amount of capital, the ratio of foreign capital, and the reason why the company falls under the category of business to be notified in advance. In addition, the type, quantity, acquisition price, timing, counterparty of acquisition (person to whom shares are transferred), purpose of acquisition, etc. must be stated at the place of shares to be acquired or discretionary operation.

Submission of advance notification

Once the advance notification form is submitted, a stamp with the date of receipt and the statement “Accepted by the Minister of Finance and the minister having authority over the business” will be placed on the form to clarify the date of receipt. This stamp includes the acceptance number “JD No. ●●”. After the notification is accepted, communication with the Bank of Japan’s International Bureau will be based on this acceptance number. The foreign investor himself/herself is the notifier of the advance notification, but if the foreign investor is a non-resident or a foreign corporation, the notification must be made by a proxy who is a resident. The name, address, and contact information of the agent must be included in the notification, but a power of attorney is not required. The ministries with authority over the business to which the advance notification must be submitted are all ministries that have authority over the business stated in the business purpose of the investee company’s registration or articles of incorporation, but the applicable business category for advance notification must be accurately stated by researching the business actually conducted by the investee company, regardless of what the articles of incorporation or registration state. For example, even if the business purpose of the articles of incorporation states that the company manufactures and develops software, if the company does not actually engage in these businesses, it is not necessary to submit an advance notification. As a notifying agent, it is important to contact the person in charge of the issuing company to confirm the actual business it is engaged in.

Examination Procedures

After submitting the advance notification to the Bank of Japan, the examination by the ministry or agency with authority over the business will begin. The examination covers a wide range of topics, and may include answering questionnaires from the competent ministry regarding the applicant investor’s business, major business partners, sales size, number of employees, shareholder composition, relationship with the issuing company in which the investment is made, the purpose of the investment in the investee, and the size and nature of the issuing company’s business. The applicant’s shareholder structure is often checked, and if the applicant’s principal shareholder is a corporation, the applicant is often further asked who the corporation’s shareholders are and about the attributes of the applicant’s principal shareholders. In addition, as a security check, the applicant will be asked whether the products and services of the issuing company’s information processing services business are subject to government procurement (limited to those related to the government’s procurement policy and procurement procedures for goods and services related to IT procurement (application by the relevant ministries and agencies in 2008)), and whether the products and services of the issuing company’s information processing services business are subject to government procurement. In addition, as part of the issuing company’s information management system, it is checked whether the issuing company has been certified under the Information Security Management System (ISMS) Conformity Assessment System as a measure against backdoors and malware, and whether the company has acquired ISO 9001 certification as a measure against backdoors and malware.

30-day trading prohibition and reduced period

In principle, foreign investors are prohibited from conducting such transactions for 30 days from the date of receipt of notification, but the prohibition period is usually shortened to two weeks (see Article 27, Paragraph 2 of the Foreign Exchange Act). Since the period is automatically shortened, there is no need to submit a written request to shorten the period to two weeks. Once the prohibited period has elapsed and the relevant transaction is permitted to take place, the acquisition of shares, etc. can actually take place. In addition, greenfield investment projects (related to the establishment of a new wholly-owned subsidiary in Japan that is wholly-owned by the filer), rollover projects (a project that has been filed in the past, where the filer plans to continue to acquire shares, etc. of the same issuing company under the same acquisition purpose and management involvement method after the expiration of the time for acquisition of shares, etc. stated in the notification), and other such projects are not required to be filed. The same notification is to be made within six months of the date of the previous notification.) For passive investment projects (projects that specify as part of the contents of the notification under Article 27, Paragraph 1 of the Foreign Exchange and Foreign Trade Act that the investment in question does not involve the implementation of a material proposal, etc.), shall be made to set the prohibited period to five business days from the date of receipt of the notification.

Results of Examination

Upon completion of the examination, the applicant will receive a letter from the Director-General of the International Bureau of the Bank of Japan stating, “The acts related to this notification may be carried out as of ●●●, ●●.”The acquisition of shares or equity must take place within 6 months from the date of receipt of the notification.

Execution Report

When a foreign investor actually acquires shares, etc., an execution report must be submitted to the Minister of Finance and the minister having jurisdiction over the business via the Bank of Japan within 45 days.

Scheduling of Advance Filings

Problems may arise, such as not being able to raise funds promptly, due to the practical time required to confirm whether or not an investment falls under the category of an advance notification industry and to prepare a notification, as well as the fact that investments cannot be executed during the prohibited period. Therefore, it is important to consider the preparation of an advance notification from the initial stages of investment and due diligence.

Items to Consider Regarding the Acquisition of Shares in a Listed Company

1 The first thing to consider when acquiring shares in a listed company is whether or not to acquire more than 1% of the shares. If it dose not acquire more than 1% of the shares, the advance filing are not required. No subsequent reporting is also required.
2 On the other hand, if the company acquires 1% or more of the listed company’s stock, the next thing to consider is whether or not the investee company is engaged in a type of business that is subject to advance notification. If the business of the investee is not in an industry subject to advance notification, no advance notification is required. Ex-post reporting is required if the investee acquires 10% or more of the company, but not if the investee acquires less than 10%.
3 If the investee operates in an industry subject to advance notification, the following compliance criteria for exemption from advance notification (i.e., (1) the foreign investor itself or a closely related person does not serve as a director, (2) the foreign investor does not propose the transfer or abolition of a business in a designated industry to a general shareholders meeting, and (3) the foreign investor does not have access to nonpublic technical information related to a business in a designated industry) are to be considered. If not, advance notification is required. In addition, an execution report must be submitted after the transaction is actually executed.
4 On the other hand, if the foreign investor complies with this standard, the next step is to consider whether the foreign investor is a foreign financial institution. If it is a foreign financial institution, no advance notification is required. In addition, if the investor acquires 10% or more of the shares, an ex-post report must be submitted; however, if the investor acquires less than 10%, an ex-post report is not required.
5 If the foreign investor is not a foreign financial institution, the next step is to consider whether the investment is in a core industry. If the investment is not in a core industry, no advance notification is required, but an after-the-fact report is necessary.
6 On the other hand, if the investment is in a core industry, we will examine whether or not the investor will comply with the additional criteria (i.e., (1) the investor will not participate in a committee with significant decision-making authority regarding a business in a core industry, and (2) the investor will not make written proposals regarding a business in a core industry, requesting responses or actions by a deadline to the board of directors, etc.). If not, advance notification is required. In this case, an execution report must also be submitted after the transaction is executed.
7 In the case of complying with the above standard, an advance notification and an execution report after the transaction are required in the case of acquiring 10% or more of the shares; in the case of acquiring less than 10%, the advance notification is exempted and an after-the-fact report is required after the transaction.

Items to consider regarding the acquisition of shares of an unlisted company

1 When acquiring shares of an unlisted company, first consider whether the investee company is engaged in a designated industry. If the investee company is not engaged in a designated industry, no advance notification is required. If the investment is less than 10%, no subsequent report is required, but if the investment is 10% or more, an subsequent report on the acquisition of shares in a non-designated industry must be submitted.
2 If the investee company is engaged in a business in a designated industry, the next step is to consider whether the investment is in a core industry. If the investment is in a core industry, advance notification is required. A post-transaction execution report is also required.
3 If it is not an investment in a core industry, we will examine whether or not it complies with the compliance criteria for exemption from advance notification (i.e., (1) the foreign investor itself or its closely related persons do not serve as directors, (2) the foreign investor itself does not propose the transfer or abolition of a business in a designated industry at a shareholders meeting, (3) the foreign investor does not have access to publicly available technical information regarding a business in a designated industry, and (4) the foreign investor does not have access to publicly available technical information regarding a business in a designated industry). If the criteria for exemption from advance notification are complied with, the advance notification is exempted, but a subsequent notification must be made.
4 If the criteria for exemption from advance notification are not complied with, advance notification is required and an execution report must also be made after the transaction.

Ex-post Reporting

(1) The foreign investor’s nationality and country of residence are Japan or one of the countries listed in the table, (2) the business of the investee does not include a business in a designated industry or is exempted from advance notification, and (3) the transaction is not conducted by an Iranian-related person and the foreign investor’s ownership percentage of the actual shares or voting rights of the actual voting rights of the foreign investor together with the closely related parties exceeds 10% on the day after the foreign investor underwrites the shares, an ex-post report is required to be submitted. Since there are a wide range of industries that require an ex-post facto report, the submission of an ex-post facto report will be mandatory in many cases for investments by foreign investors and the establishment of companies in which foreign persons or foreign corporations have invested. The ex-post facto report must be submitted to the Minister of Finance and the minister having jurisdiction over the business via the Bank of Japan within 45 days from the date of the act.

Cases in which notification is not required

There are some transactions that do not require advance or subsequent notification even if they are inward direct investments. For example, there are cases where shares are acquired by inheritance, bequest, gratuitous allotment of shares, acquisition of shares with acquisition clause, acquisition of shares of an unlisted company by a corporation surviving after merger or newly established corporation due to merger of a corporation owning shares or equity of the unlisted company, or acquisition of voting rights pertaining to the shares or equity of a newly established corporation,acquisition of new shares or voting rights pertaining to new shares issued as a result of a stock split or reverse stock split, or discretionary investment in shares pertaining to such new shares.