• 2020.10.15

Advance notification of direct internal investment

Advanced or post notification in accordance with foreign exchange law

Under the Foreign Exchange and Foreign Trade Law (hereinafter, “Foreign Exchange Law”), when a foreign investor conducts an act that corresponds to direct internal investment, such as acquisition of shares of a domestic company, Japanese security is not guaranteed. You will be required to submit a pre-notification or post-notification to screen for possible threats.

What constitutes a foerign investor?

Foreign investors are defined by the Foreign Exchange Law as (1) non-resident individuals, (2) corporations and other organizations established under foreign laws or corporations and other organizations that have a foreign office, (3) subsidiaries of persons listed in ① or ②, and ④ individuals who are non-residents are defined as Japanese corporations or other organizations that make up the majority of either officers or officers with representative authority (Article 26, Paragraph 1 of the Foreign Exchange Act.).

What constitutes direct internal investment?

Direct internal investment refers to investment made by foreign investors that has a substantial influence on the management of domestic companies, and requires prior notification or post-reporting based on the Foreign Exchange Act. Typical examples include the acquisition of shares or voting rights of listed companies in Japan that result in an investment ratio or voting ratio of 1% or more, and the acquisition of shares or equity of unlisted companies in Japan. In a familiar example, a foreigner or a foreign corporation who invests 1% or more to establish a company is also considered as inward direct investment.

Advance notification

 Whether to submit the advance notification or the post-report depends on the industry in which the investee operates. Industries requiring prior notification include manufacturing of weapons, aircraft, space, nuclear power, general-purpose products that can be used for military purposes, cyber security-related, electric power industry, gas industry, telecommunications industry, water supply industry, railway industry, oil industry, information There are a total of 155 industries such as processing related and information and communication industries. The 155 industries are further classified into (1) core industries that require priority examination as industries that have a high risk of impairing national security, (2) 155 designated industries excluding core industries, and (3) 155 non-designated industries. Will be done.

Exemption policy for prior notification

In order to promote foreign investment and reduce the burden on foreign investors, a pre-notification exemption policy has also been introduced. For example, if an overseas financial institution is an investor and meets certain exemption criteria, they will be exempt from pre-notification completely. In the case of certain direct internal investments such as acquisition of shares or voting rights by a foreign investor who has not violated the foreign exchange law in the past, or by a certain person specified by a Cabinet Order in the past, in the case of designated industries other than core industries, advance notification can be made exempt if the exemption criteria is met. In the case of core industries, if less than 10% of shares are acquired, notification is exempt.

Preparation of advance notification

When investing in an industry that falls under the prior notification, submit the prior notification form to the Minister of Finance and the minister that has jurisdiction over the business through the Bank of Japan within 6 months before making the transaction. Notification will be made using the “Notification Form for Acquisition of Equity (and Voting Rights), etc.” in Attachment 1, Form 1. In the notification form, state the name of the filer, the address, the content of the business, and the legal basis of the filer. Also, enter the name of the issuer of the stock or equity, the location of the head office, the business purpose under the Articles of Incorporation, the capital stock, the foreign capital ratio, and the reason for applying to the type of business notified in advance.

Examination procedure

 After submitting the advance notification form to the Bank of Japan, the examination will be processed by the ministries and agencies in charge of business. The content of the examination is wide-ranging, including the business content of the investor who is the applicant, major business partners, sales volume, number of employees, shareholder composition, the investee’s relationship with the issuing company, the investee’s reason for investing, and the issuing company. We may also answer questionnaires from competent ministries regarding the business scale and its contents. Often, the applicant’s shareholder composition is checked, and if the applicant’s major shareholders are corporations, he or she is asked who the shareholders of the corporation are. The attributes of major shareholders are also often asked about.

The 30 day trading ban and shortening the period

Foreign investors are prohibited from conducting such transactions for 30 days in principle from the notification receipt date, but the prohibition period is usually shortened to 2 weeks (see Article 27, paragraph 2 of the Foreign Exchange Act). The period will be shortened automatically, so you do not need to submit a petition form to shorten the period to two weeks. If you are allowed to make the transaction after the prohibition period, you will  then be able to acquire shares.

Execution report

If a foreign investor actually acquires shares, it is necessary to submit an execution report to the Minister of Finance and the Minister of Business via the Bank of Japan within 45 days.

Advance notification schedule management

It may take some time to check whether it corresponds to the type of industry to be notified in advance and to prepare a notification form, and it may not be possible to raise funds promptly due to investment not being permitted to be carried out during the restricted period. Therefore, it is important to consider preparing for advance notification from an early stage of investment and due diligence.

Subsequent report

Even if advance notification is not required, the foreign investor’s shareholding ratio based on real shares or the voting ratio based on real ownership etc. will be 10% on the day after underwriting the shares. In the case of the above, it is necessary to submit a posterior report. Since there are a wide variety of industries that require post-reporting, it is often obligatory to submit a post-report regarding investment by foreign investors and the establishment of companies funded by foreigners and foreign corporations. Subsequent reports must be submitted to the Minister of Finance and the Minister in charge of business via the Bank of Japan within 45 days from the date of the act.

When notification is not required

There are some transactions that do not require prior or subsequent notification even for direct internal investment. For example, inheritance, bequest, free allocation of shares, acquisition of shares due to acquisition of shares with acquisition clause, acquisition of shares, etc., merger of the companies that own the shares or equity of unlisted companies, or the newly established company being established after the merger, when a corporation acquires such shares or equity, or voting rights pertaining to such shares or equity, new shares issued by such acquisition, share split or consolidation. This includes the acquisition of voting rights for the new shares and the discretionary management of the new shares.

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