The Japanese government will tighten restrictions on foreign investment in Japanese companies in industries seen as key to national security, such as nuclear power and semiconductors. At present, overseas investors must seek approval from regulators when seeking to buy stakes of 10% or more in Japanese companies [that operate in strategic sectors]. The proposed change would lower the screening requirement to purchases of stakes of “1% or more.” Authorities are also weighing introducing a rule that foreign investors’ board nominations at shareholders meetings also be subject to advance government review. This government move seeks to bring Japanese regulations into line with those of the U.S. and Europe, which have tightened their own rules on foreign investment to prevent advanced technologies and confidential information from falling into the wrong hands, especially in China.
Moving the screening requirement down to stock acquisitions of “1% or more”
Japan’s Foreign Exchange and Foreign Trade Act (FEFTA), which stipulates regulations controlling foreign ownership, requires foreign investors to apply for government screening if they plan to acquire 10% or more of the stocks of listed companies that run businesses with national security implications, or if they plan to acquire stocks in unlisted companies [in such industries]. Industries subject to this requirement include arms-making, aviation, space development, electricity, gas, telecommunications, broadcasting, railways, and mobile phone manufacturing. In 2008, Tokyo invoked FEFTA to halt a U.K.-based fund’s attempt to raise its stake in Electric Power Development (J-POWER), which operates a nuclear power business.
The government plans to submit a bill to amend the FEFTA to the extraordinary Diet session in October at the earliest. The government policy is to lower the minimum stake that triggers screening from the current “10% or more” of issued stocks to “1% or more.” The government aims to bring the amended act into force by the end of 2020. This would be the first major change to Japan’s foreign investment rules since 1980, when inward investment was “liberalized in principle.”
Under the government plan, foreign investors who own 1% or more in the specified companies prior to the legislative revision would not be subject to screening, but would be required to report to the government if they wished to further increase their stakes.
Under the Companies Act, shareholders in Japanese companies can present resolutions at general shareholders meetings if they own 1% or more of the company’s shares. The government has deemed it necessary to lower the screening requirement in order to prevent inappropriate interventions by overseas investors in companies seen as key to Japan’s national security. It has become necessary for Japan to respond to changes in the external environment, including cybersecurity issues and the fight for hegemony between the United States and China.
The government is also considering broadening the scope of activities subject to advance government review. For example, a proposal has been made to require foreign investors to seek approval from regulators to suggest corporate board nominations and the sale of key business projects. The government is considering such a move out of concern that important information and technologies may be taken out of Japan by dispatched directors or others. The government will carefully address the matter in light of the impact on inward investments.
Recognizing that some investors present little security concern, the government will seek to achieve a balance by incorporating investment promotion measures. The government will also endeavor to reduce the administrative burden on investors. In the case of investments made purely for fund management reasons, for example, the government is considering substantially shortening the 30-day screening period or exempting such investments from screening even when the investment is in a specially designated industry.
Behind the government move to tighten restrictions on foreign investment are the measures taken by the United States and some European countries. U.S. restrictions on foreign investment require that all stock purchases be reported regardless of amount. Moreover, with China in mind, the United States decided in 2018 to fortify its legislation equivalent to Japan’s FEFTA. There is also a risk that Japanese companies will regress to managing their business in an arbitrary manner, prioritizing their own convenience if there is less scrutiny from the stern eye of foreign investors. The government needs to ensure the system is transparent. Companies will also be held accountable for their management.