Foreign Direct Investment (FDI)
Foreign Direct Investment Restrictions: The acquisition of a Japanese company operating in certain sectors requires prior notification and approval, where the approval is deemed if the waiting period (generally either 30 days, two weeks or five business days depending on the transaction) expires without questions or objections from the authority (“Prior Notification”). Businesses involved in the manufacture of weapons, aircraft, artificial satellites/rockets and nuclear materials, as well as businesses operating in agriculture, forestry, fisheries, petroleum, aerospace, electric/gas/water utilities, certain telecommunications, leather manufacturing and transportation were already subject to this requirement. In August 2019, the scope of the requirement was extended to cover the manufacturing of IT-related products such as integrated circuits, semiconductors, optimal/magnetic discs, mobile phones, computers, some software businesses and all telecommunication businesses.
In the case of an acquisition of shares in a listed company, a Prior Notification was not required unless the shareholding ratio reached 10%, but this has been tightened from October 2019. If the voting rights holding ratio reaches 10%, a Prior Notification is required even if the shareholding ratio is below 10%. The shareholding/voting rights holding ratio needs to be calculated by adding all the shares held by the acquiring foreign investor and those having a close relationship with such investor (e.g. parent companies, subsidiaries, officers or a third party which agreed to jointly exercise the voting rights). Further, even if a foreign investor does not acquire shares, if a foreign investor agrees with another foreign investor to exercise the voting rights for a certain Japanese listed company in the same way and the aggregate shareholding/voting rights holding ratio of the two parties (including those having a close relationship with either party) reaches 10%, a Prior Notification is required.
Launch of the Asia Region Funds Passport: The Asia Region Funds Passport (the “Passport”) has been live since 1 February 2019 as decided by the Asia Region Funds Passport Joint Committee in September 2018. Initially launched with Australia, Japan and Thailand and subsequently joined by New Zealand in July 2019, these four countries are ready to receive relevant applications from local and foreign funds.
The Passport is a multilateral framework established with a view to developing the fund management industry in Asia through enhanced access to the market and more harmonised regulations across the region. Whilst it enables a fund registered in one of the participating countries (as home country) to be offered in other participating countries (as host countries) after authorisation in the relevant host country, registered funds are required to comply with a certain set of rules under the Passport regime including in respect of investments, portfolio management, reporting and valuation.
The Republic of Korea also signed the Memorandum of Cooperation setting out the rules and mechanisms of the Passport in 2016 and is expected to be the next jurisdiction to implement the Passport.
Employment & Incentives
Work Style Reform Legislation (hatarakikata kaikaku): The new “Work Style Reform Legislation” which makes changes in Japanese labour regulations was passed in 2018 and as a part of the reform, the amendments to the Labour Standards Act (the “LSA”) came into force on 1 April 2019. Under the amended LSA, amongst other things, the upper limit of overtime work has been reformed (for small and medium-sized enterprises, such amendments will come into force in April 2020). In principle, the upper limit of overtime work has been set at 45 hours per month and 360 hours per year, and in special circumstances, 720 hours per year, 100 hours per month and an average of 80 hours per month during the past two-six months. A breach of this regulation will result in a criminal offence (i.e. up to six months imprisonment or fines up to JPY300,000).
Formulation of Fair M&A Guidelines and Group Guidelines by METI: On 28 June 2019, the Ministry of Economy, Trade and Industry (“METI”) published two separate guidelines, namely: (a) the Fair M&A Guidelines; and (b) the Group Guidelines.
The Fair M&A Guidelines revise the Guidelines for Management Buyout to Improve Corporate Value and Secure Fair Procedures which were formulated in 2007 (the so called MBO Guidelines). The Fair M&A Guidelines focus on management buyouts and acquisitions of controlled listed companies by their controlling shareholders, where issues with respect to structural conflicts of interest and information asymmetries typically exist. The Fair M&A Guidelines provide certain practical measures to ensure that the acquisitions are conducted in line with fair procedures, such as: (a) establishment of an independent special committee by the target company; and (b) a recommendation that the target company obtain independent expert advice from external advisors. The Fair M&A Guidelines are not intended to impose new regulations on acquisition procedures but are intended to establish best practices on such Japanese M&A matters.
The Group Guidelines supplement the Corporate Governance Code which came into effect in 2015 (which was further amended in 2018). Though the Corporate Governance Code mainly focused on the best practice of the governance system of a Japanese entity, the Group Guidelines focus on the governance of the group of entities as a whole. The main targets of the Group Guidelines are large Japanese companies with various subsidiaries and business portfolios with global presence. The Group Guidelines explain key concepts and practices recommended in relation to: (a) group structuring (how to value up as a group); (b) management of business portfolios (importance of periodical review and focusing on core businesses); (c) internal control systems (how to best conduct reporting and internal auditing); (d) the nomination and remuneration of subsidiaries’ management teams (including how to foster the next CEO); and (e) governance of listed subsidiaries (including practical ways to deal with risks related to conflicts of interest).
Finance & Projects
Update on Japan offshore wind: 2019 saw Japan make great strides towards achieving its 2030 energy mix target. The Act on Promotion of Use of Sea Areas to Develop Marine Renewable Energy Facilities (“Marine Renewables Energy Act”) was approved by the Diet and came into force on 1 April 2019. The Marine Renewables Energy Act sets out the principles for the designation of certain areas of territorial waters as marine renewable energy facility development promotion areas (the “Promotion Areas”) and enables wind farm developers to use the areas allocated to them for up to 30 years.
Relevant enforcement orders, regulations, the government’s basic policies (the “Basic Policies”) and two sets of inter-ministerial guidelines ((i) the Guidelines on Designation of Marine Renewable Energy Facilities Development Promotion Areas and (ii) the General Sea Areas Public Auction Implementation Guidelines) followed suit, providing key information on the process, timing and qualification requirements for hopeful developers wishing to take part in the public auction process for Japanese offshore wind projects. On 30 July 2019, the Ministry for the Economy, Trade and Industry (“METI”) and the Ministry for Land, Infrastructure, Transport and Tourism (“MLIT”) published a list of 11 areas that had prospects of being capable of hosting offshore wind projects. Of these, four areas are of high priority and likely to undergo the auction process in 2020.
Nonetheless, major issues remain, including: (i) the lack of availability of the necessary specialist vessels and personnel to deal with Japan’s unique climate conditions and the restrictions on the use of foreign vessels; and (ii) construction and lease of port infrastructures. Both are under discussion, and in relation to the latter, a draft bill was approved on 18 October 2019 that proposes to amend the Port and Harbour Act.
It is clear that we are at the juncture where key decisions are being made. Striking the right balance between energy cost and contribution to the local community is crucial to the success of the Japan offshore wind market. The overhaul of the energy industry is also underway, creating both uncertainty and opportunity for investors.
Amendment to Netting Act: On 31 May 2019, an amendment to the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions (the “Netting Act”) was enacted and published in the Official Gazette on 7 June 2019 (the “Netting Act Amendment”). The Netting Act is a primary statute of Japan to ensure the validity and enforceability of close-out netting arrangements for derivatives transactions and certain other market transactions. Currently, only a title transfer collateral arrangement for such transactions is covered by the Netting Act. In this connection, there was a concern in the market that a security interest collateral arrangement, which is commonly used to globally comply with initial margin requirements for non-centrally cleared over-the-counter derivatives transactions, is not secured under the Netting Act, and there is a risk of being treated as a “reorganisation security interest” under the corporate reorganization proceedings. However, with the upcoming IM Big Bang (originally planned in 2020 and extended to 2021) in mind, a certain type of security interest collateral arrangement will be also recognised in the corporate reorganisation proceedings pursuant to the Netting Act Amendment when it becomes effective. The implementation date of the Netting Act Amendment has not yet been determined (any date within a year of 7 June 2019 is expected) and the delegated rules that set out the details for the said security interest approach have not been fixed yet (the Financial Services Agency of Japan launched a public consultation process for bills of the delegated rules on 29 October 2019).