MoF classifies Japan’s companies by national security concerns
Following the amendment to the Foreign Exchange and Foreign Trade Act (FEFTA), which enhanced the system of prior-notification with screening of inward direct investment, the Ministry of Finance (MoF) and other ministries responsible for relevant business sectors on May 8, 2020, have published detailed factors to be considered by the authorities in screening inward direct investment, with the aim of ensuring transparency.
The key changes to FEFTA, according to Daiwa Investment Research, can be summarized as follows (as per the chart at the top of this article):
- Introduction of system of exemption from prior notification, e.g. portfolio investment to be exempt from prior notification
- Reconsideration of investment level requiring prior notification
— Acquisition of shares of a listed company in certain specified industries: requirement level changed from 10% or more to 1% or more
— Prior notification requirement extended to actions and decisions affecting exercise of influence on corporate management, such as accepting an appointment of corporate officers and transfer or acquisition of important businesses
In the Western press, these measures have been portrayed as primarily targeting activist investors, who had targeted Japanese corporates in the recent past. However, this activism was mostly targeted at redistributing the cash piles companies have been hoarding for a crisis to shareholders, and with the current pandemic, this has proven prudent, especially compared to — for example — the US airline industry that required a bailout approximating the share buy backs executed over the last 5–7 years.
In addition, the Ministry of Finance has published a classification of 3,800 listed companies in Japan based on surveys conducted March and April, as well as information in their Articles of Associations and Annual Securities Reports. The MoF concedes that the classification in the published list and the actual classification at the time of a possible investment may differ in cases where there are changes in the company’s business activities. The MoF also stresses that under the Foreign Exchange and Foreign Trade Act, in principle, investors are required to determine whether they need to submit prior-notification or not. Hence the published list has been prepared for the benefit of investors in making such decision.
The following categories have been established:
- Companies conducting business activities only in non-designated business sectors (subject to post-investment report only) — 1,698 companies, or about 45% of the total
- Companies conducting business activities in designated business sectors other than core sectors — 1,584 companies, or about 42% of the total
- Companies conducting business activities in core sectors — 518 companies, or about 14% of the total
The Minister of Finance and the Minister in charge of business shall carry out a review of inward direct investments for which prior notification has been received and complete said review within 30-days in principle, and where necessary may make a recommendation for a change in the investment or order the investor to halt said investment as per the above chart.
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