With the release of responses to public comments, the Ministry of Finance provided a highly anticipated clarification of the amendments to the Foreign Exchange and Foreign Trade Act.
Japan’s Ministry of Finance (MOF) on April 30 published its response (MOF Comments) to public comments concerning the amendments (Amendments) of relevant rules and regulations under the Foreign Exchange and Foreign Trade Act (FEFTA) and the implementation schedule for the FEFTA and relevant rules and regulations. With the publication of the MOF Comments, the overall structure governing the revision of inward direct investment into Japan contemplated by the amended FEFTA and the Amendments has become clearer. The MOF Comments have been widely anticipated by the international investment community in order to clear the uncertainties in the draft implementing regulations issued on March 14, 2020.
Below is a summary of principal issues related to investments in Japanese listed companies that have been clarified in part by the MOF Comments.
Foreign Financial Institutions
- MOF Comments explain the theory behind allowing the blanket exemptions for foreign financial institutions. MOF states that because (i) foreign financial institutions are subject to regulation and supervision of relevant foreign regulatory regimes by relevant authorities; and (ii) transactions made by them are not intended to misappropriate technology information or dispose/transfer of important business activities of target Japanese companies, the foreign financial institutions are categorized as not imposing a risk to Japan’s national security and will be eligible for a blanket exemption.
- The MOF Comments have explicitly confirmed that the following groups of foreign financial intermediaries will be “foreign financial institutions” eligible for the blanket exemption from filing BOJ notifications:
- Investment advisers registered under the Investment Advisers Act of 1940 of the United States
- Authorized Fund Managers (AFM) and Alternative Investment Fund Managers (AIFM) supervised by the UK Financial Conduct Authority
- Type 9 (Asset Management) license holders supervised by the Securities and Futures Commission of Hong Kong under the Securities and Future Ordinance of Hong Kong
- Licensed Fund Management Companies (LFMC) and Registered Fund Management Companies (RFMC) supervised by the Monetary Authority of Singapre under the Securities and Futures Act of Singapore
- In addition, the MOF Comments also make clear that that the following are eligible “foreign financial institutions” equivalent to registered investment corporations in Japan:
- Investment companies established and registered under the Investment Company Act of 1940 of the United States
- Investment companies, common funds, and unit trusts managed by a management company licensed under the Undertaking for the Collective Investment in Transferable Securities (UCITS) Directives.
- Importantly, however, the MOF Comments also make clear that, because (i) exempt reporting advisors (ADV filers) under the United States Investment Advisers Act of 1940 are not required to report to the authorities upon the inception of their businesses, and (ii) the regulations applicable to ADV filers are relaxed in comparison to registered investment advisors, the blanket exemption is not applicable to these Form ADV filers.
- The determination of whether an investor is categorized as a foreign investor is to be made at the time when an inward direct investment is made and not earlier.
- The responsible party to file a BOJ notification will depend on which party has the actual power to exercise voting rights and other rights represented by shares of the public company, and not on the identity of the party that has nominal ownership.
- Where (a) foreign investors have invested 50% or more of assets of a partnership and (b) the GP of that partnership is a foreign investor, that partnership will be categorized as a specified partnership and the GP will be entitled to make filings in the name of the partnership.
- Where a foreign investor delegates the authority to make investments, and to exercise voting and other rights in the shares of a public company, to a Japanese asset manager such that the foreign investor cannot exercise the relevant voting rights and other rights, neither the foreign investor nor the Japanese asset manager will be required to file a BOJ notification.
- Where a foreign asset manager holds the authority to manage assets contributed by multiple investors, the foreign asset manager must aggregate voting rights delegated by each investor when determining whether the foreign asset manager has crossed over the relevant filing threshold for making a BOJ notification (1% for a prior notification and 10% for a post facto notification).
- Where a foreign asset manager further sub-delegates its authority to make investments and to exercise voting rights to another foreign asset manager, and the first foreign asset manager does not conduct any asset management activities, the sub-delegated foreign asset manager should be the filing party.
- Where an investor client(s) partially delegate the authority to exercise voting rights to a foreign asset manager and reserves some portion of the authority to exercise voting rights, both the foreign asset manager and such client(s) must file a BOJ notification.
- Where a sovereign wealth fund or foreign public pension fund (correctively, SWFs) delegates all of its authority to make investments, and to exercise relevant voting rights to an asset manager, that asset manager will be subject to the requirement to make the BOJ notification, and if such asset manager is categorized as a “foreign financial institution”, the asset manager will be eligible for a blanket exemption.
- Japanese and foreign securities companies and asset managers have no obligation to confirm whether SWFs are entitled to an exemption from filing BOJ notifications (i.e., the determination of eligibility for exemption resides solely with the SWFs).
- Where a filed prior notification does not raise concerns from the point of view of Japan’s national security, BOJ (in consultation with relevant ministries) will notify the investor of clearance of the screening for the foreign investment within five business days.
- MOF Comments confirm and clarify that the share calculation method for BOJ notifications does not follow the methodology for similar calculations in respect of Japanese “large shareholding reports.”
Next Steps in Implementation Schedule
The amended FEFTA and the Amendments to the relevant rules and regulations will become effective on May 8, but there will be a 30 day-transition period. During this transition period, foreign investors are expected to submit a prior notification if they plan to purchase 1% or more of the shares of a Japanese public company and are expected to be ready to comply with the amended FEFTA and the Amendments when the FEFTA and the Amendments become fully implemented on June 7, 2020.
If a foreign investor submits a prior notification during the 30-day transition period and obtains clearance from the authorities, such foreign investor will be permitted to purchase stocks up to the notified amount at any time within a six-month period following the submission of the prior notification. It is expected that foreign investors will use this six-month period to make adjustments to their IT systems as necessary to comply with the Amendments.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Christopher P. Wells