JAPAN Law and Practice Contributed by: Yohsuke Higashi, Nobuhiko Suzuki and Hiroko Kasama, Mori Hamada & Matsumoto
Review on exercise of voting rights Under the amended FEFTA, a foreign investor is also required to make a prior notification before it exer - cises its voting rights at the shareholders’ meeting of a Japanese company engaged in any designated business sector to: • approve the appointment of the foreign investor or its closely related person as a board member of the target; or • approve a transfer of business in any designated business sector, if the agenda is proposed by such foreign investor. Continued addition of designated business sectors; Stricter review The list of designated business sectors subject to screening is continuously reviewed, and new sectors are added from time to time. The Japanese government has continued to tighten its review of foreign direct investments, and this tenden - cy will certainly continue amid the heightened tension between Western countries and Russia and China. Foreign investors are recommended to analyse the implication of the FEFTA process on any deal-making in Japan at the outset of a potential transaction, espe - cially if the investor is from China, Russia or other countries with which Japan has strained relations, or if it is funded or otherwise closely related to a foreign government. Further amendment expected Five years shall have passed in 2025 since the amend - ment of the FEFTA in 2020, and the government is committed a review of the framework under the FEFTA for any necessary updates or improvements. Changes in Tax Law Stock-for-stock acquisitions There were several M&A-related tax amendments in 2021, which could have a significant impact on M&A structuring. Among others, there were amendments to the taxation of stock-for-stock acquisitions. A number of legal and tax changes have been made to facilitate stock-for-stock acquisitions by Japanese companies, and an increase in such acquisitions is
Such exemption conditions include requirements to not: • cause their closely related persons to become a board member of the target; • propose to the shareholders’ meeting any transfer of business in any designated business sector; and • access any non-public technology information of the target relating to any designated business sec - tor. It should be noted that, because of these exemption conditions, the exemption is typically not available for a private equity buyer who intends to obtain control of a Japanese target. Also, starting from May 2025, investors that are under obligations to co-operate with intelligence activities of any foreign government are denied eligibility for any exemption. As a result, Chinese investors, who are considered to be under general obligation to co-operate with the PRC gov - ernment’s intelligence activities under the National Intelligence Law of China, can no longer rely on any exemption even with respect to a minority, passive investment. Under the amended FEFTA, the designated business sectors triggering the prior notification requirement are classified into core sectors and others, where the core sectors cover more sensitive sectors such as weapons, dual-use technologies, nuclear, aircraft, certain forms of cybersecurity and telecommunica - tions. If the target engages in a core sector business and is a non-listed company, no exemption is avail - able. If the target engages in a core sector business but is a listed company, then the exemption will be available if the foreign investor is a regulated financial institution, or if the acquisition of shares is limited to less than 10% and the foreign investor complies with even more stringent exemption conditions. Asset transactions (including statutory demergers and mergers) will also trigger the prior notification require - ment under the amended FEFTA if it is an acquisition of a business in any designated business sector from a Japanese company by a foreign investor.
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