Amendment to Japanese Foreign Exchange and Foreign Trade Act Regulations Expands Scope of "Restricted Businesses" to Include Some Information and Communications Technology Businesses

Following the Japanese government's recent amendment of the rules under the Foreign Exchange and Foreign Trade Act (the "FEFTA"), foreign investors seeking to invest in companies engaged in certain information and communications technology (ICT)-related businesses in Japan after August 31, 2019, may be required to first complete a filing with Japanese authorities.  The amended FEFTA regulations newly classify a number of ICT-related business activities as "Restricted Businesses", a category subject to special rules limiting foreign direct investment under the FEFTA.  This client alert provides an outline of the FEFTA and explains the effect of the amended regulations on future foreign direct investments in ICT-related sectors.

I.   Regulation of Foreign Direct Investment in Japan and Restricted Businesses

The FEFTA.

The FEFTA and its regulations, among other things, impose certain restrictions on Foreign Direct Investments^[1] and Specified Acquisitions^[2] made by Foreign Investors^[3].  Under the FEFTA, if a Foreign Investor makes a Foreign Direct Investment, unless one of a limited number of exceptions applies, it needs to complete either a prior filing, which subjects the transaction to substantive review by Japanese authorities, or an ex post facto report, which does not involve such substantive review.

Prior filing is generally required for a Foreign Direct Investment by a Foreign Investor where any of the following applies:

1. Nationality: The nationality or the jurisdiction of the Foreign Investor is neither Japan nor a white-listed country;
2. Restricted Business: Any of
   1. the Japanese company in which the Foreign Investor intends to invest,
   2. its Japanese subsidiaries, or
   3. a Japanese joint venture company in which the Japanese company or its Japanese subsidiary shares ownership equally with another joint venture partne is engaged in a Restricted Business; or
3. Iran-Related Parties: Certain transactions are to be made by Iran-related Parties.

Similarly, a prior filing is also required for a Specified Acquisition if the Japanese company is engaged in a Restricted Business. 

Prior Filing Requirement for Restricted Businesses.

Investments in Restricted Businesses, which are the focus of this alert, are the most relevant consideration for many Foreign Investors.  This is because, first, most Foreign Investors do not have significant Iran-related business and, second, most Foreign Investors are established in one of the 163 white-listed countries and regions.

If, as the result of a transaction, a Foreign Investor directly or indirectly comes to hold 10% or more of the outstanding shares of a Japanese company (taking into account any pre-existing holdings of such Foreign Investor), that Foreign Investor is generally required to submit an ex post facto report on the transaction to the Ministry of Finance (through the Bank of Japan) and any other relevant ministries by the 15th day (or, if the 15th day is a holiday, by the preceding business day) of the month following the month in which the transaction is consummated.  If, however, the Foreign Investor intends to make such a Foreign Direct Investment in, or a Specified Acquisition of interests in, a Japanese company and the company or its subsidiaries are engaged in a Restricted Business, prior notice must be filed with the Ministry of Finance and any other ministries relevant to the business in question.  After submission, there is a 30-day waiting period before the Foreign Investor can consummate the transaction.  This period is often shortened to two weeks but may be extended to up to five months if any relevant ministry decides that it needs more time to complete its review.

While the Ministry of Finance and any other relevant ministry may order a suspension or amendment of the investment in question, they rarely exercise this power.  In fact, there has been only one case in which the Ministry of Finance or another ministry issued an order for discontinuation of an investment under the FEFTA.^[4]  Given the increasing concern over national security as evidenced by the recent amendment, however, this issue warrants careful analysis and consideration.  As such, Foreign Investors aware of any potential issue that is unlikely to be resolved within the initial 30‑day waiting period should consider consulting on an informal basis with the relevant ministries in advance to mitigate the risk of the waiting period being extended.

II.   Amendment of the FEFTA Rules

The amended FEFTA rules newly classify the ICT-related business activities listed below as Restricted Businesses (the "New Restricted Businesses"), meaning that transactions in these New Restricted Businesses taking place on or after August 31, 2019 will be subject to the prior filing requirement.

Subdivided Classification of Industry	Japan Standard Industry Classification Number
<Manufacture of Components and Equipment related to Information Processing>
Manufacture of integrated circuits	2814
Manufacture of semiconductor memory media	2831
Manufacture of optical discs and magnetic tapes and discs	2832
Manufacture of electronic circuit mounting boards	2842
Manufacture of wired communication equipment	3011
Manufacture of mobile phones and personal handy-phone system phones	3012
Manufacture of radio communication equipment	3013
Manufacture of computers (other than personal computers)	3031
Manufacture of personal computers	3032
Manufacture of external storage	3033
<Manufacture of Software related to Information Processing>
Custom development of software	3911
Embedded software	3912
Packaged software	3913
<Business related to Information and Communication Services>
Regional telecommunications *	3711
Long distance telecommunications *	3712
Wired broadcasting and telephony	3713
Other fixed telecommunications *	3719
Mobile telecommunications *	3721
Information processing	3921
Internet use support *	4013

*The amended FEFTA regulations expand the scope of this restriction by eliminating certain carve-outs.

The determination of whether a given company is engaged in one of the New Restricted Businesses above is fact-specific.  Potential Foreign Investors in Japanese companies should conduct thorough diligence on the business of any target company as well as consult with the Ministry of Finance and any other relevant ministries on an informal basis to assess the risk of a prior filing being required.

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^[1] The defined term "Foreign Direct Investments" covers various transactions and actions related to investment in a Japanese company by a Foreign Investor, including the acquisition of shares, consenting to making substantive changes to its business purpose, establishment of a business office, making a loan/bond of a certain amount with a maturity exceeding one year, etc.

^[2] The term "Specified Acquisitions" captures acquisitions by Foreign Investors of shares in non-listed Japanese companies from other Foreign Investors, among other things.

^[3] A "Foreign Investor" is defined as (i) an individual who is a non-resident of Japan; (ii) an entity established pursuant to a foreign law or having a principal office in a foreign country; (iii) a Japanese company in which the sum of (a) the voting rights held directly by persons as set forth in (i) and/or (ii) above, and (b) the voting rights held indirectly through a prescribed company of which the voting rights held by persons as set forth in (a) and/or (b) above is 50% or more of total voting rights; or (iv) a Japanese entity in which persons as set forth in (i) above constitute either a majority of all of the officers of the company or the majority of the officers having representative authority.

^[4] An order for discontinuation of investment was issued in 2008, when The Children's Investment Master Fund, a UK-based activist fund, attempted to purchase shares giving it a 20-percent stake in J-Power, an electric power wholesaler that owns infrastructure core to the Japanese electricity supply, including nuclear power plants and power lines.