Summary

Amid concerns about predatory acquisitions of weakened companies and strategic assets during the COVID‑19 crisis, more and more countries are restricting foreign direct investment (FDI) in their domestic companies, especially in the medical and healthcare industries. These restrictions tend to target Chinese investment in particular. Japan is no exception. On April 22, 2020, the Nikkei reported that the Japanese government appears to be moving in a direction to “add advanced medicine and medical equipment businesses to the list of sectors deemed critical to national security” under the revised Foreign Exchange and Foreign Trade Act (FEFTA, or, the “Act”). [1]

This addition of medical-related sectors to the list will render the review process of FDI in Japanese medical companies more stringent. Details of the applicability, requirements and respective weights of factors considered in the review process are not necessarily clear at this moment and will be open to interpretation. Therefore, foreign investors who are looking to invest or increase their stakes in Japanese medical companies should pay close attention to the development of the proposed amendments and consult experienced FDI experts to help navigate these challenging regulatory issues.

The designation of sectors critical to national security is part of the FDI controls enforced under the revised FEFTA. On October 18, 2019, the Cabinet of Japan approved the Amendment Bill of the Act to strengthen FDI review in certain business sectors. [2] Under the revised Act, foreign investment in companies on the list of critical sectors will be subject to a prior notification requirement. Given the government’s authority to suspend, modify, or unwind the transactions, prospective investors need to effectively gain approval from the Ministry of Finance (MOF) and relevant ministries with jurisdiction over foreign transactions regarding their intended investments. The amended Act, the Cabinet Order setting out further details about the new regime, and other relevant rules and regulations (together defined as the “2019 Amendment”) have entered into force on May 8, 2020, and are expected to be fully implemented on June 7, 2020. [3]

Background

Recent years have seen various countries’ FDI regimes tightening in an effort to address leakages of information regarding critical technologies and other sensitive industries. The United States, for example, passed the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, expanding the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investments in U.S. companies that involve critical technologies, critical infrastructure, and sensitive personal data. The economic damage induced by the coronavirus pandemic has heightened fears that weakened domestic companies in critical industries are becoming vulnerable to takeover by foreign companies, particularly those that are state-owned. In addition, the COVID-19 pandemic has brought on increasing and urgent demands for medical supplies, and countries around the globe are taking action to guard against foreign acquisition of local providers of critical healthcare products and services.

Below is a summary of the protection measures taken by various countries to curb unwanted foreign takeovers.

• Australia [4]: The Australian government announced on March 29, 2020, that it would temporarily remove monetary screening thresholds for the review of foreign investments. As a result, most foreign investments in Australian companies now require the Treasurer’s approval, irrespective of the transaction value.
• Canada [5]: The Canadian government released a policy statement on April 18, 2020, stating that the government would scrutinize foreign investments in companies related to public health or companies that supply critical goods during the pandemic. The government will similarly pay close attention to any investments by state-owned companies or by investors with close ties to foreign governments.
• European Union: The European Commission issued guidance on March 25, 2020, directing its member states to counter foreign investment risks in critical health infrastructure.[6] The guidance set off a wave across Europe, with Germany, France, Spain, and Italy tightening FDI regulations by expanding the scope of security risk review to include their healthcare sectors. Italy has even gone so far as to bar acquisitions of strategic businesses by investors from other EU member states.[7]
• India [8]: On April 18, 2020, the government of India revised its FDI rules to require that investments from any country that shares a land border with India obtain prior government approval. The revisions are seen as targeting China, judging by the significant trade flows between the two countries. 
• United States: While biotechnology and genomics companies were already subject to CFIUS review prior to the pandemic, a wider range of healthcare-related transactions will likely receive stricter scrutiny than in the past. Furthermore, the Trump administration has invoked the Defense Production Act (DPA) to procure medical equipment and products from the private sector, which will facilitate the manufacturing and distribution process of medical supplies, but companies receiving funding under the DPA Title III program may now qualify as “critical infrastructure” companies subject to CFIUS’s expanded jurisdiction and increased scrutiny.[9]

Against this backdrop, it is not surprising that Japan has joined the tide. Given the prominence of medical companies in the COVID-19 investment landscape, concerns about foreign investment in Japan’s medical-related sectors continue to grow amid continued shortages of medical supplies and competing interests in the race to develop a vaccine. Reportedly, the Japanese government’s plan to assign greater significance to medical-related sectors under the revised FEFTA is intended to: (i) ensure a “stable supply of pharmaceuticals and medical equipment” for the health and security of Japanese nationals and (ii) protect “Japanese companies in the advanced pharmaceuticals and medical equipment businesses” against foreign acquisition, particularly by Chinese buyers.[10] 

The 2019 Amendment

In general, the FEFTA requires foreign investors investing in Japanese companies to submit a post‑investment notice to MOF and other relevant authorities. If the transaction involves investment in certain designated areas of businesses related to (i) national security, (ii) public order, (iii) public safety, and (iv) the smooth management of Japan’s economy (collectively, the “Designated Business Sectors”), the foreign investor is also required to meet a prior notification requirement regarding the intended investment in order to obtain regulatory clearance, unless otherwise exempted by the FEFTA.[11] Parties to the transaction must also observe a statutory waiting period of 30 days before they consummate the transaction, starting from the date of acceptance of the notification. In practice, this period is often shortened to two weeks if the MOF and relevant ministries do not raise any regulatory issues.[12]

If the MOF and relevant authorities find that the intended investment poses risks to the aforementioned considerations (i) to (iv), they can order the suspension or amendment of the filed investment. If the foreign investor fails to comply with the prior notification requirement or mandatory waiting period, or makes any false statements during filing, the MOF and relevant authorities also have the jurisdiction to order disposal of shares or any remedial measures they deem appropriate. [13] 

Prior to the most recent amendment to the FEFTA, the Japanese legislature had already passed two amendments to the FEFTA to tighten foreign investment review regulations. The first amendment, which took effect on August 1, 2019, added 20 types of businesses as Designated Business Sectors, with a clear focus on software, telecommunications, and information processing businesses. The second amendment, in effect as of October 26, 2019, expanded the types of foreign investment-related activities that are defined as “inward direct investment or an equivalent action” under the FEFTA. Following the second amendment, acquisition of 10% or more of the total voting rights of a listed company also triggers a prior notification requirement, while the original threshold was measured solely by economic ownership.

The 2019 Amendment, which took effect on May 8, 2020, has significantly lowered the prior notification threshold for acquisition of shares in a listed company operating within the Designated Business Sectors from 10% to 1% (taking into account any pre-existing holdings by the foreign investor).[14] The 2019 Amendment also identifies 12 Core Designated Business Sectors where foreign investments are regulated even more heavily. On the same day as the effective date, the MOF released a list classifying 518 Japan-listed companies as operating in the field of the 12 Core Designated Business Sectors, 1,584 companies in the 155 Designated Business Sectors (excluding core sectors), and the remaining 1,698 companies in non-Designated Business Sectors (the “Classification List”).[15] The 12 Core Designated Business Sectors are identified below:

While the 2019 Amendment has introduced a variety of exemptions for foreign financial institutions that acquire stocks solely for portfolio management purposes, the 2019 Amendment still draws criticism from foreign investors. Foreign market participants have expressed concerns about the ambiguity of exemption criteria, arguing that the tightened FDI regime not only goes against the corporate governance reforms led by Prime Minister Abe, but also has a chilling effect on foreign investment.[16]

Addition of Medical-Related Sectors

The Nikkei has reported that the Japanese government intends to add medical-related sectors to the list of Core Designated Business Sectors, though it is unclear at this point which medical companies will be identified as operating in the field of Core Designated Business Sectors.[17] If added to the list of core sectors, the current exemption scheme under the revised Act will likely cover medical-related sectors as well. According to the Nikkei:  

• “In medicine, Tokyo will include businesses that treat and prevent infectious diseases on its list of specified sectors. The classification will cover companies that handle raw materials, pharmaceuticals, vaccines, serums and formulation.”[18]
• “In the medical equipment segment, makers of products that are difficult to manufacture or for which few alternatives would be available when an infectious disease spreads globally will be included on the list. They will include makers of ventilators, heart-lung machines, infusion pumps and artificial dialyzers, all of which require advanced manufacturing and quality control.”[19]

Amid the outbreak of COVID-19, the Japanese government’s inclusion of medical-related sectors on the list of sectors deemed critical to national security is in tune with a global trend toward the restriction of FDI in order to prevent opportunistic takeovers of companies supplying critical healthcare products and equipment. At the same time, this change may present additional challenges and prolong the approval process for transactions involving a medical company or subsidiary. Because the amendments are ambiguous, and because they represent a significant change from the prior regime, it will be important for foreign investors, who are in the process of acquiring or who wish to acquire Japanese medical companies, to stay informed about changes in FDI policy.

For foreign investors who seek to establish a new company in Japan, the impact of the amendments is likely to be minimal. The amended Act scrutinizes foreign acquisitions of 1% or more shares or equity stakes in existing listed Japanese companies and generally does not cover the formation of a new company by foreign persons. However, the establishment of a branch office or other similar place of business in Japan by foreign persons is deemed as “inward direct investment or an equivalent action” pursuant to Article 26(2) of the FEFTA, which would subject the intended transaction to prior notification and post-investment reporting requirements. [20]

According to the Research Division of the MOF’s International Bureau, the MOF does not intend to solicit public comments over its Classification List. However, the MOF has stated that there is room for acceptance of (i) official opinions from companies on the list for the purpose of correcting underlying facts, if any, for determining the classification and (ii) unofficial opinions from interested parties for reference purposes. Therefore, foreign investors and relevant Japanese companies are advised to study the new regulations closely, confer with legal experts to formulate a regulatory strategy early in the deal process, and consider voicing their opinions through official or unofficial channels.

Morrison & Foerster associate Ning Ning contributed to the writing of this alert. 

[1] Nihon Keizai Shimbun, “Japan to Block Foreign Investment in Medicine and Medical Equipment Amid Coronavirus” (in Japanese), (April 22, 2020),  https://www.nikkei.com/article/DGXMZO58354080S0A420C2MM8000/.

[2] Ministry of Finance, https://www.mof.go.jp/english/international_policy/fdi/20191021.html.

[3] Ministry of Finance, https://www.mof.go.jp/english/international_policy/fdi/20200424.htm.

[4] Foreign Investment Review Board of Australian Government, “Monetary Thresholds,” https://firb.gov.au/exemptions-thresholds/monetary-thresholds (last visited May 8, 2020).

[5] Government of Canada, “Policy Statement on Foreign Investment Review and COVID-19,” (April 18, 2020), https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81224.html.

[6] European Commission, “Communication from the Commission: Guidance to the Member States concerning Foreign Direct Investment and Free Movement of Capital from Third Countries, and the Protection of Europe’s Strategic Assets, ahead of the Application of Regulation (EU) 2019/452 (FDI Screening Regulation),” (March 25, 2020), https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf.

[7] Jeremy Kahn, “The Coronavirus Pandemic’s Latest Victim: Foreign Investors,” Fortune, (April‎ ‎15‎, ‎2020), https://fortune.com/2020/04/15/coronavirus-pandemic-foreign-investment-protectionism/.

[8] The Ministry of Commerce and Industry of India, “Government Amends the Extant FDI Policy for Curbing Opportunistic Takeovers/Acquisitions of Indian Companies due to the Current COVID-19 Pandemic,” (April 18, 2020), https://pib.gov.in/PressReleasePage.aspx?PRID=1615711.

[9] Donald J. Trump, “Memorandum on Order Under the Defense Production Act Regarding 3M Company,” (April 2, 2020), https://www.whitehouse.gov/presidential-actions/memorandum-order-defense-production-act-regarding-3m-company/. 

[10] Nihon Keizai Shimbun, supra note 1; see also The Japan Times, “Japan to include Medical Sector in Stricter Curbs on Foreign Investment,” (April 23, 2020), https://www.japantimes.co.jp/news/2020/04/23/business/economy-business/japan-medical-sector-foreign-investment/#.XqJ8FUxuJyw. 

[11] See Article 27, FEFTA.

[12] See Article 27 II, FEFTA; see also Article 10(ii) of the Order on Inward Direct Investment.

[13] See Article 29, FEFTA.

[14] Ministry of Finance, https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou01_20200424.pdf.

[15] Ministry of Finance, “List of Classifications of Listed Companies regarding the Prior Notification Requirements on Inward Direct Investment under the Foreign Exchange and Foreign Trade Act,” https://www.mof.go.jp/international_policy/gaitame_kawase/fdi/list.xlsx.

[16] Anjani Trivedi, “Hedge Funds, Go Home – Japan Is Closing the Door,” Bloomberg, (May 13, 2020), https://www.bloomberg.com/opinion/articles/2020-05-12/hedge-funds-corporate-reform-strangled-by-japan-s-new-rules.

[17] See, e.g., Nikkei Asian Review, “Japan to Block Foreign Investment in Medicine Amid Coronavirus,” (April 20, 2020), https://asia.nikkei.com/Politics/Japan-to-block-foreign-investment-in-medicine-amid-coronavirus; Kosuke Takami, “Japan Names 518 Companies Subject to Tighter Foreign Ownership Rules,” Nikkei Asian Review, (May 9, 2020), https://www.nikkei.com/article/DGXMZO58881950Y0A500C2EA4000/; supra note 1. 

[18] Nikkei Asian Review, “Japan to Block Foreign Investment in Medicine Amid Coronavirus,” (April 20, 2020), https://asia.nikkei.com/Politics/Japan-to-block-foreign-investment-in-medicine-amid-coronavirus.

[19] Id.

[20] See Article 26(2), FEFTA. 

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