National security reviews 2017: A global perspective — Japan

by White & Case LLP

White & Case LLP

Past deals have almost all been approved, but 2017 amendments to FEFTA widened the scope of review and strengthened enforcement mechanisms

Under the Foreign Exchange and Foreign Trade Act (FEFTA), the Ministry of Finance (MOF) and the relevant ministries with jurisdiction over the transaction matter review foreign investments including acquisitions of Japan businesses by foreign persons or businesses. The Ministry of Economy, Trade and Industry (METI) also enforces FEFTA.

In response to the increasing complexity of foreign investment, FEFTA was amended to place new restrictions on Designated Acquisitions, from October 2017 onward, which are equivalent to those placed on Inward Direct Investments.

Who files

FEFTA requires a "Foreign Investor" to submit an advance notice or a post-transaction filing depending on the type of transaction to which such investor is a party, through the Bank of Japan to MOF and relevant ministries. Foreign Investors include:

  • Any individual who is a non-resident of Japan
  • Any entity established pursuant to foreign laws, or other entities having their principal office in a foreign country
  • Any entity in which 50 percent or more of the voting rights are held by an individual or entity described above
  • Any entity in which the majority of directors or the representative directors of the entity are individuals who are non-residents of Japan

Types of deals reviewed

The MOF and the relevant ministries review two types of transactions: (a) Inward Direct Investments and (b) Designated Acquisitions.

An Inward Direct Investment includes the acquisition of shares of a Japanese company (including initial incorporation and, in the case of a Japan-listed company, limited to the acquisition of 10 percent or more of its shares), certain loans to a Japanese company, and the acquisition of certain company bonds of a Japanese company.

A Designated Acquisition is a transaction where a Foreign Investor acquires shares of a non-listed company from other Foreign Investors.

With respect to Inward Direct Investments, almost all transactions (with some statutory exceptions) require post-transaction filings, unless advance notice, as described below, is required. Transactions requiring advance notice are subject to review and approval by the MOF and the relevant ministries. The investment from certain countries or in certain designated industries (e.g., airplanes, weapons, nuclear power, agriculture, forestry and fisheries industry, and the oil industry) are designated as the transactions that may affect national security, public order or public safety of Japan, or may have a significant adverse effect on the Japanese economy and, consequently, require advance notice filings.

Regarding Designated Acquisitions, a Foreign Investor is required to submit advance notice if the transaction is related to Japan's national security (i.e., the target company falls in a designated industry such as airplanes, weapons and nuclear power). Post-transaction filings are not required for a Designated Acquisition.

Scope of the review

For reviews of Inward Direct Investments and Designated Acquisitions that require advance notice, MOF, METI and the relevant ministries issued a public announcement in August 2017 whereby they clarified factors to consider. Such factors include:

  • Whether the production base and technology infrastructure in Japan can be maintained vis-a-vis Japan security-related industries (e.g., airplanes, weapons, nuclear power and space development)
  • Whether outflow of sensitive technology important for security can be prevented
  • Whether public activities during peacetime and emergency can be maintained
  • Whether public safety can be maintained
  • How the attributes of the financial plan and past investment behaviors of the Foreign Investors and their affiliates look, etc.


  • Almost all deals are approved
  • The October 2017 FEFTA Amendment introduced new restrictions to transfer of shares in non-listed companies from a Foreign Investor to the another Foreign Investor (i.e., out and out transfer)
  • The October 2017 FEFTA Amendment has also introduced enforcement measures for the breach of the restriction thereunder, which was not available before the amendment
  • In August 2017, MOF and the relevant authorities clarified factors to be considered during the review process for transactions subject to advance notice, in order to enhance clarity of the standard for review process

Trends in the review process

The ministries have approved almost all of the notified transactions in the past. The only known case where a transaction was blocked was in 2008 when a foreign investment fund planned to acquire 20 percent of the shares of a power company, which had a nuclear power plant. In response to the advance notice made by the fund, MOF and METI recommended that the acquisition not be allowed, because of the perceived risk that the transaction might disturb the maintenance of the public order in Japan. However, because the fund did not follow the recommendation, MOF and METI ordered the fund to discontinue the acquisition. The fund did not appeal the order.

Before October 1, 2017, only Inward Direct Investment transactions were reviewed. However, in response to the increasing complexity of foreign investment, FEFTA was amended to place new restrictions on Designated Acquisitions, from October 2017 onward, which are equivalent to those placed on Inward Direct Investments. In addition, the amended FEFTA also introduces enforcement measures for the breach of those restrictions. For example, if a Foreign Investor does not give advance notice as required by FEFTA or does not obey the recommendation or orders issued by MOF and the relevant ministries, the ministries are authorized to order the disposal of shares obtained in the transaction.

How foreign investors can protect themselves

Although there is no specific provision regarding the procedures of mitigation measures in FEFTA and related laws or orders, MOF and the relevant ministries are allowed to require mitigation measures, which are assumed to be negotiated with the Foreign Investor. That said, Foreign Investors can proactively propose and negotiate mitigation measures with the ministries in charge.

Review process timeline

A Foreign Investor who has made an advance notice filing cannot close the transaction until the expiration of 30 calendar days from the date MOF and the ministry with jurisdiction over the transaction received the notification. However, for certain transactions, such as greenfield transactions and roll-over transactions, the waiting period is usually shortened to two weeks. MOF and the relevant ministries can extend the waiting period up to five months, if it is necessary for the review.

If MOF and the ministry with jurisdiction find the reviewed transaction problematic in terms of national security, they can recommend that the Foreign Investor change the content of the transaction or discontinue the transaction after hearing opinions from the Council on Customs, Tariff, Foreign Exchange and other Transactions. The Foreign Investor after receiving such recommendation, must notify MOF and the ministry with jurisdiction of whether it will accept the recommendation within 10 days. If the Foreign Investor does not provide notice or refuses to accept the recommendation, MOF and the relevant ministries may order the modification of the content of the transaction or its discontinuance before the expiration date of the waiting period.

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