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Japan: Key points concerning the exercise of voting rights by foreign investors

Nagashima Ohno & Tsunematsu's Takeshi Inagaki looks at the key points of the new rules

The enforcement of the amendment to the Foreign Exchange and Foreign Trade Act (hereinafter the act) on May 8 2020 made it necessary for a "foreign investor" (defined in the act) to file a prior notification in circumstances in which the foreign investor approves a proposal where the foreign investor itself or its "closely related person" (defined in the act – a "related person") assumes office as a director or statutory auditor of a domestic company which operates a business, the type of which falls under business types prescribed by the government ("business types").

To confirm the need for such filing, it is necessary to consider the following: (i) whether the investor is a foreign investor; (ii) whether the type of business operated by such a domestic company falls under any of the business types; and (iii) whether the candidate for a director or statutory auditor is a related person of the foreign investor.

Regarding (i), it is noted that investors with residences or head offices in Japan may have fallen under foreign investors even before the applicability of the above amendment (e.g. subsidiaries and sub-subsidiaries of foreign corporations with head offices in Japan have also fallen under foreign investors). However, the above amendment has enabled the act to expand the scope of foreign investors with head offices in Japan.

Regarding (ii), 155 out of a total of 1,465 business types fall under the business types, including the manufacturing of pharmaceuticals and medical devices.

Regarding (iii), the scope of related persons differs from the scope in cases where a proposal is submitted by a foreign investor itself or through a third party, and cases where a proposal is submitted by a third party. In the former, the scope of related persons is more extensive. If the foreign investor is a corporation, the related persons include officers, employees, and members of the decision-making body on investment belonging to subsidiaries, sub-subsidiaries, sister companies, the parent company, the parent company of the parent company of the foreign investor, the primary clients of the foreign investor, and companies that obtain large amounts of money or other property from the foreign investor. In the latter, the scope of related persons is narrower. However, it is essential to carefully consider whether each proposal falls under the former or the latter, based on the actual situation in individual cases.

Such prior notification may not be required in exceptional cases, which are very limited. For instance, when the domestic company is a listed company, if the foreign investor and persons specified by the government ordinance hold less than 1% of the total voting rights of the domestic company, no prior notification is required. However, this exception does not apply to cases where the domestic company is not a listed company.

Based on the points stated above, it may not be uncommon for a foreign investor to file such prior notification. The increase in administrative workload for business activities of foreign investors is an area of concern.

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