May 2020

Response to the Lifting of the State of Emergency

At Sonderhoff & Einsel, all but a few of our employees have been telecommuting since April 1 in response to the spread of the new coronavirus. However, due to the Government of Japan’s lifting of the State of Emergency, the firm will tentatively shift its operations to the following from June 1:

 

(1) Work system for the Firm’s employees

Although the State of Emergency has been lifted, there are still concerns about the second wave of the coronavirus and the risk of the infection spreading is still high.  All employees, in principle, continue to be telecommuting through secured remote access to protect the confidential information of our clients.

 

For those operations and departments that require attendance at the office, the number of people attending the office will be adjusted in advance, and it will be mandatory for each employee to check their temperature before going to work, wear a mask while going to work, disinfect their hands with alcohol after entering the office, and choose a means of transportation in which social distancing can be maintained while traveling to and from work.

 

2) Contact and meetings with clients

If you know who is in charge of your case, please call or e-mail that individual directly if you can.

If you call the main telephone number 03-5220-6500, the receptionist will be able to put you in touch with the person in charge. Please note that it may take longer than usual for your call to be connected to the phone forwarding system.

 

In addition to phone calls, we are also available for web conferencing via Teams or Skype at any time. If you would like to have a face-to-face meeting, please contact the person in charge so that we can arrange for time and space in advance.

 

Currently, some postal mail is experiencing delays due to the small number of people present at the office. We will give priority to those with deadlines to be processed in the order received. If you wish to mail us by post or send a fax to our office, please let us know by e-mail ( if you do not know the address of the person in charge) so that we will be sure to receive it.

 

We apologize for any inconvenience or burden this may have caused to our clients as we deal with this unprecedented emergency situation. As we search for a new daily routine, we will strive to prevent the spread of infection and further improve the efficiency of our operations and the quality of our services, and we would like to ask for your continued guidance and encouragement.

We hope that everyone remains healthy and safe, and that the new coronavirus infection comes to an early end.

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An Introduction to the Annual Report from the Intellectual Property Court of the Supreme People’s Court (2019)

Newsletter (May 2020) │IP Practice

On April 16, 2020, the Supreme People’s Court of China promulgated the “China Intellectual Property Rights Court Annual Report (2019)” (hereinafter referred to as “report”). The Intellectual Property Court of the Supreme People’s Court of China, which was officially launched on January 1, 2019, examined cases of intellectual property rights such as appeals of patents and other technologies, played a role in further unifying the trial standards and improving the quality of trials. The report is a summary of cases heard by the Intellectual Property Court of the Supreme People’s Court of China in 2019. The report is described in brief below.

  1. Relevant data

In 2019, the IP Court accepted a total of 1,945 technology-related IP cases and concluded 1,433 cases, with a closing rate of 73.7%. Among the newly accepted cases, 962 were civil substantive cases of second instance, of which 586 were concluded; and 241 were administrative cases of second instance, of which 142 were concluded. The closing rate of administrative cases of second instance is far lower than that of civil substantive cases of second instance.

a. Statistical analysis of the source of cases

In 2019, the IP Court accepted a total of 1,684 various types of cases of second instance. Among them, 1,678 were appeals against judgments made by Intermediate People’s Courts in the first instance and 6 were appeals against judgments made by High People’s Courts in the first instance.

The ranking of the source regions of the cases is shown in the figure below. The data roughly reflect the distribution of technology-related IP disputes across the country. It is clear from the above data that economically developed regions tend to have more economic activities involving technology-related intellectual property and, accordingly, there are more related disputes.

b. Statistical analysis of the types of cases accepted

The type of 241 administrative cases of second instances were as shown in the figure below. The majority of the cases are administrative disputes over invalidation of invention patent rights (33.2%), administrative disputes over reexamination of invention patent applications (29.5%), and administrative disputes over invalidation of utility model patent rights (23.7%).

c. Statistical analysis of judgment results

In 2019, the IP Court concluded a total of 1,174 cases of second instance. Among them, 731 cases were concluded with the decisions of the first instance being affirmed; 280 cases were concluded with the appeals being withdrawn, 71 cases were concluded through mediation, with a mediation and withdrawal rate of 29.9%; and 92 cases were concluded by either being sent back for retrial or through reversal of decisions on appeal, with a send back and reversal rate of 7.8%. Of the 92 sent back for retrial or reversal cases concluded by the IP Court, there were 66 civil substantive cases of second instance, 21 cases of second instance on challenge to jurisdiction, and 5 administrative cases of second instance.

Of the 586 civil substantive cases of second instance concluded by the IP Court, 236 were concluded with the decision of the first instance being affirmed; 213 cases were concluded with the appeals being withdrawn, 71 cases were concluded through mediation, with a mediation and withdrawal rate of 48.5%; and 66 cases were concluded by either being sent back for retrial or reversal of decisions on appeal, with a send back and reversal rate of 11.3%.

Of the 142 administrative cases of second instance concluded by the IP Court, 126 cases were concluded with the decision of the first instance being upheld; 11 cases were concluded with the appeals being withdrawn; and 5 cases were concluded by reversal of decisions on appeal, with a reversal rate of 3.5%.

Of the 446 cases of second instance on challenge to jurisdiction concluded by the IP Court, 369 cases were concluded with the decisions of the first instance being affirmed; 56 cases were concluded with the appeals being withdrawn; and 21 cases were concluded by reversal of decisions on appeal, with a reversal rate of 4.7%

d. Statistical analysis of trial period

In 2019, the average trial period for substantive cases of second instance tried by the IP Court was 73 days, and 29.4 days for cases of second instance on challenge to jurisdiction. The closing rate was 39.2 cases per judge.

e. Statistical analysis of cases involving a party from foreign countries, Hong Kong, Macau, and Taiwan

In 2019, the IP Court accepted 174 cases involving a party from foreign countries, Hong Kong, Macau, and Taiwan. Among them, there were 50 civil substantive cases of second instance, 52 administrative cases of second instance, 71 cases of second instance on challenge to jurisdiction, and one other case.

The IP Court concluded 98 cases involving a party from a foreign country, Hong Kong, Macau, and Taiwan. Among them, 35 substantive cases were concluded, of which 21 were won by foreign parties (including partially won), three were won by Hong Kong, Macao and Taiwan parties, and 11 were won by parties from the Chinese mainland.

2.Case characteristics analysis

a. Overall characteristics of cases

In 2019, technology-related IP cases tried by the IP Court shared the following characteristics:

(i) The cases involved a wide range of technologies.

(ii) The cases have had a large social impact. One is the high market value of the intellectual property involved in the cases. Two is the high degree of attention from society when the cases involve cutting-edge technologies or have an impact on the national economy or people’s livelihood, such as standard essential patents (SEPs), pharmaceutical patents, etc.

(iii) The cases involve interconnected procedures. The IP Court accepted many mutually competitive litigation cases in which the parties filed multiple civil and administrative litigations against each other in different courts.

(iv) The trial period of the cases was short. The average trial period for substantive cases of second instance concluded by the IP Court in 2019 was only 73 days, which indicated that the trial period for cases involving the protection of technology-related intellectual property rights had been considerably shortened.

(v) The legitimate rights and interests of Chinese and foreign parties are equally protected. The IP Court continues to insist on equal treatment and equal protection of the intellectual property rights of both Chinese and foreign market entities of various types, according to law.

(vi) The tendency towards increasing judicial protection is clear. Among the cases concluded, cases supporting the obligee’s claims according to law accounted for 61.2% of the total.

b. Characteristics of civil patent cases

The civil patent cases heard by the IP Court have the following characteristics:

(i) There are many cases in which claim construction and the determination of equivalent infringement are the main disputes.

(ii) Legitimate source defense, prior art defense, and preemption defense are the most common types of defense.

(iii) Related cases with commercial rights protection account for a certain proportion.

c. Characteristics of administrative cases concerning patents

The administrative cases concerning patents heard by the IP Court have the following characteristics:

(i) There are many cases involving invention patents and high-tech fields.

(ii) Judgment of inventiveness is the main dispute in most cases. There were a total of 92 cases involving an inventiveness judgment, accounting for about 70% of patent administrative cases, and among the cases where the judgment of the first instance was reversed, 80% involve examination of inventiveness.

(iii) Among the cases sent back for retrial, many cases have natural persons as the applicants.

 

The Intellectual Property Court of the Supreme People’s Court has handled numerous intellectual property cases, as reported above. The court also released “Summary of the Supreme People’s Court Intellectual Property Court Judgement (2019)”, which features a selection of 36 typical cases from the cases closed in 2019, and details on the refined 40 adjudication rules. It can be said that these cases and adjudication rules are the guidelines and standards used in hearing difficult and complicated IP cases.

 

Source:http://www.court.gov.cn/zixun-xiangqing-225861.html

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Effective Date of the Amended Foreign Exchange Act on Foreign Direct Investment, and Revisions of the Draft Regulations Based on the Results of Public Comments

Newsletter (April 2020) │ Legal Affairs

 NOTE:  This newsletter was prepared based on its Japanese version as of April 30, 2020 to supplement and update the information contained in our separate newsletter.  For a better understanding of the issues, please read together with our newsletter dated March 27, 2020 (click here).

 

Our March 27, 2020 newsletter (click here) [1] explained the details of the draft Cabinet Order, Ministerial Ordinance and Public Notice (collectively or individually, “Draft”).  This newsletter outlines the revision of the Draft based on the results of the public comments carried out until April 12, 2020 (“Public Comments”) and the subsequent developments until April 30, 2020.

 

  1. The Enforcement and Implementation Dates

On April 24, 2020, the Cabinet finalized the Draft which amends the former cabinet order on foreign direct investment.  On the same date, the Ministry of Finance (“MOF”) issued a publication[2] called the “Revisions to the Draft on the Foreign Exchange and Foreign Trade Act” (“Revisions”).  This publication indicates that the Draft will be promulgated on April 30, 2020, and that the Revisions and Draft will come into effect on May 8, 2020 (“Enforcement Date”) and will be implemented on June 7, 2020 (“Implementation Date”).  The Revisions were indeed promulgated on April 30, 2020.

 

As of March, the MOF list of companies was scheduled to be published on the same date as Cabinet’s finalization.   However, the list has not been published at that time, and according to the MOF, it is scheduled to be published on the Enforcement Date.

 

  1. Transitional measures

Although prior filing needs to be made for an acquisition of 1% or more of the listed shares of an entity which is expected to be done on or after the Implementation Date, the MOF indicated that the filing may be made during the period from the Enforcement Date until the Implementation Date.  For example, if a foreign investor (“Foreign Investor”) is plans to acquire shares on or after June 7, it will be able to submit a prior filing in accordance with the amended Foreign Exchange and Foreign Trade Act (“Amended Act”) from May 8, 2020.

 

  1. Revisions in access to confidential information

If a Foreign Investor does not have access to confidential information, such inability to access confidential information can be an exemption of the prior filing requirement.  The “access” was defined more precisely as (a) acquire confidential information (except for when the issuing company provides it to the Foreign Investor) knowing it was confidential, (b) propose to disclose confidential information and knowing it is confidential, and (c) propose changes to the regulations and contracts related to the management of confidential information.

 

With respect to the above, and after reviewing the Public Comments, exceptions have been made for M&A advisory departments of security houses and banks which inevitably access confidential information and would not be eligible for exemption.  The exception is that if certain measures are taken to ensure that (i) confidential information is not provided to the stock trading department; and (ii) any influence over the issuing company through the shares held by the stock trading department is prohibited, the Foreign Investor would not be deemed to have “access” to confidential information.

 

  1. Filing is valid for any acquisitions to be made during six months of the filing

While the Draft previously required prior notification for each acquisition of 1% or more of the listed shares of an entity, it has been amended so that a Foreign Investor will be allowed to acquire shares up to the amount stated in the prior filing on multiple occasions within a six-month period from the date of approval.

 

  1. Elimination of administrative burden for prior filing and post-reporting upon acquisition of shares

(1)         Prior Filing

As mentioned in paragraph 4 above, if the prior filing is approved through the examination, a Foreign Investor can acquire shares up to the stated number of shares for a period of six months from the date of approval.  The Foreign Investor does not need to make a filing on each subsequent acquisition.  In addition, while a post-acquisition report was required to be submitted within 30 days of the closing of the transaction under the current law, the deadline for the reporting has now been extended to 45 days.

 

(2)         Post-acquisition Report

When an exemption is approved, a prior filing for the acquisition is not required, but a post-acquisition report still needs to be made when the acquisition rate reaches the following threshold:

(i)       1% or higher for the first time;

(ii)      3% or higher for the first time;

(iii)     For each acquisition of 10% or more of shares.

 

However, if the threshold (i) and (ii) is reached a second time (e.g., after going below the threshold by a sale of the shares), a post-acquisition report will not be required.

 

In addition, the filing forms of a post-acquisition report in the cases of an exemption and non-Designated Sector have been simplified after consideration of the Public Comments.  Thus, the Revisions intend to reduce some of the administrative work for a Foreign Investor.

 

  1. Other changes and the results of Public Comments

As mentioned above, the period of the Public Comments was set until April 12 for the Draft. Although a considerable number of comments should have had been submitted by industry associations and other organizations, as of now, no comprehensive response to all submitted comments has been published. The revisions from the Draft are limited to those discussed above, and there seems no other indications for further revisions. [Note:  As of May 1, 2020, the comprehensive comments of the Public Comments were published on the website of MOF.]

 

Incidentally, the public comment period for comments regarding factors for the MOF and examining authorities to consider for prior filings were open from April 4 to May 3, 2020.

 

  1. Going Forward

The Enforcement Date and the Implementation Date have been now fixed, and the schedule for implementation of the Amended Act has been clarified.  As mentioned in our previous newsletter (click here), it will be necessary for investors and companies that may potentially become Foreign Investors to prepare an internal business flow, as well as obtain external legal consultation so that they can prepare for acquiring any shares on or after June 7, respond to the appointment of officers to certain companies, and respond to voting rights promptly in accordance with the Amended Act.   In addition, although the MOF list of listed companies will not be published until May 8, Japanese companies which believe that they will likely to fall under the category of the Designated Sector industries and listed on the MOF list should prepare an internal system so that they can respond timely to inquiries from Foreign Investors regarding the matters to be stated in the filing form immediately after the publication of the MOF list.

 

 

[1] English version was released on May 8, 2020.

[2] https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou02_20200424.pdf

 

(Released on May 11, 2020 based on the Japanese version released on April 30, 2020)

 

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The Sonderhoff & Einsel routinely provides advice on foreign trade regulations, including the Foreign Exchange Act, and related regulatory issues in M&A, contract drafting and amendment, negotiations, litigation & arbitration, employee training, and responses to authorities.

 

The information provided in this document is only general information and does not provide specific professional advice. The views expressed in this newsletter are a personal one of the author and do not constitute a legal opinion of the firm.  For inquiries, please contact Naoki Watanabe at: .

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Q&A on the Draft Cabinet Order, Ministerial Ordinance and Public Notice of the Amended Foreign Exchange Act Which Restricts Foreign Investment in Japan

Newsletter (March 2020) │  Legal

NOTE:  This newsletter was prepared based on its Japanese version as of March 27, 2020, and the information contained in this newsletter has been updated in our next newsletter (click here).  

 

The amended Foreign Exchange and Foreign Trade Law (Law No. 60 of 2019) (the “Amended Act”) passed the Diet on November 22, 2019, was promulgated on November 29, 2019, and will come in effect by May 29, 2020.  While the Amended Act imposes upon “foreign investors” (to be explained later) prior filing requirements on the acquisition of shares of Japanese enterprises more extensively than before, the details of the prior filing requirements were left to relevant subordinated regulations (i.e., cabinet orders, ministerial ordinances, and public notices), which have not been clarified. This newsletter discusses in the form of Q&A, the draft Cabinet Order, Ministerial Ordinance and Public Notice which were released on March 14, 2020 (“Draft”).[1]

 

Q1:        What is the aim of the Amended Act?

A1: Recently, the United States, Europe, and other major countries have been strengthening restrictions on foreign investments which are likely to impair national security. As a response to these movements, Japan recognized that it should also take appropriate steps, and passed the Amended Act.  The purpose of the Amended Act is to appropriately monitor the involvement of foreign investors in Japanese companies which are engaged in national security.

 

Q2:        Who is a “Foreign Investor” and what changes will be made to the scope of a “Foreign Investor”?

A2: A foreign investor is defined as (i) a non-resident individual, (ii) a company or other association established under a foreign law, (iii) a company whose 50% or more voting rights are directly or indirectly held by (i) and/or (ii), or (iv) an entity of which a majority of its directors, executive officers, or other members having power and authority to control the entity are (i).  In the past, Japanese companies (a) whose 50% or more voting rights are directly owned by non-residents or foreign corporations, or (b) whose 50% or more voting rights are owned by Japanese companies falling under (a) were regarded as “Foreign Investors”.

 

However, the Draft now adopts the definition of a “subsidiary” as used in the Company Act, and therefore, a Japanese company can be regarded as a Foreign Investor even if the percentage of voting rights held by a foreign company (or its subsidiaries) does not exceed 50% but such Foreign Investor has certain power and authority to control it.  Therefore, an affiliate that had not previously fallen under the scope of a Foreign Investor may be considered as a Foreign Investor due to this amendment.  See an example chart prepared by the MOF below.[2]

Q3:        What are the major revisions to the Amended Act? 

A3: The major revisions include (i) expanding the number of industry sectors subject to the prior filing requirement for the acquisition of shares of Japanese companies by Foreign Investors, and (ii) lowering the threshold for the acquisition ratio of listed companies for the filing from ten percent (10%) to one percent (1%).  Furthermore, certain Foreign Investors that are deemed to have low national security concerns will be exempted from the filing requirements.

 

Q4:        What has been clarified by the publication of the Draft?

A4: The change in the scope of Foreign Investors (See A2); the industry sectors subject to the prior filing (See A6); the activities newly added to the subject of prior filing (See A7); and the outline of the new exemption rules (See A10) have been clarified.

 

Q5:       What changes are made in the acquisition ratio that require prior filing of the acquisition of shares of listed companies by Foreign Investors?

A5: While previously the threshold of the prior filing requirement was ten percent (10%) or more of the total number of outstanding shares, under the Amended Act, it will be one percent (1%) or more of the total number of outstanding shares.

 

Q6:       What changes are made to the industry sectors subject to prior filing?

A6: Previously, 155 out of the 1,465 industry sectors classified by the Japanese Standard Industrial Classification were designated as the industry sectors (“Designated Sectors”) that require prior filing.  In this amendment, the Designated Sectors have been divided into “core industries” and “non-core industries.” Core industries include the following 12 industrie

 

Core industries[3]
  • Weapons
  • Aircraft;
  •  Space;
  • Nuclear energy;
  • Generic products usable for military purposes; (Note: there are no limitations or exceptions for the above four items)
  • Cybersecurity: Cybersecurity-related services and services related to the provision of programs specifically designed for critical infrastructure;
  • Electric power: General electric power transmission businesses, general electric power distribution businesses, electric power supply businesses, and electric power generation businesses (limited to those having power plants with a maximum output of 50,000 KW or more);
  • Gas: General and specified gas pipeline operators, gas manufacturers, LPG operators (limited to those with storage facilities or core filling stations);
  • Telecommunications: Telecommunications carriers (limited to those who provide telecommunication services across multiple municipalities);
  • Water supply: Water utility business operators (limited to those with a water supply population of more than 50,000 people), water for water-supply business operators (limited to those with a supply capacity of more than 25,000 cubic meter per day);
  • Railway: Railway business operators (designated public organizations under the Act on Response to Armed Attack); and
  • Petroleum: Petroleum Refining, Petroleum Stockpiling, Crude Oil and Natural Gas Mining.

 

Non-core industries[4]
  •  Industries not listed in the list of core industries but are related to cybersecurity, electric power, gas, telecommunications, water supply, railway, and petroleum
  • Heat supply
  • Broadcasting
  • Passenger transportation
  • Biological preparations
  • Security services
  • Agriculture, forestry and fisheries
  • Leather-related
  • Air transport
  • Maritime transport

 

The distinction between core and non-core industries is significant in terms of whether prior notification will be exempted under the regular exemption (See A10).

 

In addition, the MOF plans to prepare a list of companies indicated as being engaged in a core industry (regardless of being in the above list of core or non-core industries), and will publicize the list by the date of the enforcement of the Amended Act.  A newspaper article reported that 400 to 500 companies out of approximately 3,800 listed companies would likely fall into the core industry category.[5]

 

Q7:       Are there any activities that have newly become subject to the prior filing requirement?

A7: In addition to the activities that have been already subject to prior filing, the following two have become subject to the prior filing:

 

(i)        Consent to an agenda of a general meeting of shareholders where a Foreign Investor himself/herself (where the Foreign Investor is an individual) or the Foreign Investor’s “Closely-related Person(s)” (where the Foreign Investor is an entity) (See A8) will assume the office of a board member(s); and

(ii)       A proposal and consent by a Foreign Investor to an agenda of a general meeting of shareholders which proposes and consents to a transfer or dissolution of a business that falls into one of the designated core industries.

 

The Draft has provided clarification on the meaning of the underlined language of the Amended Act “to consent to a substantial change in the business purpose of a company, or other item which has a material influence on the management of a company which is to be specified by a cabinet order as having a material influence on the management of a company”.

 

Regarding the proposal for appointment of a board member set forth in (i) above, consent to the agenda is subject to prior filing, even if the agenda is proposed by the company rather than the Foreign Investor himself/herself.   On the other hand, for (ii) above, a proposal made by a Foreign Investor will be subject to prior filing, but a proposal made by the company to dissolve or transfer  the business in a core industry will not trigger a prior filing.

 

Please note that even if a Foreign Investor is exempted from the prior filing requirement on share acquisition (See A10), such exemption will not apply to the above two actions (i) and (ii).

 

In addition, the “acquisition of 1% or more of the voting rights of a listed company, etc.” (acquisition of a threshold or more based on voting rights rather than on the total number of issued shares), and the “acquisition of business or succession of business by way of corporate split (absorption-type) (kyushu bunkatsu) or merger from a resident” have been also added to the subject of the prior filing requirement under the Amended Act.

 

Q8:       What is a “Closely-related Person(s)”?

A8: This is a person who is closely related to a Foreign Investor and where the Foreign Investor proposes at a shareholders meeting for someone to be appointed as a board member, as discussed in A7. Where the proposal is made by a Foreign Investor, the Closely-related Person(s) include its directors, officers, employees, and major business/trade partners.  Where the proposal is made by another party (including the issuing company), that definition includes its directors and officers.

 

Please note that the same concept of Closely-related Person(s) is used in the context of the appointment of directors and corporate auditors in the standard (See A11) as a requirement for the regular exemption at the time of acquisition of shares.

 

Q9         What changes are made to investment funds?

A9: Previously, with regard to investment funds, if each general partner (GP) or limited partner (LP) was determined to be a Foreign Investor, such GP or LP was obliged to make a filing regardless of its investment ratio in the partnership.

 

This amendment has changed the framework and has established a new category of Foreign Investors called “Specified Partnership”.  If the investment ratio of Foreign Investors in the partnership is 50% or more, or if the majority of the GPs are Foreign Investors, the relevant fund will be deemed to be a Specified Partnership.

 

Please note that even if a Specified Partnership has an obligation of prior filing, it may use the exemption it the relevant requirements are met.

 

Q10        What is the content of the new scheme of exemption of filing?

A10: While the Amended Act expands the scope of actions subject to prior filing and reduces the threshold of shareholding from 10% to 1%, the Act has established a new exemption scheme, where a company or individual would be exempted from the prior filing requirement at the time of acquisition of listed shares where such acquisition would not likely to fall into the category of foreign direct investment related to national security.

 

The Draft stipulates two types of exemption.

(1)          Blanket Exemption

The first one is a “blanket exemption” which is expected to be available for foreign financial institutions (See A13).  An acquisition of listed shares by foreign financial institutions will be exempt from the prior filing requirement if the institution meet the standard requirements listed in A11, regardless of the ratio of shareholding and whether the target company is in a core industry.

 

(2)          Regular Exemption

The second one is a “regular exemption”. According to the publication issued by the MOF, this is expected to be available for investors generally, as well as certain certified sovereign wealth funds and public pension funds (“SWF”).  As to the SWF, the MOF has indicated that it will review the following two conditions, and then execute a memorandum of understanding (the contents of which are not disclosed) with the qualified SWF.  The conditions for a regular exemption provided in the Draft are:

(i) The investment scheme of the SWF is aimed purely for economic profit; and

(ii) The decision-making of the SWF is independent from foreign governments.

 

Regular exemptions will be granted for the acquisition of shares:

(i)  in non-core industries, if standard requirements (See A11) are met; or

(ii) of less than ten percent (10%) of a company in a core industry, if the additional requirements (See A11), in addition to the standard requirements are met.  Acquisition of the shares of ten percent or more will not be exempted and be subject to prior filing.

 

Q11        What are the requirements (i.e., the standard and the additional requirements) for the exemptions?

A11:

(1)         Standard Requirements

In both cases of blanket and regular exemptions, the following standard requirements stipulated in the Draft need to be met for exemption from prior filing.[6]

(i) Foreign Investors or their Closely-related Persons(s) shall not assume the offices of director(s) or corporate auditor(s);

(ii) Foreign Investors shall not propose a transfer or dissolution of the business within the scope of a Designated Sector to the general meeting of shareholders; and

(iii) Foreign Investors shall not access undisclosed technical information relating to the business within the scope of the designated industry.[7]

 

(2)         Additional Requirements

As described in A10, where a regular exemption is available, acquisition of 1% or more but less than 10% of shares within the scope of the core industry will be exempted from prior filing if the Foreign Investor meets the standard requirements AND the additional requirements.  The details of the additional requirements are as follows:

(i)    Foreign Investors shall not participate in committees of the company that have the power or authority in important decision-making with regard to businesses belonging to core industries; and

(ii) Foreign Investors shall not submit written proposals to the Board of Directors of the company for businesses belonging to core industries which request a response and/or action from the Board within a specified time limit.

 

Q12        What types of Foreign Investors are not eligible for exemptions?

A12: Those who have been sanctioned for violation of the Foreign Exchange Act, foreign governments, and state-owned enterprises are not eligible for exemption, and are subject to the prior filing requirement and subject to examination.  However, certified SWFs (although state-owned) could obtain a regular exemption as described in A10 above.

 

Q13        What are “foreign financial institutions” in Q10?

A13: A foreign financial institution means a person(s) which is engaged in the following items and under the regulation and supervision under the laws and regulations in Japan or a foreign country:

  • Type I financial instruments trading business (security houses);
  • Banking business;
  • Insurance business;
  • Investment management business;
  • Investment-type trust business;
  • Registered Investment Corporations (Corporate-type Investment Trusts); or
  • High-speed traders under the Financial Instruments and Exchange Act.

 

Q14        How is the examination of a filing conducted?  How long will it take until the clearance is obtained?

A14: According to the MOF, an examination will be carried out exclusively from the viewpoint of the purpose of this law; i.e., to prevent the leakage of technical information pertaining to national security and the loss of business opportunities. The MOF expects that for the actions which do not pose any issues from the viewpoint of national security, a notice of clearance would be issued within five business days from the filing. Nevertheless, the items of the detailed examination have not yet been defined.

 

Q15        Will the Draft have an impact on shareholder activists?

A15: In the MOF’s “Frequently Asked Questions on Foreign Exchange Law Amendments” on its website[8], the MOF indicates that, “this amendment aims to further promote sound investment while preventing the leakage of technical information and business activities related to national security, etc., and does not aim to block activists… Of course, exercising shareholders’ rights and the dialogue with shareholders are welcomed from the viewpoint of enhancing corporate governance, and it does not impose any additional restrictions on the exercise of shareholders’ rights and the dialogue with shareholders that are not related to the aim of the amendment of the law”   Nevertheless, the requirements and additional requirements stated in A11 are related to the basic shareholders’ rights that activists generally exercise, and thus the Amended Act will have a significant impact on activist activities.

 

Q16        What are the restrictions on acquiring shares in unlisted companies?

A16: The restrictions applied for the acquisition of listed shares in Designated Sector will also be applied to the acquisition of shares of unlisted companies. In other words, if an unlisted company to which an investment is made carries out a business in a core industry, the prior filing will generally be required.  If an unlisted company to which an investment is made carries out a business in a non-core industry, the prior filing will generally be required, but if it meets the requirements of a regular exemption (See A10), it will be exempted from the prior filing requirement.

 

Q17        What is the schedule and timing of the enforcement and implementation of the new law?

A17: The Draft was released on March 14, 2020 with a 30-day public comment solicitation period until April 12, 2020.  The materials published by the MOF indicates that the Cabinet will decide to finalize and announce the Cabinet Order and a list of companies engaged in core businesses (See A6) in late April, and the Cabinet Order, the Ministerial Ordinances and the Notices are scheduled to be promulgated in between late April and early May, all of which will come into effect on the date of enforcement of the Amended Act.  Therefore, the enforcement date is scheduled to be no later than May 29, 2020.[9]  The rules under the Amended Act will apply to foreign direct investment made on or after the date on which 30 days have elapsed from the date of enforcement.[10] The MOF is considering the introduction of transitional measures to enable companies to make prior filings under the Amended Act after the date of enforcement but before the date of implementation (See our next newsletter (click here) for updated schedule).

 

Going Forward

This Amended Act has been prepared within a short period of time between its drafting, establishment, and enforcement, and the changes in the items and information to be stated in the prior filing forms have not yet been clarified.  As mentioned above, the list of the companies engaged in a Designated Sector will be later published.  If the new rules are implemented as scheduled, there will likely be confusion in the practice of drafting filings, since a number of items are not clear, and thus, a considerable number of filings will need to be made to clarify the appropriate practice of making these filings.  For investors and companies that may potentially become Foreign Investors, it will be necessary to quickly understand the outline of the new rules and prepare an internal business flow for foreign exchange law filings, as well as obtain external consultation so that they can quickly respond to the changes of the Amended Act which may impact the acquisition of shares in listed companies, appointment of board members for their portfolio companies, and handling of voting rights in such companies.  In addition, Japanese companies falling under the category of a Designated Sector and/or listed on the MOF’s company list need to pay close attention to the movement of the Draft so that they can respond timely to inquiries from Foreign Investors preparing to fill in the required items in the filing forms.

 

 

[1]   As of March 27, 2020, the draft cabinet order, ministerial ordinance and public notices were subject to public comments (https://search.e-gov.go.jp/servlet/Public?CLASSNAME=PCMMSTDETAIL&id=395122004&Mode=0). The main text of this newsletter refers to the draft cabinet order for partial revision of the cabinet order related to inward direct investment, draft order for partial revision of the order related to inward direct investment, draft public notice of business types determined by the Minister of Finance, draft public notice of business types determined by the Minister of Finance, draft public notice of standards for foreign direct investment pertaining to national security, draft public notice of standards for specified acquisition.

Please note that the English terminologies used in this newsletter may not always be identical to those used in the materials published by the MOF, although we have tried to adopt them as much as possible

[2] https://www.mof.go.jp/english/international_policy/fdi/kanrenshiryou_20200325.pdf.  Please note that while this chart indicates the case of “50% or more in total”, the test of “control” may qualify other affiliates as a “subsidiary” under the Company Act.

[3] Based on materials provided by the MOF.

[4] Ibid.

[5] Nihon Keizai Shimbun, February 21, 2020; Nikkei Asian Review, February 21, 2020

[6] Items (1) to (3) of Article 2 of the Act on Foreign Exchange and Foreign Trade, which prescribes standards for ensuring that foreign direct investment specified by the Minister of Finance and the minister having jurisdiction over the business does not fall under the category of foreign direct investment pertaining to national security pursuant to Article 27-2(1) of the Act on Foreign Exchange and Foreign Trade.

[7] Undisclosed technical information refers to confidential technology of a business in a core industry.

[8] https://www.mof.go.jp/international_policy/gaitame_kawase/press_release/faq_191025.pdf (Japanese)

[9] The Amended Act shall come into effect within six months of the date of promulgation, November 29, 2019.

[10]Article 3 of the Supplementary Provisions of the Amended Act

 

(Released on May 08, 2020, based on the Japanese version released on March 27, 2020)

 

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Sonderhoff & Einsel routinely provides advice on foreign trade regulations, including the Foreign Exchange Act, and related regulatory issues in M&A, contract drafting and amendment, negotiations, litigation & arbitration, employee training, and responses to authorities.

 

The information provided in this document is only general information and does not provide specific professional advice. The views expressed in this newsletter are a personal one of the author and do not constitute a legal opinion of the firm.  For inquiries, please contact Naoki Watanabe, the author of this newsletter at: .

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