RegTech Radar: Foreign Investment Developments
The following RegTech Radar update focuses on recent changes in Japan’s Foreign Exchange and Foreign Trade Act (FEFTA) and additional foreign investment changes in New Zealand, France and Germany from end-April to mid-May. For any additional queries regarding substantial shareholding, position limit monitoring and sensitive industries, please contact us at firstname.lastname@example.org.
New Japan Foreign Investment Threshold Provides Blanket Exception for Financial Institutions
An overview of the recent changes in Japan’s Foreign Exchange and Foreign Trade Act (FEFTA).
Japan has released a new 1% threshold rule for Foreign Investment in their 12 core areas; however, they have allowed a blanket exception for foreign financial institutions such as:
- Securities firms
- Insurance companies
- Asset management companies
- Trust companies
- Registered investment companies (including mutual fund and exchange-traded fund）
- High-frequency traders
The amendments to FEFTA entered into force on May 8th and will apply to investments in listed companies completed on or after June 7, 2020.
An English summary of the changes is available at here.
In general, the FEFTA amendments lower the threshold for prior approval notification from 10% to 1% (share capital or voting rights) investments in Japanese listed companies in certain sectors. Under the new law, business sectors have been reclassified as non-designated sectors, designated sectors or designated “core” sectors. [See English summary above at page 9 for details on sector classification.]
- A new classification of listed issuers by sector category was published on May 8th by the Japanese Ministry of Finance.
- Investments in issuers operating in the 12 core designated sectors (e.g. weapons, nuclear, aspects of cybersecurity, etc.) are subject to the most reporting. No prior reporting in required relation to issuers in non-designated sectors.
- Notable issuers on the core business sectors list include Toyota, Sony and SoftBank. There are more than 500 listed issuers now classified as operating in a core designated business sector.
There are several exemptions that limit the practical application of the 1% prior notification requirement:
The most relevant for our clients is the blanket exemption available to foreign financial institutions, which includes asset management companies and investment companies.
- The blanket exemption means no prior notification is required if certain investment conditions relating to management/activism are satisfied.
- Nonetheless, a post-investment report must be filed when shareholding reaches 10% or more in a company operating in any designated business sector within 45 days. This is an existing obligation; only the reporting deadline has changed.
A general exemption is available for other, non-FI foreign investors, including authorized sovereign wealth funds and pension funds:
- When investing in non-core business sectors, no prior notification is required from a general investor if certain investment conditions are satisfied.
- When investing in core designated business sectors, prior notification required only when reaching 10% or more shareholding.
- For general investors, a post-investment report is required when reaching 1% or more shareholding in a company in a designated business sector (including core sectors).
No exemption is available for state-owned enterprises or for investors who have been sanctioned under the FEFTA. (The exemption is also not available when FI and FI investors fail to satisfy the investment conditions relating to management and activism). For these non-exempted investors, the 1% prior notification requirement will apply fully.
Summaries of the Recent Foreign Investment Changes in New Zealand, France and Germany from end-April to mid-May
The governments of Germany, France and New Zealand are implementing changes to their respective foreign investment screening procedure in response to the COVID-19 pandemic. (Earlier in this situation we saw the tightening of foreign investment rules in Italy, Spain and Australia.)
The New Zealand Government announced amendments to its foreign investment screening procedure that will temporarily require notification to the government of transactions where an overseas person’s ownership interest reaches or exceeds 25%, 50%, 75% or 100% in a New Zealand company. In contrast to existing legislation, notification under the temporary rule change will apply regardless of the dollar value of the transaction. Additionally, a “national interest” test for all screened transactions will be introduced. These changes are expected to take effect in mid-June.
For more information, see the Treasury announcement here.
The French Ministry of Economy announced two changes to France’s foreign investment screening. First, a new sector – biotechnology – has been added to the list of critical technologies subject to investment screening in France. Second, the Ministry has proposed a temporary lowering of the threshold that triggers the screening procedure, from 25% voting rights to 10% voting rights when held by investors from outside of the EU and EEA investing in French listed companies. Once in effect, this lowered threshold is will apply until the end of 2020. A decree lowering the threshold is expected to enter into force in the second half of 2020. (Note that these announced changes are in addition to recent changes in April which saw additional sectors and lowered thresholds under a broader reform of France foreign investment review procedure that predated the current situation.)
For more information, see the Ministry of Economy’s announcement here.
The German Ministry for Economic Affairs and Energy (BMWi) has proposed revisions of Germany’s foreign investment review procedure that will expand the sectors captured by the investment review to include the health sector, specifically, makers of personal protective equipment, vaccination developers and medical devices for the treatment of infectious diseases. The BMWi also brought forward previously planned amendments to include governmental communication infrastructure and specific raw materials sectors in the investment review procedure. Investments made in these sectors by non-EU, non-EEA parties will be subject to potential review when reaching 10% of the target company’s shares. The proposed changes are currently in the federal legislative process and expected to take effect in mid-May.
For more information, see BMWi announcement here.