Deal-making across borders

Cross-border transaction laws report: Japan

Japan has long been one of Asia’s most significant markets for cross-border transactions, attracting substantial foreign investment and serving as a base for outbound trade and investment. Against the backdrop of a weak yen, inbound M&A activity remains robust and export volumes also continue to grow.

As cross-border transactions increase, foreign investors must carefully consider Japan’s regulatory framework. This article outlines key legal considerations, with particular focus on the Foreign Exchange and Foreign Trade Act (FEFTA) and Antimonopoly Act.

Inward direct investment

Under the FEFTA, a “foreign investor” making an inward direct investment in a Japanese company is generally subject to post-transaction reporting. Such investments include the acquisition of shares in unlisted companies, acquiring 1% or more of shares or voting rights in listed companies, and the acquisition of business assets from Japanese companies.

Where national security concerns are implicated, prior notification is required, subject to certain limited exemptions. If this is required, the transaction cannot be consummated during a statutory waiting period, which should be taken into consideration in the deal timeline.

1. 1. Prior notification:
      1. Designated business sectors. A key issue is whether the target operates in a “designated business sector”. These sectors are specified by ministerial ordinances and include businesses related to national security and supply chain resilience, such as semiconductors and related equipment.
         1. Whether a target company falls within a designated sector is determined by its actual business activities, rather than its stated corporate purpose.
         2. Even if the target itself does not conduct a designated business, the foreign investor may still be required to submit a prior notification where its subsidiary conducts designated business activities.
      2. Sanctions. Failure to submit a required prior notification, or submission of false information, may result in corrective orders, including divestiture of acquired shares.
      3. Waiting period and procedures. Once a prior notification is received by the Minister of Finance and the minister in charge of the designated business sector, a 30-day waiting period applies in principle. This may be shortened or extended (up to five months in total) if further review is deemed necessary. In practice, this period is often shortened.
         1. 1. Where prior notification is required, a post-closing report must also be filed with the Minister of Finance and the minister in charge of the designated business sector within 45 days of completing the transaction.
      4. Exemption from prior notification. Broadly speaking, the FEFTA allows certain foreign investors to proceed without prior notification so long as: (i) the foreign investor is eligible; and (ii) the target company’s business does not fall within a core business sector (although exemption may still be available in exemption conditions noted below).
         1. Ineligible foreign investors. A foreign investor required under foreign laws or regulations to co-operate with a foreign government by disclosing information considered important for Japan’s national security is no longer eligible to rely on the exemption regime when making an inward direct investment.
         2. Investment in core business sectors. Prior notification is generally required and exemptions are limited for investments in “core business sectors”, which are particularly sensitive in weapons manufacturing and cybersecurity.
         3. Exemption conditions. Even where investment otherwise qualifies, foreign investors must satisfy certain conditions for exemption from prior notification.
         4. There are two types of exemptions: (i) blanket exemptions for investments by foreign financial institutions in listed companies; and (ii) general exemptions available to a broader range of investors.
         5. General exemption for non-core business sectors is usually available if general conditions are met. Otherwise, prior notification is required, including acquisitions of 1% or more of shares or voting rights in listed companies, and any share acquisition in unlisted companies.
         6. For core business sectors, general exemption is more limited, available only for acquisitions of listed shares of at least 1% but less than 10%, and only if both general and additional conditions are satisfied.
         7. General conditions include refraining from proposing the transfer or disposal of designated-sector businesses at shareholders’ meetings, and refraining from accessing non-public technical information relating to such businesses. Additional conditions include refraining from attending board meetings concerning core businesses.

1. 2. Post-transaction reporting. Even where prior notification is not required, post-transaction reporting may still be necessary unless statutory exclusions apply. Reports should be submitted within 45 days of transaction.
   3. Exemption from both prior notification and post-reporting. Certain transactions, including acquisitions below statutory thresholds or by merger in specified circumstances, may be exempt from both prior notification and post-reporting.
   4. Practical implications for M&A. FEFTA analysis is a key due diligence item in cross-border M&A. Where prior notification is required, the transaction cannot be consummated for 30 days after notification is received by the Minister of Finance and the minister in charge of the designated business sector. Accordingly, transaction timelines must be structured with this statutory waiting period, making determination of whether prior notification is required a critical issue.

Careful due diligence is therefore essential to assess whether the investor qualifies as a foreign investor, and whether the target business falls within any designated business sector. In addition, parties typically include a closing condition in share purchase agreements or investment agreements requiring completion of any necessary FEFTA procedures.

Mergers control

Japan’s Antimonopoly Act applies to business combinations that may substantially restrain competition in the Japanese market, even where foreign companies are involved.

Prior notification is required for share acquisitions, mergers and other enterprise business combinations meeting statutory thresholds based on domestic turnover/sales.

Specifically, notification is generally required where the combined domestic turnover of the acquiring group exceeds JPY20 billion (USD126.7 million) and that of the target group exceeds JPY5 billion. In principle, the acquiring group may not consummate such transactions until 30 days from receiving notification by the Japan Fair Trade Commission (JFTC).

Even where no filing obligation is triggered, the JFTC may review business combinations between a foreign and Japanese company, as well as transactions between foreign companies, if the transaction could substantially restrain competition in the Japanese market. Where concerns arise, the JFTC may clear the transaction subject to remedial measures addressing such concerns.

Outbound: export controls

Under the FEFTA, the export of goods and the provision of technology may require prior authorisation from the Minister of Economy, Trade and Industry (METI).

Japan’s export control regime primarily comprises:

1. 1. List-based controls, covering goods and technologies listed in the Export Trade Control Order and Foreign Exchange Order; and
   2. Catch-all controls, under which even non-listed items may require authorisation if intended for use in weapons of mass destruction or conventional weapons programmes.

Additionally, certain exports require approval to ensure compliance with international treaties and sanctions regimes.

Making and receiving payments. Cross-border payments between residents of Japan and non-residents may be subject to reporting requirements under the FEFTA.

In practice, where payment is through financial institutions, reporting is often handled by the relevant financial institutions, and companies co-ordinate with their transaction banks to ensure compliance.

Outward direct investment

Outward direct investment refers to capital transactions by Japanese residents – including corporations with the principal office in Japan – intended to establish or maintain a lasting interest in foreign entities, such as acquisition of 10% or more of shares in a foreign company.

In principle, outward direct investments are subject to post-transaction reporting. However, in certain sensitive sectors (such as fisheries, leather, weapons or narcotics-related businesses), prior notification may be required.

The standard waiting period for outward direct investment subject to prior notification is 20 days (compared to 30 days for inward direct investment).

Certain small-scale transactions, such as acquisitions below specified monetary thresholds, may be exempt from reporting. For example, a Japanese company’s acquisition of shares in a foreign company in which it already holds 10% or more equity may be exempt if the transaction value is less than JPY1 billion.

Conclusion

As cross-border M&A and international trade continue to grow, compliance with the FEFTA and the Antimonopoly Act remains a key consideration for Japan-related investors.

Since landmark 2020 amendments, the regulatory framework has continued to evolve amid shifting geopolitical dynamics, and further regulatory developments can be expected.

This article provides a general overview of the key regulatory frameworks for cross-border transactions.

In practice, other legal considerations – including data protection, tax and labour laws – may also be relevant. Early legal assessment and careful due diligence are therefore essential to ensure the smooth execution of cross-border transactions involving Japan.

Osaka Dojimahama
CHUO SOGO LPC
Osaka Dojimahama Tower 15th Floor
1-1-27 Dojimahama, Kita-ku
Osaka, 530-0004 JAPAN
Tel: +81 6 6676 8834
Fax: +81 6 6676 8839
www.clo.jp

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Regulatory landscape of cross-border deals in Taiwan

Taiwan has emerged as a dynamic hub for cross-border investment, driven by its strategic location, robust economy and cutting-edge technology sector. In response to recent policy developments, Taiwan has implemented a comprehensive regulatory framework for investments that strikes a balance between promoting industry growth and adhering to regulatory compliance standards.

The following key themes are central to cross-border transaction considerations involving investment in Taiwan.

Restrictions on foreign investment. Taiwan’s foreign investment framework distinguishes between foreign (non-PRC) and PRC investment, with each category subjected to different regulatory approvals, limits on equity participation and review processes.

Foreign (non-PRC) investment. Foreign investors planning to acquire or invest in shares of Taiwanese companies (other than portfolio investments in exchange-traded securities) must obtain prior approval from the Department of Industrial Review (DIR) in accordance with the Statute for Investment by Foreign Nationals.

Most sectors are generally open to foreign investment. Regulators maintain a “negative list” that specifies industries where foreign investment is either prohibited or restricted. Investment in “prohibited industries” is not allowed under any circumstances, while “restricted industries” require special permits or licences from relevant authorities with adherence to additional conditions.

PRC investment. Under the current rules, a “PRC investor” is defined as any individual, legal entity, organisation or other institution originating from the Chinese mainland (referred to as a “mainland person”) that invests in Taiwan.

Additionally, a PRC investor encompasses companies based in third regions (areas outside the Chinese mainland) where mainland persons hold either:

1. 1. More than 30% of the total shares or capital contributions, directly or indirectly; or
   2. Exercise control over the company.

Investments by PRC investors require prior approval from the DIR and must comply with the business scope restrictions and limitations outlined in Taiwan’s “positive list” for PRC investments, as updated from time to time.

Review and approval. Certain industries and companies are subject to heightened scrutiny. In such cases, the DIR will refer the investment application to relevant agencies for review before making a final decision. This inter-agency consultation process may be required for industries and companies involved finance, banks, insurance, securities, consulting, telecommunications, media and broadcasting, agriculture, transportation and energy.

Merger filing. A cross-border transaction that qualifies as a “combination” under the Taiwan Fair Trade Act (TFTA) and meets certain prescribed thresholds must be submitted for prior notification (merger filing) to the Taiwan Fair Trade Commission (TFTC).

Under the TFTA, “combinations” include:

1. 1. Mergers;
   2. Acquisitions or holdings of at least one-third of the voting shares or interest in another enterprise;
   3. Transfers or leases of all or a substantial part of an enterprise’s business or assets;
   4. Arrangements with another enterprise for regular, ongoing joint operation or management of another enterprise’s business based on a contract of entrustment; and
   5. Exercising direct or indirect control over the operation or personnel of another enterprise.

The existence of “control” must be assessed in each case, as there is no definitive legal definition.

Notification is required if any of the following conditions are met:

1. 1. As a result of the combination, any participating enterprise will acquire at least one-third of the relevant market share.
   2. Any participating enterprise holds at least one-quarter of the market share prior to the combination.
   3. The combined turnover of the participating enterprises in the preceding fiscal year exceeds the thresholds promulgated by the TFTC.

Acquiring public companies

Under the Taiwan Company Act and the Business Mergers and Acquisitions Act, material decisions require the approval of shareholders holding two-thirds of the voting shares present at a shareholders’ meeting.

Therefore, to gain absolute control of a public company, an acquirer would ideally secure at least 67% of the shares. In practice, however, since not all shareholders attend meetings, an investor might gain control over a listed company’s management or operations with as little as 30% to 40% of the voting rights. The ultimate degree of control depends on the dispersion of the company’s shareholding structure.

In Taiwan, it is common for an investor to first acquire a stake in a public company before making an offer, thereby securing the votes needed to approve a subsequent M&A transaction. Any individual or entity that, alone or jointly, acquires more than 5% of a public company’s total issued shares must report this to the Financial Supervisory Commission (FSC), specifying the purpose of the acquisition.

Additionally, any change in shareholding of 1% or more must also be reported. Directors, supervisors, managerial officers and shareholders holding more than 10% of the total issued shares have ongoing reporting obligations.

A mandatory tender offer is required if an individual or group, acting alone or in concert, intends to acquire 20% or more of a public company’s issued shares within 50 days, unless an exception applies. Acquisitions are deemed to be made in concert when parties acquire shares through a contract, agreement, or any other arrangement for a shared purpose.

Since mandatory tender offers are subject to regulatory scrutiny and specific rules, foreign acquirers must be mindful of regulatory boundaries, including the offer timeline and necessary lead time for obtaining regulatory approvals such as foreign investment clearance and merger filing approvals. Additionally, they must ensure adequate funding and budget timeline for remittance and foreign exchange.

A major shareholder can force out minority shareholders via a merger or share exchange, for which the compensation is usually provided in cash.

In Taiwan’s M&A market, investors aiming to privatise a public company often use a two-step transaction structure: first conducting a tender offer, followed by a share exchange with cash consideration (cash squeeze-out). In recent years, investors confident in securing majority shareholder approval increasingly opt for a one-step transaction, such as a share swap or merger, which is more cost and time-efficient compared to the two-phase acquisition.

Additionally, M&A deals between enterprises and Cayman Islands companies listed on the Taiwan Stock Exchange or the Taipei Exchange are commonly structured as reverse triangular mergers, where the public company remains the surviving entity and becomes wholly owned by the acquirer, facilitating regulatory compliance and operational continuity.

Foreign exchange control

Taiwan generally regulates foreign exchange transactions with relevant thresholds. While foreign investors are not restricted in the total amount they can invest – provided their investment is approved by the DIR or conducted through trading in Taiwan’s securities market – Taiwan’s central bank may impose daily currency conversion quotas on large investment or repatriation amounts that could significantly affect the New Taiwan Dollar exchange rate.

Under current law, investors with foreign or PRC investment approvals may remit capital for approved investments and repatriate annual net profits, interests and cash dividends attributable to these investments. Dividends attributable to the investment may be repatriated by submitting the necessary documents to the remitting bank.

Looking ahead

Given the evolving landscape, authorities are likely to strengthen inter-agency collaboration and expand the scope of industries subject to enhanced scrutiny, particularly in critical sectors such as technology, telecommunications, defence and infrastructure.

Consequently, investors should anticipate more detailed regulatory assessments and longer approval timelines, underscoring the importance of thorough due diligence and proactive engagement with regulatory bodies to effectively navigate the complex approval processes.

Additionally, investors should stay informed about evolving regulatory frameworks and emerging policy priorities, as Taiwan may introduce new guidelines or expand existing measures to address emerging threats and technological advancements.

Building strong local partnerships and leveraging expert legal and compliance advice will further enhance the ability of investors to anticipate challenges and adapt strategies accordingly.

Lee and Li Attorneys-at-Law
8F, No. 555, Sec. 4
Zhongxiao E. Rd.
Taipei 11072 Taiwan
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com
www.leeandli.com