Doing Business In... 2021

Last Updated July 13, 2021

Japan

Law and Practice

Authors



Anderson Mōri & Tomotsune is a full-service law firm with over 500 professionals that is best known for serving overseas companies doing business in Japan since the early 1950s. It is proud of its long tradition of serving the international business and legal communities, and its reputation as one of the largest full-service law firms in Japan. Its combined expertise enables it to deliver comprehensive advice on all legal issues that may arise in the course of a corporate transaction, including those related to M&A, finance, capital markets and restructuring/insolvency, and litigation/arbitration. Most of its lawyers are bilingual and experienced with communicating, drafting and negotiating across borders and around the globe. The firm’s main office in Tokyo is supported by offices in Osaka, Nagoya, Beijing, Shanghai, Singapore, Ho Chi Minh City, Bangkok, Jakarta and Hong Kong. The article is assisted by the firm’s associates, Kohei Kajiwara, Kenichi Nakabayashi, Ayami Ogawa, Kensuke Inoue and Shunji Fukasaka.

In general, Japan is a civil law jurisdiction. Most of Japan’s modern legal systems are based on continental European civil systems; however, the end of World War II also saw the introduction of some Anglo-American legal influences.

Under the Constitution of Japan, judicial power is held by the courts, which are expressly guaranteed as being independent from other branches of the government. The Japanese court system can be broadly categorised into three levels.

  • At the first tier, District Courts are the main court of first instance for most cases (please note that Summary Courts may act as the court of first instance for small civil claims and minor criminal offences). This tier also broadly includes Family Courts, which hear family and juvenile delinquency matters. District Courts also act as the first level of appeal for certain Summary Court matters.
  • At the second tier are the High Courts, of which there are eight. The High Court acts as the general appellate court for District Court cases, as well as certain Summary Court matters.
  • At the third tier is the Supreme Court, which will generally only hear appeals on cases that involve specific questions of law.

Cases are generally determined by professional judges. However, in certain serious criminal cases (eg, offences that carry a capital sentence), there is a limited use of a jury of laypersons at the court of first instance. As a civil law system, there is no principle of binding judicial precedent. That being said, decisions of the Supreme Court are considered to be strongly persuasive and are usually taken into consideration where appropriate.

There is no general requirement for approval of all forms of foreign investment. That said, the following kinds of foreign investments, as well as certain actions against invested companies by investors, will require prior notification to the authorities (ie, the minister of finance and the competent minister). In terms of foreign investments, investors will have to wait for 30 days in general while the authorities examine the investment:

  • investments from countries with which Japan does not have existing treaties regarding inward direct investments, such as Iraq and North Korea; and
  • foreign investments in certain industries, such as agriculture, fishery, manufacturing, infrastructure projects, telecommunications and IT-related industries.

It should be noted that several types of exemptions from the prior notification requirement – which depend on investor’s categories (qualified financial institutions or not), invested industries and companies (listed or not), acquired ratio, etc – have been introduced since 2020.

During the aforementioned period of 30 days, the authorities can issue a legally binding order for the investment to be modified or suspended in particular cases explained in 2.2 Procedure and Sanctions in the Event of Non-compliance. Therefore, the requirement for prior notification is, in practice, a form of approval.

If an investor is required to provide prior notification, the notification should be made from six months to 30 days prior to the intended commencement of the investment.

The authorities shall examine the investments from the perspective of national security and the potential effect of the investment on the domestic economy.

The authorities may recommend a modification or cancellation of the investment. As a recommendation, the investor will still have the discretion to accept or reject such a recommendation. However, should the investor reject the recommendation, the authorities can issue a legally binding order for the investment to be modified or suspended.

If an investor is required to provide prior notification but fails to do so, that investor is generally liable to a sentence of imprisonment of up to three years and/or a fine that shall be calculated based on the total value of the investment. However, if an investor is a corporation, a sentence of imprisonment is not applied. The authorities also have the power to order the investor to perform all acts necessary to undo an illegal investment, including the disposal of any capital that the investor acquired as a result of the illegal investment.

There are no typical conditions. However, as mentioned above, if an investor is required to provide prior notification, the authorities may recommend a modification or cancellation of the investment, and should the investor reject the recommendation, the authorities can issue a legally binding order for the investment to be modified or suspended.

An affected investor can challenge a decision of the authority that negatively affects or suspends the investment to the higher authorities or in the court. The challenge to the higher authorities can be made within three months of the date when the investor becomes aware of the decision of the authorities and within one year of the date when the decision of the authorities is made. The challenge in the court can be made to the District Court within six months of the date when the investor becomes aware of the decision of the authorities and within one year of the date when the decision of the authorities is made.

The most common types of corporate vehicles in Japan are the stock company (kabushiki kaisha) and the membership company (mochibun kaisha). A stock company is the vehicle that is typically used. In a stock company, the liability of shareholders is limited to the value of their shares and there is generally no assumption of additional liability by the shareholders to creditors of the stock company.

In order to establish a stock company, there is no specified minimum amount of share capital or a minimum number of shareholders. There is also generally no limitation on the purposes for which a stock company can be established to the extent they are commercial, and a stock company can be established for more than one purpose.

As for membership companies, there are three types in Japan:

  • the general partnership company (gomei kaisha);
  • the limited partnership company (goshi kaisha); and
  • the limited liability company (godo kaisha).

The general partnership company and the limited partnership company are less commonly used, and the most common membership company is the limited liability company.

In the case of a limited liability company, the liability of the members of the company is limited in the same way as a stock company. The main difference between a limited liability company and a stock company is that in the case of a limited liability company, only members of the company can hold positions of management, whereas the management of a stock company is not exclusive to members of the company.

The main steps involved in the incorporation of a stock company are as follows:

  • preparation of the articles of incorporation and the certification of the articles by a notary public;
  • determination of the share issuance, share subscription and shareholders at the point of incorporation;
  • determination of the appointment of key organs such as the directors and the company secretary; and
  • registration of the stock company for incorporation with the relevant authorities.

On the specific step of share subscription, there are two ways this can be done when incorporating a stock company. The party(ies) incorporating the stock company can subscribe for all the shares at the time of incorporation, or it/they can only partially subscribe to the shares, with the remainder of the shares being subscribed by external investors. Share subscription that involves external investors typically involves more stringent procedures, in order to provide some degree of protection for the external investors.

A stock company must provide, for the inspection of shareholders, the annual financial statements of the stock company at its head office and branch offices at least two weeks before its annual shareholders' meeting. In addition, changes of management and amendments to articles of incorporation must be registered with the relevant authorities.

A listed stock company has more stringent disclosure obligations, namely:

  • financial statements must be disclosed on a quarterly basis; and
  • material corporate information such as a change of the representative director and the declaration of dividends must also be disclosed from time to time.

While it is possible for a stock company without a board of directors to make decisions concerning the organisation, operations and management via director(s) or the shareholders' meetings, many stock companies have a board of directors who are in charge of making the day-to-day decisions of the company. Depending on the stock company, it may also have other appointments, such as company auditor(s), a board of company auditors, accounting auditor(s), accounting adviser(s) and other committees. The company's management structures shall be set out in the articles of incorporation.

A shareholders' meeting can make decisions on the operation, etc of the company. A company must hold at least one shareholders' meeting in a year.

For companies with a board of directors, the types of decisions that can be made by a shareholders' meeting are limited to those that are stipulated in the Companies Act and the articles of incorporation. In general, decisions relating to the management of the company shall be decided by the board of directors.

The board shall consist of at least three directors, who are to be elected at the shareholders' meeting.

Resolutions of the board shall be passed via a majority vote of the directors present at the meeting.

There shall be at least one representative director. Representative directors have the power to represent the company, such as execute documents as a representative of the company with third parties.

The company shall be audited by the company auditor(s), the board of the company auditors, or external auditors (as the case may be), who shall also audit the directors' execution of duties.

The directors of the stock company have a legal duty of care to execute their duties according to the standard of a reasonably prudent manager.

The directors also owe a duty of loyalty to the stock company and must also comply with the relevant laws and regulations when executing their duties.

If the directors neglect their duties, they may be liable to the company for the damages caused as a result of the neglect.

A director can be exempt from liability via a unanimous vote of all shareholders.

There are no articles in the Companies Act that provide that directors may be liable to the company for damages arising from the performance of the directors' functions, where such performance does not amount to a neglect of duties.

While there is some recognition of "piercing the corporate veil" in Japan, this is not founded on statutory law and only exists as a matter of judicial precedent.

There are many labour-related laws in Japan, all of which were enacted to embody the fundamental principles and rights provided in the Constitution. In particular, the Labour Standards Act (LSA) and the Labour Contract Act (LCA) provide for the fundamental principles of individual labour relationships, while the Labour Union Act (LUA) provides for the fundamental principles of collective labour management relationships.

Japan is a country with a continental law system, in which judicial precedents do not have legal binding force. However, in the field of labour and employment law, judicial precedents are considered very important because it is often difficult to make decisions based only on the laws and regulations, as the provisions thereunder are abstract.

Form of Employment Contract

An employment contact may be executed verbally. However, to avoid any misunderstanding regarding major employment conditions, the LSA requires an employer to prepare a document clearly describing those conditions and to deliver it to a new employee upon entering into an employment contract (LSA, Article 15). Examples of major working conditions include the term of employment, the location of the workplace, the job description, the working hours, whether overtime work will be necessary, a description of days off, the leave policy, the wages to be paid and the guidelines for termination of employment.

In addition, if an employer usually employs ten or more employees, the employer must establish the rules of employment, which consist of a set of documents stipulating the specific details of the employment conditions. In addition, a copy of the rules of employment must be submitted to the labour standards inspection office together with a written opinion regarding the rules of employment from either (i) the labour union to which a majority of employees of the workplace concerned belongs (majority labour union), or (ii) if such union does not exist, an employee representing a majority of employees of the workplace concerned (employee representative) (LSA, Articles 89 and 90). The contents of the rules of employment must be made available to employees at all times for inspection (LSA, Article 106).

Duration of Employment Contract

Two main types of employment contracts exist in Japan:

  • those with a fixed term; and
  • those with an indefinite one.

In practice, regular employees are usually hired with an indefinite term.

Under the LSA, the maximum duration of a fixed-term employment contract is three years. However, the maximum duration of a fixed-term employment contract in relation to (i) certain specialist jobs and (ii) employees who are 60 years of age or older is five years (LSA, Article 14).

There is no explicit minimum duration for a fixed-term employment contract. However, the LCA provides that an employer must not set a shorter term than is necessary (LCA, Article 17, Paragraph 2).

Under the LCA, a fixed-term contract employee with an aggregate employment term of over five years is allowed to convert their employment contract to an indefinite-term employment contract upon request to their employer (LCA, Article 18).

Basic Working Time Regulations

In principle, working hours of employees may not exceed eight hours per day or 40 hours per week (LSA, Article 32). Any work exceeding eight hours per day or 40 hours per week is recognised as statutory overtime work.

A rest period of at least 45 minutes must be granted during the working hours to employees who work for more than six hours, and at least 60 minutes to employees who work for more than eight hours per day. The employer must grant all of its employees a simultaneous rest period (LSA, Article 34).

Further, employees are entitled to take at least one day of holiday per week (statutory weekly holiday) (LSA, Article 35).

Article 36 Agreement

In order to have employees perform statutory overtime work or work on a statutory weekly holiday, the employer is required to execute a labour management agreement (saburoku kyotei) (an Article 36 agreement) with the majority labour union or, if such union does not exist, with the employee representative, and submit it to the labour standards inspection office prior to commencing any statutory overtime work or work on statutory weekly holidays (LSA, Articles 32 and 36). In addition, the employer must refer to the possibility of statutory overtime work and work on statutory weekly holidays in the rules of employment in advance of requiring such overtime work.

Extra Wages

When an employee has performed statutory overtime work or work on a statutory weekly holiday, the employer must pay extra wages for that work calculated at the rate of (i) 125% of the normal salary per working hour for statutory overtime work of up to 60 hours per month and 150% for that exceeding 60 hours per month, or (ii) 135% for work on a statutory weekly holiday (LSA, Article 37).

An employee working between 10pm and 5am is entitled to an extra payment in accordance with a late-night-work compensation ratio of at least 25% of the normal salary per working hour (LSA, Article 37).

Employees in Managerial Positions

Employees in managerial positions are entitled to receive an extra wage for late-night work, but are not entitled to receive extra wages for statutory overtime work and work on statutory holidays (LSA, Article 41). Whether an employee is in a managerial position depends on various factors, such as the actual content and nature of the work performed by the employee, the authority, responsibility and the manner in which work is performed, as well as the salary and other compensation. Please note that the scope of employees in managerial positions is quite narrowly interpreted.

Unilateral Dismissal in General

When an employer unilaterally dismisses an employee, the employer must have an "objectively and socially justifiable cause" for the dismissal (LCA, Article 16). Otherwise, the dismissal is deemed to be an abuse of right and would therefore be null and void. There is no doctrine of employment-at-will in Japan. It is generally understood that the following five reasons constitute an objectively justifiable cause for a unilateral dismissal:

  • inability of the employee to offer their labour to an employer, mainly because of physical or mental disability or extremely poor performance;
  • infringement of the disciplinary rules in the workplace by the employee’s serious misconduct;
  • redundancy;
  • termination due to an agreement with a labour union; or
  • termination due to an employer’s liquidation if an employer is a corporate entity.

In addition, the employer must give the employee at least 30 days’ prior notice of the unilateral dismissal or make payment in lieu of the notice (LSA, Article 20). Except as agreed in an employment contract or the rules of employment, an employee is not entitled to any monetary compensation upon a unilateral termination of employment.

Redundancy

A unilateral dismissal due to redundancy may occur where an employer wishes to continue business operations in Japan with a substantial reduction in the number of employees. In this case, the employer must demonstrate an objectively justifiable cause for the dismissal by satisfying all the following four factors.

  • The shedding of employees is justified by a strong financial or business necessity, such that it would be extremely difficult for the employer to continue its business without implementing a reduction of employees (and not merely the fact that the employer would be more profitable if the employees were dismissed).
  • The employer has already endeavoured to take all reasonable means to avoid dismissal of employees, such as facilitating intra-company transfers (or, in some cases, associated-company transfers), offering voluntary resignation with a certain amount of severance compensation and reducing other operating costs.
  • The selection of employees for termination was conducted in a fair manner and in accordance with a reasonable and objective standard established by the employer. The selection criteria must be fair and based on a rational procedure, and not based on the employee’s gender, membership in a labour union, race, creed, or other discriminatory reason.
  • Sincere attempts at discussion or negotiation were undertaken, either with employees or their representative (including a labour union, if applicable), but were unsuccessful.

The regulations regarding notice period and monetary compensation are the same as those applicable to unilateral dismissal in general.

Employee Representative

As explained above, when an employer establishes the rules of employment, the employer must obtain a written opinion of the majority labour union or, if such union does not exist, of the employee representative. Similarly, if an employer intends to execute certain labour management agreements, such as an Article 36 agreement, the labour management agreement must be executed with the majority labour union or, if such union does not exist, with the employee representative. An employee representative shall be elected by a majority vote or majority consent of the employees.

Labour Union

Under the Constitution of Japan, workers have the right to form and join unions, the right to bargain collectively through the unions to which they belong and the right to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection (Constitution, Article 28).

A union may represent its members’ interests in bargaining with its members’ employers in relation to the conditions of employment and other matters relating to the treatment of union members. A union does not need authorisation from administrative agencies to represent its members in bargaining with their employer(s).

If a union requests a collective bargaining session, the employer may not reject that request without a reasonable basis (LUA, Article 7, item 2).

Employees are subject to income tax and local inhabitant tax in relation to their salary, and their employers must withhold such taxes, which are payable to national and local governments.

For the purpose of Japanese income tax, an individual, including an employee, is categorised as:

  • a permanent resident;
  • a non-permanent resident; or
  • a non-resident.

A resident is defined as any individual who has their residence (jusho) in Japan, or has had their temporary residence (kyosho) in Japan for more than one year. A permanent resident is defined as a resident other than a non-permanent resident (as defined below) and is subject to income tax with respect to all of their income (including salary, hereinafter the same in this section) that they have inside and outside Japan.

On the other hand, a non-permanent resident, who is defined as any individual who is a resident of Japan, but is not a Japanese national and they have had residence in Japan or temporary residence in Japan for five years or less in total, over the past ten years, is subject to income tax only with respect to income other than foreign-sourced income and any amount of foreign-sourced income that is paid in or transmitted to Japan. A non-resident (ie, any individual other than any type of resident) is subject to income tax only with respect to domestic (Japan)-sourced income. This type of income includes salaries received for work or personal services carried out in Japan, or outside Japan by a person acting as an officer of a Japanese corporation.

For the employment earnings of a permanent resident or a non-permanent resident who has submitted a certain application and whose individual income does not exceed JPY20 million per year, such an employee will only be subject to withholding tax and need not file their own tax return. Instead, the employer will be responsible for the calculation and payment of such employees’ taxes (this system, especially the year-end recalculation procedure of the system, is called the “year-end adjustment system” (nenmatsu chousei) of tax payment). The income tax rates are progressive and the maximum rate is 45%. Additionally, reconstruction special income tax will be imposed on income tax at a rate of 2.1% from 2013 to 2037. Please see the progressive income tax rates (including reconstruction special income tax) below:

  • 5.105% (for the portion of taxable income of JPY1.95 million or less);
  • 10.21% (for the portion of taxable income of more than JPY1.95 million to JPY3.3 million);
  • 20.42% (for the portion of taxable income of more than JPY3.3 million to JPY6.95 million);
  • 23.483% (for the portion of taxable income of more than JPY6.95 million to JPY9 million);
  • 33.693% (for the portion of taxable income of more than JPY9 million to JPY18 million);
  • 40.84% (for the portion of taxable income of more than JPY18 million to JPY40 million); and
  • 45.945% (for the portion of taxable income of more than JPY40 million).

Employees and their employer jointly contribute in equal parts to employee social expenses, such as national health insurance premiums and employees' pension insurance premiums.

In addition, if an employee dies, their heirs would be subject to inheritance tax. In general, inheritance tax is imposed on both domestic and foreign assets. However, depending on the nationalities and residence period of the decedent and their heirs in Japan, the taxable assets may be limited to domestic ones in some situations. Under the 2021 tax reform, on or after 1 April 2021, in cases where foreign individuals who have certain types of working visas die in Japan, their heirs without Japanese nationality would be subject to inheritance tax only on domestic assets, as long as they:

  • are not Japanese residents at the time of the decedent’s death; or
  • have lived in Japan with certain types of visas for a period not exceeding ten years in the past 15 years before the decedent’s death.

A company doing business in Japan is subject to various taxes.

Corporate income tax must be paid where a company has its head office or principal office in Japan (such company is a "domestic corporation"). If a company does not have its head office or principal office in Japan (such company is a "foreign corporation"), the company must pay corporate income tax only on domestic-sourced income. As for some categories of income, such as dividends and interest, income tax shall be withheld at the time of payment, but corporations can credit the amount of such income tax from the amount of corporate income tax subject to certain limitations.

Inhabitant tax and enterprise tax must be paid if a company has its head office or principal office in Japan, or permanent establishment in Japan.

Consumption tax, which is a type of value-added tax, must be paid if a company conducts certain kinds of transactions, such as sales of goods, leases of goods and provisions of services in Japan; certain categories of digital services provided to Japan; and importation transactions. Notwithstanding the above, with some exceptions (eg, if a company’s capital is JPY10 million or more), consumption tax shall be exempted if the amount of taxable sales in the base period, which is the fiscal year two years prior to the current fiscal year, is less than JPY10 million.

In addition to the above, there are other taxes, such as fixed property tax, stamp duty, registration tax and real estate acquisition tax.

Corporations can credit the amount of income tax withheld at source from the amount of corporate income tax imposed. Income tax withheld at source is theoretically recognised as corporate income tax that is collected in advance; therefore, such amount can be deducted from the final tax amount.

Domestic corporations are eligible to credit the amount corresponding to corporate income taxes paid in foreign countries from the amount of corporate income tax imposed in Japan, although the amount of such credit is subject to certain limitations. The purpose here is to avoid the multiple imposition of tax in different countries on the same income. Foreign corporations that have permanent establishments in Japan are also allowed to claim foreign tax credit with regard to income, which is attributable to their permanent establishments in Japan and taxable status in Japan.

Other than the above, there are various tax exemptions or tax reductions that encourage investments and R&D in Japan. For example, companies that file a blue-form tax return are eligible to credit a certain percentage of R&D expenditure from the amount of corporate income tax.

There are two regulatory frameworks in Japan in respect of a group taxation scheme: the full controlling interest framework and the group calculation framework. The latter is introduced in the 2020 tax reform to replace an older framework known as the consolidated return framework, and will be effective from any business years starting on or after 1 April 2022.

The full controlling interest framework applies mandatorily to intra-group transactions (including transactions involving transfers of assets, losses, dividends and interest) where all companies in the group are wholly owned (whether directly or indirectly) by the ultimate parent of the group, regardless of whether the ultimate parent is a foreign or domestic company or individual, provided that the parties to the relevant transaction are domestic companies. Under this regulatory framework, taxation on intra-group profits from transfers of certain kinds of assets – such as fixed assets, securities, monetary claims and deferred assets (qualifying assets) – is deferred until those assets are transferred outside the group. Additionally, intra-group contributions, donations and dividends are disregarded. If the full controlling interest framework is applied, certain tax incentives to which corporations with stated capital of JPY100 million or less are normally entitled would no longer be available to a small or medium-sized company that is fully controlled by a large corporation with a stated capital of JPY500 million or more.

On the other hand, the group calculation framework, if approved by the Commissioner of the National Tax Agency (NTA), is only applicable to groups in which all companies are wholly owned (whether directly or indirectly) by the ultimate parent of the group and the companies of the group consist only of domestic companies. Under this framework, corporate income tax is calculated on a group-wide basis (ie, offsetting profit and loss among the group corporations), but payable by each group corporation. This is the most significant change from the previous framework, under which corporate income tax is paid by the controlling corporation.

Regarding group corporations, unrealised profits and losses of qualifying assets will not be imputed to taxable income or losses, as long as certain requirements (which are consistent with those of tax-qualified reorganisation) are met (eg, where these subsidiaries are expected to remain directly or indirectly wholly owned). The Certain NOL (net operating loss) Limitation (Japanese Separate Return Limitation Year Rule) is also applied to group corporations.

In addition, under the group calculation framework, taxation on profits from intra-group transfers of assets is deferred until those assets are transferred outside the group. Intra-group contributions, donations and dividends are also disregarded under the group calculation framework.

Japanese tax law includes thin capitalisation rules. Under these rules, if interest is paid to a foreign controlling shareholder by a domestic corporation while the payer’s average interest-bearing debt to the foreign controlling shareholder in the financial year exceeds three times the value of the foreign controlling shareholder’s equity interest in the payer in the said financial year, and the payer’s average aggregate interest-bearing debt in the said financial year exceeds three times the value of the aggregate equity interest in the payer, the interest income related to the excess debt will not be deductible from the payer’s taxable income. A domestic corporation may, however, apply a different debt-to-equity ratio (instead of three times) if it can prove that a different ratio is appropriate in light of the debt-to-equity ratio of similar corporations.

In addition, under the earnings stripping rules, with some exceptions, when interest payments to related foreign corporations (such as a foreign parent company or subsidiary) exceed 20% of the statutory income of the payer, the portion of interest payments exceeding 20% of the statutory income of the payer is not deductible from the payer’s taxable income in the financial year. However, such excess portion is carried forward for seven financial years and can be used as deductible expenses until the total amount of deductible expenses reaches a 20% threshold in each of the following seven financial years.

Under Japanese transfer pricing rules, a domestic corporation that transacts with related foreign entities (such as a foreign parent corporation) will, if the transaction involves non-arm’s-length consideration, be liable for tax calculated based on an arm’s-length consideration imputed on the transaction. In calculating the appropriate arm’s-length consideration, the tax authority will apply the most suitable statutory method of calculation available.

Typically, the tax authority will request further information from the taxpayer that will help the authority to calculate an appropriate arm’s-length consideration. Where a taxpayer fails to adequately respond to such requests, or does not promptly provide such information, the tax authority will have the right to determine such arm’s-length consideration as it deems fit based on reasonable assumptions applicable to the relevant statutory method of calculation.

In addition, concerning transfer price documentation, four types of documentation are required:

  • a NUPE (Notification for Ultimate Parent Entity) form;
  • a CbCR (country-by-country report);
  • a master file; and
  • a local file.

Of these, the former three types of documentations are applicable to subsidiaries or branches in Japan that are constituent entities of a specified multinational enterprise (MNE), and the local file is applicable to all corporate taxpayers engaging in transactions with foreign affiliates.

Japanese tax laws contain general avoidance rules such as the disallowance of acts or calculations:

  • by family-owned corporations;
  • in relation to organisational restructuring;
  • by corporate groups of the group calculation framework; and
  • regarding foreign entity profits that are attributable to a permanent establishment.

Recently, these anti-evasion rules have been applied especially to several corporate intra-group reorganisations. Those cases have subsequently developed into tax disputes.

Prior notification is required for share acquisitions, mergers, splits, joint share transfers and acquisitions of business or assets, etc, that meet certain criteria.

The filing thresholds are different for each of the above-mentioned types of transactions. The major transactions are as follows.

  • Share acquisitions:
    1. the total sales in Japan of the acquiring company and other companies within the same combined business group as the acquiring company exceed JPY20 billion;
    2. the total sales in Japan of the acquired company and all of its subsidiaries exceed JPY5 billion; and
    3. the ratio of voting rights of the acquiring company upon the acquisition newly exceeds 20% or 50%.
  • Mergers:
    1. the total sales in Japan of at least one party to the merger and other companies within the same combined business group as the party exceed JPY20 billion; and
    2. the total sales in Japan of at least one other party to the merger and other companies within the same combined business group as the other party exceed JPY5 billion.
  • Acquisitions of business or assets, etc:
    1. the total sales in Japan of the acquiring company and other companies within the same combined business group as the acquiring company exceed JPY20 billion; and
    2. the total sales in Japan attributable to the business or assets to be acquired by the acquiring company exceed JPY3 billion.

Please note that "combined business group" of a party refers to a group consisting of the ultimate parent company of the party and the subsidiaries of the ultimate parent company. No filing is required for a transaction within the same combined business group.

With respect to joint ventures, it is necessary to analyse if each step of a transaction to establish a joint venture constitutes one of the above types of transactions that would be subject to the prior notification requirement and whether the relevant filing thresholds are met.

Even if a contemplated transaction is not subject to the prior notification requirement, if the transaction would substantially restrain competition in any relevant market, the transaction would be prohibited under the Antimonopoly Act.

According to the Policies Concerning Procedures of Review of Business Combination, as amended in 2019, the Japan Fair Trade Commission (JFTC) recommends voluntary filing for transactions that do not meet the mandatory filing thresholds, but that have an acquisition value exceeding JPY40 billion, if one or more of the following factors are met:

  • the business base or R&D base of the acquired company is located in Japan;
  • the acquired company conducts sales activities targeting Japanese consumers, such as providing a website or a pamphlet in Japanese; or
  • the total sales in Japan of the acquired company and its subsidiaries exceed JPY100 million.

If a contemplated transaction is subject to the prior notification requirement, the relevant enterprises are prohibited from closing the transaction for a period of 30 calendar days after formal filing (Phase I review period). If the JFTC forms the view that the transaction does not give rise to concerns over competition, the JFTC issues a clearance within the Phase I review period. However, if the JFTC forms the view that a more detailed review is required, the review process moves into a Phase II review. At the beginning of the Phase II review, the JFTC will request for additional information and the Phase II review will continue for 120 calendar days from the formal filing or 90 calendar days from the date of the receipt of all the additional information requested, whichever is the longer period.

Parties planning to file a notification may consult the JFTC not only on the descriptions of the notification form, but also on the substantive issues such as market definition and competitive assessment at the pre-notification stage. In practice, unless the transaction is very straightforward without any potential substantive issues, it is common to make use of the pre-notification consultation system, and the JFTC commences its review of the market situation and the potential substantive issues at the pre-notification stage.

If it is evident that the transaction would not restrain competition in any relevant market and the notifying parties request the JFTC to shorten the waiting period in writing, the JFTC may shorten the waiting period.

Certain anti-competitive agreements and practices such as price fixing and bid rigging are prohibited as an unreasonable restraint of trade under the Antimonopoly Act. Unreasonable restraint of trade is defined as business activities by which any enterprise, in concert with other enterprises, mutually restricts or conducts their business activities in such a manner as to fix, maintain or increase prices, or to limit production, technology, products, facilities or counterparties, thereby causing a substantial restraint of competition in any relevant market.

As for the interpretation of the elements of unreasonable restraint of trade, it would be worth noting that although “substantial restraint of competition” is one of the elements of unreasonable restraint of trade, the JFTC can easily prove that such requirement is satisfied in the case of extreme cartel behaviour such as price fixing and bid rigging, and thus it would be difficult to justify extreme cartel behaviour in practice.

Major methods of enforcement against unreasonable restraint of trade are cease and desist orders, and surcharge payment orders. However, criminal penalties are also available. The amendment to the surcharge payment system came into effect on 25 December 2020. The amount of surcharge is calculated by multiplying the amount of sales of the target products or services during the period in which the unreasonable restraint of trade occurred (the maximum period is ten years) by the surcharge percentage rate. The rate is 10% in principle, but it can be lower depending on the size of the alleged violators, or higher if there are aggravating factors (such as repeated violation).

A leniency system for an unreasonable restraint of trade is available in Japan. The surcharge reduction rate, which was amended on 25 December 2020, is determined in accordance with the order of application for leniency as well as the degree of co-operation by the offender with the JFTC. In addition, a Determination Procedure was introduced on 25 December 2020 to protect attorney-client communications in respect of legal advice regarding the alleged violations to which leniency is applicable (“Specified Communication”). The scope of the protection under the Determination Procedure is limited compared to that which is available in similar circumstances in the USA or EU. The requirements to qualify for protection under the Determination Procedure include:

  • the fact that the contents of the Specified Communication are recorded is indicated on the document itself (eg, "Specified Communications under JFTC Investigation Rules" is written or printed on the cover);
  • the documents are stored separately from other documents that are not subject to the Determination Procedure; and
  • the company submits an application form for the Determination Procedure as well as a privilege log that states an outline of the relevant documents.

The recent Supreme Court decision confirmed that even if the alleged price cartel occurred outside Japan, the Antimonopoly Act can apply if said cartel impedes competition in the Japanese market.

Certain unilateral conduct and economic dependency are prohibited as private monopolisation and unfair trade practices under the Antimonopoly Act.

Private monopolisation is defined as any conduct to exclude or control the business activities of other enterprises, thereby causing a substantial restraint of competition in any relevant market. The methods of enforcement against private monopolisation include cease and desist orders, surcharge payment orders and criminal punishment.

Various types of conduct are designated as unfair trade practices, such as:

  • refusal to trade;
  • unjustly low-priced sales;
  • resale price restrictions; and
  • abuse of superior bargaining positions.

In connection with economic dependency regulations, abuse of superior bargaining positions is the major type of misconduct to be considered and enterprises are prohibited from imposing terms and conditions that are disadvantageous to other enterprises, by unjustly leveraging their superior position over other enterprises.

All types of unfair trade practices can be subject to cease and desist orders. However, the surcharge payment order and/or criminal penalties are applicable only to certain types of unfair trade practices.

In order for conduct to be considered as private monopolisation, it is necessary to prove that it results in a substantial restraint of competition. On the other hand, a tendency to impede competition is all that is required for conduct to fall within the scope of unfair trade practices. In other words, it can be said that a higher threshold (regarding detrimental effect) needs to be satisfied in order to show the existence of private monopolisation, in comparison to unfair trade practices.

Although extraterritorial applicability of regulations on private monopolisation and unfair trade practices is not such a prominent topic of discussion, it would appear, nevertheless, that the same approach that is taken towards unreasonable restraint of trade is likely to be taken in relation to private monopolisation and unfair trade practices.

The Commitment Procedure, which is a scheme to voluntarily resolve suspected violations via mutual consent between the JFTC and the relevant enterprise, came into effect in December 2018. Eight cases regarding private monopolisation and unfair trade practices have been resolved in the Commitment Procedure as of May 2021.

The Intellectual Property Basic Act of Japan recognises the importance of IP protection as well as the idea of creating a vibrant economy and society by creating new IP. In Japan, IP is mainly protected by the Patent Act, the Utility Model Act, the Trademark Act, the Design Act, the Plant Variety Protection and Seed Act, the Act on the Circuit Layout of Semiconductor Integrated Circuits, the Copyright Act and the Unfair Competition Prevention Act.

Patent rights, etc are granted by registering with the Japan Patent Office. On the other hand, the Copyright Act protects copyrights without requiring any special formalities. In addition, the Unfair Competition Prevention Act protects trade secrets as "legally protected profits".

Japan is a party to the Patent Cooperation Treaty, the Paris Convention for the Protection of Industrial Property, the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, the Hague Agreement Concerning the International Registration of Industrial Designs, the Berne Convention, the International Convention for the Protection of New Varieties of Plants and other major IP-related treaties.

A person that invents an invention with industrial applicability is entitled to obtain a patent for that invention. "Invention" in the Patent Act is defined as a highly advanced creation of technical ideas utilising the laws of nature.

A person applying for a patent must submit a written application to the Japan Patent Office. A description, scope of claims, required drawings and a summary must be attached to the application. The legal requirements for obtaining a patent are:

  • industrial applicability;
  • novelty; and
  • inventive step.

A patent right shall become effective upon successful registration. The duration of a patent right, in principle, expires after a period of 20 years from the filing date of the original application.

Under the 2021 amendment to the Patent Act, the consent of the non-exclusive licensees is no longer required for the abandonment of a patent right or for commencement of a trial for correction of a patent right.

The patent holder has an exclusive right to commercially exploit the patented invention.

As for remedies for infringement, the patent holder may file a claim for an injunction; a claim for disposal of infringing compositions, etc; a claim for damages; a claim for restoration of credibility; or a claim for restitution of unjust enrichment. There are presumptive provisions regarding the amount of damages that may arise as a result of the infringement of patent rights.

Acts of importing products that infringe patent rights are subject to border control measures under the Customs Act. Any intentional infringement of a patent right is also subject to criminal penalties.

The 2021 amendments to the Patent Act introduced a system of amicus briefs in which a third party's opinion can be requested upon the motion by a party in a patent infringement suit.

An applicant may apply to register a trade mark to be used in connection with goods or services pertaining to the business of the applicant. "Trade mark" in the Trademark Act is defined as any character, figure, sign or three-dimensional shape or colour, or any combination thereof; sounds; or anything else specified by Cabinet order that can be perceived by people.

A person requesting a trade mark registration must submit a written application to the Japan Patent Office. Upon filing an application, one or more goods or services for which the trade mark shall be used must be described in the written application. The legal requirements for the registration of a trade mark are:

  • the trade mark is to be used in connection with the goods or services for which the trade mark is registered;
  • the trade mark is capable of distinguishing itself from other goods or services; and
  • the trade mark is not unregistrable for reasons of public interest.

A trade mark right shall become effective upon successful registration. The duration of a trade mark right is ten years from the date of registration, but may be renewed by the holder of the trade mark right by filing an application for registration of renewal.

The holder of a trade mark right shall have an exclusive right to use the registered trade mark in connection with the designated goods or designated services. The holder of the trade mark right may also prohibit a third party from using a trade mark that is similar to the registered trade mark.

As for remedies for infringement, the holder of a trade mark right may file a claim for an injunction; a claim for disposal of infringing compositions, etc; a claim for damages; a claim for restoration of credibility; and a claim for restitution of unjust enrichment. There are presumptive provisions regarding the amount of damages that may arise as a result of trade mark infringement.

Acts of importing goods that infringe trade mark rights are subject to border control measures under the Customs Act. Any intentional infringement of a trade mark right is also subject to criminal penalties. In addition, under the 2021 amendment to the Trademark Act, the act of a foreigner causing a third party to bring the infringing goods from a foreign country into Japan is also considered to be "importation" and constitutes a use of a trade mark.

A creator of a design that is industrially applicable may be entitled to obtain a design registration for that design. "Design" in the Design Act is defined as the shape, patterns or colours, or any combination thereof, of an article (including a part of an article) or a building (including a part thereof), or a graphic image on a screen (including a part thereof; but such protection of a graphic image or a part thereof is limited to those for use in the operation of a device or those displayed as a result of a device performing its functions) that creates an aesthetic impression through the eye. Building interior designs are also eligible for a design registration under the Design Act.

A person requesting a design registration must submit to the Patent Office a written application. Drawings, photographs, models or specimens must be attached to the written application. The legal requirements for obtaining a design registration are:

  • industrial applicability;
  • novelty; and
  • the design is innovative and without precedent.

A design right shall become effective upon registration. The duration of a design right, in principle, expires 25 years from the date of the application for design registration.

The holder of a design right has the exclusive right to commercially exploit the registered design and designs similar thereto.

As for remedies for infringement, the holder of a design right may file a claim for an injunction; a claim for disposal of infringing compositions, etc; a claim for damages; a claim for restoration of credibility; or a claim for restitution of unjust enrichment. There are presumptive provisions regarding the amount of damages that may arise as a result of an infringement of design rights.

Acts of importing products that infringe design rights are subject to border control measures under the Customs Act. Any intentional infringement of a design right is also subject to criminal penalties. In addition, under the 2021 amendment to the Design Act, the act of a foreigner causing a third party to bring the infringing goods from a foreign country into Japan is also considered an "importation" and constitutes an implementation of a design.

A person who creates a work (the author) enjoys the moral rights of an author and the copyright with regard to the work. 'Work' in the Copyright Act is defined as a creatively produced expression in which thoughts or sentiments are expressed and that falls within the literary, academic, artistic or musical domain.

The moral rights of authors include:

  • the right to make a work public;
  • the right to attribution; and
  • the right to integrity.

The copyright includes the right of reproduction, the right of stage performance and the right of musical performance, the right of on-screen presentation, the right of public transmission, the right of recitation, the right of exhibition, the right of distribution, the right of transfer, the right of rental and the right of adaptation.

Certain neighbouring rights are also granted to performers, producers of phonograms, broadcasters and cable-casters organisations.

There are no formalities that have to be met in order to enjoy the legal rights under the Copyright Act.

The duration of a copyright begins at the time the work is created. A copyright subsists for a period of 70 years after the death of the author.

The copyright does not prohibit (and hence does not restrain other persons from) the reproduction of the work for private use, the exploitation of works concerning incidental subjects, work in the course of consideration and any other exceptions separately provided for in the Copyright Act. In recent years, a number of more flexible exceptions have been introduced to promote the use of artificial intelligence and big data.

If the ownership of copyright is transferred to another person, the licensee has the right to continue to use the work as a matter of course.

As for remedies for infringement, the author, the copyright holder, the holder of the right of publication, the performer or the holder of the neighbouring rights may file a claim for an injunction; a claim for disposal of infringing compositions, etc; a claim for damages; a claim for restoration of credibility; or a claim for restitution of unjust enrichment. There are presumptive provisions regarding the amount of damages that may arise as a result of an infringement of copyrights.

Acts of importing products infringing copyrights are subject to border control measures under the Customs Act.

Any intentional infringement of a copyright is also subject to criminal penalties. A copyright infringement is, in principle, a crime subject to prosecution after a complaint has been made. However, following the conclusion of the Trans-Pacific Partnership Agreement, distributing pirated copies of movies over the internet has become a crime in and of itself, and no longer requires a complaint. Finally, under the 2020 amendment to the Copyright Act, the scope of copyright infringement has been expanded to include acts such as providing hyperlinks to infringing content through “leech sites” and knowingly downloading pirated works.

Devices relating to the shape or structure of an article or a combination of articles are protected by the Utility Model Act without any requirement of a substantial examination to be conducted.

Computer programs contained in software are mainly protected by the Copyright Act as copyrighted works of program. Also, computer programs may be granted patents, provided that they involve hardware control or process-using hardware. Designs, flowcharts and manuals contained in software are protected by the Copyright Act as copyrighted works of language or of diagrams.

Databases are protected by the Copyright Act as work of databases if they are aggregates of data such as articles, numerical values, or diagrams, which are systematically constructed so that such data can be searched with a computer.

Trade secrets are protected by the Unfair Competition Prevention Act. "Trade secret" in this Act is defined as technical or business information useful for business activities, such as manufacturing or marketing methods, that are kept secret and that are not publicly known. A trade secret infringement may give rise to a suit for an injunction, a claim for damages or a claim for recovery of credit, etc. There are presumptive provisions regarding the amount of damages that may arise as a result of an infringement of trade secrets. In a lawsuit for the infringement of business interests by unfair competition, if a court decides that it is necessary to maintain the secrecy of trade secrets held by a party to the lawsuit, a confidentiality protective order or a suspension of disclosure (including omitting an examination of the parties) may be issued. A trade secret infringement with a high degree of illegality is also subject to criminal penalties.

New plant varieties are protected by the Plant Variety Protection and Seed Act. The 2020 amendment to the Plant Variety Protection and Seed Act clarified that it would be an act of infringement to export the propagating materials of the registered varieties to countries even if the breeder has not intended to export to such countries, or to cultivate them in regions even if the breeder has not intended to have them cultivated there.

The circuit layout of semiconductor integrated circuits is protected by the Act on the Circuit Layout of Semiconductor Integrated Circuits.

Against the backdrop of the COVID-19 pandemic, the 2021 amendments to the Patent Act, the Design Act and the Trademark Act provide for online oral hearings in the invalidation trials. Also, the 2021 amendments to the Design Act and the Trademark Act allow for an examiner's decision effecting the design or trade mark rights to be sent electronically via the relevant international organisations.

The Act on the Protection of Personal Information (APPI) is the main piece of legislation governing the handling of personal information by business operators (information handlers) in Japan.

Examples of APPI regulations with which information handlers are required to comply are as follows.

Purposes of Use

An information handler must specify the purposes for which it will process the personal information and must not process personal information beyond the scope of the specified purpose without first obtaining the consent of the relevant data subject (APPI, Articles 15 and 16).

Collection of Personal Information

An information handler must not collect personal information using fraudulent or other unjust means. In principle, an information handler must not acquire certain sensitive personal information without obtaining the data subject’s prior consent (APPI, Article 17).

If personal information is collected, an information handler must promptly notify the relevant data subject of, or announce, the relevant purposes of use (APPI, Article 18).

Limitation on Transfer of Personal Data to Third Parties

In principle, an information handler must not transfer personal data to third parties, including its affiliated companies, without the prior consent of the data subject (APPI, Article 23). Further, in principle, an information handler must obtain the prior consent of the relevant data subject before providing their personal data to a third party in a foreign country (APPI, Article 24). An information handler must keep records regarding transfer of personal data (APPI, Articles 25 and 26).

Security Measures

An information handler must take reasonable steps to keep personal data as accurate and up to date as is necessary to achieve the purposes of use (APPI, Article 19). An information handler must take all necessary and proper measures to ensure that personal data is kept secure from loss and from unauthorised access, use and disclosure (APPI, Article 20). Further, an information handler must exercise necessary and appropriate supervision over its employees who handle personal data and over its data management outsourcing entities to cause them to implement and comply with security measures (APPI, Articles 21 and 22).

Data Subject’s Right

Upon the request of a data subject, an information handler must give access to, and/or correct, their personal data or take other appropriate measures (APPI, Articles 27 to 33).

The APPI regulates the processing of personal information by information handlers in Japan. Therefore, foreign companies doing business in Japan must comply with the APPI when they process personal information.

In principle, the APPI does not apply to the processing of personal information outside Japan. However, if a foreign company that does not have an office in Japan has acquired personal information of a data subject in Japan in order to sell a good or provide a service to that data subject, the foreign company is required to comply with the APPI even if personal information of that data subject is processed outside Japan (APPI, Article 75).

The Personal Information Protection Commission (PPC) is the primary authority with oversight over the APPI. The PPC is an independent administrative commission that ranks at the same level of the national administrative hierarchy as the JFTC and the National Public Safety Commission. The PPC is composed of a chairperson and eight members, as well as a secretariat.

In the event of leaks of, loss of, or damage to personal data, an information handler is encouraged to file a notification to the PPC. The PPC can request a report from an information handler or conduct an on-site inspection, if necessary, for compliance with the APPI. If an information handler breaches the provisions of the APPI, the PPC will first advise the information handler to cease or correct the violation. If this advice is not followed, the PPC will then issue a formal order to take the action requested in the earlier advice if the violation of important individual rights is imminent. An information handler who fails to comply with the formal order may be subject to (in the case of an individual) a fine of up to JPY1 million and/or a prison sentence of up to one year and (in the case of a corporation) a fine of up to JPY100 million (APPI, Articles 40 to 42, 84 and 87).

The 2020 Partial Amendment to the Act on the Protection of Personal Information will take effect on 1 April 2022. Major changes under this Amendment are as follows:

  • improper use of personal information will be expressly prohibited;
  • information handlers will be obliged to report certain personal data leakages to the PPC and notify the affected data subjects of the same;
  • data subjects will be granted certain rights such as the right to designate the method of disclosure of their retained personal data, the right to demand the suspension of use of their personal data when a leak has occurred or there is a possibility for their rights or just interests to be infringed, and the right to demand for disclosure of records concerning the provision of personal data to third parties;
  • information handers will be obliged to provide the relevant data subjects with certain information such as the name of the country where a recipient is located and the personal information protection system of that country when it obtains consent from the relevant data subjects regarding provision of their personal data to a recipient located in a foreign country;
  • information handlers will be obliged to confirm and record certain matters when providing a recipient with information that is expected to become personal data once received by the recipient;
  • a new concept of “pseudonymously processed information” will be introduced, which means information that is processed in a way that prevents an individual from being identified unless the information is collated with other information; and
  • the scope of extraterritorial application will be expanded.
Anderson Mōri & Tomotsune

Otemachi Park Building
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Chiyoda-ku
Tokyo
100-8136
Japan

+81 3 6775 1000

+81 3 6775 2088

etsuko.hara@amt-law.com www.amt-law.com
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Trends and Developments


Authors



Oh-Ebashi LPC & Partners is a full-service law firm with over 140 attorneys, and with its main offices in Tokyo and Osaka. It was originally established in Osaka in 1981 and now has an equivalently sized operation in Tokyo. Oh-Ebashi was the first Japanese law firm to open an office in China. Together with its Nagoya Office, Oh-Ebashi currently has offices in four locations. Oh-Ebashi has been providing its clients with the best legal advice and solutions for decades, and is committed to consistently exceeding the clients’ expectations and being their ideal legal partner. The legal practice at Oh-Ebashi covers a broad range of fields, including corporate/M&A, risk management and compliance, intellectual property, life sciences, restructuring/insolvency, competition and antitrust/consumer protection, dispute resolution, finance and insurance, employment law, administration/regulatory law, tax law, international practice, Chinese/Asian practice, private practice, and pro bono practice.

M&A

Key developments in M&A law and regulation

As the amendment to the Companies Act, which was approved by the Japanese Diet in December 2019, came into effect on 1 March 2021, a new acquisition scheme called “Share Delivery” (Kabushiki Kofu) was introduced. Share Delivery allows a Japanese stock company to acquire the shares of another Japanese stock company using its own shares as consideration, making the target company its subsidiary. The tax law was also amended so that the shareholders of the target company are able to defer payment of any capital gains tax upon receipt of the acquiring company’s shares. The combined consideration of cash and shares is also available as long as the value of the cash consideration does not exceed 20% of the total consideration value. Historically, there have been few share exchange offers in Japan compared to other countries, but these are expected to increase because of the introduction of Share Delivery, even though Share Delivery is practically available only between Japanese stock companies.

Another key development affecting M&A transactions is that, early in 2021, Japanese courts issued notable decisions on anti-hostile takeover defence measures. Under conventional M&A practice in Japan, the issuance of share options, without contribution, to all shareholders excluding the hostile tender offeror has generally been used as a poison pill. Pursuant to this, a considerable number of companies adopted an anti-hostile takeover plan, a so-called rights plan, in which such companies may issue share options by approval of the board when certain conditions are met.

In March 2021, Nippo Ltd. issued share options against a hostile takeover by Freesia Macross Co., Ltd. At first, the issuance of the share options was invalidated by the Nagoya District Court in late March 2021, but the appeals court held the issuance of the share options to be effective in an April 2021 decision (this case is still under review by the Supreme Court of Japan as of 31 May 2021). Similarly, in March 2021, Japan Asia Group Limited also tried to issue share options against a hostile takeover by City Index Eleventh Co., Ltd (“CI11”). In April, CI11’s request for an injunction to suspend the issuance of share options was approved by the Tokyo District Court and the Tokyo High Court, and consequently, Japan Asia Group finally cancelled the issuance of the share options. In the case of Nippo Ltd., the Nagoya appeals court held Nippo’s issuance of the share options to be valid because the share options were issued not only with Nippo’s board approval, but the rights plan had also been consistently approved at Nippo’s annual shareholders' meetings since 2019. By contrast, the decisions in the Japan Asia Group case denied the issuance of the share options because they were issued only through board approval, and was not approved at the shareholders' meeting. These new court precedents may thus suggest that a rights plan should be adopted with shareholders’ approval obtained in advance, or, at least, the issuance of share options by board approval in emergency situations should be designed so that it can be cancelled by shareholders’ resolution.

Recent trends in the M&A market

As mentioned above, there have been some recent court cases on anti-hostile takeover measures. The reason for this is that the number of hostile takeovers has continued to increase in Japan since 2020, although almost all the M&A transactions in Japan are still friendly transactions. In particular, hostile takeovers have been announced not only by activist funds, but also by prominent listed companies. Recent examples include tender offers for:

  • Ootoya Holdings Co., Ltd. by Colowide Co., Ltd., announced in July 2020;
  • Shimachu Co., Ltd. by Nitori Holdings Co., Ltd., announced in October 2020;
  • Tokyo Rope MFG Co., Ltd. by Nippon Steel Corporation, announced in January 2021;
  • Nippo Ltd. by Freesia Macross Co., Ltd., announced in January 2021; and
  • Japan Asia Group Limited by CI11, announced in April 2021.

Before Itochu Corporation’s successful takeover of Descente Ltd. completed in March 2019, almost all hostile takeovers in Japan had failed. But recent hostile takeovers have been generally successful. In the tender offers referenced in the above examples, (i) to (iii) were successful, while (iv) and (v) were ongoing as of 31 May 2021. This trend may have resulted from the phenomenon that (i) cross-shareholdings among listed companies for business reasons have decreased following the amendments to the Corporate Governance Code announced by the Tokyo Stock Exchange in 2018, and (ii) the number of Japanese institutional investors employing the Stewardship Code is increasing and such investors have recently been inclined to accept better offers even though they are hostile.

Another trend is the increasing number of going-private transactions of listed subsidiaries. There were about 15 cases in 2020. Recent major examples of delisting of listed subsidiaries cover tender offers for:

  • Sony Financial Holdings Inc. by Sony Group Corporation, announced in May 2020;
  • NTT Docomo, Inc. by Nippon Telegraph and Telephone Corporation (NTT), announced in September 2020; and
  • FamilyMart Co., Ltd. by Itochu Corporation, announced in July 2020.

There had previously been a unique phenomenon in Japan where major listed companies had a tendency to hold the listing status of some of their subsidiaries to maintain their reputation. However, the Tokyo Stock Exchange announced its plan to review the listing classifications in February 2020, which will take effect in April 2022. Also, in June 2019, the Ministry of Economy, Trade and Industry issued the Fair M&A Guidelines, updating the prior MBO Guidelines issued in 2007, to ensure fairness not only in MBOs but also in acquisitions of a controlled company by a controlling shareholder. The expected review of the listing classifications caused major Japanese listed companies to initiate the delisting of their listed subsidiaries, while the Fair M&A Guidelines provided safe harbour rules for going-private transactions.  

Regulations on Foreign Investments

Foreign direct investments triggering prior-notification requirements

About one year has passed since the amended regulations on foreign direct investments (FDIs) in Japan under the Foreign Exchange and Foreign Trade Act (FEFTA) have taken effect. Under the FEFTA, when a foreign investor carries out an FDI targeting a Japanese company (the “Target Company”), and the Target Company and its subsidiaries conduct businesses relating to certain “Designated Business Sectors” that may have an impact on Japan’s national security, public order or public safety, then the foreign investor is required to file a prior notification before implementing such FDI. During the past year, cases that went through the prior-notification examination process have accumulated.

With regard to FDIs conducted through stock purchases, a prior notification is not required if the foreign investor complies with certain conditions. For example, the regular exemption conditions available to general non-Japanese investors (excluding state-owned enterprises) planning to invest in a Target Company conducting business in Designated Business Sectors (excluding certain specific core Designated Business Sectors) include:

  • the foreign investor and its closely related persons will not become directors or corporate auditors in the Target Company;
  • the foreign investor will not make proposals at shareholders’ meetings for the transfer or disposition of the Target Company’s business activities relating to the Designated Business Sectors; and
  • the foreign investor will not access non-public information about the Target Company’s technologies relating to the business in the Designated Business Sectors.

Notably, the threshold for the prior-notification requirement for stock purchases in a listed company was lowered from 10% to 1%, while even a single stock purchase in an unlisted company is enough to trigger this notification requirement.

If a foreign investor plans to purchase 1% or more shares in a listed Target Company (or a single share in an unlisted company), which conducts business in Designated Business Sectors, and such investor is unable to comply with the exemption conditions enumerated above, then such investor is required to file a prior notification with the Japanese government via the Bank of Japan in order to obtain regulatory clearance.

In March 2021, a subsidiary of the Chinese information technology company Tencent obtained a 3.65% stake in the online retailing and wireless carrier giant Rakuten Inc. without filing a prior notification. They explained that the deal was a purely financial investment that is exempt from prior notification. However, since Rakuten’s business involves a significant amount of personal information and Tencent is one of the representative companies entangled in the economic battle between China and the United States, it was reported that, for national security reasons, Japanese and US authorities will be monitoring if the foreign investor will commit any illegalities as a result of the investment, including accessing non-public information of Rakuten that is one of the conditions for the exemption explained above.

Outline of the prior-notification examination process

A foreign investor who files a prior notification must observe a statutory waiting period of 30 days from the date of the filing. During this period, the Ministry of Finance (MOF) and the relevant ministries will examine the contemplated investment. This period is often shortened to two weeks if the authorities do not need to scrutinise the investment. However, if they find the necessity to carefully scrutinise the investment for possible risks to national security, etc, then the waiting period may be extended for up to five months from the date of the filing.

The authorities may give recommendations to the foreign investor and, if the investor does not observe the recommendation, order the suspension or amendment of the investment. In addition, if the foreign investor fails to comply with the prior-notification requirement, or the waiting period or the order of the suspension or amendment, then the authorities may order the disposal of any acquired shares or impose any other remedial measures they deem appropriate. Criminal punishment is also stipulated for these violations.

Practical implementation of the prior-notification examination process

Factors that the authorities consider in the examination process are publicly available on the MOF’s website (in Japanese). The authorities, taking into account these factors, evaluate whether the intended investment poses any risk to national security, etc, mainly from the perspective of the following:

  • the attributes of the foreign investor;
  • the attributes of the Target Company; and
  • the purpose and effect of the contemplated investment.

In the process of the examination, in practice, the authorities send certain questionnaires to the foreign investor in order to obtain information regarding the above factors. Depending on the answers received from the investor, further questions may be asked. Frequent or typical matters included in the questionnaires include:

  • matters concerning the investor or affecting the business policies of the investor; and
  • matters concerning the notified investment.

Generally, relevant documents are also requested, including capital relationship diagrams of the investor group, schematic diagrams of the entire investment and related contracts, and summaries.

In practice, when the authorities recognise that the intended investment poses concerns to national security, etc, they terminate the examination and recommend to the foreign investor to include certain compliance requirements in the notification form in order to avoid the issuance of an order of suspension or amendment of the investment. The details of the compliance requirements are generally proposed to the investor by the authorities taking into consideration the information stated in the notification form and the answers to the questionnaires. These compliance requirements may be very similar to the regular exemption conditions mentioned above. If the investor withdraws the original notification and refiles a new notification containing the compliance requirements that the investor has agreed to, the waiting period could be shortened to four business days from the acceptance date. 

Labour and Employment

Influence of COVID-19

Teleworking

The COVID-19 pandemic continues to spread in Japan as the country experiences a fourth wave of increasing infections at the time of writing. To prevent the spread of infection, many companies have adopted teleworking as a new work style. For its part, the government has attempted to promote and encourage teleworking to make it common practice, and has amended the related guidelines on 25 March 2021.

These guidelines illustrate the government’s interpretation of some legal points, as well as set forth aspirational conduct when teleworking is implemented; for example, how working hours and maintaining workers’ health during the course of teleworking should be managed. Generally, employers should administer and record the working hours of each employee under the labour laws and take due care not to harm the workers’ health due to the working environment, including long working hours. The Labour Standards Act (LSA) currently allows employers to adopt an “off-site deemed working hours system”, but its requirements are strict and narrowly construed. The amended guidelines provide an interpretation that enables employers to adopt a system that is broader than usual.

Shutdowns and subsidies

The pandemic has caused a huge decrease in the business needs in some industries. Many companies were forced to shut down, in whole or in part, occasionally due to the state of emergency declarations made by the government. Under the LSA, if a leave of absence is taken due to reasons attributable to the employer, a leave allowance of 60% of the average wage must still be paid to the employee. Even if the leave is due to the influence of COVID-19, it is interpreted as a cause attributable to the employer unless force majeure is found, such as when the leave is due to the government’s request. The provision of subsidies by the government has been extended until the end of June 2021; however, it is not clear up to when the provision of subsidies will be extended.

Secondments

One of the ways by which employers are trying to survive the current circumstances is by utilising secondments. Secondments fall under “labour supply”, which is defined and regulated by the Employment Security Law under Japanese Law. Before COVID-19, the Ministry of Health, Labour and Welfare (MHLW) allowed secondments under certain limited purposes, such as for personnel exchanges within a corporate group. Recently, the MHLW provided new guidelines and clarified its policy of allowing more lenient, repetitive secondments in order to maintain employment. Companies with a surplus labour force may second their employees to companies seeking labour, which arrangement is endorsed by the guidelines.

Freelance guideline

In Japan, the freelance work style has been rapidly expanding, and this further expanded during the COVID-19 pandemic. The government has stated that it is necessary that an environment be created where individuals who so desire can choose to do freelance work. On 26 March 2021, under the joint names of several administrative agencies, including the MHLW, the “Guidelines for creating an environment where people can work with peace of mind as freelancers” were issued. The guidelines focus on protecting freelancers from the exploitative conduct of their clients, as well as provide the criteria for determining when labour legislation should be applied. Although the guidelines do not mention any social security, such as a workers’ accident compensation insurance system and/or an employment insurance system, as a safety net, the government recently began to consider including freelancers under the workers’ accident compensation insurance system. There are currently no moves pertaining to applying employment insurance or a minimum wage to freelancers.

Three Supreme Court cases on equal pay for equal work

In Japan, the number of non-regular workers has been increasing in the past 30 years, and their poor working conditions and treatment have become a social problem. Non-regular workers include fixed-term and part-time workers. The Labour Contract Act (LCA) was amended in 2012 to improve the treatment of non-regular workers. Article 20 of the LCA was adopted by Article 8 of the Act on Improvement of Personnel Management and Conversion of Employment Status for Part-Time Workers and Fixed-Term Workers, and these articles prohibit employers from setting an unreasonable disparity in the treatment of regular versus non-regular workers.

On 13 and 15 October 2020, three Supreme Court cases were rendered in this regard. The Supreme Court promulgated labour principles regarding the differentiation between regular and non-regular workers in the giving of retirement allowances (Metro Commerce case; Third Small Court), bonuses (Osaka Medical and Dental University case; Third Small Court), and various allowances and treatments (Japan Post case; First Small Court). Although all of them are case judgments, it is noteworthy that the Supreme Court endorsed the differentiation in basic salaries, bonuses and retirement allowances between regular and non-regular workers if the reason for such differentiation is to secure proficient human resources. This principle sanctions the more generous treatment of regular employees if the purpose of such treatment is to allow the employer to secure and retain competent workers. When this theory is applied, even if there is a considerable difference in treatment between regular and non-regular employees, such difference would not be considered unreasonable. Thus, the Supreme Court judged that the disparity in the treatments under both the Metro Commerce case and the Osaka Medical and Dental University case was not unreasonable.

On the other hand, in the case of Japan Post, the Supreme Court stated that, regarding peripheral, incidental allowances and other treatments, if the objectives and purposes thereof also apply to non-regular employees in light of the purposes of such allowances and treatments, then differentiating between regular and non-regular workers will be deemed unreasonable. 

Personal Information Protection

Enforcement

In March 2021, it was reported that the personal information of the users of LINE, a leading social networking service provider in Japan, was being stored in foreign countries, including China, and that there were issues with the processing of the information. In response, the Personal Information Protection Commission (PPC) requested LINE to report the relevant facts and conducted on-site inspections. As a result of this, the PPC issued an interim release in April 2021 announcing that it had provided guidance to LINE due to the latter’s problems in managing its processors, while stating that there were no major issues with the international transfers.

Recent amendments of the APPI

The Act on the Protection of Personal Information (APPI) is currently in the middle of one of the most extensive amendments since its enactment in 2003, with two amendments passed by the Diet in 2020 and 2021 awaiting implementation.

Latest update on the 2020 Amendment

The APPI amendments in 2020 added many new provisions. At present, the Cabinet Order and the Enforcement Rule have been enacted, and the draft of the PPC Guidelines was published in May 2021 and is currently open to public comment.

The amendments aim to reinforce personal information protection, including the following:

  • strengthening the data subject's rights;
  • regulation of certain information related to cookies;
  • mandatory reporting of certain data breaches to the PPC; and
  • strengthening rules on cross-border transfers.

In addition, it introduces a new concept of "pseudonymised data" to facilitate the use of data. The amendments will take effect on 1 April 2022.

2021 Amendment

Other than the 2020 Amendment, another amendment was enacted in May 2021. This amendment changes the entire personal information protection system in Japan. Currently, the APPI applies only to the private sphere, and the PPC oversees only that sector. In contrast, two laws, the Act on the Protection of Personal Information Held by Administrative Organs (APPIHAO) and the Act on the Protection of Personal Information Held by Incorporated Administrative Agencies, etc (APPI-IAA), control the national public institutions. Furthermore, the local governments' processing of personal information is regulated by their respective personal information protection ordinances. There is no independent supervisory authority for these public sectors.

The 2021 amendment of the APPI aims to integrate the rules for these public areas into the APPI. As a result, the private sector entities and most public sector entities will be subject to the amended APPI and supervised by the PPC.

This amendment is anticipated to facilitate the flow of data between the public and private sectors. The government also intends to negotiate with the EU to expand the latter’s adequacy decision with respect to Japan. Currently, the decision only covers the private sector.

Since the amendment will primarily integrate the rules for the public sector into the APPI, it will have less impact on private businesses than on public entities. However, certain companies, such as those conducting joint research with a university, may be affected.

The integration of the APPIHAO and the APPI-IAA will take effect in 2022, and the integration of the local government ordinances will take effect in 2023.

Regulation of digital platforms

On 1 February 2021, the Act on Enhancing Transparency and Fairness of Specified Digital Platforms came into effect. On 1 April 2021, the Ministry of Economy, Trade and Industry (METI) designated five online mall and app store operators – including Amazon, Apple and Google – as providers of specified digital platforms. The Act imposes several obligations on them, including disclosing the terms and conditions of transactions and submitting reports to the METI every year.

Currently, the government plans to apply the Act to online advertising platform providers. It will amend the Government Order on the Act to expand it in autumn 2021. Furthermore, at the same time, the Ministry of Internal Affairs and Communications will also provide guidelines for the processing of personal data in the context of online advertising by amending the Guidelines for Protection of Personal Information in the Telecommunications Business.

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Law and Practice

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Anderson Mōri & Tomotsune is a full-service law firm with over 500 professionals that is best known for serving overseas companies doing business in Japan since the early 1950s. It is proud of its long tradition of serving the international business and legal communities, and its reputation as one of the largest full-service law firms in Japan. Its combined expertise enables it to deliver comprehensive advice on all legal issues that may arise in the course of a corporate transaction, including those related to M&A, finance, capital markets and restructuring/insolvency, and litigation/arbitration. Most of its lawyers are bilingual and experienced with communicating, drafting and negotiating across borders and around the globe. The firm’s main office in Tokyo is supported by offices in Osaka, Nagoya, Beijing, Shanghai, Singapore, Ho Chi Minh City, Bangkok, Jakarta and Hong Kong. The article is assisted by the firm’s associates, Kohei Kajiwara, Kenichi Nakabayashi, Ayami Ogawa, Kensuke Inoue and Shunji Fukasaka.

Trends and Development

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Oh-Ebashi LPC & Partners is a full-service law firm with over 140 attorneys, and with its main offices in Tokyo and Osaka. It was originally established in Osaka in 1981 and now has an equivalently sized operation in Tokyo. Oh-Ebashi was the first Japanese law firm to open an office in China. Together with its Nagoya Office, Oh-Ebashi currently has offices in four locations. Oh-Ebashi has been providing its clients with the best legal advice and solutions for decades, and is committed to consistently exceeding the clients’ expectations and being their ideal legal partner. The legal practice at Oh-Ebashi covers a broad range of fields, including corporate/M&A, risk management and compliance, intellectual property, life sciences, restructuring/insolvency, competition and antitrust/consumer protection, dispute resolution, finance and insurance, employment law, administration/regulatory law, tax law, international practice, Chinese/Asian practice, private practice, and pro bono practice.

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