Japan has tightened its rules on investments by foreign investors in local companies engaged in strategic industries, giving it a broader say in mergers and acquisitions that could affect national security.
The changes, which took effect Friday, will bring Japanese rules closer to those in other large industrial nations like the U.S., the U.K., France, and Germany, which have safeguards in place to protect strategic industries from potentially hostile foreign owners. The new regulations come as M&As involving Japanese companies grow rapidly, and coincide with huge growth in pools of capital that can be deployed by growing ranks of foreign buyout firms, sovereign investment funds, and oil-rich investors. Over the last two years, the Japanese government has introduced guidelines on implementing "poison pill" takeover defenses and a scheme that limits the ability of foreign acquirers to use shares in buying Japanese firms. Both sparked criticism that Tokyo was putting up barriers to investment by foreign private equity firms and well-capitalized overseas corporations. Bankers say the new rules are unlikely to hamper most deal activity in Japan, though some transactions may require more time and paperwork. "It should not be taken as a more stringent (and anti-reformist) regulation, which would shackle hedge fund activity," Morgan Stanley economist Takehiro Sato wrote in a note to clients. Spearheaded by the Ministry of Economy, Trade and Industry, the new framework will give the government veto power in potential deals involving companies that make specialty steel, carbon fiber, machine tools, and other products deemed strategically important because they could be diverted to military use, such as the production of nuclear weapons or missiles. Scores of Japanese companies will be governed by the new rules, including Nippon Steel Corp., Sanyo Electric Co. and Toray Industries Inc., the world's largest maker of carbon fiber, which is used in Boeing Co.'s next-generation 787 passenger jet. The changes mark the first revision to Japan's safeguards on foreign direct investment since 1991. The new rules identify 137 items considered sensitive from a national security standpoint, clarifying the previous rules, which only named industrial sectors such as nuclear power, defense, and aerospace. Many of the old rules have been retained. A foreign investor seeking to buy a 10% or larger stake in an affected Japanese company must report the purpose and size of its planned investment 30 days before the transaction. If the buyer is targeting a listed company through a tender offer bid, it can file for clearance either when it announces the TOB or before it makes the bid public, a Japanese trade ministry official said. Both France and Germany require overseas investors to report about a month in advance and gain approval when buying into sensitive firms. In the U.S., foreign investment rules cover all industries. Washington, which is set to further tighten its rules this month, can even force changes to investments up to three years after the initial approval. In the U.K., the rules cover all mergers in all industries. | |
| Changes Target: China, Russia | |
| The impact of the changes is unclear. The old system didn't appear to be a large barrier. Of the 936 inward-bound M&A deals between 2000 and 2005, only 23 cases required prior approval and all got the green light, according to data from Thomson Financial and the Japanese government. Some foreign investors have already have made filings because of the expanded list of items that require them, a Japanese trade official said, adding that he couldn't disclose further details. Even deals announced before the changes could fall under the new system. That's because the filing has to be done 30 days before the actual or planned investment date and not the date the deal is announced, another trade official said. But he didn't know of any instances. If an investment falls through because of the new system, it may never become public because the government is supposed to keep the information confidential and investors may be reluctant to announce a failed deal. The stricter requirements will increase the time to complete some deals. At best, the vetting process will likely take about two weeks. But if Tokyo takes issue with a proposed transaction, it can extend the review period up to five months. That might be the case if, for example, the government wants significant changes to the deal, such as the divestiture of a sensitive business unit of a target company. Bankers said the prospect of more paperwork hasn't deterred potential acquirers. "Our overseas clients are also looking at Japan for acquisitions. As far as we can tell, METI's new rules really haven't changed their attitudes," said Tadashi Sato, an investment banking director at Nikko Citigroup. Indeed, Tokyo's security concerns aren't focused on traditional investors in Japan, namely corporations and funds from the U.S. and Western Europe, which account for the vast majority of investment. Rather, the authorities are wary of China, Russia, and Middle Eastern nations, said a government official, who spoke on the condition of anonymity. "The direction would be to approve (applications) from advanced, industrial nations," he said. Another official said there is concern that many of Japan's most technically advanced companies have relatively small market capitalizations, making them easy targets for investors with deep pockets. Cash-rich, sovereign wealth funds are becoming more acquisitive too. China recently launched a state-backed fund with an initial capitalization of $200 billion. | |
| Government's Top Priority To Increase National Productivity | |
To be sure, some investors have expressed concern the changes may be aimed at thwarting foreign private equity firms, hedge funds, and other profit-seeking players from buying large holdings in Japanese companies. They have cause for concern. Japan's most powerful business lobby, Keidanren, and some conservative politicians have pressured, sometimes successfully, for steps to restrict the freedom of foreign capital out of fear that marquee corporate names and key technologies could be gobbled up. "I don't blame them (activist funds) if they interpret the new provision as a discriminatory measure to drive them away," said Hiroshi Motoki, chief investment officer at AIG Global Investment Group in Tokyo. Still, most bankers say such concerns are overblown. What's more, curbing inward investment would hardly be in Japan's best interest, they add. With Japan's labor force shrinking and population aging rapidly, a top priority of the government is to increase the nation's productivity. Encouraging foreign direct investment, which brings better corporate governance, new technology and financial know-how, forms part of Tokyo's long-range plan: Japan aims to double the stock of direct investment to over Y25 trillion ($217 billion) by 2010. "If implemented too strictly, (the new rules) might affect foreign investors, who are a must (for the trading volume on the Tokyo Stock Exchange)," said Dalton Investments KK chief executive Junichiro Sano. "My worry is, then, what do you do?" | |
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