With the Japanese government actively implementing tax reforms, easing restrictions, establishing special national strategic zones and offering foreign investors various preferential policies, more and more Chinese investors have turned to Japan. This article discusses the paths of investment in Japan in light of the country’s corporate legal system. Chinese companies generally invest in Japan by the following means: setting up branch companies; establishing new subsidiaries; merging with or acquiring other Japanese companies (referring to unlisted companies herein).
Setting up branch companies. According to Article 818 of Japan’s Companies Act, foreign investors should go through registration in Japan before carrying out continual business activities. Specifically, setting up a branch company is the easiest way for a foreign business to establish presence in Japan as the branch company can immediately start business operations once its representative is finalized and necessary matters are registered. A branch company established in Japan is not qualified as an independent legal person in terms of the law, and its claims and liabilities should ultimately be attributed to the headquarters, which is the same with PRC Company Law.
Establishing new subsidiaries. To establish a subsidiary in Japan, a Chinese company may choose from various legal person forms such as kabushiki kaisha (KK, or joint-stock company) or gōdōgaisha (GK, similar to limited liability company) according to Japan’s Companies Act. Compared to GKs, it is easier to conduct business and raise funds through KKs thanks to their higher public credibility, so Chinese enterprises choose to set up KKs under most circumstances. A subsidiary is qualified as an independent legal person – it is independently responsible for its claims and liabilities and its shareholders are liable to the extent of their statutory contribution. Chinese companies often use their Japanese subsidiaries to establish joint ventures with local Japanese companies, or invest in Japan by having their Japanese subsidiaries invest in Japanese companies.
Merging with or acquiring Japanese companies. Mergers and acquisitions (M&As) are largely divided into M&A by agreement after one-on-one negotiations and M&A by bidding from multiple buyers. The former involves negotiations between both transaction parties, while the latter entails procedures for bidding and bids through which the seller determines the ultimate buyer after negotiations with multiple buyers. Actual cases have shown that in the M&A of Japanese enterprises, it is not always the highest bidder that wins. While price is a factor, the seller will also consider the acquirer’s purpose, acquisition plan, post-acquisition business policies, employee placement arrangements, etc. Therefore, Chinese enterprises are advised to conduct full investigation and research of acquisition targets and develop sound acquisition plans.
The advantages of investing by M&A are that they can save on upfront investment and market development expenses when entering the Japanese market, and can also make use of the business and management experiences and technologies of the target company. However, judging from the official Japanese government stance and public opinions, Japan is still cautious about the M&A of its companies by Chinese enterprises.
Resident offices. In addition, before formally entering the Japanese market, Chinese companies may first set up resident offices (which are functionally similar to the representative offices of foreign enterprises in China) as bases to conduct market survey, collect information, procure supplies, engage in advertising, promotion and other ancillary activities via their resident offices to fully prepare for their subsequent smooth market entry (but may not directly carry out business activities). Legally, there is no special domestic barrier to investment by Chinese enterprises in Japan. However, Chinese enterprises, as foreign investors investing in Japan, should comply with Japanese laws and regulations on foreign investors.
Industries reporting. According to Japan’s Foreign Exchange and Foreign Trade Act, Order on Inward Direct Investment and other relevant laws and regulations, foreign investors investing directly in Japan (including by setting up new legal persons or branch companies, acquiring from residents or resident enterprises in Japan the shares or equities of unlisted companies, acquiring from residents or resident enterprises in Japan the outstanding shares of a listed company or company traded on the over-the-counter market to the extent of reaching or exceeding 10% of the total number of outstanding shares of the said company, etc.) are required to go through ex ante filing or ex post reporting depending on the industries invested in. Most industries are eligible for ex post reporting, except for special industries involving national security (i.e. weaponry, aircraft, etc.), public order (i.e. electricity, gas, telecommunications, etc.) and public safety (i.e. vaccine manufacturing, etc.), where ex ante filing is required.
Concentration of business operators. When pursuing the M&A of Japanese companies, Chinese enterprises should, apart from considering whether the industries to be invested are subject to ex ante filing or ex post reporting, also pay attention to the provisions on the concentration of business operators under Japan’s Anti-monopoly Act. Where concentration transactions reach the thresholds for filing under the Anti-monopoly Act, Chinese enterprises shall submit their transaction plans to the Japan Fair Trade Commission in advance, and may not delay such filing or submit false information.
With Tokyo 2020, the Japanese Government has set a policy goal of bringing in35 trillion Yen of total direct investment to Japan by 2020. It is expected that Japan will further simplify its visa regime for foreigners, promote special national strategic zones, lower corporate tax and advance other reforms to create a better and more convenient investment environment for foreign investors, including Chinese enterprises, to enter Japan.
On 25 January 2018, PRC Ministry of Commerce and six other authorities jointly issued the Interim Measures on Reporting concerning Filed (Approved) Outbound Investments. It requires that having completed the filing (approval) procedures, Chinese investors should regularly report to the competent authorities key information related to their outbound investments, such as major investment problems and their compliance with local regulations. The occurrence of major infavourable incidents or unexpected security incidents should also be timely reported on a case-by-case basis.
In Japan, due to the peculiarity of the Japanese corporate organizational system, the conservativeness of the Japanese market and cultural differences in terms of regions and enterprises, it is important for Chinese enterprises to learn about local policies and regulations, source suitable partners and consider how to operate effectively in Japan before committing to investment in Japan. In response to the challenges, it is advisable to work with lawyers familiar with legal issues in both China and Japan.
Feng Jianjian is a partner at Jingtian & Gongcheng. He can be contacted on +86 21 2613 6221 or by email at email@example.com
Zhang Bo is an associate at Jingtian & Gongcheng. He can be contacted on +86 21 2613 6299 or by email at firstname.lastname@example.org