"Japan Strengthens Prior Notification System for Foreign Stock Acquisition... South Korea Should Also Take Note"

[Asia Economy Reporter Su-yeon Woo] As Japan recently strengthened its pre-notification system for foreign capital acquisition of domestic stocks to protect key industries, there is a claim that Korea should also refer to such cases.

On the 14th, the Korea Economic Research Institute announced this through a report titled "Regulation of Foreign Investment for the Protection of National Key Industries - Focusing on the Case of Japan," commissioned to Professor Emeritus Junseon Choi of Sungkyunkwan University.

According to the report, Japan significantly revised the "Foreign Exchange and Foreign Trade Act (hereinafter referred to as the Foreign Exchange Act) Ordinances and Notices" from 2019 to 2020 to tighten the pre-notification requirements for foreign investors acquiring shares of listed companies and other Japanese firms. The purpose was to secure government-level responsiveness to foreign investments that could undermine the stability of national key industries.

First, Japan strengthened the acquisition ratio subject to pre-notification from the previous 10% to 1% starting in May last year, and secondly, expanded the industries subject to pre-notification. Initially, the target industries were aircraft, nuclear power, electricity and gas, telecommunications and broadcasting, and air transportation, but from August 2019, the notice was revised to include integrated circuit manufacturing and others to prevent national defense production and technology leakage. The law allows the government to order the sale of shares in cases of investment without notification or violation of investment change or suspension orders by foreign capital.

According to the Japanese Ministry of Finance, as of July 2020, 56.5% of all listed companies in Japan (3,822 companies) are subject to pre-notification. Not only representative companies such as automobile companies like Toyota and Honda, and electronics companies like Sony, Toshiba, and Sharp, but also delivery application Demaekan and bathhouse chain Gokurakuyu Holdings were included in the notification target due to business connections with subsidiaries.

Meanwhile, the Japanese Ministry of Finance established a "pre-exemption system" to complement the system to dispel concerns that the above amendments to the Foreign Exchange Act could deter foreign investment. Specifically, a comprehensive exemption system was introduced for financial institutions and funds such as sovereign wealth funds, and a general exemption system for investors other than financial institutions, exempting pre-notification obligations up to a 10% share acquisition ratio if they do not engage in shareholder activism activities such as shareholder proposals and executive appointments.

The report also mentioned that not only Japan but advanced countries such as the United States and Europe are strengthening regulations on foreign capital investment in their domestic markets. The United States fully implemented the "Foreign Investment Risk Review Modernization Act" from February 2020, and the European Union (EU) strengthened foreign investment regulations at the member state level and began applying EU regulations on cooperation and information sharing systems regarding inward direct investment between the EU and member states from October last year.

Professor Choi pointed out, "Investments aimed at acquiring sensitive technologies are increasing by avoiding countries where inward direct investment management has recently been strengthened," and emphasized, "To prevent Korea from becoming a 'loophole' for sensitive technology leakage, it is necessary to strengthen pre-notification for investments in core industries while simultaneously introducing a pre-notification exemption system to establish a foundation for smooth and continuous foreign investment."

This content was produced with the assistance of AI translation services.