The Year to Come and Year in Review summarise a selection of major developments you should be aware of from 2021, and a selection of key developments expected in 2022.
Key updates to
8
major legal developments in 2021 and 2022
2021 saw some important legal and regulatory developments that impacted our clients and their businesses. Our review aims to give you an overview of the key changes and looks ahead at what 2022 may bring.
Peter Frost, Managing Partner, Japan
Regulatory issues for financial institutions regulated in Japan in trading of emission allowances and carbon credits:
Owing to the global commitment to reduce greenhouse gases and achieve net-zero carbon emissions, the volume of emission allowances traded at on major emission trading systems (ETSs) and carbon credits issued in voluntary carbon markets have increased. Market participants are paying closer attention to these markets, but it should be noted that clearance is required for financial institutions regulated in Japan (such as banks, insurance companies and financial instruments business operators engaging in type 1 business (Type 1 FIBOs), including securities firms, collectively, Japanese FIs) before launching trading activities (which includes those of intermediaries, brokers or agencies). Emission allowances or carbon credits (including derivatives) are not subject to Japanese regulations unless such assets are embedded in the securities or other types of assets regulated in Japan. However, issues exist in confirming whether Japanese FIs are permitted to deal in a specific emission allowance/carbon credit. Although this is now a hot topic in Japan, the relevant laws and regulations are not brand new, and therefore issues arise.
The Banking Act provides a list of permissible businesses in which banks can conduct business in. This approach is also taken for other deposit-accepting institutions and insurance companies. Type 1 FIBOs are also subject to similar statutory restrictions under the Financial Instrument and Exchange Act, although there are certain exemptions. Under the above-mentioned Acts, the trading of “carbon dioxide equivalent quota and other similar substances” (including derivatives and activities of an intermediary, broker or agency) are included in the aforementioned list. Therefore, if all allowances/carbon credits that a Japanese FI wishes to trade fall within this category, the regulatory question here would be clear. However, it should be noted that the term “carbon dioxide equivalent quota” is defined in the Promotion of Global Warming Countermeasures Act (enacted in 1998 based on the Kyoto Protocol) and has not been updated since. Further, the definition of “other similar substances” is vague, and no further guidance has been given on its meaning by the Japan’s Financial Services Agency (JFSA), the relevant regulator. In this respect, JFSA has concluded that an analysis is required for each particular allowance/credit to determine if it falls within this category. Given that there are various ETSs and voluntary carbon credit mechanisms, JFSA’s position is understandable; even so, market participants need to consider getting clearance with JFSA.
Amendments to the law on data protection:
The amendments to the Act on Protection of Personal Information that were promulgated on 12 June 2020 will become effective on 1 April 2022. The amendments include, among others, expanding the rights of a data subject (e.g. it is now easier to request the suspension or deletion of personal data), a mandatory reporting obligation in the case of data leakage, more severe criminal sanctions (which have been effective since 12 December 2020), and tougher requirements for overseas data transfer. These amendments are in line with the approach taken globally, such as GDPR.
Japan offshore wind round 2 and 3 auctions:
In addition to the announcement of the Happo Promotion Area, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) also created four new potential promotion areas. These comprise the sea areas off the coast of (i) Oga City, Katagami City and Akita City, Akita, (ii) Yuza Town, Yamagata, (iii) Murakami City and Tainai City, Niigata and (iv) Isumi City, Chiba. Together with the three existing potential promotion areas (i.e. the sea areas off the coast of (i) the northern side and (ii) the southern side of the Sea of Japan off the coast of Aomori and (iii) Enoshima, Saikai City, Nagasaki), there are now seven potential sites awaiting designation as a promotion area in 2022.
In addition, the METI and MLIT also identified 10 future candidate sea areas for offshore wind projects, five of which are located in Hokkaido. These are potential round 4 and 5 project areas, and this announcement indicates that METI and MLIT have been making steady progress in the long-term development of offshore wind projects in Japan.
Hydrogen:
Hydrogen (together with fuel-use ammonia) was listed as one of the 14 priority sectors in the Green Growth Strategy issued by the Japanese Government on 25 December 2020 and 18 June 2021. This indicated a specific numerical cost-reduction target of 30 JPY/Nm3 and 20 JPY/Nm3 by 2050, and the introduction of a target of up to 3 million tons per year by 2030 and up to 20 million tons per year by 2050 for hydrogen. The Government’s proposed energy mix in 2050 also features hydrogen and ammonia as a 10% energy source, together with renewables at 50-60% and nuclear, CCUS and/or carbon recycling at 30-40%. There are a number of ongoing and future hydrogen-related research and development projects, and hydrogen will continue to be a key focus of Japanese energy policies in 2022.
Change in the filing process related to the Specially Permitted Businesses for Qualified Institutional Investors, etc.:
As part of the Japanese Government’s initiative to optimise the regulatory filing process by computerising administrative procedures, from the beginning of April 2022, all applicants for Specially Permitted Businesses for Qualified Institutional Investors, etc. will be required to file the notification and exhibits through an online system provided by the Financial Service Agency of Japan (available on the gBizID website). All applicants are encouraged to acquire a user ID for the online system in advance to complete the filing in a timely manner.
Amendments to the Banking Act:
In March 2021, Japan’s Financial Services Agency (JFSA) submitted to the 204th ordinary session of the Diet a revised Banking Act (2021 Amendments). This was passed by both Houses of Parliament and promulgated on 26 May 2021. The 2021 Amendments are expected to come into force in November 2021 and aim to create a framework to support the transformation of the social structure and regional development.
Amendments to the Companies Act:
The amendments to the Companies Act made in December 2019 came into force on 1 March 2021. Among others, the amendments introduced a statutory share delivery (kabushiki koufu) as a new method for M&As in Japan. Prior to the amendments, there were methods that allowed companies to use their own shares as consideration, such as a statutory share exchange (kabushiki koukan). However, a statutory share exchange was only available when the target company is a wholly-owned subsidiary, which prior to the amendments, was difficult. The amendments have rectified this. Companies can now use their shares as consideration to make the target company a subsidiary by simply using the statutory share delivery scheme.
To conduct a statutory share delivery, the acquiring company must prepare a share delivery plan (kabushiki koufu keikaku), notify the shareholders of the target company of its contents and make a request for transferring the shares of the target company in exchange for the shares of the acquiring company. Further, depending on the size and nature of the parties, the acquiring company may need to have its shareholders approve the share delivery plan.
A statutory share delivery is only available for Japanese stock companies (kabushiki kaisha). In addition, when acquiring the shares of a listed company through a statutory share delivery, the acquiring company may also need to go through a tender offer bid process under the Financial Instruments and Exchange Act.
Japan offshore wind round 1 and 2 auctions:
Offshore wind projects in Japan have continued to make significant progress in 2021. The METI and MLIT announced the bid award for the promotion area off the coast of Goto City, Nagasaki on 11 June 2021. The METI and MLIT are expected to announce the bid awards for the fixed bottom Round 1 offshore wind projects (the sea areas off the coast of (i) Choshi City, Chiba, (ii) Noshiro City, Mitane Cho and Oga City, Akita, and (iii) Yurihonjo (North and South)) in November or December 2021.
In the meantime, on 13 September 2021, the METI and MLIT announced the designation of the sea area off the coast of Happo Town and Noshiro City, Akita (Happo Promotion Area) as a round 2 promotion area, and the public consultation process for the auction guidelines was launched on 11 October 2021. The public auction for the Happo Promotion Area is expected to be launched in December 2021 or early 2022.
In addition to the development of these projects, the port area offshore wind projects have also made steady progress. Among others, the installation of the monopiles for the offshore wind project in the port area of Akita prefecture were completed in September 2021. According to the current project plan, the wind farm for this project will commence operation by the end of 2022.
New sectors to be included under foreign direct investment scheme:
Currently, the Foreign Exchange and Foreign Trade Control Act of Japan (including related regulations/public notices) requires a pre-closing approval for foreign investment into certain sensitive businesses. In November 2021, the Japanese Government added the following sectors as sensitive businesses which require a pre-closing approval upon acquisition:
- Sectors pertaining to 34 critical minerals including rare earths (e.g. metal mining and related business including manufacturing of related devices/products, software and component analysis); and
- Construction-related businesses developing port facilities or vessels on Designated Remote Islands for mineral exploration. Designated Remote Islands are specified by a Cabinet Order and currently include Okino-Tori-shima and Minami-Tori-shima.
Amendment to the Industrial Competitiveness Enhancement Act and Other Related Acts:
The act partially amending the Industrial Competitiveness Enhancement Act and Other Related Acts (Acts) took effect on 2 August 2021.
The amendment introduced an exception (Exception) to the restriction on investments in non-Japanese securities, etc. by the Investment Limited Partnership (toushi jigyo yugen sekinin kumiai, the Investment LPS). Under the Limited Partnership Act for Investment, an Investment LPS is required to maintain the total acquisition price of non-Japanese securities at less than 50% of the total amount of contributions paid by the partners to the Investment LPS. The Exception allows an Investment LPS that satisfies the following requirements to invest in non-Japanese securities exceeding this 50% limitation:
- (i) the business of the Investment LPS falls within the Specified Investment for Supporting the Utilisation of External Management Resources (gaibu keiei shigen katuyou sokushin toushi jigyo);
- (ii) the Investment LPS obtains an authorisation from the METI on its Plan for Specified Investment for Supporting the Utilisation of External Management Resources (gaibu keiei shigen katuyou sokushin toushi jigyo keikaku; the Investment Plan); and
- (iii) the Investment LPS obtains prior confirmation from the METI on each acquisition of non-Japanese securities, etc., (provided that, an ex post facto confirmation will suffice if, after the relevant acquisition, the percentage of the total acquisition price of non-Japanese securities remains less than 50% of the total amount of contributions paid by the partners to the Investment LPS).
The authorisation process (item (ii) above) and confirmation process (item (iii)) are expected to take two to four weeks respectively. In addition, an applicant for authorisation from the METI on its Investment Plan will be required to consult with the METI before submission of its application documents to discuss whether the requirements set out below (in particular, item (b)) are met and the consultation process is expected to take two to four weeks.
The Acts provide for requirements to obtain the authorisation set out in item (ii). The requirements include, among others:
- (a) (with certain exceptions) the term of Investment LPS shall not exceed 10 years;
- (b) investments to be made by the fund shall be expected to enhance the international competitiveness of Japanese industry;
- (c) the key persons of the Investment LPS shall provide management and/or technical guidance to the investee companies; and
- (d) the Investment LPS shall not make investments only to pursue financial returns.
Key contacts for Japan
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