12 January, 2017
Year in Review – Japan Law in 2016
EU Market Abuse Regulations: In July 2016, the Market Abuse Regulation of the EU (“MAR”) came into effect. MAR extends the scope of the Market Abuse Directive, the predecessor legislation which it replaces, and is generally applicable to any company which has securities listings on a regulated market or MTF market within the EEA. MAR has extended the scope of the disclosure of insider information, preparation of insider lists and market sounding. In particular, a non-Japanese issuer which both has securities listed in the EEA and is contemplating offering securities into Japan will need to consider the impact of MAR on the common practice of pre-sounding in samurai bond offerings.
Supreme Court Decision on Acquisition Price: On 1 July 2016, the Supreme Court made a decision on the acquisition price of Z-shares (zenbu shutoku joukou tsuki shurui kabushiki) following a takeover bid. KDDI Corporation and Sumitomo Corporation, majority shareholders of Jupiter Telecommunications Co., Ltd. (“JCOM”), conducted a takeover bid for shares in JCOM and, following the bid, the shares of the minority shareholders who had not agreed to the bid were acquired via Z-shares. Some of the minority shareholders claimed that the proposed acquisition price, which was equal to the price offered in the takeover bid, was not a fair price, and they filed a petition for the acquisition price of the shares to be determined. The Supreme Court found that the acquisition price of the shares should be equal to the takeover bid price considering the following facts: (i) certain procedures, which would exclude any arbitrariness in the decision process, had taken place, and the takeover bid was conducted in a manner that is generally accepted as fair; and (ii) there were no exceptional circumstances that caused any unexpected variation in the facts used as a basis for the acquisition. Read more…
Labour Regulations on Reorganisation: On 1 September 2016, the following amendments and guidelines came into force: (i) Amendment to the Ordinance for Enforcement of the Act on the Succession to Labour Contracts upon Company Split; (ii) Amendment to the Guidelines Necessary to Promote the Appropriate Implementation of Measures that the Split Company and Successor Company, etc., Should Take regarding Succession of Labour Contracts and Collective Agreements Entered into by the Split Company; and (iii) Guidelines on Points of Attention for Company, etc. regarding Merger or Transfer of Business.
Amongst other things, in the case of a company split, (i) and (ii) expand the scope of the employees with whom the transferor company must consult, as well as the content of the notifications to be sent to certain employees and said consultations. In the case of a business transfer, (iii) newly requires the transferor company to have a consultation with the employees who will be transferred and with the labour union or a representative of a majority of the employees.
Unfair Competition Prevention Act: The amended Unfair Competition Prevention Act came into force on 1 January 2016. The purpose of the amendment is to strengthen trade secret protection. The amendment (i) expands the scope of trade secrets protection (e.g. expands the scope of punishment for crimes committed outside Japan and provides penalty provisions for attempted crimes), (ii) strengthens deterrence against the invasion of trade secrets (e.g. raises the maximum amount of fines and provides confiscatory regulations), and (iii) improves effective civil remedies (e.g. extends the statute of limitations and shifts the burden of proof to the defendant in certain cases).
Margin requirements for non-centrally cleared derivatives: On 1 September 2016, a set of new regulations for financial institutions (e.g., banks and type 1 financial instruments business operators) which set out the requirements for exchanging variation margin and initial margin when trading non-centrally cleared derivatives (the “Japan Margin Rules”) was implemented. These regulations follow an international policy framework dealing with margin requirements for non-centrally cleared derivatives agreed by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. The Japan Margin Rules are phased in so that only the financial institutions belonging to large financial groups (in Japan, institutions such as MUFG and Nomura) (the
“Phase-one Firms”) are subject to the Japan Margin Rules at present.
Financial Instruments and Exchange Act: An amendment to the Financial Instruments and Exchange Act (“FIEA”) in respect of the exemption for special business activities for Qualified Institutional Investors (the “Article 63 Exemption”) was enacted on 27 May 2015 (the “Amendment”) and came into force on 1 March 2016.
In summary, the Amendment expands the obligations of persons utilising the Article 63 Exemption of the FIEA. The obligations newly introduced by the Amendment include, amongst others, (i) disclosure of information on the internet, (ii) submission of annual business reports to the regulator, (iii) disclosure of annual explanatory documents to the public, (iv) delivery of semi-annual investment management reports to investors, and (v) preparation of certain accounting books in line with the FIEA requirements. In addition, the volume of information that must be provided in the notification under the Article 63 Exemption has been increased by the Amendment. The Amendment applies to persons who have been utilising the Article 63 Exemption since before the Amendment (allowing a grace period in certain cases). Read more…
Amendment to the Banking Act: An act amending the Banking Act and other various acts to facilitate and promote financial technology or “FinTech” was promulgated on 3 June 2016 and will become effective within one year from that date.
The amended Banking Act will provide that, subject to governmental approval, a company that contributes, or is expected to contribute, to the advancement of a bank’s business or the convenience of its customers through its IT or other technology may be regarded as a new type of Category Company that will be exempt from the Shareholding Restriction and the Subsidiary Restriction (each capitalised term is defined below). Read more…
Amendment to the Act on Prevention of Transfer of Criminal Proceeds: The amended Act on Prevention of Transfer of Criminal Proceeds came into effect on 1 October 2016. The amendments contain a number of changes that will affect the customer due diligence requirements of financial institutions (including banks, insurance companies and securities companies; each a “Specified Business Operator”) when they enter into a specified transaction with their customers, such as providing loans, entering into insurance contracts, selling securities, etc. Read more…
Japan ratified Paris Agreement: On 8 November 2016, Japan ratified the Paris Agreement on fighting global warming, joining the landmark accord creating a new international framework for reining in greenhouse gas emissions that involves nearly all developed and developing nations.
In accordance with the deal, Japan plans to cut greenhouse gas emissions by 26%from 2013 levels by 2030 by switching to more efficient means of power generation: promoting the use of energy-saving light bulbs; restarting nuclear reactors; and supporting the development of renewable projects. Japan also aims for an 80% cut in emissions by 2050.
Amendments to revise the Renewable Energy Act: On 25 May 2016, the Diet, Japan’s parliament, enacted a bill to revise the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities (denki jigyou-sha niyoru saiseikanou enerugi-denki no chotatsu ni kansuru tokubetsu sochihou) (Act No.108 of 30 August 2011, the “Renewable Energy Act”). The Renewable Energy Act provides the country's feed-in tariff program (the “FIT program”), which requires power firms to buy electricity generated with renewable energy at fixed prices, with the aim of reducing the financial burden on end-consumers.
Under the revised Act, which is set to take effect in April 2017, a reverse auction system will be introduced to determine purchase prices for electricity generated by large-scale solar power systems. Read more…
Year to come – Japan Law in 2017
Act on the Protection of Personal Information: An act to amend the Act on the Protection of Personal Information was promulgated on 9 September 2015. Apart from a few exceptions that have already come into force (such as the establishment of an independent data protection authority), the amendment will come into force within two years from the date of promulgation. The amendment, among other things, (i) clarifies the definition of “personal information” and sets rules for processing “sensitive personal information”, (ii) permits the transfer of “anonymous processed information” (so-called big data) to a third party without obtaining the prior consent of the data subject, and (iii) sets certain restrictions on the transfer of data to countries where the level of data protection is insufficient.
VM (variation margin) Big-bang: From 1 March 2017, all financial institutions subject to supervision by the Financial Services Agency of Japan (the “JFSA”) (including small and medium-sized local financial institutions) will be required to exchange variation margin in accordance with the Japan Margin Rules when conducting non-centrally cleared derivatives with financial institutions. This is also the date for margin requirements with respect to variation margin to be implemented globally, and therefore it will be one of the biggest challenges for financial institutions in Japan to comply with those margin requirements in various jurisdictions (tens of thousands credit support arrangements will need to be agreed by then). Financial institutions, regulators (including the JFSA), industry organisations such as International Swaps and Derivatives Association, Inc. and law firms are very keen to support a successful VM Big bang implementation.
Japan’s overseas investment into infrastructure: The Japanese government seeks to invest in infrastructure in various regions. It intends to propose wide-ranging cooperation with Russia. Japan also seeks the chance of exporting high-speed railway technology including the construction of a 350km high- speed rail (HSR) line linking Bandar Malaysia in Kuala Lumpur with Singapore via six intermediate stations. Both projects are strongly supported by the Japanese government, and we expect to see more outbound projects in the social infrastructure sector.
Virtual currency regulation to be newly implemented: On 25 May 2016, the Japanese lawmakers passed a bill that includes amendments to the Payment Services Act (the “PSA”) and the Act on the Prevention of Transfer of Criminal Proceeds (the “Criminal Proceed Transfer Act”), both of which will regulate virtual currency exchange transactions.
The introduction of regulatory oversight of virtual currency related transactions is aimed at protecting the users of virtual currencies and ensuring that transactions are transparent and safe. In this connection, Mt. Gox, which previously operated the largest bitcoin exchange in the world, abruptly shut down all transactions of the virtual currency in 2014 after losing bitcoins worth about USD 480 million due to computer hacking. The CEO of Mt. Gox was arrested on suspicion of embezzling clients’ cash that was held in the company’s bank account. Mt. Gox reportedly kept clients’ funds and the company’s money in the same bank account, and investigators suspect that the CEO used the clients’ funds after the firm’s debts exceeded its assets in 2013. Furthermore, a virtual currency’s most unique characteristic, and the one thing that makes it different from conventional money, is that it is decentralized.
Accordingly, no single institution controls the bitcoin network, and this puts some people at ease because it means that a large bank can’t control their money. The Financial Action Task Force (the “FATF”) suggests that convertible virtual currencies are likely to present anti-money laundering/counter terrorist financing (“AML/CTF”) risks, and the FATF requested Japan, among other countries, to make efforts on cracking down on AML/CTF in respect of risky convertible virtual currencies, including bitcoins. This new law is expected to have adequate AML/CTF measures in place.
Before the amendment to the PSA, bitcoin trading platforms were able to operate freely under Japanese law without any registration and were not subject to Japan’s stringent Banking Act and Financial Instruments and Exchange Act. However, following the amendment, virtual currency exchanges are now regulated by the relevant authorities.
Namely, under the amended PSA, “virtual currency” means (i) monetary value that can be used by unspecified persons (or transferred to unspecified persons) in exchange for the purchase or borrowing of goods or the provision of a service, and they can be traded via an electronic data processing system, or (ii) monetary value that can be mutually exchanged with an unspecified person (as the counterparty) and can be transferred via an electronic data processing system.
The following person or entity falls under the category of a virtual currency exchange operator (“VCEO”): a person or entity that, in the course of trade, engages in (i) purchases and sales of the virtual currency or exchanges the virtual currency for another virtual currency; (ii) an intermediator or agent of the above transactions; or (iii) custody or safekeeping services in relation to a dealing or broking transaction set forth in (i) or (ii) above. Such person or entity is required to register with the Prime Minister as a VCEO. A foreign entity that engages in the virtual currency exchange business outside of Japan and does not obtain such registration with the relevant regulator shall be prohibited from making solicitations of the businesses indicated in (i) through (iii) above to a resident in Japan.
A VCEO shall maintain a sufficient financial basis to soundly perform the business concerned, take necessary measures to safely control data and information, prepare and preserve the books, manage customer assets separately from corporate assets and submit an annual business report to the relevant regulator. In addition, the new regulation calls for mandatory checks on a VCEO by a certified public accountant or auditing firm in order to inspect how the VCEO is managing its assets and verify its financial statements. The Prime Minister’s role is to inspect a VCEO, issue an order to improve its business operation or suspend or revoke the registration as a VCEO.
Following the amendment, a VCEO is now categorized as a “Specified Business Operator” under the Criminal Proceed Transfer Act. Accordingly, a VCEO is required to confirm the identities of its customers at the time of any transaction and to report any suspicious trading to the relevant authorities.
Finally, the amendments left unclear whether the simple purchase of virtual currencies would be subject to Japanese tax. According to an official at the National Tax Agency, bitcoin purchases will likely be subject to Japanese consumption tax unless they are singled out for exemption. In this regard, Japan’s regulatory approach seems to differ from that taken by other G7 countries that treat virtual currencies almost identically to other currencies in terms of taxation. However, the Japanese Financial Services Agency (the “JFSA”) indicated that it is not aggressively promoting the use of virtual currencies, which explains why the agency only asked the relevant tax authorities for clarification on the tax treatment of virtual currency transactions. As of the date of this newsletter, the JFSA does not seem to be making any moves towards requesting that a consumption tax not be levied on virtual currency transactions. Neither the Japanese legal system nor any regulations recognise sales and transactions made by way of virtual currencies at present, and therefore virtual currency transactions are expected to face many issues and problems going forward.
For further information, please contact:
John Maxwell, Partner, Linklaters