Japanese Companies Barred from Using National Security Designation to Thwart Takeovers

Japanese Companies Barred from Using National Security Designation to Thwart Takeovers

A senior finance ministry official in Tokyo has stated that Japanese companies cannot utilize a national security designation to impede foreign takeovers, dispelling speculation that Japan’s Foreign Exchange Act could be exploited for protectionist purposes. This statement comes in the wake of media reports indicating that retail conglomerate Seven & i Holdings is seeking classification as “core” to national security under the Foreign Exchange and Foreign Trade Act (FEFTA) to avert a buyout offer from Canada’s Alimentation Couche-Tard.

Classification Process Remains Unaltered for “Core” Designation

The official clarified that the “core” classification does not alter the government’s review process for foreign bids involving companies deemed significant to Japan’s economy or national security. Seven & i, valued at $38 billion, currently holds a classification as a company operating “designated,” not “core,” businesses. Sectors classified as “core” include those crucial for national security, such as nuclear power, space, and semiconductors.

Prior Notification Requirements

Foreign entities must adhere to stricter requirements for prior notification when acquiring stakes in companies with businesses classified as “core.” However, the official emphasized that prior notification is mandatory for acquiring control in any “designated business,” regardless of whether the target company is “core” or “non-core.”

Scrutiny Unaffected by Classification

The official stressed that the classification does not influence the level of scrutiny during the national security review, stating that the government will “examine whether the transaction would pose risks to national security.” The finance ministry’s classification list regarding prior notification requirements is derived from surveys of all listed companies and does not require government approval.

Seven & i’s Response to Survey

When questioned about the reported pursuit of the “core” designation, Seven & i confirmed its timely submission of a response to the ministry’s latest survey, outlining the company’s current structure and businesses. The survey, according to the company, is unrelated to Couche-Tard’s buyout proposal. Convenience stores, Seven & i’s primary business, fall outside the sectors requiring FEFTA review, but the conglomerate has interests in various sectors, including finance and security.

Historical Precedent

In 2008, Japan blocked the London-based Children’s Investment Fund from acquiring shares in Electric Power Development Co, known as J-Power, marking the lone instance of a transaction being rejected under the FEFTA. However, other instances have involved modifications or withdrawals of plans during the review process.