Editors note: Japan's new rules require that foreign investors must notify their finance ministry before buying one percent of many companies. This will help their national security but it will also drive down the already-undervalued yen so their exports are even more competitive.
Activists wary after finance ministry names stocks covered by law on foreign investment
[Robin Harding and Leo Lewis | May 8, 2020 | FT]
Hot springs, fountain pens and baseball stadiums are core to Japan’s national security and require clearance for foreign investment, according to a long-awaited list of companies published by the nation’s finance ministry.
Publishing the list after the market closed on Friday, the finance ministry named 518 companies including Sony and Toyota as being of “core” national interest, and more than half of all Tokyo-listed companies as operating in “designated” sectors of security concern.
The new rules mean that foreign investors will have to notify the ministry before buying 1 per cent of any covered company if they intend to nominate a director or propose the disposal of a security-related division.
It gives the finance ministry the power to make or break foreign shareholder activism in Japan, depending on whether it waves deals through, or blocks campaigns such as investor Daniel Loeb’s effort to break up Sony.
The ministry insists it is only interested in national security and will not get in the way of attempts to improve corporate governance or raise shareholder returns. In an effort to reassure activists, it published new criteria for scrutinising foreign investment, promising to look at the impact on Japan’s technological base and the degree of foreign state control.
Governments around the world including the US, France, Germany and the UK, have tightened controls on foreign investment. The European Parliament last year approved new rules for screening non-EU investment, amid concerns that China and others were seeking to acquire sensitive infrastructure. Brussels is planning new legislation that would target non EU companies that are deemed to benefit from unfair financial advantages.
The concept of “national interest” has varied from country to country. In 2006, France strengthened its rules in response to an attempted takeover of Danone, prompting jokes that yoghurt had become a strategic industry. In 2012, Paris added water to its list of strategic assets.
Companies deemed worthy of Japan’s national security focus include Gokurakuyu, an operator of hot spring resorts; Resort Trust, a leading operator of timeshare hotels; and Tokyo Dome, which runs a baseball stadium and is the target of an activist campaign by Oasis Management.
The list also includes travel agencies, apartment rental agencies, online brokerage firms and an online gift-giving service. Officials involved in the process said it was based on a review of public information: companies on the core list all mentioned a sensitive industry in their incorporation document or securities report.
Japan’s new law contains wide exemptions for foreign investors as long as they do not intend to influence company management. But it has stirred fears among activists because of the country’s history of resistance to shareholder influence.
Since 2015, when Japan introduced its first corporate governance code, foreign investors have been drawn by the theory that Japanese companies may be becoming more susceptible to shareholder pressure.
But two brokers said that over the past two weeks, clients running activist funds had seen redemptions from investors as rumours circulated that the Ministry of Finance’s eventual list of “core” companies would be extensive.
One fund manager, who has regular contact with the upper tiers of prime minister Shinzo Abe’s administration, said that the chill on activism was real and would become worse once Mr Abe stepped down. “Even I am hard pressed to find anyone in the power circles who’s speaking up for shareholder capitalism,” said the fund manager.
The new law does not necessarily create an obstacle to activism but the targets of numerous high-profile campaigns are included on the core or wider lists, including Toshiba, Lixil, Bulldog Sauce, Olympus and SoftBank.
The core list is supposed to cover companies involved in armaments, aerospace, nuclear and essential infrastructure such as electricity, gas, railways and telecommunications. The wider list includes food, broadcasting, air transport and software. However, the definition of involvement has been drawn broadly, to include a total of 2,102 public companies.
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