[Last updated: 1 January 2025, unless otherwise noted]

2.1 Main legal framework

The main rules of Japanese law relating to public tender offers can be found in the Financial Instruments and Exchange Act (Act No. 25 of 13 April 1948, the "FIEA"). The FIEA underwent major reform in 2006, introducing, among other things, stricter thresholds for mandatory offers, enhanced disclosure and an offeror's obligation to accept all offers tendered under certain conditions. The Japanese tender offer rules under the FIEA (the "Tender Offer Rules") were first introduced in 1971 and were modelled on the US tender offer rules. The current Tender Offer Rules still have some similarity to its equivalent under the US Securities Exchange Act of 1934.

The FIEA is supplemented by the Order for Enforcement of the Financial Instruments and Exchange Act (Cabinet Order No. 321 of 30 September 1965, the "Order"), and the Cabinet Office Ordinance for Disclosure Required for Tender Offer for Share Certificates, etc. by Person Other than Issuer (Ordinance of the Ministry of Finance No. 38 of 26 November 1990, the "Tender Offer Ordinance"), which set forth detailed requirements for the implementation of tender offers.

2.2 Other rules and principles

While the aforementioned legislation contains the main legal framework for public tender offers in Japan, there are a number of additional rules and principles that are to be taken into account when preparing for or conducting a public tender offer, such as:

1. The rules regarding rights of shareholders and the duties of the board of directors of the target under the Companies Act (Act No. 86 of 26 July 2005, "Companies Act"). The shareholder's right to demand disclosure of the target's shareholder registry is important in both friendly and hostile tender offers. The general framework regarding the duties of the target's board of directors applies when the target's board expresses its opinion regarding the bidder's tender offer.
2. The disclosure and delisting rules in the listing rules of the stock exchange on which the target stock is listed. Please see 3.4 and 6.1 for the disclosure requirements and see 8 for the delisting of the target's stock.
3. The insider trading, market manipulation and other unfair trade regulations under the FIEA. Please see 3.5, 6.1, 6.2 and 6.3 below.
4. The laws and regulations regarding foreign investment restrictions. Please see 2.4 below.
5. The laws and regulations regarding merger control in Japan and overseas jurisdictions. These rules are not discussed herein.
6. The laws and regulations regarding securities transactions in foreign jurisdictions, such as the US securities regulations. These may especially be relevant when the target has a substantial number of foreign investors among its shareholders. Appropriate solutions have been developed in practice to deal with specific situations in this aspect. These are not further discussed herein.

2.3 Supervision and enforcement by the Financial Services Agency

Public tender offers are subject to the supervision and control of the Commissioner of the Financial Services Agency. The Financial Services Agency is the principal securities regulator in Japan. In practice, the Director-General of the Kanto Local Financial Bureau is delegated with certain supervisory powers relating to public tender offers. The Securities and Exchange Surveillance Commission is in charge of monitoring securities markets.

The Commissioner has a number of legal tools that it can use to supervise and enforce compliance with the Tender Offer Rules, including administrative fines and administrative monetary penalties. In addition, criminal penalties can be imposed by the courts in case of non-compliance.

2.4 Governmental prior approval - Foreign investment regulation

Foreign investments are not restricted in Japan and are only subject to reporting upon completion (as opposed to prior authorization), unless they relate to certain specific sensitive activities as defined in the Foreign Exchange and Foreign Trade Act (Act No. 228 of 1 December 1949, the "FEFTA"). As a general rule, unless any of the following exemptions applies, the purchase by a foreign investor of 1% or more of the listed shares of a Japanese public company conducting sensitive activities requires prior notice ("Prior Notice") by the foreign investor to the Ministry of Finance ("MoF") and other relevant ministers of Japan through the Bank of Japan ("BoJ"):

1. foreign financial institutions (including but not limited to security houses, banks, insurance companies and investment management business operators) that hold a license or are registered under Japanese laws, or are subject to foreign financial regulations and supervisions by the competent foreign authorities equivalent to those under Japanese laws, will be exempted from any requirement of the Prior Notice in the event that such foreign financial institutions: (i) are not and will not be appointed as a director or other statutory officer and its "closely related person" is not and will not be appointed to such positions. The scope of "closely related person" differs depending on who makes a proposal for such appointment, i.e., the foreign investor by itself or a third party, (ii) will not submit proposals to shareholders meetings to transfer or dissolve the business that corresponds to the company’s sensitive activities, and (iii) will not have access to non-public technical information concerning the business that corresponds to the company’s sensitive activities (such conditions from (i) to (iii), the "Exemption Conditions"); provided that: (A) securities houses that are registered as a Type 1 Financial Instruments Business and conduct securities-related business under the FIEA, (B) banks holding a bank license under the Banking Act of Japan, or (C) other foreign financial institutions who hold a registration or license equivalent to a Type 1 Financial Instruments Business or banking license under foreign laws and maintain proper conflict management measures are not deemed to breach condition (iii) above to the extent that the non-public technical information is obtained (X) with the consent of the subject listed company (e.g., request for disclosure of due diligence information in friendly transactions) or (Y) through their investment banking service division retained by a person other than the subject listed company (e.g., request for disclosure of due diligence information in hostile transactions) on the basis that they implement proper measures (I) to insulate such non-public technical information from their trading division and any third party other than the person who retained their investment banking service division and (II) to prevent any influential power deriving from their shareholding in the subject listed company from being used for information requests;
2. general foreign investors (other than sovereign wealth funds and public pension funds) will be exempted from the requirement of the Prior Notice in the event that such foreign investors (i) intend to acquire shares in a listed company whose sensitive activities do not include any of the core sensitive activities and (ii) satisfy all of the Exemption Conditions;
3. general foreign investors (other than sovereign wealth funds and public pension funds) will be exempted from the requirement of the Prior Notice until they acquire 10% or more of the listed shares, in the event that such foreign investors (i) intend to acquire shares in a listed company whose sensitive activities include any of the core sensitive activities, (ii) satisfy all of the Exemption Conditions, (iii) are not and will not be involved in any committee that makes material business decisions concerning the company’s core sensitive activities, and (iv) will not make any written proposal to the board of directors, any committee that makes material business decisions or any members thereof requesting answers or certain actions concerning the company’s core sensitive activities by a specific deadline (conditions (iii) and (iv) being "Additional Conditions");
4. foreign sovereign wealth funds and public pension funds will be exempted from the requirement of the Prior Notice in the event that such foreign sovereign wealth funds and public pension funds (i) have obtained the exemption certificate from the MoF, (ii) intend to acquire shares in a listed company whose sensitive activities do not include any of the core sensitive activities and (iii) satisfy all of the Exemption Conditions; and
5. foreign sovereign wealth funds and public pension funds will be exempted from the requirement of the Prior Notice until they acquire 10% or more of the listed shares, in the event that such foreign sovereign wealth funds and public pension funds (i) have obtained the exemption certificate from the MoF, (ii) intend to acquire shares in a listed company whose sensitive activities include any of the core sensitive activities, (iii) satisfy all of the Exemption Conditions and (iv) satisfy all of the Additional Conditions.

The MoF will take into account the following factors when determining whether to grant the exemption certificate to foreign sovereign wealth funds and public pension funds:

1. whether forms of investments by such funds are purely for the purpose of obtaining economical profits; and
2. investment decisions of such funds are made independent from the foreign governments etc.

In connection with the distinction between "core sensitive activities" and other sensitive activities, the MoF published a list of listed companies that categorizes (i) companies which engage in any of the core sensitive activities, (ii) companies which engage in sensitive activities other than core sensitive activities and (iii) companies which do not engage in any sensitive activities. The latest list was updated on 13 September 2024 and is available at: https://www.mof.go.jp/policy/international_policy/gaitame_kawase/fdi/list.xlsx. It should be noted that this list was prepared for reference purposes only, meaning it is a foreign investor's own responsibility to conduct its analysis on such categorization based on the criteria set out in the relevant subordinate legislation.

Where the Prior Notice is required, a foreign investor may not make an investment for a period of 30 days after the acceptance of the notice by the BoJ. In practice, this period is normally shortened to two weeks if the proposed investment does not attract any concern about Japan's national security, public order or public safety. In addition, where such Prior Notice is required, the foreign investor must file an execution report through the BoJ within 45 days after the acquisition occurs.

If the MoF and other relevant ministers of Japan require more time to assess whether the investment is likely to impair national security, impede public order or compromise public safety, the waiting period can be extended up to five months, during which period the ministries may order the foreign investor to discontinue or modify the proposed investment.

Where no Prior Notice is required for an investment in a listed company engaging in sensitive activities by virtue of any of the exemptions mentioned above, (i) a general foreign investor must file an after-the-fact report through the BoJ within 45 days after its shareholding in the listed company reaches each of the 1%, 3% and 10% thresholds (and any further acquisition after 10%) and (ii) a foreign financial institution must file an after-the-fact report through the BoJ within 45 days after its shareholding in the listed company reaches the 10% threshold (and any further acquisition after 10%). For the sake of completeness, where no Prior Notice is required due to the reason that a listed company does not engage in any sensitive activities, a foreign investor must file after-the-fact report through the BoJ within 45 days after its shareholding in the listed company reaches 10% (and any further acquisition after 10%).

Please note that the definition of "inward investment" that requires Prior Notice includes certain additional activities by a foreign investor that do not necessarily entail a purchase of shares in a listed company. Such additional activities include consent to the proposal at the shareholders meeting of a listed company engaging in any of the sensitive activities where a foreign investor owns 1% or more of the total voting rights of that listed company (i) to appoint itself or its "closely related person" as a director or other statutory officer of a listed company (regardless of whether such proposal is made by itself or a third party), (ii) to transfer or dissolve the business that corresponds to the company’s sensitive activities (only if the proposal is made by such foreign investor); and where a foreign investor owns one-third or more of the total voting rights of that listed company; or (iii) to amend the business purposes of the company to include additional sensitive activities. This means that even after a foreign investor has legally acquired 1% or more of the shares in a listed company in compliance with the requirement of the Prior Notice (or in reliance on available exemptions therefrom), such foreign investor must file another Prior Notice before giving consent to the aforementioned proposals.

Further, Japanese laws regulating specific business activities restrict investments by a foreign investor or set the upper limit of holding ratio by foreign nationals. The major industries to which these rules apply include the following:

• Airlines: Foreign investors are not permitted to acquire one-third or more of the voting rights in Japanese airline companies.
• Broadcasting: Foreign investors are not permitted to acquire 20% or more of the voting rights in general broadcasting and communications companies and other similar companies.
• Telecommunications: Foreign investors are not permitted to acquire one-third or more of the voting rights of Nippon Telegraph and Telephone Corporation.

2.5 Corporate Governance Code

Japan introduced the Corporate Governance Code in 2015. While this code's primary purpose is to enhance the corporate governance of Japanese listed companies in relation to the general principle to secure shareholder rights and effective equal treatment of shareholders, it does include a supplemental principle that requires a listed company to clearly explain the position of the board on a tender offer and not to take measures that would frustrate shareholders' rights to sell their shares in response to a tender offer. The Corporate Governance Code was amended in 2018, which was the first amendment since 2015, with the aim to further promote sustainable growth and increase the corporate value of Japanese listed companies over the mid to long-term. The Corporate Governance Code was also amended in June 2021, mainly to enhance board independence, promote diversity and place greater emphasis on sustainability and ESG matters.

2.6 Introduction of Fair M&A Guidelines

Japan introduced the Fair M&A Guidelines in June 2019. The Fair M&A Guidelines provide for the best practice to protect the interests of the general shareholders of a listed target by requiring the target and the acquirer (as applicable) to implement various measures to ensure the fairness of the transaction ("Fairness Ensuring Measures") where the acquirer is (i) a controlling shareholder, or (ii) a management member of the target, which inherently entails the risk that the best interests of the general shareholders are not fairly represented by the board of directors of the target due to an existence of a structural conflict of interests. The Fair M&A Guidelines also clarify that the best practice recommended by the Fair M&A Guidelines needs to be taken into account when implementing a transaction where a similar structural conflict of interests exists. The Fairness Ensuring Measures set out in the Fair M&A Guidelines include (i) establishment of an independent advisory board to evaluate the transaction, (ii) obtaining expert advice from independent external advisors, (iii) allowing (and not agreeing on the deal protection measure that may prevent) market checks, (iv) setting a majority of minority condition in the proposal, (v) enhancing information disclosure to the general shareholders and transparency of the process, and (vi) avoiding coerciveness. The relevant target and the acquirer are not necessarily required to implement all of such Fairness Ensuring Measures and may elect to adopt all or some of such measures by taking into account the degree of structural conflict of interests between the acquirer and the general shareholders and any other specific circumstances.

2.7 Guidelines for Corporate Takeovers

On 31 August 2023, the Ministry of Economy, Trade and Industry ("METI") published the Guidelines for Corporate Takeovers – Enhancing Corporate Value and Securing Shareholders’ Interests (the "Corporate Takeover Guidelines"). The Corporate Takeovers Guidelines have been prepared to improve predictability and ensure best practices for parties involved in acquisitions and market participants and encourage economically beneficial acquisitions.

Chapter 2 of the Corporate Takeovers Guidelines presents the following three principles that should generally be respected when acquiring control of listed companies.

• Principle 1: Principle of Corporate Value and Shareholders’ Common Interests
• Principle 2: Principle of Shareholders’ Intent
• Principle 3: Principle of Transparency

Chapter 3 of the Corporate Takeovers Guidelines sets out the phased approach to acquisition proposals under the code of conduct for each director and board of directors of the target.

Chapter 4 of the Corporate Takeovers Guidelines describes how transparency in acquisitions should be improved from the perspective of both the bidder and the target in order to realize Principles 2 and 3 (i.e., the principles of shareholders' intent and transparency).

Chapter 5 of the Corporate Takeovers Guidelines describes key factors to ensure transparency and fairness of takeover response policies and countermeasures, namely (i) respecting shareholders’ intent (i.e., obtaining shareholders’ approval for adopting and implementing takeover defense), (ii) verifying the necessity and appropriateness of countermeasures, (iii) prior disclosure of takeover response policies, and (iv) promoting dialogue with market participants.

2.8 Reforms

On 15 May 2024, the bill to partially amend the FIEA, including amendments to the Tender Offer Rules, was enacted and promulgated (the "Amendment Act"). The amendments in relation to the Tender Offer Rules will take effect on the date designated in the cabinet order within two years from the promulgation (the "Effective Date"). The below summarizes the key changes from the current Tender Offer Rules.

(a) Application of one-third rule to on-market auction trading

As further explained in 4.1 below, in Japan the mandatory tender offer requirement is triggered mainly (i) where the bidder proposes to purchase shares in excess of 5% of the total number of voting rights of the target from more than 10 shareholders in a period of 61 days ("61-day Aggregation Period") through off-market trading, or (ii) where the bidder proposes to purchase shares with the result that the bidder will hold shares in excess of one-third of the total number of voting rights of the target, irrespective of the number of shareholders involved through off-market trading and/or on-market non-auction trading (the former is known as the "5% rule" and the latter is known as the 'one-third rule'). On the other hand, on-market auction trading is in principle not subject to the 5% rule nor the one-third rule based on the view that transparency and fairness are generally ensured through auction in the market.

However, in recent times, some instances have been observed where more than one-third of voting rights were acquired in a short period through on-market auction trading, and the Report of The Working Group on Tender Offer Rule and Large Shareholding Reporting Rule published on 25 December 2023 (the "WG Report") recommended that on-market auction trading should be made subject to the one-third rule from the perspective of ensuring transparency and fairness of securities transactions, which may have a material impact on corporate control.

Under the Amendment Act, the current language in the FIEA limiting the application of the one-third rule to off-market trading is removed, as a result of which the one-third rule (which is lowered to the "30% rule" as explained in (b) below) will be applicable to on-market trading (whether on-market auction trading or non-auction trading) after the Effective Date. In addition, the special one-third rule under the current Tender Offer Rules which restricts a combination of off-market trading and on-market trading (see 4.1(c) below for more details) has also been abolished as on-market trading and off-market trading are equally treated for the purpose of the one-third rule under the Amendment Act, which renders this special rule mostly redundant.

(b) Lowering of one-third rule

The current Tender Offer Rules adopted the one-third rule on the basis that one-third is the percentage that can block special resolutions at the general meeting of shareholders (see 3.1 below). However, the WG Report pointed out that a 30% threshold is used in the tender offer rules of some major countries and taking into account the actual ratio of voting rights exercised, 30% may be large enough to constitute a blocking position on special resolution matters.

Under the Amendment Act, following the recommendation of the WG Report, the one-third rule threshold has been lowered to 30%, which will come into effect from the Effective Date.