By
Iain McDonald and Arran Scott
A DOW JONES NEWSWIRES COLUMN
TOKYO (Dow Jones)--Corporate law changes
under consideration in Japan's upper house of parliament could, if enacted, make
illegal the corporate structure of many foreign firms operating in the country,
business groups said Thursday.
The changes have already passed the
Diet's lower house, but only recently have attracted the attention of foreign
companies operating in Japan and groups representing them.
These groups, including the
International Bankers Association, the American Chamber of Commerce in Japan
and the European Business Council, are lobbying the government to change the
legislation before it passes the upper house and becomes law possibly sometime
in the next month.
"We can't understand the reason
behind this move," said Jakob Edberg, policy director at the European
Business Council in Tokyo. "It seems this is hitting the securities firms
the worst."
Article 821 of the proposed Corporations
Law states that "foreign companies with a main office in Japan or whose
primary purpose is to conduct business in Japan cannot continue transactions in
Japan."
That means that foreign firms won't be
able to operate as a branch in Japan if their head office or headquarters is in
another country and was established purely for the purposes of managing
operations in Japan.
The trouble is, nearly all foreign
securities businesses in Japan have this structure, which they adopted when
setting up in the country. They used this structure to work around a requirement
in Japan that banks and securities operations of the same group operate
independently.
A large number of foreign asset
management firms, including hedge funds operating in Japan, along with foreign
businesses in other sectors, including the pharmaceutical industry, would also
be affected. Overall, these corporate law changes are the most wide reaching in
60 years in Japan.
If the new rules are passed without any
change, the affected firms would have to transfer their operations to a Japanese
company structure, which could be costly.
"Potentially, 95% of the foreign
securities community would have to convert their business to KK form," said
Christopher Wells, executive partner at legal firm White & Case. KK stands
for Kabushiki Kaisha and means public company.
For large companies it would be
"extremely costly", he said.
Some firms might have to move, for
example, thousands of contracts to a new company and the movement of assets to a
new Japanese structure could generate significant tax liabilities, he said.
Firms affected could include the biggest
names in the global securities industry.
"Mistake Or A Lack Of Serious Consideration"
An official at the Ministry of Justice,
which drafted the legislation, declined to comment on article 821 and said that
people who were in a position to comment weren't immediately available. The
official said the ministry needed more time to answer questions faxed to the
ministry earlier Thursday by Dow Jones Newswires.
Japan's main opposition Democratic Party
of Japan is also lobbying the government on the issue.
"Very simply, it's just a mistake
or a lack of serious consideration," said Tsutomu Okubo, a Democratic Party
member of the House of Councillors, the Diet's upper house. "I'm afraid of
the market impact."
"Japan needs foreign money, and our
stance is to enhance foreign investment and promote safe and transparent
infrastructure," he said. "That's why we're working hard because we're
competing with Singapore and Shanghai."
Business groups said they were at a loss
as to why the Japanese government would push through legislation with
potentially damaging implications. Okubo said the justice ministry likely
drafted the changes to the law to clear up what has always been a gray area for
foreign firms operating in Japan.
"The law department decided to
clarify the law, but didn't investigate the implications," Okubo said.
"I don't think the government had enough time to investigate the impact on
business, including the market."
Aside from making the company structure
of many foreign firms illegal, the new law would also mean branch managers of
many foreign securities firms could be personally liable for the operations of
the firm.
"Those who conduct transactions in
violation of the above regulation shall, jointly with the foreign company, bear
responsibility for repaying to the counterparty any debt that arises from the
transactions concerned," the article reads.
White & Case has proposed an
addition to article 821 that basically would allow any government agency to
exempt companies from the impact of the article, but that wouldn't necessarily
help firms in other sectors outside the financial services industry.
"This train is coming and some of
these firms are going to be standing on the tracks when it arrives," said
Christopher Wells. "Right now, it is hard to get a handle on how much
disruption would occur outside the financial sector, but it could be even worse
than in the financial sector."
Democratic Party's Okubo said it is also
possible that even if the article is passed, the government could postpone its
implementation until December 2006 at the latest.
Others say that the new law also
contravenes the General Agreement on Trade and Services, administered by the
World Trade Organization.
"In all sectors, other than
financial services, (the new law) contravenes (the agreement) and in financial
services it could be argued to contravene it," said a person familiar with
the issue.
-By Iain McDonald and Arran Scott, Dow Jones Newswires; 813-5255-2929;
iain.mcdonaldi@dowjones.com; arran.scott@dowjones.com
(Iain McDonald is a news editor in charge of Asian money coverage at Dow
Jones Newswires. Previously, he has reported on financial markets, the economy
and politics in Australia.)
(Arran
Scott is a deputy bureau chief in the Japan bureau of Dow Jones Newswires. He
reports on corporate news and previously covered government policy, the economy
and foreign exchange.)
(Natsuo Nishio contributed to this report.)
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