Asia
Foreign investors seeking to acquire Chinese domestic companies may encounter a number of different regulatory review processes. As a general matter, all foreign investments into China are subject to review and approval by the Ministry of
Commerce (MOFCOM) or its provincial counterparts. In cases that raise concerns regarding the competitive impact of a transaction, a separate review will be conducted by the antitrust division of MOFCOM, pursuant to the Chinese Anti-
Monopoly Law (AML), promulgated in 2008.
In addition to a competition review, the
AML also provides for a state security review in appropriate cases, but until recently, no specific rules had been adopted to implement these provisions of the AML. That gap was filled when, on February 3, 2011, the State
Council of China issued the Circular on the Establishment of Security Review
System in Respect of Acquisition of
Domestic Enterprises by Foreign Investors
(Circular), which serves as a legal basis for China’s first national security review system. MOFCOM subsequently issued procedural rules to implement the Circular on August 25, 2011, the Provisions on the Implementation of the System for
Security Review of Acquisition of Domestic
Enterprises by Foreign Investors .
The new framework provides that a national security review will be conducted if foreign investors seek to acquire a target within the following two industrial categories:
• Defense industry. Any investment in Chinese domestic military industrial enterprises, military industry supporting enterprises, and enterprises located in the vicinity of pivotal and sensitive military facilities, or other entities associated with the safety of national defense.
• Other key industries.
A controlling interest in any Chinese domestic enterprise involved in important agricultural products, energy and resources, basic infrastructure, transportation services, key technologies, and equipment manufacturing. This would include not only holding a majority of voting shares, but also cases in which the foreign investor obtains material influence over shareholder or board meetings, or any other situation causing transfer of actual control to foreign investors in areas such as operational decisions, financial affairs, or human resources and technologies. It also includes situations in which a controlling interest is obtained through nominee holdings, trusts, multi-reinvestments, contractual control arrangements, etc.
The Circular provides for national security reviews to be conducted by a cross-ministerial national security review joint committee (Joint Committee), led by representatives of the State Council, the National Development and Reform
Commission, and MOFCOM, with the involvement of representatives of the industrial ministries relevant to the business sector involved.
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Foreign investors who believe that a proposed transaction may fall within the scope of national security may initiate the review process themselves by filing a review application with MOFCOM. In addition, other parties, including relevant
Chinese governmental departments, industry associations, enterprises in the same industry, and upstream or downstream enterprises, can also propose that the Joint Committee undertake a security review.
Although the Circular does not provide a precise definition of “national security,” it describes its mandate in terms that appear to be substantially broader in scope than the national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). Specifically, a CFIUS review will not consider the potential economic consequences of a transaction, unless the transaction might threaten U.S. national security. By contrast, the Chinese Joint Committee has indicated that in every national security review it will consider the impact of the transaction on (i) the stable operation of the national economy; (ii) the basic living circumstances in society; (iii) national defense security, including the capacity for domestic product manufacture and for provision of domestic services, and relevant equipment and facilities needed for national defense; and (iv) the capacity for research and development of key technologies related to national security.
The national security review system represents an additional layer of government review of foreign investment activities in China. The national security review may occur in parallel with
MOFCOM’s competition review in cases where there is a concern about the market impact of a transaction. As these reviews are conducted by separate divisions of
MOFCOM, parties can expect to expend additional time and money in connection with these processes.
As with other areas of regulation in the
PRC, foreign investors will need to pay close attention to their strategies for communicating and interacting with the relevant regulatory bodies. We are not yet aware of any national security reviews having been conducted to date. Given that these are new and relatively concise regulations, many issues remain unclear, such as precisely what information will be required in the various application documents and which industry sectors fall within the “important” sectors as to which a controlling interest requires approval.
In addition, it remains to be seen how transparent the review process will prove to be.
Yujing Shu (Beijing) yujing.shu@klgates.com
Iris He (Beijing) iris.he@klgates.com
K&L Gates Global Government Solutions ® 2012 Annual Outlook
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