On February 12, 2011, the State Council General Office issued a circular on the Establishment of a Mechanism for National Security Review of Foreign Mergers and Acquisitions of Domestic Enterprises (Circular), which takes effect thirty days after the issuance of the Circular. This is the first time that China has set up a national security review mechanism of foreign mergers and acquisitions (M&A).

Industries Subject to Review

According to the Circular, in-bound M&As in the following industries will be subject to national security review by a national-level multi-ministry board and a transaction can be blocked on the ground of endangering China’s national security: (i) military industry and military-related enterprises, key and sensitive military installation related enterprises, and other enterprises related to national security; (ii) key agricultural sectors, critical energy and resources enterprises, important infrastructures and transportation enterprises, key technology enterprises, or major equipment manufacturing enterprises. Foreign M&As in the above industries or sectors will be blocked if foreign investors will obtain broadly defined control of the acquired entity.  

Multi-Ministry Review Board

Based on the Circular, a multi-ministry board will be set up ad hoc to review the M&A transactions subject to review. Overseen by the State Council, the review board will be led by the National Development and Reform Board and the Ministry of Commerce, and will include other government agencies depending on the nature of the M&A transactions.

Focus of Review

According to the Circular, the focus of the national security review will be the (i) M&A transactions’ impact on national defense, domestic productivity, service capability and relevant equipment and facilities needed for national defense; (ii) M&A transactions’ impact on the sound economic development of China; (iii) M&A transactions’ impact on the normal order of life in China; and (iv) M&A transactions’ impact on the research and development of key national defense technologies.

Review Procedures

The Circular also provides detailed procedures for the national security review. First, the national security review may be initiated by (i) the foreign investors who will acquire the Chinese domestic enterprise in the specified industries or sectors or (ii) the relevant PRC ministries or national trade associations, or enterprises in the same industry, which think the M&A transaction should be subject to national security review. The review application should be submitted to the Ministry of Commerce for a determination as to whether to conduct the review. Secondly, the multi-ministry board will initially conduct a general review by seeking written opinions from other ministries relevant to the industry. If the relevant ministries believe that the potential M&A will have some impact on national security, the multi-ministry board will start a special review process.

If the acquisition of domestic enterprises by a foreign investor has or may have a material effect on national security, the multi-ministry board will require the Ministry of Commerce together with other ministries to suspend the acquisition, or to transfer equity or assets or take other measures to eliminate the effect on national security.

A review could take between 30 to 95 days to complete.