On February 3, 2011, the State Council issued the Circular on Establishment of the Security Review System Concerning the Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “Circular”). Pursuant to the Circular, foreign investors which intend to complete a merger or an acquisition of a China incorporated entity or China assets in designated industries and would obtain control of such entities or assets are required to apply to the Ministry of Commerce (“MOFCOM”) for security review. Those sectors include key agriculture products, key energy and resources, key infrastructure, key transportation services, key technology and major equipment manufacturing. For each security review, a cross-ministerial panel (the “Panel”) led by the National Development and Reform Commission and MOFCOM involving the ministry of the relevant industry will be formed.
Following the promulgation of the Circular, MOFCOM issued the Tentative Rules on Implementing Matters Relating to the Security Review System Concerning Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “Rules”) on March 4, 2011. According to the Rules, the applicant may, before its submission of security review application, apply to MOFCOM for consultation.
The Rules set forth the security review application documents required by MOFCOM. MOFCOM will inform the applicant in writing upon its acceptance of the application. If a security review is required, MOFCOM will notify the applicant within fifteen working days, and within five wording days thereafter request the Panel to conduct the security review. If the applicant has not been informed within such timeframe, it may proceed with applying for approval for the actual transaction. The Panel’s review process is detailed in the Circular and within five working days of receiving the Panel’s written opinions, MOFCOM must notify the applicant and the relevant authorities handling the transaction.
The Rules stress that, if the transaction would negatively impact national security, MOFCOM shall, based on the Panel’s opinions and together with the relevant authorities, terminate the transaction or adopt other effective measures such as divesting equity interests or assets to offset the impact on national security. The foreign investor’s competitor or relevant ministries, trade associations or other players in downstream or upstream industries of the target may suggest through MOFCOM to initiate a security review.