New implementing rules, effective 1 September, have updated China’s national security review mechanism for foreign-invested M&A. We covered the introduction of China’s national security review regime for foreign-invested M&A in our February 2011 e-bulletin available on our website at http://www.herbertsmith.com/NR/rdonlyres/206DCF9A-544B-49E4-8EFEDB287AAE4434/18087/0224ChinasNewMASecurityReview.htm.
Significant provisions introduced by the new implementing rules include:
- Whether or not a notification is required must be assessed against the substance of a transaction and not just the form of the transaction. In particular, foreign investors may not avoid an M&A security review by employing trusts or related structures, multi-level reinvestments, leasing, loans, variable interest entities, or offshore transactions.
- The Ministry of Commerce may require a party to a transaction to provide explanations if competitors, relevant government departments or certain other concerned parties believe that it is necessary to conduct an M&A security review. This may result in a formal notification also being required.
- Pre-notification consultations remain optional. However, the new rules now specifically provide that any such consultation that does take place has no legal effect and should not form the basis of the official application.
The timing and process features of the national security review mechanism have not changed. See pages 5 to 8 of our China Investment Guide 2011 supplement (http://www.herbertsmith.com/Publications/Chinainvestmentguide2011supplement.htm) for an overview of China’s security review mechanism.