Since its accession to the World Trade Organisation, China has revised a considerable number of laws and regulations to make foreign investments in China less burdensome. Chinese economic policies, however, still require foreign investors to obtain statutory approvals from authorities to invest in China. On 3 February 2011, China's State Council published a new circular introducing an extra hurdle for foreign investments raising national security concerns: the Circular of the General Office of the State Council on the Establishment of a Security Review System Regarding Mergers and Acquisition of Domestic Enterprises by Foreign Investors (the “Circular”).
Currently, two government agencies share the responsibility for reviewing and approving foreign investments. Both the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) need to approve acquisitions of Chinese entities by foreign investors, in which process project feasibility and possible interference with China's public interests and industry policies will be reviewed. If the target company is active in a specific industry, such as the financial, transportation or mining sectors, special approval(s) from authorities supervising the relevant industry are also required. Transactions may of course – depending on the relevant thresholds – also be subject to merger control clearance by MOFCOM.
The Circular, which enters into effect on 5 March 2011, now announces an additional national security review procedure for foreign investors intending to acquire actual control over domestic enterprises in a broad range of sectors. According to the Circular, the scope of the review covers, amongst others, acquisitions of:
- military enterprises or enterprises located near key and sensitive military facilities, and other entities relating to national defence
- key domestic enterprises in areas such as agriculture, energy and resources, infrastructure, transport, technology, and manufacturing of important equipment.
The Circular provides, however, no definition of what is considered to be “national security” and “key”.
The Circular does not yet give detailed information on how and when applications should be submitted for approval. It is, however, clear that in first instance MOFCOM will decide within 5 working days after receiving an application whether a national security review is necessary. If so, MOFCOM will submit the transaction for review to a newly established committee under China’s State Council, and led by MOFCOM, the NDRC and, as the case may be, certain industry-specific supervisors. This review may take up to 30 working days, with a possible extension of 60 working days. The committee may, in case of national security issues, block the transaction or make it subject to certain conditions.
Although the spokesman of the MOFCOM stated that the purpose of the security review is to promote the structures of foreign investment in China, the Circular implements a further layer of regulation and review of foreign investments in China. Companies looking for acquisitions in China, particularly in sensitive sectors, need to be aware of the necessity to apply to MOFCOM for security review, and are recommended to consider how this process may impact the timing and overall feasibility of their deals. On the other hand, many countries, including the U.S., have similar national security reviews in place. Many international investors should therefore already be familiar with this type of processes.