China’s Ministry of Commerce (MOFCOM) released the Provisions on the National Security Review of Foreign Mergers and Acquisitions (M&A) of Domestic Enterprises (the “Provisions”) on August 26, 2011. They become effective on September 1, 2011.
The Provisions are another step in establishing China’s “national security review” regime. Several industries are specifically targeted for review in M&A transactions, including agriculture, basic infrastructure, energy and natural resources, equipment manufacturing, technology and transportation services. Unfortunately, the Provisions remain vague in describing other industries where M&A transactions may be subject to review (e.g. “other enterprises related to national security”), and they fail to provide a detailed list of sectors that fall within those industries.
Prior to the publication of the Provisions, the State Council issued the Notice of the General Office of the State Council on Launching Security Review System for M&A of Domestic Enterprises by Foreign Investors on February 3, 2011. (Please refer to White & Case China Corporate Bulletin (March 2011) for further details regarding this notice.) MOFCOM issued the Temporary Provisions on Relating Matters of the Security Review of Foreign M&A of Domestic Enterprises (the “Temporary Provisions”) on March 4, 2011, which were valid from March 5, 2011 to August 31, 2011. (Please refer to White & Case China Corporate Bulletin (April 2011) for further details regarding the Temporary Provisions.)
Compared to the Temporary Provisions, the now finalized Provisions keep procedural provisions established under the Temporary Provisions and add the following key points:
- When reviewing the acquisition of a domestic enterprise by a foreign enterprise (a “Transaction”), MOFCOM will determine whether the Transaction should be subject to national security review by considering both “the substance and actual influence” of the Transaction. Foreign investors may not avoid the national security review through methods such as a nominee structure, trust arrangements, multilayer investments, exercising control through contractual arrangements (e.g. the “variable interest entities” model) or offshore transactions. It should be noted that the Provisions fail to provide detailed definitions or examples of any such methods.
- The Provisions clarify that a request for consultation with MOFCOM prior to filing is not a prerequisite for filing an application, and furthermore, such consultation does not have a legal binding effect and shall not be treated as the basis for submitting a formal application.
- MOFCOM and other authorities involved in the security review process are now expressly required to keep state secrets, trade secrets, and other related secrets confidential.
For more information on the Provisions, please visit the following Chinese language link: http://www.mofcom.gov.cn/aarticle/b/c/201108/20110807713530. html?169040982=2722795570