China’s Office of the State Council recently announced that it would establish a panel to formally review all proposed merger and acquisition deals by foreign firms to “safeguard national security”. The Notice Regarding the Establishment of National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors will take effect in March 2011 and requires that a review be conducted on all foreign acquisitions of Chinese companies if the foreign company takes control of the Chinese enterprise.

The scope of review is expected to be broad and will cover any enterprise that is, among other things, (a) a military or military-related enterprise or is adjacent to important and sensitive military facilities and other national defense security-related entities, and (b) a national security related enterprise, including those involving important agriculture, energy and resources, infrastructure, transportation, key technology sectors and equipment manufacturers.

The new panel will be led by the National Development and Reform Commission (NDRC) jointly with the Ministry of Commerce (MOFCOM). Foreign investors are required to make the application for review with MOFCOM when acquiring domestic companies. Any third-parties, including governmental agencies or competing enterprises, may also apply with MOFCOM to request a national security review of a proposed transaction.

Although a national security review is already mandated by current Chinese law, no specific procedures have been established until now. While it is expected that the new procedures will result in increased costs and hurdles for foreign investors looking to acquire control of Chinese companies, the guidelines set forth by the State Council provide a timeline for the review process and a certain level of transparency to the process.