Nearly five years after issuing the first rules on the subject, on February 3, 2011, the PRC State Council promulgated the Circular on Establishing the Security Examination System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “Security Review Circular”). The Security Review Circular, which took effect on March 3, 2011, also serves to implement Article 31 of the PRC Anti-Monopoly Law, which took effect in August of 2008.
The Security Review Circular both establishes general national security review procedures for various categories of foreign investments and provides for establishment of the “Inter-Ministerial Joint Conference on Security Review of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors” (the “Joint Conference”). The Security Review Circular’s issuance follows several high-profile rejections (or voluntary termination) of proposed Chinese acquisitions on national security grounds in the U.S. and elsewhere.
The Security Review Circular leaves many questions unanswered. Most prominent is whether the Circular will bring greater procedural transparency to an opaque and unstructured process or, consistent with Chinese perceptions of the Committee on Foreign Investment in the United States (CFIUS), serve mainly to establish a highly politicized forum for protectionist interests.
For detailed analysis on the Security Review Circular, please refer to our previous GT Alert, “The People’s Republic Strikes Back? China Issues National Security Review Regulations for Foreign-Funded M&A,” released in February of 2011.
Concurrently with the Security Review Circular coming into effect, China’s Ministry of Commerce (MOFCOM) issued its first implementation regulations, the Interim Regulations on Issues Relating to Implementing the Security Review System for Foreign Investors' Merger and Acquisition of Domestic Enterprises (the “Interim Regulations”), to detail and clarify the security review procedures from certain perspectives.
Although the Interim Regulations are currently effective, they are still open for comments and suggestions until April 10, 2011. The effective period of the Interim Regulations will last less than six months, which illustrates MOFCOM’s intention to further develop them. Generally, the Interim Regulations mainly focus on the application and initiation of security review procedures, and the types of documents that should be submitted, and outlines possible review outcomes.
- Initiation of Security Review
According to the Interim Regulations, the initiation of security review is subject to the following rules:
- If the target of a M&A transaction is subject to security review according to the Security Review Circular, the relevant foreign investor(s) shall apply to MOFCOM for security review. If there are two or more foreign investors involved in such a transaction, they can jointly carry out the application, or they can assign one party to do so.
- Further, if a transaction is amended at a later stage so that it becomes subject to the scope of security review, regardless of whether an application for security review of this transaction has been submitted or has been examined by competent authorities, the parties to the transaction must suspend their proceedings and apply for a review.
- As the Security Review Circular regulates and the Interim Regulations reiterates, if the foreign investors failed to apply for security review, third parties — including the State Council, national industry associations, enterprises in the same industry, or upstream and downstream enterprises — may also submit, through MOFCOM to the Joint Conference, a request for security review of the M&A transaction, along with a general description of the transaction and analysis of how such transaction may influence national security. If the Joint Conference decides a security review is necessary for the transaction, MOFCOM will accordingly require the foreign investors involved in the transaction to submit their application.
- If the foreign investors failed to apply for security review where necessary, MOFCOM’s local counterparts governing such transaction should suspend the relevant approval process of such transaction and require, in written form, the relevant foreign investors to apply for a security review and should report the situation to MOFCOM.
- Before a formal application is submitted, the potential applicants may consult with MOFCOM on procedural aspects of their M&A transactions.
- Application Documentation
Applicant(s) are required to provide the following documents when filing the application for national security review:
- An application letter and a description of the relevant transaction;
- Identification documents of the foreign investor (notarized or certified);
- Background explanation of the foreign investor (including affiliates, actual controllers, persons acting in concert, relationship with relevant governments);
- Background documents of the target (documents and certificates concerning its existence and operation);
- Agreements in relation to the post-M&A entity after completion and a list of the names of its senior management;
- Transaction documents;
- Documents reflecting the potential “control” of the foreign investor over the post-M&A entity;
- Other documents as required by MOFCOM.
- Review Decisions
The Interim Rules categorized the review decisions, of which the applicants for security reviews and MOFCOM’s local counterparts governing M&A transactions shall be informed in written form, into three types:
- Clear with national security review — In this case, the applicants can proceed with their M&A transaction.
- Potential national security concern — In this case, the applicants are prohibited from proceeding with the relevant transaction and shall either amend the transaction, revise the application documents and re-submit the security review application, or abort the transaction.
- National security concern — If the transaction has had an impact or might have a significant impact on national security, MOFCOM will, with the assistance of relevant authorities, terminate the relevant transaction or take other effective measures to eliminate any negative impact on national security.