On August 25, 2011, the Ministry of Commerce of China (“MOFCOM”) released the final Rules for Implementation of the Security Review Regime for Foreign Mergers and Acquisitions of Onshore Enterprises by Foreign Investors (“SRR Rules”), which became effective September 1.
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”). Concurrently with the Security Review Circular coming into effect, MOFCOM issued on March 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 Rules”), to detail and clarify the security review procedures from certain perspectives. The SRR Rules, replacing the Interim Rules, have retained most provisions and added some further clarifications.
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. Under the Security Review Circular, foreign M&A transactions which meet the thresholds of the SRR Rules are subject to the new security review, in addition to the existing approvals required for foreign M&As.
The key change we see in the SRR Rules is that MOFCOM clearly states that it will examine the true nature and actual implications of a transaction to determine whether it should be subject to security review. This changes shows that the authority would take a rather strict approach in the enforcement of the security review regime. It is fair to say that under the SRR Rules, foreign investors interested in the restricted or prohibited industries (such as the telecom and medical services sector) are no longer able to evade the security review regime via alternative acquisition structures, for example, multi-tier investments, leases or loans, control through contractual arrangements, offshore transactions and other VIEs (Various Interest Entities). We expect that these final rules will have a far-reaching effect on the landscape for foreign mergers and acquisitions in China.