Law and policyPolicies and practices
What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?
Foreign investment has played a crucial role in China’s economy. Although unilateralism and trade protectionism pose great challenges to global free trade, the Chinese government has sent a strong signal to the world that it is determined to expand opening-up. The state policy of opening-up was emphasised in various forums by numerous government officials. In October 2019, the 19th Central Committee of the Communist Party of China (CPC) concluded its fourth plenary session in Beijing. The decision made by the CPC Central Committee includes a host of significant measures to deepen reform and opening-up. In November 2019, the Second International Import Expo was held in Shanghai. In his opening speech, President Xi mentioned ‘open’ 52 times and reaffirmed China’s commitment to its fundamental state policy of opening up. To promote more openness, Xi announced that China will adopt the following five measures: continuing to open up its market, optimise China’s opening-up structure, improve the business environment, deepen multilateral and bilateral co-operations, and advance Belt and Road cooperations.
China’s opening-up is all-dimensional and all-sectoral. On 7 November 2019, the State Council released the Opinions on Further Improving the Utilization of Foreign Investment (Opinions 2019). Opinions 2019 puts forward 20 opinions in four aspects to improve transparency and predictability of business environment for foreign-invested enterprises. Moreover, Opinions 2019 states that China will further open up its financial industry, ease entry requirements for foreign investors in banking and insurance, eliminate all restrictions on the scope of business for foreign banks, securities companies and fund management companies, and remove requirements on total assets for the establishment of foreign-funded banks.
The Foreign Investment Law of the People’s Republic of China (PRC FIL 2020) came into force on 1 January 2020. The PRC FIL 2020 sends a strong message in relation to protecting legitimate interest of foreign investors. For instance, the PRC FIL 2020 promulgates better protection of intellectual property rights and some relax of currency control over the transfer of profits, capital gains and other incomes gained in China by foreign investors in and outside of China.
China has relatively strict currency controls. However, in the trend of further opening up, the government has relaxed some restrictions. Notice by the State Administration of Foreign Exchange of Further Facilitating Cross-border Trade and Investment (No. 28  of the State Administration of Foreign Exchange) (Notice 2019) was published on 23 October 2019. Notice 2019 sets out 12 measures to boost cross-border trade and investments, and relaxes foreign exchange restrictions on foreign investment enterprises. Foreign investors are given greater freedom to use their capital funds in China as Notice 2019 allows foreign firms engaged in non-investment businesses to make equity investments with their capital funds in mainland China.Main laws
What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?
The main laws include the following:
- the PRC FIL 2020;
- Implementing Regulations of the Foreign Investment Law of the People’s Republic of China (Implementing Regulations);
- Measures for Foreign Investment Information Reporting (Measures No. 2);
- Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2019 Version)(Negative List);
- the PRC Anti-Monopoly Law; and
- Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Notice 6).
Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?
The PRC FIL 2020 is the primary law in respect of foreign investment, which is applicable to all foreign investment activities carried out directly or indirectly by foreign investors in China, including independently or jointly with other investors (i) establishing new foreign-invested enterprises; (ii) obtaining shares, equities, property shares or other similar rights and interests of Chinese domestic enterprises; (iii) investing in new projects in China; and (iv) investment through other means stipulated in laws, administrative regulations or provisions of the state council.
For the purpose of implementing PRC FIL 2020, the State Council of China further promulgated the Implementing Regulations to construe and detailing certain clauses in PRC FIL 2020, which is applicable to all foreign investment activities carried out directly or indirectly by foreign investors in China.
Where foreign investors carry out investment activities in China directly or indirectly, the foreign investors or foreign investment enterprises shall submit investment information to competent commerce authorities in accordance with Measures No.2.
The Negative List stipulates the special management measures for the market entry of foreign investment, such as equity requirements and senior manager requirements. Foreign investors shall not invest in the sectors in which foreign investment is prohibited under the Negative List, and market entry licensing of foreign investment shall be required for the investment in those sectors that are included in the Negative List and in which investment is not prohibited. Sectors not included in the Negative List shall be managed according to the principle of equal treatment of domestic and foreign investment. For some sectors, such as culture and finance, besides those requirements stipulated in the Negative List, foreign investors shall also comply with those requirements relating to the administrative approval, qualification requirements and national security, among others, which are provided in other laws and regulations. The Negative List will be updated by relevant authorities on a regular basis.
A foreign investor that merges or acquires a Chinese domestic enterprise or otherwise participates in concentration of business operators shall accept the review of the concentration of business operators in accordance with the PRC Anti-Monopoly Law.
Any foreign M&A that is in certain sectors (such as military-related industry, agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, etc) and might acquire the actual controlling right after foreign M&A, shall accept the security review in accordance with Notice 6.Definitions
How is a foreign investor or foreign investment defined in the applicable law?
The PRC FIL 2020 defines ‘foreign investment’ as investment activities carried out directly or indirectly by foreign natural persons, foreign enterprises or other foreign organisations (foreign investors) in China, including:
- foreign investors, independently or jointly with other investors, setting up foreign-invested enterprises in China;
- foreign investors obtaining shares, equities, property shares or other similar rights and interests of Chinese domestic enterprises;
- foreign investors, independently or jointly with other investors, investing in new projects in China; and
- investment through other means stipulated in laws, administrative regulations or provisions of the State Council.
Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?
China does not have specific rules for investment made by SOEs and SWFs yet.Relevant authorities
Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?
According to Notice 6, a joint ministerial meeting is responsible for conducting national security reviews of foreign investors’ M&A of military industrial enterprises or military industry-related supporting enterprises, enterprises located near key and sensitive military facilities, and other entities relating to national defence and foreign investors’ M&As of key domestic enterprises in areas such as agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, among others, whereby the foreign investors might acquire the actual controlling right thereof. Such joint ministerial meeting is led by the state council and organised by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOC) and other relevant departments.
The content of M&A security review include the Impact of the M&A transactions on the national security, the stable operation of national economy, the basic societal order and people’s living conditions and the R&D capacity for key technologies related to the national security.
Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?
The authorities have great discretion.
What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
Jurisdictional thresholds that trigger the application of the law are discussed in question 3. All foreign-invested enterprises shall be registered with the competent market regulation authority. For certain sectors, the approval from certain authorities will be necessary.
The national security review will be triggered if any foreign M&A is in certain sectors (such as military related industry, agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, etc) and might acquire the actual controlling right after foreign M&A.National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?
The foreign investor shall apply for the M&A national security review to the NDRC. The filing is mandatory and free.
For M&A national security reviews, documents that need to be submitted are as follows:
- a written application for M&A national security review and a description of the transaction signed by the legal representative or the authorised representative of the applicant;
- a foreign investor’s identity certificate or certificate of registration and credit certification documents, which are notarised or authenticated in accordance with law;
- the legal representative’s identity certificate or the power of attorney issued by the foreign investor to the authorised representative and the authorised representative’s identity certificate;
- a description of a foreign investor and its affiliated enterprises (including its actual controller and persons acting in concert), and its relationship with the government of the relevant country;
- a description of the domestic enterprise to be merged or acquired, the by-laws, business licence (photocopy) and audited financial statements of the previous fiscal year of it, the organisational charts before and after its M&A, and a description and the business licences (photocopy) of the enterprises in which it has invested;
- the contract on and by-laws of the partnership agreement on the foreign-funded enterprise to be established after the M&A and a list of the members of the board of directors to be appointed by the shareholders and the general manager to be employed or partners and other senior managerial personnel;
- in the case of any equity-based M&A transaction, the equity transfer agreement or the agreement on the foreign investor’s subscription to additional capital of the domestic enterprise, the shareholders’ resolutions of the merged or acquired domestic enterprise, resolutions of the shareholders’ meeting and the relevant asset evaluation reports;
- in the case of any asset-based M&A transaction, a resolution on the consent of the domestic enterprise’s governing authority or holder of title to assets to the sale of the assets, asset sales agreement (including a list of the assets to be purchased and their condition), information on all parties to the agreement and the relevant asset evaluation reports;
- an explanation of the impact of the voting rights to be enjoyed by a foreign investor after the M&A on the execution of the resolutions of shareholders’ meeting or shareholders’ assembly or board of directors and the partnership affairs, an explanation of other circumstances resulting in the transfer of the actual controlling powers in such aspects of the domestic enterprise as operational decision-making, finance, personnel and technology to the foreign investor or its domestic or overseas affiliated enterprise, and agreements or documents related to the aforesaid circumstances; and
- other documents required by the Ministry of Commerce.
Which party is responsible for securing approval?
The foreign investor shall file the application. If two or more foreign investors are involved, they may apply jointly or designate one foreign investor to apply for the M&A review.Review process
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
There are different stages of an M&A national security review. Once a complete M&A national security review application is received, the NDRC will make a preliminary judgment. If the NDRC decides that a review is necessary, it will notify the applicant in writing within 15 working days and submit the application to the joint ministerial meeting for a general review within five working days after notifying the applicant.
After receiving the application from the NDRC, the joint ministerial meeting has 30 working days to conduct a general review on whether the transaction affects national security or not. If it is determined that the M&A does not affect national security, then the transaction will be allowed to proceed. However, if the joint meeting finds otherwise, it will start the special review procedure that will last up to 60 working days.
There is not any exemptions or ‘fast-track’ options.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
The review must be completed prior to the close of transaction. If the M&A national security review result is positive but if the parties have implemented the transaction, the authority will require the parties to transfer relevant equities or assets to eliminate impacts that the transaction has made on national security.Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
Informal guidelines could be obtained from authorities before making a filing. Prior to making a formal M&A national security review application, applicants may request consultations with the NDRC regarding procedural issues. Such advance consultations are optional and not binding.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
There is no such practice or specialist in China. Pre-filing communications are possible as discussed in question 13. However, there is not any other lawful informal procedures to facilitate or expedite clearance.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
Relevant authorities have powers to eliminate impacts that the M&A has made on national security.
Substantive assessmentSubstantive test
What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?
An M&A national security review looks at the impact of the transaction on national defence security, the national economy, basic social order, and on research and development capabilities related to critical national security technologies.
To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?
Authorities will not consult or cooperate with officials in other countries during the substantive test.Other relevant parties
What other parties may become involved in the review process? What rights and standing do complainants have?
Relevant departments of the state council, national industry associations, enterprises in the same industry, and upstream and downstream enterprises are allowed to recommend the relevant authority to conduct an M&A national security review by submitting an application that explains relevant situations, including basic information on the transaction, specific implications for national security, among others.Prohibition and objections to transaction
What powers do the authorities have to prohibit or otherwise interfere with a transaction?
The relevant authorities have the power to require the parties to terminate the transaction or transfer relevant equities or assets to eliminate the impacts that the M&A may have made on national security.
Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?
During the review, applicants are allowed to amend their transaction plans. Even if the M&A national review result is positive, applicants can still resubmit their application after making adjustments to their transactions.Challenge and appeal
Can a negative decision be challenged or appealed?
The national security review decision is final.Confidential information
What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?
Various statutes have prohibited administrative members from disseminating confidential information gained through their work capacities, including PRC FIL 2020, the Anti-unfair Competition Law of the People’s Republic of China, the AML and the Criminal Law of People’s Republic of China. If confidentiality is breached, consequences include disciplinary sanctions and possibly criminal charges if the breach has caused serious damages.
Recent casesRelevant recent case law
Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.
After taking over the responsibility for accepting M&A national security applications in April 2019, the NDRC has made its first special review in the Yonghui Superstore acquisition of Zhongbai Holdings Group Co Ltd on 8 November 2019. The review is still ongoing and could last up to 60 days.
Updates & TrendsKey developments of the past year
Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?Key developments of the past year24 Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?
The Ministry of Justice released the Implementing Regulations for the Foreign Investment Law of the People’s Republic of China (Draft for Comment) on 1 November 2019. It is expected that the Implementing Regulations for the Foreign Investment Law of the People’s Republic of China will be published next year to demonstrate the government’s determination to further open up to foreign investment.
Lately, the government has made varies announcements that the country will further ease market access for foreign investments, shorten the Negative List and continue to improve its business environment. An order (Regulation on Optimizing the Business Environment, Order No. 722 of the State Council of the People’s Republic of China) was published by the state council on 22 October 2019 and came into force on 1 January 2020. The document shows that the Chinese government is determined to foster a market-oriented, law-based and internationalised business environment.