On February 12, the State Council General Office issued a circular on “the Establishment of a Mechanism for National Security Review of Foreign Mergers and Acquisitions of Domestic Enterprises” (the “Circular”), which takes effect 30 days after the issuance of the Circular. This is the first time that China has set up a national security review mechanism of foreign mergers and acquisitions (“M&A”).

According to the Circular, in-bound M&As in the following industries will be subject to national security review by a national-level multi-ministry board and a transaction can be blocked on the ground of endangering China’s national security: (i) military industry and military-related enterprises, key and sensitive military installation related enterprises, and other enterprises related to national security; (ii) key agricultural sectors, critical energy and resources enterprises, important infrastructures and transportation enterprises, key technology enterprises, or major equipment manufacturing enterprises. Foreign M&As in the above industries or sectors will be blocked if foreign investors will obtain broadly defined control of the acquired entity.

Based on the Circular, a multi-ministry board will be set up ad hoc to review M&A transactions subject to review. Overseen by the State Council, the review board will be led by the National Development and Reform Board and the Ministry of Commerce, and will include other government agencies depending on the nature of the M&A transactions.

According to the Circular, the focus of the national security review will be the (i) M&A transactions’ impacts on national defense, domestic productivity, service capability and relevant equipment, and facilities needed for national defense; (ii) M&A transactions’ impacts on the sound economic development of China; (iii) M&A transactions’ impacts on the normal order of life in China; (iv) M&A transactions’ impacts on the research and development of key national defense technologies.

The Circular also provides detailed procedures for the national security review. First, the national security review may be initiated by (i) the foreign investors who will acquire the Chinese domestic enterprise in the specified industries or sectors; or (ii) the relevant PRC ministries or national trade associations, or enterprises in the same industry, which think the M&A transactions should be subject to national security review. The review application should be submitted to the Ministry of Commerce for a determination as to whether to conduct the review. Secondly, the multi-ministry board will initially conduct a general review by seeking written opinions from other ministries relevant to the industry. If the relevant ministries believe that the potential M&A will have some impact on national security, the multi-ministry board will start a special review process.

If the acquisition of domestic enterprises by a foreign investor has or may have a material effect on national security, the multi-ministry board will require the Ministry of Commerce together with other ministries to suspend the acquisition, transfer equity or assets, or take other measures to eliminate the effect on national security.

A review could take 30 to 95 days to complete.