In an anticipated move, on 4 March 2011, China's Ministry of Commerce ("MOFCOM") promulgated the Ministry of Commerce Interim Provisions on Implementing the National Security Review System for Mergers and Acquisitions of Enterprises within China involving Foreign Investors ("Interim Provisions"). The Interim Provisions clarify certain procedural issues arising from the national security review system established about one month ago. The Interim Provisions will essentially play a stop-gap role – somewhat unusually they became effective as of 5 March and will expire on 31 August of this year. The public are invited to submit comments on the Interim Provisions up until 10 April. MOFCOM will also assess the comments and recommendations in the light of the implementation of the Interim Provisions so as to improve the system at a later stage.
Overview of the Interim Provisions
The Interim Provisions essentially clarify the interrelationship between the national security review and the existing foreign investment approval framework. For a proposed transaction only requiring local MOFCOM approval, but triggering national security review, local MOFCOM must suspend its foreign investment approval process and require the parties to make a national security review notification first, and report the case facts to central MOFCOM.
The Interim Provisions also introduce a pre-notification consultation mechanism, under which the parties to a transaction may apply for a meeting during which they can consult with MOFCOM regarding the relevant procedural issues. This pre-notification consultation mechanism seems to be different from that applicable to merger review pre-filing consultations in that MOFCOM seemingly wants to limit the consultation to procedural rather than substantive issues.
Perhaps the most important feature of the Interim Provisions is that they specify the materials that need to be filed for national security review, some of which are identical to those required for foreign investment and/or merger control approval, but the list is not exhaustive, being subject to the collection of "any other documents required by MOFCOM".
Notably, the Interim Provisions extend the already lengthy review procedure by an additional fifteen business days. In other words, whilst the recent circular of the State Council 1 which formally established the national security review system requires MOFCOM to decide whether to transfer a filed notification to the "cross-ministerial joint conference" under the State Council ("Joint Conference") within five business days of receipt of complete materials, the Interim Provisions prescribe that MOFCOM should notify the parties if a transaction needs national security review within fifteen business days of receipt of a complete set of application materials and must transfer the case to the Joint Conference within five business days of such notification. This has the effect of extending a potentially already lengthy procedure but, at the same time, may have the positive effect of giving MOFCOM more time to make a sound initial assessment as to whether a referral is needed. Potentially, the lack of sufficient time might create an incentive for MOFCOM to refer cases to the Joint Conference by default, in case of doubt. Hence, the additional time available to MOFCOM might hopefully translate into fewer referrals to the Joint Conference.
The Interim Provisions are a welcome development in the sense that they clarify certain practical issues relating to implementation of the national security review system. On the other hand, however, the scope of the additional guidance is rather limited. On the procedural side, many basic questions are still unanswered – for example, which unit within MOFCOM will receive and examine national security filings, or which ministries or government bodies will be represented in the Joint Conference. Furthermore, no substantive issues have been touched on. For instance, the precise scope of sectors subject to national security review, such as which agricultural products are "key" and hence fall within the scope of national security review, is not further clarified.
In terms of outcomes consistent with the Security Review Circular, the Interim Provisions provide:
- for M&A transactions with no impact on national security, the applicant is free to proceed with the transaction approval process;
- for M&A transactions which are likely to impact [negatively] on national security, the applicant must not implement the transaction until it has made adjustments to the underlying documentation and undergone review afresh;
- where an M&A transaction has already caused or is likely to cause a material [negative] impact on national security, MOFCOM shall, based on the review opinion of the Joint Conference, order termination, transfer of shares or assets or other measures to eliminate the negative impact.
What seems to be the distinction here is that M&A transactions where there is only a negative impact may be "fixed" by redrafting the documents whilst those that have had or are likely to have a serious negative impact on national security must be unwound or restructured to reduce the negative impact on national security.
Whilst it is commendable that there was only a very short time gap between the Security Review Circular and the Interim Provisions, the Interim Provisions are clearly not the final word on the national security review system. In addition, it is debatable how much consideration and weight should be given to these provisions which only have a very short, predetermined "shelf life". Multinational companies contemplating acquisitions in China will need to accept that the building of China's national security review system will be a step-by-step process. Hopefully, MOFCOM will take on board some of the comments received as part of the public consultation process and come up with a more fine-tuned set of rules to replace the Interim Provisions when they expire in August 2011.