China has now established its national security review system on foreign capital merger and acquisitions (M&A) and the regulatory rules concerning the investment in banking by foreign strategic investors. However, there is not any specialized financial security review mechanism yet. In recent years, foreign parties continued to exert pressure from all levels, requiring China to relax the restrictions on the shareholding ratio of foreign investors in the banking industry. Such discrepancy has become increasingly prominent in cross-border restructuring transactions. Therefore, China may learn from relevant international practice and establish an appropriate national financial security review mechanism.
The Ministerial Panel for the Security Review of M&A of Domestic Enterprises by Foreign Investors is responsible for the security review work of M&A. The panel must be under the leadership of the State Council, while the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) must take the lead in carrying out M&A security reviews in conjunction with other relevant departments, based on the industries and fields involved in the foreign M&A. The security review is divided into two stages: general review and special review. With respect to M&A transactions submitted by MOFCOM for M&A security review, the ministerial panel must first conduct a general review, and implement a special review if transactions fail the general review.
The security review may be started in three circumstances: (1) where the M&A of a domestic enterprise by a foreign investor is subject to a security review as specified in the relevant regulations, the foreign investor must file an application for an M&A security review; (2) where local commerce departments have received an M&A application, if the M&A is subject to an M&A security review but the applicant does not file an application for a review with MOFCOM, such local departments must suspend processing of the application, require the applicant to file an application for M&A security review with MOFCOM in writing, and report the relevant information to MOFCOM at the same time; and (3) as a third party, the departments concerned under the State Council, national industry associations, enterprises in the same industry, or upstream or downstream enterprises, may make proposals for an M&A security review to MOFCOM, and where the transaction is subject to an M&A security review, MOFCOM must submit its recommendations to the ministerial panel within five working days.
China’s financial regulatory system consists of the People’s Bank of China (PBC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC). The PBC is responsible for formulating and implementing monetary policies to maintain financial stability; the CBRC is responsible for supervising and managing the banking financial institutions; the CSRC is responsible for supervising and managing the national securities and futures markets, and the CIRC is in charge of the supervision and management of the national insurance market. In addition, the Ministry of Finance is responsible for managing the state-owned assets of financial enterprises according to regulations.
There is currently no supportive law regarding the security review of foreign investment in the finance field. The relevant legislation is of a relatively low level and without sufficient binding force, there are no connections among relevant laws and regulations, and there are not sufficient supporting systems, or a unified security review system yet. So we may adjust such situations from the following aspects:
In terms of the legislation. China has not enacted specific legislation to regulate the security review system, focusing on national security, for foreign investors to invest in the financial sector. The authors suggest developing a specific security review law at a higher level for foreign investors to invest in the financial sector, and then authorizing the relevant departments to develop implementation regulations.
We should follow the basic principles of substance over form when enacting a national financial security review system. We should judge the substantive impact of the review of “national security” and take into account the substantive review and protection of key infrastructure, basic technology and industry in the national economy while making clear the reference standards.
The design of the system might focus on the following aspects: (1) clearly incorporating the scope of security review, industry and investment behaviour, and establishing general miscellaneous provisions to retain flexibility; (2) clearly specifying the audit standards; (3) distinguishing the review and approval procedures, rights and obligations, and remedies according to the investment behaviour of different industry segments; and (4) strengthening the combination of prior review, and post, continuing supervision.
The responsible review body. It is recommended to establish a national financial security review body under the National Security Council, headed by the Central Committee for National Security, with persons from the PBC, CBRC, CSRC, CIRC, NDRC, Ministry of State Security, Ministry of Finance, MOFCOM, Ministry of National Defence, and Ministry of Industry and Information Technology as the members, to conduct security reviews on the investment in financial sectors by foreign investors.
The review procedures. We may learn from current security review procedures of foreign capital M&A, and adopt the methods of review upon the application by relevant parties, as well as upon the request of relevant authorities.
The participants. Under the current system, the participants in the security review are limited to applicants and auditors only. It is recommended to introduce more oversight and participants to the financial security review process to avoid omission and oversight.
In respect of application materials, we may require relevant applicants to present the financial adviser’s verification opinion and the legal adviser’s verification opinion, and conduct a professional analysis of the financial status and legal compliance of the applicant’s application from the perspective of a neutral professional third party, and provide necessary professional advice and support to the ministerial panel.
In terms of stakeholders, we may publicly disclose the security review items submitted by the applicants, develop clear norms or guidelines for the disclosure of security review information, supervise and urge the applicants to accurately and completely disclose relevant application materials, and accept the supervision and inquiry from the open market. The Ministerial Panel may ask questions that it deems important and request the applicant to reply in writing.
Li Wei and Tang Shi are junior partners at Grandway Law Offices
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