New security review for M&A by foreign investors initiated

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New security review for M&A by foreign investors initiated, 中国建立外资并购安全审查制度

On 3 February the State Council issued the Establishment of a Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors Notice (Guo Ban Fa [2011] 6), which came into effect on 5 March (see China Business Law Journal volume 2 issue 3, page 5). On 4 March, the Ministry of Commerce (MOFCOM) issued the Matters Relating to Implementing the Foreign Investors Merging with or Acquiring Domestic Enterprises Security Review System Interim Provisions (MOFCOM Announcement No. 8 of 2011), which are to remain in force until 31 August.

Scope of application

The Notice delineates the scope of the merger and acquisition (M&A) security review, clearly setting out the industries and types of M&A transaction that are affected, and the powers of control.

Range of industries

  • Military-industrial enterprises and those supporting the military industry, key enterprises and those around sensitive military installations as well as other entities related to national defence and security.
  • Important enterprises related to national security and major agricultural products, energy and resources, infrastructure, transport services, key technologies and equipment manufacturing, where effective control might be gained by foreign investors.
  • The State Council will make further provisions concerning the security review of M&A transactions by foreign investors affecting China’s financial institutions.

Types of transaction

  • Where foreign investors purchase the shares of enterprises with no foreign investment or subscribe to an increase in their capital.
  • Where foreign investors purchase the shares of Chinese shareholders in domestic foreign investment enterprises (FIEs), or subscribe to increase in the capital of those enterprises.
  • Where foreign investors agree to purchase the business assets of domestic enterprises through new FIEs and to operate these assets, or to purchase the shares of domestic enterprises.
  • Where foreign investors directly purchase the assets of domestic enterprises and use these assets to establish FIEs which operate them.

Effective control

“Foreign investors obtaining effective control” means foreign investors becoming the controlling shareholders or the effective controllers of domestic enterprises through merger or acquisition. This includes the following circumstances:

  • the total shares held by a foreign investor and its parent holding company or subsidiaries after a merger or acquisition come to more than 50%;
  • the total combined shares held by several foreign investors after a merger or acquisition come to more than 50%;
  • the total shares held by foreign investors after a merger or acquisition come to less than 50%, but this is enough for their vote to have a significant impact on the resolutions at general meetings of shareholders or meetings of the board of directors; and
  • other circumstances which lead to an effective right of control over the operational decision-making in domestic enterprises, or in their finances, personnel and technology being transferred to foreign investors.

Applications

Although in all cases the subject of an application for a security review will be a foreign investor which carries out M&A transactions, the application can be initiated in three different ways:

  • investors apply on their own initiative: if foreign investors consider that an M&A transaction falls within the scope of the security review, they should make their own application for a review to MOFCOM;
  • the approving authority requires it: when an application for an M&A transaction is being dealt with by a local department of commerce, and the application falls within the scope of an M&A security review but the foreign investor has not applied for such a review to MOFCOM, the department should not process the application but should issue a written demand for the foreign investor to lodge an application with MOFCOM; and
  • third-party advice: departments of the State Council, national trade associations, enterprises in the same industry and upstream or downstream enterprises may propose through a department of commerce that a security review of the proposed transaction be carried out. If, after investigation, a multi-agency panel considers this to be necessary, the foreign investor must submit an application for an M&A security review.

Review body

The Multi-Agency Panel for the Security Review of Foreign Investors Merging with or Acquiring Domestic Enterprises is responsible for conducting security reviews of foreign M&A transactions and for making decisions about them. The National Development and Reform Commission and MOFCOM are to take the lead in the multi-agency panel, while departments in charge of industries affected by foreign mergers and acquisitions are also to participate in its work.

Review process

Apart from the multi-agency panel security review process laid down by the Notice, the Interim Provisions establish an additional process whereby MOFCOM is to conduct a preliminary screening of applications for a security review.

Preliminary screening of applications

  • The applicant should, in accordance with the Interim Provisions, submit the application documents, including two special statements. The first of these is a statement describing any relationship between the foreign investor and its affiliates (including their effective controllers and persons acting in concert) and relevant national governments. The second is a statement describing the influence of the voting rights enjoyed by the foreign investor following the merger or acquisition over resolutions of meetings of shareholders, resolutions of the board of directors and the conduct of partnership affairs.
  • Where the application documents are complete and meet the statutory requirements, MOFCOM should inform the applicant in writing that the application has been received and is being processed.
  • MOFCOM should carry out the preliminary check within no more than 15 working days of the date of the written notice that the application has been received and is being processed. During this period, the applicant may not execute any M&A transactions and the department of commerce may not carry out any M&A review.
  • There are two outcomes of the preliminary check. First, where the merger or acquisition falls within the scope of the security review, MOFCOM will inform the applicant in writing and subsequently within five working days request the multi-agency panel to conduct a review. Second, where the time for the preliminary check has expired and MOFCOM has not informed the applicant in writing that its M&A transaction falls within the scope of a security review, the applicant may go ahead with the transaction in accordance with the law.
  • Before MOFCOM formally requests a security review, the applicant may make an application to MOFCOM for a discussion of the procedural issues concerning its merger with or acquisition of a domestic enterprise.

General reviews and special reviews

  • Within five working days of receiving a request from MOFCOM for a security review of an M&A transaction, the multi-agency panel should conduct a general review by asking departments concerned in writing for their views.
  • If the departments concerned agree that the transaction will not affect national security, no special review is to be conducted. If any department submits an opinion in writing that the transaction could affect national security, the multi-agency panel is to initiate the special review procedure within five working days of receipt of the opinion.
  • After initiating the special review procedures, if the opinions of the multi-agency panel regarding the security review of the M&A transaction are fundamentally similar, the panel should present the conclusions of the review; if there are significant divergences, the panel should request the State Council to make a decision.

Conclusions of the review

MOFCOM is responsible for notifying the applicant in writing within five working days of receipt of the written view of the multi-agency panel. The consequences are as follows.

  • If the view is that the M&A transaction does not affect national security, the applicant may go ahead with the transaction in accordance with the law. However, if subsequently there is a change in the transaction, an amendment of the agreement or another document, or other factors which result in the transaction falling into the scope of a security review, the transaction should be halted and a new application for an M&A security review submitted.
  • If the view is that the M&A transaction may affect national security, the applicant may go ahead with the transaction only after adjustments have been made to it, the application documents have been modified and a fresh review carried out.
  • If the view is that the transaction has already had or may have a significant impact on national security, MOFCOM may, in conjunction with relevant departments, terminate the transaction between the parties concerned, or transfer relevant shares or assets or take other effective measures to eliminate the effect of the transaction on national security.

After the expiry of the Interim Provisions, MOFCOM is expected to improve the regulations in accordance with the experience in their implementation, taking into account the comments and suggestions of the public.


Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.

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