China Formalizes Security Review Rules for Inward M&As

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Aug. 31 – China has released new regulations to formalize its security check system for inward merger and acquisition (M&A) transactions. The new law will make it relatively difficult for foreign investors to avoid security reviews, even though many investors tend to merge with or acquire Chinese companies through ways such as establishing variable interest entities or trust companies.

The new “Regulations on the Implementation of the Security Review System for M&As of Domestic Enterprises by Foreign Investors (MOFCOM Announcement [2011] No.53)” released by the Ministry of Commerce (MOFCOM) on Aug 25 will replace the “Interim Provisions on Issues Related to the Implementation of the Security Review System for M&As of Domestic Enterprises by Foreign Investors (MOFCOM Announcement [2011] No.8)” and will take effect starting from September 1, 2011.

Announcement No.53 only makes minor changes to the main structure and content of Announcement No.8, which outlined the main application as well as work procedures of the security review and clarified the necessary paperwork required from foreign investors applying for the security review.

The application process for foreign investors under the new provisions is as such:

Step One: Deciding on an application for a security review

  • A foreign investor shall submit an application for M&A security review to the MOFCOM if the domestic enterprise that is going to be merged with or acquired falls into the security review scope defined in the “Circular on the Establishment of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (guobanfa [2011] No.6)
  • If the M&A is carried out by two or more foreign investors, they can jointly file an application or designate one of the investors to do so
  • A foreign investor may be forced to file an application for an M&A security review if a third party – such as related State Council departments, national industry associations, other enterprises involved in the same industry and upstream/downstream industries – suggests that the MOFCOM should conduct a security review on the M&A case and such suggestion is approved by the MOFCOM
  • A foreign investor is allowed to reserve a consultation with the MOFCOM for better communications before filing the application

Step Two: Application paperwork submission

  • Letter of application for the M&A security review and a statement of transaction details – both documents signed by the applicant’s legal representative
  • Identity certification, registration certification, or credit worthiness certification documents of the foreign investor which have been notarized or certified in accordance with the law
  • Statement on the information pertaining to the foreign investor and its associated enterprises (including its actual controller or parties acting in concert), and a statement on its relationship with the government of relevant countries
  • Statement on the operating status of the target domestic enterprise, its articles of association, business license (photocopy), audited financial statements for the previous year, chart of its organizational structures prior to and after the M&A, and a statement on the operating status of enterprises invested in by the target enterprise, and business licenses (photocopy) of such enterprises
  • Contract, articles of association, the partnership agreement, and the name list of senior managers proposed for a foreign-invested enterprise after the M&A transaction
  • Equity transfer agreement, the agreement for a foreign investor’s subscription for capital increase, resolutions passed by shareholders as well as the general meeting of shareholders in the target domestic enterprise and the corresponding asset evaluation report, if a foreign investor is involved in an equity M&A transaction
  • Asset sale resolution passed in the target domestic enterprise, the asset purchase agreement, information on every party of the agreement and the corresponding asset evaluation report, if a foreign investor is involved in an asset M&A transaction
  • Statement on the information pertaining to the foreign investor’s voting rights and control power after the M&A transaction
  • Other types of documents required by the MOFCOM

Step Three: Security review proceedings

  • The MOFCOM will inform the foreign applicant if the M&A deal needs to go through security review procedures within 15 business days after receiving the paperwork for application. Within those 15 days, the applicant is not allowed to proceed with the M&A transaction
  • If the MOFCOM determines a security review is needed for the M&A case, it will submit the case to the inter-ministerial joint conference for further review within five business days after it makes the decision
  • The MOFCOM will deliver the review result to the foreign applicant within five business days once it receives the official result from the joint conference
  • If the review result shows the M&A deal will not influence national security, the foreign applicant can proceed with its M&A procedures; otherwise, the M&A transaction may be ceased
  • The foreign applicant is allowed to proceed with the M&A transaction if the MOFCOM sends no notice regarding security review to the applicant within 15 business days after receiving its paperwork for application

The new announcement also made a few other improvements based on Announcement No.8, such as:

  • M&As through distinct avenues – such as trust, multi-level reinvestment, leases, loan offers, variable interest entities and offshore transactions – may all face security reviews
  • Involved government authorities are under confidentiality obligations during the security review

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. In particular, the firm specializes in all matters relating to mergers and acquisitions in the country. For advice on such matters, please email, visit, or download the firm’s brochure here.

This article is also available on Dezan Shira & Associates’ online business resource library. To view the article, and other regulatory updates, please click here.

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