China to Start Security Review of Foreign Acquisitions of Domestic Companies

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Feb. 15 – Foreign investors looking to acquire or merge with Chinese companies may need to face a security review starting next month, in addition to going through the existing procedures of an industrial access review and an anti-monopoly investigation.

According to the “Circular on the Establishment of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (guobanfa [2011] No.6)” the General Office of the State Council promulgated on February 3, China will establish a joint ministerial conference system to conduct a security review of foreign mergers and acquisitions (M&A) of domestic enterprises. Circular No. 6 also specifies the scope, content, working mechanism and procedures of the M&A security review.

The scope of M&A security reviews includes foreign M&As of the following domestic enterprises in which foreign capital may obtain actual control:

  • Enterprises that are involved in the military industry or national defense/security
  • Enterprises that are located near key and sensitive military facilities
  • Enterprises that are involved in key agricultural production, major energy and resources, vital infrastructure, important transport services, core technology and major equipment manufacturing that may affect national security

Circular No. 6 defines “foreign M&A” as follows:

  • A foreign investor purchases the equity of a domestic non-foreign-invested enterprise or subscribes to the capital increase of such enterprise, such that the domestic enterprise is transformed into a foreign-invested enterprise
  • A foreign investor purchases the equity of the Chinese shareholder of a domestic foreign-invested enterprise or subscribes to the capital increase of such enterprise
  • A foreign investor establishes a foreign-invested enterprise and, through such foreign-invested enterprise, contracts to purchase the assets of a domestic enterprise and operate such assets, or purchase the equity of a domestic enterprise
  • A foreign investor directly purchases the assets of a domestic enterprise, and uses the assets to invest in the establishment of the foreign-invested enterprise to operate the assets

In accordance with Circular No. 6, foreign investors intending to acquire domestic companies shall apply to the Ministry of Commerce (MOFCOM).  For M&A transactions falling in the scope of security review, the MOFCOM shall submit it to the joint conference for security review within five working days.

The new circular will take effect 30 days from its release. That means from March 4, foreign investors who want to conduct M&As in the aforesaid industries will need to go through three types of investigations, which are:

  • Industrial access review according to the most up-to-date “Industry Catalog for Foreign Investment Guidance”
  • Anti-monopoly investigation based on the “Anti-Monopoly Law of People’s Republic of China” that took effect in 2008
  • Security review by the joint ministerial conference

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