After a period of consultation, China's Ministry of Commerce (Mofcom) has finalised key aspects of the country's new security review process for M&A deals in which foreign investors merge with or take control of Chinese enterprises in sensitive sectors.
Mofcom's newly published Rules of Ministry of Commerce on Implementation of Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors ("Security Review Rules") take effect on 1 September 2011, and replace interim rules that were published in March and subject to a consultation process.
The finalised Security Review Rules differ only slightly from the previous interim rules, which were summarised in our previous legal updates: New Rules Issued Regarding China’s Security Review Process For Foreign Investment and New Review Procedures for Foreign Investment in China. The basic principle of the new security review process remains unchanged - being that M&A deals will need to be notified to and approved by a new Inter-Ministerial Committee ("Security Review Committee") if they would result in a foreign investor merging with or acquiring Chinese enterprises in (or supporting) the military sector, or lead to the foreign investor taking control of Chinese enterprises in other sensitive sectors (including key agricultural products, key energy and resources, important infrastructure, important transport systems, key technology and critical equipment manufacturing) and thereby have a bearing on China's national security. Although tying in to references to security review in China's Anti-Monopoly Law, the new review process operates separately to anti-monopoly merger review and other foreign investment approval processes.
The Security Review Rules outline the required content of notifications to the Security Review Committee, specify the timeframe and procedural steps of the review process, and reference the decision-making powers of the committee (which includes a power to block or impose conditions on deals). All of these aspects are summarised in our previous linked updates, and no substantive changes have been made to these areas between the interim and now-finalised version of the rules.
The substantive changes that have been made include the following:
Unfortunately, the finalised rules fail to clarify a number of important issues relating to the security review process, such as how parties can self-assess whether their deals may be considered to have a bearing on China's national security when the Chinese authorities have so far only published a very broadly worded and non-exhaustive list of sectors that may be considered 'sensitive' in this respect (refer the sectors mentioned further above, which are listed in the Notice of the General Office of the State Council on the Establishment of the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors).
Although the Security Review Rules contemplate that parties may consult with Mofcom "in respect of procedural issues", which will presumably include this aspect, the scope of uncertainty seems unworkably large. Not only will this cause unnecessary anxiety in relation to many foreign investment deals, it may also hinder the ability of foreign investors to secure other required approvals in a timely manner. This is because the rules state that local bureaus of commerce must suspend their own (i.e. foreign investment approval) review of transactions that they consider fall within the scope of security review and refer these deals to Mofcom, and there is a real risk that in seeking to ensure compliance with this aspect of the rules the local bureaus will be prone to adopting a very broad interpretation of what may be a 'sensitive' sector/investment (and thereby refer all manner of deals to Mofcom for a decision on whether security review should occur, and suspend their own reviews pending such decision). There have been reports that local bureaus of commerce are in possession of a more detailed list of sensitive industries, but any such list has not been made public.
The Chinese authorities do not publish information on transactions reviewed by the Security Review Committee, so it is difficult to assess the impact the new review process is having at the present time. As things stand, the process look set to remain relatively opaque for some time yet, and is going to require careful navigation by foreign parties looking to invest in China going forward.
A flowchart outline of the security review process is available here.
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