On December 19, 2020, China’s National Development and Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”) released anticipated “Measures for the Security Review of Foreign Investments” (the “Measures”). As part of the new foreign investment regulatory framework under the China’s Foreign Investment Law that went into effect on January 1, 2020, the Measures will become effective on January 18, 2021.
Summary of the Measures
The Measures are closer to the prevailing security review procedures in other countries than the existing review in China, such as:
- establishes the standing committee and make the security review as a standard process for new foreign investment,
- a clear application and review process with a review period almost identical to the U.S. CFIUS review, and
- a clear application of the review to the investment area.
Nevertheless, it applies more rigorously and broadly than other security reviews such as CFIUS:
- it applies not only to M&A investment but also greenfield investment and other types of investment, such as securities, trusts, convertible debts,
- Any military-related investments is required for security review.
As a result, though the current implementation of Negative List may open certain industries to foreign investment, foreign investors still has to pass the security review.
Development of China's Foreign Investment security review
When the Anti-Monopoly Law released in 2007, it mentioned that the foreign investment shall go through security review according to relevant regulations at the end of Article 31. It was not until 2011 when China first established its security review on foreign investment. In February 2011, the State Council released the Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, and later in August, the Ministry of Commerce released Provisions of Ministry of Commerce on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. The Notice and the Provisions specify the scope, content and process of the existing review.
Until August 2019, Yonghui Supermarket (a joint venture) was required by NDRC to go through foreign investment security review when it intended to acquire the state-owned Zhongbai Group, and ended up abandoning the transaction. The wide publication of this case has again drawn foreign investors’ attention on Chinese security review on foreign investment.
Working mechanism as the standing review committee
Article 3 of the Measures sets up a working mechanism for the security review of foreign investments which is led by NDRC and MOFCOM. Its role is very similar to that of CFIUS, to
- handle the security review application,
- identify transactions of concern that have not been notified to working mechanism for review, and
- monitor and enforce compliance with review decisions.
Expansive scope of review
Unlike CFIUS, the review scope is comparatively expansive. In addition to investment by merger and acquisition, it also includes greenfield investment and other types of investment, such as control by agreements (VIE), trusts, convertible debts.
Moreover, the purchase of shares of China-owned listed companies will be also included in the scope of review, but it will be regulated by a separate implementation measure yet to make.
Military and significant industries subject to review
The investment industries subject to review are divided into the following two categories with different criteria:
- national defense related industries, which include military related industry and real estate that is adjacent to military facilities.
- investment related to the essential industries that may affect the national security, including certain agricultural products, energy and resources, equipment manufacturing, infrastructure, transport services, cultural products and services, information technology and Internet products and services, financial services, key technologies and other significant fields related to national security.
All foreign investment in the national defense industries are subject to review. The others requires “actual control” by the foreign investors. “Actual control” is decided by shares and the control over company’s important decisions. The Measures define “actual control” when
- the total amount of foreign investment is larger than 50% of the share, or
- the foreign investors is able to affect the board, the shareholder meetings, or the essential personnel who decides the operation, human resources, finance, or key technology of the company.
Review procedure similar to CFIUS
The Measures apply a review procedure that is extremely similar to CFIUS Review
1. Whom may apply
The applicants can be the foreign investors or the Chinese relevant parties. Anyone may suggest to the Working Mechanism on certain investment that may affect national security. The Working Mechanism may also initiate the review on its own.
2. What shall be included in the Application Document
The applicant shall initiate the review process by submitting the following documents:
- Declaration Letter including the information on foreign investors, such as names, domicile, scope of business, basic investment information,
- Investment plan,
- Statement on whether the foreign investment may affect national security,
- Other materials as requested by the Working Mechanism.
3. Who receives the application
The Working Mechanism will receive and review the application. However, unlike CFIUS which is the sole office that receives the application, the Working Mechanism may delegate certain government branches to receive the application and to forward to Working Mechanism. It is possible that in practice, the review application will be submitted to the same office (such as commercial bureau) along with other establishment materials.
4. How long is the Review Process
The review timeline is similar to CIFUS review:
- 15 working days after receiving the application to determine if review is required;
- 30 working days to complete the initial general review to approve the transaction or to start the second stage of a more thorough review;
- 60 working days to complete the second stage of review and the time could be extended in certain circumstances.
The Measures specifies the duration of the review at each stage, but does not specify the circumstances under which this timeline can be extended. It is suspended when the working mechanism requests additional documentation. Without the actual implementation of the specific review, it is difficult to predict how long the review will ultimately take to complete.
5. What will be the Decision
Also similar to CIFUS, the decision can be one of the three (1) approval, (2) deny, or (3) approval with mitigation measures.
The Working Mechanism also assumes the role of monitoring review decisions. Violation of the review decision by applicant will be recorded as a bad credit record in the relevant national credit information system.
Despite that the Measures provide a comparatively specific procedures, it leaves some significant questions open, such as the timeline, the actual office that receives the documents, the complete list of documents in the application and certain conditions of extension etc. Those questions probably will be answered in practice.