China Publishes New Rules on National Security Review of Foreign Investment

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TAKEAWAYS

  • The new national security review system will target foreign investment in military sectors and investment that involves obtaining actual control of important agricultural products, natural energy, heavy equipment manufacturing, infrastructure, transportation services, cultural products and services, information technology and internet services, financial services, and key technologies.
  • Regulators emphasize that the new rules are not protectionism or backtracking from China’s opening-up policies and would help balance the economic benefits of further opening with the need to ensure national security.
  • Foreign investment in the targeted sectors must be subject to review before the relevant parties execute the investment.

On December 19, 2020, China’s National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly issued the Measures for the Security Review of Foreign Investment (Security Review Measures), which will take effect in 30 days (i.e., January 18, 2020). The Security Review Measures follow China’s Foreign Investment Law, which took effect on January 1, 2020, and were aimed at broadening market access for foreign investors. Below is a high-level summary of the Security Review Measures.

TRANSACTIONS AND SECTORS SUBJECT TO SECURITY REVIEW

Types of Investment/Transactions subject to Review
Any foreign investments in China that impact or potentially impact the national security of China are subject to security review, which include any investment carried out by foreign investors directly or indirectly in the territory of China in the following transactions:

  1. Foreign investors by themselves or jointly with other investors invest in new project or establish a business in the territory of China;
  2. Foreign investors acquire equity or assets of enterprises registered in China through mergers and acquisitions;
  3. Foreign investors make investment in China through other means.

Covered Sectors
Foreign investment in the following sectors is subject to national security review:

  1. Invest in the military industry, military-related industry and other areas relating to China’s national defense security, as well as investment in the surrounding areas of military installations and military facilities;
  2. Invest in important areas relating to national security, including important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and Internet products and services, important financial services, key technologies, etc., and obtain de facto control of the invested enterprise.

Reviewing Authorities
A foreign investment security review working mechanism (Working Mechanism) will be established to be responsible for organizing, coordinating and guiding foreign investment security review work. The office of the Working Mechanism is established at the NDRC, and both NDRC and MOFCOM will take the lead and undertake the daily work of foreign investment security review.

Review System and Procedures
The Security Review Measures establish a three-stage review system and procedures.

  • Stage 1: Preliminary Review (15 Working Days)
    After any application for security review is submitted to the office of Working Mechanism, the office shall, within fifteen (15) working days from the date of receiving the application materials, make a decision on whether a security review needs to be conducted on the reported foreign investment and notify the relevant parties in writing. If it is decided that no security review is required, the foreign investors are allowed to proceed with the proposed investment, or otherwise the proposed investment is subject to security review.
  • Stage 2: General Review (30 Working Days)
    If the office of Working Mechanism decides that security review is required, it shall conduct a general review and complete within thirty (30) working days. If the office of Working Mechanism, upon such general review, decides that the proposed investment does not impact national security, it shall make a decision that the application has passed the security review. If the office of Working Mechanism is of the view that the proposed investment has or may have an impact on national security, it shall make a decision to conduct a special review.
  • Stage 3: Special Review (60 Working Days)
    A special review shall be completed within sixty (60) working days after the special review procedure is launched and may be extended under special circumstances. The Security Review Measures do not specify what constitutes “special circumstances” and how long the review period could be extended. After the special review is completed, the office of Working Mechanism shall make one of the following decisions:
  1. If the proposed investment does not impact national security, a decision shall be made that that the application has passed the security review.
  2. If the proposed investment impacts national security, a decision shall be made to prohibit the proposed investment.
  3. If the impact on national security can be eliminated by imposing additional conditions and the applicant undertakes in writing to accept such conditions, a decision may be made to approve the proposed investment subject to additional conditions set forth in the decision.

OUR OBSERVATIONS
On July 1, 2015, China also promulgated the PRC National Security Law (NSL), which is the most comprehensive national security legislation to date in China. On January 1, 2020, the Foreign Investment Law of China (FIL) and its implementation regulations came into effect, which establish the new foreign investment regulatory framework in China. (See our series of client alerts regarding FIL here.) The Security Review Measures mark a key step forward to implement the FIL and the NSL.

Coincidentally, on December 18, 2020, the U.S. Department of Commerce Bureau of Industry and Security (BIS) added 59 Chinese mainland entities and individuals and one Hong Kong company to the Entity List for activities that the U.S. government deemed to be contrary to the national security or foreign policy interests of the United States.

The promulgation of the Safety Review Measures signals that China is making a consolidated strong effort to implement a more unified and comprehensive system to keep strict monitoring on investment and transactions that might have national security implications.

Foreign investors are recommended to be mindful of China’s national security review system and pay attention to the proposed transactions and investment (directly or indirectly) in the industries that are target for national security review. Investment plan, schedule, and terms and conditions for closing for investment in China should take into account the timing and contingency of obtaining national security approval.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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