National Security Review of Foreign M&A Deals Clarified

National Security Review of Foreign M&A Deals Clarified


Since February 2011, all foreign mergers and acquisitions of domestic Chinese enterprises in certain sectors have been subject to national security reviews. These interim regulations will be replaced on September 1 by new and clarified regulations. The new regulations introduce no significant changes but clarify thresholds and characteristics that will trigger a national security review.

Background: On February 3, 2011, the General Office of State Council promulgated a Circular on Establishment of the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investor (Guobanfa [2011]No.6) 务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知(办发[2011]6) ("Circular 6") on guiding Merger and Acquisition ("M&A") of domestic enterprises by foreign investors.

Under Circular 6, the scope of M&A security review was set as follows: foreign investors' M&A of domestic military industry enterprises and its ancillary enterprises, the enterprises around the key and sensitive military facilities and other units which have impact on national defense security. Foreign investors' M&A of domestic enterprises which have impact on national security, in fields of important agricultural products, important energy and resources, important infrastructure, important transportation service, key technology and major equipment manufacturing, etc and which may result in foreign investors' acquirement of actual control over the enterprises.

On August 25, 2011, the Ministry of Commerce ("MOFCOM") promulgated Provisions on the Security Review Mechanism for the Merger and Acquisition of Domestic Enterprises by Foreign Investors (Shangwubugonggao[2011] No.53)务部实施外国投资者并购境内企业安全审查制度的规定(务部公告2011年第53) ("Provisions") which is an operating rule of Circular 6. This Provision shall come into effect as of September 1, 2011.

Some key provisions: 

  • If the M&A of the domestic company falls into the scope defined in Circular 6, the foreign investor shall submit an application for security review with MOFCOM.
  • If relevant departments of the State Council, national trade associations, enterprises in the same industry or upstream and downstream enterprises deem it necessary to conduct M&A security review, they may make suggestions to MOFCOM on conducting security review and submit the statement of relevant information. If the matter concerned falls within the scope of security review, MOFCOM shall submit the suggestions to the ministerial panel within five working days. If the ministerial panel deems it necessary to carry out security review, MOFCOM shall, according to the decision of the ministerial panel, require the foreign investors to submit the application for security review in light of these provisions.
  • Foreign investors cannot avoid the M&A security review by any means including but not limited to proxy, trust, multi-level reinvestment, lease, loan, variable interest entities and offshore transaction.

Timeline for security review: MOFCOM shall notify the applicant in writing within 15 working days after the receipt of the application documents and submit to ministerial panel for review and approval within 5 working days after the date of notification ("Date of Notification"). The applicant cannot conduct the M&A transaction within the 15 working days after the Date of Notification. If the applicant do not get further written notice from MOFCOM within 15 working days after the Date of Notification, the applicant can proceed with the relevant formalities according to laws and regulations.

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