China: More on China's national security review regime - the American regime vs the Chinese regime

Last Updated: 23 March 2011
Article by Susan Ning, Shan Lining and Angie Ng

On 3 February 2011, China's State Council released a notice which governs a national security review process for foreign acquisitions of domestic companies1. This national security review process will be implemented on 5 March 2011.

Since the release of the notice, there has been a flurry of articles and commentaries in both the legal and business media circuit. Foreign businesses who wish to invest in China are concerned that this is potentially another tedious clearance process (on top of the corporate, regulatory and antitrust clearance processes) to pass before they are free to close their proposed transactions.

Questions have been raised in relation to what sorts of transactions may be caught by this national security review process; how long the process; and about procedural fairness issues in relation to this process (see our article entitled "Will my transactions be subject to the National Security Review Regime?", which deals with this issue; see also our article entitled "National Security Review regime formally established in China" for more background information in relation to the process).

China is not alone in relation to instituting a national security review process to review foreign-local transactions which may impact on national security issues. There are similar processes in other jurisdictions as well, including the United States (US), Canada, Germany and Australia.

Several of our US-based clients have wondered about the differences and similarities between the US-equivalent of a national security review system (vis-à-vis foreign-local transactions) and the proposed Chinese regime.

No. Issue US national security review regime Chinese national security review regime
1 What are the primary legislation and regulations which govern the national security review of foreign-domestic deals? section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA) (section 721) and as implemented by Executive Order 11858, as amended, and Regulations Pertaining to Mergers, Acquisitions, Takeovers by Foreign Persons 2008. The Anti-Monopoly Law, and the Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (issued by the State Council), and the Interim Rules on Relevant Issues re Implementing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (issued by the Ministry of Commerce (MOFCOM), effective from 5 March to 31 August 2011)
2 What types of transactions are caught by the national security review regime? Foreign acquisition of domestic companies in the US; specifically, "any merger, acquisition or takeover...which could result in foreign control of any person engaged in interstate commerce in the United States".

Foreign acquisition of domestic companies in China. A foreign-domestic transaction may only be caught if:

  1. the domestic company is involved in selling goods or services in relation to national defense security or
  2. the domestic company is involved in selling goods or services in relation to national economic security and the foreign company acquires de facto control over the domestic company.
3 Could both proposed and completed transactions be caught by the regime? Yes, the US regime applies to both proposed and completed transactions. The Notice does not contain express provisions which deal with this issue. However, the wording in the Notice is sufficiently broad to cover both proposed and completed transactions.
4 How long will the review take? Initial review period is 30 days. If the transaction warrants further investigation, the investigation must be completed by the end of another 45 days. In addition, the President may announce a decision on whether or not to suspend or prohibit a transaction no later than 15 days on which an investigation is complete. The general review process will take 30 working days. If a transaction is subject to the special review process, this will take up to 60 working days.
5 Who are the main authorities in charge of the review process? A Committee on Foreign Investment In the United States is in charge of undertaking this review process. This Committee is made up of the following members: The Secretary of the Treasury; the Attorney General; and the Secretaries of Homeland Security, Commerce, Defense, State and Energy; the Secretary of Labor (ex officio); the Director of National Intelligence (ex officio). The FINSA also stipulates that this Committee may include generally or on a case-by-case basis the heads of any other executive department, agency or office. The President has designated the US Trade Representative and the Director of the Office of Science and Technology Policy as additional members of the Committee. A Joint Committee, led by the MOFCOM and the National Development and Reform Commission (and under the leadership of the State Council) will work with relevant government agencies to carry out the review process.
6 What types of factors will be taken into consideration when the authority reviews the transaction?

The "requirements" on national security including:

  • the domestic production needed for projected national defense requirements;
  • the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials and other supplies and services;
  • the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United State to meet the requirements of national security;
  • the potential effects of the proposed or pending transaction on sales of military goods, equipment or technology to any country;
  • the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting the US national security;
  • the potential national security-related effects on US critical infrastructure and critical technologies;
  • whether the covered transaction is a foreign government-controlled transaction;
  • the long-term projection of US requirements for sources of energy and other critical resources and material, etc.

The impact of transactions on:

  • national defense security, including production capacity of domestic products, provision capacity of domestic services and relevant equipment and facilities that are required by national defense;
  • stability of the national economy;
  • basic social life order; and
  • capacity of research and development on key technologies that have a bearing on national security.
7 Who may initiate a review? Any party or parties to the transaction. In addition, the President or the Committee may initiate a review unilaterally. Parties to the transaction or other third parties (including the relevant ministries of the State Council, nationwide industry associations, enterprises in the same industry and enterprises in the upstream or downstream industries)
8 What are the remedies in respect of a review? The transaction may be suspended or prohibited if the transaction threatens to impair the national security of the United States. The Parties may be asked to terminate the transaction or take other effective measures such as equity transfer, assets transfer etc to eliminate the impact of the transaction on national security.

1. The notice is entitled "Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Susan Ning
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.