China: MOFCOM issues national security review interim rules

Last Updated: 13 March 2011
Article by Susan Ning

On March 4 2011, just one day before the implementation of the national security review mechanism1, the Ministry of Commerce (MOFCOM) released the MOFCOM Interim Rules for Implementation (Interim Rules). These Interim Rules came into effect on 5 March and are set to expire on 31 August 2011.

The Interim Rules provide more details in relation to how the national security review process is initiated, documents to be submitted and more details the initiation of a national security review, the required documents, and the review decisions.

1. Initiation of national security review

Pursuant to the Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors released by the State Council (Notice), a national security review process may be triggered either upon voluntary request by the foreign investor involved or upon request by third parties.

  • Voluntary application by participants of proposed transactions

    The Interim Rules provide that if the merger and acquisition by foreign investors of domestic enterprises which clearly fall under the national security review scope provided by the Notice, the foreign investor(s) (Applicant) should file the application for national security review at MOFCOM. If the merger and acquisition of domestic enterprises is conducted by more than two foreign investors, they can jointly file the application or select one of them to file the application. [Note: From the way this provision is phrased in the Interim Rules, it would appear that the authorities would prefer to be notified by the foreign participants of the merger or acquisition, should these participants feel that their proposed transactions could fall under the purview of the national security review regime.]

    The Applicant should submit relevant documents requested by MOFCOM (to be discussed in section 2).  After MOFCOM deems the application documents as complete and fulfills legal requirements, it will notify the Applicant that the application has been officially accepted in writing.

    After receiving "official acceptance", the Applicant is obliged to put the transaction on hold for 15 working days during which MOFCOM will determine whether the transaction should come under review pursuant to the national security review process.  If so, MOFCOM will notify the Applicant and also notify the ministerial joint committee (Joint Committee) within 5 working days. If MOFCOM did not notify the Applicant after 15 working days, the applicant may proceed to implement the transaction.

    The Interim Rules also provide that the Applicant can apply to conduct pre-filing consultation with MOFCOM about procedural issues before officially filing the national security review application.

  • Application by third parties

    The review process may also be triggered by third party filings to the Joint Committee through MOFCOM.

    Pursuant to the Notice, third parties could include: relevant ministries of the State Council, nationwide industry associations, enterprises in the same industry (in relation to the proposed transaction) and enterprises in the upstream or downstream industries (in relation to the proposed transaction). These third parties should submit basic information to do with the transaction and details to do with how the proposed transaction may impact on national security. If MOFCOM is of the view that it is appropriate to conduct a national security review in relation to the proposed transaction, then MOFCOM will submit an application to Joint Committee within 5 working days.  The Joint Committee will then decide whether to commence a national security review process. MOFCOM will also request the foreign investor to apply for national security review if the Joint Committee deems necessary.

2. Required documents

Applicant(s) will be required to provide the following documents when filing the application for national security review:

(1) Application report

  • an application report and a description of the transaction. These documents must be executed by the legal representative or fully authorized representative of the applicant;

(2) Identification documents of the foreign investor(s):

  • a notarized and certified foreign investor identification document or relevant incorporation certificates, bank reference letter etc; and
  • identification documents of the legal representative, or power of attorney of the foreign investor, identification documents of the authorized representative;

(3) Background information of the foreign investor

  • the introduction of the foreign investor and its affiliates (such as its actual controlling party and parties acting in concert); and
  •  the statement regarding its relationship with the relevant governments;

(4) Background information of the domestic enterprise

  • the introduction of the target domestic enterprise; and its
  • articles of association;
  • business license (copy);
  • audited financial statements of the preceding year;
  • organizational chart of the company before and after the transaction;
  • introduction of its subsidiaries and relevant business licenses (copy);

(5) Post-transaction documents

  • shareholders' agreement of the foreign invested enterprise to be established after the M&A transaction; and its
  • articles of association;
  • joint venture contract or partnership agreement;
  • a list of proposed senior executives(including directors, general managers or partners) to be appointed by the parties;

(6) Transaction documents for equity acquisitions (if applicable)

  • share transfer agreement or subscription agreement;
  • relevant shareholder resolution of the target domestic enterprise; and
  • relevant asset assessment report;

(7) Transaction documents for asset acquisition (if applicable)

  • the resolution issued by the competent asset owner approving the asset sale;
  • asset purchase agreement (including list and introduction of the target assets);
  • information to do with the relevant parties; and
  • relevant asset assessment report;

(8) Introduction of control

  • a description of the impact after completion of the foreign investor's voting power over the shareholders' meeting, board resolutions or partners' executive affairs;
  • a description of condition that causes foreign investors to obtain actual control over management strategy, financial, employment and technology issues of domestic enterprise; and
  • other relevant documents;

(9) Other documents requested by MOFCOM

3. Review decisions

The Notice did not list the types of the Joint Committee's review decisions. The Interim Rules categorized the review decisions into 3 types:

  • No impact on national security
    If the Joint Committee decides that the transaction will not impact national security, the applicant can go ahead, and apply for foreign investors M&A review and other M&A approvals according to various foreign investment regulations;
  • Potential impact on national security
    If the Joint Committee decides that the transaction may impact national security. The applicant can not apply for foreign investors M&A review or other M&A approvals, and shall put the implementation on hold. The applicant may amend the transaction plan, revise the application documents and re-submit the security review application; and
  • Actual or potential severe impact on national security
    If the Joint Committee decides that the transaction has already impacted or may impact national security severely, the transaction will be prohibited. Measures will be taken to eliminate the impact on national security caused by the transaction. The measures include transfer of shares or assets.

Within 5 working days after receiving the Joint Committee's written decision, MOFCOM will notice the applicant about the decision in writing.

Comments

The Interim Rules sets out in detail how MOFCOM will deal with national security review applications.  We note that these Interim Rules are only valid for approximately 5 months – this is a signal that MOFCOM and the other authorities will "test" this system and procedure during this period and may adjust the procedure afterwards.  We also note that MOFCOM has announced that it is seeking the publics' suggestions and comments until April 10 2011, and may revise the Interim Rules after the expiration.

Besides, the Interim Rules clearly provide that if the local commerce administrative agencies notice that a M&A transaction clearly belongs to the national security review scope during the foreign invested enterprise M&A review procedure, the local commerce administrative agencies shall suspend the review procedure, request the foreign investor(s) to file national security review with MOFCOM, and report to MOFCOM about the situation. This reporting mechanism will help MOFCOM to better supervise the transactions which are not voluntarily filed by foreign investor.

1 See our article entitled " National Security Review Mechanism Formally Established in China".

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.

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