China: MOFCOM Releases Interim Measures To Implement The New Foreign Investment National Security Review Mechanism

Last Updated: 22 March 2011
Article by Nathan Bush , Theodore Kassinger Qiang Li and Fay Zhou

On March 4, 2011, the Ministry of Commerce of People's Republic of China ("MOFCOM") issued initial procedural rules to implement the new mechanism, announced on February 3, 2011, by which certain foreign direct investment transactions will be reviewed on national security grounds. The "Interim Measures of the Ministry of Commerce on Security Review Mechanism for Merger & Acquisition of Domestic Enterprises by Foreign Investors" (the "Interim Measures")1 became effective on March 5, 2011, the same date as the "Notice of the General Office of the State Council on Establishing the Security Review Mechanism for Merger with and Acquisition of Domestic Enterprise by Foreign Investors" (the "Notice").2 MOFCOM has invited comments on the Interim Measures, for which the deadline is April 10, 2011. The Interim Measures will remain in effect until August 31, 2011, after which MOFCOM may further revise the measures based on the comments received and the experience in implementing them.

The Interim Measures resolve some (but not all) of the procedural uncertainties that have surrounded the national security review notification obligation in the Notice. In particular, the Interim Measures clarify the relationship between the national security review mechanism and the general foreign direct investment ("FDI") review regime. This client alert highlights key elements of the Interim Measures.

Highlights

1. The Interim Measures clarify one important ambiguity in the Notice and the informal guidance on the Notice previously posted by the National Development and Reform Commission (the "NDRC Q&A").3 The NDRC Q&A suggested that foreign investors would not be required to make a separate filing to initiate a security review; instead, investors might be asked to provide information necessary for the security review in the course of the general FDI reviews. The Interim Measures, however, make clear that foreign investors must file a separate application with MOFCOM. (The Interim Measures and Notice contemplate applications only from foreign investors, not from the domestic parties.)

2. Foreign investors may consult with MOFCOM before officially filing an application for review.4 Such consultation, however, will be limited to "procedural issues" - MOFCOM will not provide substantive opinions on the potential issues. Unfortunately, it is not clear whether MOFCOM will advise investors whether a proposed transaction is within the scope of the Notice. As in the United States under the practice of the Committee on Foreign Investment in the United States ("CFIUS"), foreign investors may be required to file a full application in order to receive a determination that a transaction is not covered by the Notice.

3. Although the Notice does not make clear when a national security review application must be filed, the Interim Measures effectively require prospective foreign investors to file before the general FDI application is submitted: Local commercial authorities responsible for the FDI approval must suspend a FDI application upon determining that the investors have not filed with MOFCOM if a proposed transaction is covered by the national security review mechanism.5 As noted above, it may be possible to determine whether a transaction is covered only by filing such a notice.

4. The Interim Measures list the major documents to be submitted for the application.6 The required information focuses on the nature of the transaction and the target business. While the requirements are not as detailed as provided in the CFIUS rules, for example, they cover very similar ground, and MOFCOM may require other documents to be submitted concerning any particular transaction.

5. The Notice established a timeline for the review process that contemplates a final determination no later than about 90 days after the review commences. The Interim Measures provide several deadlines regarding MOFCOM's activities in the process. Notably, after accepting an application, within 15 business days MOFCOM will make an initial determination whether a transaction is subject to national security review. If MOFCOM does not notify the applicant otherwise within that period, then the applicant may proceed with the applicable FDI approval processes. Again like the CFIUS process, however, MOFCOM will not "accept" the application until it deems the materials to be complete and to meet "legitimate requirements." Thus, the 15-day initial review period may not commence for some time after the applicant has filed its notice.7

6. The Interim Measures prohibit an applicant from proceeding with a transaction without resolving national security concerns that emerge from the review process. (Although the Interim Measures refer only to "national security" concerns in this provision, presumably the same prohibition applies with respect to the two other bases for review in the Notice: "economic stability" and "social order.")

7. The foreign investors will be requested to re-submit their transaction for national security review even if they have obtained clearance from MOFCOM or the Joint-Ministry Committee (the "Committee") if the transaction is revised at a later stage and falls within the scope of national security review. In addition, MOFCOM and other authorities are empowered to take direct measures to alter a transaction in order to remove a threat to national security.

Summary of the Interim Measures

The Application Process

According to the Interim Measures, in addition to any FDI approval applications, the foreign investors should file a separate application with MOFCOM if the proposed transaction with a domestic enterprise falls under the scope of national security review as provided in the Notice.8 Where two or more foreign investors are involved, they may jointly file or they may designate one foreign investor to submit the application for security review.9 The local commercial department will not accept an application for general FDI approval, and it will instruct the foreign investor to make the security filing with MOFCOM first if that department finds the pending transaction is subject to the national security review.10

The Materials Required for the Application

Applicants must provide various documents and information in the national security filing, including:

  • An application letter and description of the transaction;
  • The identity certification of foreign investors and a bank credit letter (all notarized and duly certified), as well as identity certifications for the legal representative and authorized representative of the foreign investor(s);
  • A description of the foreign investors and their affiliates, including the person having ultimate de facto control, any persons acting in concert with the investors, and any relationship with foreign governments (e.g., state ownership or control);
  • A description of the target domestic enterprise, including copies of its business license, articles of association, audited financial statement of the preceding year, organizational charts prior to and after the transaction, and a description of entities in which it has invested and their business licenses;
  • The contract, articles of association, or partnership agreement of the proposed foreign-invested enterprise after the transaction, the proposed members of the board of directors to be appointed by the shareholders from each party, and a list of proposed directors and executives (e.g., the general manager or managing partner);
  • A description of the extent and manner in which the foreign investors may exercise control of the enterprise following the transaction, such as through shareholder votes, participation on the board, or other means. The description must include a description of the foreign investors' influence over various areas of the business (e.g., finance, technology), including both onshore and offshore affiliates. Documents relevant to this exercise of control (e.g., shareholders agreement) must be provided.
  • For equity M&A transactions, the applicant must provide relevant equity transfer or subscription agreements, shareholders' resolutions of the target domestic enterprise, and related asset evaluation reports;
  • For asset M&A transactions, the applicant similarly must provide the relevant resolutions approving the sale of assets, the asset purchase agreement (including list of assets to be purchased and the status thereof), description of the parties to the agreement, and relevant asset evaluation report. 11

Review and Acceptance of the Application by MOFCOM

Upon filing by the foreign investor(s), MOFCOM will review the materials and determine whether the application is "complete." MOFCOM may ask for additional information. When it determines the application is complete, MOFCOM will accept it and notify the applicant in writing, thereby instituting the review.12 If MOFCOM then finds that a transaction falls under the scope of the national security mechanism, MOFCOM will notify the applicant in writing within fifteen business days, and will, within five business days thereafter, forward the application to the Committee for examination.13

During these fifteen business days, the applicant may not implement the transaction and the local commercial authority must suspend any general FDI review that it has commenced. If MOFCOM has not otherwise notified the applicant in writing within the fifteen business days after accepting the application, the applicant may proceed to go through the formalities for the pending transaction pursuant to relevant regulations.14

Decision of National Security Review Committee

MOFCOM will notify the applicant and the local commercial department of the Committee's determination. Although the Interim Measures refer only to national security concerns, presumably the procedures apply equally with respect to Committee determinations based on the additional considerations of economic stability and social order. The Interim Measures address the various possible outcomes of the review process.

(1) If the Committee determines that there is no national security concern, the applicant may complete the general FDI approval process with the competent authorities pursuant to relevant regulations.

(2) If the Committee determines there are unresolved concerns, the applicant may not go forward without first adjusting the transaction structure, amending the application, and re-applying for the national security review.

(3) If the review concerns a transaction that has been completed (for example, FDI approval was granted based on an assumption that the transaction did not fall within the scope of the review mechanism) and the Committee determines that the resulting acquisition has had or may have a significant effect on national security, MOFCOM, together with relevant authorities, will terminate the transaction or take other direct action to address the concern, including by transferring relevant equity interests or assets, or by taking other means to remove the national security concern.15

Importantly, the Interim Measures contemplate a means of addressing concerns that arise during the review process by the Committee before a final determination. The applicant may file an application to MOFCOM to revise the transaction structure or to withdraw the transaction during the review and MOFCOM shall submit these applications to the Committee within five business days.16

Other Matters

The Interim Measures provide a means for MOFCOM to self-initiate a review based on a request by any department or agency of the State Council, any national industry association, any enterprise in the same industry, or enterprises in the upstream or downstream industry. If such transaction falls within the scope of the national security review mechanism (a judgment apparently to be made by MOFCOM), then MOFCOM will, within five working days of receiving the request, submit the proposal to the Committee. MOFCOM will then require the foreign investor to submit an application for the national security review if the Committee determines that a review is necessary.17

Where any application for security review is not submitted to the Committee for review or is deemed by the Committee not to affect the national security but subsequently a change in the transaction brings it within the scope of the national security review mechanism, then the parties must halt the transaction and the foreign investor must submit a review application to MOFCOM.18

Conclusion

The Interim Measures provide useful procedural guidance relating to the national security review process, building out the framework established by the Notice. As a whole, a picture is taking shape of a new regulatory scheme that purposefully incorporates some flexibility in its administration, both to accommodate interaction among investors and the Committee to address possible national security and socio-economic issues, and to permit the broad exercise of discretion by the Committee to define and to address such issues as it ultimately determines to be appropriate. Nevertheless, such flexibility leaves uncertainty, and the picture is incomplete; there remains a lack of clarity about various procedural issues as well as the scope of covered transactions and the factors that the Committee ultimately will find relevant to its determination whether a transaction might raise national security or socio-economic concerns.

The Interim Measures will only be effective until August 31, 2011. Interested parties should submit comments to MOFCOM by April 10, 2011. Final rules may emerge based on such comments received and the experience obtained in implementing these measures.

Meanwhile, both the Notice and the Interim Measures are now in effect, and the Interim Measures make clear that foreign investors must add the national review process where applicable to the regulatory clearances necessary to complete an investment transaction. Thus, prospective foreign investors now must examine closely potential national security and socio-economic impacts, and develop a plan to address possible concerns in structuring the transaction to ensure a smooth and successful review process.

An English translation of the Interim Measures is available upon request.

Footnotes

1 Interim Measures of the Ministry of Commerce on Security Review Mechanism for Merger & Acquisition of Domestic Enterprises by Foreign Investors, issued by Ministry of Commerce on March 4, 2011, available at http://www.law-lib.com/law/law_view.asp?id=343240 .
2 Guowuyuan Ban'gongting Guanyu Jianli Waiguo Touzizhe Binggou Jingnei Qiye Anquan Shencha Zhidu de Tongzhi [Notice of the General Office of the State Council on Establishing the Security Review Mechanism for Merger with and Acquisition of Domestic Enterprise by Foreign Investors] (the Notice), issued by the General Office of the State Council on Feb. 3, 2011, available at http://www.gov.cn/zwgk/2011-02/12/content_1802467.htm. See OMM Client Alert, "China Establishes Mechanism for National Security Reviews of Foreign Investments," (February 16, 2010), available at http://www.omm.com/china-establishes-mechanism-for-national-security-reviews-of-foreign-investments-02-15-2011 /.
3 NDRC Q&A, posted on February 16, 2011, available at http://www.sdpc.gov.cn/xwfb/t20110216_395284.htm .
4 Interim Measures, art. 3.

5 Interim Measures, art. 2.

6 Interim Measures, art. 4.

7 Interim Measures, art. 5.

8 Interim Measures, art. 1.

9 Id.

10 Interim Measures, art. 2.

11 Interim Measures, art. 4.

12 Interim Measures, art. 5.

13 Id.

14 Id.

15 Interim Measures, art. 6.

16 Interim Measures, art. 7.

17 Interim Measures, art. 8.
18 Interim Measures, art. 9.

O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.

www.omm.com

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.

 
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”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

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.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

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.