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.

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