China: National Security Review Mechanism Formally Established in China

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

On February 3, 2011, the State Council released the Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ("Notice"). According to the Notice, China will implement a national security review process in relation to foreign funded mergers and acquisitions ("M&A") of domestic enterprises 30 days after the issuance of the Notice. A ministerial joint committee ("Joint Committee") led by the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") will be set up to administer and enforce the national security review process.

The concept of national security review was first introduced in the Provisions on Guiding Foreign Investment of 2002, which prohibits foreign investment that may "jeopardize national security". In 2008, this national security review process was, for the first time, addressed in a law (as opposed to regulations or rules) – China's Anti-Monopoly Law ("AML"). Article 31 of the AML states that all foreign funded M&A of domestic enterprises involving national security will be reviewed for national security issues in accordance with relevant provisions of the State. The Notice echoes this AML provision.

Consequently, a foreign investor looking to invest in China by means of M&A will have to consider whether the proposed deal may trigger a national security review process on top of existing regulatory clearances (for instance, foreign investment approval from the perspective of industry policy; the antitrust merger clearance process).

1 What types of M&A deals may be subject to the national security review process?

Not all of the M&A deals will be subject to a national security review. The national security review process will apply only if the target domestic enterprise is involved in businesses that concern either national defense security issues ("national defense security businesses") or national economic security issues ("national economic security businesses"). National defense security businesses include military industry enterprises and supporting enterprises, enterprises adjacent to major and sensitive military facilities, and other entities relevant to national defense security of China. National economic security businesses include enterprises involving major agricultural products, major energy and resources, important infrastructure, transportation services, key technologies as well as major equipment that are related to national security.

In relation to M&A deals involving national economic security businesses, a national security review process may only be triggered if the foreign investor intends to acquire de facto control of the target domestic company. According to the Notice, a foreign investor will be deemed to have acquired de facto control if

  1. the foreign investor and its controlling parent or subsidiary hold an aggregate of 50% or more of the shares of the target company post-merger;
  2. several foreign investors jointly hold 50% or more of the shares of the target company post-merger;
  3. the foreign investor may have significant influence over the shareholders' meeting, the shareholders' neral meeting or the meeting of the board of directors by exercising the voting right attached to its shares post-merger, even if the foreign investor holds less than 50% of the shares of the target company post- merger; and
  4. other circumstances that may lead to shift of de facto control over the operations, finance, personnel and technologies of the domestic company to a foreign investor.

We note that the achievement of "de facto control" is a not a pre-requisite for triggering a national security review process in the context of an M&A deal involving a domestic national security defense business. In other words, all M&A deals involving domestic national security defense businesses may be subject to the national security review process.

2 What is the substance of the national security review process?

Pursuant to the Notice, the joint national security review committee will review the potential impact of the M&A deal on (i) national defense security, including impact on the capacity to produce products, provide services as well as relevant facilities equipment necessary for national defense, (ii) economic stability; (iii) basic social order; and (iv) research and development capacity of key technologies involving national security.

Though the provisions are very general, it is the first time that any statutory instrument in China has set out to define the scope of national security review mechanism. The 2002 Provisions on Guiding the Foreign Investment and the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (promulgated in 2003 and further revised in 2006 which provides that foreign investors about to acquire control over domestic enterprises shall notify MOFCOM if national economic security concerns exist) do not contain any explanation as to what the "national security review" process involves or how the term "national economic security" will be defined. The AML also does not go beyond stating that there will be a national security review process. Till today (and in spite of the Notice), it is still unclear how the Joint Committee will evaluate a merger deal from the abovementioned perspectives.

3 How a national security review process is initiated

Pursuant to the Notice, a national security review process may be triggered either upon voluntary request by the foreign investor involved or upon request by third parties. A foreign investor may voluntarily apply to MOFCOM for national security review. If MOFCOM decides that the potential deal does fall within the purview of the national security review process, MOFCOM will submit the matter to the Joint Committee to commence the process. The review process may also be triggered by third party filings to the Joint Committee through MOFCOM. In that case, the Joint Committee will decide whether to commence the review process.

A variety of parties may file such a request to commence the national security review process, including the relevant ministries of the State Council, nationwide industry associations, enterprises in the same industry and enterprises in the upstream or downstream industries. Therefore, for a deal that potentially involve national security review, even if a foreign investor does not make a filing voluntarily, it is still highly likely that a review will be triggered by request of third parties.

In addition, given that MOFCOM is also the authority in charge of foreign investment approval and antitrust merger filing clearances, we think it would be reasonable to expect that MOFCOM will submit a deal to the Joint Committee if it determines that the deal fall into the scope of national security review during the foreign investment approval process or antitrust merger filing clearance process.

4 What is the procedure of national security review

Pursuant to the Notice, the review process may take place in two stages. A deal will get into the "special review" process if it fails to go through the general review process. Please see the National Security Review Flowchart.

The general review process may last up to 30 working days from the date the Joint Committee receives MOFCOM's application. Within the 30 day period, the Joint Committee may either decide that the deal is free of national security concerns or decide that the deal should be taken to the next stage, namely, the special review process. During this general review process, the Joint Committee will solicit opinions from other relevant departments in writing. Decisions at this stage will be adopted on unanimous consent basis. In other words, if one department whose opinion is solicited thinks that the deal is likely to affect national security, the Joint Committee will kick off the special review process.

The special review process takes up to 60 working days. During this period, the Joint Committee will organize security evaluation of the deal and take into account the evaluation result in reviewing the deal. If basic consensus is reached, the Joint Committee will issue its decision. If huge disparity exists, the Joint Committee will, within the 60 day time frame, escalate this matter to the State Council for final decision.

During the whole review process, the merging parties are obligated to cooperate with the Joint Committee and are entitled to apply to MOFCOM for amendment of the deal proposal or to terminate the transaction.

5 What will be the consequence for failure of passing the review?

If the Joint Committee or the State Council decides that the proposed deal has or is likely to have major impact on national security, the merging parties will be required to terminate the deal or to undertake certain remedies such as the transfer of relevant shares, assets to eliminate any impact on national security.

Note that the Notice is silent on whether the parties at stake may file for administrative review or administrative litigation with respect to the review opinions of the Joint Committee. It remains to be seen whether the parties may have such rights in practice.

Concluding Remarks

The Notice has established the framework of the national security review process. While it gives some indication as to how the national security review process will be conducted (i.e. that there will be a ministerial joint committee system set up, the substantive tests used when conducting review), we anticipate that the State Council is likely to publish more implementing rules based on the Notice – to further specify and elaborate on how this national security process will be implemented and enforced.

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

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”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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