China: China Publishes Final Rules On The National Security Review Of Foreign Investment In Chinese Companies

China has published new rules to implement the national security review that will be conducted as part of the review of mergers and acquisitions by foreign investors and involving Chinese companies. These rules provide for review and potential rejection of acquisitions of Chinese companies by foreign investors where such acquisitions could affect national security, economic stability, social order, or research and development capabilities relating to key technologies. As with many rules of this type in China and other jurisdictions, these leave great discretion in the hands of Chinese government agencies. Whether they will constitute another serious obstacle for foreign companies doing business in China will depend on how they are applied in practice.


China's Anti-Monopoly Law ("AML"), which entered into force in 2008, provides for a national security review ("NSR") procedure for acquisitions of domestic companies by foreign investors. In March 2011, the State Council of the People's Republic of China published a notice ("NSR Notice") providing more detail on the substance of the NSR procedure. The Ministry of Commerce ("MOFCOM") now has published further implementing rules ("NSR Rules"), effective September 1.

The NSR Rules represent the culmination of a vigorous debate that has been underway in China for years regarding the perceived national security issues arising from foreign acquisitions of domestic companies, with particular concern focused on "strategic and sensitive" industries and Chinese "national champions."

The new rules may be compared to the close scrutiny that the U.S. has paid to Chinese foreign investment in the United States. Public information suggests that the U.S. agency responsible for national security review of foreign investment under the so-called CFIUS procedure itself has sought to unwind Chinese acquisition of U.S. technology. (For more information on the U.S. CFIUS process, see "Exon-Florio Alert: Regulations Implementing FINSA Take Effect," available at

Which Transactions and Sectors Are Subject to NSR?

NSR potentially has a very wide scope in terms of sectors and types of transactions.

Applicable Sectors. NSR applies to proposed acquisitions of domestic enterprises not only in the defense sector but also where those acquisitions otherwise bear on national security. This includes areas such as agriculture, energy, transportation, technology, and equipment manufacture. There is no further clarification on what these terms actually will cover.

Types of Transactions. NSR applies to any transaction in which a foreign investor gains control of a domestic enterprise or its assets. In particular, the following situations are covered:

  • Foreign investors purchase equity in a domestic, non-foreign-invested enterprise ("non-FIE," i.e., a domestic company owned by PRC investors), thereby transforming it into a foreign-invested enterprise ("FIE").
  • Foreign investors purchase equity held by Chinese shareholders in an FIE or subscribe to a capital increase in same.
  • Foreign investors establish an FIE and such FIE purchases assets from or equity in a domestic enterprise.
  • Foreign investors directly purchase assets of a domestic enterprise and use these assets to establish an FIE that operates these assets.

The substance of a transaction and its de facto effect will be considered, and any avoidance schemes will be disregarded, such as holding shares by nominees, entrustment, phased-investment, leasing, loans, control agreements, and overseas transactions.

The NSR Notice defines "control" to include situations in which (i) foreign investors own more than 50 percent of the shares, (ii) a foreign investor owns less than 50 percent of the shares but has sufficient voting rights to exert a material influence over the shareholder vote and resolutions of the board of directors, and (iii) foreign investors otherwise gain actual control of management decisions, human resources, or technologies.

Who Is Conducting NSR?

The State Council has set up a joint ministry panel ("the Panel") to conduct NSR. The Panel is under the leadership of the State Council and is led by the National Development and Reform Commission ("NDRC") and MOFCOM. It will include other relevant agencies depending on the industry sector involved.

What Does the Review Entail?

The Panel will assess the effect of the transaction on national security, including the effect on the capacity to produce domestic products, equipment, and facilities related to national security. It also will assess its effect on the stability of the national economy, on basic social order, and on research and development capabilities for key national technologies.

What Is the NSR Procedure?

A foreign investor will have to file a notification with MOFCOM regarding any transaction falling under the scope of the NSR Rules. Third parties also may refer to MOFCOM any transaction for which they deem NSR necessary.

The information to be provided as part of the application for NSR includes:

  • A description of the transaction;
  • Identity certification or registration certification, and creditworthiness certification documents of the foreign investor;
  • Information pertaining to the foreign investor and its affiliated enterprises (including its actual controller or parties acting in concert), and a description of its relationship with foreign governments;
  • Information pertaining to the acquired domestic enterprise;
  • The joint venture contract, articles of association, or partnership agreement of the foreign-invested enterprise to be established after the transaction;
  • In the case of equity transactions, the equity transfer agreement or the agreement on subscription for capital increase, the shareholder resolutions or resolutions of the general meeting of the shareholders, and the asset evaluation report;
  • In case of assets transactions, the resolution of the decision-making body of the domestic enterprise or property right holder approving the sale of the assets, the asset purchase agreement (including a list of the assets purchased and the status of such assets), information on the parties to the agreement, and the asset evaluation report; and
  • An explanation of the impact of the voting rights enjoyed by the foreign investor after the transaction on the resolutions of the shareholders' meeting or general meeting of shareholders, or the board of directors, or on the execution of partnership businesses, an explanation of other situations that may result in the transfer of actual controlling rights related to business decision-making, financial matters, human resources, technologies, etc., to the foreign investor or its domestic or overseas affiliated enterprises, and the agreement or documents relevant to the aforementioned situations.

Interestingly, the applicant's view on the possible effect of the intended transaction on national security does not seem to be required.

Following receipt, MOFCOM will submit the case to the Panel within five working days if MOFCOM believes that the materials submitted are complete and the transaction is subject to NSR review. The NSR Rules provide for an optional consultation procedure before formal application but limit the scope of consultation to procedural issues.

The Panel will first conduct a shorter "general review," which potentially may be followed by a more intensive "special review."

General Review. Within five working days of receiving the notification from MOFCOM, the Panel will request the views of all relevant government agencies, which then have 20 working days to respond in writing. Within five working days after receiving comments from the agencies, the Panel must notify MOFCOM whether a special review should be conducted. Hence, the general review at most will take 35 working days.

According to the NSR Notice, if all of the commenting agencies are of the view that no further review is warranted, the Panel will not initiate a special review. However, if some of the agencies believe that the transaction may affect national security, then a special review will be undertaken.

Special Review. The special review can take up to 60 working days (in addition to the 35 working days for general review). If the Panel is able to reach a consensus, it will notify its decision to MOFCOM. If the Panel cannot reach a consensus, it will submit the matter to the State Council for decision. MOFCOM will notify the applicant of its decision in writing.

Participation of the Applicant to the Procedure. The parties to the transaction must cooperate with the Panel during the review, submit documents and information needed for review, and respond to any questions. They also may apply to MOFCOM to modify their transaction plans or withdraw their application.

Possible Measures. If the Panel concludes that the transaction may affect national security, the Panel will request that MOFCOM and other agencies take the appropriate measures to eliminate such impact, such as by ordering the termination of the transaction or directing transfer of shares or assets. However, there are no explicit sanctions for failure to make an NSR application.

What Is the Interplay with the Merger Control Procedure?

Different Thresholds. Not all transactions subject to merger review under the AML will be subject to NSR, only those involving control over a domestic enterprise in a key sector. Mergers between foreign companies or between domestic companies will not be subject to NSR. Conversely, not all transactions subject to NSR simultaneously will be subject to merger control review, such as when the parties do not meet the merger control thresholds and MOFCOM does not sua sponte initiate antitrust review. (For more information on China's merger filing requirements, see "New Merger Notification Thresholds Under the AML Published," available at

Timing. Although the NSR Notice provides some timing details for NSR itself, some questions remain open. It is unclear how MOFCOM will treat transactions that are notified under both the AML merger control process and the NSR Notice. The NSR Notice does not specify by when an NSR application must be made, including whether it can be submitted prior to finalization of the transaction agreements merely on the basis of a memorandum of understanding. Given that the NSR Rules require that the transaction agreement be submitted as part of the application, a memorandum of understanding or letter of intent does not appear to suffice. In this respect, MOFCOM increasingly requires final executed transaction documents before formally initiating antimonopoly merger review.

Notion of Control. The definition of "control" under the NSR Notice seems consistent with MOFCOM's practice in the merger control context. One possible exception could be where a foreign investor buys a stake in a domestic company, thereby increasing total foreign ownership above 50 percent, but no individual foreign shareholder will have control. It is likely that such a scenario would not trigger a merger control notification because of the absence of a change in control. However, it could trigger a notification under the NSR Notice, because several foreign investors now will together own more than 50 percent of the shares. One problem is that under certain circumstances, a foreign investor might be unaware that its acquisition of shares will increase foreign ownership above 50 percent and thus require an NSR Notice, such as with publicly listed companies.

China's "CFIUS"?

While China's new national security review procedure bears some resemblance to the U.S. CFIUS process, there are significant differences as well. Overall, both have the same basic goal—to review foreign investments in domestic companies for their effect on national security. However, China defines "national security" much more broadly than does the definition used in CFIUS review. For example, although the U.S. statute—the Foreign Investment and National Security Act—includes "critical infrastructure" in the definition of "national security," the CFIUS regulations specifically reject defining classes of systems or assets as "critical infrastructure." CFIUS also explicitly has rejected the concept of "economic security" in the definition of "national security," although as a practical matter CFIUS does consider economic issues if they affect national security. By comparison, China's NSR Notice expressly indicates that "national security" will include such economic concerns as impact on domestic capacity, the domestic economy, "basic social order," and domestic R&D capabilities.


It remains to be seen whether China's NSR process will result in economic protectionism or even consider economic protection issues. The Notice appears to allow for such considerations if desired. In contrast, the U.S. CFIUS regulations specifically disavow economic protectionism and reiterate U.S. government policy to encourage direct foreign investment in United States industries.

The text of the State Council's Notice, the NSR Rules, and their unofficial translation can be viewed on the Jones Day web site at

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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