China's Ministry of Commerce ("MOFCOM") issued on
August 25, 2011 the "Rules on the Implementation of the
National Security Review Mechanisms" (the "New SR
1 The New SR Implementation Rules became effective on
September 1, 2011 and replaced the Temporary Rules on Several
Issues Related to the Implementation of the National Security
Review Mechanisms (the "Temporary
which were effective from March 4, 2011 to August 31, 2011. The
Temporary Rules implemented the State Council's 3 February 2011
Circular on the Establishment of Security Review Mechanisms for
Mergers and Acquisitions of Domestic Enterprises by Foreign
(the "NSR Circular").
The New SR Implementation Rules retain most of the provisions in
the Temporary Rules, but also contain following major changes:
The scope of national security review of merger and acquisition
("M&A") transactions has been explicitly extended to
include acquisition of domestic enterprises by a foreign invested
Under the Temporary Rules, the local offices of MOFCOM can initiate
national security review only when they review M&A transactions
submitted under the Regulations on Acquisition of Domestic
Enterprises by Foreign Investors
and the Several Provisions on Changes of Investors' Equity
Interests in Foreign Invested Enterprises
定》). The New SR Implementation Rules added
the Interim Regulations on Domestic Investment by
2 as an additional basis for initiating security review of
M&A transactions by the local offices of MOFCOM. This means
that beginning on September 1, 2011, any acquisition of a domestic
enterprise by an FIE is theoretically subject to national security
Foreign investors are prohibited from evading national security
review of M&A transactions by structuring around the
requirement, such as holding equity via trusts, using multiple
investment vehicles, moving the acquisition offshore, or by using
leasing, lending and contractual arrangements.
Subsequent changes to an M&A transaction, including changes
to the transactional documents, changes in business activities
and/or changes of offshore ultimate controlling entity, may trigger
national security review if a subsequent change causes the
transaction to fall within the scope of national security review,
regardless of whether such transaction was submitted to the joint
committee (which was established under the NSR Circular as the
national security review enforcement authority) for review or was
reviewed and approved by the joint committee in the first place. It
is unclear whether a security review might retroactively unwind a
completed transaction if any subsequent change to such transaction
triggers the national security review.
According to the Temporary Rules, an applicant may apply to
MOFCOM to have a pre-filing consultation with MOFCOM with respect
to procedural issues concerning the applicant's acquisition of
domestic enterprises. The New SR Implementation Rules clarify that
the pre-filing consultation is not a compulsory process and the
results thereof will not be legally binding and cannot be relied
upon as the basis for a formal filing.
The New SR Implementation Rules also provide for
confidentiality obligations on the relevant personnel and divisions
of MOFCOM as well as their local offices during national security
review work with regard to state secrets, trade secrets and other
We believe that most open issues under the NSR Circular and the
Temporary Rules remain unanswered in the New SR Implementation
Rules. For instance, the specific types of industries for national
security review have yet to be clarified, and at what stage and
with what type of submissions an applicant can apply for pre-filing
consultation is still unclear. With the New SR Implementation Rules
that became effective on September 1, 2011, China is set to tighten
up its national security review of M&A transactions, which
foreign investors and M&A practitioners should not
2 It was promulgated by the Ministry of Foreign Trade and
Economic Cooperation (the predecessor of MOFCOM) and the State
Administration for Industry and Commerce on July 25, 2000, and
mainly regulates establishment of a new enterprise in China or
acquisition of a domestic enterprise by an FIE.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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