China to Establish Security Review System for Foreign Acquisition of Domestic Companies

The General Office of the State Council promulgated the Circular on the Establishment of a Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors (the Circular) on Feburary 3, 2011.

According to the Circular, a ministerial joint conference system will be established to conduct security reviews of mergers and acquisitions (M&A) of domestic enterprises by foreign entities. The Circular also specifies the scope, content, working mechanism and procedure of the M&A security review.

The scope of the M&A security review includes foreign M&A of domestic military industry enterprises, those enterprises near key and sensitive military facilities, and units concerning national defense and security, as well as key farm products, major energy and resources, key infrastructure, important transport service, key technology, and major equipment manufacturing enterprises concerning national security, in which foreign investors may gain control.

The Circular defines “foreign M&A” as follows:

1. A foreign investor purchases the equity of a domestic non-foreign-invested enterprise or subscribes to the capital increase of such enterprise, such that the domestic enterprise is transformed into a foreign-invested enterprise;

2. A foreign investor purchases the equity of the Chinese shareholder of a domestic foreign-invested enterprise or subscribes to the capital increase of such enterprise;

3. A foreign investor establishes a foreign-invested enterprise, and, through such foreign-invested enterprise, contracts to purchase the assets of a domestic enterprise and operate such assets, or purchases the equity of a domestic enterprise;

4. A foreign investor directly purchases the assets of a domestic enterprise, and uses the asset to invest in the establishment of the foreign-invested enterprise to operate such asset.

In accordance with the Circular, foreign investors intending to acquire domestic companies shall apply to the Ministry of Commerce (MOFCOM). For M&A transactions falling in the scope of the security review, the MOFCOM shall submit an application for security review to the joint conference within five working days. 

The security review system will be implemented thirty days after the promulgation date of the Circular.

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