China issues rules on foreign investment security review

Out-Law News | 23 Dec 2020 | 12:35 am | 2 min. read

China has published rules for reviewing foreign investment on national security grounds.

The review system was announced by the National Development and Reform Commission (NDRC) and China's Ministry of Commerce (MOFCOM). A body for security reviews, headed by the NDRC and MOFCOM, will be established as part of the new system.

There are 23 rules, which cover the types of foreign investment that will be subject to review, institutions, scope, procedures, implementation and violations treatment. The new regime covers foreign investment in military sectors and the acquisition by foreign entities of controlling stakes in sectors such as energy, natural resources, agriculture, internet technology and financial services. It will take effect on 18 January 2021.

There are three types of foreign investment scenario to which the new rules will apply: foreign investors acting alone or jointly with others to invest in new projects in China; foreign investors acquiring equity or assets in Chinese enterprises by way of mergers and acquisitions; and other means of foreign investment into China.

When the parties declare their investment, they should submit materials that include the declaration, investment programme, statement on whether the proposed investment affects national security and other materials specified by the security review body, which should complete an initial review within 15 days of receipt of the materials.

The security review process includes a general review and special review, which should be completed within 30 days and 60 days of commencement date respectively. Special review may be extended under special circumstances.

In February 2011, the General Office of the State Council issued a Notice on the Establishment of a Security Review System for Foreign Mergers and Acquisitions of Domestic Enterprises, which set out proposals for the scope, content, working mechanism and procedures of a foreign investment security review process.

Transaction service expert Wei Liu of Pinsent Masons, the firm behind Out-Law, said: "There was a regulation on national security issued in 2011 by the State Council with similar contents, but it seems that the old regulation was not strictly implemented in practice. It was also quite unclear as to what industries fell exactly under the national security review scope, because in practice the detailed catalogue of industries that are subject to national security review is not publicly available."

"This time, it seems that the Chinese government is determined to put the national security review regime into real enforcement. In addition, the scope of national security review has been expanded, i.e. compared to the old regulation, 'important cultural products and services', 'important information technology and Internet products and services, important financial services' are included into scope of review for the first time."

"In terms of the definition of 'acquisition', the new regulation covers not only direct acquisition but also other 'de facto control' paths such as VIE structure. It goes without saying that this will be an important issue to note for any foreign investor who intends to acquire business in China," he said.