Name: Interim Provisions on Matters related to the Implementation of the Security Review System by The Ministry of Commerce for Mergers and Acquisitions of Onshore Enterprises by Foreign Investors (商务部实施外国投资者并购境内企业安全审查制度有关事项的暂行规定, the “Interim Provisions”)
Issuing Authority: Ministry of Commerce (“MOC”)
Effective Date: 5 March 2011
Subject: National security review of foreign investment
On 3 February 2011, the MOC issued the Circular of the General Office of the State Council on Establishing a Security Review System for Mergers and Acquisitions of Onshore Enterprises by Foreign Investors (国务院办公厅关于建立外国投资者并购境内企业安全审查制度的通知) (the “Circular”) under which a formal national security review regime was introduced for mergers and acquisitions of onshore enterprises by foreign investors (“Security Review Regime”). The Circular was discussed in our Linklaters Alert dated 15 February 2011. Following the issue of the Circular, the MOC has now issued the Interim Provisions to provide further guidance as to how the Security Review Regime is to be implemented.
The Interim Provisions are, as the name suggests, interim in nature and are only applicable for the period between 5 March 2011 and 31 August 2011. However, there is a public consultation on the rules open from 5 March 2011 to 10 April 2011, following which the MOC will conduct a review and amendment of the Interim Provisions based on, amongst other things, comments from the public.
Highlights
Reconciliation with the existing foreign acquisition approval process – the Interim Provisions provide that as part of the local MOC’s routine review of a foreign acquisition under the existing approval process, the local MOC should also conduct a preliminary assessment of whether the foreign acquisition should be subject to a security review, as provided for in the Circular (the “Security Review”). If the local MOC forms a view that the foreign acquisition falls within the scope of the Security Review and there has not yet been a Security Review conducted, the local MOC will issue a written request to the applicant requiring it to submit the transaction for review and will refuse to accept or review the foreign acquisition application until the Security Review is completed. Given this requirement on the local MOC, where an application is made directly to the central MOC for approval, it is highly likely that the central MOC will, in conducting its review, conduct a similar preliminary assessment of whether a Security Review is required and if so, impose a similar requirement that the Security Review be completed prior to its acceptance of the application.
- Application documents – There is now clearer guidance as to what type of documents are required to be submitted under the Security Review process. However, it remains to be seen whether or not the MOC will issue any further requirements for other documents or specify a standard application form for the Security Review process in the future.
The following documents are required as part of the application:
- a description of the relationship between the applicant and relevant national governments
- a list of the proposed senior management team, including the board members, general manager and partners
- a description of the proposed changes in controllers of the target.
Documents which are usually required for a foreign acquisition application or a merger control notification will also need to be submitted.
- Information required where Security Review process is initiated by third parties – The Interim Provisions provide that where a Security Review process is initiated by a third party (i.e. other than the foreign investor applicant), such as government agencies, national industry associations, enterprises in the same industry and upstream/downstream enterprises to the target, only basic information on the transaction and an analysis on the impact of the proposed acquisition on national security is required to be provided to the MOC. If the MOC forms the view that the acquisition should be subject to a full Security Review, it will request the foreign investor to provide additional information.
The Interim Provisions do not, however, provide any guidance as to the timing in which a third party may initiate a Security Review, i.e. whether or not this process must be initiated prior to completion of the acquisition or if it may be initiated post-completion.
- Suspension of transaction – Under the Interim Provisions, the relevant parties are required to suspend the transaction and submit the transaction for Security Review if there is any change to the transaction structure or documentation such that a Security Review would be required, even though the transaction had not initially been referred by the MOC to the Ministerial Committee for Security Review or the Ministerial Committee had previously taken the view that the transaction has no national security impact.
The introduction of the above provision seems to imply that once the MOC has decided not to refer a transaction for Security Review, or if a transaction has passed the Security Review, absent any change to transaction structure or documentation there will be no further suspension of the transaction under the Security Review Regime. However, further clarification from the MOC is required to confirm that this is indeed the case given the lack of an express proviso in the Interim Provisions to this effect and bearing in mind the uncertainties as to the timing in which a third party may initiate a Security Review.
If you would like to discuss anything regarding this Alert please contact Fang Jian (Shanghai), Nicola Mayo (Shanghai), Simon Poh (Shanghai), or Betty Yap (Hong Kong).
