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(Feb 25, 2011) On February 12, 2011, the General Office of China's State Council published a circular on the security review system in mergers and acquisitions of domestic enterprises by foreign investors. (Circular Issued by the General Office of the State Council on Establishing a Security Review Mechanism in the Merger and Acquisition of Domestic Enterprises by Foreign Investors [in Chinese], Guo Ban Fa  No. 6, Central People's Government website (Feb. 12, 2011), http://www.gov.cn/zwgk/2011-02/12/content_1802467.htm.) The circular was promulgated on February 3, 2011, and will take effect 30 days after promulgation. (Id.)
Scope of the Security Review
According to the Circular, the foreign merger and acquisition (M&A) of certain types of domestic enterprises related to national defense and security, including military and military support enterprises and enterprises located near major and sensitive military facilities, will be subject to an M&A security review. If the targeted domestic enterprise is involved in production of national security-related major agricultural commodities, major energy and resources, infrastructure, transportation services, key technologies, or major equipment and the M&A will result in actual control of a domestic enterprise by foreign investors, the transaction is also subject to the review. (Id., §1(1).)
Acquisition of "actual control," according to the Circular, refers to foreign investors' becoming the holding shareholder of or actually controlling a domestic enterprise after the merger and acquisition. Acquisition of actual control applies to the following circumstances:
- the foreign investor and its holding parent company or held subsidiary hold more than 50% of total equity after the M&A;
- equity held by more than one foreign investor aggregately accounts for more than 50% of the enterprise after the M&A;
- although the equity held by foreign investors is less than 50% after the M&A , the voting rights represented by that equity are sufficient to have substantial influence on the resolutions to be adopted by shareholder meetings or assemblies or by the board of directors; and
- any other circumstance under which the actual control of a domestic enterprise's operational decisions, financial, personnel, and/or technology is transferred to foreign investors. (Id., §1(3).)
Joint M&A Security Review Committee
A joint committee is to be formed to carry out the M&A security review. (Id., §3(1).) Under the guidance of the State Council and led by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), the joint committee will conduct the review by coordinating with relevant departments in charge of the industry and sector involved in the specific M&A transaction. (Id., §3(2).)
A spokesman of the NDRC said that the new rules are in line with World Trade Organization rules and similar regulations in countries such as the United States, Germany, and Canada. Promulgation of the rules aims to increase the transparency and predictability of China's reviews of foreign investment, said the spokesman, and will not affect the country's long-held policy to encourage foreign investment. (Wang Xing, Review of Foreign Takeovers Won't Hurt Investment, CHINA DAILY (Feb. 17, 2011),
|Author:||Laney Zhang More by this author|
|Topic:||Foreign investment More on this topic|
|Jurisdiction:||China More about this jurisdiction|
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Last updated: 02/25/2011