Security Censorship of Foreign Investors' M&A of Domestic Enterprises
04-03-2011

The General Office of the State Council issued the Notice on the Implementation of Security Censorship on Foreign Investors'  Merger and Acquisition of Domestic Enterprises on February 12, 2011 ("Notice").  The Notice lists deals involving the military, national defense, energy resources, and other industries that are connected with national security as falling within the scope of security review regulations and sets forth the relevant contents and procedures of such reviews. To facilitate implementation of the procedures outlined in the Notice, the Ministry of Commerce issued Provisional Regulations on Relevant Affairs of Implementation of Security Censorship on Foreign Investors’ Merger and Acquisition of Domestic Enterprises ("Provisional Regulation") on March 4, 2011.

That Provisional Regulation requires local administrative authorities of commerce to suspend acceptance and processing of an M&A transaction application until it has been submitted to the Ministry of Commerce for a security review. Upon receipt of an M&A transaction application, local administrative authorities are directed to instruct the applicant, in writing, to submit a security review application.  In addition, the local administrative authorities must submit a report to the Ministry of Commerce. The provision does not state what information should be in the report, but presumably the local administrative authorities should set forth the facts regarding the applied-for M&A transaction and the reasons for its suspension. Although the Provisonal Regulation is a temporary one and effective only until August 31, 2011, we predict that submission of a security review application will become a permanent requirement. If foreign investors intend to merge with or acquire Chinese enterprises within the industries for which security review is required, then they must consider whether their current plans are in accordance with the conditions and requirements for security clearance, whether they need to adjust or amend their current plans, etc.

The Provisional Regulation requires applicants that wish to pursue M&A transactions that are found to impact national security to make adjustments and amendments to their plans and then submit their applications for another review. Until their applications pass the security review, they cannot apply to implement their M&A transactions. In the event that the Ministry of Commerce believes that an M&A transaction will or may significantly impact national security, it will either prohibit that M&A transaction entirely or take steps to eliminate the impact of the transaction on national security. Foreign investors should expect a stringent review and not be careless about this issue. Unfortunately, however, the Provisional Regulation contains vague phrases such as "may impact national security" or "may impose impact (on national security)" without providing clear and specific guidelines to assist people in determining which transactions will be affected.  Consequently, foreign investors likely face uncertainty regarding interpretations of this regulation. 

RayYin's corporate practice provides comprehensive services in all types of corporate matters, including mergers and acquisitions. For further information or to schedule an appointment to discuss how we can assist your company with an M&A deal or other corporate matters, please contact Hao Wang at wh@rayyinlawyer.com or Yi Zhou zy@rayyinlawyer.com.