On August 25, 2011, the Ministry of Commerce ("MOC") promulgated the "Provisions on Implementing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" ("Provisions"). The Provisions were promulgated within 6 months after the previous provisional provisions, and during the interim, public opinions were widely sought. The major points of the Provisions have been set forth as below:
- Trigger of Review: The Provisions make a reference to the Circular issued by the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ("Circular"). The Circular provides for the scope of the security review system, namely mergers and acquisitions of domestic enterprises by foreign investors where the acquired company falls into the following industries: military and related industries, key and sensitive military facility industries, enterprises related to national defence and safety, key agricultural enterprises, key energy and resources enterprises, major infrastructure enterprises, key transportation services enterprises, key technology enterprises, and major equipment manufacturing enterprises, and the effective control in such enterprises may be acquired by the foreign investors. The Provisions provide that where a transaction falls under the scope of the security review system, the foreign investor in concern shall file a national security review application ("Application"). The Provisions further provide that relevant government authorities, industry association, enterprises in the industry in concern or other players in the upper and lower stream of the industry in concern may propose in writing to central MOC to trigger a national security review for an acquisition or merger of a domestic enterprise by foreign investor. If the local bureaus or branches of MOC deem that a transaction fall within the scope of review, they shall suspend any approval process for the proposed transaction and, within 5 business days upon the suspension, request the foreign investor to file an Application with central MOC. To mitigate the risk that transactions may be delayed as a result of the administrative discretion, the Provisions provide that the applicants for proposed mergers and acquisitions are entitled to file a consultation application with central MOC regarding the procedural issues, provided that any discussions and comments made during such consultation are not legally binding and do not carry any legal effect.
- Review Process and Outcome: Article 5 of the Provisions provides a detailed documents list for the Application. Central MOC shall, within 15 business days upon the acceptance of the Application, notify the foreign investor in writing about whether the transaction fall within the scope of review. The foreign investor is entitled to proceed with the relevant procedures if no written notification is received after the expiry of the said 15 business days. The controversial retrospective provision found in the previous provisional provisions has been retained in the Provisions. Such provision provides that if a completed transaction is deemed by a multi-ministry review board as jeopardizing to the national security, such transaction shall be undone by transfer of relevant shares and assets or other effective measures.
- Substantive Review: Article 9 of the Provisions explicitly provides that, in the event where foreign investors are acquiring domestic companies, whether a transaction shall be subject to security review should be judged by its substance and its practical impact. Foreign investors shall not circumvent the security review by means of, including without limitation, any nominee arrangement, trust, multi-level re-investment, lease, loan, variable interest entity structure or offshore transaction, etc.
While the Provisions try to fine-tune the procedural issues, the ample administrative discretion under the Provisions still draws considerable concerns about whether the uncertainty and the administrative burden in effecting a cross-border merger and acquisition will be unreasonably increased. Also, the Provisions have for the first time made clear that certain popular approaches frequently used to walk around PRC legal restrictions are forbidden. Under the drastically changing regulatory environment, legal counsel should be engaged to assure that an undergoing transaction is in compliance of all PRC existing laws and regulations.