Antitrust Alert: China Plans National Security Review of Foreign Investments
China is in the process of developing new rules for national security review of mergers and acquisitions between Chinese and foreign companies. The new Plan for National Security Review Mechanism (NSR Plan) will establish a multi-ministry committee to review national security issues presented by foreign mergers and acquisitions with Chinese domestic companies. This will present an additional regulatory hurdle for foreign transactions, separate from the competition review under the 2008 Anti-Monopoly Law (AML). Article 31 of the AML already provides for national security reviews, but until now no mechanism for those reviews has been implemented.
This development comes amidst increasing expressions of concerns by foreign governments and business organizations about a perceived increase in domestic protectionism and economic nationalism in China. The NSR Plan is expected to be promulgated as early as this year, though further details have not been made publicly available.
Legal and Regulatory Background
A vigorous debate has been underway in China for years regarding the perceived national security issues arising from foreign acquisitions of domestic companies, with particular concern focused on "strategic and sensitive" industries and Chinese national champions. It was widely reported that Carlyle Group’s proposed acquisition of Xuzhou Machinery in 2005 failed to obtain Chinese government approval due to national security concerns.
The AML’s article 31 requires mergers and acquisitions by foreign investors to undergo a separate national security review in addition to antitrust review. It has been widely understood that such national security review would be conducted by a separate authority according to forthcoming laws and regulations, but no implementing rules have been published and no cases are reported to have been subjected to separate national security review under the AML. The NSR Plan is expected to make article 31 operational. For a discussion of the AML and article 31, see https://www.jonesday.com/the_china_anti-monopoly_law-becomes_effective/.
In addition to the AML, article 12 of the Rules on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Foreign M&A Rules) requires foreign investors to report to the Ministry of Commerce (MOFCOM) any transactions in which they will acquire control of domestic entities in key economic sectors or affecting national economic security or famous Chinese brands. Article 12 does not include a list of "key economic sectors" or define "national economic security." Although the antitrust merger review chapter of the Foreign M&A Rules is understood to have been superseded by the AML, article 12 appears to remain in force. As of March 2010 there have been no reports of MOFCOM receiving notifications or explicitly challenging transactions pursuant to article 12, although a number of transactions (such as Carlyle/Xugong) have failed to obtain approval for undisclosed reasons. For more information on the Foreign M&A Rules, see https://www.jonesday.com/mergers-and-acquisitions-in-china-07-25-2006/.
The Plan for National Security Review Mechanism
During the annual session of the National People’s Congress in March 2010, Premier Wen Jiabao stated in his annual Government Work Report that the Chinese government will "accelerate the establishment of the National Security Review Mechanism of foreign investment." Reportedly a new plan for national security review of mergers and acquisitions by foreign investors already has been submitted to the State Council for approval. This Plan for National Security Review Mechanism (NSR Plan) was jointly drafted by MOFCOM, the National Development and Reform Commission (NDRC), and the Legislative Affairs Office of the State Council. The NSR Plan reportedly was completed in early 2009, but approval was delayed due to the global financial crisis. It now is expected to be promulgated as early as this year. However, further details of the draft Plan currently are not available, and it is unclear whether the Plan itself will be published.
The Joint Ministerial Committee
The proposed national security review reportedly will be conducted by a Joint Ministerial Committee comprised of ministers from multiple government ministries including NDRC, MOFCOM, the Ministry of Industry and Information Technology (MIIT), the Commission of Science, Technology and Industry for National Defense (COSTIND), the Ministry of Science and Technology (MOST), the Ministry of Agriculture, the State-Owned Assets Supervision and Administration Commission (SASAC), the China Banking Regulatory Commission (CBRC), the State Administration of Industry and Commerce ("SAIC"), the State Administration of Taxation (SAT), and some important trade associations. The Committee will be headed by a state leader at the vice-premier level.
Uncertain Review Scope and Process
The scope of transactions subject to national security review apparently will depend both on the industry involved and the scale of the proposed transaction. The NSR Plan reportedly includes a list of strategic and sensitive industries, but that list will not to be published, "according to international practice." The plan is said to be modeled after the Committee on Foreign Investment in the United States (CFIUS), which is responsible for U.S. national security review of foreign investment in U.S. companies.
The details currently available about the NSR Plan remain thin and leave considerable uncertainty about a number of issues, including:
- How broadly "national security" will be defined
- What industries will be considered important to national security
- The timeframe and process for review and approval
- Whether review will be initiated upon the discretion of the Joint Ministerial Committee, through a mandatory prior notification system governed by objective reporting thresholds (as for antitrust review), or otherwise
- The relationship between the National Security Review Committee and the Anti-Monopoly Commission, both of which are joint ministerial-level authorities with similar constituent members
- The relationships among national security review, article 12 of the Rules on Foreign M&A, and the Catalogue for the Guidance of Foreign Investment Industries (which designates industries in which foreign investment is prohibited, restricted or permitted).
Practical Impact and Policy Considerations
When finalized, the national security review mechanism will provide an additional regulatory hurdle for mergers and acquisitions by foreign investors in China, albeit one that Chinese legislators and regulators would say follows existing practice in other jurisdictions like the U.S. CFIUS process. Despite these international precedents, Chinese national security review is likely to add to increasing concern by Western observers about domestic protectionism and economic nationalism in China, which has been sparked by recent actions such as a government initiative favoring indigenous innovation in government procurement, about which more information can be found at the following links.
The Notice on Accreditation for State Indigenous Innovation Products (Guanyu Kaizhan 2009 Nian Guojia Zizhu Chuangxin Chanpin Rending Gongzuo De Tongzhi), promulgated by MOST, NDRC and the Ministry of Finance in September 2009 is available in Chinese at http://www.most.gov.cn/tztg/200911/t20091115_74197.htm.
See also US Companies: Concern about Innovation Policy, American Chamber of Commerce China, available in English at: http://www.amchamchina.org/download?path=/cmsfile/2010/03/22/c3a7653068add3d1688d697736c84f3c.pdf.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Shanghai & Beijing
Beijing / Brussels
H. Stephen Harris, Jr.
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