China Law Blog

By Steve Dickinson

China's National Development and Reform Commission (NDRC) recently reported on its plans for forming an interagency committee to review the national security impacts of foreign acquisitions of Chinese companies. Contrary to many of the news reports in both English and Chinese, this is not a new policy adopted by the NDRC. The formation of such a committee is consistent with longstanding China policy and it is required by law.

China's Anti Monopoly Law (AML) became effective on August 1, 2008. Article 31 of the AML provides for national security review of foreign M&A transactions as follows:

Article 31. If the merger with or acquisition of domestic enterprises by foreign investors or other forms of concentration involving foreign investors concerns national security, in addition to the review for concentration of undertakings in accordance with the provisions of this Law, it shall be examined for national security review in accordance with relevant regulations of the State.

This provision has raised three primary concerns. First, the term “national security” is inherently vague. Does it mean narrowly “national defense,” or does it mean more broadly “control of key industries by the state.” Second, who decides? That is, what agencies within the Chinese government will participate in the review process? Third, what will the procedure be? Will there be a clear process with established deadlines, or will the process be uncertain and subject to potentially conflicting interpretations at the local and national level? The answers to the first two questions are now fairly clear. Question three remains open.

With respect to question two, it has been clear from the start that the national security review process would be conducted by an inter-agency panel modeled on the Committee on Foreign Investments in the United States (CIFUS). The question has been: what agency will chair the security review committee. Some clarification was provided by the recent statement of its work plans issued by the NDRC on August 21, 2008. In Section 5(4) of this document under Other Duties, the NDRC states:

The NDRC and The Ministry of Commerce (MOFCOM) will jointly establish an inter-agency committee to examine the national security issues arising from merger or acquisition of domestic enterprises by foreign investors. MOFCOM will have primary responsibility for processing and responding to applications from foreign investors for merger or acquisition of domestic enterprises. Where such applications raise national security concerns, such issues will be considered by the interagency review committee; for projects that concern new investment in infrastructure, such matters will be dealt with in accordance with the relevant national regulations on infrastructure investment; where there are major national security concerns, these matters will be considered by a ministry level interagency committee.

The NDRC document provides no further details on the procedure to be followed or on the definition of “national security” to be applied. Clarity on this will have to wait for rules from the State Council.

Question one has a clear answer. The definition of “national security” is far broader than the “national defense” approach taken in the United States under CIFUS. The national security provision in the AML is taken from the 2006 Merger Guidelines. The AML provision is intended to follow the Guidelines, which provide for national security review at Article 12. Transactions that trigger review are those that affect “key industrial sectors,” the “national economy,” or that involve “well known trademarks or traditional brands.” This is clearly not a “national defense” criterion, but rather a “government control of key sectors of the economy” criterion. That is, the criterion focuses on maintaining national economic security, not on the narrow issue of “national defense.”

Since no rules have been issued, how should foreign investors deal with the national security review requirement at this time? The prudent approach is to assume every M&A transaction, no matter how small, requires notifying MOFCOM in Beijing. Failure to provide such notification subjects any transaction to a risk of forced termination by MOFCOM at some later date. The content and procedure for such notification should follow the procedures outlined in the 2006 M&A Guidelines, which should be considered to be fully in force. Local authorities often insist notification to MOFCOM is not necessary for smaller M&A transactions. Such advice should be viewed with caution. On the other hand, all that is required is notice. Approval from Beijing is not required on national security issues. Accordingly, it is not necessary to wait for a response from Beijing for transactions normally approvable on the local level. However, all foreign investors should independently determine whether their investments follow China's rules for foreign investment.