FAQs on Security Review System for Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors
Q: What are the objects of Review?
A: According to the Notice, the security review of M&A includes: foreign investors' mergers with and acquisitions of domestic military industrial enterprises and supportive military industrial enterprises, enterprises surrounding major and sensitive military facilities, and other entities relating to the national defense security; foreign investors' mergers with and acquisitions of domestic enterprises relating to important agricultural products, important energies and resources, important infrastructural facilities, important transportation services, key technologies, manufacturing of major equipment, etc., which relate to the national security, and whose actual controlling power may be obtained by foreign investors.
It is also prescribed that a foreign investor shall "obtain the actual controlling power" through merger or acquisition under any of the following circumstances: 1. The total shares held by a foreign investor and its parent holding company and controlled subsidiary companies after merger or acquisition account for not less than 50%; 2. The total shares held by multiple foreign investors after merger or acquisition account for not less than 50% in total; 3. The total shares held by a foreign investor after merger or acquisition account for less than 50%, but the voting power it holds according to the stocks it holds is enough to have a material impact on the resolution of the shareholders’ meeting, the general assembly of shareholders, or the board of directors; or 4. Any other circumstance which leads to the transfer of the actual controlling power of a domestic enterprise on business decisions, financial affairs, personnel, technologies, etc. to a foreign investor.
It should be noted that some supplements to the methods of merger and acquisition by foreign investors are provided in the Notice in addition to those specified in the Regulations on Foreign Investors' Merging with and Acquiring of Domestic Enterprises (2009)(hereinafter referred to as the "Regulations").
1. The "equity merger" as mentioned in the Regulations only means the foreign investor purchases by agreement the equities of the shareholders of a domestic non-foreign-funded enterprise (hereinafter referred to as "domestic company") or subscribes to the increased capital of a domestic company, and thus changes the domestic company into a foreign-funded enterprise. Nevertheless, a foreign investor can also conduct merger by purchasing the equity shares from the Chinese shareholders of a domestic foreign-funded enterprise or subscribes to the increased capital of a domestic foreign-funded enterprise.
2. Furthermore, a foreign investor can also merge or acquire a domestic enterprise by establishing a foreign-funded enterprise and through which it purchases the equity shares of a domestic enterprise. This method is not included in the Regulations. It is subject to relevant regulations regarding domestic reinvestment by foreign investors.
Q: What is the Content of Review?
A: The contents of security review of M&A include: 1. The influence of M&A transactions on the national defense security, including the ability for producing domestic products and providing domestic services required for national defense and the relevant equipment and facilities; 2. The influence of M&A transactions on the stable operation of the national economy; 3. The influence of M&A transactions on the order of basic social life; and 4. The influence of M&A transactions on the capacity of research and development of key technologies involving national security.
Q: What are the procedures for the Security Review of Mergers and Acquisitions?
A: It is prescribed in the Notice that to merge or acquire a domestic enterprise, a foreign investor shall file an application with the Ministry of Commerce according to the provisions of this Notice, if the merger or acquisition falls within the scope of security review. Moreover, where the relevant department of the State Council, a national industrial association, an enterprise of the same profession, or an upstream or downstream enterprise deems it necessary to conduct a security review of the merger or acquisition of a domestic enterprise by a foreign investor, it may put forward suggestions on the security review of the merger or acquisition via the Ministry of Commerce. Such regulation makes really good use of the supervisions among industry associations, enterprises in the same industry and upstream and downstream enterprises.
If a foreign investor files application for security review at its own discretion or as suggested by the relevant department of the State Council, a national industrial association, an enterprise of the same profession, or an upstream or downstream enterprise, the Ministry of Commerce may requests the joint meeting to conduct a security review. Members of the joint meeting may decide to conduct a security review if they do deem it necessary. It will usually firstly conduct a general security review of the merger or acquisition of which the Ministry of Commerce requests a security review, and conduct a special review if the transaction fails to pass the general review. The general review is conducted in the form of soliciting opinions mainly from competent departments. If any department holds that the merger or acquisition transaction may affect national security, members of the joint meeting will initiate the special review procedure within five working days upon receipt of all written opinions. Members of the joint meeting will complete the special review within 60 working days from the date of initiating the special review procedure, or request the State Council to make a decision. Members of the joint meeting will notify the Ministry of Commerce in writing of his own review opinions. Generally speaking, a security review will cost 95 working days.
Q: What are the results of Review?
A: The Ministry of Commerce will notify the applicant in writing of the opinions on the security review of merger or acquisition provided by members of the joint meeting. Where the merger or acquisition of a domestic enterprise by a foreign investor has produced or may produce a material impact on the national security, members of the joint meeting shall require the Ministry of Commerce to terminate the transaction between the parties concerned jointly with the relevant departments, or transfer the relevant equities, assets or take other effective measures to eliminate the effect of such merger or acquisition on national security.