Since 1 January 2020, with the coming into force of the Foreign Investment Law (“FIL”) of the People’s Republic of China (“PRC”), foreign investors have been awaiting guidance on how the PRC’s foreign investment security review system will be formulated and implemented. On 19 December 2020, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly issued the Measures for Security Review of Foreign Investment (《外商投资安全审查办法》) (“Measures”) which prescribe the general rules and detailed procedures for the security review system of foreign investment in the PRC. The Measures will take effect on 18 January 2021.
1. Scope of Measures
In terms of the forms of foreign investment regulated, the Measures adopt a similar regime to the FIL. Pursuant to the Measures, the term “foreign investment” refers to any of the following:
- A foreign investor, alone or together with another investor, invests in a greenfield project or invests by way of the establishment of a new enterprise in the PRC;
- A foreign investor acquires any equity or asset of an enterprise in the PRC by way of merger or acquisition; or
- A foreign investor invests in the PRC in any other way.
The Measures require a foreign investor or relevant parties in the PRC to proactively report the foreign investment to the governing authority before such foreign investment is made if either of the following is involved:
- Investment in the arms industry, an ancillary to the arms industry, or any other field related to national defense security or investment in an area surrounding a military installation or an arms industry facility; or
- Investment in important agricultural products, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and Internet products and services, important financial services, key technology, or any other important field related to national security, resulting in a foreign investor obtaining actual control of the enterprise invested in. The word “important”, “major” or “key” is used in the Measures to describe or qualify these sectors. Please see paragraph 3 below.
The occurrence of any of the following circumstances will constitute a foreign investor obtaining actual control of the enterprise:
- The foreign investor holds 50% or more of the equity of the enterprise;
- The foreign investor holds less than 50% of the equity of the enterprise, but has voting rights that have a material impact on the resolutions of the board of directors or the shareholders’ meeting; or
- The foreign investor is otherwise able to have a material impact on the business’ decision-making, personnel, finance, technology, among others, of the enterprise.
2. Security review process
For the purpose of organising, implementing, coordinating, and guiding the foreign investment security review, a special working mechanism office (“Office”) will be established under the leadership of NDRC and MOFCOM.
The Office shall, within 15 working days of receipt of the required information relating to the foreign investment, decide whether a security review is required and notify the relevant parties in writing.
If the Office decides to launch a foreign investment security review, a general review will be conducted first. The general review shall be completed within 30 working days from the date of decision. The Office shall thereafter decide whether to allow the foreign investment to proceed or conduct a further review (“special review”). The Office shall inform the relevant parties of its decision in writing.
Should a special review be required, the Office shall complete it within 60 working days. This period for completion of the special review can be extended by the Office if special circumstances are involved; however, the Measures do not specify what would constitute special circumstances. After the special review, the Office shall make a decision in accordance with the following considerations:
- If the reviewed foreign investment does not affect national security, the Office shall inform parties in writing that the investment has passed its security review;
- If the reviewed foreign investment affects national security, the Office shall inform parties in writing that the investment is prohibited; or
- The Office may, where the imposition of conditions is considered to be sufficient to eliminate the investment’s effect on national security per the provisions set out in the Measures and the relevant parties undertake in writing to accept the conditions, determine that the investment has passed the security review conditionally, with the imposed conditions stated in its decision.
Before the Office has decided whether a security review is required, and pending a general review or a special review, as applicable, no foreign investment shall be made.
3. Major changes
The Measures is not the first regulatory document on the security review of foreign investment in the PRC. The State Council of the PRC issued a notice on establishment of a security review system for mergers and acquisitions of domestic enterprises by foreign investors in 2011. Also in 2011, MOFCOM issued a similar document applicable to mergers and acquisitions of domestic enterprises by foreign investors in the PRC. In 2015, a regulation implemented in the pilot free trade zones in the PRC was issued by the State Council (“FTZ document”), which subjected foreign investment in green-field projects or establishment of new enterprises in the PRC to security review on the basis of the previous two documents. These three documents comprise the current regime for the security review of foreign investment in China.
Compared to the current regime, we have noted the following major changes in the Measures:
- Expanded scope: The Measures apply to foreign investment in green-field projects and the establishment of a new enterprise in the PRC, two areas which remain subject to security review. These areas of foreign investment had previously been included in the FTZ document. The Measures also go beyond the regime set out in the two 2011 documents. Special provisions relating to foreign investment in the financial services sector and to the Internet and its related products and services are also included in the security review scope set out in the Measures.
- Change of wording: The word “sensitive” (“敏感”) was used in the current regime when describing the sectors, services and products where foreign investment may trigger a security review. Under the Measures, the word “sensitive” has been discarded and only the terms “important” (“重要”), “major” (“重大”) and “key” (“关键”) remain. However, the Measures are silent on the definition of these terms. There are also no detailed lists of the sectors, services and products for which a security review will be required.
- Newly introduced provisions: The Measures also introduce new provisions and mechanisms, such as allowing foreign investors or other relevant parties to consult and query with the Office before reporting the proposed foreign investment. Moreover, members of the public can also suggest to the Office specific foreign investments for a security review. Contravention of the Measures will be recorded in the nationwide social credit system in the PRC and certain joint sanctions will be imposed on the relevant parties by different governmental authorities.
It should be noted that the Measures do not stipulate the revocation of the current regime when the Measures come into effect. We await further clarification from the relevant authorities.
The Measures reflect previous experiences and practices, especially those learned in the pilot free trade zones in the PRC, of security review of foreign investments as manifested through changes and adjustments to the current regime. Once in force, the Measures will form part of the system of the security review of foreign investment in the PRC along with the Negative List. To read more about the Negative List, please click here.
The Measures are relatively clear, explicit and practical, though some uncertainties - such as whether the decision made by the Office can be referred for administrative review or appeal - still exist, so foreign investors and relevant parties will be able to follow these Measures easily, as guidelines for their investments in the PRC.