By Susan Ning, Huang Jing and Yin Ranran
On 25 August 2011, the Ministry of Commerce (MOFCOM) released the MOFCOM Rules for Implementation of Relevant Issues regarding National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (NSR Rules). From 1 September 2011, the Rules replaces the MOFCOM Interim Rules for Implementation of Relevant Issues regarding National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (NSR Interim Rules) issued on 4 March 2011 (see our article entitled "MOFCOM issues national security review interim rules").
Compared with the Interim Rules, the key change we see in the NSR Rules is that MOFCOM clearly states that the authority will assess the applicability of the national security review (NSR) process from the substance and actual impact of a transaction; and that foreign investors shall not evade the NSR regime via alternative transaction structures, including but not limited to warehousing arrangements, trusts, multi-tier investments, leases, loans, contractual control, or offshore transactions, etc.
This change shows that the authority would take a rather strict approach in the enforcement of the NSR regime. It is fair to say that it would be very hard for foreign companies to try to circumvent the NSR process by designing complex transaction structures, including by means of variable interest entities (VIEs). It is expected that the NSR Rules will have a far-reaching effect on the landscape for foreign mergers and acquisitions in China.
Furthermore, during the foreign investment approval process, the local commerce departments (local counterparts of MOFCOM) are charged with the responsibility to screen transactions that are subject to the NSR regime yet are not voluntarily filed. According to the Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the State Council (NSR Notice), MOFCOM has the sole discretion in determining whether a transaction is subject to the NSR process. As far as we know, a list of sectors that are subject to the NSR process has been circulated to local commerce departments. Although the list is not publicly available, the scope of industries included therein is said to be broader than expected. In practice, we have encountered cases where local commerce departments require the foreign investors to file for national security review if the industry involved in the transaction has some bearing on the listed industries (see our article entitled Local commerce administrative agencies and the national security review process).
Other than being requested to make a filing by local commerce departments during the foreign investment approval process, relevant ministries of the State Council, nationwide industry associations, enterprises in the same industry (in relation to the proposed transaction) and enterprises in the upstream or downstream industries (in relation to the proposed transaction) can also trigger the NSR process by proposing such to the ministerial joint committee (Joint Committee) through MOFCOM. It is reasonable to expect that competitors who feel threatened by a transaction where NSR may be applicable may wish to trigger the NSR process if the parties have not done so. Therefore, it is particularly important for parties involved in high-profile or controversial transactions that potentially fall under the NSR regime to carefully examine the implications of the NSR Rules on their transactions to avoid any future surprises or potential delays.
Once MOFCOM officially accepts an application, the proposed transaction would face a compulsory waiting period of 15 working days, during which MOFCOM will determine whether the transaction falls under the purview of the NSR regime and therefore should be passed onto the Joint Committee.
If the proposed transaction is deemed by MOFCOM to be within the scope for national security review, the investor should expect another 30 to 90 working days (30 working days of general review period plus a possible 60 working days of special review period) to obtain the final decision of the Joint Committee.
The procedural framework of the NSR process is very close to that of the merger control process under the Anti-monopoly Law (AML). Based on our experiences in handling AML filings, nowadays a greater portion of the AML filings enter Phase II (equivalent to the special review period in the NSR process). It is yet to be found out whether it would be the same case in the NSR process.
Since there is no requirement under China’s NSR rules for publication of NSR decisions, it is not entirely clear how many NSR filings MOFCOM has accepted thus far and whether MOFCOM has approved (or disapproved) a transaction under the NSR regime. As part of the government approval procedures for foreign investment in China, the impact of the NSR process on inbound M&As is hard to be neglected. Foreign investors should always keep the NSR process in mind, plan ahead, and put in place a well-thought-out strategy.