By Zhang Yi of King & Wood’s Corporate Group

On August 25, 2011, the Ministry of Commerce (MOFCOM) promulgated the Provisions on Implementation of Security Review System Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ( “Provisions”), which will become effective on September 1, 2011. The Provisions state that foreign investors must file an application for security review with MOFCOM for merger and acquisition (“M&A”) transactions that fall within the scope of security review. If a given M&A transaction is within the scope of security review, MOFCOM will inform foreign investors within 15 working days of the application being filed, and submit the application to the Joint Ministerial Panel for security review within 5 working days. The Provisions also state that foreign investors must not use any means, including but not limited to nominee shareholdings, trusts, multi-tier investments, leasing, loaning, control agreements, and offshore transactions, to evade M&A security review.

Before the promulgation of the Provisions, relevant ministries regulated inbound M&A transactions through controlling foreign investment access and anti-trust investigations over the concentration of business operators.  On February 3, 2011, the State Council released the Circular of the General Office of the State Council on the Establishment of Security Review System Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Circular”), providing that the Joint Ministerial Panel will conduct security reviews for inbound M&A transactions. The Circular requires that if the industrial sector in which an inbound M&A transaction takes place is crucial to national security (such as major farm products, energy and resources, defense industrial and affiliated military enterprises) relevant ministries will conduct a security review. When the Circular was promulgated, MOFCOM spokesman Yao Jian commented that the establishment of the security review system will facilitate China’s opening-up policy. Relevant officials of the National Development and Reform Commission have assured that China’s opening-up and foreign capital utilization policies remain intact after the implementation of the security review system. The security review mechanism is similar to the Committee on Foreign Investment in the United States (CFIUS), which is an inter-agency committee composed of representatives from various departments within the US government. These Provisions signal the formalized regulation of inbound M&A in China’s legal system.