National Security Review of Foreign Investment in China

Denmark has promulgated a new foreign investment screening legislation which entered into force on 1 July 2021, and we have recently published an article on the Danish screening law on our website (https://www.magnussonlaw.com/news/new-danish-rules-on-screening-and-approval-of-foreign-investments/).

We are at the moment seeing a global trend for more scrutiny of foreign investments.

In addition to Denmark a number of EU countries have introduced or are looking to introduce new FDI regimes, and it is also an issue raising attention at the level of the European Commission.

It is, however, not only in Europe that we see the trend, with also China having implemented during 2021 a new national security review legislation.

The National Development and Reform Committee (“NDRC”) and the Ministry of Commerce (“MOFCOM”) of PRC jointly passed the Measures for Security Review of Foreign Investment (the “Measures”), which came into effect from 18 January 2021.

 

Scope of the Measures

The Measures, similar to many other Chinese legislative initiatives, appear to have a board range of application, targeting all forms of foreign investments, regardless of whether direct and indirect, in China, including (i) greenfield investment, (ii) equity or asset acquisition, and (iii) any other forms of foreign investment.

Foreign investment by a sole company or jointly with other foreign companies or PRC companies are all captured by the Measures.

The last catch-all  “any other forms” item set out in the Measures implies to capture any contractual arrangement (e.g. VIE), long-term loan or lease agreement, nominee shareholding, trust and similar arrangement.

 

Sectors Subject to Security Review

Sectors subject to national security review are classified into two categories:

(i) military-related sectors, which cover not only military related sectors and sectors concerning national defense, but also investment in the surrounding areas of military related sectors from a geographical point of view; and

(ii) the following key sectors with actual control of the invested company: agricultural, energy, equipment manufacturing, infrastructure, transportation, cultural, information technology and internet, financial, technologies and other important sectors concerning national security. What is considered “key” remains undefined in the Measures, leaving the authority discretion to identify any sector or capture any company from time to time.

The concept of “actual control” that is used in the Measures is consistent with other Chinese rules with regard to foreign investment security review currently in place.

A foreign investor holding more than 50% equity interests of, or having a significant impact on board or shareholding meeting of, or being able to exert a substantive impact on the business decision, personnel, finance, technology, etc. of, the invested company, can be deemed as having actual control of the invested company.

 

Procedures of Security Review

A new governmental department named “work office” is set up and jointly headed by NDRC and MOFCOM at the central level, to be responsible for national security review of foreign investment.

For a foreign company to invest in China, it may consult with the work office on relevant issues before submitting the security review application, such as whether a contemplated transaction will be subject to national security review. In such case, the parties could avoid submitting an application for a transaction not subject to security review in order to save needless time and speed up the transaction.

Once an application is submitted, it may go through three staged-steps: (i) preliminary review: the work office will decide whether security review is applicable within 15 business days; (ii) general review: the work office will decide whether to grant a clearance to the transaction or initiate a special review procedure, within 30 working days; and (iii) special review (if initiated): the work office will make final decision on the transaction within 60 days which may be extended under special circumstances without limit.

The decision can be denial, clearance, or conditional clearance. In a nutshell, the review procedure may take from 3 weeks to 5 months or even longer, upon receipt of all the necessary application documents by the work office.

Before the clearance from the work office is granted, the parties are not allowed to close the transaction.

 

Implications

China has had its national security review system for around 10 years, but so far the system has been rarely used in practice.

However, considering the current international political and economic pattern, especially the trade war between China and US, it is likely that China will expect to take a more active approach in adopting national security review as one of its measures to monitor and regulate foreign direct and indirect investments into China.

Foreign companies need to carefully assess whether a proposed transaction or establishment in China may trigger the security review as well as the potential impact on the transaction (such as timing issue, condition precedent, etc.).

More importantly, foreign investors invested or with willingness to invest into key or sensitive sectors are recommended to consult with the work office before taking a further movement to either submit security review application or close transaction without clearance.

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If you have any question or comment on this topic or any other matters related to foreign companies doing business in China or Chinese investments in Europe, please do not hesitate to contact Magnusson’s China Group.

Our China Group team has almost two decades of experience advising Chinese companies who conduct business in the Baltic Sea Region and local clients who conduct business in China.

We have Chinese qualified lawyers in our group as well as Mandarin speakers in most of our offices. Our lawyers are able to offer a comprehensive range of services in Mandarin and the local languages and have considerable experience of helping Chinese businesses who are looking to set up operations in the Baltic Sea Region.

Moreover, we are also there to support and advise local businesses looking to take advantage of the many opportunities that China offers. Our services include M&A and investments, dispute resolution, employment law, foreign investment screening, regulatory advice, e-trade and personal data and commercial contracts.

 

Nikolaj Juhl Hansen
Partner
+45 27 74 05 07
nikolaj.juhl.hansen@magnussonlaw.com

Natalie Pu
Counsel
+46 72 442 68 80
natalie.pu@magnussonlaw.com

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