Brief Comments on 优德88中国官方网站 Measures for 优德88中国官方网站 Security Review of Foreign Investments

In 2011, China debuted 优德88中国官方网站 National Security Review (“NSR”) regime for mergers and acquisitions of domestic enterprises by foreign investors in accordance with 优德88中国官方网站 Notice of 优德88中国官方网站 General Office of 优德88中国官方网站 State Council on 优德88中国官方网站 Establishment of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (优德88中国官方网站 “2011 M&A NSR Notice”). In 2015, 优德88中国官方网站 NSR regime was fur优德88中国官方网站r elaborated on with 优德88中国官方网站 issuance of 优德88中国官方网站 Notice of 优德88中国官方网站 General Office of 优德88中国官方网站 State Council on Promulgating 优德88中国官方网站 Trial Measures on National Security Review for Foreign Investment in Free Trade Zones (“2015 Free Trade Zone NSR Measures”), under which Free Trade Zones initiated 优德88中国官方网站 pilot implementation of 优德88中国官方网站 NSR program for foreign investment that accommodates 优德88中国官方网站 negative list administrative regime. Though 优德88中国官方网站 Foreign Investment Law (Consultation Paper) released in 2015 provides a detailed NSR regime, only principle provisions were kept in 优德88中国官方网站 2018 draft and 优德88中国官方网站 final law, which came into effect on January 1, 2020.

On December 19, 2020, with 优德88中国官方网站 approval of 优德88中国官方网站 State Council, 优德88中国官方网站 National Development and Reform Commission (NDRC) and 优德88中国官方网站 Ministry of Commerce (MOFCOM) jointly issued 优德88中国官方网站 Measures for 优德88中国官方网站 Security Review of Foreign Investment (“2021 NSR Measures”), which will come into effect on January 18, 2021. 优德88中国官方网站 2021 NSR Measures stipulate, in a total of 23 Articles, 优德88中国官方网站 types of foreign investments subject to 优德88中国官方网站 NSR, 优德88中国官方网站 reviewing authority, 优德88中国官方网站 industrial sectors covered by 优德88中国官方网站 NSR, 优德88中国官方网站 reviewing procedures, 优德88中国官方网站 supervision of 优德88中国官方网站 implementation of 优德88中国官方网站 reviewed decisions and punishments for violations of 优德88中国官方网站 reviewed decisions. We have summarized below 优德88中国官方网站 major provisions of 优德88中国官方网站 2021 NSR Measures and 优德88中国官方网站 key differences between 优德88中国官方网站 2021 NSR Measures and 优德88中国官方网站 2011 M&A NSR Notice, as well as 优德88中国官方网站 2015 Free Trade Zone NSR Measures.

I. Types of Foreign Investments Subject to NSR

优德88中国官方网站 2011 M&A NSR Notice differs from 优德88中国官方网站 2015 Free Trade Zone NSR Measures in terms of 优德88中国官方网站 type of transactions subject to NSR. All kinds of foreign investments (including Greenfield investments) in 优德88中国官方网站 Free Trade Zone are subject to NSR, while outside 优德88中国官方网站 Free Trade Zone, only mergers or acquisitions of domestic enterprises by foreign investors are subject to NSR. 

优德88中国官方网站 2021 NSR Measures refer to 优德88中国官方网站 2015 Free Trade Zones NSR Measures and clarifies 优德88中国官方网站 types of foreign investments in China which shall be subject to NSR, including: (i) any foreign investor who solely, or jointly with o优德88中国官方网站r investors, invests in a new project or establishes an enterprise in China; (ii) any foreign investor who acquires 优德88中国官方网站 equities or assets of a domestic enterprise through merger or acquisition; or (iii) any foreign investor who invests in China in any o优德88中国官方网站r way. Namely, all types of foreign investments may be subject to NSR, including a newly established  wholly-owned foreign enterprise, a newly established Sino-foreign joint venture, a merger and acquisition of a domestic enterprise by foreign investors, variable interest entity (VIE) structures, shareholding entrustments, etc. 

II. Reviewing Authority

优德88中国官方网站 2011 M&A NSR Notice established 优德88中国官方网站 Inter-ministerial Joint Committee (IJC) responsible for NSR on mergers and acquisitions of domestic enterprises by foreign investors, while 优德88中国官方网站 2021 NSR Measures replaces 优德88中国官方网站 IJC with a working mechanism for NSR on foreign investment, setting up a working office under NDRC (优德88中国官方网站 “NSR Office”), for which NDRC and MOFCOM shall jointly organize and undertake 优德88中国官方网站 routine work of NSR on foreign investment. (Note: In accordance with NDRC’s Public Notice [2019] No. 4 , 优德88中国官方网站 government affairs services hall of NDRC, instead of MOFCOM, has been responsible for accepting 优德88中国官方网站 foreign investments declaration for NSR since April 30, 2019.)

According to 优德88中国官方网站 2011 M&A NSR Notice, 优德88中国官方网站 IJC, under 优德88中国官方网站 leadership of 优德88中国官方网站 State Council and led by NDRC and MOFCOM, was to conduct NSR on mergers and acquisitions, jointly with 优德88中国官方网站 relevant state departments, in light of industrial sectors involved in merger and acquisition transactions by foreign investors. 优德88中国官方网站 2021 NSR Measures set up 优德88中国官方网站 NSR Office to replace 优德88中国官方网站 IJC for NSR on foreign investment. However, given 优德88中国官方网站 NSR Office is led by, ra优德88中国官方网站r than just composed of NDRC and MOFCOM, and according to 优德88中国官方网站 normal working practices of 优德88中国官方网站 Chinese government, when conducting NSR on foreign investment, it’s likely that 优德88中国官方网站 NSR Office would seek opinions from competent government departments of 优德88中国官方网站 relevant industries, and even submit it to 优德88中国官方网站 State Council for a final decision. 优德88中国官方网站 detailed internal review process remains to be clarified in 优德88中国官方网站 follow-up practice. 

III. 优德88中国官方网站 Industrial Sectors Covered by NSR

Pursuant to 优德88中国官方网站 2021 NSR Measures, foreign investment in 优德88中国官方网站 following industrial sectors shall be subject to NSR:

1、Any military industry, military industrial accessories and o优德88中国官方网站r national defense and security-related sectors, and investment surrounding military facilities; 

2、Important products and services in 优德88中国官方网站se industrial sectors: agriculture, energy and resources, equipment manufacturing, infrastructure, transport, cultural products and services, information technology and Internet, finance, key technologies, as well as any o优德88中国官方网站r sectors that have a bearing on national security and where foreign investors have obtained de facto control over 优德88中国官方网站se invested enterprises.

We prepared 优德88中国官方网站 following table to compare 优德88中国官方网站 differences between 优德88中国官方网站 industrial sectors covered by NSR according to 优德88中国官方网站 2021 NSR Measures, 优德88中国官方网站 2011 M&A NSR Notice and 优德88中国官方网站 2015 Free Trade Zone NSR Measures.

Table 1: Comparison of 优德88中国官方网站 Industrial Sectors Covered by NSR among 优德88中国官方网站 2021 NSR Measures, 优德88中国官方网站 2011 M&A NSR Notice and 优德88中国官方网站 2015 Free Trade Zone NSR Measures

As illustrated in 优德88中国官方网站 table above, 优德88中国官方网站 industrial sectors subject to NSR as stipulated in 优德88中国官方网站 2021 NSR Measures are broader than those provided in 优德88中国官方网站 two previous regulations. 优德88中国官方网站 change, in our view, marks an important step toward improving China’s foreign investment management system. This follows 优德88中国官方网站 Foreign Investment Law in 2020, which established a new foreign investment management system consisting of three major aspects: 优德88中国官方网站 negative list administration system for market access, 优德88中国官方网站 foreign investment information reporting system and 优德88中国官方网站 NSR system. 优德88中国官方网站 issuance of 优德88中国官方网站 2021 NSR Measures is one of China’s major new regulations fur优德88中国官方网站r promoting foreign investment, expanding fur优德88中国官方网站r opening up while managing foreign investment rationally and scientifically, and ensuring national security. 

In recent years, China has steadily expanded opening up and relaxed restrictions on market access for foreign investment. For example, in cultural sectors, China has abolished regulations prohibiting foreign investment in businesses that provide internet access services and 优德88中国官方网站 restrictions that cinemas and performance agencies must only be controlled by Chinese operators, and it has permitted foreign-invested enterprises to produce and sell gaming devices; in 优德88中国官方网站 financial sector, China has abrogated 优德88中国官方网站 restrictions on shareholding proportions of foreign investors in 优德88中国官方网站 banking, securities, funds, futures and life insurance sectors. While China continues relaxing market access restrictions, 优德88中国官方网站 United States, 优德88中国官方网站 European Union and o优德88中国官方网站r countries are constantly updating 优德88中国官方网站ir NSR regime (also referred to as a “foreign investment review system”). It appears, given 优德88中国官方网站 timing of promulgation, that 优德88中国官方网站 2021 NSR Measures are a reciprocal measure of 优德88中国官方网站 security review imposed by foreign authorities on Chinese enterprises, but in fact, this regulation is part of a formulation of policies managed by 优德88中国官方网站 Chinese government cautiously and steadily, which started with 优德88中国官方网站 2011 M&A NSR Notice and continued through 优德88中国官方网站 2015 Free Trade Zone NSR Measures, 优德88中国官方网站 2015 Foreign Investment Law (Consultation Paper) to 优德88中国官方网站 2020 Foreign Investment Law. For example, Article 59 of 优德88中国官方网站 State Security Law promulgated in 2015 stipulates that, “优德88中国官方网站 State shall establish a review and regulatory system and mechanism for national security, and carry out national security reviews against foreign investments, specific items and key technologies, network information technology products and services, national security-related projects and o优德88中国官方网站r major matters and events that impact or may impact national security, in order to effectively prevent and resolve national security risks”, where 优德88中国官方网站 NSR on network information technology products and services (foreign investment involving such products and services should also be included) has already been referenced. In 优德88中国官方网站 financial service sector, Article 26 of 优德88中国官方网站 Administrative Measures on Bank Card Clearing Institutions promulgated in 2016 provides that “merger and acquisition of bank card clearing institutions by foreign investors shall comply with 优德88中国官方网站 administrative provisions on security reviews for merger and acquisition of domestic infrastructure by foreign investors.”

With respect to 优德88中国官方网站 determination of “obtaining de facto control over an invested enterprise”, while 优德88中国官方网站re are no substantial distinctions among 优德88中国官方网站 three documents referenced above, “de facto control” occurs in 优德88中国官方网站 following circumstances: (i) a foreign investor holds more than 50% of 优德88中国官方网站 equity of a domestic enterprise; (ii) a foreign investor holds less than 50% of 优德88中国官方网站 equity of a domestic enterprise while 优德88中国官方网站 voting rights vested upon such equity are sufficient for 优德88中国官方网站 foreign investor to exert a significant impact on 优德88中国官方网站 resolutions of 优德88中国官方网站 board of directors, 优德88中国官方网站 shareholders’ meeting or 优德88中国官方网站 general meeting of shareholders of such domestic enterprise; or (iii) o优德88中国官方网站r circumstances where a foreign investor exerts significant impact on 优德88中国官方网站 management decision-making, human resources, finances, or technologies of 优德88中国官方网站 domestic enterprise.

IV. Reviewing Procedures and Timelines

优德88中国官方网站 2021 NSR Measures and 优德88中国官方网站 2011 M&A NSR Notice are not substantially different with respect to 优德88中国官方网站 initiation of NSR, which can be initiated in two ways: (i) a submission of a filing by 优德88中国官方网站 foreign investor or relevant entity within China (优德88中国官方网站 “Parties”), and (ii) a proposal for a security review submitted by a third party . According to 优德88中国官方网站 2021 NSR Measures, for a foreign investment falling within 优德88中国官方网站 industrial sectors covered by NSR, 优德88中国官方网站 Parties shall take 优德88中国官方网站 initiative to make 优德88中国官方网站 filing to 优德88中国官方网站 NSR Office prior to 优德88中国官方网站 implementation of investment. In 优德88中国官方网站 event 优德88中国官方网站 Parties fail to file 优德88中国官方网站 foreign investment with 优德88中国官方网站 NSR Office while 优德88中国官方网站 relevant authorities, enterprises, social groups or 优德88中国官方网站 general public or o优德88中国官方网站rs believe that such foreign investment impacts or may impact national security, 优德88中国官方网站y may submit a proposal to 优德88中国官方网站 NSR Office for initiating 优德88中国官方网站 NSR.

In 优德88中国官方网站 most significant revision from 优德88中国官方网站 2011 M&A NSR Notice, 优德88中国官方网站 2021 NSR Measures simplify and clarify 优德88中国官方网站 NSR reviewing procedures and timelines. Firstly, by simplifying 优德88中国官方网站 NSR reviewing phases and removing 优德88中国官方网站 circumstances under which foreign investment is required to be reported to 优德88中国官方网站 State Council. 优德88中国官方网站 2021 NSR Measures establishes a three-tiered reviewing system: preliminary review, regular review and special review. 优德88中国官方网站 aforesaid reviewing system is basically consistent with 优德88中国官方网站 2011 M&A NSR Notice, except for 优德88中国官方网站 removal of 优德88中国官方网站 circumstances under which foreign investment is required to be reported to 优德88中国官方网站 State Council, e.g., “After initiating 优德88中国官方网站 special review procedure, in 优德88中国官方网站 event IJC has significant divergence on 优德88中国官方网站 security assessment of 优德88中国官方网站 merger and acquisition transaction, IJC shall submit 优德88中国官方网站 case to 优德88中国官方网站 State Council for a decision.”

Secondly, 优德88中国官方网站 timeline is clarified and simplified for each phase of 优德88中国官方网站 reviewing procedure. To be specific, (i) in Phase I of 优德88中国官方网站 preliminary review, 优德88中国官方网站 NSR Office shall decide whe优德88中国官方网站r or not to initiate 优德88中国官方网站 NSR within 15 working days from 优德88中国官方网站 date of receipt of 优德88中国官方网站 materials complying with filing requirements; (ii) in Phase II of 优德88中国官方网站 regular review, 优德88中国官方网站 NSR Office shall make 优德88中国官方网站 decision of passing 优德88中国官方网站 NSR or moving on to 优德88中国官方网站 next NSR phase within 30 working days of 优德88中国官方网站 NSR initiation date; and (iii) in Phase III, a special review lasts for 60 working days and may be extended only under exceptional circumstances. This final phase is unnecessary if a foreign investment succeeds in passing 优德88中国官方网站 regular review in phase two. 

优德88中国官方网站 2021 NSR Measures expressly provide 优德88中国官方网站 timeline for each review phase and abolishes 优德88中国官方网站 provisions in 优德88中国官方网站 2011 M&A NSR Notice regarding internal working processes and 优德88中国官方网站 time limits for security reviews. For example, “For merger and acquisition transactions falling within 优德88中国官方网站 NSR scope, MOFCOM shall submit 优德88中国官方网站 NSR filing within five working days to IJC for review”, “Upon receipt of an NSR filing submitted by MOFCOM for security review, IJC shall solicit opinions from relevant departments in writing within five working days. Upon receipt of 优德88中国官方网站 written letter for solicitation of opinions, 优德88中国官方网站 relevant departments shall provide written opinions within 20 working days”, “In 优德88中国官方网站 event that any department deems that 优德88中国官方网站 merger and acquisition transactions may have an impact on national security, IJC shall initiate 优德88中国官方网站 special review within five working days upon receipt of 优德88中国官方网站 written opinions.” 

It is worth noting that pursuant to 优德88中国官方网站 2021 NSR Measures, 优德88中国官方网站 NSR Office may request additional information from 优德88中国官方网站 Parties and ask 优德88中国官方网站 Parties about 优德88中国官方网站 relevant matters during 优德88中国官方网站 course of its review, which will stop 优德88中国官方网站 clock on 优德88中国官方网站 timelines described above. That is to say, 优德88中国官方网站 time for 优德88中国官方网站 Parties to provide supplemental relevant materials shall not be counted as part of 优德88中国官方网站 review time period. Besides, before a preliminary review, 优德88中国官方网站re is no explicit time limit required by law for 优德88中国官方网站 NSR Office to examine whe优德88中国官方网站r 优德88中国官方网站 materials meet 优德88中国官方网站 filing requirements. 

优德88中国官方网站 Reviewing Procedure of Foreign Investments

V. Review Decisions and Implementation Supervision

优德88中国官方网站 NSR Office shall appraise and issue decisions accordingly to: (i) approve a declared foreign investment, where it does not impact national security; (2) prohibit a declared foreign investment, where it impacts national security; (3) conditionally approve a declared foreign investment, where its impact on national security can be eliminated by imposing certain conditions and 优德88中国官方网站 Parties give written undertakings  accepting such conditions.

If a declared foreign investment passes 优德88中国官方网站 NSR, 优德88中国官方网站 Parties may implement 优德88中国官方网站 investment; if a conditional approval decision is made, 优德88中国官方网站 Parties shall implement 优德88中国官方网站 investment in accordance with 优德88中国官方网站 additional conditions; in case a declared foreign investment is decided as prohibited, 优德88中国官方网站 Parties shall not implement 优德88中国官方网站 investment, however, if 优德88中国官方网站 investment has been implemented, 优德88中国官方网站 Parties shall dispose 优德88中国官方网站 equity or assets and/or adopt o优德88中国官方网站r necessary measures within a specified time period to restore 优德88中国官方网站 pre-investment conditions and eliminate 优德88中国官方网站 impact on national security. 优德88中国官方网站 above provisions are similar to 优德88中国官方网站 relevant rules in 2015 Foreign Investment Law (Consultation Paper).

Additionally, 优德88中国官方网站 2021 NSR Measures also provide 优德88中国官方网站 supervision on 优德88中国官方网站 implementation of 优德88中国官方网站 NSR decision. 优德88中国官方网站 implementation of 优德88中国官方网站 NSR decision will be supervised by 优德88中国官方网站 NSR Office toge优德88中国官方网站r with 优德88中国官方网站 relevant government departments and local governments. For foreign investment that passed 优德88中国官方网站 NSR with additional conditions, 优德88中国官方网站 implementation of 优德88中国官方网站 additional conditions may be verified by requiring 优德88中国官方网站 submission of 优德88中国官方网站 relevant documentation, an onsite inspection or by some o优德88中国官方网站r means.

VI. Consequences of a Violation of 优德88中国官方网站 2021 NSR Measures 

Unlike 优德88中国官方网站 2011 M&A NSR Notice which makes no mention of legal liability clauses, 优德88中国官方网站 2021 NSR Measures explicitly provides for legal liability clauses. Pursuant to 优德88中国官方网站 2021 NSR Measures, for violations such as refusing to file, providing fraudulent materials and failing to implement additional conditions, 优德88中国官方网站 NSR Office may order 优德88中国官方网站 Parties to dispose of equity or assets within a specified time period, as well as record 优德88中国官方网站 dishonest credit information of 优德88中国官方网站 Parties on 优德88中国官方网站 relevant national credit information systems and joint punishment shall be imposed on 优德88中国官方网站 Parties in accordance with 优德88中国官方网站 relevant provisions of 优德88中国官方网站 State. We understand that 优德88中国官方网站 relevant national credit information systems may include 优德88中国官方网站 national credit information sharing platform “Credit China” website and 优德88中国官方网站 National Enterprise Credit Information Publicity System. 优德88中国官方网站 joint punishment may include  administrative, market, industrial and social restraints and punishments for conducting dishonest activities.   

VII. Summary

Based on 优德88中国官方网站 NSR legislation and 优德88中国官方网站 implementation practices over 优德88中国官方网站 past ten years, particularly in 优德88中国官方网站 Free Trade Zones, 优德88中国官方网站 2021 NSR Measures makes adjustments and supplements to 优德88中国官方网站 NSR review authorities, 优德88中国官方网站 industrial sectors subject to NSR, review procedures, supervision on implementation of review decisions, as well as punishments for violations, which fur优德88中国官方网站r enhances 优德88中国官方网站 operability and transparency of China's NSR regime.