Circular on the Establishment of a System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors

I. Scope of Security Review

1. The scope of the Security Review shall be as follows: acquisition by foreign investors of domestic military armament enterprises and suppliers to military armament enterprises, enterprises adjacent to key and sensitive military facilities and other entities that are crucial to national defence and security; and acquisition by foreign investors of important agricultural product, important energy and resource, important infrastructure, important transport service, key technology, major equipment manufacturing and other such enterprises that are crucial to national security and where actual control may be secured by the foreign investors.

2. The acquisition of domestic enterprises by foreign enterprises refers to the following:

(1) purchase by foreign investors of equity interests in domestic non foreign-invested enterprises or subscription by foreign investors for capital increase of domestic non foreign-invested enterprises, which results in the domestic enterprises being converted into foreign-invested enterprises;

(2) purchase by foreign investors of the equity interests of Chinese parties to domestic foreign-invested enterprises or subscription by foreign investors for capital increase of domestic foreign-invested enterprises;

(3) the establishment by foreign investors of foreign-invested enterprises through which they purchase by agreement the assets of domestic enterprises and operate such assets or through which they purchase equity interests in domestic enterprises; and

(4) the direct purchase of assets of domestic enterprises by foreign investors and using such assets to establish foreign-invested enterprises to operate the same assets.

3. The phrase “foreign investor secures actual control” means that the foreign investor becomes, by virtue of an acquisition, the controlling shareholder or de facto controller of a domestic enterprise. Such securing of actual control includes the following circumstances:

(1) the foreign investor and its holding company parent and/or controlled subsidiaries holding at least 50% of the total shares after the acquisition;

(2) holding of at least 50% of the shares in total by more than one foreign investor after the acquisition;

(3) although the foreign investor's total shareholding after the acquisition is less than 50%, by virtue of the voting rights attached to the shares it holds, it nevertheless has a material effect on the resolutions of the shareholders' meeting or shareholders' general meeting, and those of the board of directors; or

(4) other circumstances that lead to actual control over the business decision-making, finances, personnel matters, technology, etc. of a domestic enterprise passing to a foreign investor.

II. Subject of Security Review

1. The impact of an acquisition transaction on national defence and security, including the effect on the production capacity for domestic products, the provision capacity for domestic services required for national defence and related equipment and facilities.

2. The impact of an acquisition transaction on the stable operation of the national economy.

3. The impact of an acquisition transaction on the basic livelihood of the public.

4. The impact of an acquisition transaction on the research and development capacity for key technologies that have a bearing on national security.

III. Work Mechanism for Security Review

1. A system for an inter-ministerial joint conference (the Joint Conference) for the Security Review of acquisition of domestic enterprises by foreign investors will be established, which will specifically be responsible for Security Review work.

2. The Joint Conference, under the guidance of the State Council, led by the National Development and Reform Commission and the Ministry of Commerce and, depending on the industry and sector involved in the acquisition by foreign investors, in concert with the relevant departments, will conduct the Security Review.

3. The principal duties of the Joint Conference will be to analyse the impact on national security of acquisition of domestic enterprises by foreign investors; to research and coordinate major issues encountered in the Security Review of acquisition of domestic enterprises by foreign investors; and to conduct Security Review of, and conduct Security Review and render the decision on, transactions involving acquisition of domestic enterprises by foreign investors that require such Security Review.

IV. Security Review Procedure

1. When a foreign investor is to acquire a domestic enterprise, it shall submit an application to the Ministry of Commerce in accordance herewith. If the acquisition transaction falls within the scope of those subject to a Security Review, the Ministry of Commerce shall refer it to the Joint Conference for a review within five working days.

2. If a relevant department of the State Council, national industry associations, enterprises in the same industry or upstream or downstream enterprises is/are of the opinion that the acquisition of a domestic enterprise by a foreign investor requires the conduct of a Security Review, it/they may, through the Ministry of Commerce, propose that such a Security Review be conducted. If the Joint Conference deems that the conduct of a Security Review is indeed necessary, it may decide to conduct such review.

3. When the Ministry of Commerce refers an acquisition transaction to it for a Security Review, the Joint Conference will first conduct a general review. If the transaction fails to pass the general review, it will then be subject to a special review. The parties to the acquisition transaction shall cooperate in the Security Review by the Joint Conference, provide the materials and information required for the Security Review and submit to the relevant questioning.

The general review shall be conducted by a seeking of opinions in writing. Within five workings days after receipt of an acquisition transaction application referred to it for a Security Review by the Ministry of Commerce, the Joint Conference will seek the opinions of the relevant departments in writing. The relevant departments shall submit their written opinions within 20 working days after receipt of the written letter seeking their opinions. If all of the relevant departments are of the opinion that the acquisition transaction will not affect national security, no special review will be conducted. The Joint Conference will then draw up its review opinion and notify the Ministry of Commerce thereof in writing within five working days after receipt of all of the written opinions.

If a department is of the opinion that an acquisition transaction could have an impact on national security, the Joint Conference shall initiate the special review procedure within five working days after receipt of the written opinions. Once the special review procedure has been initiated, the Joint Conference will arrange for a security assessment of the acquisition transaction and conduct the review of such transaction in light of the assessment opinions. If the opinions are essentially consistent, the Joint Conference will draw up its review opinions. If there exists a major difference of opinions, the Joint Conference will refer the transaction to the State Council for a decision. The Joint Conference will complete the special review or refer the transaction to the State Council for a decision within 60 working days from the date of initiation of the special review procedure. The Joint Conference will notify the Ministry of Commerce of its review opinions in writing.

4. The applicant may apply to the Ministry of Commerce to revise its transaction plan or cancel the acquisition transaction during the Security Review.

5. The Ministry of Commerce will notify the applicant in writing of the Security Review opinions.

6. If an acquisition of a domestic enterprise by a foreign investor has had or could have a material impact on national security, the Joint Conference shall demand that the Ministry of Commerce, in concert with the relevant departments, terminate the transaction of the parties, or order transfer of the relevant equity interest or assets or take other such effective measures, so as to eliminate the effect of the acquisition on national security.

V. Miscellaneous Provisions

1. Relevant departments and entities shall inculcate an outlook of the overall situation, strengthen their awareness of responsibilities, safeguard state secrets and trade secrets, enhance work efficiency and, while widening the opening to foreign investment and raising the standard of use of foreign investment, promote the healthy development of acquisition made with foreign capital and duly protect national security.

2. When an acquisition of a domestic enterprise by a foreign investor involves an investment in new fixed assets, approval of the project shall be carried out in accordance with state provisions on the administration of the investment in fixed assets.

3. When an acquisition of a domestic enterprise by a foreign investor involves a change in state-owned assets and equity, matters shall be handled in accordance with relevant state provisions on the administration of state-owned assets.

4. Security Review of acquisition of domestic financial institutions by foreign investors will be provided for separately.

5. Acquisition by investors from the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan shall be handled with reference to this Circular.

6. The Security Review system shall be implemented 30 days after the issuance of this Circular.