The PRC Ministry of Commerce (MOFCOM) in February released widely anticipated regulations to institute security reviews for foreign mergers and acquisitions (M&A) that relate to China’s national security. The Notice on the Security Review of Foreign M&A of Domestic Enterprises includes specific procedures, more regulatory hurdles, and possible barriers to approvals for foreign investors. It also raises concerns about the ability of foreign companies to pursue M&A growth strategies in China.
Foreign investors face additional procedures
The notice finalizes the establishment of a new national security review committee, led by MOFCOM and the PRC National Development and Reform Commission (NDRC), to review foreign enterprises’ M&A of domestic companies. Specifically, the committee will target reviews of M&A in enterprises related to key agricultural products, basic infrastructure, defense, energy and resources, equipment manufacturing, technology, and transportation services. Some of these sectors overlap with the nine “pillar industries” announced in December 2006 as sectors in which state-owned enterprises should play a leading role: auto, chemical, construction, electronic information, heavy equipment manufacturing, nonferrous metal, research and development (R&D), steel, and technology.
The security review process, which took effect March 5, 2011, will apply to all foreign investors that conduct M&A with domestic enterprises related to national security as defined in the notice. Specifically, foreign investors that would become the controlling shareholder or the actual controller of a domestic enterprise must submit applications to MOFCOM for a general review process that can last up to 30 business days. Applications that fail to receive approval during the general review will face an additional special review period of up to 60 business days. Relevant government agencies, industry associations, or affected enterprises or competitors may also recommend foreign M&A cases to MOFCOM for security review.
According to the notice, the security review will analyze the M&A deal’s effects on national security, China’s economy, social stability, and the R&D capabilities of key national security technologies. Transactions found to have “significant effect on national security” will be terminated or approved conditionally.
Effects of the security review unclear
Though companies should be concerned about the notice’s broad definition of “national security,” which allows MOFCOM and NDRC to use their discretion in the security review process and more easily terminate business deals, many analysts do not see the notice as a significant change from previous PRC practices. Several key questions about the new procedure remain, however.
- Though the notice removes “national economic security” as a basis for review, the stipulation that the committee review how M&A transactions affect China’s economy suggests that commercial considerations—including economic protectionism—could still be a factor in the reviews.
- It remains unclear whether the notice will apply to new transactions only, or if the committee can review previous M&A deals retroactively. It is also unclear whether, alternatively, pending M&A approvals will be subject to the new rules.
- The notice does not indicate whether reviews are required or voluntary.
The PRC government has had wide latitude to block M&A since it issued the Antimonopoly Law (AML) in 2008, but few foreign acquisitions of domestic companies have been affected so far. As of December 2010, MOFCOM had reviewed more than 140 M&A cases since implementing the AML, approving 95 percent of the cases without conditions and 7 cases with conditions to remedy competition issues. Several of the conditional approvals involved international M&A only, such as InBev’s acquisition of Anheuser-Busch Co. Ltd. MOFCOM has rejected only one case: the Coca-Cola Co.’s proposed acquisition of China’s Huiyuan Juice Group Ltd. (Data does not exist, however, for companies that may have felt inhibited by China’s AML and avoided M&A accordingly.) Though the notice will increase administrative burden for foreign companies in the targeted industries, whether the number of rejected M&A cases will increase remains to be seen.
Separate provisions for specific M&A cases
The notice states that the PRC government will issue separate security review regulations for foreign companies engaged in M&A with domestic financial institutions, but it is unclear when these regulations will be released. Furthermore, foreign M&A of domestic enterprises that result in increased fixed assets or modification of state-owned property must consult additional related regulations.
Christine Kahler is manager, Business Advisory Services, at the US-China Business Council (USCBC) in Washington, DC. This article is adapted from a report that first appeared in China Market Intelligence, USCBC’s members-only newsletter.