Author: Qiu Jian Zhu Yongchun
As previously reported, the State Council of China issued the Circular on Establishment of Security Review Regime for Foreign Investors’ Mergers and Acquisitions of Chinese Enterprises (“Circular 6”) in February 2011; and, in the following March, the Ministry of Commerce of China (“MOFCOM”) issued the Provisional Regulations on Implementation of the Security Review Regime for Foreign Investors’ Mergers and Acquisitions of Chinese Enterprises (“Provisional Regulations”). As the Provisional Regulations will expire by the end of this month, MOFCOM issued the Regulations on Implementation of the Security Review Regime for Foreign Investors’ Mergers and Acquisitions of Chinese Enterprises (“Regulations”) on August 26, 2011 and such Regulations will take effect as of September 1, 2011.
In comparison to the Provisional Regulations, we think that it is worth noting the following points of the Regulations:
1. The Regulations further clarify the applicable scope of the security review regime. That is, the security review regime applies not only to the mergers and acquisitions of Chinese enterprises directly conducted by foreign investors, but also the investment conducted by foreign-invested enterprises in China, which are Chinese legal entities by nature.
2. For the purpose of anti-circumvention, the Regulations adopt the principle of substance over form. Pursuant to the Regulations, “[the authority] shall consider the substance and actual influence of a proposed transaction to determine whether the security review regime applies. A foreign investor may not circumvent the security review regime by any means, including without limitation, nominee shareholding, trust, multi-layer investment structure, leasing, debt, variable interest enterprise, offshore transaction, etc.”
3. The Regulations reiterate that the security review regime may apply (again) where changes occur to a transaction. Such changes include particularly “adjustment of M&A transaction, amendment to the transactional documents, change of business operations, and other changes (such as change of overseas actual controlling person)”.
4. The Regulations substantially confirm the procedural requirements as set out in the Provisional Regulations, such as the review procedures, application and review timelines, application documents, etc.
Said above, we think that the security review regime set out under Circular 6 and the Regulations may need further clarifications and improvement. For example, Circular 6 lists industrial sectors that shall be subject to security review regime; however, it would not be easy to ascertain if the proposed transaction relates to “important agricultural products, important energy and resources, critical infrastructure facilities, important transportation services, key technologies, manufacture of important equipment”. Within such context, it is advisable for an investor to keep communication with authorities in a timely manner during the course of the transaction, such that the investor may accurately understand the applicability of the security review regime and enhance the certainty of the transaction.