China Upgrades Security Review on Foreign Investment

While China has endeavored to streamline foreign investment approval through pre-establishment national treatment plus a negative list system, there has been an increased emphasis on safeguarding national security, a trend also gaining more prominence in other jurisdictions such as the U.S. (CFIUS review) and the EU (FDI screening).  On December 19, 2020, China’s National Development and Reform Commission (the “NDRC“) and Ministry of Commerce (the “MOFCOM“) published the Measures on Foreign Investment Security Review (the “FISR Measures“), to be implemented as of January 18, 2021.  The FISR Measures supersede China’s current national security review rules, and are among the latest rules implementing the P.R.C. Foreign Investment Law. As a result, foreign investment in key sectors will require stronger compliance assessment and planning.  We share some highlights below:

  • Highlight 1 – Expanded transaction scope captures “contractual control”.  The FISR Measures expand the review scope from M&A transactions to a much larger scope of foreign investment, including greenfield investment (e.g. establishment of joint ventures or wholly-owned subsidiaries) in China and other forms of investment, such as contractual control (e.g.

    VIE arrangement) of a domestic entity. (Article 2)

  • Highlight 2 – A standing review mechanism coordinated by NDRC. In contrast with an interim inter-ministerial joint committee under the State Council and coordinated by the NDRC and the MOFCOM, FISR Measures provide that a foreign investment security review office (“FISR Office“) will be set up in the NDRC, led by both the NDRC and the MOFCOM. (Article 3)
  • Highlight 3 – Expanded sectorial coverage.  In addition to the sectors caught by the current security review rules, if an investment results in effective foreign control in a significant product or service in sectors such as culture, information technology and internet and financial services, prior security review notification may be required. (Articles 4)
  • Highlight 4 – Review phases and timeline.  Similar to the existing review procedure, a decision on whether to conduct review will be made within 15 working days of receipt of notification materials.  In case of a decision to proceed with review, a preliminary review shall be completed within 30 working days.  The investment will be greenlighted if no national security concern arises during such phase.  Otherwise, a special review procedure will be initiated and can last up to 60 working days, subject to extension under special circumstances. (Articles 7-9)
  • Highlight 5 – Conditional clearance available.  Similar to merger control review, a transaction may be conditionally cleared if remedial measures can be implemented to address the security concerns identified during the review.  However, if there is no viable measure to eliminate the identified national security concern, the investment shall be prohibited. (Articles 9, 12, 13 and 18)
  • Highlight 6 – Non-compliant investment can be unwound or be subject to divestiture.  If a foreign investment is implemented without notification and remains un-notified after requirement by the FISR Office, the office may, on grounds of national security concerns, order that the transaction be unwound or the relevant business/assets concerned be disposed of.  Similar mechanism also applies where a prohibited foreign investment is implemented, or a clearance decision is made based on false or incomplete information, or a conditionally cleared transaction is not implemented in accordance with the restrictive conditions imposed. (Articles 12, 16-18)
  • Highlight 7 – Notation in national credit system as part of the sanction.  In addition to the above disposal or unwinding exposure, non-compliance will result in negative credit history of the parties involved, which may impact their future activities in China . (Article 19)

We will closely follow the implementation of the FISR Measures. 

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