Preferential policies

A security review system for mergers and acquisitions of domestic enterprises by foreign investors 

People's governments of provinces, autonomous regions and municipalities directly under the Central Government, ministries and commissions of organizations directly under the State Council：

With the in-depth development of economic globalization and the further expansion in recent years of China's opening-up, foreign investment through mergers and acquisitions has been gradually increasing. This trend has promoted the diversified utilization of foreign investment in China and played a positive role in optimizing the allocation of resources, promoting technical progress, improving business management levels and many other aspects of the economy. To guide the orderly development of mergers and acquisitions of domestic enterprises by foreign investors and to safeguard national security, upon the approval of the State Council, you are hereby notified of matters relevant to the establishment of a security review system for mergers and acquisitions of domestic enterprises by foreign investors (hereinafter referred to as the "security review of mergers and acquisitions", or SRMA for short) as follows：

I. Scope of SRMA

(I) The scope of SRMA is the merger and acquisition by foreign investors of domestic military-industrial and military-related enterprises, neighboring enterprises of key and sensitive military facilities and other units concerning national security; and such domestic enterprises as major agricultural products, energy and resources, infrastructure, transportation services, key technologies and major equipment manufacturing involving national security and whose actual right of control may be gained by foreign investors.

(II) Mergers and acquisitions of domestic enterprises by foreign investors occur when：

1.Any foreign investor purchases equity in a domestic non-foreign-invested enterprise or offers to contribute to the increase of capital of a domestic non-foreign-invested enterprise to alter it into a foreign-invested enterprise;

2.Any foreign investor purchases the equity of a Chinese Party in a domestic foreign-invested enterprise or offers to contribute to the increase of capital of a domestic foreign-invested enterprise;

3.Any foreign investor establishes foreign-invested enterprises and purchases the assets of a domestic enterprise and handles them according to a signed agreement, or purchases equity in a domestic enterprise via the foreign-invested enterprise; 

4.Any foreign investor directly purchases the assets of a domestic enterprise and utilizes them to invest and establish a foreign-invested enterprise to operate business.

(III) That any foreign investor gains the actual right of control means that the foreign investor becomes the controlling shareholder or actual controller of one domestic enterprise through merger and acquisition, including the following：

1.Total shares held by one foreign investor, its controlling parent company and subsidiary account for more than 50 percent through merger and acquisition;

2.Shares of several foreign investors total more than 50 percent through merger and acquisition;

3.The voting power enjoyed by one foreign investor whose shares may account for less than 50 percent through merger and acquisition has, however, been enough to have a major influence on the decisions of the board of shareholders or board of directors; 

4.Other situations that may cause the actual control right to operating decisions, finance, personnel and technology of one domestic enterprise to transfer to any foreign investor.

II. Content of SRMA

the effect of mergers and acquisitions on national security, including the productive capacity of domestic products for national defense, domestic service providing capacity and related equipment and facilities;

the effect of mergers and acquisitions on steady national economic growth;

the effect of mergers and acquisitions on the basic social living order; 

the effect of mergers and acquisitions on the research and development capacity of key technologies involving national security.

III. Working mechanism of SRMA

The system of the ministerial joint conference for SRMA of domestic enterprises by foreign investors (hereinafter referred to as the joint conference) shall be established to specifically undertake the SRMA;

The joint conference, together with relevant departments, conducts SRMA under the leadership of the State Council and led by the National Development and Reform Commission and the Ministry of Commerce in areas involving mergers and acquisitions by foreign investors; 

The main functions of the joint conference are to analyze the effect on national security of mergers and acquisitions of domestic enterprises by foreign investors; to study and coordinate the major problems arising from the SRMA of domestic enterprises by foreign investors; and to conduct security reviews of necessary mergers and acquisitions of domestic enterprises by foreign investors and make decisions accordingly.　

IV. Procedures for SRMA

Any foreign investor shall file an application for the merger and acquisition of one domestic enterprise to the Ministry of Commerce in accordance with the circular herein. For the merger and acquisition within the scope of security review, the ministry shall request the joint conference to conduct review within five working days;

Where relevant departments of the State Council, the national trade association, the trade enterprise and upper- and lower-reach enterprises deem that it is necessary to conduct SRMA when any foreign investor handles a merger and acquisition of one domestic enterprise, they may entrust the Ministry of Commerce to put forward a proposal for SRMA. Where the joint conference deems that it is necessary to conduct SRMA, it may decide on a security review.

The joint conference shall firstly conduct the general review on the merger and acquisition requested by the Ministry of Commerce for security review and then a special review on those failing to pass the general review. The party involved in the merger and acquisition should cooperate with the joint conference, offer materials and information for the security review and receive related inquiries.

The general review adopts the written request for advice, and the joint conference solicits from relevant departments advice within five working days of receiving the application from the Ministry of Commerce for SRMA. Relevant departments should provide written opinion within 20 working days upon receiving the letter of written request for advice. A special review shall not be conducted, provided that relevant departments all hold that the merger and acquisition does not affect national security, and the joint conference shall be responsible to provide the review opinion within five working days of receiving all written advice and to notify the Ministry of Commerce in written form.

If any department deems that a merger and acquisition might affect national security, the joint conference should start procedures for a special review within five working days, after which the joint conference shall organize a security evaluation of the merger and acquisition and conduct a review of it by combining the evaluation opinion, and provide the review opinion when the agreement is basically reached; if there is a major difference, the joint conference shall be responsible to report to the State Council for decision. The joint conference shall complete the special review within 60 working days of the date of starting the procedures for the special review, or report to the State Council for decision, with the Ministry of Commerce to be notified of the review opinion in written form.

(IV) The applicant may file an application to the Ministry of Commerce for amendments to the plan for the merger and acquisition or its cancellation in the SRMA.

(V) The applicant shall be informed of the opinion on SRMA by the Ministry of Commerce in written form.

(VI) Where the merger and acquisition of one domestic enterprise by any foreign investor has seriously affected or will probably affect national security, the joint conference should request the Ministry of Commerce and relevant departments to terminate the act of the party concerned, or transfer related equities, assets, or take other effective measures to eliminate the effect of the merger and acquisition on national security.

V. Other provisions

(I) Relevant departments and organizations shall adopt an overall point of view and deepen awareness of responsibilities to protect national secrets and business secrets, increase the efficiency and promote the healthy development of mergers and acquisitions by foreign investors, while expanding opening-up to the outside world and raising the level of utilizing foreign capital and practically safeguard national security.

(II)  Where the merger and acquisition of one domestic enterprise by any foreign investor involves newly increased investment in fixed assets, it shall go through project approval according to the national provisions for the management of investment in fixed assets.

(III) Where the merger and acquisition of one domestic enterprise by any foreign investor is involved in the alteration of State-owned ownership, it shall be subject to relevant provisions for the management of State-owned assets.

(IV) The SRMA of one domestic financial institution by any foreign investor shall be separately regulated.

(V) Mergers and acquisitions by investors from Hong Kong and Macao special administrative regions and Taiwan shall refer to the Circular herein.

(VI) The system of SRMA shall be valid after 30 days since the Circular herein is promulgated.

This English version is only for reference. To learn more, please refer to the authoritative Chinese version.