China’s new national security review for foreign investment
The national security review of foreign investment (“the review” for short) was established in China in 2011 and was applied to foreign acquisitions of Chinese companies only. However, in December 2020, in response to China’s new Foreign Investment Law which called for a comprehensive approach to reviewing foreign investments with respect to national security, China announced the Measures on the Security Review of Foreign Investment. These measures upgrade China’s review system potentially covering all types of foreign investments. From 2011 to present, China has been very selective about which foreign investment transactions are subject to review. Nonetheless, it is important for Canadian businesses to understand China’s current national security review system for foreign investment to assess whether a particular investment would trigger a review.
What transactions are covered by the review?
The review covers direct or indirect greenfield investment, acquisitions, or any other form of investment by foreign investors into China if:
- the investment is in the sectors of military industry, military industrial support and other fields relating to national defense, or in geographic locations in the vicinity of military facilities and military industrial facilities; or
- the investment is in the sectors of importance for national security, such as important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and Internet products and services, important financial services, and key technologies, and results in the foreign investor’s actual control of the invested enterprise.
There is no definition of “important”.
Who is the review authority?
The Foreign Investment Security Review Working Mechanism Office (“the Review Office” for short) consists of National Development and Reform Commission (NDRC) and the Ministry of Commerce of the People's Republic of China (MOFCOM) officials; it is responsible for accepting fillings submitted by investors and conducting the review.
How to trigger the review?
Parties of the investment subject to the scope of the review are required to proactively report to the Review Office. If the parties are uncertain if their investment falls under the review, they may consult with the Review Office prior to the actual filling. After receiving all required materials from the parties of the investment, the Review Office has 15 business days to decide whether they will launch the review.
In addition, any person can propose to the Review Office to initiate a review if such person believes there is a national security concern. The Review Office may also request the parties of the investment to report within a prescribed period of time, if the Review Office believes the investment should be reported.
What is the process of the review?
After the Review Office decides to initiate the review, they have 30 business days to run a general review of the investment in question. Following the general review, the Review Office approves either the transaction or, proceeds with a special review, which takes up to 60 business days or longer under special circumstances. Lastly, the Review Office will decide to approve the investment, impose conditions or ban the investment. The decision is final and is not subject to administrative or judicial review.
What are the liabilities for violations?
The Review Office can order the parties to divest by disposing shares or assets or take other necessary measures to restore pre-investment conditions if the parties of the investment fail to:
- make a filing where it is required
- provide false information
- conceal relevant information in the review
- fail to comply with a conditional clearance decision
The parties would also be registered into the Chinese corporate social credit system and subject to sanctions by Chinese government agencies affecting other areas of business not necessarily related to the reviewed investment, such as restrictions on bidding for projects, removal of preferential tax treatment, etc.
What are the recommendations for Canadian companies?
According to the Embassy’s informal conversation with NDRC, a review of an investment may occur before, during or after the investment is made. Canadian companies that have made or are considering making an investment should consult with legal professionals and carefully assess whether a proposed transaction could trigger a review. Companies and their counsel should also consult with the Review Office in relation to specific situations as needed.
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