Close
What would you like to look for?
Site search

15 February 2021

China’s Measures for the Security Review of Foreign Investment: A Brief Overview

On January 18, 2021, the Measures for the Security Review of Foreign Investment of China ("Security Review Measures") came into force. With this new legislation, any foreign investment – be it through an acquisition of a Chinese company or the establishment of a Chinese subsidiary - that has or may have an impact on national security may potentially be subject to a security review in China. 

In the following post we provide a brief outline to the implications of the Security Review Measures for foreign investments in China.

What investments qualify as "foreign investments"? 

Foreign investment means any investment activity of a foreign investor carried out directly or indirectly within the territory of the People's Republic of China, and includes the following circumstances: 

  • A foreign investor, solely or jointly with any other investor, invests in the establishment of a new project or a new enterprise in the People's Republic of China; 
  • A foreign investor, by means of merger and acquisition, acquires the equity or assets of any enterprise in the People's Republic of China; or
  • A foreign investor makes investments in the People's Republic of China by other means.

The Security Review Measures clarify that an investor from the Hong Kong Special Administration Region, Macao Special Administration Region and Taiwan shall be treated as a foreign investor. 

Which foreign investments are subject to security review? 

The Security Review Measures provides for two categories of foreign investments that are subject to security review. 

  • Military and state defense 
    This category consists of any foreign investment in the military industry and military supply industry that concern national defense and security, as well as military facilities and areas surrounding industrial military facilities. 

  • Important products and key technologies
    This category consists of foreign investments in any important agricultural product, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technologies and internet products and services, important financial services, key technologies and other important fields that concern state security, provided that the foreign investor obtains the actual control over the enterprise invested in. 

The Security Review Measures define the term "actual control" very broadly. A foreign investor may obtain actual control over the enterprises invested in:

  • If he holds at least 50% of the enterprise's equity; 
  • If He holds less than 50% of the enterprise's equity, but with his voting rights can have a significant impact on the resolutions of the board of directors, shareholders' meeting or general meeting of shareholders; or 
  • If he, through other means, can have a significant impact on the business decision-making, personnel, or finance and technology of the enterprises invested in. 
     

How is the security review process initiated? 

Prior to making the foreign investment, which has or may have an impact on  national security, the foreign investor, or a relevant party in China must submit a declaration to the "Working Mechanism Office" established under the National Development and Reform Commission ("NDRC"), and led by the NDRC and Ministry of Commerce. The following materials must support the declaration: 

  • Declaration form
  • Investment plan
  • A statement on the possible impact on national security 
  • Other materials prescribed by the Working Mechanism Office

Besides, the Working Mechanism Office is entitled to require the foreign investor or the relevant party in China to submit a declaration for the above-defined foreign investment.

In addition, any relevant authority, enterprise, public organization, or the public may submit a proposal to the Working Mechanism Office to initiate a security review against a foreign investment if they believe that such foreign investment has or may have an impact on state security. 

What does the security review procedure look like?

The security review consists of three stages: 

  • Preliminary review 
    Within 15 working days from submitting the fully documented declaration, the Working Mechanism Office shall decide if a security review is necessary. 

If the answer is negative, the investment may proceed. If the answer is affirmative, a general review will be conducted. 

  • General review 
    Within 30 working days from the date of the preliminary review decision, the general review must be completed. If the Working Mechanism Office comes to the conclusion that the foreign investment has or may have an impact on national security, a special review shall be initiated. Otherwise, the foreign investor may proceed with the investment. 
     
  • Special review
    The special review must be completed within 60 working days from the date of initiation; in exceptional cases, the period of review may be extended.

    If the Working Mechanism Office did not identify an impact on national security, the investment may proceed. If the foreign investment has an impact on national security, the investment will be prohibited. If the impact on national security can be eliminated through additional conditions, and the party(ies) concerned commit(s) to accept such additional conditions, the foreign investor may proceed with the investment, subject to such additional conditions.


What are the consequences for violating the Security Review Measures? 

Making investments without submitting a prior declaration, providing false materials to or concealing relevant information from the Working Mechanism Office, or failing to make the investments under the specified additional conditions, can have the following consequences: 

  • The Working Mechanism Office may order the foreign investor to dispose of the equity or assets within a prescribed time limit and take other necessary measures to restore the situation that existed before the investment was made and eliminate the impact on national security; or 
  • The parties concerned obtain a negative entry in the relevant state credit system, and become subject to joint disciplinary actions by the state authorities. 


Closing remarks and recommendations

This new foreign investment control legislation provides a framework for security review of foreign investment in China in general. However, many essential questions like "What qualifies as important products or key technologies?" and above all, "What is the definition of national security?" remain unanswered. These questions will have to be further clarified by interpretation or supporting regulations. Practice will show how these new measures will be applied. 

We advise that foreign investors pay close attention to the implementation of the Security Review Measures and the introduction of supporting regulations. If any investment is planned in China, an assessment of the need for security clearance should be started as early as possible, and in the case of uncertainties, consultation with the Working Mechanism Office should be considered. 

For questions or in-depth advice, please do not hesitate to reach out to our China Desk team or your normal VISCHER contact person.

Categories: China Desk, Corporate and Commercial, Mergers & Acquisitions

You are currently offline. Some pages or content may fail to load.