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15 February 2021
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.
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:
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.
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:
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:
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.
The security review consists of three stages:
If the answer is negative, the investment may proceed. If the answer is affirmative, a general review will be conducted.
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:
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
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