National Security Review for Foreign Investment in China

National Security Review for Foreign Investment in China

On December 19th, 2020, The National Development and Reform Commission of China (“NDRC”) and the Ministry of Commerce (“MOFCOM”) jointly issued the “Measures for the Security of Review of Foreign Investment” (Hereinafter referred to as “the Measures”), which will take effect from January 18th, 2021.

The purpose of the Measures is to review foreign investments & their possible impact on the national security of the People’s Republic of China. Since the promulgation of the New Foreign Investment Law at the beginning of 2020, which clearly stipulated the establishment of such a security review system, it is of no surprise to see the promulgation of the Measures in 2020.

We will therefore highlight some of the main aspects of note from the Measures for your reference, namely:

Institutional Framework for Security Review

A foreign investment security review interagency working mechanism (Hereinafter referred to as the working mechanism), established under the Measures shall organize, coordinate, and guide foreign investment security investigations.

Investments/Transactions Which May Fall Under the Categories for Security Review

The types of investments/transactions carried out by foreign investors directly or indirectly in China (via greenfield investments, M&A’s or other methods) that may be subject to security review include the following:

1) Investments/transactions in any fields such as the military industry and military-supporting industry that concern state defense and security, as well as military facilities and areas surrounding industrial military facilities;

2) Investments/transactions in any important agricultural products, energy and resources, major equipment manufacturing, infrastructure, important transportation services, important cultural products and services, information technologies and internet products and services, financial services, key technologies and other important fields that concern state security, and obtaining the actual control over the enterprises invested in.

In addition, The Measures also provide for third-party organizations such as government agencies, companies, social organizations, and the general public to recommend to the Working mechanism to initiate security review on foreign investments that may affect national security.

Security Review Procedure

1) A foreign investor in China in any of the aforementioned transactions/investments shall make a declaration to the Working ,Mechanism Office prior to making such investment/transaction. Upon receiving such declaration, the working mechanism will first examine if the foreign investment/transaction requires such a security review, prior to such examination, the investment/transaction may not be carried out.

2) If the Working mechanism decides that the foreign investment requires such a review, it will then start a general review which shall be completed within 30 working days. Where, upon the completion of such a general review, the declared foreign investment/transaction is deemed to have no impact on national security, the security review will be passed and the investment/transaction can be made.

3) When the working mechanism considers that the foreign investment/transaction has the potential of an impact on national security upon the culmination of the initial general review, such investment/transaction will then go through a subsequent special review, which will be completed within 60 working days (in limited scenarios the special review may require a period of longer than 60 days, upon such an occurrence, reasons will be provided for the delay).

The working mechanism will prohibit such investment/transaction to be carried out within such period and if upon completion of the special review, the working mechanism believes that in adding restrictions to the investment/transaction, its impact on state security may be eliminated, and the party accepts such restrictions, the working mechanism can make a decision of allowing the completion of the security review with conditions.

Remedies Placed Upon Violators of the Measures

If a declaration is not made, the materials prepared for the declaration are fake or information is concealed, or the aforementioned restrictions to an investment/transaction as outlined by the working mechanism are not followed, the working mechanism can order the investor to correct such violations.

If the investor fails to do so within the prescribed time limit, the working mechanism can take necessary measures to restore equity or assets to the state before the investment was made as well as eliminating its impact on national security. In addition to which, the investor in question may face disciplinary actions and the credit score of the parties involved will be negatively influenced.

Aspects of the Measures Yet to be Finalized

According to Article 22 of the Measures, foreign investment in the capital markets in China is subject to rules which will be further formulated by China Securities Regulatory Commission and a specific office of the working mechanism established under the Measures.

Areas of Variation in Comparison to Other Investment Screening Mechanisms

The Committee on Foreign Investment in the United States (CFIUS) is similar to that of the Measures, in that it is also an interagency committee authorized to review certain transactions involving foreign investment within the United States. However, CFIUS may also review foreign investments concerning national security arising from non-controlling investments and real estate transactions involving foreign investors.

CFIUS, in recent years under the Trump campaign, has sought to raise barriers for Chinese companies, most notably in 2018 when CFIUS blocked Ant Group’s plan to acquire U.S. money transfer company MoneyGram International Inc for $1.2 billion and last year when outgoing U.S. President Trump ordered ByteDance Technology to divest TikTok, citing national security concerns. As an unfortunate more recent development in regards to Chinese businesses investing in the U.S. arose on December 18th 2020, when the US Commerce Department announced that it had added 59 Chinese companies to a trade blacklist, in the name of “protecting US national security“. Due to this move, US firms will have to obtain a license to do business with companies contained on the list, which has understandably received a considerable backlash from their counterparties in the People’s Republic of China.[1]

The EU Regulation Establishing a Framework for Screening of Foreign Direct Investments into the European Union (The Regulation) provides a coordination mechanism for both EU member states and the European Commission to allow for a more coherent screening of incoming foreign direct investment (FDI) that could potentially affect the security and public order of the EU and its member states. However, unlike the Measures and CFIUS, there is no unified screening mechanism between member states, as there is a discretion on member states to utilize such screening mechanism and the actions which the Commission may take under The Regulation are limited, as the final decision on the investment may ultimately lay with the Member State.

The criteria for screening within the Regulation is quite wide in comparison to the aforementioned mechanisms. Although fully operational from the 11th of October 2020, EU Member States and the EU Commission have taken steps over the previous 18 months to ensure full compliance with the new EU-wide mechanism for cooperation. At the time of writing, a total of 15 EU member states have national investment screening mechanisms, inclusive of Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, The Netherlands, Poland, Portugal, Romania, Slovenia, Spain, with several other Member States currently in the development stages of their own national screening mechanisms. Within the aforementioned time period however, although in practice, an example of a full obstruction to foreign investment has not yet materialized under this new regime.

Concluding Thoughts

It may be advisable for foreign investors planning to make investments/transactions in any of the abovementioned defined parameters to firstly ascertain whether they may be obliged to make a declaration to the working mechanism as per the stipulations outlined within the Measures. Parties involved should subsequently, in preparing investment plans, schedules and terms of investment, account for additional time constraints on any such investment/transaction while also formulating contingency plans with respect to any and all possible outcomes of the security review process.

At the time of writing, the Measures have not yet clarified all of the details for the security review of foreign investments, which understandably, has raised concerns among foreign investors. The initial opinion from arising from the domestic authorities assert that the Measures are “a move towards aligning China with major jurisdictions such as the United States, the European Union, Australia, Japan and the United Kingdom which already have or in the process of publishing national security regimes, and are not intended as an instrument of protectionism [2]. While this may not be the intent, the Measures adds another layer of scrutiny and bureaucracy which may have an impact on future investments of foreign investors investing in China.

In noting this point, it would be remiss not to remark that the timing of the release of the Measures is quite odd, considering the recent political endorsement for the terms of the EU-China Comprehensive Agreement on Investment (CAI). European firms enamored by the advantages gained on market access within the investment agreement in principle, will soon be greeted with the renewed requirements for the screening of investments within the Chinese marketplace. We will continue to follow the updates of the security review of foreign investment as they develop.

[1] https://global.chinadaily.com.cn/a/202012/21/WS5fdfda17a31024ad0ba9ce44.html

[2] http://www.scio.gov.cn/xwfbh/gbwxwfbh/xwfbh/fzggw/Document/1694981/1694981.html

Should you have any questions on this matter, please do not hesitate to contact us at info@dandreapartners.com.

National Security Review for Foreign Investment in China(图1)

National Security Review for Foreign Investment in China(图2)