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The Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
To the people's governments of all provinces, autonomous regions and municipalities directly under the Central Government and all the departments of and the organizations directly under the State Council,

In the midst of the development of economic globalization and further implementation of China's opening up policy, China has seen gradual increase in the numbers of mergers and acquisitions (M&As) of domestic enterprises by foreign investors, which has played an active role in promoting the diversification of foreign capital utilization in China, optimizing resource allocation, promoting technological advancement, and enhancing enterprise management capability. In order to guide the orderly development of foreign investors' M&As of domestic enterprises, and protect the national security, subject to the approval of the State Council, we hereby announce the relevant matters regarding the launching of security review system for M&As of domestic enterprises by foreign investors (hereinafter referred to as "M&A security review") as follows:


1. Scope of M&A security review
(1) Scope of M&A security review covers: foreign investors' M&As of military industrial enterprises or military industry related supporting enterprises, enterprises located near key and sensitive military facilities, and other entities relating to national defense; foreign investors' M&As of key domestic enterprises in areas such as agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, etc., whereby the foreign investors might acquire the actual controlling right thereof.
(2) M&As of domestic enterprises by foreign investors shall refer to the following circumstances:
(a) A foreign investor's purchase of the equity of a non-foreign-invested enterprise in China, or subscription of the capital increase of a non-foreign-invested enterprise in China, thereby transforming said enterprise into a foreign-invested enterprise;
(b) A foreign investor's purchase of the equity held by Chinese shareholders in a foreign-invested enterprise in China, or subscription of the capital increase of a foreign-invested enterprise in China;
(c) A foreign investor establishes a foreign-invested enterprise, purchases by agreement the assets of a domestic enterprise through said foreign-invested enterprise, and operates such purchased assets, or purchases the equity of a domestic enterprise through the said foreign-invested enterprise; or
(d) A foreign investor directly purchases the assets of a domestic enterprise and uses the purchased assets to invest and establish a foreign-invested enterprise for operation of such assets.
(3) A foreign investor acquiring the actual controlling right shall mean that the foreign investor becomes the controlling shareholder or actual controller of the concerned domestic enterprise through the M&A, which shall include the following circumstances:
(a) A foreign investor or its parent company or subsidiary holds a 50% stake or more in the target company after the M&A;
(b) More than one foreign investor holds an aggregate of 50% stake or more in the target company after the M&A;
(c) A foreign investor holds less than 50% stake in the target company after the M&A, but the voting rights actually enjoyed by the foreign investor is sufficient to exert major impact on the resolution of the shareholders' meeting, general meeting of shareholders, or the board of directors; or
(d) Other circumstances that may result in the actual controlling right in business decision-making, financial affairs, human resources, technologies, etc., being transitioned to the foreign investor.

2. Content of M&A security review
(1) Impact of the M&A transactions on the national security, including the domestic product manufacturing capacity, domestic service provision capacity, and relevant equipment and facilities needed for the national security;
(2) Impact of the M&A transactions on the stable operation of national economy;
(3) Impact of the M&A transactions on the basic societal order and people's living conditions; and
(4) Impact of the M&A transactions on the R&D capacity for key technologies related to the national security.

3. M&A security review work mechanism
(1) A system of ministerial panel for the security review of M&As of domestic enterprises by foreign investors (hereinafter referred to as "Ministerial Panel") shall be established to be responsible for the specific M&A security review work ;
(2) The Ministerial Panel shall be under the leadership of the State Council, while the National Development and Reform Commission and the Ministry of Commerce shall take the lead in carrying out M&A security review in conjunction with other relevant departments according to the industries and fields involved in the foreign M&A; and
(3) The main duties and responsibilities of the Ministerial Panel shall include: analyzing the impact of the M&A of domestic enterprises by foreign investors on the national security; studying and coordinating the major issues involved in the security review of foreign investors' M&As of domestic enterprises; carrying out security review regarding the foreign investors' M&As of domestic enterprises if so required and making decisions.

4. Procedures of M&A security review
(1) With regard to a foreign investor's M&A of a domestic enterprise, the investor shall file an application with the Ministry of Commerce in accordance with this Notice. If the M&A falls under the scope of security review, the Ministry of Commerce shall file a request for M&A security review with the Ministerial Panel within five working days;
(2) With regard to a foreign investor's M&A of a domestic enterprise, if the relevant departments under the State Council, national industrial associations, enterprises in the same trade, and other enterprises on the upstream and downstream sides believe it necessary to conduct the M&A security review, they may make proposals through the Ministry of Commerce on conducting the M&A security review. The Ministerial Panel may decide to conduct the review if it deems  it necessary;
(3) With respect to M&A transactions submitted by the Ministry of Commerce for M&A security review, the Ministerial Panel shall first conduct general review, and implement the special review if the transactions fail the general review. The parties to the transactions shall cooperate with the Ministerial Panel in the review process, provide materials and information required for the security review work, and accept relevant inquiries;
The general review shall be carried out by means of written opinion solicitation. Upon the receipt of the application for M&A security review filed by the Ministry of Commerce, the Ministerial Panel shall seek opinions in writing from the relevant departments within five working days. The relevant departments shall, upon the receipt of the opinion solicitation letter, present written opinions within 20 working days. If the relevant departments reach a consensus that the concerned M&A transactions will not have any impact on national security and the special review is unnecessary, the Ministerial Panel shall issue review opinions within five working days upon the receipt of all the written opinions, and inform the Ministry of Commerce of the same in writing.
If certain departments believe that the concerned M&A transactions may impact the national security, the Ministerial Panel shall initiate the special review procedures within five working days upon the receipt of the relevant written opinions. After the special review procedures are initiated, the Ministerial Panel shall organize security assessment on  said M&A transactions and review the same by taking into account the assessment opinions. If a consensus is reached after the review, the Ministerial Panel shall present review opinions. In the event of major divergence of views, the Ministerial Panel shall report the circumstances to the State Council for a decision. The Ministerial Panel shall complete the special review or report to the State Council for a decision within 60 working days after the special review procedures are initiated. The Ministry of Commerce shall be notified of the review opinions in writing by the Ministerial Panel;
(4) During the M&A security review, the applicant may apply with the Ministry of Commerce for modification of the transaction plan or cancellation of the transaction;
(5) The Ministry of Commerce shall notify the applicant of the M&A security review opinions; and
(6) If a foreign investor's M&A of a domestic enterprise has exerted, or is likely to exert, major impact on the national security, the Ministerial Panel shall require the Ministry of Commerce, in conjunction with other relevant departments, to terminate the transaction, or take other effective measures such as transfer of relevant equity or assets, so as to eliminate the influence of the said M&A on the national security.

5. Other provisions
(1) The relevant departments and entities shall bear in mind the overall interests, enhance their sense of responsibility, keep the national secrets and trade secrets, and improve their work efficiency, so as to promote the sound development of foreign capital M&As and effectively safeguard the national security in the midst of the further opening up the market to the outside world and improvement of the capability in foreign capital utilization,;
(2) Where a foreign investor's M&A of a domestic enterprise involves new investment in fixed assets, the transaction shall be subject to project verification and approval in accordance with the relevant provisions of the State on fixed asset investment management;
(3) Where a foreign investor's M&A of a domestic enterprise involves the change of State-owned equity, the relevant provisions of the State on State-owned asset management shall apply;
(4) The security review for foreign investors' M&A of domestic financial institutions shall be separately provided;
(5) With regard to M&As by investors from the Hong Kong Special Administrative Region, the Macau Special Administrative Region or Taiwan Region, this Notice shall apply as a reference; and
(6) The M&A security review system shall become effective 30 days from the date of promulgation of this Notice.

General Office of the State Council
February 3, 2011