China: Measures for the Security Review of Foreign Investment

China: Measures for the Security Review of Foreign Investment

The Ministry of Commerce and the National Development and Reform Commission have published measures for the review of foreign investment presumed to take effect on the 18th of January 2021.

The measures stipulate carrying out a national security review of specific foreign investment categories in the PRC mainland market. It also includes investments by investors from Hong Kong, Macau and Taiwan; the review scope shall consist of aspects connected with procedures, enforcement, supervision and compliance. When a foreign investment is made under specific categories, an application for its review is required to be submitted to The Foreign Investment Security Review Office; foreign investments divide foreign investors on the following criteria:

1. Acquisition of equity interest or assets of an onshore PRC enterprise
2. Investment in new project or establishment of a new enterprise, solely or jointly
3. Any other means of investment within the PRC

The measures can be divided into the following categories;

1. Investments made in national defence, military installations, military facilities or any other such investment involving the military industry;
2. An investment in agricultural products, energy resources, infrastructure, manufacturing, transportation services, IT, financial services, technologies, or any other such sector that would result in a ‘controlling stake’ in a PRC enterprise; or
3. If an investor holds more than 50% of the equity of an enterprise; significant voting rights which impacts the Board of Directors’ resolution or is capable of influencing business decisions, finance, human resources and technology of the enterprise; such a foreign investor is considered to hold a controlling stake.

Process

The measures stipulate that a foreign investor is required to secure a consultation with the Review Office before making any formal submissions, following which, an application accompanied with the application report, investment plan, and a statement declaring that the investment is not a threat to national security and all such other documents are to be submitted to the Review Office. Upon conducting a preliminary review of all such documents submitted, the Review Office shall, within 15 days, determine whether a general security review is necessary.

If such a general security review is recommended, the Review Office shall within 30 days upon commencement of the evaluation, determine whether the foreign investment poses any threats to foreign security; if not, whether it has passed the review; determine whether according to the general review a special review is required or not.

In case a special review is recommended, such review shall be concluded within 60 days from its commencement. The Review Office may then determine;

1. That such investment does not pose any security risk and is permitted to invest
2. That such investment poses a security risk and shall be barred from investment
3. That certain special conditions shall be imposed on them whose compliance, shall determine whether an investment can be made or not

An investor can only proceed with investing in completion of the security review and not otherwise. Failure to adhere to any of the measures as enumerated may attract orders from the Review Office to divest the investment, reinstatement of invested equity, and so on.