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Security Review System

China has established a security review system for the M&As of domestic enterprises by foreign investors in recent years. Documents such as the Circular of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Guo Ban Fa [2011] No.6) issued on 3 February 2011, and the Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (MOFCOM Announcement [2011] No.53) issued on 25 August 2011, have set out detailed provisions on the scope, content and procedure of M&A security reviews.

Scope of Security Review

The Circular of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors has clearly defined the scope of security review of M&As of domestic enterprises by foreign investors as follows: foreign investors’ M&As of domestic military enterprises and supporting enterprises, enterprises located near key and sensitive military facilities, and other entities that have a bearing on national defense and security; foreign investors’ M&As of domestic enterprises that have a bearing on national security in areas such as important agricultural products, important energy and resources, important infrastructures, important transportation services, key technologies, and major equipment manufacturing, with the possibility of foreign investors obtaining actual control.

There are four forms of M&As of domestic enterprises by foreign investors: (1) foreign investors purchasing the equities of a domestic non-FIE or subscribing to the increased capital of a domestic non-FIE, turning the status of the domestic enterprise into an FIE; (2) foreign investors purchasing the equities of the Chinese shareholders of an FIE in China or subscribing to the increased capital of an FIE in China; (3) foreign investors establishing an FIE and, through the FIE agreement, purchasing and operating the assets of a domestic enterprise, or purchasing the equities of a domestic enterprise through the FIE; (4) foreign investors purchasing directly the assets of a domestic enterprise and using the assets to invest in the establishment of an FIE to operate the assets concerned.

The possibility of foreign investors obtaining actual control is an important criterion for determining whether it is necessary to conduct M&A security review. According to the Circular of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the obtaining of actual control by foreign investors refers to circumstances under which the foreign investors, through the M&A, become the controlling shareholder or actual controller of the domestic enterprise. Such circumstances include: when the foreign investor and its parent company and subsidiary hold an aggregate of over 50% of the total shares after the M&A; when several foreign investors jointly hold over 50% of the total shares after the M&A; when the foreign investor has significant influence over the resolution of the shareholders’ meeting, the shareholders’ general meeting or the meeting of the board of directors by exercising the voting rights attached to its shares after the M&A, even if the shares held are less than 50% of the total shares; other circumstances that may lead to a shift of the actual control over operations, finance, personnel and technologies of the domestic enterprise to the foreign investor.

Content provided by Picture: HKTDC Research
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