The regulatory landscape in China regarding foreign investment is gradually being established and refined, aiming to balance the benefits of foreign investment with the necessity of safeguarding national security. Several laws and regulations have been implemented to manage this delicate balance, which are critical for any potential foreign investors to understand. This article will briefly introduce China’s security review system for foreign investment in the context of relevant cases.
[Relevant Laws and Regulations on Security Review of Foreign Investments]
1. The Foreign Investment Law of the People’s Republic of China
The Foreign Investment Law of the People’s Republic of China, effective from January 1, 2020, promotes and protects foreign investment, regulates foreign investment activities, protects investors’ rights, and maintains market order. It introduces a pre-establishment national treatment plus a negative list management system and outlines the fundamental rules for the establishment, alteration, and termination of foreign-invested enterprises. 2. Measures for the Security Review of Foreign Investment
Issued on December 19, 2020, and effective from January 18, 2021, these measures detail the foreign investment security review system, including scope, standards, procedures, and handling of review results, ensuring foreign investment activities do not harm national security. 3. Notice on Establishing a Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors
This 2011 notice clarifies the security review system for mergers and acquisitions of domestic enterprises by foreign investors, specifying the scope of the review, standards, and procedures to prevent potential national security threats from foreign mergers and acquisitions.
4. National Security Law
Effective from July 1, 2015, the National Security Law is fundamental for protecting national security in China. It provides basic principles and systems for national security work, including economic activities like foreign investment that may endanger national security. 5. Special Administrative Measures for the Access of Foreign Investment (Negative List)
Published annually, the negative list outlines industries and fields restricted or prohibited for foreign investment, ensuring that such investment aligns with national economic security and industrial policies. Areas not on the list are subject to pre-establishment national treatment. 6. Measures for Reporting Information on Foreign Investment
Effective from January 1, 2020, these measures stipulate the information reporting obligations of foreign-invested enterprises, ensuring the government can timely monitor foreign investment activities for effective supervision and review. 7. Notice on Issuing the Catalogue of Industries for Encouraging Foreign Investment
This catalogue provides guidance on foreign investment industries, specifying industries and fields that are encouraged, restricted, or prohibited, offering policy direction for foreign investors and ensuring national economic and industrial security.
[Key Provisions of the Measures for the Security Review of Foreign Investment]
The Measures for the Security Review of Foreign Investment in China establish a comprehensive framework for assessing foreign investments to ensure they do not threaten national security. They cover various forms of foreign investment, especially in critical sectors like national defense and technology. The review process involves initial and comprehensive assessments to determine potential risks, and decisions can result in approval, conditional approval, or prohibition of the investment. Key provisions include:
1. Scope of Application:
The Measures encompass various forms of foreign investments, including:1) Mergers and Acquisitions: Transactions where foreign investors acquire control of existing Chinese entities.2) Greenfield Investments: Establishing new operations or businesses in China by foreign investors.3) Other Forms of Control: Any investment structures that result in foreign investors gaining control over Chinese entities, such as through contractual arrangements or significant minority stakes.
2. Key Sectors:
The Measures focus on investments in critical sectors, defined broadly to ensure comprehensive coverage, including:1) National Defense: Sectors directly or indirectly related to military and defense capabilities.2) Infrastructure: Key infrastructure sectors such as energy, transportation, water resources, and telecommunications.3) Critical Technologies: High-tech industries involving advanced manufacturing, new materials, and biotechnology.4) Information Technology: Industries related to cybersecurity, data processing, and internet services.5) Any Other Areas: Any other sectors deemed to have a significant impact on national security, including financial services and critical cultural products.
3. Definition of Control:
Control is defined by the ability of foreign investors to exert decisive influence over a Chinese entity's operations, which can be achieved through:1) Significant Shareholding: Holding more than 50% of the equity interest in an entity.2) Voting Rights: Possessing substantial voting power to influence key decisions.3) Appointment Power: The ability to appoint or remove senior management or board members.4) Operational Influence: Any other means by which significant influence over management, finance, or technology is exerted.
4. Security Review Process:
1) Initial Review: Assesses if investments fall within the scope of security review.2) Comprehensive Review: Conducted if initial review suggests potential national security concerns.3) Review Timeframe: Initial review takes 30 working days, while the comprehensive review can take up to 60 working days, extendable under specific circumstances.
5. Decision and Outcomes:1) Approval: If no security concerns are found.2) Conditional Approval: Approved with conditions to mitigate identified risks.3) Prohibition: If significant security risks are found, the investment is prohibited.
These provisions ensure a robust framework for safeguarding national security while allowing for foreign investment under regulated conditions. The detailed review process and clear definitions of control and critical sectors help prevent potential threats from foreign investments, aligning them with China's strategic interests.
[Relevant Cases of Security Review of Foreign Investment Published by NDRC]
1. Acquisition in the Petrochemical and Chemical Fibre Industries:In 2023, an international oil company acquired a 10% equity interest in a Chinese petrochemical company. The NDRC passed the review, considering the strategic importance of the sector.
2. Foreign-Owned Retail Sector Company Acquisition:In 2019, a foreign retail company acquired a 10.14% stake in a Chinese retail company, a supplier for the 2019 Military Games. The NDRC terminated the review, indicating potential national security concerns.
These cases underscore the extensive scrutiny by the NDRC, particularly in sectors deemed critical to national security, ensuring that foreign investment aligns with China’s national interests.
Conclusion
Understanding and navigating China’s regulatory framework for foreign investment security review is crucial for foreign investors. The key laws and measures, along with recent case analyses, highlight the importance of compliance and thorough preparation for any foreign investment transactions in China.
[Relevant Laws and Regulations on Security Review of Foreign Investments]
1. The Foreign Investment Law of the People’s Republic of China
The Foreign Investment Law of the People’s Republic of China, effective from January 1, 2020, promotes and protects foreign investment, regulates foreign investment activities, protects investors’ rights, and maintains market order. It introduces a pre-establishment national treatment plus a negative list management system and outlines the fundamental rules for the establishment, alteration, and termination of foreign-invested enterprises. 2. Measures for the Security Review of Foreign Investment
Issued on December 19, 2020, and effective from January 18, 2021, these measures detail the foreign investment security review system, including scope, standards, procedures, and handling of review results, ensuring foreign investment activities do not harm national security. 3. Notice on Establishing a Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors
This 2011 notice clarifies the security review system for mergers and acquisitions of domestic enterprises by foreign investors, specifying the scope of the review, standards, and procedures to prevent potential national security threats from foreign mergers and acquisitions.
4. National Security Law
Effective from July 1, 2015, the National Security Law is fundamental for protecting national security in China. It provides basic principles and systems for national security work, including economic activities like foreign investment that may endanger national security. 5. Special Administrative Measures for the Access of Foreign Investment (Negative List)
Published annually, the negative list outlines industries and fields restricted or prohibited for foreign investment, ensuring that such investment aligns with national economic security and industrial policies. Areas not on the list are subject to pre-establishment national treatment. 6. Measures for Reporting Information on Foreign Investment
Effective from January 1, 2020, these measures stipulate the information reporting obligations of foreign-invested enterprises, ensuring the government can timely monitor foreign investment activities for effective supervision and review. 7. Notice on Issuing the Catalogue of Industries for Encouraging Foreign Investment
This catalogue provides guidance on foreign investment industries, specifying industries and fields that are encouraged, restricted, or prohibited, offering policy direction for foreign investors and ensuring national economic and industrial security.
[Key Provisions of the Measures for the Security Review of Foreign Investment]
The Measures for the Security Review of Foreign Investment in China establish a comprehensive framework for assessing foreign investments to ensure they do not threaten national security. They cover various forms of foreign investment, especially in critical sectors like national defense and technology. The review process involves initial and comprehensive assessments to determine potential risks, and decisions can result in approval, conditional approval, or prohibition of the investment. Key provisions include:
1. Scope of Application:
The Measures encompass various forms of foreign investments, including:1) Mergers and Acquisitions: Transactions where foreign investors acquire control of existing Chinese entities.2) Greenfield Investments: Establishing new operations or businesses in China by foreign investors.3) Other Forms of Control: Any investment structures that result in foreign investors gaining control over Chinese entities, such as through contractual arrangements or significant minority stakes.
2. Key Sectors:
The Measures focus on investments in critical sectors, defined broadly to ensure comprehensive coverage, including:1) National Defense: Sectors directly or indirectly related to military and defense capabilities.2) Infrastructure: Key infrastructure sectors such as energy, transportation, water resources, and telecommunications.3) Critical Technologies: High-tech industries involving advanced manufacturing, new materials, and biotechnology.4) Information Technology: Industries related to cybersecurity, data processing, and internet services.5) Any Other Areas: Any other sectors deemed to have a significant impact on national security, including financial services and critical cultural products.
3. Definition of Control:
Control is defined by the ability of foreign investors to exert decisive influence over a Chinese entity's operations, which can be achieved through:1) Significant Shareholding: Holding more than 50% of the equity interest in an entity.2) Voting Rights: Possessing substantial voting power to influence key decisions.3) Appointment Power: The ability to appoint or remove senior management or board members.4) Operational Influence: Any other means by which significant influence over management, finance, or technology is exerted.
4. Security Review Process:
1) Initial Review: Assesses if investments fall within the scope of security review.2) Comprehensive Review: Conducted if initial review suggests potential national security concerns.3) Review Timeframe: Initial review takes 30 working days, while the comprehensive review can take up to 60 working days, extendable under specific circumstances.
5. Decision and Outcomes:1) Approval: If no security concerns are found.2) Conditional Approval: Approved with conditions to mitigate identified risks.3) Prohibition: If significant security risks are found, the investment is prohibited.
These provisions ensure a robust framework for safeguarding national security while allowing for foreign investment under regulated conditions. The detailed review process and clear definitions of control and critical sectors help prevent potential threats from foreign investments, aligning them with China's strategic interests.
[Relevant Cases of Security Review of Foreign Investment Published by NDRC]
1. Acquisition in the Petrochemical and Chemical Fibre Industries:In 2023, an international oil company acquired a 10% equity interest in a Chinese petrochemical company. The NDRC passed the review, considering the strategic importance of the sector.
2. Foreign-Owned Retail Sector Company Acquisition:In 2019, a foreign retail company acquired a 10.14% stake in a Chinese retail company, a supplier for the 2019 Military Games. The NDRC terminated the review, indicating potential national security concerns.
These cases underscore the extensive scrutiny by the NDRC, particularly in sectors deemed critical to national security, ensuring that foreign investment aligns with China’s national interests.
Conclusion
Understanding and navigating China’s regulatory framework for foreign investment security review is crucial for foreign investors. The key laws and measures, along with recent case analyses, highlight the importance of compliance and thorough preparation for any foreign investment transactions in China.