China MOFCOM Issues Interim Measures on Security Review for M&A Transactions

On February 3, 2011, the PRC State Council released the Circular on the Establishment of a Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Circular”). Subsequently, the Ministry of Commerce (MOFCOM) issued the Interim Provisions of the Ministry of Commerce on Issues Related to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Interim Provisions”), which took effect on March 5, 2011 and will remain valid until August 31, 2011.

The Interim Provisions provide that, where a foreign investor’s M&A of a domestic fall under the scope of M&A security review specified in the Circular, the investor should file an application with the MOFCOM for security review. If the M&A is carried out by two or more foreign investors, they can jointly file an application or designate one of the investors to do so.

It also provides that where local commerce authorities in charge handle applications for M&A transactions that fall under the scope of security review, but the applicants failed to apply for M&A security review, the local authorities should temporarily refuse to accept the application, require the applicants to file applications for M&A security review, and report the relevant information to the MOFCOM.

The Interim Provisions also provide that, before filing an official application for M&A security review, the applicant may request a consultation with the MOFCOM on the procedural issues with regard to the M&A transaction. However, the provision does not specify what the applicants need to submit in order to apply for the negotiation, and at what stage of the M&A negotiation can the application for consultation be submitted (e.g. whether some written agreement need to be entered into among the M&A parties prior to applying for the consultation).
The Interim Provisions provide a list of documents that applicants are required to submit when applying for the M&A security review, some of the key documents are as follows:

(1) Identity certification, registration certification, or credit worthiness certification documents of the foreign investor which have been notarized or certified in accordance with the law; identity certification document of the legal representative, or the power of attorney issued by the foreign investor and identity certification document of the authorized representative thereof;
(2) Statement on the information pertaining to the foreign investor and its associated enterprises(including its actual controller or parties acting in concert), and a statement on its relationship with the government of relevant countries;
(3) Statement on operating status of the target domestic enterprise, its articles of association, business license (photocopy), audited financial statements for the previous year, chart of its organizational structures prior to and after the M&A, and a statement on the operating status of enterprises invested by the target enterprise, and business licenses (photocopy) of such enterprises;

After the M&A is approved by the joint committee, the applicant can complete the formalities for the M&A transaction. If the committee regards the M&A to have a likely impact on national security, the applicant must adjust the transaction and revise the application documents accordingly, and reapply for security review. However, if the M&A has already caused a great impact on national security, or will possible cause such impact, then the project will be terminated, or effective measures such as transfer of equity or assets will be undertaken to eliminate the impact of the transaction on national security.

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