Exploration

Key Points and Remaining Issues of the Measures

for the Security Review of Foreign Investment

2020-12-06


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On December 19, 2020, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") promulgated the Measures for the Security Review of Foreign Investments (Order [2020] No.37 of NDRC and MOFCOM) (the "Measures for Security Review" or the"Measures"), effective as of January 18, 2021. The Measures for Security Review, comprised of 23 articles, specifies the types of foreign investments to which security review is applicable, authorities, scope, procedures of security review, supervision over the implementation of review decisions and punishment measures for violations. The Measures further improves the standardization, accuracy, and transparency of security review, minimizes the impact of security review on foreign investment activities and protect the enthusiasm and legitimate rights and interests of foreign investors.


I. Background of the Promulgation of the Measures for Security Review


Improvement of China's foreign investment administrative system and expansion of opening up policy to the world. The Measures for Security Review was formulated mainly on the basis of the needs of China's opening up policy to the world and the needs of the continuous improvement of the foreign investment administrative system. The implementation of the security review system for foreign investments shall prevent the generalization of security review. It is imperative to coordinate the relationship between security and development, and to adhere to the principle of attaching equal importance to opening-up and security, so as to facilitate the further opening up to the world and the expansion of the use of foreign investment as well as China's future participation in the establishment of high-level international investment rules.


Prior to the promulgation of the Measures for Security Review, relevant regulations have already been issued, which laid certain foundation for its promulgation. The security review system for foreign investments in China started from a series of security review provisions for mergers and acquisitions of domestic enterprises by foreign investors in 2011, including the Provisions of the Ministry of Commerce on Implementing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors(the "Provisions for Security Review of M&As") and its supporting provisions. On April 20, 2015, the General Office of the State Council promulgated the Notice on Promulgation of the Pilot Measures for the National Security Review of Foreign Investments in Pilot Free Trade Zones(the "Notice on the Review in FTZs"), extending the security review system from M&A investment to new investment (new projects or establishment of enterprises) within the scope of the Pilot Free Trade Zones. On March 15, 2019, theForeign Investment Law of the People's Republic of China(the "Foreign Investment Law") was promulgated, providing only general descriptions but no detailed rules for the security review system.


The introduction of the Measures for Security Review is to conform to the internationally accepted security review system for foreign investment. The foreign investment security review is an internationally accepted foreign investment administrative system. For example, the United States has promulgated Foreign Investment Risk Review Modernization Act, EU has issued the Regulation of Establishing a Framework for Screening of Foreign Direct Investments into the European Union, Australia has formulated the Foreign Investment Reform (Protecting Australia's National Security) Bill, etc. Many countries have incorporated security review systems in the legal system of foreign investment. In this context, the NDRC and the MOFCOM have formulated the Measures for Security Review upon the approval of the State Council based on past practice of security review in China since 2011.


II. Main Contents of the Measures for Security Review


The Measures for Security Reviewmainly stipulates the following six aspects: 


(Ⅰ) Security review bodies for foreign investment 

A working mechanism for security review of foreign investment is established, with the office of the work mechanism set up under the NDRC, and led by the NDRC and the MOFCOM. The working mechanism will undertake the routine work of security review of foreign investment1. According to Announcement of the National Development and Reform Commission([2019] No.4), applications for security review of foreign investment will be received at the government affairs service hall of the NDRC. 


(Ⅱ) Scope of security review for foreign investment

Security review for foreign investment shall be conducted within the following scope: (i) investment in any of such fields as the military industry and military-supporting industry that concern state defense and security, as well as military facilities and areas surrounding industrial military facilities; and (ii) investment in any important agricultural product, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technologies and internet products and services, important financial services, key technologies and other important fields that concern state security while obtaining the actual control over the invested enterprises2. If a foreign investor is not sure whether its investment falls within the scope of security review, it may consult the Office of the Work Mechanism for Security Review of Foreign Investment on the specific information of the project, for contact information, foreign investors may refer to the Announcement of the National Development and Reform Commission([2019] No.4). 


(Ⅲ) Declaration mechanism for security review of foreign investment

Foreign investors or related parties in China are obliged to take the initiative to make a declaration to the working mechanism office prior to making the investment which fall with the scope of security review3. For a foreign investment that should have been declared but has not been declared, the working mechanism office may require it to declare within a time limit4. The relevant authorities, enterprises, social organisations and the public may also propose review suggestions to the working mechanism office5.


(Ⅳ) Procedures and time limit for security review of foreign investment

The security review is divided into three phases. The first phase is preliminary review. A decision on whether to initiate the security review shall be made within 15 working days from the date when the materials that meet the declaration requirements are received6. The second phase is general review. A decision on whether to pass the review shall be made within 30 working days from the date when the review is initiated, otherwise, the review shall proceed to the next phase in accordance with the procedures7. The third phase is a special review lasting 60 working days. This phase is not a compulsory procedure for each project. Only projects that fail to pass the general review may enter into the special review. Under special circumstances, the time limit for special review may be extended. An examination decision will be issued upon the completion of the special review. During the review period, the time taken for supplementation of materials shall not be included in the review period8 


(V) Implementation of decisions on security review of foreign investment

Where the working mechanism office makes a decision of passing security review, the party concerned may make its investment; if the investment passes the conditional review, the investment shall be made in accordance with the additional conditions; where a decision to prohibit investment is made, the party concerned may not make its investment9.  


(Ⅵ) Punishment for violation of the rules


For the violation behaviors such as refusal to make declaration, falsification and failure to implement the additional conditions, the parties concerned may be ordered to dispose of their equities or assets within a prescribed time limit, or their bad credit records may be included in the relevant national credit information system and shall be subjected to joint disciplinary action in accordance with the relevant provisions of the State10.


III. Remaining issues to be resolved


(Ⅰ)Measures for Security Review of Foreign Investment in the Field of Securities 

Article 22 of the Measures stipulates that where a foreign investor purchases the stocks of any enterprise in China through a stock exchange or any other securities exchange premises approved by the State Council, thus having or possibly having an impact on state security, the specific measures for application of the Measures thereto shall be formulated by the securities regulator under the State Council in collaboration with the working mechanism office. The relevant work is still under way.


(Ⅱ) Unspecified content of security review of foreign investment

The Measures has not provided specific content of security review of foreign investment. We expect that the working mechanism office may, in general, examine the impact of foreign investment on the “security of national defense, stable operation of national economy, basic social living order, national cultural security, public ethics, national cyber security and R&D capacity of key technologies involving national security" by referring to the expressions in the Provisions on Review of M&As and the Notice on Review of TTZs.


(Ⅲ) Whether the Measures for Security Review apply to the VIE structure 

Article 2 of the Measures for Security Review retains expressions such as "indirect investment" and "other forms" in the definition of foreign investment. Therefore, there is still room for legislative interpretation of the security review system to be applied to the VIE structure, and it is still pending whether the general norms of foreign investment shall be applied to the VIE structure. 


(Ⅳ) Whether remedial measures can be taken after a decision is made

Article 35 of the Foreign Investment Law stipulates that " the State shall establish a safety review system for foreign investment, under which the safety review shall be conducted for any foreign investment affecting or having the possibility to affect national security. The decision made upon the safety review in accordance with the law shall be final". Therefore, if any investor intends to challenge the review decision, it is not clear whether a remedy may be taken through administrative review and administrative litigation. The relief mechanism of investors, the reviewing body for the implementation of any remedy and the relevant procedures need to be further specified.


Notes

[1]Article 3 of the Measures for Security Review of Foreign Investment

[2]Article 4 of the Measures for Security Review of Foreign Investment. Article 4, paragraph 2 provides that:“Obtaining the actual control over the enterprises invested in” shall involve the following circumstances:

1. the foreign investor holds 50% or more equity of the enterprises invested in; 

2. the foreign investor holds less than 50% equity of the enterprises invested in, but the voting rights enjoyed by it can have a significant impact on the resolutions of the board of directors, shareholders' meeting or general meeting of shareholders; and

3. other circumstances that cause the foreign investor to have a significant impact on the business decision-making, personnel, finance and technology, etc. of the enterprises invested in.

[3]Article 4 of the Measures for Security Review of Foreign Investment

[4]Article 16 of the Measures for Security Review of Foreign Investment

[5]Article 15 of the Measures for Security Review of Foreign Investment

[5]Article 15 of the Measures for Security Review of Foreign Investment

[6]Article 7 of the Measures for Security Review of Foreign Investment

[7]Article 8 of the Measures for Security Review of Foreign Investment

[8]Article 8 and Article 9 of the Measures for Security Review of Foreign Investment

[9]Article 12 of the Measures for Security Review of Foreign Investment

[10]Article 17, Article 18 and Article 19 of the Measures for Security Review of Foreign Investment


Authors:

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Harrison Jia   

                                          

Partner

 


                       

Mr. Jia Hui's practice focuses on M&A and insurance. Jia Hui is a qualified lawyer from New York and China. He serves as Assistant Chairman and Secretary General of the Belt and Road Service Mechanism, Deputy Secretary General of the China New Energy International Alliance, Representative of the Insurance Association of China, and member of the Legal Compliance Committee of the Insurance Asset Management Association of China. Lawyer Jia Hui is a member of the Standing Committee of the Asia Pacific Law Association under the "One Belt, One Road" initiative, and has been selected as one of the "Nationwide Thousand Foreign-related Lawyers" of the Ministry of Justice and one of the "Thousand Professional Plan" for China's insurance industry.

E:jiahui@dehenglaw.com


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Ju Guang   

                                          

Paralegal

 


                       

Ju Guang, paralegal of DeHeng Law Offices, Master of Science in Nanyang Technological University and LLM in City University of Hong Kong. Ju Guang's practice focuses on cross-border investment and M&A.                       

E:juguang@dehenglaw.com


Disclaimer:


This article was written by a lawyer of DeHeng Law Offices. It represents only the opinions of the author(s) and should not in any way be considered as formal legal opinions or advice given by DeHeng Law Offices or its lawyers. If any part of this articles is reproduced or quoted, please indicate the source.


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