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Briefing on Foreign Investment Security Review Measures

2020-12-24 133


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On December 19, 2020, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) of the Peoples’ Republic of China (“PRC[1]) jointly released the Measures for the Security Review of Foreign Investments (“Security Review Measures”), which will be implemented from January 18, 2021.


Prior to the promulgation of the Security Review Measures, the PRC had established a foreign investment security review system as a preliminary framework. Under the Security Review Measures the scope of transactions which are subject to security review will be expanded and it has further provided details as to the responsible authority and the review procedures.


The Security Review Measures is formulated with the Foreign Investment Law and the State Security Law as the primary legal basis. The Foreign Investment Law and its implementation regulations states that the foreign investment security review system for foreign investment that affects or may affect national security will be established. The State Security Law stipulates the basic principles and institutional framework for defending state political power, sovereignty, national unity and territorial integrity, people's well-being, sustainable development of economic society and other major interests of the state.


Drawing on the security review practice in the past decade in the PRC and the experience of other major countries, the Security Review Measures has set out rather comprehensive and systematic provisions on the foreign investment security review system, while treating opening-up and national security as equally important.


Key Points


This briefing aims to set out the significant and fundamental rules in the Security Review Measures.


1.    Scope of security review

Foreign Investment that affects or may affect national security shall be subject to security review in accordance with the Security Review Measures.


(1) Definition of Foreign Investment

The definition of “foreign investment” in the Security Review Measures is basically consistent with that in the Foreign Investment Law. Foreign investment refers to the investment carried out directly or indirectly by foreign investors within the territory of the PRC, including investment in new projects or establishment of enterprises, acquiring equity or assets of domestic enterprises through mergers and acquisitions and investment through other ways (“Foreign Investment”).


It is worth noting that foreign investors purchasing domestic corporate stocks through stock exchanges or other securities trading markets approved by the State Council of the PRC which affects or may affect national security are not subject to the Security Review Measures and the special measures applicable for such circumstances are being drafted separately by the China Securities Regulatory Commission.


(2) Covered Sectors

Foreign Investment in the following sectors will be subject to security review:


a) Investment in the military industry, military industry supporting fields and other fields related to national defense security, as well as investment in military industry facilities and military industry facilities’ surrounding areas; and


b) Investment in significant agricultural products, essential energy and resources, major equipment manufacturing, important infrastructure, important transportation services, significant cultural products and services, important information technology and Internet products and services, important financial services, key technologies and other fields that have importance in national security and obtain the “actual control”[2] of the invested enterprises.


2.    Security Review Procedure

2.1 Initiation of review procedure

The office of the working mechanism to be set up in the NDRC will be responsible for the security review.


If the Foreign Investment falls within the scope of the security review, foreign investors or relevant domestic parties shall take the initiative to make filing to the office of the working mechanism before implementing the investment. The documents to be submitted include the letter of application, investment plan, description of the effect on national security and other materials required by the office of the working mechanism.   


2.2 The process of the security review

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3.    Consequences of Violation

For Foreign Investment subject to security review, if the relevant party fails to make the filing in accordance with the provisions of the Security Review Measures, it will be ordered to make the filing within a specified period of time. If such relevant party still fails to comply, it will be ordered to dispose of the equity or assets within a specified period of time and take any other necessary measures to restore to the state before the implementation of the investment and eliminate any possible impact on national security. Such violation will also be recorded in the relevant national credit system.


Outlook

 

Foreign Investors should pay close attention to the upcoming implementation and future development of the Security Review Measures. Before making investment in the PRC, foreign investors should always evaluate whether their investments are subject to security review, its impact and make reasonable business arrangements accordingly.

 

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We, Jia Yuan Law Offices will be pleased to remain at your disposal for any further updates or clarifications as may be required in relation to the Security Review Measures.

 

[1] For the purpose of this article, PRC means the People's Republic of China, excluding Hong Kong, Macau and Taiwan.

[2] Actual control means holding more than 50% equity of the invested enterprise, or having substantial impact on the resolutions of the board of directors, the shareholders’ meeting of the invested companies, or having a substantial impact on the business decision-making, personnel, finance, and technology of the invested enterprises.



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