Alert – MOFCOM Security Review and Interim Provisions

15 September 2011

MOFCOM formalises security review procedures for foreign investment

On 25 August 2011, the Ministry of Commerce of the People's Republic of China (MOFCOM) published the Provisions of the Ministry of Commerce on Implementing the System of Security Review for Acquisitions of Domestic Enterprises by Foreign Investors (the Provisions), which came into force as of 1 September 2011.

The Provisions are in fact a revised version of the previously promulgated Interim Provisions of the Ministry of Commerce on relevant Issues in Implementing the System of Security Review for Acquisitions of Domestic Enterprises by Foreign Investors which came into force on 5 March 2011 and ceased to be effective on 31 August 2011.

In addition to formalising the procedures and documentation requirements for the security review, the Provisions further stress that the contents and impact of the transactions will be scrutinised to determine whether a security review is necessary. The Provisions expressly state that foreign investors must not use any method, including but not limited to nominee arrangements, trusts, multi-level holding structures, lease arrangements, loan arrangements, variable-interest entity (VIE) structures and overseas transacting, in order to circumvent the security review.  VIE structures are investment structures commonly used in sectors that have restrictions on foreign investment in China, such as the internet and media, and usually involve complex contractual arrangements between foreign investors and domestic companies that hold the relevant approvals or licenses that cannot be granted to foreign-controlled companies.  VIE structures are, strictly speaking, a way of avoiding Chinese foreign investment restrictions.  Whilst the Provisions do not prohibit VIE and similar structures, the authorities will scrutinize them as part of the security review process.

According to a catalogue published by MOFCOM on 6 March 2011, the industries that are subject to the security review include: grain planting; livestock breeding; oil and natural gas exploitation; mining; manufacturing of large special equipment, metal vessels, aircrafts, spacecrafts, industrial automatic control devices, motors, electrotechnical instruments and meters; power and heat generation; water production and supply; waste water treatment; railway transportation; ports for cargo transportation; pipeline transport; posting and delivery service; telecommunication and other information transmission service; wholesale and retail; and geology prospecting. 

Foreign investors who wish to acquire Chinese enterprises in any of the above industries, whether directly or indirectly, must be aware of and comply with the requirements of the security review.

MOFCOM promulgates interim provisions on assessing the impacts of concentrations

On 29 August 2011, MOFCOM published the Interim Provisions on Assessment of Impacts of Operators' Concentrations on Competition (Interim Provisions) which came into force as of 5 September 2011 as one of the auxiliary regulations to the Anti-Monopoly Law.

According to the Interim Provisions, for the purpose of assessing the impact of an M&A transaction (or concentration) on market competition, MOFCOM will, on a case-by-case basis, take the following elements into account:

  • the market share of each of the operators in the transaction;
  • the degree of concentration in the relevant market;
  • impact of the transaction on market entry and technological advances;
  • impact of the transaction on customers and other operators;
  • impact of the transaction on the development of the national economy;
  • any other elements that may impact market competition.