On March 4th 2011, Ministry of Commerce (“MOFCOM”) issued the Interim Rules on Implementation of a Security Review System regarding M&A Transactions Executed by Foreign Investors over Domestic Enterprises (the “Interim Rules”), which will come into effect on March 5th, the same day the Notice on the establishment of a security review system regarding merger and acquisition (“M&A”) transactions over domestic enterprises executed by foreign investors (“the Notice”) comes into effect.

The Interim Rules specify more details with respect to the procedure of national security review. The Interim Rules will play a transitional role in the establishment of national security review system because it will expire on August 31st 2011.

1. Initiation of National Security Review

The Interim Rules provide that if M&A transactions executed by foreign investors over domestic enterprises clearly fall within the national security review scope stipulated in the Notice, the foreign investor (the “Applicant”) shall apply for this review to MOFCOM. If M&A transactions are conducted by more than one foreign investor, the security review may be applied by the Applicants jointly or by only one of them.

If M&A transactions fall within the national security review scope but are not applied for the national security review to MOFCOM, the general review on M&A transactions will not be accepted by local commercial committee. The local commercial committee shall request foreign investors to apply for the national security review to MOFCOM in writing.

2. Function of MOFCOM

The Applicant should submit relevant documents to MOFCOM. If the documents are complete and meet legal requirements, the Applicant will be notified in writing that the security review application is accepted by MOFCOM within 15 working days after the reception of the application by MOFCOM.

After receiving the official acceptance of MOFCOM, the Applicant is not allowed to implement the M&A transaction within 15 working days after the written notice of the official acceptance is received by the Applicant. If MOFCOM doesn’t notify the Applicant within 15 working days, the Applicant may proceed to implement the M&A transaction.

The Interim Rules also provide that the Applicant may apply for the pre-filing consultation to MOFCOM with respect to procedural issues before officially applying for the national security review.

3. Review Decisions

The Interim Rules provide three kinds of review decisions by the joint committee (“Joint Committee”):

  1. No impact on national security

    If the transaction will not impact national security after the security review, the Applicant can apply for the general M&A review and other relevant approvals according to various foreign investment regulations;

  2. Potential impact on national security

    If the transaction may impact national security, the Applicant can not apply for the general M&A review or other relevant approvals until the Applicant amends the transaction plan, the application documents and re-submits them for security review;

  3. Actual or potential severe impact on national security.

    If the transaction has already impacted or may severely impact the national security, the M&A transaction will be prohibited. Measures, such as share transfer and assets transfer, will be required by the authority to eliminate the impact on national security caused by this M&A transaction.

Comments

The Interim Rules specify some details on the national security review application procedure, such as documents to be submitted and the review decisions by the Joint Committee. It will facilitate the review application and increase the transparency of the review. Meanwhile, the Interim Rules stipulate the function of MOFCOM, which have clarified the uncertainty regarding the function of MOFCOM in the Notices and will help MOFCOM to better supervise the M&A transactions.

The Interim Rules will expire on August 31, 2011. Any suggestion or comments from the public are encouraged to provide to MOFCOM until April 10 2011, and MOFCOM may adjust the Interim Rules according to the public’s suggestion or comments after the expiration of the Interim Rules. This arrangement in the Interim Rules clearly indicates that MOFCOM and the relevant authorities will evaluate the review procedure system established in the Interim Rules during the effective period and improve the specific regulations in the Interim Rules later.