CHINA: Introduction of review of China foreign takeovers on national securities grounds

Monday February 21 2011

The State Council of China has proposed new rules for reviewing proposed China mergers and acquisition (MA) deals by foreign firms on grounds of national security. The State Council, China`s Cabinet, announced that it was establishing a panel to check whether MA deals struck by foreign firms in the country endanger national security.The panel will review attempts by FIEs to buy or merge with domestic companies whose business pertains to national defence, agriculture, energy, resources, key infrastructure, transport systems, key technology sectors and important equipment manufacturing industries.

The review will be conducted by a China foreign investment security review board under the cabinet, members of which come from the National Development and Reform Commission (NDRC), the MOC and other agencies.

The new regulations, which take effect in March, come at a time when China is expected to see more MA deals struck by foreign firms. Currently, inward MA accounts for about 3 percent of China`s total FDI, a sharp contrast with the global average level of more than 70 percent. China`s taking in FDI through more MA will promote industrial consolidation and restructuring, and it will also mean more efficient utilization of the existing resources, he said.

The NDRC has said that national security scrutiny would only occur when foreign companies take a majority stake in a domestic MA deal, meaning that a minority stake purchase will not trigger a review.

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