Around one month after the issuance of the Notice on the Establishment of the National Security Review Mechanism for the M&A of the Domestic Enterprises by the Foreign Investors on Feb. 12, 2011 by the State Council (the Security Review Rule), one of the leading departments authorized thereby promulgated the Tentative Provisions on Matters Relevant to the Implementation of the National Security Review Mechanism for the M&A of the Domestic Enterprises by the Foreign Investors (实施外国投资者并购境内企业安全审查制度有关事项的暂行规定) on 4 March 2011 (the NSR Implementation Rule).
Why MOFCOM not NDRC
MOFCOM, as one of the implementing agency, is trying to set out the procedures for itself to review M&A of the domestic enterprises by the foreign investors (the Deal) requiring national security review. The other co-leading agency, National Development and Reform Commission (NDRC), keep silent on the implementing rules. It seems that MOFCOM plays a core role in the whole national security mechanism. However, it is not the truth. The reason for MOFCOM to publish this NSR Implementation Rule is that it is the monitor at the front on behalf the government and ｓｅｌｅｃｔs the deals on its tables to submit to the intra-ministry panel (the Panel) in accordance with the standards in the Security Review Rule. MOFCOM needs the NSR Implementation Rule, though it is not in mature, to notify the potential acquirers how to work with MOFCOM for the national security review.
But it does not mean that NDRC is losing its saying in the national security review. Once MOFCOM recommends the Deal to the Panel, it mostly depends on the attitude of NDRC to make a decision. Since MOFCOM holds the opinion in its independent review that the Deal needs to go through the national security review, it does not make sense that MOFCOM says no at the Panel level. In addition, the functions of NDRC, among the others, include monitor macroeconomic and social development trend and provide forecast warning and information guidance; to study important issues concerning macroeconomic performance, aggregate balance, national economic security and overall industrial security and put forward policy recommendations on macroeconomic management. This means that NDRC has more understanding about whether the Deal has or will affect the national security rather than MOFCOM. The final a sword of Damocles will be held by NDRC.
MOFCOM and NDRC have to coordinate between themselves in order for the national security mechanism running smoothly. MOFCOM may use the standards prescribed in article 1 of the Security Review Rule when going through the submitted documents by the acquirer. NDRC may not focus on these documents check, but access the connection between the Deal with the national security. The four factors listed in article 2 of the National Security Rule may be the only reference for NDRC to make a decision on the Deal.
Consultation
Like in the concentration review procedure, the NSR Implementation Rule adopts the consultation step. Before the official submission to MOFCOM for the national security review, the acquirer may apply for consultation with MOFCOM about the procedural problems they may have about the Deal. It is believed that every acquirer is very clear about how to acquire the companies in China. So the “procedural problems” must be understood as the problems in the review procedure of MOFCOM. The problems to be consulted with MOFCOM, in essence, will not be limited to procedural problems, but the contents in the relevant documents of the Deal.
The NSR Implementation Rule does not say how to submit this consultation application, by fax, email or orally? The acceptable way to MOFCOM must be in writing. It seems that MOFCOM does not have any obligation to make any responses to the consultation application in a specific period. It means that MOFCOM may accept the consultation application or refuse it without any notice.
If MOFCOM agrees to set up a consultation meeting with the acquirer, any responses or comments from the officials of MOFCOM will not be in writing and binding. This will cause the worry of the acquirer about how helpful this consultation procedure is.
Conflict between MOFCOM and its authorized local branch
MOFCOM local branches will play a core role as an initiator of the national security review. In the recently issued Circular of the Ministry of Commerce on Issues concerning Foreign Investment Administration, MOFCOM has authorized its local branch to review and approve most of foreign investment projects, except for those specified in the Provisions on M&A of a Domestic Enterprise by Foreign Investors(2009) (M&A Provisions 2009). Article 11 of M&A Provisions 2009 stipulates that if any domestic company, enterprise or natural person merges its affiliated domestic company in the name of a company legally established or controlled by the aforesaid domestic company, enterprise or natural person in foreign countries or regions, it shall be subject to the approval of the MOC. Article 12 thereof also says that if foreign investors merge a domestic enterprise and obtain the actual control over the enterprise, and if such merger involves any critical industry, affects or may affect the security of national economy, or causes transference of actual control over the domestic enterprise who possesses a resound trademark or China''s time-honored brand, the parties to the merger shall apply to the MOC. All the other types of approvals shall be handled by the local MOFCOM. The standards and industries established by in the Security Review Rules will be the basis for the local MOFCOM to review the Deal. Due to the lack of more detailed specification, the MOFCOM local branches will have more discretion.
The NSR Implementation Rule provides that the MOFCOM local branches can not accept the application of the acquirer if the Deal falls into the review scope of the Security Review Rule. The question is that how the local branch can know whether the Deal should go through the national security review if it does not accept the application and review the documents. It is not believed that the officials responsible for receiving the applications have the ability to find out immediately the nature of the Deal when the application is handed over to them through the window. If the officials in the local branch need several days or weeks to evaluate, how long it will take is missing information here.
Supposing one local branch accepts the application and issues the approval for the Deal, MOFCOM or the other authorized initiators in the Security Review Rule think persuade the Panel believes that the Deal should be reviewed by the Panel. Then the Panel notifies MOFCOM to require the acquirer to take some measures to eliminate the effect on the national security. The local branch accepting and issuing the approval will face the risks for its activities.
The documents to submit
In the NSR Implementation Rule, the documents to be submitted to MOFCOM are listed. The crucial ones that will significantly affect the Deal are as the following:
1.Identification of the acquirer.
The identification (ID card or registration license) and the credibility certificates of the acquirer need to be notarized and authenticated. Generally, the whole notary and authentication process will take around 3 months or even longer in some cases. This will increase the time cost, risks and uncertainty of the Deal in the aspects of market and government approvals.
2.Information disclosure by the acquirer
MOFCOM requires the acquirer to submit the information about itself and its associates (including the actual controller and persons acting in concert) and the explanation on the relationship between the acquirer and the related governments. Since most of the acquirers are the international enterprises and have presences in many countries in the aim of the maximum profit, it will bring more difficulties for the acquirer to clarify the relationship between its associates and the local governments, especially when the associate is a joint venture with the local state-owned enterprise. One more concern is what MOFCOM wants to know about this kind of relationship. It will be unclear for the acquirer on what should be provided to and satisfy MOFCOM for its national security review of the Deal in China. For the special purpose vehicle (SPV) in the tax heaven, this disclosure requirement will be challenged in the implementation.
3.Information about the target company
In the submission to MOFCOM, the information about the target company, such as the description of business, bylaws, business licenses (photocopy), the financial statement in the previous fiscal year, charts of the structure before and after the acquisition and the description of business and license (photocopy) of its invested enterprises. Almost all of the above can be obtained through the due diligence done by the acquirer if the target company warrants its accuracy and truth.
To some extent, this will force the target company to provide the accurate and true information to the acquirer, esp. the part to be submitted to MOFCOM. But we are not aware of what kind of penalty the target company will face if its provided information is false or wrong, intentionally or unintentionally.
On the other hand, it is very important for the acquirer to obtain the complete cooperation from the management of the target company.
The procedure in MOFCOM
The national security review procedure is extended to 120 days in case of the acquirer submits the application for the national security review. In the NSR Implementation Rule, MOFCOM input two clear time limitation for its review procedure. One is 15 business days during which MOFCOM will review the submitted application by the acquirer and make a decision whether it should be submitted to the Panel. If MOFCOM notifies the acquirer that the national security review is unnecessary or there is no responses from MOFCOM during the 15 business days, the acquirer can go ahead with the Deal and the local branch can proceed with the M&A approval. The other is 5 business days within which MOFCOM shall notify the acquirer of the decision of the Panel once it receives.
Another clarification is about the procedure for the other ministries (departments or commissions), National-wide industrial organizations, the enterprises in the same industry of the target company and the upstream and downstream enterprises of the target company (collectively as “the other initiators”) to initiate the national security review. In the Security Review Rule, it reads like that MOFCOM will forward the suggestion from the other initiators to the Panel without preliminary review. In the NSR Implementation Rule, MOFCOM clarify that it will filter the suggestions from the other initiators and forward it to the Panel if necessary. This clarification will absolutely enhance the saying of MOFCOM in the whole procedure of national security review, which is not good for the external supervision of the work done by MOFCOM. It may be consulted with and obtained the consent of the Panel (mainly NDRC) in order for decreasing the workload thereof.
Conclusion
We can realize the efforts of MOFCOM in sorting out the procedure of national security review. Meanwhile, not being confidence and being lack of experience are the shortcomings of MOFCOM. The NSR Implementation Rule is expected to be revised in the following 5 months after its implementation date of March 5, 2011. This short life will leave the acquirer in uncertainty and hesitation. Whether the revised version in 5 months can be better than the current one is another issue for the market players.
【作者简介】
李治国，辽宁师范大学英语文学学士，辽宁大学法学学士，布鲁塞尔自由大学国际比较法硕士，北大经济法研修班，目前关注能源、矿产资源、外商投资、并购和反垄断法方面的理论和实务问题。
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