Establishing a financial security review system

China has now established its national security review system on foreign capital merger and acquisitions (M&A) and the regulatory rules concerning the investment in banking by foreign strategic investors. However, there is not any specialized financial security review mechanism yet. In recent years, foreign parties continued to exert pressure from all levels, requiring China to relax the restrictions on the shareholding ratio of foreign investors in the banking industry. Such discrepancy has become increasingly prominent in cross-border restructuring transactions. Therefore, China may learn from relevant international practice and establish an appropriate national financial security review mechanism.

The Ministerial Panel for the Security Review of M&A of Domestic Enterprises by Foreign Investors is responsible for the security review work of M&A. The panel must be under the leadership of the State Council, while the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) must take the lead in carrying out M&A security reviews in conjunction with other relevant departments, based on the industries and fields involved in the foreign M&A. The security review is divided into two stages: general review and special review. With respect to M&A transactions submitted by MOFCOM for M&A security review, the ministerial panel must first conduct a general review, and implement a special review if transactions fail the general review.

The security review may be started in three circumstances: (1) where the M&A of a domestic enterprise by a foreign investor is subject to a security review as specified in the relevant regulations, the foreign investor must file an application for an M&A security review; (2) where local commerce departments have received an M&A application, if the M&A is subject to an M&A security review but the applicant does not file an application for a review with MOFCOM, such local departments must suspend processing of the application, require the applicant to file an application for M&A security review with MOFCOM in writing, and report the relevant information to MOFCOM at the same time; and (3) as a third party, the departments concerned under the State Council, national industry associations, enterprises in the same industry, or upstream or downstream enterprises, may make proposals for an M&A security review to MOFCOM, and where the transaction is subject to an M&A security review, MOFCOM must submit its recommendations to the ministerial panel within five working days.

Li Wei and Tang Shi are junior partners at Grandway Law Offices