China Issues Rules on National Security Review for M&A Transactions

On February 3, 2011, the General Office of the PRC State Council issued the Notice Regarding the Establishment of National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the "Notice"), which will take effect 30 days after its promulgation. The Notice represents another major step that the Chinese government has taken in recent years in the area of regulating mergers and acquisitions (M&A) of domestic companies by foreign investors in China.

1 Background

As early as 2003, China issued provisional rules governing acquisition of domestic companies by foreign investors, and on August 8, 2006, these provisional rules were amended into the Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors ("M&A Rule") by the Ministry of Commerce ("MOFCOM") and five other agencies. The M&A Rule, for the first time, called for notification and review of a transaction that might have an impact on China's