China's New M&A Security Review

A new security review mechanism for foreign-invested M&A deals adds to the regulatory burden of foreign investors acquiring Chinese domestic enterprises. However, as similar though less comprehensive provisions already exist, the new rules do not necessarily increase the risk of foreign-invested M&A transactions being prohibited.

The new M&A security-review rules are set out in the Notice on Establishment of a Security Review System for Acquisition of Domestic Enterprises by Foreign Investors (Notice), which was recently issued by the State Council and which will be effective from 5 March 2011.

Notifications

While the scope of the review only covers certain types of foreign-invested M&A deals (see below), the Notice suggests that all foreign investors must give notice to the Chinese Ministry of Commerce (MOFCOM) when acquiring a Chinese domestic enterprise. MOFCOM will then decide whether to initiate an M&A security review. The Notice does not clarify whether M&A