Few economies are truly open to foreign investment and China is not among these. China has historically blocked foreign companies from acquiring domestic assets and companies. The regulations on which such blocking actions are based have changed over the years. The objective however, has not. It regards the protection of national interests. In Chinese regulations, this translates into the broad concept of “state security”.

A security review system has been installed to protect “state security” in acquisitions of Chinese companies. This “Security Review” system exists in addition to anti-monopoly review. In 2011, three new regulations were promulgated on the Security Review (the “Regulations”). The Regulations supervise and control acquisitions of any form of Chinese domestic companies or assets by foreign investors.

Foreign investors usually prefer to stay clear of Security Review, but this is not always necessary or advisable. This Special gives a short introduction on the Regulations and its implication of the Security Review on the current practice.

Scope of the Regulations

The regulations apply to acquisitions of Chinese domestic companies by foreign investors. This includes a foreign investor acquiring equity interest in a non Foreign Invested Enterprise (“FIE”) or acquiring equity interest from Chinese party(or parties) in a FIE; or subscribing to the capital increase of a FIE or non FIE; or acquiring assets of domestic companies directly or indirectly and operating the acquired assets through a FIE. (“Acquisitions”).

If the envisaged Acquisition may affect Chinese “state security” or “national defence”, the Security Review needs to be conducted. These terms can be interpreted to cover any type of Acquisition in any type of industry. The focus lies however on domestic enterprises/assets in the armament industry or producing important agricultural products, important energy or resources, important infrastructure, important transportation, key technology or major manufacturing equipment. Again, there is no indication what qualifies as “important”, “key technology” or “major manufacturing equipment”.

The Regulations give the Ministry of Commerce (“MOFCOM”) substantial discretion to determine whether a particular Acquisition should be subjected to the Security Review on a case by case basis. MOFCOM will review the Acquisition on the basis of the essential content (often referred to as the “substantive content”) and substantial impact of the envisaged transaction.

The scope of the Security Review covers any type or manner of Acquisition of equity interest in or effective control over certain domestic companies or acquisition or control over domestic assets. This does not mean that every form of cooperation will be deemed an Acquisition and subjected to the Security Review. Security Review is a possibility that should be taken into account beforehand.


The Regulations expressly state that the foreign investor should not circumvent the M&A Security Review by any means, such as nominee holding, trustees, multi-level re-investment, leasing, loans, contractual control and offshore transactions. This “catch-all” provision makes the evasion of the Security Review by any legal structure uncertain.

Acquisitions outside of China are not formally subject to the Security Review. However, the Regulations expressly state that offshore transactions cannot be used to avoid the Security Review. Although it is not clear to what extent offshore transactions will be examined, it appears that offshore transactions will also be examined on case by case basis and based on their “substantive content” and “actual impact” on state security.

Security Review Process

Central MOFCOM is the governmental authority in charge of the Security Review. Foreign investors should apply for the Security Review to central MOFCOM in Beijing before they proceed with an envisaged Acquisition. MOFCOM at the Provincial or County level (“local MOFCOM”) is obliged to examine whether an Acquisition is subject to the Security Review when it reviews the application for a particular Acquisition. If local MOFCOM deems that a particular Acquisition should be subjected to the Security Review, it will inform the applicant that the Security Review needs to be completed before local MOFCOM can approve the Acquisition.

Not every Acquisition has to seek approval from local MOFCOM before the foreign acquirer takes control. For example, if a foreign investor acquires assets of a domestic company and operates such assets through an existing FIE, that acquisition will not have to be approved by local MOFCOM beforehand. This may seem a practical method to avoid the Security Review, but foreign investors should be aware that circumvention is not permitted (see above) and other parties may also inform MOFCOM of the transaction that why they deem it should be subject to the Security Review. In addition to the local MOFCOM, all related governmental authorities, the national industry association and any related enterprises may make proposals to the MOFCOM to request a Security Review.  Thus, theoretically, any party may initiate the Security Review process.


MOFCOM conducts continuous supervision on the Acquisition of domestic companies or assets by foreign investors. If the Acquisition particulars change in writing or in practice after the Acquisition was approved with/without completion of the Security Review, a new the Security Review may be required and the transaction halted.


The scope of the Security Review is very broad and covers any acquisition of domestic companies or assets by foreign investors that may affect state security based on the essential content and substantial impact of the related Acquisition.

The Security Review mechanism looks comprehensive and acts as continuous supervision. Theoretically, any related governmental authorities, industry associations and related enterprises may make proposals to the central MOFCOM to request a Security Review at any time whenever before or after a particular Acquisition is approved by local MOFCOM.

Our View

The introduction of Security Review is not intended to block ordinary acquisitions of domestic companies or assets by foreign investors, but to give the MOFCOM certain level of flexibility to stop any Acquisition that may damage the state safety or safety of national defence. HIL has long standing experience in sino-foreign cooperation, trade and investment transactions having acted for both the Chinese party and the foreign party. We would be delighted to assess your envisaged transaction and provide you with accurate and practical advise on the approval process (including the Security Review) and the protection of your interests.

Lynn Zhang