China’s revamped national security regime poses new challenges for foreign investors

China’s new Measures for the Security Review of Foreign Investment have revamped its national security regime, extending its scope to capture additional transaction types and more sectors. The Measures, which took effect from 18 January 2021, require a pre-closing filing for all direct or indirect foreign investments within China in certain key sectors including military / national defence, energy, infrastructure, culture, internet and finance. It is essential for foreign investors to assess the impact of China’s national security review at an early stage in their deal planning - in terms both of transaction timelines and substantive risks.

Expanded scope of targeted sectors, subject to broad discretion

The Measures provide that a filing obligation applies to the following foreign investments:

• Any investment in military or national security/defence-related industries or in areas surrounding military (industrial) facilities;
• An acquisition of control in key products relating to national security, including agriculture products, energy and resources, equipment, infrastructure, transportation, cultural products and services, information technology and Internet products and services, financial services, technologies.

The Measures expand the scope of the sectors previously covered and include new areas such as key information technology and Internet products and services, financial services and cultural products and services.

However, neither the Measures nor any other relevant laws or regulations provide a clear definition of these areas. As a result, terms such as (key) “equipment” or (key) “technologies” could potentially be interpreted broadly (as in many other foreign investment regimes) and cover a wide range of products and services. We expect the authorities to enjoy a broad discretion in interpreting the scope of the covered sectors.

The Measures appear to reserve jurisdiction over foreign-to-foreign transactions

The Measures provide that the filing obligation applies to all “foreign investments” in the relevant sectors. “Foreign investments” include investments by foreign investors in new projects / enterprises, acquisition by foreign investors of equity or assets of domestic enterprises or foreign investment in other forms. Previously, China’s national security review regime explicitly excluded from its jurisdiction (1) acquisition of interests in wholly foreign owned enterprises and (2) acquisition of interests held by foreign investors in a Sino-foreign joint venture, thereby significantly limiting the scope of Chinese foreign investment control. The Measures removed these exclusions, appearing to suggest that the Chinese authorities intend to reserve the power to review foreign-to-foreign transactions under the revamped national security regime.

This is not surprising, considering that the Measures were enacted in the context of the “arm’s race” of new or strengthened foreign investment control / national security review regimes in major jurisdictions around the globe (many of which target Chinese foreign investments). As foreign-to-foreign transactions are generally not exempted from review in other countries (such as the US, the UK, Germany), the Chinese authorities may also want to reserve jurisdiction over these transactions – although our current expectation is that such a “weapon” would likely be used sparingly and target only specific cases.

Review period

If a transaction is filed under the Measures, the review could take between 15 and a maximum of 105 working days, depending on whether it gives rise to national security concerns. Any time required for the parties to provide supplementary materials will not be counted in the review period, creating additional uncertainty in the review timeline.

Outcomes

Following their review, the Chinese authorities may impose remedies or prohibit the transaction to address any national security concerns.

Where parties fail to file, the authority may firstly order them to file. If the parties still refuse to file, the authority may order them to dispose of their equity interests or assets and take other necessary measures to "restore the investment to its original state" and eliminate any impact on China's national security.