CHINA Law and Practice Contributed by: James Hu, Yingjie Kang, Huihui Li, Sherry Xu, Bivio Yu and Lisa Zhao, Fangda Partners
(b) important energy and resource; (c) significant equipment manufacturing; (d) critical infrastructure; (e) critical transportation services; (f) important cultural products and services; (g) important information technology and internet product and services; (h) important financial services; (i) critical technology; and (j) other industries with national security impor - tance (ie, assessed on a case-by-case basis, with factors including whether the Chinese government has separately flagged or desig - nated certain sectors or certain products or services as “strategic”). FDI Types The NSR regime applies to direct or indirect invest - ments by foreign investors (including those in the regions of Hong Kong, Macau and Taiwan) in Chi - nese domestic enterprises, primarily in the form of (i) investment in a greenfield project or establishment of a foreign-invested enterprise in China, independently or jointly with other investors, and (ii) M&A (ie, asset or equity acquisitions). The NSR regime can be extend - ed to other transactions such as contractual control, trusts, multi-layer investments, overseas transactions, leases or convertible bonds, created to achieve the same purpose as a direct share or asset acquisition. In particular, foreign investors investing in offshore entities who (directly or indirectly) own equity in Chi - nese companies or assets located in China (also called “foreign-to-foreign” deals) are also covered investment transactions. However, recent practice demonstrates that “foreign-to-foreign” deals are less likely to require a formal NSR review or lead to any substantive national security concern. For an FDI transaction originally not subject to NSR, NSR approval will need to be sought before the par - ties can make any changes to, for example, the busi - ness structure, business scope or identity of foreign controllers, that result in the FDI falling within the scope of the NSR. Likewise, if an FDI transaction has already received NSR approval but the parties con - template making changes to the transaction, the par -
ties must seek new NSR approval before they make the changes. Control Determination With regard to “Category B” investment, a foreign investor is regarded to acquire control if: • the foreign investor and its affiliates acquire 50% interest or more in an enterprise; • the foreign investor with another foreign investor acquires 50% interest or more in an enterprise; or • the foreign investor acquires less than 50% interest in an enterprise but has sufficient voting rights to materially influence shareholder meeting or board of director meetings; and • there are other factors allowing the foreign inves - tors to exert significant influence over the enter - prise’s operational decisions, human resources matters, financial matters and technology. Monetary Thresholds There are no monetary thresholds for a transaction to be qualified for NSR review. Changes to Existing Transactions As well as new transactions, changes to existing transactions that may affect national security (eg, changes to the foreign investor’s contractual rights, the business scope of the foreign-invested entity, or the foreign investor’s identity) may trigger NSR notifi - cation obligations afresh. Reviewing Authority An interagency function called the “NSR Working Mechanism” is empowered under the NSR Meas - ures to organise, co-ordinate and supervise the NSR review. This function, which is consensus-driven, is jointly led by NDRC and MOFCOM and, depending on the investment areas concerned, other ministries of the central government, such as the Ministry of National Defence (MOD), the Cyberspace Administra - tion of China (CAC), the Ministry of Industry and Infor - mation Technology (MIIT) and the Ministry of Transport (MOT), may also be involved to give their opinions. The Office of the NSR Working Mechanism (the “NSR office”), which comes under NDRC, carries out the day-to-day NSR functions, including accepting the
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