CHINA Law and Practice Contributed by: Jeff Liu, Jeanette Wang, Yulong Lai and Yun Bi, Shihui Partners
Theoretically, the NSR process takes place in paral - lel with merger control review. In practice, if there is a national security concern in the NSR, the SAMR is unlikely to grant merger control clearance until such national security concern has been addressed. 5.6 Substantive Criteria and Risk Factors The NSR Measures do not list the factors or criteria for assessing national security or public order risks. However, the Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors published in 2011 explains that the NSR shall assess the impact on national defence and security, including the produc - tion capacity of domestic products, capacity for pro - vision of domestic services and relevant equipment and facilities required for national defence, the stable operation of the national economy, the basic order of society, and the research and development abilities of core technologies involving national security, which still serves as guidance on the substantive criteria of the NSR. 5.7 Mitigation Measures, Conditions and Prohibitions Article 9 of the NSR Measures allows parties to make a written commitment of conditions where the impact on national security can be addressed, and the NSR Office may grant conditional approval with such additional conditions. However, unlike the merger control regime, there is neither public guidance nor public precedent on what types of conditions may be imposed, which is usually subject to the discretion of the authority. 5.8 Enforcement and Sanctions For failure to notify transactions, the NSR Office may request the transaction parties to notify within a time limit, and further request the parties to dispose of equity or assets and to take other necessary meas - ures within a time limit to unwind the transaction and eliminate the impact on national security if the parties refuse to notify upon the request. The authorities can review transactions that have been closed on their own initiative.
For any foreign investment where the transaction par - ties fail to comply with conditions, the NSR Office may request them to make corrections within a time limit, and further to unwind the transaction if the parties refuse to make such corrections. The NSR regime does not introduce fines as sanc - tions, but parties that fail to notify or comply with con - ditions shall be included in the relevant credit informa - tion system of the State as parties with poor credit records and shall be subject to the joint punishment mechanism. 5.9 Transparency, Confidentiality and Judicial Review During the review process, parties may discuss with the authorities and amend investment structures and mechanisms to address the national security con - cern (if needed). However, according to the FIL, the NSR decision is final and cannot be appealed through administrative review or judicial review. 6. Sectoral and Other Regulatory Approvals 6.1 Regulated Sectors Requiring Approval Change-of-Control Approval Requirement in the Financial Sector The financial sector (including banks, securities firms, insurance companies and other types of financial institutions) is a key sector where regulatory approval is required for change of control or ownership result - ing from M&A transactions. The main financial regulators overseeing such approv - als include (i) the NFRA, (ii) the People’s Bank of China (PBOC) and (iii) the CSRC. Financial regulatory approvals are required not only for change of control, but also when certain sharehold - ing thresholds below 50% are reached in a merger, acquisition or other investment transaction. Other Sectoral Approval Requirements For other regulated industries, laws and regulations may broadly require entities to obtain approval from relevant industry regulators when conducting mergers
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