On 18 January 2021, the Measures for Security Review of Foreign Investment (外商投资安全审查办法) ("SR Measures"), which was jointly issued by the PRC National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") on 19 December 2020, took effect. The SR Measures consist of 23 rules, covering among others the types of foreign investment which will be subject to review, the regulatory authority, scope of national security review, review procedures and timelines, and implementation and consequences of violations.
Compared with the existing PRC national security review mechanism introduced in 2011 that focused exclusively on the mergers and acquisitions of domestic enterprises by foreign investors, and the national security review trial regime launched in 2015 applicable only in the free trade zones, the SR Measures have introduced a revised national security review regime, expanding its application nationwide for different types of foreign investment. These include not only direct investment through acquisitions, but also indirect investment and "greenfield" investment in the form of establishing a wholly foreign-owned subsidiary or a joint venture. As for the sectors covered by security review, the SR Measures segregate them into two categories: (i) military-related industries and investments in areas of proximity to military facilities regardless of the element of control; and (ii) critical/important non-military sectors where foreign investors may exercise "actual control". The sectors in the second category include agricultural products, energy and resources, equipment manufacturing, infrastructure, transportation services, IT and Internet/online products and services, financial services, and critical technologies.
There are still a number of issues to be clarified under the SR measures, including without limitation (i) how to define "critical/important" in the above-mentioned sectors, and (ii) the distance requirements for "proximity" to military facilities, leaving a wide discretion to the regulators in interpreting the SR Measures. Therefore, it is advisable for the interested parties who are currently investing or proposing to invest in China to seek legal advice or consult the regulators at an early stage to evaluate whether their proposed investment in China may be subject to the national security review.
