The State Council recently issued a circular on the establishment of a system of national security review of mergers and acquisitions (M&A) of domestic firms by foreign investors. Under the new system, foreign mergers and acquisitions of Chinese military industry enterprises and supporting companies, companies around key and sensitive military facilities, and other defense-related units will be subject to review.

A joint-ministerial panel for national security review of foreign M&A of domestic firms will be established in early March. The circular makes clear the scope, content, working mechanism and procedures for security review.

Under the Anti-Monopoly Law, when a foreign investor makes an M&A bid for a domestic enterprise or is involved in "concentration of business operators" by other means and national security is involved, it is necessary not only to examine the concentration of business operators but also to conduct examination on national security grounds in accordance with relevant provisions.

According to the security review system announced by the State Council, the scope of M&A security review covers foreign investors who propose to take over military industry enterprises and supporting enterprises, companies around key and sensitive military facilities, and other units relating to national defense.

The content of security review covers the effects of mergers and acquisitions on national defense, including the capacity of producing products and providing services and relevant facilities serving defense needs, their effects on the smooth running of the national economy, their effects on the basic order of people’s lives, and their effects on the research and development of key technologies related to national security.

Foreign investors intending to acquire domestic firms are required to file applications to the Ministry of Commerce. The Ministry of Commerce will request the joint panel to review the application within five working days if it falls within the scope of security review. The joint panel will begin by making a general review. Cases that fail to pass the general review will have to go through a special review.