China Forms Committee to Review Foreign Acquisitions, Citing Security

[WSJ_law_blog]

In 2005, private equity behemoth Carlyle made a bold move in China. It struck a deal to buy an 85% stake in Xugong, one of the country’s leading machinery makers. At the time, David Rubenstein, Carlyle’s founder, said: “This is not just a landmark deal for Carlyle, this is a landmark deal for everybody. It is going to been seen as an important moment is U.S.-China business cooperation.” Instead, the deal became a nightmare, including a backlash of nationalist sentiment from those in China’s business community who believed it was a mistake to cede control of Xugong to foreigners. Some cited national security concerns. Nearly three years later, after agreeing to ratchet down its stake, Carlyle finally abandoned the deal last month.

Now, reports the WSJ’s Andrew Batson and Matthew Karnitschnig, China’s government is formalizing a process for reviewing foreign acquisitions of local companies for national-security concerns, though many questions remain over how and when it will use its authority to block deals. In organizational plans published last week, the government said it will establish a “joint ministerial meeting” system– apparently a kind of committee — for investigating security concerns arising from foreign companies’ investments in China.

“It looks like a national-security-review mechanism similar to Cfius in the U.S., where several ministries are involved,” said Michael Han, a lawyer at Freshfields in Beijing, referring to the Committee on Foreign Investment in the U.S., a 12-agency panel that vets foreign deals for security concerns. “We still have not seen any rules on how the national-security review will operate,” he said, adding that he hopes the government will clarify its plans.

This isn’t the first time China has legislated a security review. Two years ago, it enacted a raft of M&A law, called the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. The law contained an undefined “security review” for acquisitions of companies in “core” industries, but no further guidance was given.

The creation of the new review process, writes the WSJ, continues the reshaping of the Chinese legal landscape for deals brought by the passage of new antitrust legislation. The Anti-monopoly Law, which took effect this month, provides for a government review of national-security concerns raised by foreign investors’ acquisitions in China, a process that is separate from an antitrust probe. The Ministry of Commerce is in charge of reviewing transactions for their impact on competition and will be foreign companies’ main point of contact for the joint security review.