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China's national security review: motivations and the implications for investors.

Foreign direct investment in China has been a bright spot in the midst of a global recession. The economic powerhouse attracted a record $244 billion in foreign direct investment in 2010, up more than eighty percent from the previous year's total of $131 billion. Over the past decade, twenty percent of foreign direct investment to developing countries has gone to China. While these investment dollars generate significant economic benefits, they have also aroused concerns among Chinese leaders that they pose a potential threat to China's national security.

Responding to these concerns, on February 3, 2011, China announced a formal process for reviewing mergers and acquisitions (M&A) of domestic companies by foreign investors for national security implications. Theories abound among commentators as to China's motivations in announcing a new national security review mechanism. Some analysts have expressed concern that China will use the review process to make it increasingly difficult for foreign investors, especially those from countries that have traditionally restricted Chinese investment in their own economies, to carry out M&A transactions in China. But this Note demonstrates, though historical analysis and a comparison of the U.S. and Chinese systems, that China merely seeks to clarify its investment regulations and that investors will benefit from this development. Although the Chinese system is far from perfect, it will at least systematize what has been, until now, an ad-hoc review process.


INTRODUCTION

I. CHINA'S GRADUAL, INCREMENTAL DEVELOPMENT OF A NATIONAL
SECURITY REVIEW SYSTEM

   A. The National Security Review Has Existed for Years, and Its
   Evolution
Has Been Shaped by Genuine Economic Security Concerns

1. The Journey Towards a Formal National Security Review Begins:
From the 2003 Interim Provisions Through the 2008 Anti
Monopoly Law

2. China Takes the Final Step in 2011: From the State Council's
Circular Six Through MOFCOM's Clarifying Regulations

   B. China's Past Responses to Prior Investments Show that Its
   Government
Has Been Primarily Motivated by a Desire to Protect Its Economic and
Security Interests

   C. As an Extension of Existing National Security Review Law, the New
Rules and Regulations Will Bring Greater Predictability and
Transparency to the System

II. CHINA'S NATIONAL SECURITY REVIEW AND CFIUS: CUT FROM THE SAME
CLOTH

   A. A Brief Introduction to CFIUS

   B. Comparison Between CFIUS and China's New Mechanism

      1. Review Bodies

      2. National Security Review Process

      3. Sectors of Focus

      4. Transactions Subject to Review: Covered Transactions and
      Foreign
Control

      5. Criteria for Evaluation

      6. CFIUS in Practice--And What It May Tell Us About the Chinese
System

III. AMBIGUITIES OF CHINA'S NATIONAL SECURITY SYSTEM: IMPLICATIONS
FOR INVESTORS, AND RECOMMENDATIONS TO IMPROVE THE LAW

   A. Additional Delays for Investors

   B. Uncertainty Regarding Retroactivity

   C. Complex Relationship with Existing Investment Regulations and
Reviews

   D. Broad Definition of Industry Sectors and Transaction Types
   Triggering
Review

   E. Anti-Circumvention Principles
CONCLUSION

APPENDIX A: CHINA'S NATIONAL SECURITY REVIEW PROCESS

APPENDIX B: RESULTS OF CFIUS NOTIFICATIONS, 1988-2010

APPENDIX C: FLOWCHART ILLUSTRATING CFIUS REVIEW PROCESS


INTRODUCTION

Foreign direct investment in China has been a bright spot in the midst of a global recession. The economic powerhouse attracted a record $244 billion in foreign direct investment in 2010, up more than eighty percent from the previous year's total of $131 billion. (1) Over the past decade, twenty percent of foreign direct investment to developing countries has gone to China. (2) While these investment dollars generate significant economic benefits, they have also aroused concerns among Chinese leaders that they pose a potential threat to China's national security.

Responding to these concerns, on February 3,2011, the General Office of the State Council, China's highest executive body, announced a formal process for reviewing mergers and acquisitions (M&A) of domestic companies by foreign investors for national security implications. (3) The announcement, commonly known as Circular Six, (4) was followed in March and August of 2011 by clarifying departmental rules released by China's Ministry of Commerce (MOFCOM). (5)

Theories abound among commentators as to China's motivations and timing in announcing a new national security review mechanism. What drove the State Council's decision--and why did it take action now? One commentator has pointed out the "hardly coincidental timing" that China's announcement of Circular Six came within days of when the United States' national security review body-the Committee on Foreign Investment in the United States (CFIUS)--advised Huawei, a major Chinese technology company, to divest assets it had recently acquired from a U.S. company due to potential negative implications for U.S. national security. (6) Indeed, China has seen many high-profile deals fail because of other countries' national security concerns regarding Chinese acquisitions of their domestic firms in strategic sectors. Although the new provisions were in the works long before CFIUS's Huawei announcement, some analysts have expressed concern that the timing of the announcement evinces China's retaliatory intent. (7)

As this Note will show, however, the history behind China's national security review mechanism indicates that it was primarily motivated by a desire to create a viable and transparent security review system to protect its economic security interests rather than to retaliate against other countries. Moreover, the announcement of a formal mechanism should hardly be a surprise to the investment community, given that earlier versions of a national security review have already made several appearances in Chinese legislation since 2003. (8) In Part I, this Note will explain why retaliatory motives are unlikely to be the driving force behind the evolution of China's national security review mechanism over the past decade. Instead, China was motivated by growing concerns about the absence of strong national and economic security policies to protect its interests.

The resemblance of China's national security review mechanism to that of its U.S. counterpart, CFIUS--which has been active for decades and is well known in the investment community--bolsters this Note's argument that China is motivated by a desire to build a sophisticated system that protects its security interests, not by retaliatory intent. To illustrate this point, Part II compares in detail the key features of the two systems. By adopting an already-functional system, and even opening up provisional rules to public comment, China has demonstrated its commitment to developing a workable process to strike the difficult balance between protecting security interests and encouraging investment.

Despite China's efforts to establish a functional system largely based on the CFIUS model, China's national security review mechanism, as analyzed in Part III, still has some remaining ambiguities and uncertainties due to vague provisions in the new rules. This part also discusses implications of these deficiencies for foreign investors. This Note concludes by offering recommendations to the Chinese government to improve and further clarify the law.

I. CHINA'S GRADUAL, INCREMENTAL DEVELOPMENT OF A NATIONAL SECURITY REVIEW NYSTEM

The history behind China's national security review for foreign M&A activity demonstrates that Circular Six was hardly a knee-jerk reaction to recent events. Indeed, China's rules and regulations in this area have been evolving for nearly a decade, and the latest announcement presents the most detailed explanation of the review process that the government has offered to date. If anything, the new rules and regulations should be understood as extensions of existing law, bringing transparency and clarity to the national security review process.

Nonetheless, some critics have pointed out China's timing in announcing its new procedure. (9) The government issued Circular Six within days of CFIUS's recommendation to the prominent Chinese high-tech company Huawei that it voluntarily divest assets it recently acquired from U.S. tech company 3Leaf Systems; otherwise, President Obama would order Huawei to do so. (10) MOFCOM publicly criticized CFIUS afterward, emphasizing that "the acquisition of 3Leaf's technology assets is a normal business activity of Huawei ... and we regret" the decision. (11) A MOFCOM spokesman even went so far as to assert that "[i]t's clear that there are many cases where the U.S. is using a security review to refuse" Chinese investment. (12)

Huawei's attempted acquisition of 3Leaf's assets is not an isolated example: China is no stranger to seeing its companies face political pressure from other governments as they try to acquire foreign companies. (13) Huawei, run by a former Chinese military officer, similarly failed to acquire U.S. company 3Com in 2008, after political pressure from Congress led the company to withdraw its CFIUS application. (14) China National Offshore Oil Corporation (CNOOC) also withdrew its bid for U.S. oil company Unocal Corporation in 2005 prior to CFIUS review due to political pressure. (15) One researcher has explained that "[t]here is an implicit American prohibition on Chinese participation in advanced technology. ... because the U.S. doesn't trust the Chinese government." (16) This rejection of Chinese investment occurs beyond the United States as well. (17) Indeed, one could easily develop a story that China was sending a signal to the United States in announcing its own analogue to CFIUS. Some commentators have thus interpreted China's national security review as a vengeful move directed towards western countries. (18) Under this line of reasoning, Chinese companies are continually obstructed in expanding their investment footprint abroad, (19) and the Chinese government's new process directly targets countries that have impeded Chinese investors.

This theory, however, overlooks two critical points. First, the concept of a national security review has been appearing in the Chinese legal landscape since 2003, demonstrating that the formal national security review system is not an impulsive reaction to recent events. Tracing the evolution of the national security review mechanism, changes in the law occurred in response to increasing foreign direct investment and high-profile attempted acquisitions of Chinese companies. Second, recent foreign investment transactions show that China has long conducted informal national security reviews and has already demonstrated it will not abuse this power in a retaliatory manner. In light of these two points, the investment community should instead view the new rules and regulations as extensions of existing law that provide clarity to foreign investors.

A. The National Security Review Has Existed for Years, and Its Evolution Has Been Shaped by Genuine Economic Security Concerns

The idea of a national security review has appeared in Chinese law since 2003, and the latest rules and regulations simply clarify what many investors have wondered for years: how the review would actually be conducted. MOFCOM itself has stated that the rules are an extension of China's existing law. (20) While some details of the review process remain ambiguous, the new rules establish a clearer, more transparent system, and investors will benefit from a better understanding of the review process.

1. The Journey Towards a Formal National Security Review Begins: From the 2003 Interim Provisions Through the 2008 Anti-Monopoly Law

The evolution of China's national security review law demonstrates that its government was motivated by perceived threats to its economic security from foreign investment. The idea of a security review first appeared in 2003, mentioned briefly as part of a new Chinese anti-monopoly review (21) announced in the Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. (22) Under Article 19 of those provisions, if a government agency believes that "important factors [with respect to the transaction] exist which seriously impact market competition, the national economy, people's livelihood or state economic security," then an investor may be required to inform MOFCOM of the transaction. (23)

This timing of the emphasis on economic security is not surprising, given that China had recently acceded to the World Trade Organization, opening itself up to increasing intertwinement with the global economy. (24) One China-based lawyer noted that the 2003 Interim Provisions may have been promulgated to "guard against growth of foreign market share in the Chinese economy as a counterbalance to China's WTO market-opening concessions." (25) Another commentator flatly stated that the provisions are "aimed to control the market power caused by transnational corporations in Chinese markets." (26) Moreover, the provisions represented a shift in the government's focus away from being involved in technical details of a transaction towards long-term effects on economic security, the environment, and competition. (27)

Even after the passage of the 2003 Interim Provisions, commentators continued to call for stronger anti-monopoly regulations to counter the growing influence of foreign M&A in China. (28) A MOFCOM researcher even called the phenomenon of increasing foreign investment "merger mania," warning against its negative effects on China's economic security. (29) Similarly, a Chinese journalist cautioned in 2003 that "China ... lacks protective measures that can effectively prevent inappropriate mergers and acquisitions from undermining economic order in the country" and that unrestrained M&A activity could lead to foreign monopolies "that would restrain China's economic development." (30) Others feared economic security consequences including environmental degradation, harm to the interests of Chinese employees, and the loss of state-owned assets. (31)

The Chinese government shared these economic security concerns. In 2004, China's State Administration for Industry and Commerce released a report identifying foreign companies that restricted market competition in China, including: Microsoft (ninety-five percent Chinese market share), Tetra Pak (also ninety-five percent), and Eastman Kodak (fifty percent). (32) The report accused foreign companies of "using their dominant roles in technology, brand recognition and capital and management to suppress competitors and maximize profits from the Chinese mainland," and of "carr[ying] out sweeping mergers and acquisitions to absorb their major competitors." (33)

In spite of the 2003 Interim Provisions, investment inflows from abroad grew rapidly: From 2004 to 2005, foreign direct investment in China nearly doubled, increasing from $55 billion to $104 billion. (34) Moreover, according to the Chinese government, foreign M&A comprised less than five percent of China's total foreign direct investment before 2004, but reached nearly twenty percent in 2005. (35) The government's fear of foreign control of the Chinese economy was reflected in other pronouncements, such as China's announcement of a policy of "indigenous innovation" in 2006, including national plans to spur technological innovation by Chinese companies and reduce reliance on foreign enterprises for Chinese economic success. (36)

Criticism of rising foreign direct investment in China reached fever pitch in 2005, when the Chinese government struggled to handle the high-profile proposed acquisition of Xugong, a major construction company, by U.S. investment firm The Carlyle Group (Carlyle), (37) generating a public outcry. (38) In the end, Carlyle halted its efforts to acquire Xugong in 2008 after dealing with years of red tape from the Chinese government. (39) Illuminating the government's rationale for delaying the transaction, the Chinese media reported that Xugong was a "strategic national business." (40) As one Chinese newspaper reported, Xugong "is a market leader in China's machinery sector" and "[s]ome analysts had said China could lose its technology to foreign competitors if important firms like Xugong are sold to overseas companies," harming China's economic security. (41)

In light of these investment trends, and considering the government's handling of the Xugong deal, it is hardly surprising that China soon tightened its control over foreign direct investment. China made the concept of a national security review more concrete in 2006, replacing the 2003 Interim Provisions with Regulations on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors. (42) Article 12 of these new regulations provided for a national security review for foreign acquisitions if the domestic firm "involve[d] a key industry" or if the transaction "could have a material impact on the economic security of China," or "would result in the transfer of control over any well-known trademark or Chinese historical brand." (43) Indeed, one can see the imprint of the Carlyle-Xugong deal in the "well-known trademark or Chinese historical brand" provision. Despite this clarification, the national security review remained "poorly defined," and the new regulations therefore "caused significant unease in the [foreign direct investment] community," (44) which hoped that China would further clarify the new law. (45)

One year after the promulgation of the 2006 Regulations, China reaffirmed that it would conduct national security reviews for foreign investments in a new Anti-Monopoly Law. (46) Adopted by the Standing Committee of the National People's Congress in August 2007, the new law focused on protecting market competition through preventing monopolies. (47) Accordingly, if a transaction has a negative impact on competition, the Chinese government may attach conditions to the transaction to offset these negative effects, or even require an investor to divest its assets. (48) The law is not limited to acquisitions of or by Chinese companies; it also applies to acquisitions of foreign companies by foreign investors that may affect competition in China. (49)

One part of the law receiving considerable attention from the investment community was Article 31, which reaffirmed that China would conduct national security reviews for certain foreign acquisitions. At the time, discussion of Article 31, which was generally unpopular among foreign investors, focused on China's desire to protect domestic industry from foreign takeovers, with little discussion of retaliatory motivations. (50) Article 31 provides:


   Where a foreign investor participates in the concentration of
   business operators by merging or acquiring a domestic enterprise
   ... and the national security is involved, besides the examination
   on the concentration of business operators according to this Law,
   the examination on the national security shall also be conducted
   according to the relevant provisions of the State. (51)


China has vigorously contested that Article 31 indicated that the Anti-Monopoly Law would be discriminatory, (52) emphasizing that the concept of a national security review was not new. A Chinese news article translated and reproduced on the website of China's Embassy in the United States reads: "China has already established a basic national security check system for foreign mergers and acquisitions." (53) In other words, Article 31 only clarified that the Anti-Monopoly Law did not displace the existing national security review under the 2006 Regulations, which would occur alongside the anti-monopoly review. (54)

In passing the Anti-Monopoly Law, China also emphasized that a national security review was warranted because "[qoreign companies have begun to acquire major state-owned enterprises or companies with famous brands, arousing concerns about economic security." (55) Further justifying the law, Xinhua News Agency, a government-owned media outlet, cited rapidly increasing foreign investment as one of the drivers behind the law's passage. (56) Thus, as the national security review evolved from 2003 through 2007, commentary from both the government and the investment community focused on China's aspiration to protect its economic interests, not a desire to provide other countries with a taste of their own medicine.

2. China Takes the Final Step in 2011: From the State Council's Circular Six Through MOFCOM's Clarifying Regulations

Against this backdrop, the 2011 announcement of a formal national security review mechanism in Circular Six was not only foreseeable, but expected. In fact, in announcing the passage of the Anti-Monopoly Law in 2007, Xinhua News Agency had reported that more detailed regulations on the review process would be announced by 2010. (57)

Thus, China has intended for years to provide greater detail to investors regarding the national security review process. The new rules and regulations therefore simply provide foreign investors with the clarity they long sought regarding the national security review mechanism. (58) As with past regulations, Circular Six indicates its goals are to protect Chinese economic security. The Circular seeks to "guide the orderly development of mergers and acquisitions" and "safeguard national security," given increasing foreign investment. (59) The government's observation of increasing investment is indeed grounded in reality:

Foreign direct investment into China has quintupled following China's accession to the World Trade Organization, from $44 billion in 2001 to $220 billion in 2011. (60)

According to the Circular, China's National Development and Reform Commission (NDRC) and MOFCOM will jointly lead the national security review process. (61) Building upon the principles outlined in Circular Six, MOFCOM provided more detail on the new process on March 4, issuing Announcement Eight. (62) Demonstrating its willingness to consider outside input, MOFCOM accepted public comments until April 10 for consideration before issuing final rules in August 2011. (63)

Incorporating feedback from public comments, MOFCOM issued final rules on August 25 in Announcement Fifty-Three, (64) providing minor changes. (65) As will be further discussed in Part II, the features of the new system demonstrate China's willingness to play by existing rules, closely mirroring well-known processes and provisions from the U.S. national security review system.

B. China's Past Responses to Prior Investments Show that Its Government Has Been Primarily Motivated by a Desire to Protect Its Economic and Security Interests

Further supporting the argument that China was motivated by economic security concerns rather than retaliation, China has long had the ability to conduct informal national security reviews during the M&A approval process, (66) and there is little evidence that China has exercised this authority in a retaliatory manner. It is unlikely that 2011's announcement of a national security mechanism indicates a major shift in Chinese policy.

Indeed, examples such as the failed Carlyle-Xugong deal demonstrate that China has, at least informally, been reviewing foreign acquisitions for security implications for some time. As discussed above, the government's actions were grounded in national security concerns--or at least in "economic security" concerns. (67) Similarly, China intervened in two attempted foreign acquisitions of Chinese steel companies after the passage of the 2006 Regulations. (68) In 2007, government authorities failed to approve European-based ArcelorMittal's acquisition of a majority share in China Oriental Group, a Chinese steel company.69 Two years later, authorities again failed to provide antimonopoly approval in time for the acquisition of another Chinese steel company, Delong Holdings, by Russian steel company Evraz Group. (70) Although MOFCOM did not provide a reason for failing to approve the Evraz-Delong transaction, it is well known that China has consistently recognized steel as a critical strategic sector for the Chinese economy. (71)

Moreover, there is little reason to believe that China will suddenly regularly intervene in foreign investment transactions when it has long possessed the ability to do so through other means and has exercised that ability prudently. For example, the results of anti-monopoly reviews indicate that China has generally exercised restraint in restricting foreign M&A transactions. Over four years, the government has attached conditions to approval for only seven transactions, and only one deal has been rejected. If we assume that the Chinese government has also been considering national security during these approval processes, as required by Article 31, then these statistics provide hope that China will similarly refrain from abusing its formal national security review to effectuate retaliatory ends. MOFCOM's published anti-monopoly review results from 2008-2011 are below: (72)


Year        Cleared Without   Cleared With   Rejected
            Conditions        Conditions

2008        16                1              0
2009        75                4              1
2010        116               1              0
2011 (73)   118               1              0
Total       325               7              1


MOFCOM has thus cleared ninety-eight percent of anti-monopoly review applications with no conditions. According to MOFCOM's Anti-Monopoly Bureau, it has approved a higher percentage of cases without conditions than its European counterpart. (74) The only blocked transaction that has raised eyebrows within the foreign direct investment community was Coca-Cola's failed bid to acquire Huiyuan Juice Group in 2009. (75) Although the deal was invalidated on anticompetition grounds, this rationale has been criticized given that the acquisition would have given Coca-Cola only a twenty percent share of the Chinese juice market. (76)

Where anticompetition grounds fail to explain the government's reaction, national security concerns may help to clarify China's true motives. China's definition of "national security" is not limited to the defense sector: it also includes "economic growth," "social order," and "the R&D capacity of key technologies" related to national security. (77) Although this definition was not formally part of Chinese law until 20 11, it likely codifies factors that the government has been using for years. Under this broader definition, the Chinese government could have found the acquisition of a national champion in the juice industry (78) to be damaging to "economic growth." Indeed, one Chinese economics professor surmised that "the review ... did not just focus on individual benefits, but stressed the overall benefits of the whole society." (79) Or, the government may have voided the transaction in light of its effects on "social order" given the public outcry against the acquisition of a well-known national brand by a large foreign corporation. (80) Thus, even if the government has not conducted formal national security reviews in the past, examples like Carlyle-Xugong, the rejected steel deals, and Coca-Cola-Huiyuan demonstrate that informal reviews have long been taking place. As existing reviews have not been employed in a retaliatory manner, there is little reason to believe that China will begin employing national security reviews in this way.

C. As an Extension of Existing National Security Review Law, the New Rules and Regulations Will Bring Greater Predictability and Transparency to the System

Given that China has long been informally conducting national security reviews, several commentators have welcomed the development of a concrete procedure, emphasizing that it will bring transparency to the approval process. (81) Although China retains wide discretion in implementing the review, the new rules offer investors a better idea of what the government will consider, putting them on notice as to the potential risks of a transaction. Moreover, the fact that Chinese authorities have not yet seriously abused their national security review power suggests they will exercise similar restraint under the formal national security review process. (82)

Indeed, the Chinese government has stressed the transparency that the review system will bring. On March 7, MOFCOM Minister Chen Deming emphasized that the review "by no means indicates any change for China's commitments on further opening up to the rest of the world," and would "help create a more transparent and workable legal framework." (83) The NDRC, co-leader of the national security review's Joint Conference with MOFCOM, similarly emphasized that the procedure is not a protectionist tool designed to make investing in China more difficult. (84)

Given that Chinese authorities are not required to publish information about completed national security reviews, investors will have a difficult time learning from past reviews. Recently, however, the government completed its first national security review since the final rules went into effect, approving Nestle's acquisition of Chinese company Yinlu Food Group. (85) The acquisition was significant: Nestle's proposed transaction included the purchase of a sixty percent stake of the company, whose 2010 annual sales reached 5.46 billion yuan ($854 million). (86) The approval of this transaction is a positive first signal to investors that authorities will continue to allow foreign direct investment to flourish in China.

II. CHINA'S NATIONAL SECURITY REVIEW AND CFIUS: CUT FROM THE SAME CLOTH

Regardless of the Chinese government's motivations, the fact remains that in implementing a national security review, China is simply establishing a system that already exists in several other countries including the United States, Canada, and Australia. (87) China's system is similar to one of the best-known national security review processes, CFIUS, and is therefore hardly an outlier among national security review processes. (88) While these resemblances could be read as bolstering the case that China is trying to "get back" at the United States and other countries, these similarities may actually underscore China's effort to develop a workable national security review process based on existing systems that are well known and recognized by investors. China's determination to consider international investment norms, for example, was demonstrated in MOFCOM's acceptance of public comments following Announcement Eight, and the incorporation of some of these comments into Announcement Fifty-Three. The fact that China's new rules simply clarify its existing national security review, and that China did so by mirroring a well-known system, suggests that China was not motivated by impulsive desires to make foreign investment difficult.

As the national security review system for the world's largest economy, CFIUS is well known within the foreign investment community. Given CFIUS's prominence, several commentators have already noted the similarities between CFIUS and the Chinese mechanism.89 Below, after offering a brief overview of the U.S. system, I provide a detailed comparison discussing CFIUS and its Chinese analogue. (90) In so doing, I highlight the similarities and differences between these two processes, and what these may mean for investors in practice. The many similarities suggest that China, in developing its own process, sought to imitate a system that investors were already familiar with, enabling consistency across national security review regimes.

A. A Brief Introduction to CFIUS

CFIUS reviews the national security implications of certain foreign takeovers of U.S. companies. Formally established in 1975 by President Gerald Ford through an Executive Order, (91) CFIUS operates under section 721 of the Defense Production Act of 1950. (92) The President officially received the authority to suspend and prohibit foreign investment transactions in 1988 with Congress's passage of the Exon-Florio amendment to the Defense Production Act, and the President delegated the investigative part of this authority to CFIUS. (93)

After two decades of CFIUS operation, the U.S. Congress passed the Foreign Investment and National Security Act of 2007 (FINSA) (94) to strengthen CFIUS's ability to review and restrict transactions. This legislation broadened the definition of national security and permitted any CFIUS member to initiate a review. FINSA has been interpreted as a congressional statement that CFIUS had actually been too lenient in reviewing transactions. (95)

Reporting a foreign investment transaction to CFIUS is primarily voluntary. Through 2010, CFIUS has received more than 2,000 notices from foreign investors, (96) and the President has only once officially prohibited a transaction. (97)

B. Comparison Between CFIUS and China's New Mechanism

1. Review Bodies

Chaired by the U.S. Secretary of the Treasury, CFIUS is an interagency committee comprising the heads of nine federal agencies: the Department of the Treasury, Department of Justice, Department of Homeland Security, Department of Commerce, Department of Defense, Department of State, Department of Energy, Office of the U.S. Trade Representative, and the Office of Science and Technology Policy. (98) CFIUS also has five observing members as well as two non-voting ex officio members. (99) For each CFIUS review, the Treasury Secretary, as Chair, designates a lead agency as appropriate. (100) The President or Chair may add relevant members to CFIUS on a case-by-case basis. (101)

At first glance, it appears that the Chinese Joint Conference charged with conducting the national security review may have been modeled after CFIUS's interagency committee structure. As in CFIUS, an agency focused on economic matters--MOFCOM--co-chairs the Joint Conference, reinforcing the message that China seeks to continue to promote inbound investment. Indeed, in the United States, having the Treasury Secretary lead CFIUS (as opposed to the Secretary of Defense, for example) sends a message to investors that CFIUS remains sensitive to promoting an open investment environment. (102)

With the Chinese system, the role of other agencies is less well defined, as Circular Six only provides that "pertinent departments" beyond NDRC and MOFCOM will be Joint Conference members. (103) This suggests that the Joint Conference's composition may change from transaction to transaction, (104) unlike CF1US's defined list. Despite the wording of Circular Six, it is possible that some agencies may nevertheless become frequent members of the Joint Conference, regularly contributing their views. (105) If certain agencies do not become regular players, however, it will be interesting to see how this affects the quality of the review process. On one hand, a ministry's rare or occasional involvement in the process may hinder its development of expertise in responding to national security reviews. On the other hand, if a ministry is only called to participate when it is likely to have relevant knowledge, this may present a more streamlined process than CFIUS's, by only calling upon agencies who are likely to have valuable input.

2. National Security Review Process (106)

Prior to filing a notice, a foreign investor can request a pre-filing consultation with CFIUS. (107) CFIUS, however, cannot issue advisory opinions: Instead, the consultation "aid[s] [CFIUS's] understanding of the transaction and provide[s] an opportunity for [CFIUS] to request additional information to be included in the actual notice." (108) Unlike China's pre-filing consultation, CFIUS's consultation does not appear to be limited to procedural matters. China's hesitance to engage foreign investors in substantive discussions is understandable, though, given that the system is new and MOFCOM itself may not yet know exactly how the review process will operate.

The CFIUS process can begin in one of two ways: (1) the foreign investor can voluntarily file a notice with CFIUS, (109) or (2) any CFIUS member can unilaterally initiate a review. (110) This is not unlike the Chinese system, which requests voluntary applications but can also be triggered by third parties. The category of third parties who can initiate a review under the Chinese system, however, is much broader, including "national industry association[s]" or "enterprise[s] in the same industry or upstream or downstream enterprise[s]." (111) This extensive third-party provision may reflect Chinese concems about enforcement, encouraging investors to report investments voluntarily. In the end, though, the practical consequences of this difference are insignificant. Even if no CFIUS member agency recognizes initially that a transaction may fall under CFIUS's purview, a competitor could easily bring it to a member agency's attention--or to Congress' s. (112)

Once CFIUS initiates the review process, in most cases it has thirty days to conduct an initial review to determine the potential national security implications of the transaction. (113) During this period, CFIUS members can request additional information from investors as needed. (114) If CFIUS finds that the transaction falls within one of the four investigation-triggering categories, it initiates a forty-five day investigation. (115) These categories include: (1) "the transaction threatens to impair U.S. national security and that threat has not been mitigated"; (116) (2) "the transaction is a foreign government-controlled transaction"; (3) "the transaction results in foreign control over critical infrastructure that ... could impair national security, if that impairment has not been mitigated"; and (4) "the lead agency recommends, and CF1US concurs, that an investigation be undertaken." (117) If CFIUS is satisfied after the thirty-day review that none of these criteria are met, the review is closed and the investor may proceed.

Like CFIUS, MOFCOM provides for a two-step review process including a shorter general review and a longer, in-depth special review. Although the CFIUS investigation-triggering factors appear more specific than those provided by MOFCOM (which only requires that the transaction "may affect the national security" (118)), the inclusion of "catch-all" provisions in the CFIUS regulations reduces any benefits to foreign investors that such specificity may provide. Indeed, CFIUS's second and third categories only indicate when an investigation will be mandatory. The vagueness of the first and fourth categories does not help investors, other than informing them that any agency believing the transaction merits an investigation can indeed trigger an investigation. Therefore, the only major difference between the two systems regarding the triggering of the second review round is that CFIUS outlines some situations in which investigation is mandatory, while the Chinese system does not.

If CFIUS finds through the investigation that the transaction indeed poses national security concerns, it can work with the investor to negotiate a mitigation agreement to address threats to national security. (119) This is similar to China's mitigation system under the Anti-Monopoly Law, which enables the government to provide a conditional approval to investors. (120) Similarly, under MOFCOM's rules, an investor failing to pass the national security review may revise and resubmit its application; alternatively, MOFCOM may take "effective measures" to reduce the threat posed by the transaction. Thus, as does CFIUS, the Chinese mechanism provides an opportunity for investors to proceed with the transaction if modified to the government's satisfaction. This flexibility on the part of the Chinese government may have been adopted to mirror the U.S. system; it also supports the government's assertion that China is not trying to close its doors to foreign investment. Without any concrete examples of such measures, however, it is difficult to determine how they will be employed in practice. It is possible that conditional approvals may prove to be so draconian that a company will forgo the transaction entirely, producing the same result as if the Joint Conference rejected the transaction outright.

If a transaction's security threats cannot be mitigated and CFIUS--even only one agency--believes the transaction should be suspended or prohibited, CFIUS refers the transaction to the President for a final decision. (121) The President has fifteen days to decide whether to take action. (122) Similarly, China's process designates the State Council--the highest administrative body--as the final decisionmaker if Joint Conference members do not reach a consensus. (123) Unlike CFIUS, however, MOFCOM does not bind the State Council to a timeline for final decision. (124) Even before referring the decision to the final arbiter, China's process already can last significantly longer than the U.S. process (115 business days--or more than 160 total days--versus 75 total days). (125) This timing difference will be further aggravated if the State Council consistently takes longer than the U.S. President's fifteen days to reach a final decision.

But like other differences between the two processes, it is unclear whether the divergence will have any impact in practice, given the likely rarity of such referrals. From 1988 through 2010, CFIUS has only referred fourteen transactions to the President--or less than one percent of the 2,154 notices received. (126) Similarly, if the discretion exercised by MOFCOM under the Anti-Monopoly Law is any guide, it is unlikely that the Joint Conference will frequently refer decisions to the State Council. Moreover, the Joint Conference has the power to reject the transaction itself, unlike in the United States, where only the President can suspend or prohibit a transaction. Thus, under China's system, referral to the State Council only occurs in the case of disagreement among Joint Conference members, limiting the number of cases when an investor would be subject to the open-ended timeline of a State Council decision.

Lastly, one key feature of the CFIUS process is the safe harbor it provides--once a transaction passes CFIUS review, it is immunized from future reviews (127) unless the investor submitted false or misleading information or breached a mitigation agreement. (128) Investors who do not file a notice with CFIUS, however, expose themselves to CFIUS-initiated review at any time, even if the transaction has been completed. (129) The safe harbor provision therefore incentivizes voluntary notice filing.

China's review system provides no explicit safe harbor. Such a provision may not be necessary, however, given China's enforcement mechanism created through its third-party initiation provision discussed above. Even though a foreign investor may not be guaranteed safe harbor at the review's end, an investor whose transaction may be subject to a national security review has a strong incentive to report a transaction voluntarily before a competitor notifies MOFCOM. Moreover, Announcement Fifty-Three could reasonably be construed as providing an implied safe harbor, as it specifies that a transaction that has passed the national security review may become subject to another review if the transaction undergoes major changes in ownership or business activities. (130) If Chinese authorities could reopen transactions at will, such a provision would be unnecessary. Thus, the absence of an explicit safe harbor provision in the Chinese rules is unlikely to reduce a foreign investor's likelihood of submitting an application.

3. Sectors of Focus

Unlike the Chinese rules and regulations, CFIUS's authorizing legislation and regulations do not list the sectors within its purview. China has defined the relevant industry sectors as the military industry, "key agricultural products, key energy or natural resources, key infrastructure facilities, key transportation services, and key technologies and manufacturing of equipment." (131)

CFIUS, on the other hand, "does not focus on any one U.S. business sector or group of sectors." (132) The Treasury Department's Guidance Concerning the National Security Review Conducted by the Committee on Foreign Investment in the United States' provides important clues, however, highlighting sectors that "have presented national security considerations," including: government contractors, often in the defense, information technology, telecommunications, energy, natural resources, and industrial sectors; or non-contractors in the energy, transportation, or finance sectors. (133) Moreover, as discussed below in Subpart II.B.5, CFIUS is required to consider a transaction's impact on "critical infrastructure, including major energy assets," "critical technologies," and "international technological leadership." (134) Thus, although CFIUS does not explicitly define sectors of focus, these clues indicate that China's sector list closely tracks those that CFIUS has traditionally reviewed.

4. Transactions Subject to Review: Covered Transactions and Foreign Control

The U.S. Congress has adopted a broad definition of "covered transactions" that may be subject to CFIUS review, encompassing: "any merger, acquisition, or takeover ... by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States."135 The Department of Treasury's regulations further state that the following are considered "covered transactions":

1) "A transaction which, irrespective of the actual arrangements for control provided for in the terms of the transaction, results or could result in control of a U.S. business by a foreign person."

2) "A transaction in which a foreign person conveys its control of a U.S. business to another foreign person."

3) "A transaction that results or could result in control by a foreign person of any part of an entity or of assets, if such part of an entity or assets constitutes a U.S. business."

4) "A joint venture in which the parties enter into a contractual or other similar arrangement, including an agreement on the establishment of a new entity, but only if one or more of the parties contributes a U.S. business and a foreign person could control that U.S. business by means of the joint venture." (136)

The regulations also describe several scenarios that are not covered transactions, including: greenfield investments; (137) stock splits that do not result in a change in control; "passive investment" transactions resulting in less than ten percent control of voting rights for the foreign investor; and others. (138)

A threshold question for investors, then, is what constitutes foreign "control" of a U.S. business. Again, the Treasury regulations adopt a broad definition:


   The term control means the power, direct or indirect, whether or not
   exercised, through the ownership of a majority or a dominant
   minority of the total outstanding voting interest in an entity,
   board representation, proxy voting, a special share, contractual
   arrangements, formal or informal arrangements to act in concert,
   or other means, to determine, direct, or decide important matters
   affecting an entity. (139)


The Treasury Department then lists ten "important matters" that, if directed by a foreign investor, may lead CFIUS to find that the investor "controls" the U.S. business. (140) The department has emphasized, however, that "CFIUS will continue to consider all relevant facts and circumstances, rather than applying a bright line test to determine whether a transaction results in foreign control." (141)

As evidenced by these broad U.S. definitions, the question of whether a transaction is subject to CFIUS review focuses on a transaction's effects rather than its technical details. And just as the United States refuses to adopt a "bright line test" for foreign control, MOFCOM similarly stated in Announcement Fifty-Three that "authorities should judge whether [a] transaction is subject to the security review based on the essential content and actual impact of the transaction" and that "[f]oreign investors shall not avoid M&A security review though any means." (142) Both governments have thus made clear that investors will not be able to evade a review on technical grounds alone, ensuring that they have broad jurisdiction over potentially questionable deals. (143)

One key difference between the Chinese and U.S. regulations, however, is that CFIUS can only review a transaction if the foreign investor obtains "control" over a U.S. business. For China, however, there is one sector where "actual control" is unnecessary: the defense sector. (144) But, this distinction may have little significance in practice. Given the U.S. government's emphasis on its ability to define "control" as it sees fit, CFIUS may choose to apply a lesser standard of "control" to any transaction involving the military or defense sectors.

The Huawei example demonstrates the flexible approach that CFIUS has adopted with respect to its own regulations. Huawei claims that it did not notify CFIUS of its acquisitions of 3Leaf's assets as the assets did not "constitute[] a U.S. business" as specified in the Treasury regulations. (145) CFIUS, however, interpreted its regulations broadly, giving it jurisdiction over this $2 million asset purchase in the information technology sector. (146) Thus, in practice, both countries preserve significant flexibility in exercising jurisdiction over potentially sensitive transactions that, on their face, may not fall within the purview of a national security review.

5. Criteria for Evaluation

CFIUS's authorizing statute and corresponding Treasury Regulations emphasize that the Committee may only consider questions of national security in evaluating transactions. (147) Under 50 U.S.C. App. [section] 2150(f) (2006), CFIUS and the President should consider eleven factors in determining a transaction's potential effects on national security, paraphrased below:

1) Domestic production needs relating to national defense;

2) The ability of domestic industries to meet national defense requirements;

3) Control of domestic industry by "foreign citizens," affecting U.S. capability "to meet the requirements of national security";

4) Potential effects "on sales of military goods, equipment, or technology to any country" that "supports terrorism"; is "a country of concern" with respect to proliferation of missiles or chemical or biological weapons; is a "potential regional military threat" to U.S. interests; or is listed on the "Nuclear Non-Proliferation-Special Country List";

5) Potential effects on U.S. "international technological leadership in areas affecting United States national security";

6) "[N]ational security-related effects" on U.S. "critical infrastructure," such as major energy assets;

7) "[N]ational security-related effects" on U.S. "critical technologies";

8) Whether the transaction is a "foreign government-controlled transaction" as defined in the statute;

9) If "foreign-government controlled," the investor country's record in nonproliferation, counterterrorism, and export controls;

10) U.S. long-term needs for energy sources and other critical resources; and

11) Other factors "as appropriate."

While some of these factors have clear national security implications, others such as energy and international technological leadership do not fall within the traditional purview of "national security." For such factors, Congress was careful to include phrases such as "national security-related effects" to remain true to CFIUS's mission of focusing only on national security.

Compared to CFIUS's factors, China's criteria for national security are broader, encompassing the "national defense," "national steady economic growth," "the basic living social order," and "the R&D capacity of key technologies involving the national security." (148) China will therefore have considerable flexibility in implementing its new national security review policies. (149) Indeed, economic protectionism will likely play an explicit role in national security reviews, (150) while the United States has specifically rejected such considerations. (151) In fact, the Treasury has emphasized that "CFIUS members recognize [the] inherent link between national security interests and U.S. economic prosperity and that U.S. prosperity is furthered through foreign investment in the United States." (152) Thus, it is clear that China intends to have broad discretion to prevent the consummation of certain transactions--far broader than that possessed by U.S. authorities. As discussed above, however, this is not a major shift from China's existing investment review practices, and at least provides notice to foreign investors regarding the criteria the government will consider.

6. CFIUS in Practice--And What It May Tell Us About the Chinese System

While it may be easy to believe that CFIUS is an instrument of economic protectionism, this overlooks CFIUS's complex history. Indeed, CFIUS may even have acted at times as a bulwark against protectionism. When President Ford introduced CFIUS in 1975, he was heading off potential congressional action to limit the ability of Middle Eastern investors to invest in U.S. assets. (153) And when CNOOC's attempted acquisition of Unocal in 2005 met political resistance, it was Congress, not CFIUS, that derailed the deal. (154) In another transaction that created a political firestorm, Dubai Ports World's 2006 acquisition of a British company that owned ports in the United States, CFIUS had already approved the deal. (155) Following significant pressure from Congress, Dubai Ports World announced in 2009 that it would transfer the U.S. ports it owned to a U.S. entity. (156) It was in response to deals like these that Congress passed the Foreign Investment & National Security Act (FINSA) in 2007, making it more difficult for foreign deals to obtain CFIUS approval. (157) From 2008, one year after F1NSA's passage, through 2010, the number of CFIUS investigations has skyrocketed: eighty-three transactions reached the investigation stage (twenty-seven percent of notified transactions), compared to thirty-seven investigations from 1988 through 2007 (two percent of notified transactions). (158) Although CFIUS has not referred a deal to the President since 2006, (159) this may be a result of the deterrent effect that CFIUS plays, discouraging foreign investors from pursuing sensitive deals.

What can the CFIUS story tell us about China's national security review mechanism? First, CFIUS serves as a reminder that a national security review is not necessarily a negative development for foreign investors. Just as CFIUS may have counteracted restrictive congressional legislation in the United States, so China's system may provide domestic assurance that deals will be consistently vetted, potentially reducing the intervening role that politics may play. Moreover, the new system adds transparency to foreign investment review in China, replacing the currently ad hoc system. The fact that China not only modeled its system after the well-known CFIUS process, but also solicited public comment, also signals that China sought to create a functional national security review that will still enable foreign investment to flourish.

Like CFIUS, the Chinese system may nonetheless have a deterrent effect that will not be directly visible in the results that the national security review will produce. Thus, even if ultimately foreign transactions enjoy high approval rates under the review, this tells us nothing about foreign investors that may have avoided sensitive deals. Moreover, as with CFIUS, "rejection" of a deal may not always come through formal rejection. Like CFIUS's announcement to Huawei that it would refer the deal for presidential decision if Huawei would not comply with CFIUS's request, so too Chinese authorities may discourage investors from pursuing a deal without formally rejecting the application. Thus, official results will only provide part of the picture of the true effect that the new Chinese national security review will produce.

III. AMBIGUITIES OF CHINA'S NATIONAL SECURITY SYSTEM: IMPLICATIONS FOR INVESTORS, AND RECOMMENDATIONS TO IMPROVE THE LAW

Even if China's creation of a national security review process was motivated by valid concerns about its own economic security, this does not mean the process will be painless for investors. Opinions vary as to whether China's new national security review will affect its openness to investment, and given that the Chinese government does not make publicly available the results of these reviews, (160) it may remain difficult for some time to answer this question. Nonetheless, it remains important for investors to be aware of and comply with these new rules and regulations. It has been suggested that Huawei received harsh treatment from CFIUS because it did not voluntarily report its acquisition of 3Leaf's assets; (161) similarly, foreign investors may risk unfavorable results in China if they fail to seek necessary approvals. Thus, in this Part, I highlight implications of the national security review for foreign investors seeking to pursue M&A transactions in China, focusing on potential problems the law will generate, as well as areas of uncertainty in implementation and enforcement.

A. Additional Delays for Investors

Even if the national security review process will not be employed as an instrument of economic protectionism, it will nonetheless add further delays to an M&A approval process that is already difficult and time-consuming for investors. (162) As highlighted above, the approval process can take more than five months. Accordingly, several law finns have advised clients to expect longer timelines in obtaining approvals for M&A transactions. (163)

Even if the Joint Conference completes reviews quickly and efficiently, the process nonetheless creates an additional layer of review for investors, (164) as it requires investors to spend substantial time and energy in preparing and planning the minutiae of a transaction before they even know whether the government will approve the deal. (165) All of this planning will further add to the timeline and resources that investors must build into investment decisions.

B. Uncertainty Regarding Retroactivity

Another major ambiguity in the new rules is their silence as to whether they apply to pending or even previously approved transactions. (166) Thus, companies who have recently completed M&A transactions should clarify with counsel or MOFCOM whether they should submit an application for a formal national security review even if their transactions were approved before the new rules existed. On the one hand, one law firm has commented that "[t]here is no suggestion that this power is limited to reviewing future transactions," (167) implying that Chinese authorities retain the power to evaluate completed transactions. On the other hand, given that an informal national security review existed prior to the 2011 rules and regulations, the government would have likely blocked or at least substantially delayed a previous transaction if it posed significant national security risks. Thus, even if the government officially retains the power to reopen approved transactions, exercise of such a power is unlikely to occur frequently.

Related to this question of retroactivity for completed transactions is the question of whether transactions that pass the national security review in the future can be re-opened at a later date. For example, although MOFCOM rules specify that subsequent changes to an approved transaction may retrigger a national security review, it remains unclear whether the government has the power to actually unwind a completed transaction. (168) Similarly, one law firm has noted another potential retroactivity problem: that "[t]heoretically, MOFCOM may reopen the review process after the 15 working days of 'no reply' period has lapsed." (169) Moreover, there is no deadline for third-party recommendations that MOFCOM undertake a review, (170) It may therefore be possible that competitors can submit a request for a review even if MOFCOM previously decided, based on an investor's own submissions, that review was not needed.

Again, it is possible that none of these retroactivity issues actually exist. Until Chinese authorities clarify these potential problems, however, investors must remain vigilant to the possibility of re-opened transactions, including these considerations in their risk analyses.

C. Complex Relationship with Existing Investment Regulations and Reviews

Although the rules suggest, and commentators generally agree, (171) that the national security review process is distinct from the existing anti-monopoly review, the interaction between the two processes may become complex. First, the new review adds an element of strategic decisionmaking for investors, (172) On the one hand, while investors can pursue both reviews at once, it may make more sense to first focus on one review, as there is little point in proceeding with both if a transaction will fail one or the other. On the other hand, waiting for one approval to be completed before pursuing another will add further delays to the overall approval process.

Second, it will be interesting to see how local commerce departments handle their responsibility to notify MOFCOM of transactions that may be subject to a national security review. (173) The frequency with which they decide to exercise this authority will affect foreign investors significantly. The broad definitions in current regulations mean that not only investors will have difficulty determining when to file a national security review application--local commerce departments will face these problems, too. These local commerce departments may end up overreporting transactions, flooding MOFCOM with applications for transactions unlikely to affect Chinese national security. One law firm has also discussed the opposite possibility: that local governments may be hesitant to hand over control of a transaction to MOFCOM and may instead underreport transactions, especially those transactions that are expected to benefit the local economy. (174)

Third, the Chinese government has not yet made explicit the relationship between industry sectors covered by the national security review and the government's existing Catalogue for Guidance of Foreign-Invested Industries [TEXT NOT REPRODUCIBLE IN ASCII.] which specifies whether investment in a particular industry sector is encouraged, permitted, restricted, or prohibited. (175) For example, although "important agricultural products" are subject to national security review under Circular Six, this seems to conflict with the fact that many agricultural sectors, including rubber, traditional Chinese medicines, and bamboo are in the "encouraged" category in the Catalogue. (176) If investment in a certain sector is "encouraged" under the Catalogue, it would be reasonable to assume that such transactions are unlikely to pose national security risks. But until China clarifies the relationship between these two sets of regulations, investors should remain cautious.

Moreover, investors must keep in mind that not all transactions subject to one approval process will be subject to the other. For example, mergers between foreign companies, while subject to the anti-monopoly review, will not be subject to the national security review. (177) Similarly, transactions that fall under the national security review but do not meet the size threshold under the Anti-Monopoly Law will not be subject to the anti-monopoly review. (178) One particular area where investors should be especially cautious is in determining whether a small asset purchase in a domestic Chinese company that already has some foreign ownership may tip the balance of the company's ownership to be more than fifty percent foreign-owned. (179) This type of transaction would not trigger an anti-monopoly review since there is no change in control of the company; it may, however, trigger a national security review since the investor's purchase transformed a domestic Chinese company into a foreign-owned one. (180) Even for small equity investments, therefore, foreign investors should be aware of the Chinese company's existing ownership and ascertain whether their investments may trigger a national security review.

D. Broad Definition of Industry Sectors and Transaction Types" Triggering Review

Another area of concern is the broad range of vaguely defined industry sectors subject to national security review. The US-China Business Council, representing more than two hundred companies in China, emphasized in official comments to MOFCOM that "the scope [of industry sectors] as currently defined remains vague," and that "[s]uch general language creates significant uncertainty ... and it could result in investors' unwillingness to pursue transactions that would bring beneficial capital, technology, and management expertise to China." (181) One of the sectors, broadly defined as "key technologies," could leave investors "scratch[ing] their heads over whether, for example, investment in a software start-up in Chengdu would come under the purview." (182) As has happened in the United States, however, some of these questions will likely answer themselves through time as the government completes more reviews.

Although the problem of overly broad definitions is not unique to the Chinese system, (183) the Chinese government can still work to alleviate some of these concerns through future regulations or through official clarifications. Perhaps in response to these criticisms, MOFCOM has been circulating internally a list of approximately sixty industry sectors that may be subject to a national security review. (184) Once this list is made available to the public, however, it may not necessarily assuage investors' concerns: The list is reportedly quite broad, including sectors such as medical equipmen (185) that seem unconnected to national security. Nonetheless, making this list publicly available will put investors on notice.

E. Anti-Circumvention Principles

The rules make clear that investors cannot circumvent the national security review through technicalities alone. One statement that has received considerable attention from commentators is Announcement Fifty-Three's pronouncement that authorities reviewing a transaction will look to "the essential content and actual impact of the transaction." (186) Thus, investors must refrain from "avoid[ing] M&A security review through any means, including without limitation commissioned shareholdings, trusts, multi-level investments, leases, loans, contractual control, overseas transactions, etc." (187)

Although not directly stated by the rules, commentators have interpreted this "anti-circumvention clause" as implying that transactions carried out through a variable-interest entity (VIE) structure are subject to national security review. The VIE has been a popular mechanism for foreign companies to invest in sectors that have been traditionally restricted to foreign investment. (188) Through a VIE, a foreign investor partners with a domestic Chinese company (the VIE) to jointly invest in an offshore holding company that owns a subsidiary in China. (189) The foreign-owned Chinese subsidiary and the domestic VIE, the latter of which holds the necessary licenses to operate in China, enter into contracts allowing the subsidiary to control the activity of the VIE, thus enabling a certain degree of foreign control in a restricted industry sector. (190) Such VIE arrangements have been common in the Intemet sector, for example. (191)

Until recently, the Chinese government has been relatively silent about VIEs, and the question of their legality has been a "grey area." (192) Announcement Fifty-Three may therefore signal that the Chinese government is not only aware of the use of VIEs but may decide to regulate them more strictly. (193) This would not only affect those looking to invest in Chinese companies in potentially sensitive sectors, but may also reverberate in the greater investment community, especially in sectors in which VIEs are a popular way of conducting business. (194)

CONCLUSION

It may be years before the effects of China's national security review are fully apparent. Nonetheless, it has had at least one important effect so far: finally clarifying to investors how China will conduct foreign investment reviews. Thus, the law is not a new obstacle to be feared; rather, it assures investors that the national security review will be a deliberative, systematic procedure replacing the ad hoc processes that have been taking place for years in China.

But the process is not without its flaws, and existing ambiguities in the law are understandably causing concern among investors. As it stands, Chinese authorities risk being flooded with applications due to the uncertain scope of the national security review. There are several ways in which the Chinese government can act immediately to save its own time and resources as well as those of foreign investors. I provide three such recommendations below.

First, to reduce uncertainty regarding the retroactivity of national security reviews, the Chinese government should create a safe harbor analogous to that provided by CFIUS. Under such a provision, a company passing the national security review (with MOFCOM's decision not to pursue a review considered as "passing") should be exempt from later review, including from one triggered by third parties. Like the CFIUS "safe harbor," China's version could include exceptions to applications that provide false or misleading information, or as currently specified in Announcement Fifty-Three, for transactions that later make material changes to their terms or their scope. This safe harbor provision would also encourage compliance among foreign investors, who may be more likely to file for a review in order to reduce future risk.

Second, China can further help investors and conserve its own resources by expanding the scope of the pre-filing consultation beyond procedural discussions to encompass substantive topics as well. A foreign investor looking to buy a Chinese medical device company, for example, may not realize that its investment would fall within the purview of the national security review. If it had the opportunity to engage authorities in a more meaningful discussion, however, it would have a better understanding of the review's scope, making the process more efficient for both investors and government officials alike. By providing more consultations upfront, the government will save time and money in enforcement costs, as well as weed out applications from investors that truly pose no threat to China's national security.

Third, the new rules do not provide a minimum threshold for either the value of the transaction or the size of the company acquired before a review is triggered (195)--and they should. This lack of a minimum threshold may discourage investors from pursuing smaller transactions, as these may not be worth the time and resources required to complete a national security review. (196) Moreover, this lack of a threshold may create problems for the government as well. As one lawyer noted: "Without a threshold, [MOFCOM] will find thousands of applications on its desk. How will they handle it?" (197) As this comment demonstrates, this is another area where providing more clarity will benefit not only investors, but also the government. If smaller, less significant transactions do not trigger the review process, then government agencies will be able to focus their efforts on larger transactions that are far more likely to affect China's national security.

The problems discussed above are not unique to China's system--but this does not mean they should be left unaddressed. In fact, if the Chinese system succeeds both in protecting China's national security interests and in assuring investors that the system will not be misused, it may even become a model for other countries to follow.

In the meantime, investors should continue to exercise caution in M&A decisions, especially where potentially sensitive sectors are involved. If the new national security review is anything like the CFIUS process, then forthrightness will be rewarded, while attempts to circumvent review will be frowned upon, potentially producing disastrous results for the investor. Therefore, investors should remain aware of existing uncertainties regarding the law's implementation, erring on the side of overreporting to Chinese authorities. Whatever China's intentions may be, there is little doubt that the new process will add further delays to the approval process--but in light of the new rules and regulations, this is something that investors can plan for in advance.

APPENDIX A: CHINA'S NATIONAL SECURITY REVIEW PROCESS


APPENDIX B: RESULTS OF CFIUS NOTIFICATIONS, 1988-2010 (198)

Year     Number    Notices        Number of
         of        Withdrawn      Investigations
         Notices   During
                   Review (199)

1988     14        --             1
1989     204       --             5
1990     295       --             6
1991     152       --             1
1992     106       --             2
1993     82        --             0
1994     69        --             0
1995     81        --             0
1996     55        --             0
1997     62        --             0
1998     65        --             2
1999     79        --             0
2000     72        --             1
2001     55        --             1
2002     43        --             0
2003     41        --             2
2004     53        --             2
2005     64        1              1
2006     111       14             7
2007     138       10             6
2008     155       18             23
2009     65        5              25
2010     93        6              35
TOTAL    2154      54             120

Year     Notices         Presidential
         Withdrawn       Decisions
         During
         Investigation

1988     0               1
1989     2               3
1990     2               4
1991     0               1
1992     1               1
1993     0               0
1994     0               0
1995     0               0
1996     0               0
1997     0               0
1998     2               0
1999     0               0
2000     0               1
2001     1               0
2002     0               0
2003     1               1
2004     2               0
2005     1               0
2006     5               2
2007     5               0
2008     5               0
2009     2               0
2010     6               0
TOTAL    35              14


APPENDIC C: FLOWCHART ILLUSTRATING CFIUS REVIEW PROCESS (200)

(1) Foreign Direct Investment, Net Inflows (BOP, Current US$), WORLD BANK, http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD (last visited Jan. 4, 2013).

(2) Foreign Direct Investment--The China Story, WORLD BANK (July 16, 2010), http://www.worldbank.org/en/news/2010/07/16/foreign-direct-investment-china-story.

(3) Circular of the General Office of the State Council on the Establishment of Security Review System Regarding the Merger and Acquisition of Domestic Enterprises by Foreign Investors (promulgated by the Gen. Off. of the St. Council, Feb. 3, 2011, effective Mar. 3, 2011) (China) [hereinafter Circular Six], available at http://english.mofcom.gov.cn/aarticle/policyrelease/domestiepoli cy/201103/20110307430493.html.

(4) Guowuyuan Bangongting Guanyu Jianli Waiguo Touzizhe Bingguo Jingnei Qiye Anquan Shencha Zhidu de Tongzhi [TEXT NOT REPRODUCIBLE IN ASCII.] [Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors] (promulgated by the Gen. Off. of the St. Council, Feb. 3, 201 I, effective Mar. 3,2011) (Lawinfochina) (China) [hereinafter Circular Six Lawinfochina].

(5) See Shangwubu Shishi Waiguo Touzizhe Bingguo Jingnei Qiye aquan Shencha Zhidu Youguan Shixiang de Zanxing Guiding [TEXT NOT REPRODUCIBLE IN ASCII.] [Tentative Provisions on Matters Relevant to the Implementation of the System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors] (promulgated by the Minister of Comm., Mar. 4 2011, effective Mar. 5, 2011) CHINA L. & PRAC. [hereinafter Announcement Eight], available at http://www.chinalawandpractice.com/Article/2800324/Channel/993 9/Ministry-of-Commerce-Tentative-Provisions-on-Matters-Relevant-to-the-Implementation-of-the-Syst em-for.html; Shangwubu Shishi Waiguo Touzizhe Bingguo Jingnei Qiye Anquan Shencha Zhidu de Guiding [TEXT NOT REPRODUCIBLE IN ASCII.] [Provisions of the Ministry of Commerce on Implementing a Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors] (promulgated by the Ministry of Comm., Aug. 25, 2011, effective Sept. 1, 2011) (China) [hereinafter Announcement Fifty-Three], translation available at http://www.cov.com/files/upload/MOFCOM%20Announcement%20No.%2053.pdf.

(6) China and CFIUS: A Double-Edged Sword, CLIFFORD CHANCE 2 (Mar. 2011), https://onlineservices.cliffordchance.com/online/freeDownload.action?key=OBWIbFgNhLNomwBl%2 B33QzdFhRQAhp8D%2BxrIGReI2crGqLnALtlyZe4zaTrF%2FVr0dRpgOf3Zttz7p%0D%0A5mt12P8 Wnx03DzsaBGwsIB3EVF8XihbSpJa3xHNE7rFDg0iAqBBi&attachmentsize=55446.

(7) See, e.g., New Review Procedures for Foreign Investment in China, MAYER BROWN JSM 4 (Feb. 16, 2011), http://www.mayerbrown.com/files/Publication/13c9ac80-823a-48fc_8f42_02c14137a9 8b/Presentation/PublicationAttachment/5604d628_ac9c_4a 18_88ad_24691b93ba3d/10450.pdf; CLIFFORD CHANCE, supra note 6, at 2.

(8) See Daniel Chan et al., New PRC Rules on National Security Review of M&As by Foreign Investors, DLA PIPER 1 (Mar. 2011), http://www.dlapiper.com/files/Publication/ecba0b4b-71c4-4425-9 996-29e4cb718140/PresentatiordPublicationAttachment/abb1e2ca-c0ca-4dbb-8dc0-37876d0464ba/Ne w%20PRC%20Rules%20on%20National%20Security%20Review%20of%20M%26As%20by%20Fore ign%20Investors.pdf.

(9) See, e.g., CLIFFORD CHANCE, supra note 6, at 2; CF1US & Its Chinese Counterpart, NATIONAL SECURITY LAW BRIEF (Mar. 27, 2011), http://nationalsecuritylawbrief.com/2011/03/27/cfiu s-its-chinese-counterpart/.

(10) CLIFFORD CHANCE, supra note 6, at 2.

(11) Id.

(12) China Irked by Unfair Treatment, CHINA DAILY (Feb. 19, 2011), http://www.chinadaily.com.cn/business/2011-02/19/content_12043558.htm.

(13) See. e.g., Libin Zhang & Casey Rubinoff, China Adopts Process for National Security Reviews of Mergers and Acquisitions Involving Foreign Investors, CHINA L. REP., Apr. 2011, at 3, 5, available at http://meetings.abanet.org/webupload/commupload/IC860000/newsletterpubs/China-LawRptr_No_18.pdf.

(14) Bruce Einhorn, Huawei's 3Corn Deal Flops, BLOOMBERG BUSINESSWEEK (Feb. 21, 2008), http ://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2008/02/huaweis_3com_de.html.

(15) Ben White, Chinese Drop Bid to Buy U.S. Oil Firm, WASH. POST (Aug. 3, 2005), http://www.washingtonpost.com/wp-dyn/content/article/2005/08/02/AR2005080200404.html.

(16) China Irked, supra note 12.

(17) See, e.g., Geraldine Johns-Putra, China's New Foreign Investment Review System, AUSTRALIA CHINA CONNECTIONS, http://www.chinaconnections.com.au/en/magazine/back-issues/75march-april-2011/941-chinas-new-foreign-investment-review-system (last visited Jan. 4, 2013) (discussing the rejection by Australia's Foreign Investment Review Board of China Non-Ferrous Metal Mining (Group) Co., Ltd's attempt to acquire an Australian mining company).

(18) See Zhang & Rubinoff, supra note 13, at 5; see also MAYER BROWN JSM, supra note 7, at 4 (discussing concerns that the national security review is as much about retaliation as it is about national security); China's MOFCOM Issues Interim Rules on National Security Review of Foreign Acquisitions, CLEARY GOTTLIEB 1 (Mar. 15, 2011), http://www.cgsh.com/files/News/902841ee-bd0e-4 d31-91 cc-28e8fc5e29bb/Presentation/NewsAttachment/95e31104-c7a4-4859-a56f-317f053068c8/CGS H%20Alert%20-%20MOFCOM%20Issues%20Interim%20Rules%20on%20Security%20Review.pdf ("The speedy adoption and implementation of the new security review regime may reflect Chinese frustration over U.S. security reviews of proposed foreign investments by Chinese companies.").

(19) See, e.g., MAYER BROWN JSM, supra note 7, at 4 (discussing U.S. and Australian government rejections of acquisitions of domestic companies by Chinese companies on national security grounds).

(20) Lan Xinzhen, Proceed with Caution, BEIJING REV. (Sept. 26, http://www.bjreview.com.cn/business/txt/2011-09/26/content_393320.htm.

(21) Chan et al., supra note 8, at 1.

(22) H. Stephen Harris et al., Interview with Shang Ming, Director General of the Anti-Monopoly Bureau Under the Ministry of Commerce of the People's Republic of China, THE ANTITRUST SOURCE, Feb. 2009, at 1, 3, available at http://www.americanbar.org/content/dam/aba/publishing/antitrust_sourc e/Feb09_ShangIntrvw2_26f.authcheckdam.pdf.

(23) MARK WILLIAMS, COMPETITION POLICY AND LAW IN CHINA, HONG KONG, AND TAIWAN 200-01 (2005).

(24) See Wang Xiaoye, Report." Anti-Monopoly Law Vital, CHINA DAILY (Aug. 22, 2004), http://www.chinadaily.com.cn/english/doc/2004-08/22/content_367692.htm; cf Zhengxin Huo, A Tiger Without Teeth: The Antitrust Law of the People "s Republic of China, 10 ASIAN-PAC L. & POL'Y J. 32, 60 (2008).

(25) Peter A. Neumann, Private Acquisitions by Foreign Investors in China: Is the Party Finally Over?, CHINA L. & PRAC. (Apr. 2003), http://www.chinalawandpractice.com (search for "Private Acquisitions by Foreign Investors").

(26) Wang Xiaoye, supra note 24.

(27) Xu Ping & Mark Schaub, Progress or Setback? Looking at the New Approval Procedures for Foreign Investment Projects, CHINA L. & PRAC. (Nov. 2004), http://www.chinalawandpractice.com (search for "Progress or Setback").

(28) See. e.g., Julian Zhu, China's Approach to Anti-Trust Issues, CHINA L.& PRAC. (May 2003), http://www.chinalawandpractice.com (search for "China's Approach to Anti-Trust Issues"); Yin Dandan, PRC Researcher Urges Measures to Deal with Effects of 'Merger Mania ', FIN. TIMES, July 17, 2003; Wang Xiaoye, supra note 24.

(29) Yin Dandan, supra note 28.

(30) Id.

(31) Id.

(32) Wang Xiaoye, supra note 24.

(33) Id.

(34) Foreign Direct Investment. Net Inflows (BOP, Current US$), WORLD BANK, http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?page=1 (last visited Jan. 4, 2013).

(35) Anti-Monopoly Law Seeks" to Regulate Foreign Acquisitions, XINHUA NEWS AGENCY (June 25, 2007), http://www.china.org.cn/english/BAT/214960.htm.

(36) China's Path Toward Innovation, BEIJING REV. (July 26, 2010), http://www.bjreview.com.crgexpert/txt/2010-07/26/content_287930.htm.

(37) Wan Zhihong, Carlyle Abandons Xugong Dream, CHINA DAILY (July 24, 2008), http://www.chinadaily.com.cn/bizchina/2008-07/24/content_6873004.htm.

(38) Christopher Bodeen, National Security Checks for Foreign Investments Get Tougher Under New Chinese Law, ASSOCIATED PRESS, Aug. 30, 2007.

(39) See Toh Han Shih, Security Law Will Scare Investors'. Lawyers Say, S. CHINA MORNING POST, Mar. 14, 2011, at Business-1.

(40) Id.

(41) Wan Zhihong, supra note 37.

(42) Harris et al., supra note 22, at 3.

(43) Li Qiang & Eric Zabinski, Assessing the State of M&A in China, in BEST PRACTICES FOR INTERNATIONAL BUSINESS TRANSACTIONS IN CHINA 53, 56 (2011).

(44) Mark Williams, Foreign Direct Investment in China: Will the Anti-Monopoly Law Be a Barrier or a Facilitator?, 45 TEX. INT'L L.J. 127, 143 (2009).

(45) See Recent Developments in China's Policies" Towards Cross-Border Mergers and Acquisitions (M&A), ORG. FOR ECON. CO-OPERATION & DEV. 3, 5 (Dee. 2006), http://www, oec d. org/dataoecd/1/26/37808943.pdf.

(46) See Fanlong Duanfa [TEXT NOT REPRODUCIBLE IN ASCII.] [Anti-Monopoly Law of the People's Republic of China] (promulgated by the Standing Comm. of the Nat'l People's Cong., Aug. 30, 2007, effective Aug. 1, 2008) (Lawinfochina) (China) [hereinafter Anti-Monopoly Law].

(47) See id.

(48) See, e.g., Harris et al., supra note 22, at 1, 6-7.

(49) For example, all six transactions that have received conditional approval are foreign acquisitions of foreign companies: InBev-Anheuser-Busch, GM-Delphi, Mitsubishi-Lucite, PfizerWyeth, Panasonic-Sanyo, and Novartis-Alcon. See Bruno Peixoto et al., International Antitrust, 45 INT'L LAW. 39, 49 (2011).

(50) See, e.g., Williams, supra note 44, at 128; Anu Bradford, Chinese Antitrust Law: The New Face of Protectionism?, HUFFINGTON POST (Aug. 1, 2008, 4:46 PM), http://www.huffingtonpost.com/a nu-bradford/chinese-antitrust-law-the_b_116422.htrnl.

(51) Anti-Monopoly Law, supra note 46, art. 31 (emphasis added).

(52) See, e.g., Harris et al., supra note 22, at 1, 3-4.

(53) China Adopts Anti-Monopoly Law, EMBASSY OF THE PEOPLE'S REPUBLIC OF CHINA IN THE U.S. (Aug. 30, 2007), http://www.china-embassy.org/eng/xw/t357030.htm.

(54) Cf Steve Dickinson, National Security Review Under China's New Anti-Monopoly Law, CHINA L. BLOG (Aug. 29, 2008), http://www.chinalawblog.com/2008/08/security_review_under_china s_n.html (noting that the national security review mentioned in Article 31 "is not a new policy").

(55) China Adopts Anti-Monopoly Law, supra note 53 (emphasis added).

(56) Anti-Monopoly Law Seeks" to Regulate Foreign Acquisitions, supra note 35.

(57) Id.

(58) China Unveils Its National Security Review Process of Foreign Investments, WILSON SONSINI GOODRICH & ROSATI (Feb. 18, 2011), http://www.wsgr.com/wsgr/Display.aspx?SectionName=publica tions/PDFSearch/wsgralert_china_national_security.htm; see also ORG. FOR ECON. CO-OPERATION & DEV., supra note 45, at 3, 5 (outlining problems with 2006 regulations and providing policy recommendations to clarify the law).

(59) Circular Six Lawinfochina, supra note 4.

(60) WORLD BANK, supra note 1; WORLD BANK, supra note 34.

(61) Circular Six Lawinfochina, supra note 4, art. III.

(62) Announcement Eight, supra note 5.

(63) Chanet al., supra note 8, at 4.

(64) Announcement Fifty-Three, supra note 5.

(65) MOFCOM Issues Final National Security Review Rules, CLEARY GOTTLIEB 2 (Sept. 19, 2011), http://www.cgsh.com/files/News/31760287-9ae4-4499-9fgf-20e84ba6d576/Presentation/NewsA ttachment/5d0747e0-df96-46b9-9a9d-21da85fc0871/CGSH%20Alert%20-%20MOFCOM%20Issues% 20Final%20National%20Security%20Review%20Rules.pdf.

(66) See, e.g., MAYER BROWN JSM, supra note 7, at 4 ("Chinese authorities already possess a broad range of powers to curb foreign investment. ... "); Zhang & Rubinoff, supra note 13, at 2.

(67) Wan Zhihong, supra note 37.

(68) See Jane Lee & Rachel Armstrong, Analysis: New China M&A Committee Lifts. Hopes of More Transparency, REUTERS (Feb. 16, 2011), http://mobile.reuters.com/article/innovationNews/idUS TRE71F36B20110216.

(69) China Oriental Says ArcelorMittal Takeover of Company on Hold, XINHUA FIN. NEWS, Aug. 4, 2008.

(70) Evraz Ends Plans to Take over Delong, SHANGHAI DAILY (Aug. 20, 2009), available at http://www.chinamining.org/Investment/2009-08-20/1250731005d28203.html.

(71) See Jonathan R. Woetzel, Remaking China's Giant Steel Industry, MCKINSEY Q., Dec. 2001, https://www.mckinseyquarterly.com/Remaking_Chinas_giant_steel_industry_1130.

(72) Susan Ning & Huang Jing, MOFCOM Revealed Yearly Merger Control Statistics, CHINA L. INSIGHT (Sept. 26, 2011), http://www.chinalawinsight.com/2011/09/articles/corporate/antitrust-com petition/mofcom-revealed-yearly-merger-control-statistics/#more.

(73) The 2011 numbers reflect the totals as of August; MOFCOM had received 142 applications as of August 2011, and anticipated reviewing more than 200 applications by the end of the year. Id.

(74) Fei Ding et al., Interview with Shang Ming, Director General of the Anti-Monopoly Bureau Under the Ministry of Commerce of the People's Republic of China, THE ANTITRUST SOURCE, 1 (Feb. 2011), www.nera.com/nera-files/PUB_ATSource_MOFCOM_0311.pdf. Admittedly, these figures do not reflect the fact that some companies may have been deterred from pursuing acquisitions due to concerns about the anti-monopoly review. See Zhang & Rubinoff, supra note 13, at 6.

(75) MAYER BROWN JSM, supra note 7, at 4.

(76) Lee & Armstrong, supra note 68.

(77) Circular Six, supra note 3, art. II.

(78) See Lan Xinzhen, A Deal Denied, BEIJING REV. (Mar. 30, 2009), http://www.bjreview.com.cn/special/2009-03/30/content_189099_4.htm.

(79) Id,

(80) See, e.g., Sundeep Tucker et al., China Blocks Coca-Cola Bid for Huiyuan, FT.COM, http://www.ft.com/intl/cms/s/O/5c645830-1391-11de-9e32-0000779fd2ac.html#axzzlgSOPM414 (last updated Mar. 19, 2009, 4:17 AM).

(81) See. e.g., MAYER BROWN JSM, supra note 7, at 34; Toh Han Shih, supra note 39.

(82) See Zhang & Rubinoff, supra note 13, at 6 ("[H]istory shows that the Chinese government has been conservative in exercising its ability to block deals. ... since the AML's inception, MOFCOM has reviewed over 140 M&A cases and approved 95% of those cases without conditions (seven cases with conditions).").

(83) Id.

(84) MAYER BROWN JSM, supra note 7, at 5.

(85) Lan Xinzhen, supra note 20.

(86) Id.

(87) MAYER BROWN JSM, supra note 7, at 4.

(88) Cf Foreign Acquisition of Chinese Enterprises to Be Vetted for National Security Risks, KPMG 2 (Mar. 2011), http://www.us.kpmg.com/microsite/tnf-asiapacific/2011/China_Marchl4.pdf ("Many other countries have similar regimes to safeguard their national security. There is valid reason for China to institute its own security review system."); Lan Xinzhen, supra note 20 ("Western countries are the true forerunners of safety reviews for M&As involving foreign investors with countries like the United States and Canada operating intricate review systems through legislation and special agencies.").

(89) See, e.g., Lee & Armstrong, supra note 68; Thomas Chou et al., China's New National Security Review Process for Foreign Acquisitions." Crossing the River by Feeling the Stones, MORRISON FOERSTER 3 (Feb. 22, 2011), http://www.mofo.com/files/Uploads/Images/110222-National -Security-Review-Process-for-Foreign-Acquisitions .pdf.

(90) Although a comparison with the national security reviews of other countries would be ideal, such a study is beyond the scope of this Note.

(91) Exec. Order No. 11,858, 3 C.F.R. 990 (1971-1975).

(92) The Committee on Foreign Investment in the United States (CFIUS), U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Invest ment-in-US.aspx (last updated Mar. 20, 2011, 8:20 AM).

(93) U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-05-686, DEFENSE TRADE: ENHANCEMENTS TO THE IMPLEMENTATION OF EXON-FLORIO COULD STRENGTHEN THE LAW'S EFFECTIVENESS 1 (2005).

(94) See David Zaring, CF1US as a Congressional Notification Service, 83 S. CAL. LAW REV. 81, 95-96 (2009).

(95) Id. at 95.

(96) Data from 2005-2010 were compiled from CFIUS's annual reports to Congress and the CFIUS table available at Resource Center, U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-reports.aspx (last updated Dec. 5, 2011). Data from 1988-2004 were compiled from EDWARD M. GRAHAM & DAVID M. MARCHICK, U.S. NATIONAL SECURITY AND FOREIGN DIRECT INVESTMENT 57 (2006). This dataset is reproduced in Appendix B.

(97) In 1990, President George H.W. Bush rejected China National Aero-Technology Import and Export Corp.'s attempt to acquire Mamco, a Boeing supplier. Cecile Kohrs Lindell, CFIUS Rising, DEAL MAC. (Aug. 13, 2010), http://www.thedeal.com/magazine/ID/O35709/insights/rules-of-the-road/c fius-rising.php.

(98) Composition of CFIUS, U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resouree center/international/foreign-investment/Pages/cfius-members.aspx (last updated Dec. 1, 2010, 8:08 AM).

(99) Id.

(100) Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702, 70,702 (Nov. 21, 2008) (codified at 31 C.F.R. pt. 800) [hereinafter Regulations], available at http://www.treasury.gov/resource-center/international/foreign-investment/Documents/CFIUS-FinalRegulations-new.pdf.

(101) Exec. Order No. 13456, summarized at http://www.treasury.gov/resource center/international/foreign-investment/Documents/Summary-EO11858-Amend.pdf.

(102) Cf U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 93, at 11 (explaining Treasury's reluctance to take action that may have a "perceived negative impact on foreign investment and a conflict with the U.S. open investment policy").

(103) Circular Six, supra note 3, art. III(II).

(104) See China Issues National Security Review Rules for Foreign Investment, COVINGTON & BURLING 4 (Feb. 18, 2011), http://www.cov.com/files/Publication/fe87b494-e64d-4ae9-b8a67e32 f94 fe406/Presentation/PublicationAttachment/bea0749d- fa9b-4e45-96467f0236flbc81/China_Issues_National_Security_Review_Rules_For_Foreign_Investment.pdf.

(105) Suat-Eng Seah & Kevin B. Goldstein, China Adopts National Security System for Foreign Investment, WEIL, GOTSHAL & MANGES 2 (Feb. 2011), http://www.weil.com/files/Publication/18be9f9 6-4993-40a6-8204-3c8860c1cc17/Presentation/PublicationAttachment/60a4ed13-f7da-4285-adc9-5499 d7828a84/Asia_Alert_Feb_2011.pdf.

(106) A flowchart summarizing the Chinese process and timeline is included in Appendix A; a flowchart illustrating the CFIUS review process appears in Appendix C.

(107) Filing Instructions, U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resource center/international/foreign-investment/Pages/cfius-filing-instructions.aspx (last updated Mar. 12, 2011, 8:20 AM).

(108) Id.

(109) Process Overview, U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resource-center /intemational/foreign-investment/Pages/cfius-overview.aspx (last updated Dec. 1, 2010, 8:08 AM).

(110) Regulations, supra note 100, at 70,723.

(111) See Announcement Fifty-Three, supra note 5, art. 3.

(112) For example, in CNOOC's attempted acquisition of Unocal, CNOOC's competing bidder Chevron, a U.S. firm, "heavily lobbied" members of Congress to oppose the deal. In the end, it was congressional pressure, not CFIUS, which ultimately caused CNOOC to withdraw its bid. See White, supra note 15.

(113) Process Overview, supra note 109.

(114) Id.

(115) Regulations, supra note 100, at 70,702.

(116) Under Executive Order 11858, a transaction falls under this category as long as any one of CFIUS's member agencies believes that that there is a potential impairment that has not been mitigated. See id.

(117) Id.

(118) Circular Six, supra note 3, art. IV(III).

(119) Regulations, supra note 100, at 70,702. In 2009, for example, actions required through mitigation agreements included: establishing a Corporate Security Committee and Security Officer within the company; assuring that the company will comply with guidelines to handle existing government contracts and customer information; and notifying government parties of any important changes to products or services. Committee on Foreign Investment in the United States. Annual Report to Congress, COMM. ON FOREIGN INV. 1N THE U.S. 14 (Nov. 2010), http://www.treasury.gov/resourcecenter/international/foreign-investment/Documents/CFIUS%20Annual%20Report%20to%20C0ngress %20for%20CY09.pdf.

(120) See, e.g., supra notes 4849 and accompanying text.

(121) See Guidance Concerning the National Security Review Conducted by the Committee on Foreign Investment in the United States, 73 Fed. Reg. 74567, 74569 (Dec. 8, 2008) [hereinafter Guidance], available at http://www.treasury.gov/resource-center/international/foreigninvestment/Docu ments/CFIUSGuidance.pdf.

(122) Process Overview, supra note 109.

(123) See Circular Six, supra note 3, art. IV(III).

(124) See, e.g., Toh Han Shih, supra note 39.

(125) It is also possible that China purposely adopted a longer timeline to ensure that its staff has enough time to review a transaction; it has been suggested that the U.S. timeline does not leave enough time for agencies to conduct a thorough review. See U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 93, at 3 (explaining that since agencies have thirty days to respond, they must determine the likely result by the twenty-third day); id. at 5 (quoting the Department of Justice as stating that "any 'extension of the time available ... would be helpful'"); id. at 15 (noting that "analysts have between 3 and 10 days to analyze the acquisition").

(126) For data sources, see supra note 96. Moreover, the Presidential Decisions figure does not include, for example, situations in which CFIUS heavily encouraged an investor to withdraw its notice, indicating that it will refer the decision to the President if the investor does not comply. This is the decision Huawei faced in early 2011. See CLIFFORD CHANCE, supra note 6, at 2.

(127) Guidance, supra note 121, at 74569.

(128) 50 U.S.C. App. 2170(b)(1)(D) (2006).

(129) Guidance, supra note 121, at 74569; see Joe McDonald, China Telecom Presses U.S. Deal, U.S. Scrutiny Falls" on Proposed 3Leaf Acquisition, HOUS. CHRON., Feb. 18, 2011 (discussing CFIUS pressure on Huawei to submit a notice regarding its already-completed acquisition of 3Leaf's assets).

(130) Announcement Fifty-Three, supra note 5, art. 10.

(131) Circular Six, supra note 3, art. I(I).

(132) Guidance, supra note 121, at 74570.

(133) Id.

(134) 50 U.S.C. App. [section] 2170(f)(2006).

(135) Id. [section] 2170(a)(3).

(136) Regulations, supra note 100, at 70,721-22.

(137) Id. at 70,721.

(138) ld. at 70,722.

(139) Id. at 70,704.

(140) Id. at 70,718.

(141) CFIUS Reform: Final Regulations Issued on November 14, 2008, U.S. DEP'T OF THE TREASURY 1 (Nov. 14, 2008), http://www.treasury.gov/resourcecenter/international/foreign-investmen t/Documents/Summary-FinalRegs.pdf.

(142) Announcement Fifty-Three, supra note 5, art. 9.

(143) See, e.g., Chou et al., supra note 89, at 2 ("As with reviews under CFIUS, the [Joint Conference] is likely to analyze whether there is 'actual control' based on the specific nature of the transaction.").

(144) See Circular Six, supra note 3, art. I(I).

(145) CLIFFORD CHANCE, supra note 6, at 2.

(146) Id.

(147) See 50 U.S.C. App. [section] 2170(b)(1)(A)(i) (2006) ("[The President] shall review the covered transaction to determine the effects of the transaction on the national security of the United States. ... "); Regulations, supra note 100, at 70,714 ("Safeguards in section 721 and Executive Order 11858, however, ensure that actions taken by the President or the Committee are taken only to address legitimate national security concerns.").

(148) Circular Six, supra note 3, art. I(I).

(149) Cf Lee & Armstrong, supra note 68 (noting one banker's comment that "the Chinese government often has a lot of flexibility in how it implements its policies").

(150) See H. STEPHEN HARRIS ET AL., ANTI-MONOPOLY LAW AND PRACTICE IN CHINA 137 (2011).

(151) Id. at 138.

(152) U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 93, at 28.

(153) Zaring, supra note 94, at 92.

(154) See Evelyn Iritani, Chinese Bid for Unocal Stirs up Issues, L.A. TIMES, June 25, 2005, at C1, available at http://articles.latimes.com/2005/jun/25/business/fi-uschina25.

(155) Jessica Holzer, Was the Law Followed on Dubai Ports Deal OK?, FORBES.COM, (Feb. 23, 2006, 6:00 AM), http://www.forbes.com/2006/02/22/logistics-ports-dubai-cx_jh_0223cfius.html.

(156) Dubai Company Gives up on Ports Deal, CBSNEwS.COM (Feb. 11, 2009, 6:43 PM), http://www.cbsnews.com/2100-250_162-1385030.html?tag=contentMain;contentBody.

(157) Zaring, supra note 94, at 95-96.

(158) See dataset in Appendix B.

(159) Id.

(160) See, e.g., Woon-Wah Siu et al., China Finalizes National Security Review Rules for Inbound M&A Transactions, PILLSBURY WINTHROP SHAW PITTMAN 3 (Sept. 7, 2011), http://www.pillsburylaw.com/siteFiles/Publications/ChinaAlert09072011.pdf; Hannah C.L. Ha et al., China Finalises Key Aspects of the Security Review Process Applieable to Foreign Takeovers of Domestic Companies, MAYER BROWN JSM (Aug. 31,2011), http://www.mayerbrown.com/publication s/article.asp?id=11484&nid=6.

(161) CLIFFORD CHANCE, supra note 6, at 2.

(162) See, e.g., China Launches National Security Review System .for Foreign M&A, CLIFFORD CHANCE 3 (Feb. 2011), https://onlineservices.cliffordchance.com/online/freeDownload.action?key-OB WIbFgNhLNomwB1%2B33QzdFhRQAhp8D%2BxrIGReI2crGqLnALtlyZewNxtTAowaABwHBQc9z qbsHp%0D%0A5mt12P8Wnx03DzsaBGwsIB3EVF8XihbSpJa3xHNE7rFDg0iAqBBi&attachmentsize =60046 ("The merger control review process in China is already prone to delays. The addition of national security review, if required, can be expected to add further delays to transaction timetables" (emphasis added).).

(163) See, e.g., Peter Come & David Huang, China Establishes National Security Review System for Inbound M&A Transactions, DORSEY & WHITNEY (Oct. 17, 2011), http://www.dorsey.com/eu_inbound_m_a_transactions/; Ha et al., supra note 160.

(164) A Beijing based-lawyer at a Chinese law firm commented that the new process "will make [transaction] approval ... difficult, time-consuming, and costly since the acquirer has to design its M&A plan elaborately." Candice Mak, Be Familiar with M&A Details" Before Security Review Submission, CHINA L. & PRAC. (Apr. 2011), http://www.chinalawandpractice.com (search for "Be Familiar with M&A Details"); see id. ("[M]arket players are increasingly facing more difficulties in providing all the required submission information."); The US-China Business Council Comments on the Provisional Regulations on Issues Related to the Security Review System for Foreign Enterprises' Mergers and Acquisitions of Domestic Companies, US-CHINA Bus. COUNCIL 3, https://www.uschina.org/public/documents/2011/04/ma_security_review_eng.pdf (last visited Jan. 4, 2013) ("Preparing [the requested application] materials would increase costs for applicants without providing any additional benefit to a security assessment.").

(165) See Mak, supra note 164 (noting one lawyer's comment that an investor must now "elaborately" plan out the transaction before it knows whether it will obtain approval).

(166) CLIFFORD CHANCE, supra note 162, at 3; Christine Kahler, Foreign M&_A in China Face Security Review, USCBC MAGAZINE, https://www.chinabusinessreview.com/public/1104/cmi.html (last visited Dec. 14, 2011).

(167) Victor Ho et al., MOFCOM Finalises Implementing Rules for National Security Review, ALLEN & OVERY (Sept. 14, 2011), http://www.allenovery.com/publications/en-gb/Pages/MOFCOM. Finalises-Implementing-Rules-for-National-Security-Review.aspx.

(168) David Livdahl, Jenny Sheng & Henri Li, MOFCOM Issues New Rules on National Security Review, PAUL HASTINGS 2 (Sept. 2011), http://www.paulhastings.com/assets/publications/2OlO.pdf?wt. mc_ID=2010.pdf.

(169) Chan et al., supra note 8, at 4.

(170) Id.

(171) See, e.g., CLIFFORD CHANCE, supra note 162, at 2; China to Start Security Review of Foreign Acquisitions of Domestic Companies, CHINA BRIEFING (Feb. 15,2011), http://www.china-briefing.com /news/2011/02/15/ehina-to-start-security-review-of-foreign-acquisitions_of_domestic_companies.html; Ha et al., supra note 160.

(172) See. e.g., CLIFFORD CHANCE, supra note 162, at 3 ("[F]oreign investors will need to consider carefully whether to conduct a parallel review or whether to 'trigger' national security review first with merger control following close behind (or vice versa).").

(173) Under Announcement Fifty-Three, supra note 5, art. 2, when China's local commerce departments conduct the existing anti-monopoly review, they may also trigger a national security review by notifying MOFCOM of transactions they believe fall within the national security review's scope. If a transaction comes to MOFCOM's attention in this way, the investor must submit an application to MOFCOM.

(174) John V. Grobowski, Tentative Provisions on Relevant Issues Concerning Implementation of the Security Review System of Foreign Mergers' and Acquisitions of Domestic Enterprises, FAEGRE & BENSON (Apr. 1,2011), http://www.faegre.com/13074.

(175) Seah & Goldstein, supra note 105, at 4.

(176) Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007), INVEST IN CHINA, http://www.fdi.gov.en/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372.

(177) HARRIS ET AL., supra note 150, at 137.

(178) Id.

(179) Peter J. Wang et al., China Publishes Final Rules on the National Security Review of Foreign Investment in Chinese Companies, JONES DAY (Sept. 2011), http://www.jonesday.com/china_publishes final_rules.

(180) Id.

(181) US-CHINA BUS. COUNCIL, supra note 164, at 1-2.

(182) See Toh Han Shih, supra note 39.

(183) See supra note 132 and accompanying text; see also Zhang & Rubinoff, supra note 13, at 6 ("Indeed, many countries' legislations on national security reviews have intentionally left the term 'national security' undefined and the language of the legislations has typically been vague and general.").

(184) Lester Ross et al., China's National Security Review of Mergers and Acquisitions: Permanent Implementing Regulations Issued, WILMERHALE (Sept. 19, 2011), http://www.mondaq.com/x/145824/ Compliance/Mergers+AcquisitionsChinas+National+Security+Review+Of+Mergers+VIEs+Permanent +Implementing+Regulations+Issued; Security Review on Foreign Acquisitions to Focus on Substance of Transactions, KPMG 2 (Sept. 2011), http://www.kpmg.com/Global/erdissuesAndinsights/ArticlesPu blications/taxnewsflash/Documents/china-sept20no1.pdf; China Issues Final Implementation Provisions for National Security Review Rules, COVINGTON & BURLING 3 (Aug. 31, 2011), http://www.martindale.com/mergers-acquisitions-law/article_Covington-Burling-LLP-1341602.htm.

(185) Ross et al., supra note 184; COVINGTON & BURLING, supra note 184, at 3.

(186) Announcement Fifty-Three, supra note 5, art. 9.

(187) Id.

(188) CLEARY GOTTLIEB, supra note 65, at 2.

(189) Id.

(190) ld.

(191) Rocky Lee, VIE Structures Under Closer Examination, CHINA L. & PRAC. (Oct. 2011), http://www.chinalawandpractice.com (search for "VIE Structures Under Closer Examination") ("The VIE structure is typically used in China's restricted internet or e-commerce sectors.").

(192) CLEARY GOTTLIEB, supra note 65, at 2.

(193) Lee, supra note 191.

(194) See. e.g., Kathrin Hille, Foreign lnternet Presence in China to Face Scrutiny, FIN. TIMES (Sept. 1, 2011, 5:23 PM), http://www.ft.com/intl/cms/s/2/7f8645e2-d493-11e0-a42b-00144feab49a.html.

(195) CLIFFORD CHANCE, supra note 162, at 2; Toh Han Shih, supra note 39.

(196) See Toh Han Shih, supra note 39.

(197) Id.

(198) Data from 2005-2010 were compiled from CFIUS's annual reports to Congress and from the CFIUS table available at Resource Center, U.S. DEP'T OF THE TREASURY, http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-reports.aspx (last updated Dec. 5,2011). Data from 1988-2004 were compiled from GRAHAM & MARCHICK, supra note 96, at 57.

(199) According to Graham and Marchick, "CFIUS does not keep or publish data on withdrawals that occur after a filing has been made but prior to investigation." GRAHAM & MARCHICK, supra note 96, at 57. This book was published in 2006, before FINSA and the advent of the annual report. CFIUS began making this information available beginning in 2007 (publishing data back to 2005).

(200) U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 93, at 8.

Cathleen Hamel Hartge *

* J.D. Candidate, Stanford Law School, 2013. I am grateful to Mei Gechlik for her guidance and helpful comments in writing this Note.
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