CHINA/US/AUSTRAILIA Comparison – Comparing China’s NSR Process with the Process in Australia and the United States

Executive Summary/Highlights:

Susan Ning’s last post explained China’s new National Security Review Process.  This post makes the case that, despite foreign investors’ fear that the new process is yet another tedious regulatory and “protectionist” hurdle to doing deals in China, the process is in fact quite similar processes in the Western world, including the United States, Canada, Germany and Australia.

I           Introduction

On 3 February 2011, released a notice which, for the first time, formalizes and sets out a national security review (“NSR”) process for foreign acquisitions of domestic companies in China. This notice is entitled “Notice by the General Office of the State Council in relation to the institution of the National Security Review system for mergers and acquisitions of domestic enterprises by Foreign Investors”[1] (“Notice”). This Notice (and consequently, China’s NSR regime) came into force on March 5, 2011.

Since China’s State Council the release of the Notice, there has been a flurry of articles and commentaries in the press. Foreign businesses who wish to invest or continue investing in China are concerned that the NSR process is yet another tedious regulatory hurdle they have to pass (on top of the current corporate, industry-based and antitrust clearance processes) before they are free to close their deals. Cynics have criticized China’s NSR regime as just another “protectionist” measure by the Chinese government to control the economy. In fact, China is not alone in its institution of a formal NSR process governing foreign-domestic transactions; there are similar processes in the more “liberal” world, for instance in the United States, Canada, Germany and Australia.

This article compares China’s NSR regime against the regimes in the United States and Australia.

II          Comparing China’s NSR Process with the Process in Australia and the United States

The table provides a “snapshot” of the key provisions within the NSR regimes of China, the United States, and Australia.

Annex – Snapshot of the key provisions within the national security regimes of China, the United States and Australia

No. Issue China United States Australia
1. What are the primary legislation and regulations which govern the national security review of foreign-domestic deals? Notice by the General Office of the State Council in relation to the institution of the National Security Review system for mergers and acquisitions of domestic enterprises by Foreign Investors 2011 No. 6; and Interim Rules for Implementation Section 721 of the Defense Production Act of 1950 (as amended by the Foreign Investment and National Security Act of 2007 (section 721); and as implemented by Executive Order 11858; Regulations Pertaining to Mergers, Acquisitions, Takeovers by Foreign Persons 2008.31 C.F.R. 800 et seq. (2010). Foreign Acquisitions and Takeovers Act (Cth) 1975; Foreign Acquisitions and Takeovers Regulations (Cth) 1989;Australia’s Foreign Investment Policy
2. What types of transactions are being caught by the NSR regimes (i.e. what are the “tests”)? Foreign companies merging with or acquiring domestic businesses in China. The domestic businesses are either national defense or national economic businesses. Parties should generally file a notice with the Committee on Foreign Investment in the United States when the transaction:

  • ImplicatesU.S.national security interests. National security has always been interpreted very broadly. 2007 legislation expanded “national security” to include “homeland security,” which includes effects on critical infrastructure, such as major energy assets, or on critical technologies, such as defense articles or other export controlled items; and
  • Results in a “foreign person” having “control” of a “” This is a complex inquiry. “Control” is not defined by a numerical benchmark (e.g., 50 percent ownership is not required). Rather, the Treasury Department’s regulations set out a functional definition of control that is based on how much influence over’ decisions the foreign ownership permits.
It is mandatory to notify the Foreign Investment Review Board of the following types of transactions:

  • subject to certain exceptions, an acquisition of an interest in Australian urban land, regardless of value (noting that both “interest” and “Australian urban land” are defined very broadly);
  • an acquisition of a substantial interest (15 percent or more) in an Australian corporation or trust, or an increase in a substantial interest where the value of the assets of that corporation or trust exceeds A $231 million (indexed annually), and higher for US and NZ investors in some circumstances).

The Treasurer also expects that any “direct investment” (ie, 10% or more, or an investment with any elements of control) by a foreign government or its related entity (such as a state-owned enterprise), regardless of value, will be notified, although strictly speaking there is no statutory basis for this.

The Treasurer also has power to evaluate other transactions under the “national interest” regime, such as any acquisition of a business located in Australia valued at more than A$231 million (indexed annually, and higher for US and NZ investors in some circumstances) and certain offshore acquisitions where there is a sufficient connection to Australia.  Notification of such transactions is not mandatory, but notification (and notice of no objection by the Treasurer) creates a safe harbor which ensures the Treasurer cannot unwind the transaction after completion.

3. Could both proposed and completed transactions be caught by the regime? Yes. Yes. Yes.
4. What is the maximum review period (and please give a brief breakdown of stages of review)? General Review stage will span for a maximum of 30 working days. If the transaction warrants further investigation, Special Review stage will span for a maximum of another 60 working days. The formalU.S.national security review process takes a maximum of 90 calendar days. Initial review is 30 calendar days. If the transaction warrants further investigation, the investigation must be completed by the end of another 45 calendar days. In addition, the President may announce a decision on whether to suspend or prohibit a transaction no later than 15 calendar days after an investigation is complete. 40 calendar day approval process (consisting of a 30 day approval period and a 10 day notification period) applies to most applications. This 40 day approval process can be extended:

  • formally if the Treasurer issue an extension order (by a maximum of a further 90 days). It is possible to extend this further but this is very rare.
  • informally if the Foreign Investment Review Board requests applicants to withdraw and relodge the application (restarting the 40 day clock).

Certain applications are not subject to any formal statutory time periods. Generally these are applications by foreign governments and their related entities (such as state-owned enterprises) which would not be notifiable except for the fact that the applicant is a government investor.

5. Who are the authorities in charge of the review process? A Ministerial Joint Committee, led by the National Development Reform Commission and the Ministry of Commerce (and under the overarching leadership of the State Council). This Joint Committee will work with other relevant government agencies to carry out the review process. The Committee on Foreign Investment in the United States is in charge of undertaking this review process. This Committee is made up of the following members: The Secretary of the Treasury (chair); the Attorney-General; and the Secretaries of Homeland Security, Commerce, Defense, State and Energy; the Secretary of Labor (non-voting); the Director of National Intelligence (non-voting). The Committee may include generally or on a case-by-case basis the heads of any other executive department, agency or office. The President has also designated the US Trade Representative and the Director of the Office of Science and Technology Policy as additional members of the Committee. The Foreign Investment Review Board is a non-statutory advisory body which reviews all applications and makes a recommendation to the Treasurer. The Treasurer makes the final decision on all applications.
6. What factors will be taken into consideration when the authority reviews the transaction? Whether the transaction has a severe negative impact on national security. Specifically, the impact of transactions on:

  • national defense security, including production capacity of domestic products, capacity of domestic services and relevant equipment and facilities which are required by national defense;
  • stability of the national economy;
  • basic social life order; and
  • capacity of research and development on key technologies that have a bearing on national security.


CFIUS’ policy is to limit its review to genuine national security concerns, not broader economic or other national interests.CFIUS is required by statute to consider the following factors:

  • the domestic production needed for projected national defense requirements;
  • the capability and capacity of domestic industries to meet national defense requirements;
  • the control of domestic industries and commercial activity by foreign citizens and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security;
  • the potential effects of the proposed or pending transaction on sales of military goods, equipment or technology to certain designated countries;
  • the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting the US national security;
  • the potential national security-related effects on US critical infrastructure and critical technologies;
  • whether the covered transaction is a foreign government controlled transaction;
  • adherence of the foreign investor’s country to nonproliferation control regimes, the relationship of such country with the United States(specifically its record on cooperating in counter-terrorism efforts), and the potential for transshipment or diversion of technologies with military applications; and
  • the long-term projection of US requirements for sources of energy and other critical resources and material.
The Foreign Investment Review Board examples proposals to determine if they are contrary to the national interest. The term “national interest” may include without limitation:

  • national security;
  • competition;
  • other policies like tax and the environment;
  • the economy and the community; and
  • the character of the investor (namely the extent to which the acquirer operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision).
7. Who may initiate a review? Parties to the transaction or any other third parties (including other government departments, industry associations, and other businesses). Any party or parties to the transaction. Filing is generally voluntary. However, the President or the Committee may initiate a review unilaterally. The person proposing to make the investment is responsible for lodging the application and dealing with the Foreign Investment Review Board. The Treasurer can also independently initiate a review where no application is lodged. In addition, members of the public can report suspected breaches of the foreign investment regime to the Foreign Investment Review Board.
8. What are the remedies in respect of a negative review? The parties may be asked to terminate the transaction and may be asked to undertake conduct to mitigate any negative impact on national security (including divestiture). The President may bar the parties from completing the transaction or force them to unwind a completed transaction if it threatens to impair the national security of theUnited States. Parties sometimes withdraw their applications for CFIUS approval, and abandon their transactions, if it becomes apparent that the transaction will not be approved by CFIUS. The Treasurer may issue an order prohibiting the transaction, or if the transaction has already completed, issue an order requiring the parties to unwind the transaction.

III         Lessons Learnt from the United StatesandAustralia

In the coming months, it will be interesting to see the sorts of deals that fall under the purview of the NSR regime in China and whether the majority of these deals are approved (just like in the United States and Australia). It will also be interesting to see the kind of deals which are prohibited pursuant to the NSR regime or whether participants in deals which are likely to be prohibited by the NSR regime in China tend to abandon their deals, just like in the United States and Australia.

We note that in the United States, more than 85 percent of the transactions that the Committee on Foreign Investment in the United States(the “CFIUS”) reviewed between 2008 and 2010 were approved. The U.S. President has only once taken the formal step of blocking a transaction, but parties sometimes have decided to abandon their deals when it becomes clear that the CFIUS was prepared to make a negative recommendation to the President.

The recent attempt by leading Chinese telecommunications equipment provider Huawei to acquire staff and intellectual property from 3Leaf Systems, a server technology start-up in California, was a relatively rare instance where the parties did not abandon the deal until after CFIUS made a negative recommendation to the President. However, Huawei decided to unwind the 3Leaf transaction before President Obama made a formal decision.

Recent examples of deals where the parties have withdrawn their CFIUS application before CFIUS even made a negative recommendation to the President include the Firstgold deal in 2009 and the Emcore deal in 2010. Firstgold Corporation, a US mining company located in Nevada and Northwest Non-Ferrous International Company, a large Chinese mining and geological firm, were reportedly unable to address the national security issues associated with a Chinese company acquiring a gold mine in close proximity to a naval air station. As a result, the parties were forced to abandon their deal and Firstgold went out of business. Similarly, an attempt by Tangshan Caofeidian Investment Corporation to acquire the fiber optics business of Emcore Corporation, a New Mexico-based provider of semi-conductor components, reportedly fell apart because of U.S.national security concerns about Chinese control of sensitive U.S. technology.

We note that in Australia, business investment proposals are also seldom blocked under the broader “national interest” regime (managed by the Foreign Investment Review Board). On April 8, 2011, the Australian Treasurer rejected the proposed acquisition by the operator of the Singapore Exchange of the operator of the Australian Securities Exchange. Prior to this, the last formal rejection of a business investment proposal was in 2001, when Shell attempted to acquire 60 percent in Woodside Petroleum. However, in Australia (just like in the United States) it should be noted that the incidence of rejection might be higher, but for the fact that applicants often withdrew or modified their business investment proposals if it became clear that the Treasurer was likely to reject a proposal. In addition, rejection of real estate proposals (especially residential real estate proposals) is more common.

The manner in which China’s NSR regime is set out is comparable to the regimes in the United States and Australia. In China, the maximum time it would take for the Joint Committee to review an application is 90 working days; in the United States it is 90 calendar days and in Australia, it is generally 40 calendar days (although this can be extended by both formal and informal means, and no time limits apply to certain investment proposals). All three regimes are concerned with the negative impact in which foreign investment might have on the national economy, including where foreign investors purchase key assets of the state.


[1] See:

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.