Clifford Chance

Foreign investments into China are increasingly subject to China’s national security review (NSR) regime. In this blog, we share our FAQs regarding NDRC pre-consultation procedures for NSR purposes.

Introduction

Since the Chinese national security review ("NSR") regime came into force on 18 January 2021, foreign investors have become increasingly aware of the potential implications of the NSR, particularly when a Chinese merger control approval needs to be obtained in parallel in a specific transaction. Given the broad definition of sensitive sectors under the NSR rules, we have seen many foreign-to-foreign transactions technically fall within the scope of the NSR. The lengthy review process under the NSR (90 business days, with the possibility of further extension) has also prompted a need to pre-consult with the competent authority (National Development and Reform Commission, "NDRC") for the purposes of seeking official confirmation as to whether an NSR filing is actually required. This blog sets out some FAQs (see below) in relation to these pre-consultation procedures with a view to assisting foreign investors in navigating the NSR regime for their investments in China.

Which party can initiate the pre-consultation procedures?

According to the NSR rules, "transaction parties" can initiate the consultation process. In practice, it is common for the foreign investor to initiate the consultation procedure or for the parties to initiate it jointly. In some cases, the target can also initiate the consultation procedure on its own, in which case the NDRC might be interested in knowing the reasons for this and may ask for further information.

When can the pre-consultation process be initiated? Does it require signing of transaction documents?

In practice, the transaction parties can initiate the pre-consultation process once transaction documents (e.g. the share purchase agreement) are available. The NDRC is unlikely to respond to a consultation application in the absence of any transaction documents indicating that the parties are seriously negotiating the transaction (i.e. due to lack of deal certainty).

In some cases, non-binding legal documents (such as a term sheet or letter of intent) may also be accepted as evidence of deal certainty and serve as the basis for pre-consultations with the NDRC.

Are there specific information requirements for the application for pre-consultation?

There are no specific information requirements when applying for pre-consultation under the NSR rules. In practice, the parties are expected to at least include the following in the consultation paper: information about the contemplated investment, the identity of the parties to the transaction, the parties' businesses in China, and the relevant industry/sector in which both parties are active. The NDRC does, however, have considerable discretion to request additional information during its review process.

How will the NDRC respond to the application for pre-consultation?

The NDRC can respond to the application for pre-consultation either formally by email or less formally by phone. In practice, the NDRC will also hold face-to-face meetings if they consider it necessary to discuss certain key issues. The NDRC is likely to decline an application for pre-consultation if it deems any pre-consultation unnecessary, e.g. in the event of insufficient deal certainty (see above).

How long does a pre-consultation usually take?

There is no "statutory" timeline for a pre-consultation with the NDRC for NSR purposes. In practice, the duration of a consultation with the NDRC varies. Based on our experience, it can take several weeks or even several months from the submission of the consultation paper, depending on factors such as the complexity of the transaction, the sensitivity of the sectors/products concerned, and the NDRC's caseload.

Can the NDRC address substantive issues in its feedback on a pre-consultation?

NDRC feedback on a consultation (as explained above) will only confirm whether a formal filing is required or not. In practice, the response from NDRC officials, either by email or phone, is usually quite succinct (e.g. a brief message along the lines of "after reviewing this case we take the view that a formal NSR filing is required", without providing any specific reasons).

In our experience, the NDRC is unlikely to consider substantive issues in a consultation process and would not therefore generally address requests such as whether a given transaction is likely to give rise to material national security concerns. Having said this, if the NDRC confirms that a formal filing is required, it is already indicating to a certain extent that there are likely national security concerns, although it is unlikely to provide a formal view on any final outcome (i.e. unconditional approval, conditional approval or prohibition) at the pre-consultation stage.

Disclaimer:

Any content above relating to the PRC is based on our experience as international counsel representing clients in business activities in the PRC and should not be construed as constituting a legal opinion on the application of PRC law. As is the case for all international law firms with offices in the PRC, whilst we are authorised to provide information concerning the effect of the Chinese legal environment, we are not permitted to engage in Chinese legal affairs. Our employees who have PRC legal professional qualification certificates are currently not PRC practising lawyers.