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The Ministry of Commerce of the People's Republic of China (MOFCOM) has released the Circular on Further Improvement of the Examination and Approval Process Regarding Foreign Investment, explicitly delegating Central MOFCOM’s approval authority over certain merger and acquisition transactions and foreign investments to its local counterparts at the provincial, municipal and local levels.

Circular 7, which was promulgated on March 12, 2009 and became effective on March 5, 2009, provides exceptions for certain projects that exceed proscribed financial thresholds.

Summary of Circular 7

Before Circular 7 was adopted, approval by Central MOFCOM in Beijing was generally required for mergers and acquisitions involving domestic Chinese companies and foreign investments that exceeded prescribed monetary thresholds or involved so-called round-trip investment. ¹

With the enactment of Circular 7, approval authority has now been delegated to MOFCOM’s local counterparts for the following M&A transactions and foreign investment projects, which previously required approval by Central MOFCOM:

• Mergers or acquisitions by foreign investors or foreign invested enterprises (FIEs) of domestic enterprises (cross-border M&A transactions) in industries identified as “encouraged” in China’s Foreign Investment Industrial Guidance Catalogue (Catalogue) with an acquisition consideration equal to or less than US$100 million.
• M&A transactions in industries identified as “permitted” in the Catalogue when the acquisition consideration is equal to or less than US$100 million, or in industries identified as “restricted” in the Catalogue when the acquisition consideration is US$50 million or less.
• Establishment of an FIE (irrespective of the registered capital amount) in industries identified as “encouraged” in the Catalogue, as well as subsequent increases in the registered capital and amendment to the constitutional documents of such FIE--provided, however, that such FIE is not deemed important to China’s economy under the required “state comprehensive balancing” analysis.² 
• Establishment of a branch by an FIE outside China.

Previously, investors tended to rely on the investment handbook published by MOFCOM, primarily because the relevant laws and regulations concerning M&A, including the 2006 M&A Rules, did not specify the competent examination and approval authority for M&A transactions. With the adoption of Circular 7, foreign acquirers of domestic companies now have greater certainty in identifying the relevant approval authority for specific transactions.

The decentralization of MOFCOM’s approval authority reflected in Circular 7 should be a positive development for foreign companies and investment funds considering acquisitions or investments in China. It generally signals that governmental authorities intend to expedite the relevant review and approval processes.

Given that Circular 7 has been recently promulgated, the new approval requirements will need to be tested and guidance will need to be sought from MOFCOM on its interpretation and implementation.

¹ China enacted the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, effective on September 8, 2006. Under the 2006 M&A Rules, approval of MOFCOM is required for all sizes of investments when a domestic target company is to be acquired by an offshore holding company formed or controlled by the domestic target company’s Chinese resident shareholder or affiliatres.

² Pursuant to an the Circular on Enlarging the Local Approval Power for Encouraged Foreign Investment Projects Requiring No State Comprehensive Balancing promulgated by MOFCOM and NDRC in December 1999, foreign invested projects that require “state comprehensive balancing” refer to foreign invested projects important to China’s economy and the people’s livelihood. Examples of such projects would include any foreign investment project that requires any investment within the budget of the central PRC government, infrastructure projects (such as railways and key water reservation projects) and major industrial projects (such as oil refining and paper pulp projects).