M & A Law Prof Blog

Mandatory shareholder arbitration being considered by SEC ... again?

Apparently the whole issue of mandatory arbitration of shareholder disputes has begun to percolate again. The issue is whether the SEC should permit registration statements to go effective with mandatory shareholder arbitration provisions in their corporate charters. This had been percolating for some time as a high priority item for some interest groups, waiting for a Republican administration to push it through. So, here we are, a two years into the Trump Administration and the scuttlebutt is that there is talk of moving forward with this. 

 Commissioner Pierce seems fine with the idea. Commissioner Piwowar is already on the record as good to go with this. Commissioner Clayton (here) and then Commissioner Jackson, on the other hand seem reticent to move away from the status quo (so, no). We'll see where it goes from here, but clearly if this is going to move, now is the time. 

Before things move too quickly, though, just a gentle reminder that under §115 of the Delaware Corporation Law, mandatory arbitration provisions that prevent shareholders from bringing their cases in the Delaware Chancery Court are not permitted to be included in the corporate charter. Section 115 reads as follows:

The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.  “Internal corporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery. (Emphasis added)

Even if the SEC permits a corporation to go public with such a provision, such a provision would violate state corporate law.

Given that more than 60% of publicly traded companies are incorporated in Delaware, if the SEC were to move forward with permitting mandatory shareholder arbitration, most listed corporations would not be in a position to include such provisions. So, why bother? Indeed, there are lots of good reasons why the SEC shouldn't take a permissive approach towards shareholder arbitration. 

First, I'm no fan of the litigation flotsam that jammed up the courts these past few years. Frankly, the disclosure settlement litigation was mostly just rent seeking in the economic sense. We're all better off without it. However, the creation of law by courts operating in the open is a public good. If shareholder claims were to be moved into arbitration we would lose the value of incremental developments of the law and the value associated with investors as well as managers actually knowing what the law is. All of that becomes a closely held mystery once we move a substantial block of shareholder claim resolution into private arbitration. 

Second, in confidential arbitration bad actors and bad actions go unnoticed. Or, to the extent self-interested managers are successfully sued, there is little prospect for accountability. For example, if a board engages in a self-dealing transaction is sued, then discovery, the trial and then the opinion are all held in confidence - not disclosed via any court filing system and not filed with the SEC, except in the most cursory fashion. That can't be good for "price discovery." Who wants that kind of system? Bad actors. 

So, count me down as a "no" if the SEC is still actively considering this bad idea. 

-bjmq

Odds of Comcast-TWC Deal Going Through?

 By now a coin flip?

 

-bjmq

Law Profs against Comcast/TimeWarnerCable

Last week a number of law professors, led by Dan Sokol, sent a letter to the FCC opposing the Comcast/TimeWarnerCable transaction. You'll remember that this deal requires not only anti-trust approval but also approval of the FCC. In fact, it requires a determination by the FCC that the merger is in the "public interest". The letter takes on a number of Comcast's arguments in favor of the deal, including the "no overlap, no problem" argument, noting that at the extreme this argument leads directly to the conclusion that the FCC should be okay with a single broadband cable provider in the US, which on its face seems absurd.

One thing I had forgotten, but the letter writers correctly focus on:  this tie up (Comcast acquiring TimeWarnerCable) involves exactly the same assets (plus more) of a previous deal (AT&T/MediaOne in 2000). The DOJ stepped in and blocked that transaction and blocked it on antitrust grounds.  One wonders if the competitive landscape has changed so much since then that this deal is okay. Though there have been some changes to the contours of competition in this space, the basic lay of the land is still the same. 

-bjmq

Comcast merger raises questions, but any answers?

 It's no surprise that the proposed Comcast-TWC merger raises questions about consolidation in the cable business.   But it's hard to say that there are any simple answers.  The issues that are raising some of the loudest concerns stem from the fact that this merger will be a merger of number 1 and number 2 in a business where there are only really 5 significant players left.  In all seriousness, questions about the consolidation of the cable business and that issue left the station years ago.  A couple of decades ago there were hundreds of cable businesses in the country.  Through subscriber swaps and consolidation smaller systems we have seen the sector get more and more consolidated over time.  

That's not likely going to change anytime soon, if ever.  Ideally, consumers would benefit from increased competition for the last mile.  We're not going to get that from this transaction.  In fact, to the extent there was marginal competition for franchises along the edges of the consolidated territory, that competition is going away.   The potential for competition for the last mile is really muted.  Verizon has largely given up any hopes of expanding its current base.  Satellite is a poor second choice, really ideally suited for the hard to serve rural areas that cable systems aren't really interested in.   Overbuilders?  They exist, but they are will forever be, niche players. 

So, if consolidation is the way things are going to be, why not more regulation of this natural monopoly?  Perhaps regulation of natural monopolies is out of fashion.  That's unfortunate.  Consoldidation without regulation may be responsible in part for why we pay so much for the service we have.  

 Other issues that get raised by this particular transaction is the tendancy of the cable providers to consolidate vertically as well as horizontally.  As consolidated cable moves up the chain to control content as well as the pipes there are serious questions about access that are raised.  The deal Comcast reached with the government when it purchased NBC Universal last year to treat content fairly is good, but the cable providers still face the economic incentives to shift content whenver they can to their favored providers.  

In any event, perhaps Leo Hindery is correct and that when asked, this transaction will sail through the regulatory process.  Perhaps.  But there are more questions than easy answers with this transaction. 

 -bjmq

Update: Felix Salmon thinks broadband access in the US blows...and is expensive to boot.

 

CFIUS and China

An announcement today that Lenovo has agreed to acquire the low-power server business of IBM reminds me that CFIUS just relased its Annual Report for 2012.  OK, it's 2014!  But remember, CFIUS is an ad-hoc committee without even a building in DC.  We can give them a break for being a little slow on the reporting side.

The big news from this most recent report is that China is moving on up to the big time.  Previously, the countries with the largest number of CFIUS filings were France and the UK.  Now, they have been replaced by Chinese filings.  Of course, the total number of transactions covered under the CFIUS regime remains small, but as the Lenovo/IBM deal suggests, these deals are in potentially critical technology areas.

-bjmq

Smithfield gets attention

No surprise really.  File this under "miscellaneous regulatory review (a.k.a. politics)".  The Senate Agriculture Committee will hold hearings on July 10 to review the acquisition of Smithfield.  On what basis?  Who knows.  Who cares, really.  Here's the text of a letter a bi-partisan group of Seantors sent to Treasury Secretary Lew asking that acquisitions of food companies be submitted for national security review:

We are writing with regard to the proposed purchase of Smithfield Foods, the world's largest producer and processor of pork, by the Shuanghui Group. Although the Committee has not reached any conclusions with respect to this particular acquisition, it has raised a number of questions about how the foreign purchase of a major agriculture or food company is reviewed by the United States Government.

It has been publicly reported that the parties to this transaction are submitting it to the Committee on Foreign Investment in the United States (CFIUS) for review. The President has delegated to you the authority to add "the heads of any other executive department, agency, or office" that you deem appropriate to CFIUS on a case by case basis, and to designate a "lead agency or agencies" to "have primary responsibility" for that review.

We believe that our food supply is critical infrastructure that should be included in any reasonable person's definition of national security. As such, we strongly encourage you to include the Department of Agriculture and the Food and Drug Administration in any CFIUS review of this transaction, and consider designating the Department of Agriculture as one of its lead agencies. Further, any CFIUS review of this transaction should look beyond any direct impact on government agencies and operations to the broader issues of food security, food safety, and biosecurity.

Considering the potential for other foreign acquisitions of American food and agriculture companies, we also have a number of broader questions about how these transactions are reviewed and whether the appropriate authorities are evaluating potential risks and proposing sufficient mitigation measures to protect American interests. For instance, what measures should be considered to ensure that a company will maintain operations that comply with stringent American food safety and biosecurity standards? What measures should be considered to ensure that taxpayer supported research and development and any resulting intellectual property are properly safeguarded? Should trends in foreign acquisitions also be monitored to ensure the ongoing integrity of key components of the American food supply?

The United States has the safest, most efficient and reliable food supply in the world. It is one of our nation's great strengths, and we must ensure that it is preserved and protected. The Committee on Agriculture, Nutrition, and Forestry will further examine how this transaction is reviewed and how these transactions should be reviewed in the future. We look forward to your cooperation in that important effort.

"Biosecurity"... sounds scary.  Strikes me that this is decidedly not a transaction that should be subject to CFIUS review.

-bjmq 

Challenges to the Smithfield transaction

File this one under miscellaneous regulatory approval.  It's likely that the Smithfield acquisition by Shuanghui International is going to get pretty intensive review by a Congress.  No big surprise there.  Congress has regularly used large Chinese acquisitions to make political hay.  This one, though, is a little different. What's the hook? National security - "Gawd, they're taking our ham!"  Seems like weak tea.  Heidi Moore suggests a different national security hook - concern that the lack of effective food standards at the Chinese parent could bleed down into Smithfield and adversely affect the US food supply.  That's interesting and might be compelling, but we'll see how it plays out. Hey, maybe the result will be to increase the FDA's budget.  OK, probably not...

-bjmq

Duke-Progress CEO settlement

You may remember last summer there was a bit of a kerfluffle over the post-closing CEO change at the combined Duke Energy-Progress Energy.  When the North Carolina based energy firm announced its merger with Progress, it stated that Progress Energy CEO William Johnson would lead the combined company post-closing.  When the merger closed on July 2, 2012 the board met and immediately fired Johnson and replaced him at CEO with Duke Energy CEO James Rogers.  For those of us on the outside, this whole episode was a little odd, and raised some questions about how much parties in mergers of equals actually have to negotiate post-closing leadership and employment questions.  

However, the quick leadership change also raised questions with state regulators.  Almost immediately after the firing of Johnson, the North Carolina Utilities Commission, which was required to approve the merger, opened an investigation.  Central to that investigation were the statement made to the commission related to the post-closing leadership structure of the combined firm.  The commission was told that Johnson would lead the firm and relied on those statements in order to approve the transaction.  Since that turned out not to be true  almost immediately following closing, the NCUC wanted another look.  The hearings related to the merger were held throughout the summer. The documents and audio files of their hearings can be found here.

Now, Duke and the NCUC have reached a settlement.  And ... well ... it's pretty clear that the NCUC is unhappy with the quick leadership change.  So, they want a couple of scalps.  The settlement includes the resignation of CEO James Rogers.  A new board committee will be set up to search for a replacement CEO.  Duke is required to re-hire the former Progress GC to advise the corporation on North Carolina regulatory issues.  Duke will hire a new GC, so long as that new hire was not involved in any of Duke's representations to the NCUC leading up to the merger.  And, a former Progress manager will take over as head of state-regulated power susidiaries. 

Duke is also required to maintain its corporate headquarters and at least 1,000 employees in North Carolina for at least five years.  There is $25 million in givebacks to North Carolina consumers. And, Duke is required to issue what can only be described as a corporate apology to the NCUC acknowledging to the NCUC that it had fallen short of the NCUC's understanding of Duke's obligations under its "regulatory compact" with the state.

The settlement itself is pretty much a house-cleaning of Duke managers at the very top and an attempt by the NCUC to put Progress employees back in a position to exert some influence.  Lesson here for transaction lawyers - be careful what you say to regulators.  If you don't mean it, it may come back to haunt you.

-bjmq

Presidential Order Prohibiting a Chinese-Owned Company From Acquiring U.S. Wind Farm Projects

It is one of those things that rarely happens in an M&A deal. Late last week, President Obama issued an order prohibiting Ralls Corporation, a U.S. affiliate of the Chinese machinery manufacturer Sany Group, from acquiring four U.S. wind farm project companies.  The wind farms are near restricted air space the U.S. Navy uses for flight training.  President Obama’s order followed a recommendation from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency group headed up by the Treasury Department that evaluates the national security risks of foreign investments in U.S. companies or operations. See here for the Treasury Department’s press release on the order. WilmerHale also has a useful short release on this rather unusual Presidential action.

Reuters reports that Ralls has sued CFIUS and the President, although the chance of a successful suit is really slim given the President’s broad authority on national security matters. It will be interesting to see whether the court will even entertain Ralls’ arguments.  The case is Ralls Corp. v. Committee on Foreign Investment in the U.S., 1:12-cv-01513, U.S. District Court, District of Columbia (Washington).

-    AA

Canada is ... interesting

Now, I don't often say that, but things are happening up there that we should pay a little attention to.  Canada has for a long time been much less solicitous towards the poison pill than Delaware (or other US) courts.  In Canada, boards have the authority to adopt poison pills, subject to review by the provincial securities commissions. The commissions have the authority to order pills redeemed.  In making the determination with respect to whether or not to order a pill redeemed, the commissions consider, among other things, whether the shareholders have voted to ratify the adoption of the plan.  (I've blogged about Candadian pill standards before, see here).  

In any event, the Canadians take a position that is very Gilson/Bebchuk-like on the scale of things in the long-standing takeover debate: the corporation is ultimately owned by the stockholders.  In response to an unsolicited offer, boards may use defensive measures in order to help negotiate a higher price, but in the end, a board may not stand between shareholders and the opportunity to tender into a non-coercive offer.  I suspect there's a finance study out there on takeover premia in Canada.  If not, that sounds like a study/summer project.   

Contrast the Canadian position with the Delaware position, which, following Airgas and Versata, can only be called a reluctant endorsement by the Chancery Court of "just-say-no".  In that long-standing debate, it's pretty clear that Marty Lipton has won the day.  

So, and this is where Canada is interesting, it looks like Canada is making increasing noises about moving away from its long-standing position with respect to poison pills and its more shareholder-centric approach to the takeover law and towards a more Delaware-like approach.  Already last year, it was bubbling under the surface. High profile takeovers of Canadian firms by foreign acquirers tends to ignite the passions of nationalism.   Recently, it's been proposed acquisition of Rona Inc by Lowe's Co - we can't have the Yanks owning our big-box hardware stores afterall.  In any event, the acquisition played an important role in the recent provincial elections in Quebec, which saw the Quebec nationalist party put back in power.  During that election, both the Liberal and PQ included anti-takeover legislation in their party platforms. Liberal leader Charest went so far as to announce a $1 billion "foreign-takeover fund" that would be used to finance domestic acquisitions of Quebecois companies.  No clue whether he intended to use the proposed fund to fend off interlopers from Alberta, but we won't ever find out.  Charest lost and he's on his way out.  The incoming PQ has already signaled that they aren't supportive of a Lowe's/Rona deal (and here).  I suppose the PQ could try to stymie foreign takeovers by requiring that all tender offer documents be in French.  Or, it could repeat what the Canadian government did last year in the proposed Potash aquisition - declare the Rona hardware retailer a vital national asset and a transaction not to Canada's benefit block the deal. Uh ... too much? 

Short of that, it looks like the more obvious path would be to adopt a constituency statute that would place more power in the hands of the board and permit them to more aggresively resist unwanted offers.    

So, something to watch. Of course, putting more power in the hands of boards doesn't ensure that Canadian businesses stay Canadian, but I suppose that's a lesson our friends up North will have to learn on their own. 

-bjmq

 

More on Facebook's 3(a)(10) fairness hearing

I noted earlier in the week that Facebook will be issuing 23 million shares as consideration in its acquisition of Instagram pursuant to a 3(a)(10) fairness hearing exemption.  There are lots of good reasons to issue shares pursuant to a 3(a)(10) exemption - cost, timing, etc.  But, remember today is the day 270 million shares hit the market following the expiration of lock-ups, and FB has hit an all time low.  I suspect the market won't be all that happy to absorb 23 million more shares at the end of next week...

If you're at all interested, Facebook's fairness hearing package should published on the CALEASI database.  I just did a quick search and it's not there, yet.  

Oh, I commented for the FT on the Facebook fairness hearing.  I think I said something like "It was worth a billion at signing and now it's down by half, is that fair?"   Since I asked that question, let me answer it.  Uh...yes.  Instagram was a company that sold for $1 billion (30% cash and 70% stock)  despite having no revenue!  Is it fair to shareholders that their revenueless company now gets only $350 million of stock (or some rough equivalent) and $300 million in cash now that Facebook's shares have declined in value?  Sure it is.   Is it the highest price the board could have gotten?  Probably not. In hindsight, taking more of that in cash would have worked out better, but the Instagram board made a reasonable bet -- that FB shares might soar -- that turned out to be wrong.  No penalities for that.

In any event, Instagram has only a handful of shareholders who are all extremely close to management - the CEO of Instagram holds 45% of the shares himself.   I doubt any of them are going to show up at what will otherwise be a non-contentious hearing to demand more for their revenueless company.

-bjmq 

Senators weigh in on EMI acquisition

In a letter to the FTC, Senators Herb Kohl (D-WI) and Mike Lee (R-UT) come to the defense of audiophiles everywhere.   Their letter summarized findings of a hearing by the Subcommittee on Antitrust, Competition Policy, and Consumer Rights on the proposed acquisition of EMI by Universal.  They point to the rapid shift in the structure of the music distribution market from CDs to online distribution and caution that the acquisition could potentially be anticompetitive - a combined Universal/EMI controls over 40% of US market share by revenue (and 51 of the 2011 Billboard 100).  Sens. Kohl and Lee argue that the strength of a combined Universal/EMI's catalogue could form a bottle-neck in any online distribution and create market power for the combined entity, stifling potential competition and efficiency.  

For its part, Universal's CEO told the committee that it would be "insane not to license, develop, make available through as many platforms through as many retailers as possible."  I don't know...I seem to remember a time not long ago when all the major record labels were "insane" in precisely that way. 

In any event, here's the full text of the letter to the FTC. The ball is in the FTC's court.  

-bjmq

No public benefit

Over the past week, AT&T withdrew its application to the FCC for approval of the T-Mobile transaction, calling into question the prospects that this transaction will go forward.  (It won't without FCC approval.)  In any event, the FCC report analyzing the public benefits associated with this proposed transaction has since been released. What did the FCC conclude in its draft report on the transaction? Well, that there wasn't much public benefit to be had by doing the transaction:



If AT&T ultimately terminates the merger agreement because of the inability to get government approvals that will trigger the $4 billion reverse termination fee under the merger agreement.  AT&T has already started laying the groundwork to do just that. 

-bjmq

CFIUS approval for NSYE/DB

Reuters is reporting that DB's acquisition of the New York Stock Exchange has been approved by the US  Committee on Foreign Investments.  It didn't even cross my mind that a voluntary CFIUS filing would have been on the radar for this transaction.  Though, I suppose control of the capital markets in the US is a question of national security.

-bjmq

UK Parliament releases report on Kraft acquisition of Cadbury

The FT has a nice review of Kraft's acquisition of Cadbury one year on.   The initial results of the acquisition appear to be mixed.  On the one hand, 

Speaking to the Financial Times before Monday’s statement from the committee, [Kraft CEO Rosenfeld] said: “We have clearly shown ourselves to be good stewards of the brands, and yet the continued assault has been somewhat surprising.

“I think we’ve done everything possible to address concerns, to respond to issues, and the focus remains on making sure that this integration is successful."

Defectors from Cadbury and politicians beg to differ. They say the speed of the integration, allied to the fact that the hostile nature of the bid precluded due diligence, has made the process more fraught. Ms Rosenfeld’s perceived disdain, for workers as well as parliament, has added to the rancour.

In the wake of the acquisition and what were understood to be broken promises related to the status of the Cadbry plant in Bournville, the UK Takeover Panel revisited its rules and the UK Parliament tasked a Select Committee to undertake an investigation.  The Committee's report, Is Kraft Working for Cadbury?, was released earlier this month. The report - though critical of Kraft in many respects - was guardedly optimistic:

 Our overall conclusion, therefore, is that, while there remain some significant concerns about Kraft takeover of Cadbury, a number of positive signs may be beginning to emerge. Those positive messages would have been considerably more convincing if conveyed directly to bodies such as ourselves from the top of the organisation. As for the future, Kraft's witnesses asked us to judge Kraft on its deeds. We shall.

For the timebeing, that seems to be it from the Parliament and its investigation.  

-bjmq

AT&T and T-Mobile and state clearances

The WSJ Deal Journal is reporting that the NY Attorney General has jumped into the merger clearance business:

Attorney General Eric Schneiderman, who took office at the beginning of the year, announced today his office will “undertake a thorough review” of AT&T’s proposed $39 billion takeover of mobile phone company T-Mobile. 

More work for lawyers, so I suppose that can only be a good thing.  On the other hand, if more than a couple more AGs begin their own investigations of the AT&T/T-Mobile deal that could quickly spell the end of the deal.  At least with the FTC/DOJ and the FCC clearance process the pathes are well trod.  Not too many surprises will emerge from either of those bureacracies.  The NY AG's office?  Other AG offices around the country?  Well, who knows what could result from that process.  

-bjmq

Things t-Mobile wishes it didn't say...

 

"Sometimes you just gotta pay more to be slower ... makes sense if you don't think about it ..."

 

AT&T and T-Mobile

AT&T announces that is acquiring T-Mobile for $39 billion.  My first thought is that this will take a long time to clear the HSR process.  I haven't given this much thought, yet, but if this transaction doesn't at least go through a 'second request' we should just shut down the FTC altogether.  I mean, there is no question that this transaction will result in AT&T being the single largest wireless carrier by far.  Because this is a telecom deal, the FCC will also have a say in whether this deal can go forward.  The FCC's mandate to ensure that mergers are in the "public interest" has come under some criticism for being too far reaching at times.  The FCC was able to squeeze out of CenturyLink/Qwest commitments to build out low-income broadband access as a condition to approving that merger just last Friday.  I wonder if the FCC can squeeze out of AT&T a commitment not to drop more of my calls? 

In any event, the FCC has recently been talking about reworking its merger approval process, perhaps narrowing its scope.  Jonathan Baker, the Chief Economist over at the FCC posted a couple of days ago to the FCC's official blog on the proposed changes to the FCC's merger approval process. 

AT&T and T-Mobile have a transaction web-site up already:  http://www.mobilizeeverything.com.  Go there for merger docs, etc.

-bjmq

Merger Pre-approvals in India

The Indian Competition Commission has recently published draft rules on the pre-approval of mergers in India.  The draft rules are intended to go into effect this summer (June/July 2011).  After they go into effect, India will join the growing list of countries (US, EU, Brazil, China, etc.) that will assert jurisdiction over international transactions where there is a nexus to India.  Unlike the 30 day US HSR process for most transactions, the Indian process commits to resolving reviews of applications within 180 days of receiving them, with an outside date of 210 days.  Nothing like efficiency!

The Commission is presently taking comments until March 22, 2011. I have an idea for a comment -- how about reducing the review period to say ... 30 days unless there is any reason to undertake a more extensive investigation.

-bjmq

 

Chinese "CFIUS process"

Reuters reports on China's announcement that China will begin subjecting inbound M&A activity to national security reviews - its own version of the US CFIUS process.  Although the US security review system entails a voluntary filing, I suspect the Chinese version that they are currently envisioning will be slightly more intrusive.  Here's the official goverrnmenent announcement (translated by the Google machine):

In order to guide foreign investors and orderly development of the domestic enterprise, safeguard national security, by the State Council, is to establish a foreign investor acquires a domestic enterprise security review (hereinafter referred to as M & A security review) system in the matter are as follows:

    First, the scope of M & Security Review
    (A) safety review of the range of M & A: Foreign investors, supporting the takeover of a domestic defense industry and military enterprises, key, sensitive military installations around the business, and relationships with other units of national security; foreign investor acquires a domestic national security of the important agricultural products, it is important energy and resources, critical infrastructure, an important transportation services, key technologies and major equipment manufacturing and other enterprises, and the actual control may be achieved by foreign investors.
    (B) a foreign investor acquires a domestic enterprise, is the following:
    1  foreign investor purchases shares of enterprises with foreign investment or subscribe for capital increase domestic non-foreign-invested enterprises, domestic enterprises to make the change into a foreign-invested enterprises.
    2  foreign investment in a foreign investor purchases the equities of Chinese enterprises, or enterprises with foreign investment capital increase subscription.
    3  foreign investors to establish foreign-invested enterprises and enterprises with foreign investment agreement through the purchase of a domestic enterprise assets and operates its assets, or through the foreign-invested enterprises to purchase shares of domestic enterprises.
    4  the territory of foreign investors to buy corporate assets, and invest the assets of the foreign-invested enterprises operating assets.
    (C) to obtain effective control over foreign investors, foreign investors means a domestic enterprise through the acquisition of a controlling shareholder or actual controller. Include the following:
    1  foreign investors and its parent holding company, subsidiary after the acquisition of the total shares held by more than 50%.
    2  several foreign investors in the acquisition of shares held after the combined total of more than 50%.
    3  foreign investors in the acquisition of shares held after the total amount of less than 50%, but according to their holdings enough to enjoy the right to vote, or the shareholders meeting of shareholders, resolution of the board have a significant impact.
    4  other decision-making led to a domestic enterprise, finance, personnel, technology transfer of effective control over the situation to foreign investors.

    Second, the contents of M & Security Review
    (A) of the M & A transaction on national security, including the defense needs of the domestic production capacity, the domestic services capacity and the impact on equipment and facilities.
    (B) of the M & A transactions on the stable operation of the national economy.
    (C) of the M & A transactions on the impact of basic social order of life.
    (D) M & A transactions involving national security, the impact of key technology R & D capabilities.

    Third, M & A security review mechanism
    (A) the establishment of a foreign investor acquires a domestic enterprise security review of the Inter-Ministerial Joint Conference (hereinafter referred to as joint) system, the specific commitment to the safety review of mergers and acquisitions.
    (B) under the leadership of the joint meeting of the State Council, the Development and Reform Commission, Ministry of Commerce take the lead, according to foreign capital industries and sectors involved, together with relevant departments to carry out M & Security Review.
    (C) of the joint meeting of the main responsibilities are: analysis of a foreign investor acquires a domestic enterprise to national security; research, coordination of the foreign investor acquires a domestic enterprise security review of the major issues; on the need for safety review of the foreign investor business transactions within the safety review and decision.

    Fourth, M & A security review process
    (A) a foreign investor acquires a domestic enterprise, shall be in accordance with the provisions of this notice by the investor to the Ministry of Commerce to apply. That fall within the scope of the safety review of mergers and acquisitions, the Ministry of Commerce should be brought to within 5 working days to review the joint meeting.
    (B) a foreign investor acquires a domestic enterprise, relevant State Council departments, national trade associations, industry enterprises and downstream enterprises that require acquisition of security review, conducted by the Ministry of Commerce security review of the proposed merger. Joint acquisitions deemed necessary by the safety review, may decide to conduct the review.
    (C) of the joint review of the Ministry of Commerce deals brought to safety, the first general review of the general review of the failed, to conduct a special review. The parties shall deal with the joint safety review, to provide security review required materials, information, and accepted the inquiry.
    Review of written comments of general way. Ministry of Commerce received the Joint Security Review deals brought to the application, within 5 working days, the departments concerned to seek a written opinion. After receiving the additional request in writing the relevant departments, should be within 20 working days to submit written observations. Such as the departments concerned that the deal does not affect national security, are no longer conduct a special review by the joint meeting of all the written comments received within 5 working days to review comments, and written notice to the Ministry of Commerce.
    M & A transactions, if any departments that may impact on national security, joint written comments should be received within 5 working days after the start the special review process. Start the special review procedures, joint organization of the safety assessment of mergers and acquisitions, combined with assessment of the review of M & A transactions, basically the same comments, review comments made by the joint meeting; there are significant differences, by the joint meeting of the State Council for decision. Joint meeting since the launch of special review procedures within 60 working days to complete special reviews, or to the State Council decision. Review comments in writing by the joint meeting of the Ministry of Commerce.
    (D) the safety review process in the acquisition, the applicant may apply to the Ministry of Commerce program to modify or withdraw merger transaction.
    (E) acquisition of security review was made by the applicant written notice of the Ministry of Commerce.
    (Vi) acts of a foreign investor acquires a domestic enterprise to national security have caused or may cause significant impact on the joint meeting with the relevant departments should be required to terminate the Ministry of Commerce of the transaction parties, or transfer the relevant shares, assets or other effective measures to eliminate the merger and acquisition on national security.

    V. Other provisions
    (A) the relevant departments and units to establish the overall concept, enhance a sense of responsibility and keeping state secrets and commercial secrets, improve efficiency, expanding opening up and foreign investment to improve standards at the same time, promote the healthy development of foreign capital to safeguard national security.
    (B) the acquisition of domestic enterprises involving foreign investors new investment in fixed assets, fixed assets investment by state regulations for project approval.
    (C) acquisition of domestic enterprises involving foreign investors to change the state-owned property, the management of state assets by state regulations.
    (D) a foreign investor acquires a domestic financial institutions, security review separately.
    (E) Hong Kong SAR, Macao Special Administrative Region, Taiwan investors in mergers and acquisitions, with reference to the provisions of this notice.
    (Vi) M&A safety review system since the date of the notice issued 30 days after implementation.

Rules for this review process are expected to be released in March.

-bjmq