The Security Review That Has to Happen Before You Close
Foreign investment security review is a pre-closing obligation in defined sectors. Failing to file before implementing can lead to being ordered to dispose of the equity or assets acquired.
HainanInc Transactions Advisory
· 4 min read
Most transaction risk is priced. Security review is different, because the downside is not a price adjustment or an indemnity claim — it is being told to unwind a deal that has already completed. The obligation is to file before implementing the investment, which makes it one of the few regulatory items in a Chinese acquisition where the timing of the filing, rather than its outcome, is what determines the exposure.
The instrument and the mechanism
The Measures for the Security Review of Foreign Investment (外商投资安全审查办法) were issued as Order No. 37 of the National Development and Reform Commission and the Ministry of Commerce on 19 December 2020, taking effect on 18 January 2021. A working mechanism was established with its office in the National Development and Reform Commission, led jointly by that Commission and the Ministry of Commerce. On receiving complete materials, the office must decide within 15 working days whether a security review is required, notifying the parties in writing.
The sectors captured follow the framework established for security review of foreign acquisitions: enterprises connected with the military, important agricultural products, energy and resources, critical infrastructure, transport services, key technologies and major equipment manufacturing — where the foreign investor may acquire actual control.
The review instruments, as published
- Measures for the Security Review of Foreign Investment (外商投资安全审查办法) — National Development and Reform Commission and Ministry of Commerce Order No. 37 — issued 19 December 2020, in force 18 January 2021.
- Same measures — the working mechanism office, established in the National Development and Reform Commission and led jointly with the Ministry of Commerce, must decide within 15 working days of receiving complete materials whether a security review is required, and notify the parties in writing.
- Same measures — where parties fail to report an investment within the scope of review before implementing it, the office may order a supplementary report; refusal to report may result in a requirement to dispose of the equity or assets and other necessary measures to restore the position before the investment.
- Notice of the General Office of the State Council on establishing a security review system for foreign investors' mergers and acquisitions of domestic enterprises (2011) — the earlier framework identifying the sectors covered where a foreign investor may acquire actual control.
- Hainan Free Trade Port foreign investment access negative list, and the Market Access Negative List (2025 edition) — the separate access screen, which security review does not replace.
- All positions above verified against the issuing bodies' published texts in September 2026.
'Actual control' is the concept doing the work
Whether a transaction is caught turns substantially on whether the foreign investor acquires actual control, and control is not simply a majority of shares. Board appointment rights, veto rights over material decisions, contractual arrangements that determine how the business is run: each can constitute control at a shareholding level that looks comfortably minority. A deal structured to stay below a percentage threshold, with governance rights that deliver control anyway, has managed the appearance rather than the substance — and it is the substance the review is concerned with.
The remedy is not a fine. It is being told to give back what you bought.
The consequence of not filing is structural
Where parties fail to report an investment within the scope of review before implementing it, the office may order a supplementary report, and where they refuse, may require disposal of the equity or assets together with other measures necessary to restore the position that existed before the investment. For a buyer that has integrated a target, funded it and begun operating it, an unwind order is a materially worse outcome than any diligence finding — and it arrives after the price has been paid.
Three screens, run separately
Security review is one of three distinct filters on an inbound acquisition, and they are frequently conflated. Foreign investment access asks whether foreign capital may hold this business at all, answered against the applicable negative list. Merger control asks whether the concentration requires antitrust clearance, answered against declaration thresholds. Security review asks whether the transaction affects national security. Clearing one says nothing about the others, and each has its own timetable that the transaction schedule has to accommodate.
What a Hainan acquisition needs settled early
- Whether the target's activity falls within a sector the review framework covers.
- Whether the buyer acquires actual control on substance — governance rights, not only shareholding.
- Whether the access negative lists permit foreign ownership of this activity at all.
- Whether merger control declaration thresholds are met, as a separate question.
- A closing timetable built around the 15 working day decision on whether review is needed, plus any review that follows.
- How the target's own compliance record, tax positions and substance claims will be inherited on completion.
Where we work on transactions
Our transaction work is the entity-side and regulatory-side preparation: establishing which of the three screens apply and on what timetable, diligence on the target's registered position and compliance record, and the post-completion work of making the acquired entity's registrations, governance and filings consistent with its new ownership. Where a Hainan target carries preferential tax positions, the substance and eligibility conditions behind them survive the transaction and are worth testing before completion rather than after.
This is general commentary on published policy, not legal or transaction advice on a specific deal. Confirm the current position with the relevant authorities before relying on any of the above. Positions were verified against published sources in September 2026.