Law Times

Law Times • February 6, 2012 FOCUS PAGE 11 Concerns over Chinese merger changes overblown Stats show new regulations have barely affected approvals, processing times BY JULIUS MELNITZER For Law Times lated to national security have barely aff ected the approval rate or process- ing time for mergers-and-acquisi- tions activity. "Of some 200 applications re- S ceived in 2011, 75 per cent have been processed, and of these, 95 per cent have been approved," says Rob- ert Kwauk of Blake Cassels & Gray- don LLP's Beijing offi ce. Th e numbers belie the an- ticipation. When the procedures, which strengthen governmental re- view of the acquisition of sensitive assets by foreign investors, came into force, many in the business commu- nity believed the process could sig- nifi cantly delay approvals of trans- actions by the Chinese government. Indeed, the procedures granted the government very broad powers to amend and outright cancel transac- tions that it deemed to have national security implications. Th e security regulations apply to a broad range of transactions in sensitive sectors, including agricul- tural products, energy, resources, infrastructure, transportation, tech- nology, and equipment manufac- turing. Even if the investment target is unrelated to national security, the government has the power to review any transaction located near sensi- tive military facilities. Transactions that fall within the scope of the regulations include di- rectly purchasing equity shares in a domestic enterprise; buying a local shareholder's interest in a foreign- invested enterprise; acquiring assets or equity from a domestic entity through a foreign-invested enter- prise; and directly purchasing assets of a domestic enterprise. Transactions that produce more than 50-per-cent foreign ownership or de facto control are subject to a se- curity review. Control occurs when tatistics recently released by the Chinese government in- dicate that the country's new merger review regulations re- a foreign investor, its parent, and any subsidiaries hold more than 50 per cent of the target's shares; multiple foreign investors hold more than 50 per cent of the shares; the voting power of the foreigner's share, even when less than 50 per cent, could have a material impact on share- holders' meetings, the general as- sembly of shareholders or the board of directors; and foreigners obtain de facto control of the target's business decisions, fi nancial aff airs, person- nel, technologies or other important business elements. Th e Ministry of Commerce and the National Development and Re- form Commission are the regulat- ing agencies with the state council having the last word. Th e regulators will analyze a transaction's impact on national defence, economic stability, social order, and key technologies. Investors in transactions with national security implications must submit them to the ministry for review. Adding to the uncertainty, the regulations provide that the state council, a national trade association, a company in the same industry, and even an upstream or downstream enterprise can also submit a review application. In any event, the ministry has fi ve days to decide whether a secu- rity review is necessary. If it decides that one is, it must request the joint committee to review the transaction. Th e regulations set out two stages for a security review by the joint committee. Th e fi rst is a general review, where the joint committee must request opinions from the rel- evant departments within fi ve days of receiving the ministry's request. Th e departments have 20 business days to respond. Within fi ve days of receipt of all of the responses, the joint committee must determine whether the transaction aff ects na- tional security. If the determination is that the transaction doesn't aff ect national security, the second stage, called a special review, won't be necessary. China's national security concerns are 'no different from the way it has always been in Canada,' says Robert Kwauk. But if even one department concludes that national security is at stake, a special review must take place. Th e joint committee has 60 days to complete the review or ask the state council to decide the matter. Th ere's no time limit for a fi nal decision by the state council. Th roughout the security review, the foreign investor can ask the ministry to amend or cancel the transaction. Overall, a security review in- volving a general review can take up to 35 business days. When a special review is necessary, the process can take as long as 95 days, not including the time it takes the state council to decide. Th e greatest diffi culty in the process may be that it can be hard to determine whether a transaction attracts the security regulation. Th e unclear wording of the regulations, for example, has led some observers to suggest that even a small foreign ownership investment in a sensitive sector can trigger a security review. Clearly, most of the concerns have come to naught. But this doesn't surprise Kwauk. "As it turns out, the foreign investment catalogue issued and updated from time to time by the CYNTHIAKUEHL Toronto Office 416-601-2363 ckuehl@lerners.ca JASONSQUIRE Toronto Office 416-601-2369 jsquire@lerners.ca BY JULIUS MELNITZER For Law Times egy for Canadians and others filing patents in the U.S.," says James Baker, a partner and patent agent at Gowling Lafleur Henderson LLP's Ottawa office. "Although not directly affected by the legislation, Canadian patent law must be taken into account when considering filing strategies for applications in both Canada and the U.S." Indeed, the changes are revolutionary. " The [act] is the biggest substantive change in O U.S. patent law since 1952," says David Elkins, the global leader of Squire Sanders LLP's intellectual property and technology practice group. Among other things, the changes affect the reg- istration and post-grant review processes as well as the fees. On the patent litigation side, the legislation n Sept. 16, 2011, U.S. President Barack Obama signed the Leahy-Smith America Invents Act into law. "The [act] will change the patent strat- changes the eligibility rules for false marking lawsuits, eliminates the best-mode requirement as grounds for invalidity, and expands prior-user rights as an infringement defence. Not insignificantly, fees will rise by 15 per cent. And although applicants will now be able to request prioritized examination of patent applications hav- ing a limited number of claims without submitting additional search or support documentation, the additional fee for large applicants is US$4,800. Undoubtedly, the most important change is the adoption of a first-to-file system that finally brings the United States into line with virtually all of the rest of the developed world. But not everyone is happy about that. Critics claim the change will spark a race to file that creates an unfair burden on individuals and small companies that don't have the resources to file as promptly as larger competitors might. But propo- nents counter that the new system will reduce the cost of the patent process and infringement litigation, See Leahy-Smith, page 13 www.lawtimesnews.com ntitled-1 1 12-01-30 8:46 AM Toronto: 416 867 3076 London: 519 672 4510 www.lerners.ca We guide foreign and domestic clients through the complexities that they face when their business disputes cross borders. In its recent US Guides to Leading Cross-Border Litigators, Lexpert named Cynthia Kuehl and Jason Squire as "Litigators to Watch". We welcome the opportunity to discuss any questions you have about cross-border litigation. Contact Cynthia or Jason today. Ministry of Commerce and the National Development and Reform Commission has always prohibited or restricted foreign participation in some of the more sensitive in- dustries," he notes. "And the areas of sensitivity were quite broad, includ- ing such things as national security, scarcity, and strategic concerns." In other words, foreign invest- ment in sensitive sectors might well not even make it to the point of re- view from the perspective of the new merger regulations. Kwauk also notes the new reg- ulations on national security didn't change the behaviour of Chinese regulators. "National security, however defi ned, is the foremost concern of all countries, and like other gov- ernments, the Chinese have been taking it into consideration when approving foreign investments since Day 1, which was well be- fore the regulations took eff ect in 2011," he says. "And that's no dif- ferent from the way it has always been in Canada, where no one is naive enough to believe that we did not take this issue into consid- eration before the words national security were formally introduced into our foreign investment review process a couple of years ago." Kwauk's point is that even be- fore national security became an explicitly reviewable factor under the Investment Canada Act, it had always been there subsumed under the net-benefi t test that the statute articulates. "I cannot imagine how an in- vestment by a foreign entity could be of net benefi t to any country if it threatened our national security," he says. Th e upshot is that if there's a tempest over the new Chinese merger review provisions, it may well be contained in a rather small teapot. LT New U.S. patent law has implications for Canadians

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