China's move to block the foreign acquisition of Manus, a promising AI startup, underscores the country's position that cross-border deals in critical sectors must comply with national security reviews, regardless of corporate restructuring, said analysts.
In late December last year, American tech giant Meta announced plans to acquire Manus for 2 billion U.S. dollars. Chinese regulators have since launched an investigation into the deal for national security reasons.
China's top economic planner, the National Development and Reform Commission, announced on Monday that the office of the foreign investment security review working mechanism had issued a decision to prohibit foreign investment in Manus and has ordered the parties involved to revoke the acquisition deal.
Legal experts said the case sends a clear signal that regulators apply a "substance-over-form" principle to scrutinize transactions that attempt to bypass security reviews through corporate reorganizations.
"According to Article 4 of the foreign investment security review regulations, important information technology, internet products and services, and key technologies are all critical sectors. If foreign investment seeks to obtain actual control in such sectors, it must proactively file for a security review. It appears that this transaction did not make such a filing, thus violating the regulations," said Shen Ziying, senior partner of Beijing Jincheng Tongda and Neal Law Firm.
In the Manus case, the company moved its headquarters to Singapore while its core business remained in China. Subsequently, key personnel, technology and other core assets were gradually transferred overseas, while the domestic entity was stripped of its core operations.
Lawyers said any attempt to circumvent regulatory oversight through structural design is non-compliant, warning that compliance is the lifeline for businesses.
"This decision draws a red line. National security reviews follow the principle of 'substance over form', looking through the legal form to the economic reality. That is the red line," Shen said.
China's foreign investment security review system aims to balance opening-up with national security, a common practice among many countries. Experts stressed that lawful regulation is a necessary measure for orderly opening-up and does not contradict China's commitment to encouraging foreign investment.
"China's opening-up policy is a national strategy and remains unwavering. At the same time, the international economic and trade landscape and the geopolitical environment are indeed very complex. Under such circumstances, we need to take a holistic approach that both foreign investment and outbound investment must be conducted in an orderly manner. This ensures that cross-border operations can develop in a more sustainable way while keeping security bottom lines firmly in place," said Cui Fan, a professor in economics at the University of International Business and Economics.
China's ban on Manus acquisition signals compliance red line in key sectors: experts
