GC Agenda China: July 2015

Practical Law UK Articles 8-617-6027 (Approx. 14 pages)

GC Agenda China: July 2015

by Brad Herrold, Consultant and Practical Law China

2015 annual information reporting season commences for FIEs

On 13 July, the Ministry of Commerce (MOFCOM) (中华人民共和国商务部), the State Administration of Taxation (SAT) (国家税务总局) and the National Bureau of Statistics of China (NBS) (国家统计局) issued the Notice on the Launch of the 2015 Foreign Invested Enterprise Annual Investment Operation Information Joint Reporting Work (2015 Joint Reporting Notice) (关于开展2015年外商投资企业年度投资经营信息联合报告工作的通知). Under the notice, all FIEs must provide the following information concerning their 2014 operations by 15 October 2015:

The FIE's name, organisation code, business registration number, operating term, enterprise type (that is, its categorisation as encouraged, permitted or restricted under the Catalogue of Industries for Guiding Foreign Investment (2015 Revision)), business scope and corporate structure.
Information on the FIE's ownership structure and any allocated but unremitted dividends.
Information on the FIE's foreign shareholder loans, investments in China and abroad, turnover, gross profit, net profit and tax payments (including employee withholdings).
Information on the FIE's R&D activities and any official recognition as a high-tech enterprise or a technically advanced service enterprise.
Information on the FIE's employees, including foreign employees and new hires.

(Article 1, 2015 Joint Reporting Notice).

The reporting regime replaces a system in which FIEs were subject to an annual inspection. The changes are part of a full-scale reform of China's corporate law launched in 2013 (see Decision of the Central Committee of the Communist Party of China on Several Major Issues on Comprehensively Deepening Reforms 2013). FIEs in Shenzhen and the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) (中国(上海)自由贸易试验区) have been required to provide this information since April 2014.

Each of the promulgating authorities has access to the information, which is publicly searchable on the National Annual Investment Information Disclosure Platform for Foreign Invested Enterprises at http://gongshi.lhnb.gov.cn/ (Article 2, 2015 Joint Reporting Notice).

The annual reporting system will make it easier for practitioners in China to find corporate information. Ren Qing, a partner at Zhong Lun Law Firm, Beijing, described the new regime as "Another step designed to reduce the burden on entities and government departments and another welcome change consistent with the broader trend to simplify company formation and maintenance generally".

Action items

GC for companies with an FIE in China should collect the requisite information and ensure the information is uploaded to the National Online Annual Investment Operation Joint Reporting and Sharing System for Foreign Invested Enterprises to http://lhnb.gov.cn/ before 15 October 2015.

NPC passes national security review law for foreign investment in key industries

The National People's Congress (NPC) Standing Committee (全国人民代表大会常务委员会（全国人大常委会)) promulgated the National Security Law of the People's Republic of China 2015 (2015 National Security Law) on 1 July 2015. The law overhauls the national security review (NSR) process in China (PRC) (中国(中华人民共和国)).

The new legislation defines national security for the first time. The definition comprises a status under which the PRC is able to continuously maintain its national security, with the following relatively free from danger, and international and domestic threat:

The state's political regime, sovereignty, unity and territorial integrity.
The welfare of the people.
Sustainable economic and social development.
Other significant national interests.

(Article 2).

NSR of foreign investments

The first piece of national legislation to cover NSR was the Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors 2011 (2011 Notice). The 2011 Notice required M&A transactions in which foreign investors acquired equity or assets of domestic Chinese enterprises in key and sensitive industries to undergo NSR. For more information on NSR scrutiny in M&A transactions, see Practice note, China aspects of global M&A: Foreign investment restrictions and National Security Review (NSR) and Article, China's new M&A review rules: a comparison with the US.

In May 2015, China adopted a more extensive and sophisticated NSR regime for all foreign investment activities in China's free trade zones (FTZs). Inside the FTZs, all foreign investments that have national security implications must undergo NSR, regardless of whether they are structured:

As a new enterprises (also called greenfield investment).
Through a merger or acquisition of pre-existing enterprises.
By way of other investments, such as through contractual arrangements (for example, through avariable interest entity (VIE)), share entrustment, trust, reinvestment, overseas transaction, lease or convertible bond subscription.

(Notice of the General Office of the State Council on Printing and Distributing the Trial Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones 2015.)

For more information on the NSR regime implemented in the FTZs, see Practice note, China (Shanghai) Pilot Free Trade Zone: overview: National security review.

On 19 January 2015, the Ministry of Commerce (MOFCOM) (中华人民共和国商务部) released a Draft Foreign Investment Law (2015 Draft Foreign Investment Law) for public comment. Under the 2015 Draft Foreign Investment Law (as had been seen with the FTZs), all foreign investment activities which damage or may damage China's national security must undergo NSR (see Legal update, Draft Foreign Investment Law open for comment until 17 February).

Action items

GC for companies with China operations or China investment plans should follow up closely on the developments of this NSR regime, particularly any implementing rules for specific industries or areas that are likely to be subject to a high level of NSR scrutiny. These industries and areas include cyber security, and network information technology products and services.

National Security Law requires state to safeguard key economic interests

The new legislation requires the state to safeguard key economic interests including industries that are vital to the national economy, key industrial sectors, key infrastructure projects and key construction projects (Article 19).

The law identifies the following industrial sectors as being key:

Finance.
Energy and resources.
Food hygiene and safety.
Culture.
Technology.
Cybersecurity.
Ecological and environmental protection.
Nuclear technology.
Exploration and discovery of aeronautics and space, international deep-sea and seabed areas, and polar regions.

Aside from industrial sectors, a terrorism, extremism or religious connection is also specified as a factor that can bring a matter within the ambit of the new legislation.

NSR mechanisms apply to foreign investment, technology, network IT and construction projects

The 2015 National Security Law requires the state to establish an NSR mechanism for matters that affect or can affect national security, including:

Foreign investment.
Network IT products and services.
Construction projects.

(Article 59).

The government also reserves the right to specify matters or key technologies for which NSR mechanisms must be established, and to establish mechanisms for any other "major activities that have national security implications".

NPC circulates draft network security law

On 6 July 2015 the National People's Congress (NPC) Standing Committee (全国人民代表大会常务委员会（全国人大常委会）) circulated the 2015 Network Security Law (Draft) (2015 Draft Network Security Law) for public comment. The draft contains provisions on network security and data privacy that make it relevant to international IT companies and other companies with operating assets in China. The draft law applies to the construction, maintenance, operation and use of networks, broadly defined as systems composed of information terminals that collect, store, process and transmit data, as well as the supervision of network security. The Cyberspace Administration of China (CAC) is charged with implementing the provisions of the draft law in conjunction with the Ministry of Industry and Information Technology (MIIT) (工业和信息化部), China's telecommunications and internet regulator, the Public Security Bureau (PSB) (公安局) and other relevant government agencies. The 2015 Draft Network Security Law is a priority item in 2015 for the NPC Standing Committee, that is, the PRC government will seek to pass definitive legislation before the end of the year.

The goals of the 2015 Draft Network Security Law are:

Ensuring Chinese cyber-sovereignty and national security.
Protecting the private data of Chinese citizens and organisations.

New standards could prejudice foreign companies

Several provisions of the 2015 Draft Network Security Law could affect market access by foreign IT companies. The most prominent include:

A requirement to develop a set of network security standards unique to China (Article 13).
A ban on the sale of key network security equipment and specialised network security products that do not comply with national and industrial standards (Article 19).
A graduated system that obliges network operators to take progressively more extensive steps to preserve network security (Article 17).
A prohibition on storing or transmitting network data (including user data) for key information infrastructure outside China without special permission. Key information infrastructure includes government networks such as those used by China's military and administrative agencies, critical services such as utilities and medical care, and key industries such as energy, transportation and finance, as well as networks owned or managed by network service providers with a large number of users (Article 56).

The State Council will determine the specific obligations and thresholds of the graduated system and stipulate rules for the certification procedure, while the Cyberspace Administration of China (CAC) will develop the national network security standards and a catalogue for the certification system and administer a national security review procedure for procurement of key network security equipment and other products.

"The draft law sets the stage for accelerated efforts by the Chinese government to implement onerous cyber security standards for various types of IT products and services," said Paul McKenzie, a partner in Morrison & Foerster, Beijing. "Banking standards announced last year were not implemented due to concerns voiced by banks and IT companies. We can expect renewed standard setting efforts affecting a broad range of sectors in the near future, some of which foreign IT companies may find difficult or unpalatable to comply with."

The 2015 Draft Network Security Law also:

Requires network operators to ensure the integrity and confidentiality of network data.
Prohibits users from:
- endangering (directly or indirectly) network security or propagating terrorism, racism, pornography or other acts deemed to threaten social security;
- infringing on the property or privacy rights of others.

(Article 9).

A unified framework for data protection

The 2015 Draft Network Security Law also addresses China's fragmented data privacy regime (for an overview of the current regime, see Article, Data privacy in China). The draft law introduces a unified definition of personal information comprising the name, date of birth, identity certificate number, biometric data, occupation, contact information and other information that can be used separately or in combination to identify a citizen (Article 65(5)). The draft law also includes the following data privacy protections:

Network operators can only collect and use personal information that is relevant to their core business activities and for which they obtain the express consent of their users (Article 35).
Citizens may require network operators to delete personal information that is collected unlawfully, and to amend inaccurately recorded personal information (Article 37).
Individuals, organisations (including network operators) and government agencies are prohibited from using or selling personal information without consent (Article 39).
Operators of key information infrastructures must keep the personal information they collect within Chinese territory or undergo a security evaluation before export (Article 31).
Government agencies must protect the confidentiality of personal information and trade secrets (Article 39).
Network operators must maintain confidentiality, take remedial measures if a network security breach occurs, terminate, record and report to the authorities unlawful transmissions of personal information, and establish and publish a data privacy complaints mechanism (Article 40).

The data protection provisions of the draft law have received more support from practitioners, constituting in Paul McKenzie's view "a welcome effort by China's legislature to unify and standardise requirements governing the collection, processing and use of personal data".

Action items

GC for IT companies may wish to co-ordinate with industry associations and chambers of commerce to monitor and help drive the development of network security standards in China. All companies operating in China will want to ensure that their internal data privacy protection rules and procedures conform to the provisions of the draft law, in addition to any sector specific rules. This may include, for example, relocating servers that store customer data from outside to inside China for business that are not run entirely from offshore.

SPC issues provisions on recognition and enforcement of Taiwanese arbitral awards

On 2 June 2015, the Judicial Committee of the Supreme People's Court (SPC) issued the Provisions on the Recognition and Enforcement of Arbitral Awards Rendered in the Taiwan Region 2015 (2015 Taiwan Arbitral Awards Provisions). The provisions took effect on 1 July 2015 and apply to a pending action for recognition and/or enforcement of a Taiwanese arbitral award, even if the action was filed before 1 July, that:

Stems from a civil or commercial dispute.
Was rendered by a permanent arbitration institution or an ad hoc tribunal in Taiwan pursuant to Taiwanese arbitration rules.

(Article 2, 2015 Taiwan Arbitral Awards Provisions).

Applications are subject to a limitation period of two years, which starts to run on the last day of the period specified in a legal document for performance of execution (or where no period is specified, two years from the date on which the legal document takes effect) (Article 19).

On accepting an application, the court must issue a decision to recognise the arbitral award within two months after the date on which the application was filed. If the court wishes to not recognise an arbitral award, it must first submit its decision to the SPC for approval within two months after the date on which the application was filed. In both situations, the two-month period excludes the time required to carry out service of process, to investigate the issues, and to collect evidence from Taiwan (Article 13).

Grounds for refusing to accept a Taiwanese arbitral award

The provisions set out the available grounds on which a People's Court can refuse to recognise a Taiwanese arbitral award, including:

A lack of civil capacity.
An invalid arbitration agreement (through the specified governing law, or if no governing law is specified, Taiwan law).
A lack of proper notice to the respondent.
A violation of the relevant arbitral rules.
An arbitration proceeding or arbitral award that dealt with issues not relevant to the dispute submitted for arbitration (unless the court can segregate the relevant issues).
An arbitral award that is not yet binding or that has been revoked by a Taiwanese court.
A violation of Chinese law or its principles.
A threat to the mainland's social or public interest.

(Article 14).

These grounds are significantly broader than the grounds for refusing to enforce an award under the mainland's reciprocal enforcement agreements with Hong Kong and Macau. As Janie Wong, Of Counsel with Orrick, Herrington and Sutcliffe in Hong Kong notes, "while further guidance is a welcome development, certain grounds for refusing enforcement of a Taiwan award appear to leave room for uncertainty".

Action items

To mitigate potential risks associated with enforcement, GC may wish to review the relevant provisions of contracts that require disputes to be resolved through a Taiwanese arbitration forum, particularly where the contract could be construed to violate mainland law. GC handling ongoing disputes before a Taiwanese arbitral forum should ensure that it strictly adheres to the arbitral rules.

MIIT opens e-commerce to 100% foreign ownership nationwide

On 19 June 2015, the Ministry of Industry and Information Technology(MIIT) issued the Circular of the Ministry of Industry and Information Technology on Liberalising the Restrictions on Foreign Shareholding Percentages in Online Data Processing and Transaction Processing Business (For-profit E-commerce Business) 2015 (2015 E-commerce Circular). The 2015 E-commerce Circular allows foreign investors to own 100% of a company engaged in online data and transaction processing services. Foreign ownership was previously limited to 50%, although in January 2015 this was raised to 100% within the China (Shanghai) Pilot Free Trade Zone. The move is part of the Chinese government's ongoing efforts to develop an open, secure and reliable e-commerce market by 2020 (see GC Agenda China: May 2015: State Council issues opinions to support expansion of e-commerce, for an overview of the policy background).

The 2015 E-commerce Circular took effect immediately on issue, and when combined with other rules currently in effect, allows a wholly foreign-owned foreign-invested telecommunications enterprise (FITE) to engage in e-commerce activities anywhere in China on issue of an online data and transaction processing services permit (OTP Permit) and satisfaction of other criteria specified in the notice. The notice does not address whether the issue of an OTP Permit alone is sufficient for an FITE to engage in online marketplace activities, or whether an FITE will still need an internet content provider licence, in addition to the OTP Permit.

Action items

GC for foreign parties to an e-commerce joint venture are no longer required by law to have a Chinese partner. Those who wish to keep their partners may find this a good time to re-examine the terms of the partnership. As the notice may be interpreted differently by different local branches of the MIIT, GC for companies wanting to engage in online marketplace activities in China on a wholly-foreign-owned basis should confirm with their local branch of MIIT how the notice will be applied and the licensing and other procedures needed to take advantage of it.

SIPO issues revised patent enforcement measures

On 29 May 2015, the State Intellectual Property Office (SIPO) (中华人民共和国国家知识产权局) issued revised Measures for the Administrative Enforcement of Patents. The revised measures took effect on 1 July 2015. The revised measures apply to the enforcement of patent rights by China's patent administration authorities, including the investigation and resolution of patent infringement and counterfeiting disputes as well as mediation by the administrative authorities.

The revisions include:

Establishing a record-keeping mechanism for patent disputes.
Standardising the qualification requirements of officials within the patent enforcement authorities and the procedures that these officials must follow.
Shortening the time period for administrative enforcement from four months to three months (for inventions and utility model patents) or two months (for design patents).

The revised measures also seek to improve the administrative enforcement of patent disputes related to the e-commerce sector, and particularly counterfeit sales through online retail platforms. Practitioners have welcomed the measures. Scott Palmer, a partner in Sheppard Mullin, Beijing, described them as "generally good news". Palmer emphasises the potential for the provisions that relate to e-commerce and infringements at trade shows to "turn a new chapter in enforcement against entities that display and advertise infringing goods online and at trade shows", something that he notes will be of particular importance to patent holders.

Action items

GC for companies with patent infringement issues in China may wish to consider their administrative enforcement options, particularly for straightforward infringements. By taking advantage of the streamlined administrative enforcement process against easy targets, patent holders can collect valuable evidence for subsequent litigation against more strategically important targets or counterfeiting networks. For a step-by-step guide to enforcing IP rights against counterfeiters in China, including a discussion of how to identify strategically important enforcement targets, see Practice note, Effective anti-counterfeiting enforcement in China: stage by stage.

SAIC implements policy of issuing business licences before pre-approvals

On 11 May 2015, the State Administration for Industry and Commerce (SAIC) (中华人民共和国国家工商行政管理总局) issued the Notice on Strictly Implementing the "License first, then Permit" Reforms and Strictly Executing Business Registration Pre-approval Matters (关于严格落实先照后证改革严格执行工商登记前置审批事项的通知) (2015 Pre-Approvals Notice). The notice allows SAIC and its local branches (local AIC) to carry out registration procedures for actions required to be registered with SAIC such as establishment, dissolution or change in details without first requiring applicants to obtain pre-approval from another government agency.

The notice applies to all approvals required from agencies other than SAFE as prerequisites to business registration, except for those listed in two appendices setting out the circumstances in which pre-approval still must be obtained before:

An initial business registration may be completed.
An existing business registration may be amended or cancelled.

These exceptions include the MOFCOM approvals required to establish, amend or dissolve FIEs, which remain a prerequisite to an FIE applying to SAIC for a business licence (Item 6, Appendix 1, List of matters continuing to require pre-approval, 2015 Pre-approvals notice), as well as the industry regulator pre-approvals required for companies in sensitive industries such as publishing, finance, direct sales and aviation.

Outside these excluded matters, applicants are free to register with SAIC without having obtained the relevant third-party approval. The change does not remove the need to obtain approvals from other government agencies, only the need to delay SAIC registration until they have been obtained. Applicants must still obtain any relevant approvals, and must register any such approval with SAIC within 20 days after issue.

Action items

GC of companies that are contemplating a new business venture or that need to amend or cancel business registrations with SAIC or local AICs can take advantage of the streamlined approvals process (except for those on the exclusions list).

Ministries publish internet finance guidelines

On 18 July 2015, the People's Bank of China (PBC) (中国人民银行), the Ministry of Industry and Information Technology (MIIT) (工业和信息化部), the Ministry of Public Security (MPS)(公安部), the Ministry of Finance (MOF)(财政部), the State Administration of Industry and Commerce (SAIC) (国家工商总局), the Legislative Affairs Office of the State Council (LAOSC) (国务院法制办公室), the China Banking Regulatory Commission (CBRC) (中国银行业监督管理委员会), the China Securities Regulatory Commission (CSRC) (中国证券监督管理委员会), the China Insurance Regulatory Commission (CIRC)(中国保险监督管理委员会) and the State Internet Information Office (SIIO) (国家互联网信息办公室) jointly issued the Guiding Opinion on Promoting the Healthy Development of Internet Finance (关于促进互联网金融健康发展的指导意见) (Yin Fa [2015] No. 221) (Internet Finance Guidelines).

The guidelines explain how China's financial and internet regulations apply to the country's growing Internet finance industry. Since the guidelines are high-level principles, the details of the regulatory regime will be set out in implementing legislation. Internet finance (as defined by the guidelines), is the provision of funds, payment, investment and information intermediary services (such as loan marketplaces or credit investigation businesses) by traditional financial institutions or internet enterprises. The definition is intentionally broad, and specifically includes online:

Payment processing platforms.
Peer-to-peer (P2P) lending.
Microfinancing.
Crowdfunding.
Fund sales.
Insurance.
Trust services.
Consumer finance.

(Part I preamble, Internet Finance Guidelines).

Existing financial regulators have jurisdiction over internet finance

Under the guidelines, China's existing financial regulators have jurisdiction over internet finance businesses. These regulators already exercise this control over traditional finance businesses. The details of the institutions that regulate specific business types are set out in part II of the guidelines:

Type of business	Regulator	Authority
Online payments	People's Bank of China (PBC)	Article 7, Internet finance guidelines
Online lending (that is, peer-to-peer (P2P) and microfinancing)	China Banking Regulatory Commission (CBRC)	Article 8, Internet finance guidelines
Crowdfunding	China Securities Regulatory Commission (CSRC)	Article 9, Internet finance guidelines
Online fund sales	China Securities Regulatory Commission (CSRC)	Article 10, Internet finance guidelines
Online insurance	China Insurance Regulatory Commission (CIRC)	Article 11, Internet finance guidelines
Online trusts and consumer finance	China Banking Regulatory Commission (CBRC)	Article 12, Internet finance guidelines

The Ministry of Industry and Information Technology and the State Internet Information Office, China's internet regulators, do not exercise jurisdiction over the substantive business carried out by internet finance companies. However, MIIT and SIIO continue to exercise jurisdiction over the websites and telecommunication networks used to provide these services.

Although the guidelines do not announce a new regulator for internet finance, the PBC has been directed to set up a trade association for the industry.

Internet finance companies must observe KYC, data privacy and other financial regulations

The Internet Finance Guidelines clarify that internet finance companies must observe the same regulations as traditional financial institutions. Specifically, these entities must:

Take effective measures to identify their clients, actively monitor and report any suspicious transactions for anti-money-laundering purposes (Article 18, Internet Finance Guidelines).
Provide completed and detailed information disclosure to investors and clients and warn customers more regularly about investment risks (Article 15, Internet Finance Guidelines).
Keep clients' personal data and transaction information confidential (Article 16, Internet Finance Guidelines).
Refrain from the illegal sell or divulging of clients' personal data (Article 17, Internet Finance Guidelines).

Action items

For GC at financial institutions who have moved part of their existing businesses online, the guidelines do not create any new action items. GC at companies that follow the business models specifically mentioned in the guidelines should review their operations to ensure that they comply with the regulations, if they have not done so already.

GC at companies in related businesses not specified within the guidelines, such as online finance leasing businesses, should anticipate that the government will clarify their position in the coming months. The publication of detailed legislation from the financial regulators specifying how they will exercise their jurisdiction over internet finance is anticipated.

GC Agenda China: July 2015 | Practical Law