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GC Agenda China: October 2017
Practical Law UK Articles w-011-1602 (Approx. 8 pages)
GC Agenda China: October 2017
by Brad Herrold, Consultant and Practical Law China
| Law stated as at 27 Oct 2017 |
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.
China signs Convention on Choice of Court Agreements
On 12 September 2017, China's Ambassador to the Netherlands signed the Convention on Choice of Court Agreements (选择法院协议公约) on behalf of the Chinese government.
Once ratified by China's president in accordance with a decision by the National People's Congress (NPC) Standing Committee, the convention will help promote certainty in relation to some commercial disputes between Chinese and foreign contracting parties.
Under the convention, a judgment on a civil or commercial dispute issued by a court in a contracting state designated in an exclusive choice of court agreement will be recognised and enforceable in the courts of another contracting state, provided the parties to the dispute reside in different contracting states. A contracting state refers to any country or region party to the convention.
The convention will not apply to, among others, the following subject matters:
- Employment and consumer contracts.
- Family law and inheritance matters.
- Insolvency and related matters.
- Competition or anti-monopoly issues.
- The validity and infringement of intellectual property rights.
- The validity and dissolution of legal persons.
- Personal injury claims.
- Arbitration proceedings.
The exclusive choice of court agreement must be concluded after the convention has taken effect in both contracting states.
An exclusive choice of court agreement refers to an agreement which designates, for the purpose of resolving disputes, the jurisdiction of the courts of a contracting state (or one or more specific courts of a contracting state) to the exclusion of the jurisdiction of any other courts.
Courts other than the chosen court are required to stay or dismiss related proceedings, unless the chosen court refuses to assert jurisdiction.
For more coverage of this development, see Legal update, China signs Convention on Choice of Court Agreements.
Market reaction
Timothy Blakely, Partner, Morrison & Foerster, Hong Kong
"China's decision to sign the convention is consistent with other recent measures supportive of international enforcement of court judgments. These include decisions to enforce court judgments from Singapore and California based on the principle of reciprocity and statements by the Supreme People's Court highlighting judicial cooperation in mutual recognition and enforcement of commercial court judgments involving China's "Belt and Road" initiative. Once the convention is ratified, however, its effectiveness in practice may depend on implementation. For example, how broadly will China's courts apply the convention's public policy exception to the obligation to enforce foreign judgments, and will China adopt supportive procedures such as the need for higher court approval if a lower court denies enforcement of a foreign judgment under the convention?"
Second batch of pilot areas submit overall market access plans to State Council
On 21 September 2017, Xinhua News Agency reported that the second batch of pilot districts (including Zhejiang and Hubei areas) are formulating and submitting their overall plans to the State Council with a view toward fully implementing China's new negative list system for administering market access by 1 January 2018.
Once implemented, the national negative list for market access will apply certain special administrative measures equally to both foreign and domestic investment. In April 2016, the National Development and Reform Commission (NDRC) released a draft version to be piloted in Shanghai, Tianjin, Guangdong and Fujian (see Legal update, Draft negative list for market access: implications).
The proposed overall plans to the State Council are working to:
- Revise or revoke local rules and regulations that are inconsistent with the new market access system.
- Improve the mechanisms for administrating market access in their respective jurisdictions.
- Suggest adjustments to the national negative list for market access.
The report suggests that the shift toward allowing the market to play a decisive role in China's economy, as well as the corresponding liberalisation of prevailing market access restrictions, are viewed as necessary steps to allow China to remain competitive in the international economic arena.
For more coverage of this development, see Legal update, Second batch of pilot areas submit overall market access plans to State Council.
Market reaction
Ren Qing, Partner, Global Law Offices, Beijing
"The government is keen to ensure that China remains a competitive international destination for foreign direct investment. Specifically, the report highlights the government's intent to pilot the new market access approach in select administrative regions nationwide well ahead of its self-imposed January 2018 deadline."
Action items
No specific action is required because of this development, but GC should continue to monitor the government's progress in implementing the new approach to market access, both nationally and regionally, to identify potential opportunities to invest or to renegotiate or restructure existing arrangements.
MOFCOM circulates draft revised rules on merger control notification and review
On 8 September 2017, the Ministry of Commerce (MOFCOM) issued the Notice to Solicit Public Comments on the "Measures on the Review of Concentrations of Business Operators (Revised Draft for Comments)" (商务部关于《经营者集中审查办法（修订草案征求意见稿）》公开征求意见的通知).
If adopted, the draft would replace the following implementing rules issued by MOFCOM in relation to the merger control provisions of the Anti-monopoly Law of the People's Republic of China 2007:
- Measures on the Review of Concentrations of Business Operators 2009.
The major changes in the draft include:
- Meaning of control. A concentration only occurs where a transaction gives an undertaking a right to control, or an ability to exert decisive influence over, another undertaking. The draft largely follows existing rules by listing the factors for determining whether a concentration gives one undertaking control over another. In addition, the draft makes new law by providing that control may involve an ability to influence business and management decisions on the budget, business plan and appointment and dismissal of senior management of an undertaking.
- Interrelated transactions. Where an undertaking obtains control over another undertaking through a series of transactions that are legally or factually conditioned on each other, the transactions will be deemed to be a single concentration.
- Calculation of turnover. A transaction must be declared where the relevant undertakings meet certain annual combined turnover thresholds. The draft clarifies that in calculating turnover, an undertaking is required to tally only the turnover of those other undertakings the undertaking controls at the time of the declaration. In addition, the turnover of a jointly-controlled undertaking must be allocated equally among the undertakings participating in the concentration.
- Treatment of concentrations below turnover thresholds. The draft permits MOFCOM to investigate a concentration where the turnover thresholds are not met and notification is not required, provided the investigation follows the rules applicable to instances where a concentration meets the thresholds but the undertakings fail to file.
For more coverage of this development, see Legal update, MOFCOM circulates draft revised rules on merger control declaration and review.
Market reaction
Adrian Emch, Partner, Hogan Lovells, Beijing
"Much of the draft copies existing rules or practice, but some of the new rules are important. This is particularly the case for the guidance on "control". Here, MOFCOM proposes to closely follow EU competition law by using veto rights over budgets, business plans and senior management appointments as a key benchmark. If adopted, this rule will reduce the number of cases filed with MOFCOM, given that at present some transactions below that benchmark are filed with the regulator."
Action items
GC for companies engaged in or contemplating transactions that involve concentrations of undertakings will want to closely study the draft, particularly those provisions that change the current rules governing the notification and review of concentrations, before the draft takes effect. If a proposed transaction presents a significant risk under the draft, counsel may wish to discuss the situation with specialist advisors and MOFCOM to gain an increased level of comfort.
State Council expands "permit-licence separation" pilot reform programme to all pilot FTZs
On 22 September 2017, the State Council issued the Opinions on Promoting the "Permit–Licence Separation" Pilot Reform Programme on a More Extensive Scale (国务院关于在更大范围推进〝证照分离〞改革试点工作的意见), effective immediately through 21 December 2018.
The opinions aim to replicate a pilot reform programme, which simplifies administrative licensing procedures by separating the administration of operating permits and business licences, into the pilot free trade zones (FTZs) in Tianjin, Liaoning, Zhejiang, Fujian, Henan, Hubei, Guangdong, Chongqing, Sichuan and Shaanxi. The programme was initially conducted in the Shanghai Pudong New District, and was based on reforms approved by the State Council in relation to 116 administrative licensing items. For more information, see Legal update, State Council approves pilot reform in Shanghai to simplify administrative licensing procedures.
The opinions permit each FTZ to adopt any of these reforms without seeking further State Council approval, though State Council approval is required to implement additional reforms involving laws, administrative regulations and State Council documents.
The opinions require the FTZs to implement the reforms by:
- Standardising administrative licensing standards and procedures by replacing traditional examination and approval procedures with record-filing procedures, implementing a self-policing mechanism through industry associations and enterprise reporting obligations, and enhancing administrative transparency and predictability for businesses.
- Strengthening post-establishment enterprise supervision by requiring regulators in the FTZs to carry out random inspections, provide guidance to industry associations, and implement publicly available credit ratings, information disclosure and blacklisting systems.
- Promoting information sharing through the verification and disclosure of basic enterprise information and by further developing the national enterprise credit information platform and inter-departmental data exchange system.
- Under the leadership of each FTZ's provincial people's government, determining which reforms to adopt, identifying the bases, materials, procedures and time limits for matters still subject to examination and approval, and summarising and assessing the experiences and methods for implementing and supervising the administrative licensing reforms.
For more coverage of this development, see Legal update, State Council expands "permit-licence separation" pilot reform programme to all pilot FTZs.
Market reaction
Zhang Wei, Associate, Morrison & Foerster, Beijing
"Expanding the pilot programme to scale back the range of industry permits is a positive development. It is important to note, however, that this reform only applies in China's designated pilot FTZs and that implementation will vary by region. There is still a long way to go before this measure and other related reforms have a concrete positive effect on businesses outside the FTZs."
SPC issues rules governing former SPC personnel
According to a report published on the official website of the People's Court Daily on 11 October 2017, the Supreme People's Court (SPC) issued the Implementing Opinions on the Opinions on the Behaviour of Civil Servants after Resigning from Public Service (〈关于规范公务员辞去公职后从业行为的意见〉的实施意见), with immediate effect.
The Opinions on the Behaviour of Civil Servants after Resigning from Public Service 2017 were jointly issued in May 2017 by the Organisation Department of the Communist Party of China (CPC) and various government agencies.
The implementing opinions, which aim to enhance the authority and credibility of the judiciary by regulating the behaviour of judges and other SPC personnel after they leave the judiciary, follow the framework and content of the opinions. Together, the opinions and implementing opinions represent another step in China's ongoing anti-corruption campaign.
According to the report, the restrictions in the implementing opinions are triggered when personnel of the SPC resign, obtain lawful approval to terminate their employment relationship with the SPC, and become self-employed or employed by an enterprise (other than a state-owned enterprise (SOE)).
The implementing opinions divide SPC personnel into two groups according to their respective administrative rank:
- Judges and trial support staff.
- Judicial administrative staff.
Each group is subject to a separate set of restrictions. Specifically:
- Those with an administrative rank of judge or higher may not engage in profit-making activities directly related to their original field of public service for three years.
- Judges and trial support staff are banned for life from litigating on behalf of plaintiffs or defendants in their original court (with minor exceptions).
- Those with a lower administrative rank are restricted from engaging in profit-making activities directly related to their original field of public service for two years.
Personnel are subject to investigation at least once a year during the relevant restricted period. Those found to have violated the provisions of the opinions and implementing opinions will be ordered to cease their illegal behaviour, and may forfeit or be penalised up to five times the amount of any illegal gain. CPC members are subject to discipline under party rules.
For more coverage of this development, see Legal update, SPC issues rules governing former SPC personnel.
Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai
"The revolving door between public service and the private sector has been a common but controversial phenomenon around the globe. While some restrictions have existed under the Judges Law for years, the implementing opinions further elaborate the restrictions recently imposed on public officials and apply to former SPC judges and personnel amid a wave of judges quitting for private practice in recent years. The implementing opinions have attracted significant attention from the legal community, though many commentators mistakenly believe they apply nationwide, that is, beyond the SPC. As a former judge, I believe it is possible that provincial and lower level courts could follow suit and adopt similar measures, but the practical impact of the implementing opinions remains to be seen."