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GC Agenda China: August 2017
Practical Law UK Articles w-010-1101 (Approx. 7 pages)
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.
MOFCOM amends FIE record-filing measures
On 30 July 2017, the Ministry of Commerce (MOFCOM) issued a revised version of the Interim Measures on the Administration of Record-filing of the Establishment and Amendment of Foreign-invested Enterprises (外商投资企业设立及变更备案管理暂行办法), which took effect upon issuance.
Under the revised interim measures, the following foreign investment projects now are subject to MOFCOM's record-filing regime, as long as no special administrative measure applies and no round-trip investment is involved:
- Any domestic Chinese company's merger with or acquisition by a foreign investor.
- Any strategic investment by a foreign investor in a non-foreign-invested listed company.
In practice, MOFCOM has applied the record-filing regime to strategic investments in existing foreign-invested listed companies provided no special administrative measure is involved, since the original record-filing measures were adopted in 2016. The revised interim measures expressly endorse this point.
Like other foreign-invested enterprises (FIEs) that are eligible for record-filing, the revised interim measures require FIEs established pursuant to a merger or an acquisition or a strategic investment in a non-foreign-invested listed company to update the record-filing where a change occurs to the information disclosed in the initial filing.
The documents that must be submitted to complete record-filing now also include:
- Where a change occurs in the ultimate actual controller of an FIE subject to record-filing, a shareholding chart that discloses the ultimate actual controller of the FIE.
- Where a foreign investor pays for the investment consideration using the equity of a foreign company (that is, through cross-border share swap), the onshore investee company's Certificate of Overseas Investment by Enterprises (企业境外投资证书).
For more coverage of this development, see Practice note, Chinese foreign direct investment reform: MOFCOM record-filing regime and Legal update, MOFCOM amends FIE record-filing measures.
Market reaction
Philip Cheng, Partner, Hogan Lovells, Shanghai
"The revisions expand the application of the record-filing regime to include inbound acquisitions of and strategic investments in purely domestic-invested companies by foreign investors. China's experiment with ditching the cumbersome examination and approval process for foreign investment is proving so successful that there is practically little for MOFCOM to approve any more."
Action items
GC for companies having or to have a China presence will want to confirm whether any special administrative measures set forth in applicable negative lists, as well as restrictions contained in other legislation, continue to apply given China's recent foreign investment reforms. For example, MOFCOM regards affiliated parties acquisitions as an exception to the record-filing regime, so that this type of round-trip acquisition remains subject to the more rigorous MOFCOM examination and approval procedure (which in practice is extremely difficult if not impossible to obtain). Counsel will also want to ensure that pre-existing qualified FIEs should carry out record-filing whenever a relevant change to the FIE occurs.
CBRC and MCA issue measures on charitable trusts
On 26 July 2017, the China Banking Regulatory Commission (CBRC) and the Ministry of Civil Affairs (民政部) (MCA) jointly issued the Measures on the Administration of Charitable Trusts (慈善信托管理办法), which took effect upon issuance.
The measures are intended to facilitate the use of charitable trusts for philanthropic purposes by fleshing out the relevant provisions of the Charity Law of the People's Republic of China 2016 (中华人民共和国慈善法) (2016 Charity Law), which took effect 1 September 2016. (For information on the 2016 Charity Law, see Legal update, NPC enacts Charity Law.)
A charitable trust refers to a public welfare trust under which a principal entrusts qualified assets to a trustee and permits the trustee to manage and dispose of such assets in its own name for charitable purposes in accordance with the wishes of the principal.
According to the measures, a charitable trust must satisfy the following conditions:
- The trust must be established for a charitable purpose, including to alleviate poverty, assist the elderly, orphans and disabled, provide disaster and emergency relief and so on.
- The principal must have full civil capacity, the trustee must be a charitable organisation or trust company designated by the principal, and beneficiaries must have no interest in the principal or trustee.
- The assets must be definite and lawfully owned by the principal.
- The establishment of the trust must be in writing and certain matters must be specified in a trust document.
The trustee must complete a record-filing procedure with a competent civil affairs department of the people's government at the county level or above within seven days of concluding the trust document.
The measures also permit principals, trustees and beneficiaries to obtain tax preferences according to law and encourage local governments to develop local policies and measures to promote the development of charitable trusts.
For more coverage of this development, see Legal update, CBRC and MCA issue measures on charitable trusts.
Market reaction
Thomas Man, Professor from Practice, Peking University School of Transnational Law
"Charitable trusts have experienced a sharp growth spike since the Charity Law took effect last September. The measures reflect the government's willingness to facilitate private corporate and individual efforts to assist in providing social and relief services, as well as the need to regulate these efforts and generate public confidence in philanthropic institutions. However, as many of the local tax preferences have yet to be enacted, the true impact of the measures remains to be seen."
Action items
Counsel for philanthropic organisations will want to consider the risks and advantages presented by the existence of formal enabling rules and ensure that any charitable trust is perceived as a tool for, and not a challenge to, implementing government policy and that its activities fully comply with the obligations contained in the measures, the 2016 Charity Law and other relevant legislation.
PBOC requires non-bank payment institutions to settle online transactions through a new platform
On 4 August 2017, the Payment and Settlement Department (支付结算司) of the People's Bank of China (PBOC) issued the Notice on Migrating the Online Payment Business of Non-bank Payment Institutions from Direct Connection Mode to Network Platform Processing (关于将非银行支付机构网络支付业务由直连模式迁移至网联平台处理的通知).
The notice requires third-party non-bank payment institutions such as Alipay and Tenpay to settle online client payment transactions through a centralised network platform, that is, the Non-bank Payment Institution Network Payment Settlement Platform (非银行支付机构网络支付清算平台), from 30 June 2018. The new platform is operated by the Network Connection Settlement Company Limited (网联清算有限公司), a company established in 2017 by the PBOC (as the largest stakeholder) and other 44 entities and associations including Alipay, Tenpay and UnionPay.
Under the current direct connection model, third-party non-bank payment institutions connect directly with one or more banks, enabling them to settle online payments without the PBOC's supervision, which frustrates the PBOC's ability to regulate this sector and could facilitate illegal activities such as money laundering.
The move follows recent attempts to limit financial risks in the growing online payment sector by curbing the issuance of new payment business licences (支付业务许可证) for non-bank payment institutions and limiting their ability to use client funds to finance their own investments.
The notice also requires all banks and non-bank payment institutions to access the network platform and prepare to migrate their payment settlement activities to the platform by 15 October 2017.
For more coverage of this development, see Legal update, PBOC requires non-bank payment institutions to settle online transactions through a new platform.
Market reaction
Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai
"Establishment of this integrated platform is an important step in the PBOC's continuing efforts to more closely supervise the operations of non-bank payment institutions. Basic standards applicable to these institutions were put in place in 2010, through the promulgation of the 2010 Measures for the Administration of Payment Services of Non-Banking Institutions (非金融机构支付服务管理办法). We anticipate that the PBOC enforcement will be strengthened through the supervision of this new platform."
Action items
GC for banks and non-bank payment institutions will want to closely study the notice and work together with business partners to comply with the migration initiative. Counsel need to be aware that the period for migrating payment functions to the new platform begins 15 October 2017 and all payments must be settled through the platform from 30 June 2018.
SPC, MOJ and CBRC jointly clarify enforceability of notarised debt instruments
On 13 July 2017, the Supreme People’s Court (SPC), Ministry of Justice (MOJ) and China Securities Regulatory Commission (CSRC) jointly issued the Notice on Fully Utilising the Enforceability of Notarial Certificates for Banking Financial Claims Risk Prevention and Control (关于充分发挥公证书的强制执行效力服务银行金融债权风险防控的通知).
Under Chinese law, a Chinese notary is entitled to certify a debt instrument to accord compulsory enforceability to the document under the following conditions:
- The debt instrument contains a right to payment of money, goods or valuable securities.
- The rights and liabilities are clear, and the creditors and debtors have no doubt about the payment obligation in the debt instrument.
- The debt instrument makes it clear that the debtor is willing to accept enforcement in accordance with law when the debtor fails to perform or properly perform its obligations.
A creditor to a notarised debt instrument of this type can apply to a competent people's court for direct enforcement, after obtaining an execution certificate from the notary but without the need to pursue litigation before enforcement.
To enhance the efficiency and lower the cost of realising non-performing bank loans, the notice clarifies the circumstances when a notary can certify a debt instrument, the obligations of notaries and banks (that is, the creditors that seek to directly enforce debt instruments) in certifying and enforcing notarised debt instruments, and the scope and legal effect of enforceable notarised debt instruments.
Under the notice, the scope of bank debt instruments eligible to apply for this enforceability notarisation is:
- Various types of financing contracts, including various types of credit contracts, loan contracts, bills of acceptance and other types of paper financing contracts, financial leasing contracts, factoring contracts, open letters of credit and credit card financing contracts (including credit card contracts and various instalments contracts).
- Debt restructuring arrangements, repayment contracts, repayment commitments, and so on.
- All kinds of security agreements and guarantees.
- Other debt instruments that also meet the statutory conditions for enforceability notarisation.
For more coverage of this development, see Legal update, SPC, MOJ and CBRC jointly clarify enforceability of notarised debt instruments.
Market reaction
Shirley Wang, Partner, Zhong Lun Law Firm, Beijing
"The notice expands the scope of enforceability of notarial certificates to protect financial creditors' rights. In addition, the notice provides a clearer legal basis for the people's courts to enforce relevant notarial certificates, and to improve the efficiency of realising the claims of financial creditors, while reducing costs."
Action items
GC for banks operating in China should become fully aware of the added protections afforded under the notice, as well as the obligations imposed on banks in relation to their efforts to directly enforce notarised debt instruments. Likewise, counsel for companies who are parties to any bank debt instrument should study the notice and be fully aware of the direct enforceability of a notarised instrument.
MOJ further standardises notarisation practices
On 14 August 2017, the MOJ issued the Notice on Five Nonconforming Practices by Notaries (关于公证执业"五不准"的通知).
The notice aims to curb fraud and abuse by further standardising the practice of notaries and notarial institutions in China.
Specifically, the notice requires notaries and notarial institutions:
- To inform the applicant about the legal consequences of falsely or fraudulently obtaining a notarial certificate, and not to notarise documents without confirming an applicant's identity.
- Pending the issuance of related measures, not to notarise or certify the compulsory enforceability of financing contracts between individuals, legal persons and other organisations, except for financing contracts concluded by approved financial institutions.
- To perform a substantive examination before issuing any notarial certificate.
- In relation to the disposition of real property, not to carry out the notarisation of a one-time entrustment of all important matters and not to notarise an entrustment that is a guarantee in substance or appears to be a guarantee.
For more coverage of this development, see Legal update, MOJ further standardises notarisation practices.
Market reaction
Stephen Lin, Partner, Fangda Partners, Shanghai
"Given the notarisation of false applicants and matters in various locations throughout China, the MOJ issued the notice to standardise notary practices nationwide by specifying five acts that cannot be performed during notarisation. By introducing practical restrictions in relation to real estate, financing and authorisation matters, the notice emphasises the principle of 'substantive examination', which urges notaries to become more cautious and professional in future, though some legal practitioners have criticised the notice for going too far and imposing an unreasonably high burden on notaries."
Action items
Counsel for companies that are often required to deal with notaries for matters like real estate authorisation or financing contracts enforceability arrangements, should become familiar with the new duties imposed on notaries, particularly the obligation for notaries to conduct a substantive examination of the underlying transaction or document for which notarisation is requested. Companies may also communicate with notaries to understand whether the notarisation process may be prolonged or more documents may be required as a result of the notice.