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GC Agenda China: January 2018
Practical Law UK Articles w-012-9048 (Approx. 7 pages)
GC Agenda China: January 2018
by Brad Herrold, Consultant and Practical Law China
| Law stated as at 30 Jan 2018 • China |
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.
NDRC issues new outbound investment rules
On 26 December 2017, the National Development and Reform Commission (NDRC) issued the Administrative Measures for Outbound Investment by Enterprises, which will take effect 1 March 2018 and replace prior rules issued in 2014.
Key changes in the new measures include the following:
- The new rules apply to direct overseas investment (and in Hong Kong, Macau and Taiwan) by domestic financial and non-financial enterprises, as well as social organisations such as NGOs, and indirect overseas investment by foreign enterprises controlled by domestic enterprises and individuals. The new rules do not apply to direct overseas investment by individuals.
- Outbound investment in "sensitive projects", which include newly defined regions and industries, requires approval by the NDRC; other overseas investment projects only require record-filing. Outbound investment projects may not be implemented until successful completion of the approval or record-filing procedure, and documents evidencing approval and record-filing are valid for two years.
- The separate procedure involving submitting a project information report for projects with investments by the Chinese side of USD300 million or more (known as the NDRC's Lu Tiao (路条) mechanism) is no longer required. For any non-sensitive project with indirect investments by the Chinese side of USD300 million or more, the investor must complete a project information filing procedure through the NDRC’s online platform, but that filing is supposed to be fairly straightforward.
The new measures require the NDRC to develop an online platform and to provide outbound investors with investment guidance. The measures also have provisions against investor behaviour that adversely impacts competition, labour rights, the environment and China's reputation, and require the NDRC to publicly shame enterprises that violate the new measures.
For an overview of the regulatory framework for Chinese outbound investment, see Practice note, China outbound investment: approvals and process.
Market reaction
Calvin Chiu, Counsel, Dentons, Beijing
"The new measures finally address longstanding questions that have puzzled practitioners, for example, expressly applying to financial enterprises, abolishing the Lu Tiao requirements, and requiring approval or filing before implementing a project. The changes will provide investors with a higher degree of certainty and enable deal structures more in line with prevailing international standards. On the other hand, the measures also expand regulatory coverage to include overseas investments through offshore vehicles controlled by onshore enterprises or individuals and emphasise post-establishment compliance and regulatory supervision of outbound investment projects."
Action items
GC for any investor in an outbound investment project will want to closely study the new measures and discuss the specific implications with external advisors. Counsel will also want to work with business colleagues to develop steps to ensure the project remains in compliance throughout its life cycle.
SPC issues new interpretations on arbitral judicial review cases
On 26 December 2017, the Supreme People's Court (SPC) issued two judicial interpretations to clarify the trial and reporting procedures in cases involving the judicial review of arbitration, which took effect 1 January 2018.
Under the Relevant Provisions on Issues involving the Reporting of the Judicial Review of Arbitration Cases (关于仲裁司法审查案件报核问题的有关规定), the reporting procedure for foreign (that is, non-mainland China) and foreign-related arbitration is expanded to domestic arbitration cases. Key changes include:
- A people’s court that reviews a domestic arbitration case and finds an arbitration agreement to be invalid, or that revokes or refuses to enforce an arbitral decision of a domestic arbitral tribunal, must report to and obtain approval from the higher people's court in its jurisdiction.
- In cases involving parties from different provinces, and cases where the basis for setting aside or refusing to enforce a domestic arbitral decision is against the public interest, the higher people’s court must also report to and obtain approval from the SPC.
The other judicial interpretation (namely, the Provisions on Several Issues Concerning the Trial of Judicial Review of Arbitration Cases) (关于审理仲裁司法审查案件若干问题的规定)) clarifies various issues surrounding the applicable law of an arbitration agreement. For example, where the parties intend to choose a particular law governing the validity of an arbitration agreement or clause, they must do so expressly, and a general choice of law provision governing the underlying contract is not sufficient to clearly express that intent.
For background and more information on the two judicial interpretations, see Legal update, SPC publishes new judicial interpretations on arbitration.
Market reaction
Timothy W. Blakely, Partner, Morrison & Foerster, Hong Kong
"The new interpretations underscore China's supportive approach to arbitration. With the extension of the existing pre-reporting system for foreign and foreign-related cases to domestic cases, no arbitration award in China can be overturned or refused enforcement without some higher court review and approval. This will extend the benefits of the pre-reporting system to international parties operating in China through WFOEs, which are restricted to domestic arbitration. The new interpretations also permit higher courts to seek clarification from the parties during the review process. These benefits may not be cost free, however, as opening the pre-reporting system to domestic cases and permitting reviewing courts to seek input from parties may serve to further delay enforcement."
Action items
Counsel for any individual or entity that wishes to choose a specific law to govern an arbitration clause in a commercial agreement must do so expressly in the arbitration clause. GC for clients involved in the enforcement of an arbitral award in China should be aware that the pre-reporting system applicable to foreign and foreign-related cases has been expanded to apply to domestic cases.
PBOC eases restrictions on cross-border RMB settlement
On 5 January 2018, the People's Bank of China (PBOC) issued the Notice on Further Fine-tuning the Policies on Cross-border RMB Business to Promote Trade and Investment Facilitation.
The notice partially implements the State Council's Notice on Several Measures for Promoting the Growth of Foreign Investment 2017 (国务院关于促进外资增长若干措施的通知) and marks another step toward fully integrating China's currency into the global economy.
Specifically, the notice instructs China's banks to permit:
- Enterprises to use RMB to settle any cross-border transaction that can be settled in foreign currency under the law.
- Foreign investors to open multiple RMB deposit accounts for capital, transfer funds among onshore RMB capital accounts, pay upfront investment costs in RMB and settle and remit overseas their profits, dividends and other investment returns in RMB.
- Domestic enterprises to repatriate RMB funds raised through the overseas issuance of bonds and stocks to meet their actual business needs in China.
- Foreign entities to open designated RMB deposit accounts to participate in carbon emissions trading in RMB via domestic carbon emissions trading institutions.
For more information on currency controls in China, see Practice notes, Foreign exchange control in China and Payment options (inbound M&A): China.
Market reaction
Shirley Wang, Partner, Zhong Lun Law Firm, Beijing
"The notice reflects the regulator's intent to ease restrictions on cross-border settlement by promoting the use by enterprises of RMB for cross-border settlement and to support banks in handling cross-border RMB settlement of current accounts for individuals. The notice also facilitates overseas investors to carry out direct investment in RMB and ensures that the profits obtained by foreign investors in China can be lawfully remitted abroad. In addition, the notice permits enterprises to remit to China RMB funds raised overseas for use as actually needed."
CBRC issues rules on entrusted loans
On 6 January 2018, the China Banking Regulatory Commission (CBRC) issued the Measures on the Administration of Entrusted Loans by Commercial Banks (商业银行委托贷款管理办法), which finalised draft provisions circulated in 2015.
Under the measures, an entrusted loan refers to the disbursement of funds by a commercial bank or other CBRC-qualified lending institution to a borrower on behalf of a client. The client acts as the principal and determines the borrower, purpose and terms of the underlying loan.
The measures further regulate the source and the use of entrusted loans. For example:
- Clients include most legal persons, non-legal person organisations and natural persons. Financial asset management companies and other financial institutions are excluded.
- Funds used in entrusted loans may not come from clients' funds managed by others, bank credit, other forms of debt, or funds without a proven source, and the entrusted loan proceeds may not be used to invest in prohibited industries, financial products or equity.
In turn, the commercial bank, which acts as an agent, may not:
- Determine the borrower on behalf of a client, participate in the client's business decisions in relation to an entrusted loan, or advance the loan funds for the client.
- Determine or be the guarantor for the borrower, pay back the loan for the borrower, or directly or indirectly make entrusted loans by using bank credit loans or investment funds.
- Offer any form of guarantee for an entrusted loan, sign other contracts or agreements that may change the nature of the entrusted loan business, or bear other risks for clients or borrowers.
Market reaction
Allen Ng, Partner, Baker & McKenzie, Hong Kong
"The measures tighten the permitted sources of funds that can be used to extend entrusted loans and the uses of entrusted loan proceeds. The key impact on Chinese entities is that they can no longer use borrowed monies to extend entrusted loans or use entrusted loan proceeds to undertake matters unrelated to their business scope (such as equity investment or the purchase of financial or speculative products). In keeping with recent macro-economic policies, the measures indicate that Chinese regulators are keen to curb shadow banking activities as a part of their efforts to support the steady development of the economy."
Action items
GC should be aware that the new measures expressly prohibit a client from using borrowed funds to extend an entrusted loan or using an entrusted loan to sidestep other regulatory restrictions. Counsel for commercial banks should carefully study the measures and ensure business colleagues are aware of the new restrictions.
TRAB begins online publication of trade mark review decisions
On 15 December 2017, the State Administration for Industry and Commerce (SAIC) announced that from 28 December 2017 all trade mark review decisions of the Trademark Review and Adjudication Board (TRAB) will be published in the "Review decisions" section of its website within 20 business days after delivery, except where public disclosure is prohibited under relevant laws and regulations.
The TRAB is an independent administrative body responsible for handling disputes involving decisions by the Trademark Office (TMO), which is responsible for trade mark registration and administration. For more information on trade mark rights generally, see Practice note, Trade marks (China): Overview.
The following TRAB decisions will be published:
- Decisions rejecting review of a TMO decision.
- Decisions involving review of a TMO decision to refuse to register a trade mark.
- Decisions involving requests for a ruling of trade mark invalidity.
- Decisions involving review of a TMO declaration of trade mark invalidity.
- Decisions involving review of a trade mark cancellation.
- Other decisions involving a final adjudication by the TRAB.
Scott Palmer, Partner, Sheppard Mullin, Beijing
"This new publicly available database is an effort by the TRAB to further enhance the transparency of its decision making and is indeed a welcome development. The TRAB has been working at calibrating its review standards with the Beijing IP Court and Higher People's Court, and ready access to a wide range of decisions will provide a way to monitor review trends and gauge its progress in this regard. It will also be helpful to those of us who regularly advise clients on matters that go before the TRAB, such as TMO appeals and invalidations."