GC Agenda China: September 2017

Practical Law UK Articles w-010-6304 (Approx. 9 pages)

GC Agenda China: September 2017

by Brad Herrold, Consultant and Practical Law China

SPC issues 4th interpretation of Company Law

On 25 August 2017, the Supreme People's Court (SPC) issued the Provisions on Various Issues on the Application of the Company Law of the People's Republic of China (IV) (最高人民法院关于适用〈中华人民共和国公司法〉若干问题的规定（四）), which took effect 1 September 2017.

The provisions, which follow a draft circulated in April 2016, are the SPC's fourth judicial interpretation of the Company law of the People's Republic of China 2013 (中华人民共和国公司法). For a detailed summary of the draft, see Legal update, Supreme People's Court circulates draft of new Company Law interpretation.

The final provisions clarify the following issues (among others):

Validity of resolutions

A company's shareholders, directors and supervisors can file a lawsuit to challenge the validity of a resolution.
A minor procedural defect does not provide a basis for a court to revoke a resolution.
A legal relationship formed between a company and a bona fide counterparty pursuant to a resolution is not affected when a court revokes or invalidates the resolution.

Shareholder's right to know

If a former shareholder has preliminary evidence to show its interests as a shareholder were harmed, it may inspect and copy specific documents from the period it was a shareholder.
The provisions define the meaning of an "improper purpose", where a company can deny a shareholder's request to inspect the company's books.
A shareholder and its agents are liable to a company for disclosing trade secrets obtained by exercising a right to know.

Shareholder's right to profit distribution

A court must dismiss a claim for distributed profits if a shareholder does not produce a valid resolution with a specific distribution plan, except where the shareholder can prove that an abuse of shareholders' rights by another shareholder (such as concealing or transferring profits) led to the company not distributing profits.

Enforcement of pre-emptive rights

Notice of a proposed equity transfer may be in writing or "any other reasonable method through which one can confirm receipt of the notice".
The term "same conditions" refers to a comprehensive examination of the price, payment method and time period.
A transferor may abandon a proposed equity transfer where another shareholder attempts to exercise its pre-emptive rights, except where a company's articles of association provide, or all shareholders agree, otherwise.

Derivative suits

The provisions clarify several procedural issues relating to shareholders' derivative suits, such as the circumstances where a company is listed as plaintiff, the allocation of interest and costs, and so on.

For more coverage of this development, see Legal update, SPC issues 4th interpretation of Company Law.

Market reaction

Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai

"The interpretation provides much needed clarity on a variety of issues of keen importance to shareholders, who now have powerful weapons to protect their rights and interests, including the revocation of certain resolutions, the right to inspect and copy certain documents, and so on. As such, the interpretation will likely bring a new wave of litigation, particularly in derivative suits, where the company now must bear reasonable costs in some circumstances, and long-simmering disputes involving Sino-foreign joint venture partners."

Action items

GC for any company, or shareholder of a company, registered in China will want to closely study the interpretation and take steps to ensure business colleagues are aware of the protections put in place by the interpretation. In some cases, counsel may wish to seek specialist advice to revise a company's constitutional documents and consider making or defending against potential claims.

NPC reviews second draft of Anti-unfair Competition Law

On 5 September 2017, the National People's Congress (NPC) Standing Committee released the Anti-unfair Competition Law of the People's Republic of China (Second Draft for Deliberation) (中华人民共和国反不正当竞争法（修订草案二次审议稿）) for public comment.

This draft follows a prior draft circulated by the NPC in February 2017 (see Legal update, NPC deliberates on draft Anti-unfair Competition Law).

The second draft contains the following key changes against the first draft:

Commercial bribery. The elements of a bribery offense include an intent to seek a trading opportunity or other competitive advantage. Entities with which a business operator may commit bribery are specified.
Trade secrets. A third party commits infringement if it knows or should know that a trade secret was not lawfully obtained by a current or former employee of a rights holder or another entity and still obtains, discloses, uses or allow others to use it.
Internet. Online commercial activities are subject to the same restrictions against unfair competition as traditional commerce.
Procedural restrictions. Administrative authorities must obtain approval to begin an investigation, seal and seize products and search bank records.
Compensation for civil liability. The cap on compensation for intellectual property or trade secret-related unfair competition is RMB3 million (as determined by the courts) if the loss or illegal gain is difficult to assess.
Tying. Tying and imposing other unreasonable conditions in relation to the sale of goods and services are no longer covered in the second draft, as these acts are regulated under the anti-monopoly law (see Practice note, Abuse of market dominance in China).

For more coverage of this development, see Legal update, NPC reviews second draft of Anti-unfair Competition Law.

Market reaction

Xu Liang, Partner, Hogan Lovells, Beijing

"The list of unfair acts remains long and diverse, but the revised draft attempts to balance some of the concerns raised by businesses against the concerns of regulators. In particular, administrative authorities now must obtain approval to begin an investigation, seize assets or look into bank accounts, third parties (including employees and former employees) are prohibited from passing along a company's trade secrets, and online business operators are expressly bound by the same rules applicable to traditional businesses."

Action items

GC for companies operating in China will want to reiterate concerns about the company's risk exposure in relation to commercial bribery, particularly the provisions related to the acts of employees and the bribery of third party influencers, and to ensure that senior management understand the risks and take active measures to train and discipline staff. Counsel also will want to stress other types of anti-competitive acts, including unfair promotional activities, anti-competitive uses of technology, and acts no longer covered by this law, but still prohibited under other rules.

China issues further guidance on outbound investment

On 18 August 2017, the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), People's Bank of China (PBOC) and Ministry of Foreign Affairs (MFA) jointly issued the Notice of Guiding Opinions to Further Guide and Standardise the Direction of Outbound Investment (关于进一步引导和规范境外投资方向指导意见的通知), which took effect 4 August 2017.

The guiding opinions reflect China's interest in continuing to promote targeted outbound investment, while curbing speculative and risky investment projects and investment in sensitive industries and regions.

Specifically, the guiding opinions:

Restate China's policy preferences for outbound investment, including standardising the record-filing, plus negative list administrative system.
Encourage outbound investment in infrastructure that furthers China's "Belt and Road" initiative, and trade, culture, logistics, finance and other service sectors.
Restrict outbound investment in real estate, hotels, film studios, entertainment, sports clubs, and equity investment funds or investment platforms without a specific industrial project, and so on.
Prohibit outbound investment involving the export of core military technology and products without government approval, gambling and sex industries, and so on.

The guiding opinions also issue a call to safeguard outbound investment by:

Adhering to the encouraged, restricted and prohibited classification system outlined above.
Perfecting administrative mechanisms through inter-departmental information sharing, blacklisting offenders, and so on.
Improving service levels, in part by developing service intermediaries.
Strengthening security and contingency planning.

For more coverage of this development, see Legal update, China issues further guidance on outbound investment.

Market reaction

Ren Gulong, Partner, Anjie Law Firm, Beijing

"The guidelines are significant to the healthy development of outbound investment by eliminating market concerns on the government's intent to limit outbound investment, clarifying the direction of outbound investment, and improving the regulation of outbound investment. The guidelines clearly support further outbound investment by qualified investors in useful projects. At the same time, the guidelines call for third party service providers, including legal, tax, design consulting, risk assessment, security and other intermediary services, to minimize the risks inherent in outbound investment. It is foreseeable that outbound investment will continue in a rational and stable way going forward."

Action items

GC for domestic companies investing in businesses or acquiring assets outside China (or for foreign companies partnering with a Chinese investor) should consider the policy behind the guidelines and in some cases prepare for a more stringent government approval process. Counsel for service providers may wish to alert government relations colleagues of any opportunities for growth presented by the guidelines.

CBRC issues guidance on information disclosure by P2P lending agencies

On 25 August 2017, the China Banking Regulatory Commission (CBRC) issued the Guidelines for Information Disclosure on the Business Activities of Network Loan Information Agencies (网络借贷信息中介机构业务活动信息披露指引).

The guidelines were issued to partially implement the Interim Measures on the Administration of the Business Activities of Network Loan Information Agencies 2016 (网络借贷信息中介机构业务活动管理暂行办法), which together with the Guidelines for Network Loan Information Agencies record-filing management 2016 (网络借贷信息中介机构备案登记管理指引) and the Guidelines on the Depository Business for Funds of Online Peer-to-Peer Lending 2017 (网络借贷资金存管业务指引) form the regulatory framework governing peer-to-peer (P2P) lending. (For detailed coverage of the interim measures, see Legal update, Four agencies issue final version of P2P agency measures. For more information on P2P lending, see Practice note: overview, Internet finance in China: P2P lending.)

According to the guidelines, a network loan information agency and its branches must disclose the following information through its official website and other internet channels (such as Apps, Wechat and Weibo):

Information disclosed to the public. This includes an agency's basic information, operating information, contact information (for public enquiry or complaint), and the cause, status, possible impact and measures to be taken regarding any material incident.
Information disclosed to lenders. This includes basic information on the borrower and project, project risk assessment and possible risk outcomes.

The content of any disclosure must be kept in writing for at least five years from the date of disclosure.

The guidance took effect immediately upon issuance, but it gives network loan information agencies up to six months to rectify any areas of non-compliance.

For more coverage of this development, see Legal update, CBRC issues guidance on information disclosure by P2P lending agencies.

Market reaction

Harvey Lau, Partner, Baker & McKenzie, Shanghai

"With the issuance of these guidelines, the "1+3" regulatory framework for P2P lending, that is, the interim measures, plus guidelines on record-filing, depository businesses and information disclosure, has been established at last. Specifically, the disclosure guidelines prescribe uniform and detailed requirements for the information that each lending agency and its branches must disclose. These new requirements should help to improve transparency in relation to agencies, borrowers and projects, lessen the risks to lenders, and foster the healthy development of the P2P lending market."

Action items

GC for companies operating as a network loan information agency will want to carefully study the disclosure requirements and put in place mechanisms to ensure compliance. Counsel for any individual or entity operating in this space, including lenders, borrowers and custodial banks, will want to ensure compliance with the entire regulatory framework as the grace period under the interim measures has expired.

TC 260 circulates revised draft guidelines on data export security assessments

On 30 August 2017, the National Information Security Standardisation Technical Committee (TC 260) circulated for public comment the second draft of the Guidelines for the Security Assessment of Outbound Data Transmissions (Draft) (数据出境安全评估指南（征求意见稿）).

The guidelines establish the criteria, procedures and standards for carrying out security assessments of proposed data exports and partially implement the Cybersecurity Law of the People's Republic of China 2016 (中华人民共和国网络安全法), which requires operators of critical information infrastructure (CII) to store in China personal information and important data collected or generated in China and prohibits CII operators from transmitting this data abroad before passing a security self-assessment and in some cases a security assessment organised by a government agency.

Like the first draft, the second draft imposes assessment requirements on not only CII operators, but all network operators, that is, owners, managers and service providers of a website, offline network or intranet.

The second draft clarifies the following terms:

"Domestic operation" includes foreign network operators that conduct business in or provide goods or services to China, where personal information and important data are involved.
"Important data" does not include state secrets or any data lawfully available through government channels.
"Data export" means a network operator that collects or generates personal information or important data during domestic operations and transmits the data one time or continuously to a foreign institution, organisation or individual.
"Consent of data subject" means a written statement or other behaviour that clearly authorises a data export.
The process for conducting a security assessment involves the following steps, depending on whether a security self-assessment is sufficient or a security assessment organised by a government agency is also required:
- Self-assessment: preparation of a data export plan analysing the purpose of a proposed data export, that is, to determine if it is lawful, legitimate and necessary and assuming the plan passes the purpose test, an analysis of the risk of disclosure, damage, tampering or abuse after the data is exported or re-transferred by the recipient.
- Government assessment: assuming the plan passes both the purpose test and the risk test and government approval is required, approval of the data export plan by the national network information department and the sender's regulator(s).

Comments on the second draft may be submitted to TC 260 until 13 October 2017.

For more coverage of this development, see Legal update, TC 260 circulates revised draft guidelines on data export security assessments .

Market reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai

"Companies hoping that there would be clarity by now need to continue to be patient. The second draft is clearly the product of a lot of discussion and debate. Even though they are not drafted to be binding standards, the guidelines reflect the views of regulators and will when issued inform enforcement practice. But in some respects they still reflect positions inconsistent with the 2016 Cybersecurity Law itself and are highly unpopular with both domestic and foreign businesses. Will data export restrictions apply only to CII operators or to network operators generally? Will the authorities seek to apply them even to foreign companies with no network infrastructure in China if they do business with Chinese customers? These threshold questions will not be fully resolved until the draft is finalised."

Action items

GC for any business in China (or any foreign individual or entity that does business in China) that transmits abroad personal information or important data will want to review IT infrastructure and work with technology and government relations colleagues to ensure that the business develops and implements effective security assessment and compliance mechanisms.

GC Agenda China: September 2017 | Practical Law