GC Agenda China: May 2016

Practical Law UK Articles 2-628-7293 (Approx. 11 pages)

GC Agenda China: May 2016

by Brad Herrold, Consultant and Practical Law China

NPC enacts foreign NGO Law

On 28 April 2016, the Standing Committee of the National People's Congress (NPC) enacted the Law of the People's Republic of China on the Administration of Activities in China by Foreign Non-governmental Organisations 2016 (2016 Foreign NGO Law), which will take effect on 1 January 2017. The NPC reviewed the law three times. Each draft attracted significant adverse feedback internationally.

The final version of the law contains some significant changes:

Clarifying scope of application. The final version augments the definition of "foreign NGO" with examples (including, foundations, social groups and think tanks) (Article 2) and in a separate article appears to exclude "collaboration and exchanges" between foreign schools, hospitals and research institutions and their domestic counterparts from the scope of the law(Article 53).

Easing operating restrictions. The law now permits NGOs to establish more than one representative office (RO) in China, eliminates the five-year limit on an RO's term of operation, and replaces the permit requirement for temporary activities with a record-filing procedure (Article 9).

Removing restrictions on recruiting volunteers and hiring staff. The final version removes restrictions on an RO's volunteer recruitment and staff hiring as well as prohibitions on recruitment in relation to a foreign NGO's temporary activities in China.

The final version also retains several controversial clauses, including:

Regulating foreign NGOs through the Ministry of Public Security (MPS) and the provincial level public security bureaus (Article 6), as opposed to the Ministry of Civil Affairs, China's traditional regulator for non-profit organisations.
Prohibiting foreign NGOs from engaging in vaguely defined activities that (Article 5):
- harm national unity or national security or foment ethnic separatism.
- damage the rights and interests of China, the public or citizens or legal persons.
- engage or finance profit making activities, political activities or religious activities.
Prohibiting foreign NGOs and their ROs from raising funds in China (Article 21).
Permitting the MPS, provincial and/or municipal level public security bureaus to punish foreign NGOs, ROs and their senior personnel, including physical detention (Articles 45 to 50).

For further information on the prior draft of the law, see GC Agenda China: June 2015, Draft foreign NGO law triggers vigorous push back.

For information on the Charity Law, see Legal update, NPC enacts Charity Law.

Market reaction

Liu Jinghua, partner, Baker & McKenzie, Beijing

"The legal grey area in which foreign NGOs operated for years in China is now largely settled, and the requirement that the ROs of foreign NGOs be sponsored through a professional supervisory unit indicates the intention of the Chinese government to tighten its control over the activities of foreign NGOs in China. We will need to wait and see how the government will enforce the law in practice, and in particular how this law will interact with the Charity Law, which was enacted earlier this year."

Action items

GC for foreign NGOs must consider steps to address the risks associated with government enforcement as well as the advantages presented by the existence of formal enabling rules. A detailed analysis depends largely on the nature of a foreign NGO's activities. If the NGO operates as a charity, it may be possible to organise under the more favourable Charity Law of the People's Republic of China. If it engages in permitted, non-charitable activities, it may be able to expand its China operations through a representative office. By contrast, if an NGO's activities are perceived as a challenge to government policy, the new law may be interpreted to proscribe the formation of a representative office and put at risk the current China operation and its senior personnel. GC for companies cooperating with foreign NGOs should consider contracting with the NGO’s RO directly. If doing business with a foreign NGO that has not set up an RO, GC can consider contractually obliging the NGO to record-file with the appropriate government department in respect of any collaboration, supported by an indemnity for any loss caused as a result of the NGO failing to do so.

NDRC circulates draft guidelines on monopoly agreement exemptions

On 12 May 2016, the National Development and Reform Commission (NDRC) circulated for public comment the Guidelines on the General Conditions and Procedures for Monopoly Agreement Exemptions (Draft to Solicit Comments) (Monopoly Agreement Exemptions). The draft guidelines represent another in a series of draft guidelines circulated by China's anti-monopoly enforcement agencies (AMEA) in recent months to flesh out various provisions of the Anti-monopoly Law of the People's Republic of China 2007 (2007 AML).

The draft specifies the conditions and procedures for applying for an exemption pursuant to Article 15 of the 2007 AML from the prohibited types of monopoly agreements set forth in Articles 13 and 14 of the 2007 AML. Specifically, it:

Permits operators and industry associations to apply to an AEMA for exempt status where an agreement has been concluded and an AMEA investigation is ongoing (Article 5, Monopoly Agreement Exemptions).
Requires applicants for an exemption, among other things:
- To identify in the application all applicants and all operators affected by the agreement.
- To prove a significant, causal relationship between the implementation of the agreement and a specific reason for exemption enumerated under Article 15 of the 2007 AML.
(Articles 6 and 7, Monopoly Agreement Exemptions.)
Identifies the major factors to be considered in determining whether the agreement:
- Will not seriously restrict competition in the relevant market.
- Will enable society and consumers to share in the benefits of the agreement.
(Articles 8 and 9, Monopoly Agreement Exemptions.)
Stipulates the conditions and procedures for obtaining feedback from interested parties and issuing, publicising and subsequently revoking or invalidating an exemption decision (Article 11, Monopoly Agreement Exemptions).

The draft also describes two circumstances in which operators may seek "exemption advice" from an AMEA before an agreement is concluded and an investigation is initiated. These are:

An agreement has cross-border effects and the parties to the agreement plan to seek an exemption in one or more foreign jurisdictions.
An agreement has a general and significant impact on an entire sector of the Chinese economy.

The period for submitting feedback on the draft guidelines will end 1 June 2016.

Market reaction

Adrian Emch, partner, Hogan Lovells, Beijing

"To a large extent, the draft views the exemption procedure as a way for a company to bring a defence after it has become subject to an antitrust investigation. It is only in very limited circumstances that companies can preemptively consult with the NDRC or another antitrust agency on the legality of their agreement before it comes into force. The NDRC may be concerned that, if the consultations were too widespread, they could overwhelm the authority with applications and run against the spirit of the Chinese government's directive to cut administrative approvals, not add new ones."

Action items

GC for any company that has concluded or is considering an agreement that could be deemed to restrict competition should carefully review and consider the draft guidelines. Before signing off on a related contract, counsel will want to study the descriptions of prohibited agreements in Articles 13 and 14 of the Anti-monopoly Law and the list of reasons for exemption in Article 15. If the arrangement raises significant questions, it is important to seek specialist advice, both on the anti-competitive nature of the agreement and on the relative advantages and disadvantages of seeking an exemption. If the circumstances permit exemption advice, counsel should consider approaching the appropriate regulator, either alone or jointly with the counterparties to the agreement.

SAIC revises company registration and related rules

On 29 April 2016, the State Administration for Industry and Commerce (SAIC) issued a series of revised rules on the registration of enterprise legal persons, foreign contractors (that is, foreign companies that engage in production and business operations within Mainland China) and pledges of equity interests, as well as its rules governing the authority of the SAIC's lower level subordinates (AICs) to register foreign invested enterprises. Each of the revised rules took effect immediately upon issuance.

Specifically, the SAIC revised the following rules:

Implementation Rules for the Regulations of the People's Republic of China on the Administration of Enterprise Legal Person Registration. Deletes references to liaison offices of foreign invested enterprises (FIEs).
Administrative Measures for the Registration of Enterprises from Foreign Countries (Regions) that Engage in Production and Business Operations within Mainland China. Delegates registration authority to the provincial level AICs, and replaces the annual inspection requirement with a new requirement to submit an annual report on the SAIC's online enterprise credit information disclosure system.
Measures for the Registration of Share Pledge with Industry and Commerce Administration Authorities. Removes the requirement to obtain approval from an FIE's original approval authority to register a pledge of an equity interest in foreign invested company, and requires the AICs to post the pledge registration on the enterprise credit information disclosure system.
Measures for Granting Administration Authority over Registration of Foreign-Invested Enterprises. Extends the authority to carry out the registration of FIEs to qualified AICs below the provincial level.

For further information on company registration in China, see Practice note, Establishing a China business, Business registration in China.

Market reaction

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

"These new regulations reflect a significant effort on the part of the SAIC to streamline the compliance obligations of foreign invested enterprises and foreign companies in relation to business registration with the SAIC and its local counterparts, and to harmonize those requirements with those applicable to domestic companies. This is good news for foreign investors. Eliminating the requirement that government approves pledges of equity in foreign invested enterprises, and requiring equity pledges to be posted on the relevant AIC's website, should facilitate financings involving share pledges."

Action items

While most of these revisions represent a housekeeping effort (that is, they bring China's company registration rules into conformity with other recent changes to laws and regulations. The removal of the approval requirement for equity pledges of foreign invested enterprises is significant. GC should bring this to the attention of Finance colleagues as being able to give pledges more easily may increase the company's financing options.

SPC and SPP issue interpretation on criminal bribery and corruption cases

On 18 April 2016, the Supreme People's Court and the Supreme People's Procuratorate jointly issued the Interpretation on Certain Issues concerning the Application of Law in Handling Criminal Cases Involving Embezzlement and Bribery, with immediate effect.

The Criminal Law of the People's Republic of China 1997 (1997 Criminal Law), as amended for the ninth time in November 2015, prescribes various punishments for, among other offences, the crimes of embezzlement, accepting a bribe and offering a bribe, whether in a commercial context or involving state personnel or persons with influence over state personnel (for detailed coverage, see Legal update, Criminal Law amendment: Changes to China's anti-bribery regime). These punishments, which include fixed prison terms and concurrent fines, are expressed in general terms that are tiered in accordance with the severity of the crime. The interpretation fleshes out the meaning of these general terms and in many cases raises the monetary thresholds that trigger criminal prosecution.

In addition, the interpretation:

Expands the definition of "money and property", that is, the material benefit that induces the exchange of an "improper benefit", which constitutes a crime, to include benefits that:
- Can be converted into a monetary amount such as decorating a residence or discharging a debt.
- Require the payment of money such as membership services and travel.
Clarifies that accepting money and property after the provision of an improper benefit is still regarded as an inducement and therefore constitutes the offence of accepting a bribe.
Explains the circumstances under which punishment may be mitigated or exempted by voluntarily disclosing the crime of offering a bribe before prosecution and investigation.
Establishes the monetary ranges of the fines imposed for the crimes of embezzlement or accepting a bribe.

For further information on the penalties for criminal bribery and corruption, see Practice note, Bribery and corruption offences, enforcement and penalties: China.

Market reaction

Wang Jing, partner, PwC Legal China, Beijing

"Coming on the heels of the hotly debated draft amendment to the Anti-unfair Competition Law, the interpretation sends a clear signal to China's business community on the continued strengthening of China's anti-bribery policies. Despite raising the thresholds for criminal liability, the new interpretation maintains high pressure on certain bribery practices that have relatively serious circumstances. It raises the bar for bribers of state functionaries who apply for mitigated penalties or exoneration. In addition, the new rules make clear the principles for setting criminal penalties in cases where the party accepting a bribe has influence over a state functionary."

Action items

Though to this point criminal bribery actions in China have been far less common than related administrative actions, GC for any commercial operation in China must become familiar with both the administrative prohibitions on bribery and the more complicated criminal sanctions addressed by the interpretation. Many commentators expect a substantial number of compliance actions will flow from the interpretation, and it is critical for counsel to improve awareness and amend specific compliance mechanisms at an early date. These efforts should include an internal comprehensive risk assessment, a review of compliance policies, procedures and disciplinary measures, and the development of vigorous training and monitoring systems.

Five ministries issue intern management regulations

On 11 April 2016, the Ministry of Education, Ministry of Finance, Ministry of Human Resources and Social Security, China Insurance Regulatory Commission, and State Administration of Work Safety jointly issued the Regulations on Managing Internships for Vocational School Students. The regulations took immediate effect and simultaneously superseded the Administrative Measures on the Internship of Secondary Vocational School Students issued in 2007.

The regulations expand the scope of application to cover student interns from higher vocational schools and provide additional protections, including:

Limitation on use percentage. The number of interns used by an employer must not exceed 10% of the total number of its employees, and the number of interns in a specific job position must not exceed 20%.
Term of internship. Depending on the study target, the term of an internship generally may not exceed six months.
Internship agreement. Interns, vocational schools and employers must conclude an agreement before an internship commences.
Prohibited areas. Vocational schools and employers may not:
- Arrange for students under age 16 or in their first year to do internship work.
- Arrange for interns to work on statutory public holidays, overtime or night shifts.
- Arrange for students to intern for a commercial entertainment provider (for example, a bar, night club, KTV, public bath and so on).
- Arrange for interns to undertake high-risk tasks (for example, overhead, underground or exposed to radiation, poisons or explosive substances).
- Charge a deposit, including commissions and management fees.
Payment for interns. Interns must be paid no less than 80% of the salary of a regular employee in the same position during the probationary period.
Compulsory insurance. Vocational schools and employers must purchase liability insurance for interns.

Market reaction

Jonathan Isaacs, partner, Baker & McKenzie, Hong Kong

"Although the new regulations provide significantly more detail in terms of the protections and restrictions applicable to different types of internships, they still remain quite vague on the consequences for violations of the regulations and therefore it remains to be seen how much actual impact the new regulations will have."

Action items

GC for companies that regularly engage or plan to engage student interns from higher and secondary vocational schools will want to closely study the regulations to ensure compliance. It may be advantageous to work on a named basis with vocational schools and local employment regulators to develop and implement a formal intern programme.

SPC issues interpretation on consumer public interest litigation

On 24 April 2016, the Supreme People's Court issued the Interpretation concerning Several Issues on the Application of Law in Hearing Consumer Related Civil Public Interest Lawsuits, which took effect on 1 May 2016. The interpretation addresses a type of public interest lawsuit where designated organisations that have not been harmed have a statutory right to bring a lawsuit on behalf of an uncertain number of consumers that have been or could be harmed by a product or service. The interpretation aims to provide clarity to and reflects the SPC's efforts to establish a framework for consumer public interest lawsuits.

The interpretation mainly focuses on the following issues:

Which organisations are permitted to file consumer public interest lawsuits and under which conditions (Articles 1 and 2).
Which courts have jurisdiction over these lawsuits (Article 3).
What requests for relief a court may support (Articles 13, 17 and 18).
The relationship between public interest lawsuits and private interest lawsuits (Articles 9, 10 and 16).

Market reaction

Jianwei (Jerry) Fang, partner, Global Law Office, Shanghai

"The fact that the interpretation provides legal standing to bring consumer public interest lawsuits will have a huge impact on the consumer rights litigation landscape in China. Previously, consumer public interest organizations did not have a statutory right to bring lawsuits on behalf of consumers, and therefore their role in protecting consumers was limited. We are likely to see these organizations becoming much more active, especially where consumers are not well positioned to litigate against large business operators. Furthermore, these lawsuits will also help consumers to bring their own lawsuits more easily since certain facts (such as product defects) found by a court in a public interest case may be recognized by courts in later cases brought by consumers."

Action items

GC for companies engaged in the manufacture, distribution or retail of consumer goods or services should prepare for a potential rush of public interest litigation in China, as well as follow-on direct claims by consumers, in part by studying the types of permitted plaintiffs, the conditions for filing suit, court jurisdiction and available relief under the interpretation.

SPC issues revised court rules

On 14 April 2016, the Supreme People's Court held a press conference to discuss the release of a revised version of the Court Rules of the People's Courts of the People's Republic of China, which took effect on 1 May 2016. The court rules were initially promulgated on a trial basis in 1979 and last revised in 1993.

According to the press conference, the revised court rules are intended to ensure:

The protection of guaranteed rights by ensuring that participants in court proceedings can exercise their litigation rights, providing special protection to the rights and interests of minors, respecting the human rights of criminal defendants, protecting the security of witnesses and personal information, and ensuring courts are more easily accessible for persons with disabilities.
The rules of a fair trial by ensuring equal treatment to the parties in legal proceedings, ensuring the sufficient supervision of trials, and observing court etiquette.
Court security by strengthening court security checks to prevent the entry to courtrooms of dangerous materials and other prohibited or unknown items, and severely punishing those who violate security rules.
Court order by prohibiting disruptive behaviour and the use of phones and audio or visual recording devices, the display of banners and the distribution of leaflets, and severely punishing those who insult, threaten or physically assault judicial officers or participants or damage court facilities, litigation documents or other evidence.
Trial publicity by requiring the public dissemination of information on the location, available seating and so on of court activities, and permitting the broadcast of court activities where a higher degree of public attention will help promote rule of law.

Market reaction

Jianwei (Jerry) Fang, partner, Global Law Office, Shanghai

"Following the 'litigation explosion' in China, the Chinese judiciary has been quickly developing and transforming for the last three decades. The revised court rules aim to standardize many modern, best practices already implemented by certain courts, and it will therefore modernize court hearings nationwide. Furthermore, the revised court rules will also help protect the human rights of criminal defendants and the equal litigation rights of parties in civil cases. Overall, the revised court rules will focus attention on the importance of procedure, which is often neglected compared to substance in litigation. These improvements will have a positive impact on litigation practice and create a better environment for fostering the rule of law in China."

Action items

GC generally will want to familiarize themselves with the existence and nature of the revised rules, especially in relation to any potential litigation. GC for companies actively involved in court hearings in China will want to ensure that trial counsel is well-versed in the rules and prepared to take advantage of any related opportunities that may arise at trial. In addition, to the extent that the new rules expand on recent trends toward bolstering the rights of consumers, GC for companies involved in the manufacture and distribution of all types of consumer goods may wish to brace for a further uptick in consumer claims.

GC Agenda China: May 2016 | Practical Law