GC Agenda China: March 2016

Practical Law UK Articles 1-625-3585 (Approx. 9 pages)

GC Agenda China: March 2016

by Brad Herrold, Consultant and Practical Law China

SPC issues judicial interpretation of property law

On 23 February 2016, the Judicial Committee of the Supreme People’s Court (SPC) released the Interpretation concerning Several Issues on the Application of the Property Law of the People’s Republic of China (I), which will take effect 1 March 2016.

The interpretation addresses six main issues:

Real property registration. Under the Property Law of the People's Republic of China 2007 (2007 Property Law), property rights must be registered when they are created, amended, transferred or extinguished. The interpretation clarifies various issues involving disputes over real property ownership in relation to the registration requirements.
Pre-registration. Under the 2007 Property Law, after a pre-registration is made, the disposal of real property is invalid without the consent of the rights holder listed in the pre-registration. The interpretation further clarifies the circumstances that may constitute a disposal or invalidate a pre-registration.
Transfers of special types of personal property. Disputes involving special types of personal property (for example, vessels, airplanes and motor vehicles) have increased in recent years. The interpretation aims to protect consumers by excluding creditors of a transferor from the scope of protection of a “bona fide third party” (that is, a third party acting in good faith) under the 2007 Property Law.
Legal instruments that change property rights. Under the 2007 Property Law, People’s Court rulings, arbitration awards and so on, that create, alter, transfer or extinguish property rights take immediate effect. The interpretation limits the scope of application of this principle to cases involving the division of co-owned real property or personal property and certain enforcement proceedings.
Rights of first refusal of co-owners. The 2007 Property Law establishes a system for rights of first refusal for co-owners (that is, joint owners of a shared interest in property). The interpretation clarifies, among other issues, the conditions to, and the timing, scope and protection of a co-owner’s right of first refusal.
Good faith acquisitions of property rights. The 2007 Property Law establishes a system recognizing buyers of property rights acting in good faith. The interpretation determines who bears the burden of proving good faith, when a real property transferee is acting in good faith and when it is acting with gross negligence, the timing of the effectiveness of a related transfer, the reasonableness of the transactional price and so on.

Market reaction

Maria Wang, partner, Morrison & Foerster, Shanghai

"The interpretation is a welcome further development on China’s property law regime. It provides much-needed clarity on a range of issues relating to property rights that are often the subject of disputes in China."

Action items

GC for real estate developers or any organization involved in a dispute over real property will want to study the details of the interpretation. Likewise, GC for companies involved in or contemplating a transfer of a special type of personal property or an acquisition or sale of an entity that holds real property should examine the new rules closely.

State Council circulates draft of revised Anti-unfair Competition Law

On 25 February 2016, the Legislative Affairs Office of State Council (LAOSC) issued a notice seeking public comment on a revised draft of the Law of the People's Republic of China Against Unfair Competition 1993. The current law, which is enforced by the State Administration of Industry and Commerce, dates to 1993, and the revisions represent an attempt to address the increasingly sophisticated commercial environment and legislative framework that has emerged in China since then.

The draft contains several proposed changes, including:

Commercial bribery. The draft would create offences for receiving any kind of bribe (and not just an off-book rebate) and bribing a third party who can influence a counterparty to a commercial transaction. The draft revisions also would impose vicarious liability on an employer for a bribery act by its employee and expand the current books and records requirements, so that any “transfer of economic benefit” must be recorded in the contract and in the financial statements of both parties.
Anti-trust and competition. The draft would introduce the offence of abuse of a “relative dominant position” in relation to a particular transaction with a specific counterparty, augmenting the restrictions on abuse of a dominant market position under the Anti-Monopoly Law of the People's Republic of China 2007 (2007 AML). The draft also would prohibit the abuse of software or other technology online to restrict, distort or affect competition and eliminate certain provisions to bring it into conformity with the 2007 AML.
Other changes. The draft would include new or revised clauses aimed at protecting a variety of civil and property rights, including infringement of business logos and trade marks, injury to business or product reputation, collusion in bidding, and the misuse of network technology, among others. The draft would also harmonise the definitions used in the law with those used in other recent legislation,. For example, the 2007 AML, the Advertising Law of the People's Republic of China 2015, and the Trademark Law of the People's Republic of China 2013.

For detailed analysis of the proposed revisions on commercial bribery, see Legal update, Draft anti-unfair competition Law: Commercial bribery implications.

For detailed analysis of the proposed revisions on competition law, see Legal update, Draft anti-unfair competition Law: Anti-trust and competition implications.

For detailed analysis of the proposed on intellectual property, see Legal update, Draft Anti-unfair competition law: Intellectual property implications.

Market reaction

Ma Chen, partner, Han Kun Law Offices, Beijing

"The proposed amendments to the Anti-unfair Competition Law represent a positive step towards more comprehensive regulation of competition behaviors in a broad sense. However, the draft provisions relating to "relative dominant position" is somewhat worrying, as it could open the floodgate for litigation cases that are not possible at the moment. People will be closely watching this new development."

Action items

GC for any company operating in China will want to study the changes to the rules on commercial bribery and proactively adapt business and record keeping procedures to comply with the proposed amendments. GC for companies involved in other activities regulated by the draft revisions, especially companies with significant patent portfolios, will want to become familiar with the relevant provisions and make any necessary adjustments to internal procedures and controls.

PBOC further opens interbank bond market to foreign institutional investors

On 17 February 2016, the People’s Bank of China (PBOC) issued the Announcement on Relevant Matters concerning Further Improvement in the Investment in the Interbank Bond Market by Foreign Institutional Investors, which further opens China’s interbank bond market to foreign institutional investors. Interbank bonds are mainly comprised of government bonds, central bank notes, financial bonds and non-financial corporate bonds issued by China’s central state owned enterprises.

Under the announcement, a "foreign institutional investor" refers to a qualified foreign:

Commercial bank, insurance company, securities company, fund or asset management company or other financial institution (as well as investment products sold by a financial institution).
Pension fund, charitable fund, endowment or other medium and long term institutional investor recognised by the PBOC.
Other qualified financial institutions, including:
- Institutional investors from Hong Kong, Macau and Taiwan.
- Foreign central banks, international financial organisations and sovereign funds.
- Qualified foreign institutional investors (QFII) and Renminbi QFII.

Foreign institutional investors generally must commission a qualified settlement agent to engage in interbank bond trading and settlement, though there appears to be an exception for foreign central banks, international financial organisations and sovereign funds, which are permitted under separate PBOC rules to directly conduct interbank bond trades and settlement. Most commentators are waiting for the PBOC to clarify this point.

The announcement requires a settlement agent to determine whether a foreign institutional investor is qualified. Once qualified and registered (by its settlement agent) with the Shanghai branch of the PBOC, a foreign institutional investor may conduct interbank bond trading and settlement without PBOC approval and without reference to the prior quota system. Those requirements were imposed by prior rules that are inconsistent with the provisions in the announcement and thus no longer apply.

Market reaction

Harvey Lau, partner, Baker & McKenzie, Shanghai

"The announcement eventually may help stimulate inbound investment and promote RMB internationalisation, but qualified foreign institutional investors (other than QFII and Renminbi QFII) still need to wait for the detailed implementation rules to be published to understand the foreign exchange control aspects of this investment opportunity. A recent press release by the State Administration of Foreign Exchange (SAFE) dated 22 March 2016 confirmed that SAFE would enact and release detailed operational rules on the announcement, although there was no fixed timetable as to when they would be available."

Action items

GC for institutional investors qualified under the announcement, especially non-QFII or Renminbi QFII investors, will want to become familiar with the announcement, as well as other related and future developments, to determine if the announcement presents additional investment opportunities and how best to exploit those opportunities.

CFDA circulates revisions to drug quality management standards

On 20 February 2016, the China Food and Drug Administration (CFDA) circulated for public comment a set of draft revisions to the Drug Quality Management Standards 2015. The amendments would bring the standards into conformity with the Opinions on Accelerating the Construction of an Important Product Traceability System, issued by the LAOSC on 30 December 2015.

The standards, referred to as "Good supply practices", or GPS, were issued by the Ministry of Health in 2013 and were updated by the CFDA in July 2015. The opinions require enterprises to develop and implement systems to trace “important” products, including pharmaceutical products, through procurement, production and distribution.

The revisions highlight the responsibility of pharmaceutical companies to independently trace their own products and mainly focus on changing references to an "electronic monitoring system for drugs" to a "drug traceability system". Specifically, the revisions:

Add a general clause requiring pharmaceutical companies to build drug traceability systems to enable them to source the origin of a drug, trace its whereabouts, and investigate related liabilities in accordance with national rules, except where drugs are otherwise subject to special management under national rules.
Delete or revise various clauses that require pharmaceutical companies to scan the electronic monitoring code (that is, the bar code) for a drug and to upload the related data to a national online database.
Change the phrase "implement the provisions on the electronic monitoring of drugs" to "implement the provisions on drug traceability" in various clauses.
Delete or revise the requirements that enterprise computer systems "satisfy drug electronic monitoring implementing conditions" to refer to "satisfy drug traceability requirements".

Market reaction

Philip Cheng, partner, Hogan Lovells, Shanghai

"The revisions show the CFDA’s efforts to address the historical issues arising from the electronic monitoring system and further streamline its oversight functions relating to the traceability of drugs. However, it will be important for the CFDA, after consulting with pharmaceutical companies, industry associations and experts, to include more detailed guidance as to the specific requirements for the new drug traceability system."

Action items

As pharmaceutical companies would responsible for constructing their own drug traceability systems, GC for pharmaceutical companies will want to carefully understand the GPS revisions and consider various approaches to implementing a traceability system. As the revisions are still in draft form, it may make sense to coordinate with internal government relations colleagues to discuss with the CFDA.

CFDA health food registration and record-filing measures

On 26 February 2016, the China Food and Drug Administration (CFDA) issued the Measures on the Administration of Health Food Registration and Record-filing, which will take effect from 1 July 2016. The measures will replace the Trial Measures on the Administration of Health Food Registration issued in 2005 and help flesh out the Food Safety Law of the People’s Republic of China 2015 in relation to the distribution of health foods in China.

Under the measures, health foods may be distributed in China only upon successful completion of one of the following regulatory procedures:

A traditional registration procedure.
A faster, less onerous record-filing procedure.

The following health foods are subject to record-filing:

Health foods that use raw materials listed in the health food raw materials catalogue.
Health food supplements (that is, health food products that contain supplements with vitamins, minerals and other nutrients), where both:
- The nutrients are listed in the health food raw materials catalogue.
- The health food supplements are being imported for the first time.

Health foods are subject to registration if either:

They contain raw materials not listed in the health food raw materials catalogue.
They are being imported for the first time (but do not contain health food supplements).

In relation to imported health foods, only the foreign manufacturer may apply to register or record-file the products, and the products must qualify under the rules for distributing the product in the foreign jurisdiction.

In addition, where a health food registrant transfers technology, the assignee must file a new registration application, and the technical requirements for the product must be consistent with the technical requirements in the original application.

Market reaction

Philip Cheng, partner, Hogan Lovells, Shanghai

"The dual-track registration and record filing system is a good step toward regulating the health food market, as the level of scrutiny applied will be ingredients-based. The only question is what type of ingredients will require greater scrutiny, and that should be determined by the pending ingredients catalogue."

Action items

GC for health food and supplement manufacturers and distributors will want to carefully study the measures, as well as the catalogue when it becomes available, to fully understand the applicable procedures, including the revised procedure in relation to the transfer of health food technology.

SAIC issues rules on blacklisting dishonest companies

On 30 December 2015, the State Administration for Industry and Commerce (SAIC) issued the Interim Measures on the Administration of the List of Dishonest Enterprises with Serious Violations, which will take effect 1 April 2016.

In its purview as China’s company registrar, the SAIC maintains an online, publicly available company information disclosure system. Under the interim measures, companies that meet any of the following conditions will be blacklisted on the company information disclosure system:

The company is on the “abnormal business operations” list for three years without performing its related obligations, that is, it fails to meet its information disclosure requirements and fails to correct the matter.
The company is deregistered for submitting false materials or adopting other fraudulent means to conceal important facts in the course of amending its registration or deregistering.
The company receives three or more administrative penalties within a two-year period for any of the following:
- Organizing or facilitating multilevel marketing schemes.
- Conducting illegal direct sales activities.
- Engaging in acts of unfair competition.
- Providing unsafe products or services that cause personal injury and other serious infringements of consumer rights and interests.
- Publishing false advertising that causes personal injury or other adverse social impact.
The company receives two or more administrative penalties within a five-year period for trademark infringement.
The company is ordered to stop accepting trademark agency business.
The company may be removed from the blacklist if it does not commit another violation of these rules within five years from the date it is blacklisted.

The consequences of blacklisting include:

Targeting the company for stricter administrative supervision.
Prohibiting the company’s legal representative from becoming another company’s legal representative for three years.
Disqualifying the company for credibility recognition and honorary titles.

For more information on the company information disclosure system, see Practice note, Understanding the 2013 Company Law reforms: China: Company information disclosure system.

Market reaction

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

"The new "blacklisting" measures evidence the SAIC's focus on stricter policing of the activities of companies within regulatory areas for which the SAIC is responsible – including not only company registration, but also advertising, consumer protection, and aspects of competition law. The measures also potentially offer greater transparency in the exercise by the SAIC of its powers as company registrar."

Action items

GC for any company registered with the SAIC will want to pay close attention to the measures, as well as other rules referenced by the measures, and implement procedures to minimise the risk of exposure to the blacklisting sanctions. This would include primarily the company information disclosure rules and regulations protecting consumer rights and fair competition.

GC Agenda China: March 2016 | Practical Law