GC Agenda China: August 2016 | Practical Law

GC Agenda China: August 2016 | Practical Law

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.

GC Agenda China: August 2016

Practical Law UK Articles w-003-2587 (Approx. 9 pages)

GC Agenda China: August 2016

by Brad Herrold, Consultant and Practical Law China
Published on 29 Aug 2016China
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.

China issues national level rules governing online taxi reservations services

On 27 July 2016, the Ministry of Transport (MOT) issued the Interim Administrative Measures for the Business of Online Taxi Booking Services 2016, which will take effect from 1 November 2016.
The interim measures require online taxi reservations platforms to, among other things:
  • Maintain servers in China (Article 5).
  • Provide database access to and cooperate with government authorities (Articles 5 and 27).
  • Complete record-filing procedures with the relevant departments in charge under the Ministry of Industry and Information Technology (MIIT) and the Ministry of Public Security (MPS) (Article 10).
  • Conclude full-time labour contracts or part-time services agreements with drivers, depending on the length and frequency of the drivers’ services (Article 18).
The interim measures require online taxi services vehicles to:
  • Be less than eight years old or have logged less than 600,000 kilometers (Article 39).
  • Have satellite positioning and emergency alarm devices (Article 12).
  • Obtain a Network Reservations Taxi Transport Permit (Article 13).

Market reaction

Wu Ye, Partner, King & Wood Mallesons, Shenzhen

"The measures are the first nationwide administrative regulations on online taxi reservation industry, which makes China the first and only country in the world that officially acknowledges the legality of online taxi reservation business at present. This may encourage the promulgation of legislation for other sharing economy sectors. Upon implementation, the operation of online taxi reservation business will become legal and regulated in China and the thresholds and compliance requirements for market entry will also be standardized and enhanced. However, only with this milestone legislation at the national policy level open issues remain, including whether different local governments will promulgate their respective implementing rules and supporting methods based on different local practices, how online taxi reservation platforms will improve their technology, service and security to propel brand loyalty, and how this sector will co-exist and compete in good order with the traditional taxi business model."

Action items

GC for companies already involved in this sector in China (and for companies considering market entry) will want to closely study these rules to ensure full compliance of the market entry requirements. Counsels for other companies directly or indirectly involved in the emerging sharing economy in China also may wish to review these rules to gain a sense of the government’s perceived interests in regulating their business. Given the significant nod to local variation contained in the rules, it also may be advantageous to approach local officials, either on a named or anonymous basis, to better understand their views on the sector and to help educate them on the benefits that sharing community businesses can bring to the local economy.

CAAC to further relax restrictions on foreign investment in civil aviation

On 22 July 2016, the MOT issued the Notice Soliciting Public Comments on the Supplementary Provisions (6) on the Provisions on Foreign Investment in the Aviation Industry (Draft for Comments) (交通运输部关于《<外商投资民用航空业规定>的补充规定(六) (征求意见稿) 》公开征求意见的通知).
The underlying provisions (first issued in 2002) used to restrict foreign investment in the civil aviation sector to a non-controlling share in a Sino-foreign equity joint venture (EJV) or Sino-foreign co-operative joint venture (CJV) for a maximum 30-year term of operation. These restrictions have been gradually liberalised in five previous supplementary provisions.
The draft supplementary provisions proposed this time:
  • Permit CEPA-qualified service suppliers to establish wholly foreign-owned enterprises (WFOEs) engaged in aircraft maintenance, airline catering, air cargo transportation and warehousing, parking lot and ground services (excluding security-related service items).
  • Permit all foreign investors to establish WFOEs engaged in air transportation sales agency businesses in any of the four pilot free trade zones (Guangdong, Shanghai, Tianjin and Fujian).
  • Permit foreign investors to establish WFOEs engaged in air cargo transportation and warehousing, ground services, airline catering and parking lots.
  • Remove the restrictions that Chinese shareholders must hold a controlling share in joint ventures engaged in general aircraft maintenance services.
  • Permit foreign investors to establish EJVs or CJVs engaged in general aircraft maintenance services.
  • Remove the obligations of foreign-owned joint ventures engaged in aircraft maintenance services to contract for business in the international maintenance market.

Market reaction

Xu Liang, Partner, Hogan Lovells, Beijing

"Aside from some clarifications and minor adjustments, the draft reflects the opening-up policies for CEPA service providers and for foreign investors in the four free trade zones published by the State Council in June and July of 2016, respectively. Upon final issuance of this next round of supplementary provisions, foreign investors interested in these sectors may consider entering the market by acquiring a CEPA service provider in Hong Kong or Macau or by investing in one of the four free trade zones."

Action items

GC for companies involved in any of the affected businesses may wish to consider investing in China by acquiring a CEPA qualified service supplier, or in one of the four pilot free trade zones through a foreign-invested vehicle, subject to any remaining limitations on foreign shareholding.

CFDA issues final version of drug quality management standards

On 13 July 2016, the China Food and Drug Administration (CFDA) issued the Decision on Revising the "Good Supply Practice for Pharmaceutical Products" 2016, with immediate effect. These standards, commonly known in the industry as "good supply practices" (GSP), were first issued by the Ministry of Health in 2013 and updated by the CFDA in July 2015.
This decision partially modifies draft revisions circulated in February 2016, and brings the standards into conformity with the State Council’s Opinions on Accelerating the Construction of an Important Product Traceability System 2015 (国务院办公厅印发《关于加快推进重要产品追溯体系建设的意见》).
The final version includes the following changes:
  • Strengthening provisions requiring pharmaceutical companies to establish and implement traceability systems for pharmaceutical products (Articles 2, 36(21), 57, 135, 138(17), 146 and 181).
  • Reinforcing provisions requiring pharmaceutical companies to electronically monitor pharmaceutical products and data uploads (Articles 84 and 161).
  • Adding the qualifications requirements for the personnel of pharmaceutical companies that transport vaccines (Article 22(2)).
  • Clarifying the equipment requirements for companies engaged in the storage or transportation of pharmaceutical products that must be refrigerated or frozen (for example, vaccines storage must be equipped with at least two independent freezers) (Article 49).
  • Clarifying that violations of the GSP standards will be punished in accordance with Article 78 of the Drug Control Law of the People’s Republic of China 2015 (Article 183).

Market reaction

Philip Cheng, Partner, Hogan Lovells, Shanghai

"These rules sadly reflect the game of catch-up with unscrupulous medical suppliers. They have managed once again to damage public confidence in the safety and efficacy of core medical necessities such as vaccines. It will take time as well as vigilant enforcement for these measures to repair the damage."

Action items

GC for pharmaceutical companies will want to carefully review the GSP revisions and consider how to develop and document the implementation of an effective traceability system in the China market. As is the case with other new or newly revised legislation in China, it may make sense to coordinate with government relations colleagues to discuss with the relevant branch of the CFDA the details of a proposed system before it is implemented.
In addition, counsel for companies engaged in the storage or transportation of pharmaceutical products that must be refrigerated or frozen should educate business colleagues to ensure compliance with the equipment requirements.

NDRC circulates draft guidelines for determining punishment under AML

On 17 June 2016, the National Development and Reform Commission (NDRC) circulated for public comment the Notice on Soliciting Public Opinions on the "Guidelines on Recognizing the Illegal Gains Obtained by Business Operators from Monopolistic Acts and Determining the Amount of Fines" (Draft for Comments) 2016. These represent the latest in a series of draft guidelines circulated by the NDRC and China’s other competition regulators in relation to the Anti-Monopoly Law of the People's Republic of China 2007 (2007 AML).
The draft presents an analytical framework to help regulators and business operators determine the amount of illegal gain and the corresponding fines for violations of Articles 46 and 47 of the 2007 AML, which prohibit monopoly agreements and the abuse of a dominant market position, respectively.
Specifically, the draft guidelines:
  • Broadly define "illegal gain" as the additional gain obtained as a result of monopolistic conduct determined by measuring changes in pricing, sales volumes, market share and profit margins (Articles 5 and 6).
  • Introduce the key terms for use as comparative tools for measuring increased income, reduced expenses or both (Article 7).
  • Identify certain situations where monopolistic conduct violates the 2007 AML, but where the conduct does not result in illegal gain (Article 13).
  • Provide a basis for adjusting the fine due to the presence of aggravating or mitigating circumstances (Articles 20-23, 25-27).

Market reaction

Adrian Emch, partner, Hogan Lovells, Beijing

"The AML requires antitrust authorities to impose fines and disgorge illegal gains, but specifies only a broad range of fines and provides no guidance for determining illegal gains. Not surprisingly, the calculation of fines and illegal gains has been a thorny topic for companies unlucky enough to be involved in a Chinese antitrust investigation, with only past, often inconsistent cases for guidance. The draft guidelines generally represent a welcome step towards more transparency and predictability. Of course, there is still quite some room for improvement, and hopefully the authorities will take on board the response of the business community to the government’s call for stakeholder feedback."

Action items

While none of the draft guidelines circulated in recent months by China's competition regulators have been officially promulgated or taken effect, GC for companies with arrangements that could be deemed to restrict competition or with a market position that could be regarded as dominant should become familiar with the development of these drafts. If a situation presents a significant risk, counsel should seek specialist advice and consider approaching the relevant regulator to discuss the facts on a named basis.

SAIC circulates draft rules to implement consumer protection law

On 5 August 2016, the State Administration for Industry and Commerce (SAIC) circulated the Implementing Rules for the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests (Draft to Solicit Comments) (中华人民共和国消费者权益保护法实施条例(征求意见稿)).
The draft rules flesh out the provisions of the Law of the People's Republic of China on the Protection of Consumer Rights and Interests 2013 and in many cases restate, enhance or complement existing rules found in other legislation.
Specifically, the draft rules:
  • Address a number of hot button consumer protection issues, including recalls of defective products, protections for personal data and security for pre-paid cards (Articles 7, 22 and 37).
  • Clarify the nature, role and obligations of consumer advocacy organisations (Articles 44 - 46).
  • Establish dispute resolution principles for the alleged infringement of consumer rights and interests (Chapter 6).
  • Increase the liability of businesses that infringe consumer rights and interests and administrative agencies for failing to protect consumers (Chapter 7).
For a discussion of penalties related to consumers personal data protection, see Practice note, Data privacy in China: Liabilities under the consumer protection law.

Market reaction

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

"With the significantly revamped Consumer Protection Law having come into effect over two years ago, the SAIC has had time to consider practical issues associated with enforcement of the law and so issuance of implementing regulations is to be expected. These draft rules address some important open issues under the law, including in regard to privacy. In an evolution of existing rules governing spam emails, Article 23 of the draft requires that businesses obtain consumer consent in order to make telephone solicitations. If implemented, this requirement will have a significant impact on many Chinese businesses‎."

Action items

Given the flurry of media and policy attention to consumer protection issues, GC for all companies that manufacture or distribute consumer related products or provide services to consumers in China will want to carefully assess the impact of the draft implementing rules before the final version takes effect, particularly in relation to product returns and recalls, data privacy and applicable sector specific obligations.

SPC issues judicial interpretation governing online judicial auctions

On 3 August 2016, the Supreme People's Court (SPC) issued the Provisions on Several Issues Concerning the Online Judicial Auction by the People's Courts 2016. The provisions will take effect from 1 January 2017.
The provisions require, among other things:
  • The SPC to develop and maintain a list of qualified online auction services providers (Article 4).
  • Courts to conduct judicial auctions online, except where prohibited by or where other methods are required under Chinese law.
  • Courts to determine the reserve price, the deposit and payment methods for each auction.
  • An online auction services provider to ensure the secure and normal operation of the online judicial auctions platform and provide a secure and convenient electronic payment system.
For a discussion of auctions sales in international acquisitions, see Practice note, Auction sales: international acquisitions: The auction.

Market reaction

Jerry Fang, Partner, Global Law Offices, Shanghai

"The online judicial auctions started as a pilot program in early 2010s, and it has since become a popular, transparent, efficient and convenient means to auction the seized properties for the enforcement of the judgment and judicial awards. Prior to the interpretation, many courts have adopted online auction for properties such as apartment or lands. The interpretation is important and will have far reaching impact on enforcement and beyond. It will not only play an important role in promoting the standardization of the online judicial auction, but also make the enforcement process much more transparent and efficient, therefore reducing the corruption risks in the enforcement area that has attracted much criticism against the Chinese judiciary."

Action items

GC for companies involved in an online auction, either as a party to a lawsuit, an interested party or a services supplier, will want to closely review the interpretation to understand the detailed rules and procedures that will take effect beginning next year. The specific procedures, rights, obligations and liabilities contained in the rules will be of particular importance to counsel seeking to enforce judgments in Chinese courts.

SPC issues interpretations on application of law in territorial waters

On 1 August 2016, the SPC issued a pair of judicial interpretations on cases related to trials that pertain to the application of the law of China's territorial waters. These interpretations relate to China's disputed claims of territorial sovereignty over the South China Sea.
Specifically, the interpretations stipulate:
  • The scope of China’s territorial waters, including China’s contiguous zones, exclusive economic zones, continental shelf and other sea areas, is under the jurisdiction of China.
  • Those who illegally hunt or kill rare and endangered wildlife, or illegally harvest aquatic products will be prosecuted in accordance with the Criminal Law of the People's Republic of China 1997 (1997 Criminal Law).
  • Claims arising from marine accidents or pollution (or the threat of pollution) that occur inside Chinese territorial waters fall under the jurisdiction of a Chinese maritime court.
  • Infringees have the right to seek compensation for damage to fishing boats and fishing gear, fishing and cargo losses, and lost revenue caused by marine accidents and maritime pollution, except where they are not licensed.
  • The standards and thresholds for determining the circumstances that should be regarded as "serious cases" or "especially serious cases" under the 1997 Criminal Law for crimes of illegally entering Chinese territorial waters or engaging in illegal activities involving aquatic products and resources.
For a discussion of the role of SPC judicial interpretations under Chinese legal regime, see Practice note, Understanding Chinese legislation: Provision, and form, of binding interpretations of law).

Market reaction

Thomas Y. Man, Professor, Peking University School of Transnational Law, Shenzhen

"The interpretations appear to sidestep law of the sea issues and provide a legal basis for bringing within the jurisdiction of China's maritime courts claims related to sovereignty, security and economic interests across much of the South China Sea and East China Sea. This development, coupled with the power of a Chinese court to assert jurisdiction and impose Chinese law where it finds no "actual connection" between a dispute and a foreign court or law, provide China’s maritime courts sweeping powers, even for example in regions jointly managed by China and neighboring countries, to enforce China’s territorial claims and punish violators of Chinese law."

Action items

GC for companies engaged in shipping, aquatic products and other marine industries should be aware that China's maritime courts are empowered to assert jurisdiction and impose and enforce Chinese law where a dispute occurs in or otherwise affects any maritime region claimed by China as sovereign territory, including in relation to disputes involving contracts that contain clauses that specify a foreign dispute resolution forum or a foreign governing law.