China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

By Wang Fengli and Wang Jiangang, King & Wood's Dispute Resolution Group

For many people, their main wealth management strategy involves purchasing financial products promoted by banks. Since the first impact of the global financial crisis was felt in 2008, the performance of different bank-issued financial products has varied greatly. Some Chinese investors have lost money as a result of buying financial products promoted by foreign-funded banks, and some have even sued those banks for compensation. Since financial products are generally quite complex, hurt investors often make their claim against a bank on the grounds that the bank failed to give clear notice about the risks inherent in the financial product which it was promoting and that the bank induced the investor into purchasing a product while concealing important facts.

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By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong is blessed with many favorable elements for business growth. The most prominent factors often cited for Hong Kong's business success include its gateway role to China, the rule of law, and a location where goods, services and finance move freely. Such a positive environment has led to many success stories, particularly in the tech sector.

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By John Lo, Partner, Corporate, King & Wood–Hong Kong

Nurturing the growth of a science and technology focused sector became a significant part of the government policies of the first post-1997 administration. Under the guidance of the late Professor Tien Chang-lin, former chancellor of University of California, Berkeley, the government issued a technology blueprint for Hong Kong shortly after the changeover, which led to a new period of innovation and growth in the tech sector.

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By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong has a strong venture capital industry and a vibrant capital market, which together afford a much needed financial backdrop for financing growth businesses. This business friendly environment provides funds for start ups as well as exit strategies for more mature companies.
 

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By Tony Dong and Alice Zhang, King & Wood's Tax Department

It is common for multinational companies to deploy offshore holding structures or set up special purpose vehicles ("SPVs") in tax havens to make investments, enter into cross border transactions or to list their IPOs. There are various reasons for companies to utilize offshore SPVs, and tax optimization is clearly one of the top considerations. For example, a company may take advantage of preferential tax treaty provisions or align profits to a low-tax jurisdiction or tax haven. However, in recent years, governments around the world have been tightening their tax administration of cross-border tax avoidance arrangements with TPG's recent tax dispute in Australia is the latest example. The Chinese government has been actively involved in the game, and the State Administration of Taxation ("SAT") has issued a series of regulations in 2009 to strengthen tax scrutiny on non-residents.

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By John Lo, Partner, Corporate, King & Wood–Hong Kong

To a large extent, angel investment in Hong Kong has so far revolved around individual investors rather than institutions. It is useful to examine local angel financing activities by looking at the angel profiles.To date, no systematic research has been conducted regarding the number or makeup of business angels in Hong Kong. General observations indicate that the following groups, not in any order, have been spearheading the efforts: (a) former VC practitioners; (b) individuals who have made money from entrepreneurial activities or as angels; (c) second generation of the leading business families; (d) professionals such as lawyers, doctors and accountants; (e) tech executives and professionals; (f) well-to-do manufacturers who made their initial fortunes with investments in China; and (g) returnees or overseas Chinese with exposure to angel investment elsewhere.
 

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By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong has perhaps one of the most heterogeneous and interesting mix of startups in the world in terms of founder makeup, location of operational base and target markets.  Founders of a Hong Kong startup, for example, could be made up of individuals from a wide variety of personal backgrounds, including locals, returnees mostly from North America, foreign expats, and PRC residents and returnees, especially those hailing from the Pearl River Delta. While a “Hong Kong startup” may be taken to mean the use of a Hong Kong incorporated operating or holding company, depending on the background or special strength of its founders, its actual seat of management or key operational base could be in Hong Kong, in China, or sometimes even the U.S. The initial targeted market of startups could also vary widely from the local market, to China, Southeast Asian region or other overseas markets.
 

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By John Lo, Partner, Corporate, King & Wood – Hong Kong

Angel investment in Hong Kong may be on the verge of an exciting transition from being an occasional engagement of a wealthy few to a more widespread, organized form of startup financing involving many more people with the wherewithal to invest.
 

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By Stephen Nelson, Partner and Head of King & Wood's Taxation Practice

It is not uncommon for foreign investors to sell the shares of intermediate holding companies that hold the equity in Chinese companies as a way to exit their investments in China, in order to get around government approval procedures, as well as to avoid PRC tax on their capital gains. It certainly appears that these offshore transfers may be examined by the China tax authorities going forward, and may no longer escape the Chinese tax net. Recently, the State Administration of Taxation (the “SAT”) issued the circular Guoshuihan [2009] No. 698, “Strengthening the Tax Administration of Equity Transfers by Non-resident Enterprises” ("Circular 698”), which, for the first time, explicitly requires disclosure to the tax authorities of offshore indirect transfers of equity in PRC companies. The tax authorities may then examine the transferred offshore holding company in order to ascertain whether the structure has a reasonable commercial purpose – if not, the offshore gain could be held subject to Chinese tax.

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林燊，金杜律师事务所税务主管合伙人

过去实践中，为了绕过中国商务局、税务局等部门的审核监管，境外投资方通常会考虑采用转让设在境外（例如BVI, 香港）的控股公司的股权而达到转让国内企业股权的目的。时过境迁，这种做法现在很有可能会受到中国税务机关的挑战。近日，国家税务总局下发《关于加强非居民企业股权转让所得企业所得税管理的通知》（国税函[2009]698号，简称“698号文”），该文件第一次将间接转让（即前述的转让境外控股公司）以明文规定的形式纳入中国税务审查的范畴。税务机关将审查境外股权结构是否具有合理商业目的，如果没有，那么转让境外股权取得的资本利得仍有可能需要在中国缴税。因此，这将对境外控股公司架构及境外并购重组交易产生重大影响。

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By Mark Schaub, Partner, Corporate, King & Wood - Shanghai

Three consumer credit companies have obtained regulatory approval for their establishment from the China Banking Regulatory commission (CBRC). The main shareholder in each of these consumer credit companies are domestic banks namely Bank of China (BOC), Bank of Beijing and Bank of Chengdu.

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By Zhang Yi, Partner, & Alan Du, Counsel, Corporate Group, Shanghai

The Administrative Measures for Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (the “Measures”) was issued by State Council on 2 December 2009. The Measures, effective from 1 March 2010, will allow foreign investors to directly act as partners of partnerships in China.

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林燊，金杜律师事务所税务主管合伙人

          中国政府对境外控股公司的反避税管理又向前迈进了一步。国家税务总局日前下发文件，即《关于如何理解和认定税收协定中”受益所有人”的通知》（国税函[2009]601号，简称“601号文”），指导地方税务机关调查认定申请人是否满足“受益所有人”的条件，以决定申请人能否享受税收协定中有关股息、利息、特许权使用费、财产转让收益等优惠待遇。该文件的发布引起广泛关注，跨境交易的税务筹划及利用境外控股公司享受税收协定优惠的安排将受到很大限制。

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By Stephen Nelson, Partner and Head of King & Wood's Taxation Practice

China’s crack down on tax anti-avoidance took another major step forward with the release of a new Circular by the SAT which may severely restrict the ability of offshore holding companies to take advantage of tax treaty benefits. The SAT’s “Notice on Interpretation and Determination of Beneficial Owner under Tax Treaties” (Guoshuihan [2009] No. 601, or “Circular 601”), directs local tax authorities to investigate whether an applicant satisfies the requirements to qualify as a beneficial owner, which is a pre-requisite to enjoy the benefit of a reduced withholding tax on dividends, interest, royalties or capital gains under a double tax arrangement.

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The People's Government of Shanghai Pudong New Area promulgated on June 2, 2009, the Pilot Measures for the Establishment of Foreign-invested Equity Investment Management Enterprises in the Pudong New Area of Shanghai ("Pilot Measures"). The Pilot Measures provide guidance on registration and incorporation of equity investment management companies in Pudong New Area to be established by foreign equity investment capital firm including private equity investment and venture capital.
 

By Zhang Yi, Partner at King & Wood's Corporate Group

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Malicious litigation is broadly thought to be using a legal right to litigate to protect an interest when no substantive right has been violated. Currently, Chinese law does not provide any specific provisions on how to determine whether a party has abused its right to litigate, nor does the law define the concept of malicious litigation. Moreover, Chinese law does not provide specific remedies for a victim of malicious litigation to repair the damages suffered from a malicious litigation.

By Xu Jing, Partner at King & Wood's Intellectual Property Group

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Chinese outbound investment has grown rapidly in the last few years, particularly in the energy, mining, banking, IT and creative industries. On August 18, 2009 China Petroleum & Chemical Corporation (Sinopec) announced the USD 7.2 billion acquisition of the Swiss Addax Petroleum Corporation. This was the largest international acquisition by a Chinese company to date. Additionally, CNPC has made several large international acquisitions - for example, in May, 2009, CNPC acquired a 45% stake in Singapore Petroleum for USD 1.2 billion while companies such as China Minmetals, China Nonferrous Metals, Baosteel, and ICBC have also made significant outbound investments recently. With the increasing internationalization of Chinese companies, commercial disputes are almost inevitable. In our experience, when dealing with international arbitration and litigation proceedings, we see Chinese companies employing a number of different strategies:

By King & Wood's Cross Border Dispute Resolution team

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Emissions trading refers to a mechanism for trading legal emissions rights as commodities with the aim of controlling the overall emission of pollutants into the environment and optimizing the allocation of emissions quotas. As a concept, emissions rights trading dates back over thirty years. However, it was not until the advent of the Kyoto Protocol which became effective in 2005, that the international community established the “Clean Development Mechanism” (“CDM”), a global emissions reduction regime. Under this mechanism, every developed country is required to commit to a certain amount of emissions reduction by a specified deadline. Those countries which generate more emissions than their certified emission reduction (“CER”) may purchase CER credits from the countries which have unused CER credits or which are not subject to emissions reduction commitments. In other words, enterprises in different countries may buy and sell rights to emit carbon dioxide by means of climate exchanges in a similar manner as they would trade stocks in stock exchanges.

By Xu Ping, Partner, FDI

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A Chinese company's top executive is usually the company's legal representative, and he or she is legally entrusted with the company seal, which is the company's official symbol. The company seal provides the legal capacity to make and execute agreements, provide guarantees, transfer assets, and legally bind the company. When a legal representative is replaced, the displaced legal representative must return the company seal to the company so that the new legal representative can represent the company. However, if the displaced legal representative refuses to return the seal, the company could be liable for all the agreements that the former legal representative binds the company to. In other words, even if the articles of association can be used to remove an executive it does not necessarily mean that the foreign investors have been able to regain control of the company in practice. Therefore, retrieving the terminated legal representative's unlawfully held company seal is an important step toward the foreign investors recapturing control of the company.

By Zhang Shouzhi, Xu Xiaodan and Li Xiang, King & Wood's Cross-Border Dispute Resolution Practice, Beijing

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China's rapid economic development and its emerging middle class allow franchises to operate in China under the following model:

The franchisor
• owns a well-known brand with a global reputation;
• has a strong desire to expand its brand in China;
• currently lacks sufficient capital and the traditional franchising model is no longer suitable to support such expansion.

The franchisee:
• has a well-developed distribution network;
• already owns second-line brands for the same or similar products which have already established certain market share in China;
• has ready capital and other operational resources.

By Cecilia Lou, Partner at King & Wood's Intellectual Property Group

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Once a friend of mine visited Shanghai and asked me to recommend some quick restaurants. After listing a few options, I realized that he was not interested in them as he just wanted to find a simple restaurant providing real Shanghai cuisine. It dawned on me that, we were surrounded by national and international franchised stores with standardized products and services which often provide little local flavor. Franchising is ubiquitous in China, and not just the fast food chains.

 By Cecilia Lou, Partner at King & Wood's Intellectual Property Group

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Not only the marketing affairs, the Chinese Basketball Association also effectively controls all other critical aspects of the CBA under the CBA AOA. The following three issues illustrate how the Chinese Basketball Association greatly influences the operations of the CBA clubs.

By Wang Rui, Partner at King & Wood, William Gould, Alvin Attle, and Peter Gall

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The rapid expansion of the NBA in China overshadowed the premier professional basketball league in China— the China Basketball Association (“CBA”). Beyond the superior play, the CBA currently underperforms the NBA in many other aspects.

By Wang Rui, Partner at King & Wood, William Gould, Alvin Attle, and Peter Gall

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On June 9, 2009, the State Administration for Foreign Exchange (“SAFE”) issued the Notice on Certain Issues Relating to Foreign Exchange Administration on Offshore Lending by Domestic Enterprises (the “Notice”) effective as of August 1, 2009, in an effort to deal with the difficulties faced by offshore Chinese-funded enterprises that have “gone abroad” in obtaining financing offshore and increasing working capital, to encourage more domestic enterprises with strong capital strength to “go abroad”, and to enhance the use of funds by domestic enterprises.
 

King & Wood's Finance Group

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From 2003-2007, over US$100 billion poured into China via offshore structures in tax havens like the Cayman Islands. Much came from global institutional investors who tasked alternative investment managers with allocating a percentage of their portfolios to high-yield opportunity funds, emerging markets and real estate.

Everyone wanted a piece of the “China Dream,” but in recent months they have woken up to deteriorating economic conditions. Institutional investors are forcing redemptions of their investments from high-yield, high-risk markets.

Jack Rodman, Senior Advisor to King & Wood\'s International Debt/Restructuring Practice

Summarized from Mr. Rodman's article for China Economic Review, May 2009.

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The Legislative Office of China's State Council is currently soliciting public opinions for a draft set of defective products recall rules. The draft has been prepared by the General Administration of Quality Inspection, Supervision and Quarantine of China.

Mark Schaub, Partner, Corporate

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China has issued a raft of measures aimed at moulding its auto industry to meet both the challenges posed by the global economic crisis and possibly even use the crisis to achieve long held strategic government goals. The short term goal appears to be to boost domestic consumption of cars and thereby stimulate the economy. The longer term goals have been previously enunciated in NDRC auto policy, namely consolidate the industry, build some national auto champions and build quality “green” cars. According to The New York Times, China is aiming to become a global leader in manufacturing electric cars.

Xu Ping, Partner, FDI

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China's insurance industry has experienced significant changes since its World Trade Organisation (WTO) entry. It has gone from being a predominantly closed market in the early 1990s, to one in which foreign insurers now account for more than half of all insurance companies. The Insurance Law, as the basic law governing China's insurance industry, however, have not fully reflected that growth and change.

On 28 February 2009, the Standing Committee of National People's Congress adopted the long-awaited amendments to the Insurance Law which will become effective as of 1 October 2009. A number of new provisions are included and extensive amendments to existing provisions made. Some of the key amendments are discussed below particularly those which may likely impact on the investment in, and the operation of insurance companies and insurance intermediaries in China.
 

Mark Schaub, Partner, FDI

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China's Ministry of Commerce (MOFCOM) has recently issued a number of notices delegating approval competency to lower governmental levels. This delegation of approval competency to local authorities will greatly accelerate the approval process for foreign invested projects. Two prominent areas in this general policy of devolution are delegation of approval authority over (i) foreign invested holding companies and (ii) foreign invested venture capital enterprises (“FIVCEs”) as well as foreign invested venture capital management enterprises (“FIVCE Management Firm”).

Xu Ping & Mark Schaub of King & Wood's Foreign Direct Investment Practice

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Often, when Chinese lawyers deal with foreign-related cases they see the term "attorney-client privilege" in the foreign lawyer issued legal opinions and memorandums. Furthermore, many foreign lawyers would like to know if their communication with the Chinese lawyers they work with is provided the same amount of protection as their communication with their clients.

Black's Law Dictionary defines attorney-client privilege as a client's right to refuse to disclose, and to prevent anyone else from disclosing, confidential communications between him or her and his or her attorney. This privilege prevents attorneys from disclosing their communications with their clients. Furthermore, this protection prevents any other party, including, the attorney from using any information that could be considered "attorney-client privilege" as evidence in a litigation. However, there are exceptions. For example, an attorney has a duty to disclose privileged information if the disclosure is related to criminal activities. The attorney-client privilege was established to encourage honest communication between an attorney and his or her clients. This opportunity for honest communication will reduce the chance that a client will intentionally or unintentionally engage in an illegal activity due to ineffective communication with his or her attorney.

Gui Hongxia and  Li Xiang of King & Wood's Dispute Resolution Group

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According to Chinese media reports last year, six children died and nearly 300,000 others were sickened after consuming milk powder containing melamine, a toxic industrial chemical that was added to show a higher protein level in the milk powder. The melamine contamination of dairy products was discovered to be widespread. Concerns about food safety have surfaced in China long before the melamine dairy scare: sub-standard baby milk produced in Anhui, Longkou noodles containing lead from Shandong, fake alcohol in Guangdong, soy sauce made from human hair (still not clear how that works in practice), eggs with melamine – this list is long and a cause of grave concern to Chinese consumers.

This unrest in relation to food safety led to an Asian Development Bank policy note being delivered to the PRC State Council in 2007. The policy note was the result of a technical assistance project between the PRC State Food and Drug Administration and the World Health Organization. The note was generally positive and commented favorably on the great efforts made by the PRC government to improve food safety. Despite some progress, problems remained – in particular in respect of inter-agency coordination and the lack of a framework law in respect of food safety. The latest milk powder problem may have been the catalyst that further sped up the introduction of the new law.

As such, the PRC Food Safety Law was approved by the National People's Congress (NPC) on February 28, 2009, and provides a legal basis for the government to strengthen food safety control "from the production line to the dining table."
 

The law which goes into effect on June 1, 2009, consolidates hundreds of regulations and standards covering China’s 500,000 food-processing companies and promises tougher penalties for producers of tainted products.

Mark Schaub, Partner, FDI

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A. General Devolution to Lower Levels

China's Ministry of Commerce (MOFCOM) has continued their trend of further delegating approval competency to lower governmental levels. This delegation of approval competency to local authorities will greatly accelerate the approval process for foreign invested projects.

MOFCOM issued, on March 5 the Notice on Improving the Examination and Approval over the Foreign Investment (the “Notice”) which simplifies the approval process through the following means:

1. In the Notice, MOFCOM delegates its approval competency under certain conditions:

FIEs falling within encouraged sectors (regardless of investment amount) which were previously approved at the central MOFCOM level can now be approved by MOFCOM counterparts at the provincial level, vice-provincial city level (1), or national economic development zone level. It is important to note that the usual threshold of USD 100,000,000 total investment does not apply to encouraged sector projects. Accordingly, the basic policy is that encouraged projects can be approved locally except for some specific exceptions such as central government reliant projects (2) or FIEs governed by specific rules or industrial policies.

A basic rule has always been for amendments to FIEs to be approved by the original approval authority. The Notice changes this by allowing FIEs originally approved by MOFCOM to have subsequent commercial changes approved by MOFCOM’s local counterparts except for capital increases which require National Development and Reform Commission approvals or share transfers which result in a transfer of the controlling interest to the foreign shareholder.

The Notice also largely devolves approval competency for mergers and acquisitions of domestic companies by foreign investors and FIEs to local authorities. Projects falling within encouraged or permitted sectors can be approved locally if the transaction amount is below USD 100,000,000. Local approval can also be obtained in restricted categories if the transaction amount does not exceed USD 50,000,000. It is important to note that in respect of acquisitions the Notice states that competency shall be determined by reference to the transaction amount not total investment. However, it is important to note that this devolution of authority does not waive approval requirements in respect of the Chinese Securities Regulatory Commission (CSRC) or the state-owned assets supervision and management authorities. Accordingly, in many sensitive cases central level approvals will still be required. Similarly, strategic investments in listed companies will still need MOFCOM level approval.
 

Mark Schaub, Feng Xin, Duncan Hwang of King & Wood's Foreign Direct Investment Practice

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In the year following the entry into effect of the PRC Enterprise Income Tax Law, the Chinese tax authorities have issued several rules clarifying emphasizing the position on withholding tax on China-sourced income of non-resident enterprises. Recently, a new regulation was issued that sets out the procedural rules for withholding income tax, the Provisional Administrative Measures on Withholding Enterprise Income Tax for Non-resident Enterprises, Guoshuifa [2009] No. 3.

Stephen Nelson, Partner & Alice Zhang, Taxation

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The Chinese legislature created a hybrid from the different approaches adopted by civil and common law jurisdictions through the Copyright Law of the People's Republic of China (the “Copyright Law") and the Regulations on the Implementation of the Copyright Law of the People’s Republic of China (the“Implementation Regulations"), and produced the twin concepts of “legal entity work” and “occupational work” for assigning rights to works made in the course of an employment relationship. For example, a book written by a group of employees organized by an entertainment company for celebrating the company's anniversary would likely be considered “legal entity work”, but a piece of music composed by a composer employee (not for specific purposes) is “occupational work”, because in the former case, supervision of the company would be involved but the latter case it would not.

Being able to draw a clear line between “legal entity work” and “occupational work” is crucial during a due diligence investigation in terms of copyrighted materials in employment relationships- ascertaining an accurate chain of title from the author turns out to be a thorny issue. Though these two types of works are seemingly similar, the attribution of the copyright ownership between a legal entity employer and an employee is critical. Though the determination of “legal entity work” and “occupational work” can be extremely confusing, neither the legislatures nor judicial organs have ever promulgated any guidance. Thus far, only the National Copyright Administration of the People’s Republic of China (the “NCA") has expressed its viewpoints on this matter in the circular “Reply to the Liaoning Tieling Mediate Court Regarding How to Determine Legal Entity Work and Occupational Work” (the “NCA Circular”), which however does not have judicial binding force.
 

Wang Rui, Partner, International Trade

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The pass-through tax treatment for partnership enterprises has finally been officially confirmed by the PRC tax authority, via the Circular on the Issues Concerning the Income Tax of the Partners in Partnership Enterprises, Caishui [2008] No. 159, which took effect retroactively as of January 1, 2008. It represents an important first step in the development of Chinese partnership tax law. 

Stephen Nelson, Partner, and Alice Zhang, Taxation

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Towards year end of 2008, the PRC Government announced the repeal of the tax incentive allowing for the importation of equipment free of duty and VAT for encouraged foreign investment enterprises (FIEs). At the same time, the refund available for VAT paid on domestic equipment purchases was also repealed. This was in conjunction with the reform of the VAT system, discussed in an earlier blog on this site.

The PRC government now has issued two notices grandfathering the old VAT benefits until the middle of this year, one for the imported equipment and one for the domestic equipment.

Stephen Nelson, Partner, & Alice Zhang, Taxation

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On November 5, 2008, the PRC State Council passed The Provisional Regulations of the People’s Republic of China on Value-Added Tax, extending VAT reforms to all industries nationwide from January 1, 2009.

Stephen Nelson, Partner, Taxation & Alice Zhang, Legal Assistant

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Under the United Nation's Framework Convention on Climate Change (UNFCCC), “developed country Parties should provide new and additional financial resources to support the transfer of technology and take all practical steps to promote, facilitate and finance the transfer of, or access to, environmentally sound technologies and know how to developing country Parties.” However, a UNFCCC report revealed that a large portion of developing nations do not take advantage of CDM projects to import technology.
 

As long as technology transfer from developed countries is a convenient low-cost means for China to reduce GHG emissions, why doesn't China have more CDM projects that involve technology transfer? [continue reading to see our analysis]
 

Wang Rui, Partner, International Trade

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The Hong Kong Government has decided to introduce a cross-sector competition law during the 2008-09 legislative session. The Government has published a draft framework for the competition law and is currently seeking public comments on this draft.

The introduction of a competition law is a significant step for an economy to take. Not all competition laws are the same and the most important thing is that the law is designed well to suit the Hong Kong economy.

I. Key features of the draft framework paper

A. Competition rules
There are three core prohibitions commonly found in competition laws around the world. These are a prohibition against horizontal coordinated conduct such as price fixing between competitors; a prohibition on an abuse of unilateral market power (sometimes called an abuse of dominance or otherwise called an abuse of a substantial degree of market power); and a prohibition against anticompetitive mergers.

The competition law would contain two broad prohibitions:

• prohibition against undertakings (individuals, companies or other entities engaged in economic activities) entering into agreements, decisions or concerted practices with the purpose or effect of substantially lessening competition (the "First Conduct Rule"); and

• prohibition against undertakings that possess a substantial degree of market power from abusing that power with the purpose or effect of substantially lessening competition (the "Second Conduct Rule").

The Public Consultation Paper also raises the possibility of a prohibition against mergers or acquisitions that are likely to substantially lessen competition (the "Merger Rule") and a clearance process for mergers and acquisitions. If this possibility was not adopted, it would put the Hong Kong competition law out of step with most other competition law regimes around the world.

Also prohibited in some jurisdictions and not in others is certain vertical conduct like resale price maintenance. For example, the competition law on the Mainland contains such a provision. However, in step with recent US case law, Singapore does not prohibit such vertical conduct. The proposed Hong Kong law would follow the latter course.

*Nick Taylor is a partner of Gilbert+Tobin, a strategic partner of King & Wood since November 2007.
**Kenneth Choy is a Partner King & Wood - Hong Kong.

 

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Stellar Megaunion Corporation ("SMC") was in serious debt, as it could barely repay its liabilities. New World China Land ("NWCL"), which was seeking an opportunity to go public, proposed to acquire SMC as a shell company which has no assets, but is publicly listed. To achieve this goal, NWCL conducted several rounds of negotiations with SMC's creditors to settle SMC's debts and clear the roadblocks for the acquisition. However, the parties were unable to make much progress in the negotiations due to the large number of SMC's creditors involved. As SMC needed to solve its debt crisis as soon as possible and its negotiations with NWCL were deadlocked, the company decided to reorganize to completely release itself from the heavy debt burdens in a short period time.

SMC's Reorganization
A. Reorganization initiated by SMC's creditors
As SMC failed to repay it debts due, a third party creditor petitioned the proper Intermediate People's Court (the "Court") to reorganize SMC. The Court accepted the petition on March 11, 2008 ([2008] Yusanzhongbozi No.1).

B. Confirmation of Creditors' Rights
According to the proposed reorganization plan the administrator of SMC (the "Administrator") submitted to the Court and the first SMC creditors' meeting, 70 creditors filed claims and the total value of confirmed claims was nearly RMB 2.5 billion. [continue reading to find out the outcome]
 

Liu Yanling, Partner and head of King & Wood's Bankruptcy, Restructuring & Insolvency Practice.

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At first glance, the goals of intellectual property law and competition law might appear to conflict. IPR owners are granted statutory rights to control access and charge monopoly rents to others for use of their rights. IPR owners may also use terms of IPR licences to regulate downstream activities of their distributors, such as imposing exclusivity, territorial restraints and price restraints. Competition law, on the other hand, is directed at curtailing such market power which may prove harmful to economic welfare.

 However, IP laws and competition laws can also be seen as complementary rather than antagonistic. Both laws share the same fundamental goals of enhancing consumer welfare and promoting innovation. According to the United States (US) Department of Justice (DoJ) and the Federal Trade Commission (FTC) :

 “…[competition] laws protect robust competition in the marketplace, while intellectual property laws protect the ability to earn a return on the investments necessary to innovate. Both spur competition among rivals to be the first to enter the marketplace with a desirable technology, product, or service.”

 While an IPR may confer a “legal monopoly” over a product, process or work, it does not necessarily confer an “economic monopoly”. Further, while an IP license may well confer restraints on licensees (such as territorial restraints) with respect to a specific product, process or work, there may be sufficient actual or potential close substitutes that constrain the exercise of market power by the IPR owner.

 Despite the view that the goals of IP and competition laws are complementary, difficult questions can arise when competition law is applied to specific activities involving IPRs.

A. China's AML:  Article 55

 The IPR provision in the AML is set out in Article 55:

“This law shall not apply to the conduct of operators to exercise their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this law shall apply to the conduct of operators to eliminate or restrict market competition by abusing their intellectual property rights.”

 Article 55 exempts conduct which amounts to an exercise of IPRs so long as:  those IPRs are exercised in accordance with the provisions of laws and administrative regulations relating to IPRs; and the conduct does not amount to an abuse of IPRs by eliminating or restricting competition.

 The Article 55 approach is very similar to the approaches in Australia and Canada. In both these countries, there has been debate about when the IPR owner is only fairly exercising their inherent rights in the IPR or is trying to achieve something more which has an anti-competitive outcome. Experiences in both countries show that this dividing line can be difficult to draw.

* Angie Ng is a graduate in the Competition and Regulatory Group at Gilbert + Tobin in Sydney, Australia.

** Ding Liang is of counsel for King & Wood's International Trade Practice in Beijing.

*** Peter Waters is a partner in the Competition and Regulatory Group at Gilbert + Tobin in Sydney, Australia.

King & Wood established a strategic alliance with Gilbert + Tobin in November 2007.
 

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 Recently, the Chinese government issued a couple of new laws and regulations to curb overseas “hot” money and strengthen the administration of foreign exchange. On August 5, 2008, the State Council amended and promulgated the Regulations on Foreign Exchange Administration of the People's Republic of China which requires that foreign exchange and the fund for settlement in a capital account should be used as approved by relevant approval authorities. On August 29, 2008, the Circular of Relevant Implementation Questions Concerning the Improvement of Administration of Payment and Settlement of Foreign Exchange Capital of Foreign Invested Enterprises (the “Circular”) was then issued by the State Administration of Foreign Exchange (“SAFE”), according to which the RMB settled from the capital account of a foreign invested enterprise (“FIE”) should be used in accordance with the business scope approved by the governmental agencies and may not be used to make equity investments in China. This means foreign investors cannot directly make use of the foreign exchange in their capital account to invest in China, which is expected to have a major impact on domestic re-investment by FIEs.

  In the past, a number of foreign investors used to invest in China by first establishing a FIE and then using the FIE as an investment arm to re-invest in China. Please note such an FIE referred to here is not the so-called “foreign funded investment company” (“Investment Company”) which is a special entity set up by foreign investors to mainly engage in direct investment in China. Rather it refers to such a FIE whose business scope may include production, retail, wholesale of products, consulting or technology services or other businesses rather than “investment” as permitted under PRC law.

 Interestingly, the item of “investment” is normally not allowed to be included in the business scope of a FIE by approval authorities like the Ministry of Commerce (“MOFCOM”)  and corporate registration bodies like the State Administration for Industry and Commerce (“SAIC”) along with their local counterparts. However,  the Provisional Regulations on Investment within China by Foreign Invested Enterprises which was promulgated dated July 25, 2000 jointly by MOFCOM and SAIC does grant a FIE a qualification to re-invest in China. In practice, a FIE is permitted to conduct investment in China e.g. acquiring the equity interests of other FIE(s) or domestic company(s), but a FIE is required to use RMB to make such investment under the current PRC law. Thus a question arises: if a FIE has no or cannot obtain sufficient amount of RMB by whatever lawful means, could it be allowed to convert funds into RMB from its capital account for the purpose of investment?

Huang Caihua, Associate, Foreign Direct Investment

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The Implementation Regulations of the PRC Employment Contract Law, which has been anticipated for over a year, became effective on September 18, 2008. Overall, the Regulations are consistent with the spirit of the Employment Contract Law and resolves certain problems in its implementation. However, the Regulations have a relatively limited impact and failed to meet many expectations.

A few limitations include:

(1) The Regulations do no resolve the question of whether a company may unilaterally make a final decision in formulating and revising internal rules, regulations, and other material matters or if the company must jointly formulate such internal policies along with its employees. Basically, the Regulations do not clarify whether the employer can determine the matters by itself when trade unions or employee representatives disagree. It is unfortunate that the differing views and practices on this question are not addressed as this is a major point of contention.

(2) The Regulations do not define the terms “temporary”, “auxiliary” and “substitute” employees as described in the Employment Contract Law. The three terms are used to classify those job positions that qualify for labor dispatch. Although the Regulations intentionally omitted definitions to preserve flexibility, the omission still makes that corresponding article in the Employment Contract law difficult to implement in practice and does not provide clarity for how to handle labor dispatch.

Resolving the above issues will most likely now be addressed by local rules promulgated in the future. Therefore, it is very important for employers to keep an eye on the local legislation (of both the place of the company’s registration and the place of performance of the employment contract). As always, the employer also then needs to continually update its internal regulations and rules in accordance to latest national and local legislation.
 

Duan Haiyan, associate, Labor & Employment

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The current concerns about the spiking of dairy products in China with melamine have expanded into concerns about the state of Chinese food safety generally.

The problem does not appear to be a lack of regulations as there are a myriad of  relevant laws, regulations and rules (including PRC Food Hygiene Law, PRC Product Quality Law, PRC Agricultural Product Quality Safety Law, PRC Consumer Rights Protection Law, Special State Council Rules on Strengthening Supervision and Management of Food Safety, National Plan for Major Food Safety Emergencies to name a few).

Mark Schaub, Partner, FDI

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The new PRC Enterprise Income Tax Law (“EIT law”) came into effect on January 1, 2008 and consolidated the enterprise income tax regimes for domestic enterprises and foreign-invested enterprises and ended the system of dual income tax regimes. The new EIT law unified the tax rates and tax incentive policies for both domestic enterprises and foreign-invested enterprises so that more equitable market conditions are created.

For those enterprises previously enjoying favorable tax incentives under the former tax regimes, the new EIT law provides a 5-year transitional period. For example, enterprises that enjoyed fixed term tax exemptions and reductions may continue to enjoy them until the end of the original term. Enterprises that used to enjoy a 15% tax rate will gradually shift from the lower rate to the 25% as required by the new EIT law. The transitional tax incentive policies are provided in many different tax regulations. The following is an introduction of some of the transitional tax policies:
 

Stephen Nelson, head of King & Wood's Taxation Practice & Wu Libin 

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The First Intermediate Court of Beijing recently issued a landmark decision under the new Labor Mediation and Arbitration Law (effective May 1, 2008). Under the new law, only employees can appeal certain arbitration decisions, while the employer is only able to request the court to vacate arbitration decisions on certain narrow grounds.

Wu Jing, Attorney, Labor & Employment

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After the Qualified Domestic Institutional Investor scheme (QDII) was implemented in April of 2006 to help relieve pressure on the RMB by promoting capital outflows and Chinese companies in various industries in the private sector were encouraged to go abroad, China’s outbound investment totaled approximately $20 billion in 2007.

In the first half of 2008, overseas investment of Chinese companies has more than doubled from last year. This year, Chinese outbound investment has already reached 16 billion euros (nearly $23 billion) according to Bloomberg.

Correspondingly, we have seen an increasing number of our domestic Chinese clients invest abroad for both market seeking and resource seeking opportunities. We expect this trend to accelerate in the coming years as outbound rules continue to be relaxed and domestic companies shift their strategies to compete globally.

This trend, coupled with close working relationships with a significant number of American companies and law firms have lead King & Wood to establish its New York office opening September 9th, 2008. As a firm with an extensive client list in the banking industry, our location on Madison Avenue will serve as serve as a local presence for many of our American clients and also provide international support for our clients at home. Since 2001, King & Wood has made a series of international moves such as San Francisco, Hong Kong, Tokyo and most recently with our Sydney Strategic Alliance at the end of 2007.

For years we have seen U.S. and European law firms expand into China. As the global clout of Chinese companies grows, we will see continue to see Chinese law firms expand with them. 

Duncan Hwang, Foreign Lawyer, FDI

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A few years ago, it seemed that Shanghai was on the verge of becoming the Asian city of choice for multinationals establishing regional HQs. However, this did not come to pass and it appears that this has caught the attention of the Shanghai Municipal Government...  

By Mark Schaub, Partner, King & Wood Shanghai Office, FDI

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1.Introduction

On 6 June 2008, the Government of the Hong Kong Special Administrative Region (the “HKSAR”) announced the “Arrangements for the Implementation of Clean Development Mechanism (“CDM”) Projects in the Hong Kong Special Administrative Region” (the “Implementation Arrangements”). The Implementation Arrangements have been developed following consultations between the National Development and Reform Commission (“NDRC”) of China and the Environment Protection Department (“EPD”) of the HKSAR. The Implementation Arrangements sets out the specific procedures for Hong Kong companies to conduct CDM projects in Hong Kong...

 By Andrew Tan 

 Partner   Arculli Fong & Ng   (in association with King & Wood, PRC Lawyers)

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2008 is destined to be an extraordinary year for global cross-border M&A. King & Wood, as a leading law firm deeply rooted in this activity in China, has noticed the following trends in the second half of 2007 and the first half of 2008...

By Wang Junfeng, Partner 

Edward Jing, King & Wood’s Securities Group

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As consideration for obtaining Olympic marketing rights, the official sponsors have contributed considerable funds and goods to the Olympic Games.  The strong support of sponsors is crucial to the successful staging of every edition of the Olympic Games.  As such, the International Olympic Committee (“IOC”) views the protection of the sponsors’ rights as an important aspect in the preparation and organization of the Olympic Games.  The Government of the Beijing Municipality and Beijing Organizing Committee for the Games of the XXIX Olympiad (“BOCOG”) also solemnly have covenanted in the Host City Contract and the Marketing Plan that they will take all necessary measures to prevent and combat ambush marketing in any form...

By Wang Rui, Partner, King & Wood’s Olympic Group

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Recent issues regarding Chinese products have focused on the gaps remaining in the law.  However, the gaps are quickly closing.  Product safety has become a top priority for China. Chinese authorities have streamlined the legislative process for product recalls at all levels...

By Li Yongmei King & Wood’s Domestic Litigation & Arbitration Practice

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Last month, Mr. Martin Lipton, of Wachtell, Lipton, Rosen & Katz, honored King & Wood with a speech on the implications of the “poison pill” in legal practice.  Mr. Lipton is noted for his innovative "rights plan", a series of defensive measures taken by the board of a target company in a hostile takeover.  The “rights plan” is meant to ward off hostile offers that substantially underestimate the value of the target's shares.  The rights plan was later referred to as the "poison pill" by Wall Street bankers whose attempts at hostile takeover below fair value were frequently frustrated by the "rights plan."


Mr. Lipton's speech inspired me to ponder the question of how defensive measures work in China's corporate governance.  I then googled the word "poison pill" and "company" in Chinese, but found no instances of companies utilizing the poison pill within China.  So why is there no poison pill in China?
 

By   Li Wenbo   King & Wood’s International Trade Group

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The “Law of the People’s Republic of China on Mediation and Arbitration of Labor Disputes” (“the New Law”) came into force on May 1, 2008. This promulgation has introduced many innovative concepts to Chinese law. The most notable change was the extension of the statutory period for filing arbitration applications in labor disputes.


By Xu Xiaodan,  King & Wood's International Litigation & Arbitration Group.

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The massive May 12, 2008 Wenchuan earthquake caused heavy property damage and saddening losses of life in the Chinese Providences of Sichuan, Shanxi, and Gansu. In order to support the earthquake relief and reconstruction effort, the Ministry of Finance and State Administration of Taxation has implemented post disaster tax deductions and exemptions. These relief measures impact affected individuals or enterprises, and also donations toward the relief effort. The most significant tax relief measures were announced in the “Notice on Implementing the Earthquake Relief and Reconstruction Tax Policies”(Notice 62). The taxes covered in the Notice included: enterprise income tax, individual income tax, house property tax, resource tax, stamp tax, urban land use tax, vehicle and vessel use tax, import tax.
 

By Zhang Yu, Wang Xiujuan, Chengdu Office of King & Wood, FDI

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Two sets of new measures have been issued in June 2008 (namely Measures for the Administration of Prohibited and Restricted Technology Import and Measures for the Administration of Import and Export Contracts Registration) which are likely to have a material, practical affect upon technology licenses and transfers to and from China. In November 2007, the Ministry of Commerce updated the Category of Prohibited and Restricted Technology Import.


The measures are a mix of devolution (i.e. the regulations delegate responsibility down to regional Bureaux of Commerce); increased regulation and supervision on the one hand but relaxation in other regards.


By Mark Schaub, Partner Shanghai Office of King & Wood，FDI   

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Unclear provisions have frequently caused liability disputes for late payment damages. Clearly a non-breaching party may claim damages for late payment. Yet, opposing parties have often advanced differing methods for calculating damages depending on which method provides a more favorable outcome. In the past, courts also proposed differing principles for deciding cases. This lack of uniformity often led to confusion.


By Cheng Shigang, Associate in King & Wood's Domestic Litigation and Arbitration Group.   

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Two sets of new measures have been issued in June 2008 (namely Measures for the Administration of Prohibited and Restricted Technology Import and Measures for the Administration of Import and Export Contracts Registration) which are likely to have a material, practical affect upon technology licenses and transfers to and from China.

The measures are a mix of devolution (i.e. the regulations delegate responsibility down to regional Bureaux of Commerce); increased regulation and supervision on the one hand but relaxation in other regards.

By Mark Schaub, Partner

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Despite 30 years of opening up, actual Chinese government policy remains opaque. Although not as incomprehensible to the outsider as Kremlin watching was in the Cold War there are still few opportunities to really grasp what type of foreign investment is actually in favor at any given time. Circular 57, also known as Catalogue for the Guidance of Foreign Investment Industries (“Catalogue”) was overhauled late last year and does provide some hints in this regard.

More than anything else the Catalogue shows increased regulation as the number of industries subject to specific restrictions or encouragement has been increased since the 2004 version (i.e. encouraged category now has 351 subjects compared to 257 in 2004; restricted has increased from 78 to 87; prohibited from 35 to 40). Activities not mentioned within the Catalogue are considered “permitted” and are not subject to any specific restrictions or preferential treatment.

Naturally there are winners and losers.

Some winners include 1) environmentally friendly industries; 2) some forms of media (restrictions on foreign investment in sports, entertainment, radio and television program production have been loosened from prohibited to restricted); 3) telecommunications (maximum foreign share raised from 35% to 49%).

Some losers include: 1) heavily polluting manufacturing (in particular batteries have been hit hard); 2) internet news and services are prohibited (although this may have been more a clarification than a change of existing policy); 3) foreign activities in real estate (due to, a possibly misguided, assumption that foreign investment is driving real estate prices ever higher).

Naturally the Catalogue is only one part of the picture. Investors will also need to examine what operational licenses and approvals are required and different localities also have different local policies. Despite this the Catalogue remains a useful initial tool for investors to gauge the likely attitude of the approval authorities to their project.

 By Mark Schaub, Partner  Shanghai Office of King & Wood，FDI
 

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As China's economy continues to develop, the administration of developments in urban and rural areas of China requires a more focused approach to ensure the harmonious development of each area's economy along with the preservation of local culture, heritage and infrastructure needs. The new system provides localities with guidelines to ensure nationwide consistency while providing a certain amount of autonomy to allow for specific local needs.

The Urban and Rural Planning Law of the People's Republic of China became effective on January 1, 2008 and replaced the City Planning Law. Previously, urban and rural plans were governed by different laws. The City Planning Law governed urban areas and the Administrative Regulations on the Country and Township Construction Plans governed rural areas. The new law now begins an era of integrated urban and rural planning.

Highlights of the Urban and Rural Planning Law
1. Emphasizing Procedural Requirements such as Notice & Comment Period
2. Tightening Environmental Protection, Natural and Cultural Heritage Protection
3. Strengthening Rural Planning
4. Public Participation and Increasing Supervision and Inspection
5. Providing Relevant Legal Liabilities Punishing Local Governments for Non-compliance.

A Few Hot Issues:

-The Urban and Rural Planning Law stipulates more stringent approval procedures for building premises required by township and village enterprises, rural common facilities or public interest establishments within a township or village planning area. The Urban and Rural Planning Law provides that no farm land can be used for such buildings unless approved by the corresponding department of urban and rural planning under the people's government of the city or county.

-Chapter III of Implementation of Urban and Rural Planning, provides more complicated construction land-use right approval procedures than that provided in the Land Administration Law and former City Planning Law. Procedures for changing land use purpose are more stringent to curb disorganized allocation, transfer and use of construction land.

-The right to legally recover State-owned land is addressed in Article 58 of the Land Administration Law, which provides that "proper compensation should be given to land use right owners", but the Urban and Rural Planning Law, in line with the legislative spirit of the Property Rights Law , provides that "compensations shall be made according to law". This provision denotes an inclination towards property right holders.

It will be interesting to see how the law is enforced. This could be a great tool for smart growth within China.

By Zhang Tianhui, Editor, King & Wood China Bulletin

CONTINUE READING... 
CONTINUE READING IN CHINESE...中文

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