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Haworth & Lexon Law Newsletter
No.9 2011 (Total:No.116) Otc.15, 2011
Edited by Haworth & Lexon
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Haworth & Lexon Law Newsletter is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, E-commerce, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.
Guidelines:
Latest News:
Latest Laws and Regulations:
Circular on Issues concerning Cross-border Direct Investment in RMB
Administrative Measures for Settlement of Foreign Direct Investments in RMB
Provisions (I) of the Supreme People??s Court on Several Issues concerning the Application of the Enterprise Bankruptcy Law of the People??s Republic of China
Supplementary Circular on Issues Relating to the Improvement of Business Operations with respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises
Several Provisions on the Entrustment of Assessments and Auctions by the People??s Courts
Administrative Measures for the Operation of Clean Development Mechanism Projects (Revised)
Circular on the VAT Policy on Software Products
Circular on Encouraging the Development of Service Outsourcing Industry and Simplifying the Examination and Approval Procedures for Pilot Foreign-funded Offshore Call Center
Circular on Issues concerning the State-owned Equity Exchange between Central Enterprises
Announcement on Issues concerning the Implementation of Preferential Policies for Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Products
Circular on Regulating the Commercial Single-Purpose Pre-paid Card
Legal Practices:
Application of the General Provisions of the Anti-Unfair Competition Law????A Case Study on the Kelp Export Quota
Risks for Sellers under FOB Terms
Legal Process and Governmental Examination & Approval of Overseas Investment by Domestic Enterprises
Latest Laws and Regulations
Circular on Issues concerning Cross-border Direct Investment in RMB
The Ministry of Commerce promulgated the Circular on Issues concerning Cross-border Direct Investment in RMB (hereinafter referred to as the Circular) on October 12, 2011 and put it into effect on the same day.
The Circular stipulates that foreign investors (including Hong Kong, Macao and Taiwan investors) may conduct direct investment with legally-obtained overseas RMB funds. The oveaseas RMB funds refer to:
(1) RMB funds obtained by foreign investors from RMB settlement of cross-border trade, as well as RMB profits and RMB funds obtained from share transfer, capital reduction, liquidation and advance recovery of investment, which are legally obtained by foreign investors from within China and remitted out of China;
(2) RMB funds legally obtained by foreign investors from outside China, including but not limited to RMB funds obtained by such means as overseas issuances of RMB-denominated bonds or stocks.
Cross-border direct investment in RMB and the reinvestment by foreign-funded enterprises as investees shall meet the requirements of the existing foreign investment management system, applicable laws and regulations on foreign investment and other relevant provisions, and comply with the state industrial policies on foreign investment and relevant provisions on security review of mergers and acquisitions by foreign investors and anti-monopoly review. Cross-border direct investment in RMB in real estate industry and strategic investment in domestic listed companies shall be governed by the current administrative provisions on foreign investment. Cross-border direct investment in RMB shall not be made directly or indirectly in negotiable securities and financial derivatives, or be used for making entrusted loans, within China.
Examination and Approval Authority: The local proper administration of commerce shall enter the Statement on the Cross-border Direct Investment in RMB into the management system for foreign investment examination and approval, and for the cross-border direct investment in RMB falling under any of the following circumstances, the provincial proper administration of commerce shall affix a seal and signature to the Statement on the Cross-border Direct Investment in RMB, and submit it to the Ministry of Commerce for review.
(1) investment of RMB funds at 300 million Yuan or more;
(2) investment in a sector such as financing guarantee, financing leasing, microfinance or auction;
(3) investment in a foreign-funded holding company, a foreign-funded venture capital enterprise or a foreign-funded equity investment enterprise; or
(4) investment in an industry under the macroeconomic control of the State, such as cement, iron and steel, electrolytic aluminium and shipbuilding.
Administrative Measures for Settlement of Foreign Direct Investments in RMB
The People??s Bank of China promulgated the Administrative Measures for the Settlement of Foreign Direct Investments in RMB (hereinafter referred to as the Administrative Measures) on October 14, 2011 and put them into effect on the same day.
As specified by the Administrative Measures, in handling settlement of foreign direct investments in RMB, foreign investors may, in accordance with the provisions on the administration of bank settlement accounts, apply to open a RMB bank settlement account for a foreign institution. For funds for front-end RMB expenses related to any investment project in question and RMB funds used in domestic reinvestment which are obtained by way of profit distribution, liquidation, capital reduction, equity transfer and advance recovery of investment, the special deposit account for front-end RMB expenses and the special deposit account for RMB reinvestment shall be opened according to the principle of ??special account for special purpose?? and any receipt and payment of cash shall not be handled by way of such account. For foreign-invested companies, foreign-funded venture capital enterprises, foreign equity investment enterprises and investment-specialized foreign-funded partnership enterprises that legally conduct investment business within the territory of China, the enterprise invested in by any one of them shall open a special reserve deposit account for RMB capital fund to deposit RMB registered capital or contributed capital and handle relevant fund settlement business.
The RMB registered capital remitted inward and the RMB contribution subscribed by overseas investors shall be subject to the principle ??special purpose for special account??, i.e. such capital and contribution shall be deposited in a special savings account for RMB capital and any receipt and payment in cash shall not be handled through such account. Where an overseas investor merges and acquires a domestic enterprise in RMB to establish a foreign-funded enterprise or an overseas investor pays the equity transfer price to the Chinese shareholder of the enterprise funded by overseas investors, the Chinese shareholder shall apply to set up a RMB special savings account for merger and acquisition for deposit of merger and acquisition funds in RMB remitted inward by overseas investors, and any receipt and payment in cash shall not be handled through such account.
Where an overseas investor remits outward its RMB profits or its RMB funds obtained from capital reduction, share transfer, liquidation, advance recovery of investment, etc., the bank shall handle this after examining and verifying the profit disposal resolution and tax certificate, or the approval or filing document and tax certificate produced by the proper department of the State.
Where an overseas investor utilizes the RMB funds orginated from RMB profit distribution, advance recovery of investment, liquidation, capital reduction, share transfer, etc. in domestic reinvestment or registered capital increase, the overseas investor may deposit the RMB funds in the special account for RMB reinvestment and handle the relevant settlement business in accordance with the Administrative Measures. The bank shall handle the foreign payment business after examining and verifying the approval or filing document and tax certificate produced by the relevant department of the State.
Provisions (I) of the Supreme People??s Court on Several Issues concerning the Application of the Enterprise Bankruptcy Law of the People??s Republic of China
On September 9, 2011, the Supreme People??s Court promulgated the Provisions (I) of the Supreme People??s Court on Several Issues concerning the Application of the Enterprise Bankruptcy Law of the People??s Republic of China (hereinafter referred to as the Judicial Interpretation of Bankruptcy Law), and put them into effect on September 26, 2011.
Where a debtor has insufficient assets for repaying all its debts or is apparently insolvent, the people??s court shall determine that the debtor has a cause of bankruptcy. Where the relevant party argues that the debtor has no cause of bankruptcy because the person jointly liable for the debts of the debtor has not lost solvency, the people??s court shall not support the argument.
To determine a debtor is unable to repay a due debt, three conditions shall be met, i.e. the debt relationship has been legally established; the time limit for repayment of the debt has expired; and the debtor has not fully repaid the debt.
Where a debtor??s balance sheet or audit report, asset appraisal report and any other such document show that its total assets are insufficient for repayment of its total debts, it shall be determined that the debtor has insufficient assets for repaying all its debts, unless there is sufficient contrary evidence. Where a debtor falls under any of the following circumstances, the people??s court shall determine that the debtor is apparently insolvent, though the value of its ledger assets is greater than that of its debts:
(1) It is unable to repay a debt for serious lack of funds, impossibility to realize its assets or for any other reason whatsoever;
(2) It is unable to repay a debt because the whereabouts of its legal representative is unknown and there is no other person in charge of asset management;
(3) It is unable to repay a debt even after the enforcement by the people??s court;
(4) It is unable to repay a debt because it has suffered losses for a long time and has difficulty in making up losses;
(5) Any other circumstance which leads to the debtor??s insolvency.
Where an enterprise which is a legal person has been dissolved but has not been liquidated or has not completed liquidation within a reasonable time limit, if a creditor applies for the bankruptcy liquidation of the enterprise as a debtor, the people??s court shall accept the application unless the debtor adduces evidence that it has no cause of bankruptcy within the statutory time limit for objection.
Where the applicant files a bankruptcy application with the people??s court but the people??s court fails to accept the application or fails to execute Article 7 of the Judicial Interpretation of Bankruptcy Law, the applicant may file a bankruptcy application with the people??s court at the higher level.
Supplementary Circular on Issues Relating to the Improvement of Business Operations with respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises
On July 18, 2011, the State Administration of Foreign Exchange promulgated the Supplementary Circular on Issues Relating to the Improvement of Business Operations with respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign-invested Enterprises (hereinafter referred to as the Supplementary Circular), and put it into effect on August 1, 2011.
With regard to the materials that shall be submitted by the enterprise when applying to the designated bank for settlement of exchange for the capital fund, the Supplementary Circular specifies some pertinent supplementary materials that shall be furnished in addition to the materials deemed indispensable by Document No.142 [2008] Hui Zong Fa. Such supplementary materials shall include the relevant original vouchers of the outward payments made under the order of payment out of the RMB fund originated from the immediately previous settlement of foreign currency capital; printed search result of the authenticity of online invoices bearing the official seal or financial seal of the enterprise. The bank shall, in light of the aforesaid materials, carefully examine the compliance, genuineness and consistency of the purposes of the RMB fund obtained from the settlement of foreign currency capital of the foreign-funded enterprise.
After the Supplementary Circular became effective, where the accumulated amount of capital fund of an enterprise, plus the amount of paid-up foreign exchange in such capital fund account, amounts to 95% of the accumulated credit arising in that account, the bank shall examine the authenticity of such certificates as the invoice corresponding to the said settlement of exchange, and have such words as ??settlement of exchange for 95% capital in the account verified (excluding remittance)??, the date and the bank business seal on the settlement of exchange application form submitted by the enterprise, after which the bank may handle the relevant procedures for settlement or payment of exchange for the capital fund remained in accordance with the requirements for the system of foreign exchange settlement upon payment.
Where an enterprise conducts settlement of exchange in the name of reserve funds, the maximum amount shall be USD 50,000 each time and USD 100,000 each month.
Several Provisions on the Entrustment of Assessments and Auctions by the People??s Courts
On September 7, 2011, the Supreme People??s Court promulgated the Several Provisions on the Entrustment of Assessments and Auctions by the People??s Courts (hereinafter referred to as the Several Provisions), and put them into effect on January 1, 2012.
According to the Several Provisions, an assessment or auction institution which has obtained the administrative license by the administrative department of the government and has a specified qualification grade may voluntarily sign up for participating in assessment or auction activities entrusted by a people??s court. A people??s court shall determine the assessment or auction institution by random selection. A higher people??s court or an intermediate people??s court may uniformly entrust an external institution in light of its local actualities.
Unless otherwise prescribed, the auction activities entrusted by a people??s court shall be carried out at a uniform trading location or on a network platform determined by the relevant administrative department.
Any judicially-engaged auction involving state-owned assets shall be carried out by a state-owned property exchange institution at or above the provincial level, and the auction institution shall be responsible for the relevant issues during the auction; where judicially-engaged auctions of securities assets, according to the Securities Law, shall be listed, traded in or transferred on a stock exchange, the stock exchange shall take charge of this, and the auction institution shall be responsible for the relevant issues during the auction; and judicially entrusted auctions of other securities assets shall be carried out by an auction institution in accordance with the detailed rules for implementation formulated by the relevant regulatory department.
Administrative Measures for the Operation of Clean Development Mechanism Projects (Revised)
On August 3, 2011, the National Development and Reform Commission, Ministry of Science and Technology, Ministry of Foreign Affairs and Ministry of Finance jointly promulgated the Administrative Measures for the Operation of Clean Development Mechanism Projects (Revised) (hereinafter referred to as the Administrative Measures), and put them into effect on the same day.
According to the Administrative Measures, Chinese-funded or Chinese-holding enterprises within the territory of China are eligible to legally conduct CDM projects with foreign partners.
As set forth in the Administrative Measures, enterprises administered by the Centeral Government (??central enterprises??) may directly submit an application to NDRC for CDM projects; other project owners may submit an application for a CDM project to the provincial development and reform commission in the location of such project. The relevant authority and local government may organize enterprises to submit an application for CDM projects together with the following materials: a CDM project application form; a printed copy of enterprise qualification certificate; a printed copy of approval document on project feasibility report; a printed copy of assessment report (or registration form) on environmental impact; project design document; project profile and financing representation; and other materials as deemed necessary by NDRC.
The provincial development and reform commission in the region where the projects are located, within twenty (20) working days after accepting the application submitted by any project implementation institution other than those central enterprises as set forth in the appendix, shall submit all pertinent project application materials and preliminary comments to NDRC and shall not reject the application submitted by such project implementation institutions; NDRC shall organize an expert review of the target project, the duration of which shall not exceed thirty (30) days. After the target project goes through the expert review, it shall be submitted by NDRC to the CDM Board for examination.
If no foreign buyer is found at the time when the project is reported for approval, it shall be indicated by the project implementation institution in the project application form as a unilateral CDM cooperation project. After obtaining the State approval, the emission reduction generated from the project shall be transferred to the State Account of China, and may not be transferred out therefrom until NDRC grants approval.
The proceeds obtained from the transfer of CDM emission reduction shall be wholly owned by and at the discretion of the Chinese Government and the project implementation institution. The funds collected by the Chinese Government from CDM projects shall be used for supporting counterattacks over climate change.
Circular on the VAT Policy on Software Products
On October 13, 2011, the Ministry of Finance and State Administration of Taxation promulgated the Circular on the VAT Policy on Software Products (hereinafter referred to as the Circular), and put it into effect on January 1, 2012.
The term ??software products?? as mentioned herein refers to information processing programs and relevant documents and data. Software products comprise of computer software products, information system and embedded software products. Embedded software products refer to the software products that are embedded in and sold along with the computer hardware and machine & equipment and constitute an integral part of the computer hardware and machine and equipment.
For a VAT taxpayer who sells its self-developed software products or imported software products that have been transformed to meet domestic needs, VAT shall be levied at a rate of 17% and the refund-upon-collection policy shall be applied to the part of VAT in excess of 3% of their actual tax burden. If a taxpayer is entrusted to develop software products, VAT shall be levied in the case that the copyright of the software products is owned by the entrusted party; no VAT shall be levied in the case that the copyright of the software products is owned by the entrusting party or jointly owned by the two parties; for software products which have been registered with the State Copyright Administration and the copyright and ownership of which are transferred when the taxpayer sells them, no VAT shall be levied. The Circular also stipulates the calculation method for the amount of VAT which shall be immediately refunded upon payment.
Software products that meet the following requirements may enjoy the VAT preferential policy as stipulated by the Circular: 1. having obtained the inspection and testing certification materials issued by a software inspection and testing institution recognized by the provincial administrative department for software industry; 2. having obtained the ??Software Product Registration Certificate?? issued by the competent administrative department for software industry or the ??Computer Software Copyright Registration Certificate?? issued by the administrative department for copyright.
For a VAT taxpayer who sells other goods or taxable services when selling software products, the unassignable input tax shall be determined in accordance with the actual costs or sales revenue; with respect to the input tax of the production equipment and tools specially used for software product development, it shall not be distributed. The taxpayer shall report the selected distribution manner to the competent tax authority for record purposes and shall not change it within one (1) year starting from the date of filing.
Circular on Encouraging the Development of Service Outsourcing Industry and Simplifying the Examination and Approval Procedures for Pilot Foreign-funded Offshore Call Center
On November 10, 2010, the Ministry of Industry and Information Technology promulgated the Circular on Encouraging the Development of Service Outsourcing Industry and Simplifying the Examination and Approval Procedures for Pilot Foreign-funded Offshore Call Center (hereinafter referred to as the Circular).
The Circular stipulates that 21 service outsourcing exemplary cities, including Beijing, Tianjin, Shanghai, Chongqing, etc., shall set up offshore call centers, i.e. both the ultimate service receivers and clients concerned shall be located overseas. Subjects of pilot offshore call centers are wholly foreign-owned or Sino-foreign joint venture telecommunications enterprises whose ratios of foreign equity are not subject to any restriction.
The procedures for examining and approving the pilot call centers are as follows:
(1) A major investor applying to set up a pilot call center in any of the service outsourcing cities for foreign-funded telecommunication enterprises they invest in shall directly apply to the communication administration at the provincial level or at the level of municipality directly under the Central Government with jurisdiction over the exemplary city, and submit related materials in accordance with Article 12 of the Provisions on the Administration of Foreign-funded Telecommunications Enterprises, Article 14 of the Regulation on Telecommunications and other relevant laws and regulations.
(2) The communication administration at the provincial level or at the level of municipality directly under the Central Government, after granting an approval, shall issue an approval document for the pilot off-shore call center operation and submit the document to the Ministry of Industry and Information Technology of the PRC for record purposes.
(3) The major investor of the enterprise, upon the strength of the approval document issued by the communication administration at the provincial level or at the level of municipality directly under the Central Government, shall handle the relevant procedures for application with the competent department of the pilot municipality for the foreign-funded enterprise establishment in accordance with the laws and regulations on foreign investment, and obtain a ??Certificate of Approval for Foreign-Funded Enterprise??.
(4) With regard to an enterprise that conducts off-shore call center business in more than one pilot city in the form of branch office, the headquarters, instead of the branch offices in different localities, shall handle the relevant procedures for application with the communication administration and the administration for industry and commerce at the provincial level or at the level of municipality directly under the Central Government.
Circular on Issues concerning the State-owned Equity Exchange between Enterprises Administered by the Central Government
On September 7, 2011, the State-owned Assets Supervision and Administration promulgated the Circular on Issues concerning the State-owned Equity Exchange between Central Enterprises Administered by the Central Government (hereinafter referred to as the Circular), and put it into effect on the same day.
The state-owned equity exchange as stated in this Circular refers to the exchange of enterprise equity held by and between enterprises administered by the Central Government (??central enterprises??) and their wholly-owned and or absolute controlling enterprises, or exchange of enterprise equity held by state-owned entities with equity and assets held by enterprises that are actually controlled by central enterprises in which the cash as premium account for less than 25% of the whole assets exchange in the course of assets restructuring of the central enterprises.
The Circular puts forward a series of requirements for state-owned property replacement. Firstly, a feasibility study on state-owned property replacement shall be well prepared, and the effect of such replacement on business performance and future development, the relationship between such replacement and the central enterprise restructuring and development plan shall be carefully analyzed and a feasibility demonstration report shall be accordingly produced. Secondly, the internal decision-making procedures shall be strictly performed in accordance with the relevant laws and the articles of association of the enterprise and a written resolution shall be formulated in this respect. Thirdly, the two parties to such replacement shall engage a qualified assets appraisal institution to conduct assets appraisal on the subject matter of the replacement and handle relevant filing-for-record procedures for the appraisal in accordance with the law. Fourthly, after the two parties hereto reach an consensus through negotiations, they shall conclude a replacement agreement which shall have clear-cut clauses on replacement price and the method for the payment to be made up, if any, settlement of the subject matter of the replacement, liability for breach and dispute resolution terms and conditions for the entry-into-force hereof, etc.
Announcement on Issues concerning the Implementation of Preferential Policies for Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Products
On September 13, 2011, the State Administration of Taxation promulgated the Announcement on Issues concerning Implementation of Preferential Policies for Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Products and put it into effect on January 1, 2011.
Agriculture, forestry, stockbreeding and fishery projects that enjoy tax preferences according to Article 86 of the Regulations on the Implementation of the Enterprise Income Tax Law of the People??s Republic of China shall be implemented by reference to the standards prescribed by the Industrial Classification for National Economic Activities (GB/T4754-2002), unless it is otherwise provided for, excluding those under the category of restricted or eliminated projects prescribed by the Guidance Catalogue for Industrial Restructuring (2011).
In addition, any enterprise engaged to conduct preliminary processing of agricultural products as set out in Document No. 149 [2008] Cai Shui and Document No. 26 [2011] Cai Shui upon strength of a proxy contract may charge for its processing services in accordance with the list of tax-free agricultural products subject to initial processing. Income obtained by the enterprise from sales of purchased tea after screening, repackaging and packaging shall not be subject to any tax preference for agricultural products subject to initial processing.
Where an enterprise entrusts another enterprise or individual to engage in agricultural, forest, stockbreeding, and fishing projects as stipulated by Article 86 of the Regulations on the Implementation of the Enterprise Income Tax Law of the People??s Republic of China, it may enjoy the relevant tax preferences for the income it obtains therefor. Where an enterprise conducts direct trading business after it purchases certain agricultural products, it shall not enjoy the relevant tax preferential policy for the income it obtains therefor.
Appendix: Article 86 of the Regulations on the Implementation of the Enterprise Income Tax Law of the People??s Republic of China: the provision that reduction of or exemption from enterprise income tax may apply to the income of an enterprise obtained from agricultural, forest, stockbreeding, and fishing projects as stipulated by Article 27 (1) of the Enterprise Income Tax Law shall be interpreted as:
(1) Where an enterprise engages in any of the following projects, it need not pay any income tax:
1. planting of vegetables, cereals, potatoes, oil plants, beans, cotton, hemps, sugar plants, fruits, nuts, etc;
2. breeding of new varieties of crops;
3. planting of traditional Chinese medicinal herbs;
4. cultivation and planting of forest trees;
5. raising of animals and poultry;
6. gathering of forest products;
7. other agricultural, forest, animal raising and fishing projects such as irrigation, initial processing of agricultural products, veterinary science, promotion of agricultural techniques, operations and reparation of agricultural machines, etc.;
8. ocean fishing.
(2) Where an enterprise engages in any of the following projects, it shall be subject to income tax levy at the reduced half rate:
1. the planting of flowers, teas, and other beverage plants and spicery plants;
2. maritime aquaculture and inland aquaculture.
An enterprise which engages in any of the projects restricted or prohibited by the State may not enjoy any of the preferential enterprise income tax treatment as set forth herein.
Circular on Regulating the Commercial Single-Purpose Pre-paid Card
On September 8, 2011, Shanghai Municipal Commission of Commerce and Shanghai Administration for Industry & Commerce promulgated the Circular on Regulating the Commercial Single-Purpose Pre-paid Card (hereinafter referred to as the Circular).
The Circular defines the real-name purchase of card, non-cash purchase of card and the quota for card issuance.
The Circular mainly includes the following aspects. Firstly, the real-name registration system shall be adopted for single-purpose pre-paid card. Any entity or individual purchasing registered single-purpose prepaid cards or purchasing 10,000 yuan or more unregistered single-purpose prepaid cards at one time shall be subject to real-name registration with the card issuer. Secondly, a non-cash purchase system shall be adopted for single-purpose prepaid cards. Any entity that purchases 5,000 yuan or more cards at one time or any individual who purchases 50,000 yuan or more cards at one time shall do so through bank transfer rather than in cash. For the purchase through bank transfer, a card issuer shall register the names of paying and receiving accounts, account numbers, amount and so on of each transaction. Thirdly, the par value of an unregistered single-purpose prepaid card shall not exceed 1,000 yuan, and that of a registered single-purpose prepaid card shall not exceed 5,000 yuan.
Legal Practices
Application of the General Provisions of the Anti-Unfair Competition Law??A Case Study on the Kelp Export Quota
The case of the kelp export quota involved the application of Article 2 of the Anti-Unfair Competition Law, i.e. provisions of principle, and in the meantime the question as to whether business opportunities may be protected by the Anti-Unfair Competition Law. Therefore, this case had attracted a lot of public attention in the legal profession starting from the first trial, second trial to the retrial. The Supreme People??s Court promulgated in April 2011 the Annual Reports on Intellectual Property Rights Cases (Summary) (2010) with analyses and comments on the case of the kelp export quota to render guidelines for trial of similar cases.
[Case Profile]
The defendant Ma Daqing executed with Shandong Foodstuffs Import and Export Corporation (hereinafter referred to as ??Shandong Foodstuffs??) a labour contract with the duration from 1986 to December 2006. In September 2006, the defendant Qingdao SKD Credit Trading Co., Ltd. (hereinafter referred to as ??SKD Company??) was established, with the nephew of Ma Daqing as its legal representative and the spouse of Ma Daqing as its supervisor, and Ma Daqing began to work for this company forthwith after his labour contract with Shandong Foodstuffs automatically terminated.
Shandong Foodstuffs, together with another three companies, had obtained since 2001 from COFCO a specific quota of export to Japan in respect of the kelp produced in specific areas. After the foregoing quota was announced, Ma Daqing, on behalf of Shandong Foodstuffs, was responsible for concluding ??Sales Contract?? with Japan TOKAI SUISAN TRADING CO., LTD and otherwise and handling the kelp export business. On January 1, 2007, Beijing Branch of COFCO issued a ??Notice on Submitting Kelp Business Plan?? to Shandong Foodstuffs and SKD Company respectively to require the two companies to submit their respective kelp export plans, in order to determine the one to be in charge of the kelp export business. Soon afterwards, Beijing Branch of COFCO conducted a tour of observation on the two companies. On February 14, 2007, Beijing Branch of COFCO decided to entrust SKD Company with the 2007 made-in-Weihai kelp export to Japan and finally, SKD Company obtained a quota of 310-ton made-in-Weihai kelp export to Japan while Shandong Foodstuffs obtained a quota of 320 tons.
The plaintiff Shandong Foodstuffs believed that its kelp export business, as a kind of business opportunity created and maintained through over thirty-year efforts, shall be protected by law. Ma Daqing??s act of seeking for himself illegal interests through a series of illegal acts after he left Shandong Foodstuffs by virtue of the complete process, techniques and customer information in respect of the kelp business he has obtained when he worked in Shandong Foodstuffs shall be deemed as business opportunity fraud, which breached the market competition rule of honesty and good faith and fell under the category of profiting by other people??s toil so as to cause huge economic losses to the plaintiff. Considering this, Shandong Foodstuffs, referencing provisions of Article 2 of the Anti-Unfair Competition Law of the People??s Republic of China, pleaded the court to order the defendant to immediately stop his unfair competition act and pay Shandong Foodstuffs RMB 6 million Yuan as compensation for its losses.
[Court Ruling]
The court of first instance asserted that, if a proper business operator obtained some kind of competitive edge with its own efforts, but some other operator later grabbed such competitive edge by improper means so as to cause losses to the proper business operator and mess up social and economic orders, such act, in accordance with Article 2 of the Anti-Unfair Competition Law, shall be deemed as unfair competition act. In this case, the opportunity of kelp export to Japan could not be obtained by any export-qualified enterprise through open channels such as submission of a proposal, so it was indeed by proper and fair means that Shandong Foodstuffs obtained such competitive edge. It appeared that SKD Company obtained the kelp export opportunity by submitting a kelp export proposal and subjecting itself to examination by relevant authorities, but there was not any evidence that could prove the properness and fairness of SKD??s success. On the other hand, as SKD Company??s obtainment of the opportunity of kelp export to Japan invoked a direct competition against and caused economic losses to Shandong Foodstuffs, the act of Ma Daqing and SKD Company shall be construed as constituting an unfair competition act. In light of the foregoing, the court made the ruling that the two defendants shall not conduct kelp export to Japan within three (3) years thereafter and in the meantime shall compensate the economic losses caused to the plaintiff, i.e. more than RMB 2 million Yuan.
The two defendants were not convinced by the ruling of first trial and instituted another appeal to Shandong Higher People??s Court which, after trial, found that Ma Daqing??s act did not constitute a breach of the principle of good faith or the acknowledged business ethics, and could not be construed as constituting an unfair competition act. Besides, Shandong Foodstuffs did not sign a confidentiality agreement with Ma Daqing, so the latter was not obliged to bear the confidentiality obligation or the non-compete obligation. Therefore, Shandong Foodstuffs shall not restrict Ma Daqing from participating in free competition in accordance with Article 2 of the Anti-Unfair Competition Law or seeking special statutory protection; and the ruling of first trial, with protection on Shandong Foodstuffs in accordance with Article 2 of the Anti-Unfair Competition Law, was actually made as a result of wrong application of law. In light of this, the ruling of first trial was revoked hereby and all appellate claims of Shandong Foodstuffs were dismissed.
Shandong Foodstuffs soon afterwards submitted another application for retrial of the case to the Supreme People??s Court, which finally replied with a refusal.
[Brief Analysis]
According to the Annual Reports on Intellectual Property Rights Cases (Summary) (2010) by the Supreme People??s Court, the following four important judicial guidelines may be concluded from the case of the kelp export quota:
1. Under special circumstances an unfair competition act may be determined by referencing to Article 2 of the Anti-Unfair Competition Law, where statutory preconditions are indispensable.
The Supreme People??s Court asserts that an act shall meet the following preconditions in order to be deemed as an unfair competition act in accordance with Article 2 of the Anti-Unfair Competition Law. Firstly, the Anti-Unfair Competition Law defines 11 kinds of unfair competition acts, but the provisions of principle may be applicable to such act in case it goes beyond the statutory scope. Secondly, the legal rights and interests of other operators have indeed been impaired by such act. Thirdly, such act is deemed as inappropriate or accountable due to its breach of the principle of good faith and acknowledged business ethics. In the Anti-Unfair Competition Law, the principle of good faith is mainly embodied in the acknowledged business ethics; and the business ethics reflect a kind of moral principles, a standard of conduct jointly and commonly acknowledged by participants of transaction, and shall be judged in accordance with the ethical standards for participants of transaction, i.e. economic men, in specific business areas. The reason that the case of the kelp export quota was not supported by the Supreme People??s Court was right its inconformity with the third point mentioned above.
2. Business opportunities may become the legal interests protected the Anti-Unfair Competition Law under certain circumstances.
The Supreme People??s Court asserts that business opportunities that are expected to be reasonably obtained under general circumstances may become the legal interests protected by laws, especially the Anti-Unfair Competition Law; however, in light of the openness and uncertainties of business opportunities, only those competitors that disobey the principle of good faith and breach acknowledged business ethics so as to grab the business opportunities that are expected to be reasonably obtained by others will be punished by the Anti-Unfair Competition Law.
3. An employee??s plan to establish a company competing with his/her current employee brewed during his/her incumbency shall not be considered as certainly inappropriate.
The Supreme People??s Court asserts that an employee??s plan to establish a company competing with his/her current employee brewed during his/her incumbency to make preparations for his/her career after he/she leaves office shall not be considered as certainly inappropriate; only when the employee??s plan constitutes a breach of statutory or agreed non-compete obligation, shall it be deemed as inappropriate.
4. The employee??s act of working for another employer competing with his/her former employer and utilizing the knowledge, experience and skills acquired when working with the former employee shall not be simply deemed as unfair competition as per Article 2 of the Anti-Unfair Competition Law.
The Supreme People??s Court asserts that knowledge, experience and skills acquired and accumulated by the employee in routine work, excluding those containing business secrets of the employer, shall be deemed as an integral part of his/her personal character and may be utilized freely by the employee after he/she leaves office; under circumstances where the employee does not breach the non-compete obligation and does not infringe any business secret, his/her act of serving another employer competing with his/her former employer with knowledge, experience and skills acquired in the former employee shall not be simply deemed as unfair competition in accordance with Article 2 of the Anti-Unfair Competition Law.
(The author??s contact information: kelvincheng@hllawyers.com)
Risks for Sellers under FOB Terms
FOB has been a priority in China??s foreign export trade for many years, and it has even gained momentum in recent years, to which the 80% proportion in some foreign trade enterprises is the best illustration. Many Chinese sellers believe that an export deal accomplished in accordance with FOB price terms may save them much time and money spent on chartering, booking, insurance, etc. so that they may put more efforts into the work related with the trading business. Moreover, a FOB price quotation tends to be more acceptable and more likely to cause a deal to be done than a CIF price quotation in foreign export. Despite the advantages of FOB terms, the sellers in international trade are often confronted with many risks under FOB terms.
First of all, it shall be made clear that FOB is a price term frequently used in foreign trade business, with the full name as Free On Board (named port of shipment). In accordance with the provisions of International Rules for the Interpretation of Trade Terms 2000, ??Free on Board?? means that the seller delivers the goods on board the vessel (note: not cross the ship??s rail) nominated by the buyer at the named port of shipment and performs the delivery; and the buyer must bear all costs from that moment onwards. Therefore, trade terms only serve to define the risks and liabilities but bear no relation with the transfer of ownership which shall be prescribed by contracts rather than trade terms. Although there is not any statutory provision on the real right of bill of lading, under general circumstances, the ownership of the goods is still vested in the seller after Free On Board on the seller??s side. Therefore, where the buyer does not make the payment of goods or the carrier releases the goods without the original bill of lading, the seller shall claim the ownership rather than the creditor??s right.
It appears that under FOB terms the sell bears a not so heavy burden, and it seems to be alright after the seller has the goods delivered on board the vessel. However, in real pratices, it is particularly necessary for the seller to be precautious against the following risks.
I. Risk before Delivery
The buyer always buys insurance against ??all risks with warehouse to warehouse clause?? for the goods to be delivered, in other words, the insurance liability for the insured goods borne by the insurance company continues from the departure of the goods from the consignor??s warehouse at the port of lading set forth in the insurance policy to the delivery at the consignee??s warehouse at the port of destination set forth in the policy. However, before the goods is delivered on board the vessel, the buyer is not entitled to any benefit from the insurance for the goods for reason that the buyer does not bear the risk of losses or damages to be probably caused to the goods. As a result, there is no use the buyer claiming compensation against the insurance company upon strength of the insurance contract. Besides, since the seller is not a contracting party, it is not entitled to any compensation from the insurance company, either. Therefore, despite the fact that the buyer of the goods has already bought the insurance, the seller cannot get any insurance compensation for any losses or damages caused to the goods after the goods cross the ship??s rail.
II. The potential risk caused by non-vessel operation carrier to the seller
Concluded from the author??s practices, the seller usually engages a freight agency somewhat ??specially?? related to it as the carrier to issue the bill of lading. Such freight agency, without any capacity or qualification of actual freight forwarding (the assumption of civil liabilities is also in a poor status), is only responsible for handling the procedures for goods import and export and issuing in its own name the bill of lading, which the freight agency may use to exchange for the seller??s goods. However, the bill of lading issued by the actual carrier (i.e. the bill of lading actually fulfilled) bears no relation with the seller but is subject to the destination port agent designated by the buyer, and with such a bill of lading, the buyer may take possession of the goods from the actual carrier. Once the destination port agent colludes with the buyer to swindle, the seller will probably suffer a great loss, under which circumstances the seller may only hold liable the freight agency who has issued the bill of lading, but as a result that the freight agency often lacks the capacity to assume civil liabilities, the seller usually cannot get sufficiently compensated.
III. Risk Caused by Lien on the Goods
Article 87 of the Maritime Law of the People??s Republic of China stipulates that if the freight, general average contribution and demurrage that are payable to the carrier, extra reasonable expenses paid by the carrier on behalf of the owner of the goods and other charges to be paid to the carrier have not been paid in full, nor has an appropriate security been given, the carrier may have a lien, to a reasonable extent, on the goods.
Concluded from the author?? practices, if the buyer does not make the payment of goods and still defaults on freight payable to the carrier, the goods still in the possession of the seller may be held under lien by the carrier, the reasons for which are as follows:
1. Under FOB terms, the buyer shall pay the freight, which is only an arrangement made between the buyer and the seller, without any relation with the carrier. As long as it is not indicated in the transport instrument that the consignee shall pay the freight, the carrier may claim the freight against the seller by means of lien on goods.
2. The issue as to whether the subject matter of the carrier??s lien belongs to the debtor is a big headache for lawyers, judges, etc. in judicial practices. At present, it is commonly believed that the ownership of the goods held under lien is of no significance to the carrier, the reasons for which are as follows. Firstly, the lien is legally determined from the perspective of jurisprudence as the real right for security, but it is still the right provided for in the transport contract; in accordance with the relativity principle of contract, lien, as part of the contract content to bind the contracting parties, bears no relation with the ownership of goods. Secondly, the ownership of the goods is not the precondition for the shipper and the carrier to conclude a transport contract, so it is neither sufficiently supported nor fair enough for the ownership of the goods to be deemed as the essential condition for lien. Thirdly, the ownership of the goods in transit is frequently transferred; if the carrier is required to only keep the goods owned by the debtor under lien, the carrier??s lien on goods will make no sense in real practices.
(The author??s contact information:rogergu@hllawyers.com)
Legal Process and Governmental Examination & Approval of Overseas Investment by Domestic Enterprises
In accordance with the Measures for the Administration of Overseas Investment promulgated by the Ministry of Finance in 2009, ??overseas investment?? refers to the behaviour of legally established domestic enterprises establishing overseas non-financial enterprises via new set-ups or mergers, or acquisition of the ownership right, controlling right and operating and managing right of the existing non-financial enterprises overseas.
Since the mid-1990s, overseas investment by domestic enterprises have been on a rapid rise, with the total amount of direct overseas investment (non-financial category) by domestic enterprises reaching up to USD 59 billion in 2010, the 10th year since the launch of the State ??going-out?? strategy. In the meantime, China has gradually formulated the examination & approval and management system for overseas investment by domestic enterprises, and has set up differentiated examination & approval authorities as well as differentiated procedures for examination & approval of overseas investment by domestic enterprises with a view to different investment subjects, regions where the investment is introduced, project types, project scale, etc.
Where an enterprise conduct overseas investment, it shall go through major stages including investment planning, due diligence, negotiation and execution of legal documents, project implementation.
The investment planning stage mainly involves assessment on investment risks, selection of transaction structures and preliminary decision on financing arrangement. Thereinto, risk assessment comprises of assessments on the political environment, economy, laws and regulations, foreign capital access, labor, environment, tax policy, etc. of the target country, as well as the assessment on special risks of a particular industry and special risks of a particular project, including project approval, related law, market, financial risks, integration risks, anti-monopoly examination, other special circumstances of the target enterprise, etc.; optional transaction structures include investment in the set-up of a new enterprise, purchase of the target enterprise shares or assets, entry into strategic cooperation via contracts or agreements, or investment via intermediate holding company; besides, the sources of the capital required for investment and the financing arrangement shall be taken into consideration in the investment planning stage.
Due diligence investigation is divided into such stages as preliminary investigation, comprehensive investigation and common investigation, which mainly cover issues relating to law, finance, commerce and business, and tax, IP, environment, compliance, IT, etc. The due diligence on overseas investment shall be assisted by lawyers of the target country, and any issues discovered during the due diligence shall be handled promptly and the results hereof shall be taken as the major grounds for legal document drafting.
During the negotiation stage, the investment participant shall determine the major content of the main agreement and collateral agreement as well as the drafting party of legal documents concerned. Take the purchase project for example, the important clauses of legal documents mainly include the subject matter, price terms, precondition for settlement, representation and warranty of the seller, warranty for the completed stage, compensation warranty, applicable laws and dispute resolution clauses.
The project implementation stage mainly includes the satisfaction of settlement terms and specific settlement work. The greatest importance of this stage is to obtain approval of the government of the target country and China government. At present, the examination and approval by China government of overseas investment mainly involves the National Development and Reform Commission, Ministry of Commerce and Administration of Foreign Exchange.
Project examination and approval carried out by NDRC is mainly based on the Interim Administrative Measures for the Examination and Approval of Overseas Investment Projects and the Circular of NDRC on Issues concerning the Improvement of the Administration of Overseas Investment Projects. It shall be highlighted that the Circular on Properly Handling the Delegation of Approval Authority over Overseas Investment Projects to Lower-level Authorities promulgated by NDRC made amendments to some original provisions relating to the approval of overseas investment projects and made some adjustment and improvement in respect of the project verification authority project registration system, record management measures, information report scope, special project approval, etc.
The overseas investment projects (excluding financial projects) of central enterprises shall be examined and approved by the Ministry of Commerce, while those of local enterprises shall be subject to the examination and approval by provincial administrations for commerce or go through the examination and approval by the Ministry of Commerce with an application thereto by virtue of provincial administrations for commerce. The focuses of the Ministry of Commerce for overseas investment projects are placed on the investment environment of different countries (regions), the status of safety of different countries (regions), the political and economic relationship between the investment destination countries (regions) and China, the policies for guiding investment abroad, the reasonable distribution in different countries (regions), the obligations in relevant international treaties and safeguarding the legitimate rights and interests of enterprises, but the Ministry of Commerce is not responsible for determining whether an overseas project is economically or technically feasible.
The State Administration of Foreign Exchange and its branches are mainly responsible for examining the source of foreign exchange capital of overseas investment projects, foreign exchange registration of overseas investment and approval of outward remittance of foreign exchange capital for overseas investment.
In addition, where a State-holding enterprise conducts overseas investment, it shall go through the examination and approval by the State-owned Assets Supervision and Administration Commission of the State Council.
To sum up, any enterprise seeking overseas investment shall first of all understand and obey the relevant laws and regulations, rules and policies both at home and abroad, assess its own conditions, capabilities and the investment environment of the target country (region) from an objective point of view, and seek help from professionals in law, finance and tax affairs to carry out active and stable overseas investment.
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