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Haworth & Lexon Law Newsletter
No.5 2012 (Total:No.123) July 12, 2012
Edited by Haworth & Lexon

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.

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Latest News of Haworth & Lexon

Haworth & Lexon Law Firm Sets Up Haworth & Lexon Scholarship in East China University of Political Science and Law

In June 2012, Haworh & Lexon Law Firm executed an Agreement between Haworth & Lexon Law Firm and East China University of Political Science and Law (ECUPL) on Setting Up Haworth & Lexon Scholarship Entitled (??Agreement??). According to the Agreement, there are 20 candidates in the first round of assessment and selection, who shall be examined by a re-evaluation committee consisting of the partners of Haworth & Lexon Law Firm and directors of legal department of well-known enterprises through taking part in simulated law practice drillings such as legal studies and case analyses; and finally the award recipients will be determined by the re-evaluation committee on the basis of the examination results. Haworth & Lexon Law Firm will grant ECUPL??s excellent students the ??Haworth & Lexon Scholarship?? for five consecutive years.

LexisNexis Reprinted the Perfect Winning of Capital II: A Complete Guide to Company Investment and Financing Mode and Process

The book Perfect Winning of Capital II: A Complete Guide to Company Investment and Financing Mode and Process (Updated Version) was published by the China Legal Publishing House last year and was very popular among entrepreneurs thanks to its high practical value. In March 2012, the world famous publishing group LexisNexis entered into an agreement with China Legal Publishing House whereby China Legal Publishing House shall license LexisNexis to reprint the majority of Perfect Winning of Capital II. Recently, the reprinted part of the book has been recorded in the database of LexisNexis.

Legal Updates Express

Interpretation of the Supreme People??s Court on Issues Concerning the Application of Law in the Trial of Cases of Disputes over Sale and Purchase Contracts

On May 10, 2012, the Supreme People??s Court promulgated the Interpretation on Issues Concerning the Application of Law in the Trial of Cases of Disputes over Sale and Purchase Contracts (Fa Shi [2012] No.8, effective as of July 1, 2012, hereinafter referred to as the Interpretation) to render judicial interpretation over relevant stages and contents involved in the specific provisions of Chapter 9 ??Sale and Purchase Contract?? of the Contract Law.

The Interpretation consists of 8 Parts and has 46 Articles in total, which mainly provides for rules on application of laws on issues, such as formation and effectiveness of sale and purchase contracts, delivery and transfer of ownership of subject matter , assumption of risks for damage and loss of subject matter, inspection of subject matter, liabilities for breach, retention of ownership, special sales and purchases, etc..

I. Formation and Effectiveness of Sale and Purchase Contract

The Supreme People??s Court, by following the principle of ??encouraging trade and increasing wealth??, provides in the Interpretation that ??if there is no written contract between the parties concerned and one party claims the existence of contractual relationship of sale and purchase upon strength of delivery notes, acceptance notes, settlement notes or invoices, the people??s court shall determine whether a sale and purchase contract is formed based on the method, practice of transaction between the parties concerned and other relevant evidences??.

II. Delivery and Transfer of Ownership of Subject Matter

As electronic information products apparently differ from subject matters of traditional sale and purchase contracts, the Interpretation explicitly provides for the method of delivery of ??electronic information products??, i.e. ??if a subject matter is an electronic information product that is not required to be delivered in the form of a tangible carrier, the parties concerned do not clearly agree on the delivery method and the delivery method cannot be ascertained in accordance with the provision of Article 61 of the Contract Law, the buyer??s receipt of the agreed electronic information product or the document of ownership of the product shall be deemed as delivery of the product??. The head of the Second Civil Adjudication Tribunal of the Supreme People??s Court defined in his answers to the journalists?? questions with regard to Interpretation that the Interpretation determined two methods of delivery as per the characteristics of electronic information products: 1) delivery of the documents of title; 2) receipt or downloading of such electronic information products by means of network transmission.

Furthermore, the Interpretation confirmed the efficacy of ??invoices?? or relevant documents as proof to the seller and the buyer, providing that ??in the case that the seller argues the performance of obligation for the delivery of subject matter on the strength of special VAT invoice and tax deduction documents while the buyer does not agree with the argument, the seller shall provide other evidence to prove the fact that the subject matter has been delivered?? and ??If a contract stipulates that common invoices shall be accepted as the certificate of payment or the parties thereto are used to take common invoices as the certificate of payment, and the buyer argues performance of obligation of payment upon the strength of common invoices, the people??s court shall uphold such argument unless there is evidence sufficient to prove the contrary.??

III. Retention of Ownership

The Interpretation defines and replenishes the system of ??retention of ownership??:

(1) Retention of ownership is not applicable to immovable property. If a party to a sale and purchase contract claims that the provisions of Article 134 of the Contract Law on the retention of the ownership over a subject matter shall apply to immovable properties, the people??s court shall not uphold the claim.

(2) Circumstances where retention of ownership is not applicable. If the buyer has already paid more than 75% of the total price of the subject matter and the seller claims to take back the subject matter, the people??s court shall not uphold the claim.

(3) Redemption of subject matter that is subject to retention of ownership. As prescribed by the Interpretation, if, after the seller takes back a subject matter, the buyer eliminates the cause which entitles the seller to take back of the subject matter and claims for the redemption of the subject matter during the redemption period agreed by both parties or specified by the seller, the people??s court shall uphold the claim.

In addition, the Interpretation also provides for some other issues involved in the Specific Provisions of Sale and Purchase Contract, such as assumption of subject matter risks, inspection of subject matter, liabilities for breach, etc.

Notice of the China Securities Regulatory Commission on Properly Managing the Initial Public Offering and Listing of Companies Providing Catering or Other Daily Life Services

On May 16, 2012, China Securities Regulatory Commission promulgated the Notice on Properly Managing the Initial Public Offering and Listing of Companies Providing Catering or Other Daily Life Services (Fa Xing Jian Guan Bu Han [2012] No.244) (hereinafter referred to as Notice), and subsequently promulgated the Guidelines for Information Disclosure Concerning Initial Public Offering and Listing of Catering Service Companies and Other Living Service Companies (for Trial Implementation) (hereinafter referred to as the Guidelines). The promulgation of the Notice turned over a new leaf for the IPO of catering service companies which has been stagnated for more than two years.

The Guidelines are formulated to regulate the information disclosure involved in the initial public offering and listing of catering companies and other daily service companies in seven aspects including the issuer??s business development conditions, main business mode, sustainable development capacity, food safety, etc.

Based on the characteristics of catering enterprises, the Guidelines specify that the prospectus of a catering enterprise shall detail the business status of its direct sales stores and franchised outlets, including address, business area, opening date, decoration cost and amortization policy, table/seat velocity ratio, per capita consumption, etc. In addition, controllers, franchise costs, management fees of franchised outlets shall be disclosed; and the prospectus shall also disclose the commercial cooperation arrangement after expiration of the franchise, historical record of percentage of non-renewal after the franchise expires, whether there is any dispute between the issuer and the current interested parties of the franchised outlet, information on shareholding in the franchised outlet by controlling shareholder or actual controller of the issuer, director, supervisor and senior management personnel and its lineal relative and internal employees of the issuer and etc.

With regard to the food safety issue which is now being closely watched by the public, the Guidelines also list specific provisions. Catering enterprises shall disclose their food safety control system and the management measures for purchasing, processing, storing, distributing, human resources, quality control, etc., e.g. the identity of the senior management level in charge of food safety, number, positions, qualification and background of employees in charge of quality supervision and control; methods, frequency and standards for supplier inspection. Besides, conditions of punishment against issuers by fire control departments, consumers?? right and interest protection authorities, etc. shall also be disclosed.

Launch of the Pilot Program on Private Placement Bonds by Small and Medium-sized Enterprises

On May 22, 2012, Shanghai Stock Exchange and Shenzhen Stock Exchange separately promulgated the Measures of Shanghai Stock Exchange for Pilot Program on Private Placement Bonds for Small and Medium-size Enterprises and the Measures of Shenzhen Stock Exchange for Pilot Program on Private Placement Bonds for Small and Medium-size Enterprises (hereinafter collectively referred to as the Pilot Measures), which symbolize the official launch of the pilot program on private placement bonds for small and medium-size enterprises. Pursuant to the Pilot Measures, issuers of private placement bonds for small and medium-size enterprises are limited to small and medium-size enterprises that conform to the Notice on Printing and Distributing the Regulations on Standards for Sizing of Small and Medium-sized Enterprises (Gong Xin Bu Lian Qi Ye [2011] No.300) and have not been listed in Shanghai Stock Exchange or Shenzhen Stock Exchange, excluding the real estate enterprises and finance enterprises for the time being.

As defined by the Pilot Measures, the private placement bonds for small and medium-sized enterprises (hereinafter referred to as the ??private placement bonds??) refer to corporate bonds that are issued or transferred in a non-public way by micro, small and medium-sized enterprises in China and for which principal and interest are repaid within certain time limits under agreements. Issuers shall issue private placement bonds in a non-public way rather than in ways of advertising and public solicitation, or in a disguisedly public way. The total number of investors in every issuance of private placement bonds shall not exceed 200. Where the private placement bonds are transferred in Shanghai Stock Exchange or Shenzhen Stock Exchange, the issuers shall handle the record formalities with the relevant stock exchange.

In addition, the Pilot Measures have also confirmed the conditions for the private placement bonds subject to record formalities: the issuer shall be a limited liability company or company limited by shares registered in China; interest rate of the private placement bonds shall not exceed three times of the benchmark interest rate of bank loans with the same repayment period; period shall be one year or more.

With regard to the investors participating in subscription of private placement bonds, the Pilot Measures have also provided for the relevant conditions: such investors shall be financial institutions established with the approval of relevant financial regulatory departments, including commercial banks, securities companies, fund management companies, trust companies, insurance companies, etc.; wealth management products issued by the above-mentioned financial institutions to investors, include but are not limited to bank wealth management products, trust products, investment-linked insurance products, fund products, asset management products of securities companies, etc.; such investor shall be enterprise with legal persons status with registered capital of not less than RMB ten million or partnership enterprises with total capital contribution subscribed by partners of not less than RMB fifty million and total paid-up capital contribution of not less than RMB ten million; or other qualified investors recognized by the Stock Exchange. In addition, pursuant to the Pilot Measures, the issuer??s directors, supervisors, senior managers and shareholders holding more than 5% of shares and underwriter of such private placement bonds may participate in the subscription and transfer of private placement bonds issued.

Another mentionable thing is that, the Pilot Measures promulgated by Shanghai Stock Exchange further specify the conditions that shall be satisfied by individual investors: the total assets of the investor??s personal securities accounts, capital accounts and assets management accounts are not less than RMB five million; the investor has two years or more of experience in securities investment; and the investor understands and accepts private placement bond risks.

In respect of protection of the investors?? rights and interests, the Pilot Measures request the issuers to establish a special account for repayment security and a system for repayment security, and the issuers are also required to specify measures for restricting dividend distribution in the prospectus to ensure the repayment of private placement bond principal and payment of interest on schedule, and to promise not to distribute profits in cash if failing to fully withdraw repayment security.

In addition to the Pilot Measures, Shenzhen Stock Exchange also promulgated the supporting regulation, i.e. the Operating Guideline of Shenzhen Stock Exchange for Pilot Business of Small and Medium Enterprise Private Placement Bonds (hereinafter referred to as the Operating Guideline). The Operating Guideline further details the contents of the Pilot Measures of Shenzhen Stock Exchange to provide for the content and format of the record registration form, placement instructions, risk recognition of qualified investors, etc. for private placement bonds for small and medium-size enterprises, as well as the scope and content of due diligence that shall be carried out by underwriters. In the meantime, the Operating Guideline also provides for the duties of the trustees for private placement bonds, convening conditions for opening bonds holders?? meeting, etc.

Minutes of the Work Conference for the Trial of Administrative Cases Involving Company Registration

On May 22, 2012, the Supreme People??s Court promulgated the Minutes of the Work Conference for the Trial of Administrative Cases Involving Company Registration (hereinafter referred to as the Minutes) which, as a summary of contents of the conference held by Supreme People??s Court with some local courts and government departments in Dongguan City, Guangdong Province on October 15, 2011, mainly provide for the relevant issues existing in the administrative cases involving company registration.

(I) On handling company registration with false materials

As specified by the Minutes, in the event of any mistake in the registration due to the fact that the applicant concealed the relevant situations or provided false materials, the registration authority may make correction in legal proceedings in accordance with the law. Where the registration authority made correction in accordance with the law and performed the obligation of due care when process the registration but the plaintiff did not apply for withdrawal of the lawsuit, the people??s court shall reject the plaintiff??s claim. Where the mistake in the registration is not caused due to reasons attributable to the plaintiff, the prepaid case acceptance fee shall be returned to the plaintiff. Where the registration authority refuses to make correction, the people??s court may, in light of the actual conditions, repeal the registration act, determine the registration act as illegal or order the registration authority to perform its duty of correction.

Where the company??s legal representative, shareholders, etc. apply for confirmation of the illegitimacy of the registration or for revocation of the registration on the ground that the application materials are not signed or sealed in person, the people??s court shall in principle apply the provisions of the preceding paragraph. However, if it is proved that the plaintiff knew about the situation but did not raise any objection and was later engaged in the relevant management and operation activities on that basis, the people??s court generally would not render support for the plaintiff??s claim.

(II) On issues concerning the civil legal relationship involved in company registration

As specified by the Minutes, where the interested party lodges an lawsuit with respect to the registration act on the ground that the civil act upon which the company registration is made is null and void or shall be cancelled, the people??s court may seek the following means after investigation: identifying the authenticity of the said civil act in administrative actions upon strength of the effective evidence; advising to settle the civil dispute but for the issues related with the authenticity through civil lawsuits, etc.

(III) On enforcement of effective court rulings and arbitration awards

As confirmed by the Minutes, where the interested party does not agree with the change or cancellation effected in accordance with the effective court rulings, arbitration awards or content determined in the letter of notice requesting assistance in enforcement issued by the people??s court and hence files an administrative action, the people??s court will not accept the action, except under the circumstance where there is any discrepancy between the registration act and contents of the forgoing instruments.

Where the effective rulings or arbitration award upon which the company registration is made are cancelled in accordance with laws, the interested party applies with the registration authority for renewing the registration; in the event the registration authority refuses to do so, the people??s court shall accept the consequent administrative action filed by the interested party raising an objection in that regard.

On May 22, 2012, the Supreme People??s Court promulgated the Interpretation Regarding Certain Issues Related to Specific Application of Laws in Handling Criminal Cases Involving Insider Trading and Divulgation of Inside Information (Fa Shi [2012] No.6, effective as of June 1, 2012, hereinafter referred to as the Interpretation). The Interpretation explains in details the concepts or issues such as persons with knowledge of inside information on securities and futures trading and illegal acquisition of inside information on securities and futures trading.

(1) Scope of persons with knowledge of inside information on securities and futures trading

As prescribed by the Interpretation, the following persons shall be determined as ??persons with knowledge of inside information on securities and futures trading??: persons specified in Article 74 of the Securities Law; and persons specified in Paragraph 12 of Article 85 of the Regulations for the Administration of Futures Trading

(2) Identification of the acts of ??persons who illegally obtain inside information on securities and futures trading??

Persons that commit any of the following acts shall be determined as ??persons who illegally obtain inside information on securities and futures trading?? specified in Paragraph 1 of Article 180 of the Criminal Law: (1) obtaining inside information by such means as stealing, swindling, extract, eavesdropping, luring, spying or private deal; (2) close relatives of or other persons close to the persons with knowledge of inside information on securities and futures trading who, within the sensitive period of inside information, engage in, or expressly or impliedly cause others to engage in or divulges inside information to cause others to engage in securities and futures trading which is related with the said inside information, and relevant trading activities are obviously abnormal without any justifiable reason or legitimate information source; or (3) any person, who has contact or touch with the persons with knowledge of inside information on securities and futures trading within the sensitive period of inside information, engages in, or expressly or impliedly cause others to engage in or divulges inside information to cause others to engage in securities and futures trading which is related with the said inside information, and conducts relevant trading activities that are obviously abnormal without any justifiable reason or legitimate information source.

(3) Identification of ??relevant trading activities that are obviously abnormal??

As prescribed by the Interpretation, ??relevant trading activities that are obviously abnormal?? shall be determined in terms of coincidence degree of time, trade deviation degree and degree of benefit connection, etc. by taking the following circumstances into comprehensive consideration: (1) the time of opening, cancelling and activating capital account or the time of designation of transaction (custody) or cancelling a designated transaction (transfer of custody) is basically consistent with the time when the inside information is formed, changed and published; (2) the time of capital change is basically consistent with the time when the inside information is formed, changed and published; (3) the time of buying or selling securities and futures contracts related to inside information is basically consistent with the time when the inside information is formed, changed and published; (4) the time of buying or selling securities and futures contracts related to inside information is basically consistent with the time when the inside information was learned; (5) the behaviour of buying or selling securities and futures contracts is obviously different from the usual trading practice; (6) the behavior of buying or selling securities and futures contracts or the behaviour of holding securities and futures contracts in a centralized manner obviously deviates from the fundamentals reflected by the public information of these securities and futures; (7) trading capital flow-in and flow-out from the account is related to or is associated with the persons with knowledge of the inside information or persons who illegally obtain the inside information; and (8) other obviously abnormal trading activities.

Duration of the ??sensitive period of inside information??

As prescribed by the Interpretation, ??sensitive period of inside information?? refers to the period between the formation and publication of the inside information. At the meantime, the Interpretation further details issues, such as formation and publication of inside information. As prescribed by the Interpretation, the occurrence time of ??major events?? as prescribed in Paragraph 2 of Article 67 of the Securities Law, and the formation time of ??plans?? and ??schemes?? mentioned in Article 75 of the Securities Law and the formation time of ??policies?? and ??decisions?? mentioned in Paragraph 11 of Article 85 of the Regulations for the Administration of Futures Trading shall be deemed as the formation time of inside information. As for any motion, plan, decision or executive that influences the formation of inside information, the commencement time of the motion, plan, decision or execution shall be deemed as the formation time of the inside information. Publication of inside information refers to the disclosure of inside information in such media as newspapers and websites designated by the securities and futures regulatory authorities under the State Council.

Measures for the Disposal of Idle Land

On June 1, 2012, the Ministry of Land and Resources promulgated the Measures for the Disposal of Idle Land (effective as of July 1, 2012, hereinafter referred to as the Measures) to provide for the investigation, identification and disposal of ??idle land??.

(1) Definition of ??idle land??

For purposes of the Measures, ??idle land?? shall mean any State-owned land for construction use, of which the holder of the land use right fails to start the construction and development thereof within one year after the commencement date of the construction and development work as agreed upon and prescribed in the contract for fee-based use of State-owned land for construction use, or the decision on allocation of State-owned land for construction use. Any State-owned land for construction use of which the construction and development has been started but the area of land that is under construction and development is less than one third of the total area of land that should have been under construction and development, or the invested amount is less than 25% of the total investment, or the construction and development of which has been suspended for more than one year, may also be regarded as idle land.

(2) Process for investigating and identifying ??idle land??

The Measures define the process for investigating and identifying ??idle land??. Where a competent department of land and resources at the municipal or county level finds that any State-owned land for construction use is suspected to be a plot of idle land as defined in Article 2 of the Measures, it shall launch an investigation and issue a Notice of Investigation of Idle Land to the holder of the land use right within 30 days. Where any State-owned land for construction use proves to be a plot of idle land as defined in Article 2 of the Measures after the investigation, the competent department of land and resources at the municipal or county level shall issue the Letter of Identification of Idle Land to the holder of the land use right.

(3) Penalty on of ??idle land??

As prescribed by the Measures, except for land left idle due to the delay in the commencement of the construction and development of a plot of State-owned land for construction use is caused by any government or government department, the land left idle for any other reasons shall be disposed of in accordance with the following manners: where the land has remained idle for more than one year, the competent department of land and resources at the municipal or county level shall collect the charges for idle land at the rate of 20% of the land transfer or allocation fee, and the said charges for idle land shall not be included in the production cost by the holder of the land use right; where the land has remained idle for more than two years, the competent department of land and resources at the municipal or county level shall, with the approval of competent people??s government, such land use right could be taken back by the government without any compensation.

On May 23, 2012, the Ministry of Land and Resources and the National Development and Reform Commission jointly printed and distributed the Notice on Issuing and Implementing the Catalogue of Restricted Land Use Projects (2012) and the Catalogue of Banned Land Use Projects (2012) (hereinafter referred to as the Notice), which, as specified therein, is applicable to the projects of new construction, renovation and expansion projects. A construction project included in the Catalogue of Restricted Land Use Projects shall satisfy the conditions set forth therein before the land and resource authorities and investment authorities could process relevant formalities. For a construction project which is included in the Catalogue of Banned Land Use Projects, or utilizes the technologies or equipment or has the scale specified in the Catalogue of Banned Land Use Projects, the land and resource authorities and investment authorities shall not process the relevant formalities.

Compared with the previous catalogues, the Catalogue of Restricted Land Use Projects reflects one more restriction that the floor area ratio of a residential project shall not be less than 1.0 (inclusive). In addition, in the category of non-ferrous metal, the previous catalogue provides that exploitation of molybdenum and rare earth mine shall be prohibited without exception, but in the Catalogue of Restricted Land Use Projects, new construction or expansion of any molybdenum ore project with a molybdenum amount less than two hundred thousand tons and an exploitation scale less than one million tons per year and the project of rare earth exploitation, beneficiation, smelting, separation shall be prohibited (except for the project which does good to the optimization of overall arrangement and merger and restructuring, provided that such project will not increase the total capacity).

Guiding Opinions on Active Introduction of Private Investment in the Restructuring of State-owned Enterprises

On May 23, 2012, the State-owned Assets Supervision and Administration Commission of the State Council promulgated the Guiding Opinions on Active Introduction of Private Investment in the Restructuring of State-owned Enterprises (Guo Zi Fa Chan Quan [2012] No.80, hereinafter referred to as the Guiding Opinions) to provide for the relevant policies and conditions for private investment to participate in the restructuring of State-owned enterprises with a view to encouraging the same.

The Guiding Opinions prescribe that private investment entities may participate in the restructuring of State-owned enterprises by way of capital contribution, acquisition of shares, subscription for convertible bonds, finance lease, etc. Equity investment funds may be established by and between private investment entities or by private investment entities and State-owned enterprises to participate in the restructuring of State-owned enterprises, make joint investment in strategic emerging industries, and make overseas investment.

The Guiding Opinions emphasize that if State-owned shareholders transfer, by way of public offer or block trade, the shares held by them in the listed companies, they shall not separately impose additional conditions on candidate transferee??s qualification for private investment entities. The transfer of State-owned property rights in enterprises shall be conducted by way of public bidding in the property rights exchange market selected and acknowledged by regulatory authorities of State-owned assets above the provincial level, except in case that transfer by way of mutual agreement is allowed by relevant regulations of the State; no additional conditions on qualification shall be imposed on private investment entities as the transferee.

Notice of the State Administration of Foreign Exchange on the Administration of Foreign Exchange on Encouraging and Guiding the Healthy Development of Private Investment

On June 1, 2012, the State Administration of Foreign Exchange promulgated the Notice on the Administration of Foreign Exchange on Encouraging and Guiding the Healthy Development of Private Investment (Hui Fa [2012] No.22, effective as of July 1, 2012, hereinafter referred to as the Notice).

The Notice has streamlined administration over capital remittance into China in foreign direct investment that the difference between the total investment amount remitted abroad and registered capital by a domestic enterprise in direct foreign investment may, upon the registration at the foreign exchange administration bureau at the place where the domestic enterprise is located, be directly remitted back to China without handling the capital decrease or capital withdrawal registration formalities. The Notice simplifies the foreign exchange administration on overseas lending and allows the domestic enterprise to carry out overseas lending by using domestic loans in foreign currency. The Notice has cancelled approval on purchase and payment in foreign exchange for carrying overseas lending and approval on verification on remittance lending fund back to China. A domestic enterprise, when providing overseas loans, after the overseas lending limit has been verified and approved by the foreign exchange administration bureau at the place where the domestic enterprise is located and after having gone through relevant registration formalities, may directly receive and pay the fund with a lending account specially for overseas lending purpose at a designated foreign exchange bank.

In the meantime, the Notice has appropriately loosened the administration on guarantee to foreign entities by PRC individuals. When the domestic enterprise is providing foreign security for overseas financing by its invested overseas enterprise, a domestic individual is allowed, as the joint security provider, to provide security for the same debt through guarantee, mortgage, pledge or other manner as allowed by the Securities Law.

Legal Practices

Whether Resale Price Maintenance Agreements Violate the Antimonopoly Law: An Analysis of the Johnson & Johnson Monopoly Case

Since the Anti-monopoly Law of the PRC came into enforce on Aug 1, 2008, there have been constant voices of doubt on whether it could play its due role in practice. Also there have been disputes over the application of relevant provisions of the Anti-monopoly Law. A recent case reflected on the problems mentioned above.

[Case Briefing]

It is reported ??that on May 18, 2012, Shanghai No.1 Intermediate People??s Court rendered a first-instance judgment on the monopoly dispute between Beijing Rainbow Medical Equipment Technology & Trading Co. Ltd. (??Rainbow??) and Johnson & Johnson (Shanghai) Medical Equipment Co. Ltd. and Johnson & Johnson (China) Medical Equipment Co. Ltd. ( collectively ??Johnson & Johnson??).

Rainbow has been the distributor of Johnson & Johnson in Beijing over its stitching instrument and suturing products for 15 years. In January 2008, Johnson & Johnson signed a distribution contract with Rainbow, specifying the distribution area, distribution targets, and the lowest sale price. In July 2008, Johnson & Johnson claimed that Rainbow had reduced the sale price without authorization and illegally acquired distribution right of suture outside the authorized area. Thus, Johnson & Johnson stopped the supply of products to Rainbow and terminated its distribution right.

Decision of the Court: Not A Conduct of Monopoly

The Shanghai No.1 Intermediate People??s Court held that in order to hold an undertaking civilly liable for a monopolistic conduct, the elements as follows shall be in place: 1) the existence of the monopolistic conduct; 2) the loss suffered by others; and 3) causation between the monopolistic conduct and the loss. In this case, the distribution contract between the plaintiff and the defendant indeed included a provision limiting the lowest resale price, but the provision alone cannot constitute a monopolistic agreement. Further inquiry on its strength to eliminate or restrict competition has to be considered. Rainbow failed to submit evidence to prove the relevant market information of the product in the distribution contract, including market share, competition status, supply of the product, variation of price, etc., but Johnson & Johnson proved the existence of several like product suppliers in the market of upstream industry. Therefore, there is no sufficient evidence to prove the existence of the monopolistic conduct.

Issue: whether the Resale Price Maintenance Agreement shall be subject to per se illegal rule and be deemed as in violation of Anti-monopoly Law

Article 14 of the Anti-monopoly Law provides that: ??Any of the following monopoly agreements among operator and its counterpart are prohibited: (ii) restrict the lowest price for resale??, which is referred by Rainbow as ground that the resale price maintenance agreement violated the Anti-monopoly Law. However, Clause 2 of Article 13 of the Anti-monopoly Law provides: ??Monopoly Agreements referred to in this law are agreements, decisions or concerted actions which eliminate or restrict competition.??

Then, if there is a provision in the contract restricting the lowest price for resale, should examination be conducted over whether such agreement has the strength to eliminate or restrict competition when determining whether or not such agreement is monopoly agreement, or should the per se illegal rule be applied to determine that such provision on lowest price for resale is a kind of monopoly agreement? This is the crucial point for the Johnson & Johnson Monopoly case and for application of Article 14 of Anti-monopoly Law. However, there is no unanimous view over this critical issue.

The Judicial Interpretation on the Anti-monopoly Law by the Supreme People??s Court reflects the judiciary organ position from a side perspective

On May 8, 2012, the Supreme People??s Court released the Provisions of Supreme People's Court on Several Issues Concerning Application of Law in Hearing the Civil Dispute Cases Arising from Monopolistic Activities (hereinafter referred to as the Provisions). The Provisions do not respond to the crucial point mentioned above, and do not render any interpretation over the application of Article 14 of the Antimonopoly Law. However, the person in charge of the Intellectual Property Right Tribunal of the Supreme People??s Court responded to journalists that, ??For most vertical agreements, monopoly problems would arise only when the competition between different companies is not sufficient. In other words, negative effects on competition would arise only when there is certain imbalance of the market in suppliers or buyers or both.?? The answer reflects the position of the judiciary organ over whether per se illegal rule should apply to resale price maintenance agreement.

View of theorists

Professor Huang Yong, an expert of the anti-monopoly law, a professor at University of International Business and Economics, attended the GCR Live 3rd Annual Competition Law, Consumer Goods and Retail Conference held in London on May 9, 2012. According to a media at Weibo , he pointed out that resale price maintenance was still a common commercial phenomenon in China, and more guidance are needed to determined whether the per se illegal rule or the rule of reason shall be applied to evaluate the legality of the such resale price maintenance. He also mentioned that the law enforcement organs had not expressed their view on the resale price maintenance.

Legal advice: caution is required for dealing with similar provisions

As mentioned by the person in charge of the Intellectual Property Right Tribunal of the Supreme People??s Court, for most vertical agreements, monopoly problems would arise only when the competition between different companies is not sufficient. Therefore, it is still controversial whether agreements restricting lowest resale price of distributors are monopolistic, and theorists and practitioners have reached no unanimous or conclusive decision over whether the per se illegal rule should apply or the parties should prove the existence of effective competition. Also, there has been no uniform opinion in relevant areas in other countries.

Meanwhile, we believe that resorting to court is not the exclusive way to deal with a price monopoly agreement dispute in China. The National Development and Reform Commission and its authorized departments also have the power to investigate into the matter. Although the court of first instance in Shanghai hearing the Johnson & Johnson Monopoly case decided that the per se illegal rule should not be applied to resale price maintenance agreements, the attitude of the highest judicial organ and the National Development and Reform Commission is not yet clear. Therefore, when companies are dealing with similar provisions, caution is still needed.

(The author??s contact information: baileyxu@hllawyers.com)

Serial Articles: Comparisons among Judicial Practices of Labor Disputes I

It is more than four and a half years since the promulgation of the Labor Contract Law of the PRC as of January 1, 2008. After the Labor Contract Law was carried out, the State successively promulgated the Law on Labor-Dispute Mediation and Arbitration and Regulations on Implementation of the Labor Contract Law of the People??s Republic of China as supporting provisions for the Labor Contract Law. Nevertheless, in the implementation of the Labor Contract Law, some disputes have arisen out of the interpretations of the provisions therein, so the Adjudication Committee of the Supreme People??s Court promulgated the Interpretation of the Supreme People??s Court on Certain Issues Concerning the Application of Law in Trying Cases Involving Labor Disputes (III) (??Interpretation??) with specific provisions on those major disputed issues in practices. However, the contents of the Interpretation which consists of 18 articles only, are far from enough to clarify all the disputed issues.

Under such circumstance, the higher people??s courts and the labor and personnel dispute arbitration commissions in some provinces and municipalities directly under the Central Government again promulgated some local guiding opinions on trial of labor dispute cases, but the higher people??s courts and the labor and personnel dispute arbitration commissions in different locations have different interpretations of the Labor Contract Law and Law on Labor-Dispute Mediation and Arbitration. Therefore, the standards of our nation for identifying some hot legal issues in judicial practices of labor disputes could be called a mess.

In light of the above, the author summarized some guiding opinions of the relevant authorities and departments in Beijing, Shanghai, etc. along with comparisons among some hot legal issues for the readers?? reference.

Issues concerning whether an open-ended labor contract is a must for the second renewal of the labor contract

Given the ??QFLP Policy?? of the above local governments each permits the approved foreign-invested equity investment management enterprises to conduct equity investment with their foreign capital and such investment does not affect the original nature of the equity investment enterprises receiving the investment, a conclusion is likely to be made that where a foreign-funded GP uses the foreign exchange quota available under QFLP policy to contribute capital to the fund in accordance with the relevant provisions and all the sources of the remaining capital are RMB, the original nature of such equity investment fund is still RMB fund and, if the nature of the fund remains unchanged, such equity investment fund is entitled to the national treatment for RMB fund with respect to investment industry and process and thus the laws with respect to restriction on foreign investment industries and fields could be circumvented and the investment cost could then be reduced.

Comparison among different provisions
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Contents
Shanghai Opinions

Article 4: (I) when an open-ended labor contract shall be concluded.
Where the employee raises a request for conclusion of an open-ended labor contract which conforms to the relevant legal provisions but the employer fails to conclude such contract with him/her, pursuant to Clause 2 of Article 16 of the Interpretation of the Supreme People??s Court on Certain Issues Concerning the Application of Law in Trying Cases Involving Labor Disputes (Fa Shi [2001] No.14), a people??s court may deem the circumstance as an open-ended labor contract relations existing between the two parties and shall determine the rights and obligation relations between both parties in accordance with the original labor contract. The rights and obligation relations between both parties in accordance with the original labor contract include the right and obligation relations established in the form of a written contract or that established in the manner of de facto labor relations.
(II) Effectiveness of the fixted-term labor contract when the conditions for conclusion of an open-ended labor contract are satisfied. Where the employee meets up with the conditions for conclusion of an open-ended labor contract but signs a fixed-term labor contract with the employer,pursuant to Article 14 of the Labor Contract Law and Article 11 of the Regulations on Implementation of the Labor Contract Law, such fixed-term labor contract shall be binding upon the parties thereto. Upon expiry of the contract term, such labor contract shall automatically terminate.
Jiangsu Opinions I

Article 7: where the labor contract between the employer and the employer is automatically renewed upon expiry of the original contract term as agreed by the employer and employee, it shall be deemed that the two parties have signed the labor contract anew, except for the legal renewal of the labor contract in accordance with the particulars set forth in Article 42 and Article 45 of the Labor Contract Law.
Article 11: where the employer fails to conclude an open-ended labor contract with the employee in accordance with Article 14 of the Labor Contract Law, and the employee requests to confirm the formation of the open-ended labor contract relationship between him/her and the employer, such request by the employee shall be supported by the court.
Jiangsu Opinions II
Article 5: where, during the term when the fixed-term contract is being performed, the employee requests to change the original labor contract to open-ended labor contract, such request shall not be support by the court, except for the circumstance where such change is agreed by the employer.

Legal Analysis:

With regard to the second renewal of labor contract, Article 14 of the Labor Contract Law of PRC stipulates: under any of the following circumstances, if an employee proposes or agrees to renew the labor contract or to conclude a labor contract, the employer shall execute an open-ended labor contract with the employee, unless the employee requests the conclusion of a fixed-term labor contract: ??(3) The employee intends to renew the labor contract after he/she has consecutively concluded a fixed-term labor contract with the employer twice and he/she has not been found in any of the circumstances specified in Article 39 or Paragraph (1) or (2) in Article 40 of Labor Contract Law. In practices, at present, the dispute lies in the two aspects as follows with respect to interpretation of the foregoing provisions: (1) after the second conclusion of a fixed-term labor contract, is it a must for the second renewal between the employer and the employee? Is it possible that the employer may refuse the second renewal? (2) if a fixed-term labor contract is concluded as the second renewal between the employee and the enterprise, is the fixed-term labor contract still effective then?

With regard to the above two aspects, different regions have different practices. The practices in Shanghai follow a less strict principle. According to Shanghai Opinions, after the second conclusion of a fixed-term labor contract, the employer has option not renew the labor contract. The fixed-term labor contract signed by the employee and the employer for the third time (even for the fourth or fifth time) remains effective, unless the employee can prove that he/she was coerced to sign such fixed-term labor contract. For the same circumstance, judicial practices in Beijing operate differently: after the second conclusion of a fixed-term labor contract, where the employee requests to renew the labor contract, the employer must execute a labor contract with the employee. Upon the second renewal of the labor contract between the employee and the employer, as long as the employee has requested to sign an open-ended labor contract with the employer, the employer is then obligated to do so, under which circumstance a fixed-term labor contract entered into between the two parties may be deemed ineffective (the burden of proof shall be assumed by the employer to prove that the employee signed the fixed-term labor contract out of his/her own free will).

Comparatively speaking, the requirement on the second renewal of labor contract is the strictest in Beijing, completely following the literal meaning to interpret Article 14 of the Labor Contract Law; however, such requirement is relatively relaxed in Shanghai, Jiangsu, etc. where a fixed-term labor contract formed as the second renewal of labor contract between the employer and the employee remains effective. There is no any explicit judicial interpretation in that respect in Guangdong, but as reflected by some cases, practice in Guangdong, Shenzhen, is inclined to the practices in Beijing.

Legal Advice:

It depends on the policies of different regions as to whether a fixed-term labor contract can be concluded as the second renewal of the labor contract between the employer and the employee. If the employer is located in Shanghai or Jiangsu, a fixed-term labor contract can be concluded, but to prevent further risks, the employer may add such representations as follows to the labor contract renewed for the second time: ??upon execution of this labor contract, I have fully understood the rights of the employee conferred upon by Article 14 of the Labor Contract Law and I am willing to perform the period of this labor contract as agreed??. For the employer which is located in Beijing, Guangdong or otherwise or which is located in Shanghai but has some employees working in Beijing, Guangdong or otherwise, it is suggested that an open-ended labor contract should be concluded by the employer with those employees as the second renewal, unless the employer is able to obtain such evidentiary materials as indicating the fact it is those employees who have requested to sign an fixed-term labor contract, such as the employees?? written application, etc.

(The author??s contact information:kevincheng@hllawyers.com)

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