This Article discusses significant legal developments in Central/East Asia and China Law from 2023.
On March 5, 2023, the 14th National People’s Congress (NPC), the legislative body of the People’s Republic of China (China), convened in Beijing and will conclude in March 2028. A skim of the NPC, and its Standing Committee, “the NPC Standing Committee,” shows they adopted fifteen new laws, including amendments to existing laws, from national security, legislation, and environment protection, to civil procedure to corporate governance. This article summarizes certain key aspects of China’s changes in legislation and practice and provides insights to American lawyers and anyone who has a general interest in the market.
In a significant step to reinforce fair competition and provide guidance on the enforcement of Anti-Monopoly Law (AML), the China State Administration for Market Regulation (SAMR) promulgated four regulations (Regulations) on March 24, 2023. These Regulations, with an effective date of April 15, 2023, include the Regulation on Merger Control Review (Merger Control Regulation), Regulation Prohibiting Monopoly Agreements (Monopoly Agreement Regulation), Regulation Prohibiting Abuse of Market Dominance (Abuse of Dominance Regulation), and Regulation Prohibiting Abuse of Administrative Power to Eliminate and Restrict Competition (Administrative Prohibition Regulation). The Regulations, built on the AML and its 2022 amendment, introduce substantial improvements and have noteworthy implications for international companies operating in, or engaging with, the Chinese market.
The Merger Control Regulation includes three primary aspects:
The Merger Control Regulation specifies the factors to be considered when determining whether a subject company has “control” or “power to control” under the AML, which is key to determining the merger review threshold and assessment of a proposed merger’s market impact. The factors for consideration include, the goal and future plans of the merger transaction under review (transaction); changes in the shareholding structure before and after the transaction; other shareholders’ voting mechanisms and voting subject matters (including the history of other shareholders’ attendance and voting patterns); the decision, management, and voting mechanisms of other shareholders through the company board; the appointment and removal of senior management; the relationships between other shareholders; and the relationship between the applying shareholder and other shareholders. This clarification provides guidance to companies and enforcement agencies on the application of this important concept. It also preserves room for SAMR’s discretion by including a catch-all in the clause.
The Merger Control Regulation prohibits companies from implementing a concentration without applying for and receiving a merger control approval (Implemented Concentration), without which such companies will be subject to heavy fines. Implemented Concentration can occur through changing the business registration or the registration of their rights, appointment of senior management personnel, participation in business decisions and operational management, exchange of sensitive information with other merger parties, and substantive integration of business. This clarification helps companies determine their action plan and avoid penalties.
The Merger Control Regulation imposes heightened penalties for procedural violations, including refusing to provide information or providing false information, concealing, destroying, or transferring evidence, or other acts impeding an investigation, with penalties of up to one percent of the sales amount of the previous year or RMB five million. Individuals engaging in such violations are subject to penalties of up to RMB 500,000.
The Monopoly Agreement Regulation represents a more refined approach to tackling monopoly agreements, with particular attention paid to the internet platform economies. Notable amendments include the following four provisions:
The Monopoly Agreement Regulation offers a more precise framework for identifying market dominance, referring to the scope of competition for specific goods or services (products) over a certain period, encompassing both the relevant product market, and the relevant geographical market. The regulation, in alignment with other international regimes, mandates that the determination of relevant markets be based on a demand substitution analysis. This involves evaluating factors including consumer reactions to changes in product prices, product characteristics and usage, and distribution channels. The regulation also directs that supply substitution be considered in defining markets, including assessing the other suppliers’ ease of switching to producing the product at issue and competitiveness of the product market after the switch.
In essence, the regulation provides a comprehensive framework for defining relevant markets by incorporating the demand and supply substitution analyses, thereby ensuring a comprehensive examination of the various factors in the context of traditional and platform-based economies.
The regulation expressly prohibits competitors from entering into anti-competitive agreements by utilizing data, algorithms, technology, and platform rules to achieve signaling, coordination, and the exchange of sensitive information. The regulation also expressly prohibits businesses from utilizing data, algorithms, technology, and platform rules to achieve illegal resale maintenance agreements.
The regulation sets out the circumstances constituting aiding and abetting in Article 19 of the AML, where a business organizes other businesses to reach monopoly agreements. Abettors include those who are not parties to an illegal agreement, but do have a decisive or dominant role in determining the scope, content, and performance conditions of the agreement. Significantly, the regulation expressly provides that businesses can be liable for antitrust violations on a “hub-and-spoke” theory by entering into multiple bilateral agreements between competitors, facilitating communications, exchanging sensitive information, or coordinating actions.
The regulation outlines the factors to be considered in determining whether an exemption applies, including the specific form and effects of the agreement, the causal relationship between the agreement and the result in fact, whether the agreement is a necessary condition for the result in fact, and whether consumers can benefit from the agreement in product price, quality, or available variety. This new general guideline will continue to pose challenges to enforcement agencies and businesses as they grapple with weighing the complexity of these multiple factors.
The Monopoly Agreement Regulation provides considerable discretion to the antitrust enforcement agencies when imposing a penalty. They are instructed to consider the specific circumstances of each case, including the nature, circumstances, degree, duration, and consequences of the illegal conduct. In cases where the violation is notably severe, the consequences are “exceptionally harmful,” and the impact is “particularly egregious,” as the SAMR has the authority to levy fines exceeding the established ranges, up to five times the statutory limits. This approach acknowledges that antitrust violations can vary widely in their nature and impact, granting SAMR more authority to issue penalties that commensurate with the gravity of the offense.
Overall, this regulation underscores SAMR’s commitment to enforcing antitrust laws and fostering fair competition in the marketplace. The regulation aims to curb anticompetitive behavior and protect the interests of consumers and competitors.
The Abuse of Dominance Regulation, like the other three regulations, refines key concepts in the AML, attends to the needs of E-commerce, and enhances enforcement authorities. The primary enhancements are as follows:
The regulation, like the Monopoly Agreement Regulation, contains a new section to guide the relevant market definition.
The regulation, with special attention to the online platform economy, requires the enforcement agencies, in determining market dominance, to consider transaction amount, volume, and the ability to control volume. In determining “unfair prices,” enforcement agencies must consider the cost interdependence among various relevant markets within the platform’s involvement in multiple related markets and its rationality. An illegal tie-in can also occur when an E-commerce operator uses pop-ups, mandatory transaction steps, or other methods, making it difficult for users to choose, modify, refuse bundling, or combine the sale of different products. Furthermore, the regulation expressly prohibits platform operators from utilizing data, algorithms, technology, and platform rules to abuse their market-dominant positions.
Pursuant to the regulation, antitrust enforcement agencies may conduct interviews with the legal representatives or responsible individuals of operators suspected of abuse of dominance violations. The regulation also requires antitrust enforcement agencies to initiate an investigation based on written complaints submitted with real names.
The Administrative Prohibition Regulation specifies certain prohibited acts that administrative agencies must avoid, as they constitute an abuse of their administrative power. Notably, this includes making cooperation agreements or memoranda to prevent or hinder market entry or prescribe unfair treatment to business operators to eliminate or restrain competition. To elaborate, the regulation also identifies other types of abusive acts, such as requesting, implying, refusing, stalling, keeping records to directly or indirectly limit the operation, purchasing, using merchandise, or services of certain designated entities.
Importantly, the antitrust enforcement agencies are authorized to interview legal representatives or responsible persons of administrative agencies that allegedly violate the AML and its related regulations, and request abatement measures. The regulation does not authorize antitrust enforcement agencies to prescribe penalties or order abatement; rather, the antitrust enforcement agencies are required to report their interview meetings to the investigated agency’s supervisory government agencies.
Overall, these four new regulations present both challenges and opportunities to international businesses and their lawyers. The emphasis on strict enforcement with increased fines and corrective measures for violators underscores China’s commitment to maintaining fair and open markets through a focus on deterrence. International companies operating in China or engaging with Chinese entities must reassess their business practices to ensure compliance with the new regulations.
China’s Company Law was initially adopted in 1993, and has been amended five times since then. Over the years, there were calls to further amend the law, which were not acted upon until the last few days of 2023. On December 29, 2023, the NPC Standing Committee made the final step to update the Company Law of the PRC (“2023 Company Law”), effective July 1, 2024. Undoubtedly, the new amendment will have a significant effect on the establishment and management of corporations in China.
The 2023 Company Law, among other things, responds to the call for protection of minority shareholder(s), sets a limit on capital contributions while granting flexibility in corporate governance. The following are descriptions of some major changes in these areas.
China is one of the few countries that require registered capital, an amount the shareholder(s) must contribute to keep the company operating, which provides immunity to its shareholder(s) once they pay in. Since the Company Law was adopted in 1993, and for a long period afterwards, shareholders were required to pay registered capital in advance and have an certified audit in order to trigger the establishment of a company. This hurdle had been called unreasonable during the course of economic research, which was abandoned in 2014, and shortly after China declared the direction of a market economy. With that, shareholders may determine the term of payment at-will, to a maximum of fifty years or even longer. This freedom in capital contribution has been proven to allow businesses to flourish. Like a double-edged sword, it has also demonstrated problems, creating tremendous zombie enterprises with no paid-in capital to run, eventually leading to deadlocks in seeking remedies where shareholder(s) tend to be less serious in commitment.
The 2023 Company Law requires that capital contributions subscribed by shareholders of a limited liability company be fully paid within five years from the date of establishment of the company, in accordance with the provisions of the articles of association. In certain key industries, the term to contribute capital may be shorter if required by law, regulation, or per decision of the State Council.
The law also provides more details regarding equities forfeited. In one scenario, if a shareholder fails to contribute the registered capital within a specified period, including the grace period, it would forfeit unpaid equities, and its equity may be transferred or written off as a follow-up. The law, however, does not address how a company duly registered prior to the end of June 2024, with a commitment of capital contribution longer than five years shall comply, and defers to the State Council to set a grace period.
Due protection to minority shareholders is a headache to administrative and judicial bodies everywhere, and the same applies to China. Many urged specific provisions be enacted if a majority shareholder or management goes against the interest of minority shareholders.
To reflect this concern, the 2023 Company Law adds certain provisions, such as: (1) in the event that a controlling shareholder abuses the dominant right and seriously damages the interests of the company or other shareholders, the other shareholders shall have the right to request the company purchase his/her/its equity at a reasonable price; (2) shareholders (typically minority shareholders) have the right to review, and copy the register of shareholders and accounting vouchers in addition to articles of association, minutes of shareholders’ meetings, resolutions of the Board of Directors, resolutions of the Board of Supervisors, financial accounting reports, and other relevant materials of the company; (3) any shareholder who owns more than one percent equity of a company shall be entitled to submit temporary proposals for the shareholders’ meeting in due process and this equity threshold is not subject to change; and (4) where a company reduces its registered capital, it shall do so in proportion to the capital contribution or shares held by shareholders, unless otherwise provided by law or agreed unanimously by all the shareholders.
Moreover, the 2023 Company Law limits the power of controlling shareholders and actual controllers who enjoy decision-making power without legal position in the company, as such actual controllers might infringe on the interests of the company through invisible actions such as related party transactions. In this regard, the 2023 Company Law clearly provides that where a controlling shareholder and the actual controller who does not serve as directors of the company but manages or controls the company de facto, a duty of loyalty and diligence assumed by directors, supervisors and senior executives to the company shall also apply.
There has been inconsistency in Chinese laws in terms of corporate governance. In general, the law sets three tiers: the meeting of shareholder(s), board of directors/executive director, and top-down management. In addition, the previous law mandated any company to appoint a board of supervisors or a single supervisor, separate from key management to maintain sound governance of a company.
There were calls for changes to allow a small or medium company with a simple shareholding structure to be allowed more free choice. To address that, the 2023 Company Law allows a company to dispense with a board of supervisors as long as it sets an audit committee consisting of directors in the board of directors to exercise such power, subject to the articles of association. In other words, appointment of a supervisor is not a mandate as long as the company creates a similar function within the board of directors.
It is worth noting that the 2023 Company Law also sets out more details, including events and procedures that impose liability on controlling shareholders, de facto shareholders, and management who conduct activities against minority shareholders and/or damage the interest of the company. It will be interesting to see how this change evolves in practice.
This section discusses the proposed amendments to the Trademark Law, including the Chinese court’s move to curb abuse of litigation rights and discourage trademark infringement by allowing high damage awards, and some positive developments related to trademark prosecution matters in 2023.
On January 13, 2023, the China National Intellectual Property Administration (CNIPA) published the Draft Amendment to the PRC Trademark Law (Trademark Law Draft Amendment) for public comment. The introduction of rules regarding “trademark use or commitment to use a trademark at the stage of application stage,” the mechanism for removing registered trademarks that are not in use after five years of registration, and the prohibition on repeated trademark applications for the same trademark for the same goods or services by the same applicant are of major concern to foreign brand owners and these proposed amendments, if enacted, will significantly affect their trademark filing and portfolio management strategy in China. The Trademark Law Draft Amendment was not adopted by lawmakers in 2023, and is expected to undergo several rounds of revisions. But, it sends a strong signal to the legal community and is already having an effect in practice.
In terms of judicial protection, the Supreme People’s Court (SPC) issued Guiding Opinions, providing the following guidance: (1) to continue to crack down on malicious hoarding and squatting of trademarks; (2) where the concerned party violates the principle of good faith by acquiring and exercising the relevant intellectual property rights in bad faith, the court shall, in accordance with the law, dismiss its claim for infringement of intellectual property rights; (3) if a defendant proves that the plaintiff has abused its right to bring the lawsuit, thereby damaging the defendant’s legitimate rights and interests, and requests the plaintiff to reimburse the reasonable litigation costs, the court shall support the defendant’s request in accordance with the law; and (4) to strictly implement the system of punitive damages for intellectual property infringement.
China does not follow case law, but certain remarkable and cited cases provide reference to local courts and demonstrate the attitude of the judiciary, which align with the Guiding Opinions.
In Siemensaktieng-Sellschaft and Siemens (China) Ltd. v. Ningbo Qishuai Electric Appliance Co., Kunshan New Venture Electric Co. and Wu Qianzhi involving trademark infringement and unfair competition, the SPC upheld the first-instance judgment of the Jiangsu Provincial Higher People’s Court, which found that Ningbo Qishuai Electric Appliance Co. had infringed Siemens’ trademark rights and awarded damages in the amount of RMB 100 million yuan. The courts took into consideration the high reputation and economic value of Siemen’s intellectual property rights, the scale of the infringement, the sales data on record, and the sales regions of the infringing products, the categories of the infringing products, and determined that the damages should be higher than the statutory maximum, which is RMB five million yuan under the PRC Anti-Unfair Competition Law.
In the trademark infringement case of Nature Republic Co., Ltd. v. Jianglin Cosmetics Department of Wangdu County, the SPC reversed the trial and appellate judgments and answered the thorny question of whether to support a plaintiff’s claim for damages against a bona fide seller in bulk litigation. The SPC found that the legitimate source defense was established because the seller had exercised reasonable care and met its burden of proving the legitimate source of the infringing product. The SPC also found that the plaintiff filed lawsuits against many small and medium-sized sellers in more than ten provinces in mainland China for the same infringing goods as in the present case, resulting in bulk litigation. Therefore, the SPC concluded that, while the seller should cease the infringement, the seller should not be held liable for the damages claimed by the plaintiff, and issued the following directions in its retrial judgment: the trademark right holder has the legitimate right to legally and reasonably protects its interests. However, the court held that allowing a trademark right holder to use “enforcement” and “litigation” as tools to make profits is not in line with the purpose of intellectual property protection, is not conducive to maintaining the stability of trade order, and is a waste of judicial resources to a certain extent. Such conduct should not be encouraged.
The year 2023 also witnessed the following positive developments in procedural rules, which are welcomed among U.S. business entities because the implementation of these new rules will significantly reduce time and costs for securing and enforcing their trademark rights in China.
In June 2023, CNIPA issued its internal Regulations for Suspension of Trademark Review Cases. According to the new rules, CNIPA may, ex officio or at the request of a concerned party, suspend the trial of refusal appeal, opposition review, and invalidation actions under certain situations where the status of the cited marks is uncertain or are supposed to be invalid. Recent practice has shown that such new suspension rules can effectively solve the problem of the lack of coordination between administrative authorization procedures, as well as between administrative procedures and judicial procedures, and also reduce the burden of repeated filings by the applicant.
In June 2023, the Beijing IP Court, which conducted the first-instance judicial review over CNIPA trademark decisions, issued new rules on the pre-docketing of refusal appeal litigation. According to the new rules, if the outcome of the case depends on the status of the cited pending trademark, the plaintiff may request a suspension and formally register court appeal within twelve months from the date of initial court appeal filing. This is equivalent to granting a twelve-month extension to the plaintiff, who will have sufficient time to decide whether to continue with the administrative litigation based on the final status of the cited mark made by the relevant CNIPA.
At the General Debate of the 75th Session of the United Nations General Assembly on September 22, 2020, China’s President Xi Jinping proposed that China aimed to have carbon dioxide emissions peak before 2030 and achieve carbon neutrality before 2060.
With the release of Working Guidance and Action Plan for Carbon Dioxide Peaking Before 2030, as well as the issuance of “12 implementation programs for key areas and industries” and “11 support and service programs” by relevant ministries, China has built up a “1+N” policy framework for Carbon Dioxide Peaking and Carbon Neutrality (Dual Carbon).
In 2023, China continued to advance environmental and ecological protection legislation. For instance, the newly revised Marine Environmental Protection Law provides that the State advocates green, low-carbon, and intelligent shipping to reduce emissions of greenhouse gases (GHGs) and air pollutants. In addition, the newly adopted Law on Ecological Conservation on the Qinghai-Tibet Plateau also requires that the State strengthenes the protection and restoration of wetlands on the Qinghai-Tibet Plateau to improve their carbon sequestration capacity. It can be seen that China has comprehensively integrated green and low-carbon development philosophy into its newly enacted and revised laws to promote the reduction of carbon emissions in the industrial sector while enhancing the functioning of the ecosystem.
To implement these initiatives, Chinese government agencies introduced several industry policies to support the Dual Carbon goal. Not coincidentally, the SPC issued guidances toward the same direction.
In February 2023, China’s most powerful government agency, the National Development and Reform Commission (NDRC), took the lead in implementing policies on promoting energy conservation, carbon reduction, and recycling of products and equipment. These policies require enterprises to carry out energy-saving and carbon-reducing upgrading of products and equipment such as boilers, motors, power transformers, refrigeration, lighting, and household appliances.
On March 28, 2023, the NDRC issued Decree No. 2, which serves as an amendment to the energy conservation review system effective since 2010. The decree is set to align the system with the “1+N” policy framework of Dual Carbon and focuses on consumption of fossil and renewable energy, raw material energy use, and carbon dioxide emissions of the projects concerned.
On November 13, 2023, the NDRC, along with other ministries, issued the Opinions on Accelerating the Establishment of Product Carbon Footprint Management System, which proposes to set carbon footprint accounting rules and standards by 2025, then again in 2030. It also proposes to establish a carbon footprint background database in relevant industries, as well as carbon label certification for products, and to facilitate convergence and mutual recognition with major trading partners.
On April 1, 2023, the Standardization Administration of China, together with other ministries, issued the Guidelines for the Construction of Carbon Dioxide Peaking and Carbon Neutrality Standard System, setting out the main target that at least 1,000 national and industry standards would be developed or revised by 2025. The Dual Carbon standard system includes four primary subsystems: basic universal standard subsystem, carbon emission reduction standard subsystem, carbon removal standard subsystem, and market-oriented mechanism standard subsystem. These subsystems are further divided into fifteen secondary subsystems and sixty-three tertiary subsystems. These systems cover key industries and fields, such as energy, industry, transportation, urban and rural construction, and water conservancy, and meet the application of various scenarios such as regions, industries, parks and organizations.
On October 19, 2023, China’s Ministry of Ecology and Environment (MEE) issued Decree No. 31, which supports development of renewable energy, forestry carbon sinks, methane emission reduction and other projects that contribute significantly to carbon reduction and sinks through the voluntary GHGs emission reduction trading mechanism.
The judicial system, led by the SPC, is not far behind these developments. On February 16, 2023, the SPC issued the Opinions on Completely, Accurately and Comprehensively Implementing the New Development Concept and Providing Judicial Services for Actively and Steadily Promoting Carbon Dioxide Peaking and Carbon Neutrality (Opinions).
According to the Opinions, Chinese courts will focus on cases related to (i) energy conservation and emission reduction, low-carbon technology, carbon trading, and sustainable finance; (ii) ecological and environmental infringement disputes over GHGs emissions; (iii) carbon emission quotas, and (iv) China Certified Emission Reduction (CCER) trading disputes and support conclusion of trade contracts of carbon emissions, carbon emission quota, CCER, etc. Judges should balance development and emission reduction when they hear and rule on cases.
On August 15, 2023, the first National Ecological Day, the SPC issued the interpretation in the same week to strengthen the protection of forest resources in a judicial way. According to the interpretation, the courts will impose heavier penalties in cases where the destruction of forest resources results in the loss of, or permanent damage to, the basic functions of forest land or other farmland, the unlawful occupation of forest land or other farmland within the core protection zone of a nature reserve, or the unlawful harvesting in national parks or nature reserves. This judicial policy demonstrates China’s determination to protect the ecological environment.
It is too soon to say that China’s ambitious goal will be realized on time. However, the economic slowdown did not prevent the Chinese government from marching toward carbon neutrality with a comprehensive approach in legal, administrative and judicial actions.
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The year 2023 was unique because it was a time of normalization after COVID-19, and it marks the halfway wwpoint of the 14th Five-Year Plan. The Chinese government is dedicated to trade and economic growth to create a fair and friendly competitive market. For instance, the General Office of the State Council issued Opinions of the General Office of the State Council on Promoting the Stabilization of Scale and Optimization of Structure of Foreign Trade (Opinions) to strengthen trade promotion and expand markets by stabilizing and scaling up the imports and exports of key products. The Opinions identify several measures to increase fiscal and financial support, accelerate innovative development of foreign trade, and optimize the environment for the development of foreign trade. In addition, the Opinions include measures to regulate utilization of foreign investment and guarantee the national treatment for foreign-invested enterprises, indicating that foreign investment will be continuously advocated and strengthened in the foreseeable future.
It is notable that China acceded to the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents (Convention) on March 8, 2023, effective as of November 7, 2023. Accordingly, a concerned party from member countries of the Convention no longer need to obtain legalization from the Chinese embassy or consulate to legalize its document in certain circumstances, such as to file cases in any court in China. Without a doubt, this will save time and money for the industry over the long run.
Fairly speaking, 2023 was not special in terms of legislation and enforcement in China. We do not see much development of guidance in data security or personal data protection, and some of the key legislations as projected by the NPC Standing Committee have yet to be realized. We expect more to come in 2024.
Jiangxiao Hou and Ju-Ya Lu co-author part I, Yanling Zheng writes Part III, while Steven Shengxing Yu and Izzy Zhuoming Yang contribute to rest of the Article. Chris Zhang, associate of Hiways Law Firm, Claire Wu, and Zhiwei Wang, LLM students at the Shanghai University of Political Science and Law also made a good contribution.
