China Law Vision

CIRC Published Revised Administrative Measures for Insurance Clauses and Premium of Property Insurance Company

Dr. Zhan Hao — Fri, 12 Mar 2010 16:44:09 +0800

Recently, CIRC revised the old Administrative Measures for Insurance Clauses and Premium of Property Insurance Company 2005 and published a new one (“New Administrative Measures”). The new one will be effected since 1^st April of this year.

The New Administrative Measures were revised to be in line with the new Insurance Law which was published and effected last year and were mainly revised from three aspects: (1) completing filing system of insurance clauses and premium; (2) enhancing the management of compliance chief officer and actuary chief officer; (3) strengthening supervision of insurance companies in line with new Insurance Law. Specifically speaking, the New Administrative Measures put focus on the following points.

1. Changing the way of supervising regional products. New Administrative Measures provide that the head officer of insurance company need to file the materials of regional products directly in the CIRC. According to this stipulation, all developments and filings of products must be handled by the head office of insurance companies. On the one hand, the CIRC may use this regulation to strengthen the supervision of insurance companies and prevent insurance institutions disturb market or infringe insurance applicants or insureds by extension clauses, special agreements or adjusting premium rate in regional products. On the other hand, the CIRC may concentrate on examining the compliance, standardization and actuary of premium when all products are filed and examined only by CIRC.

2. Increasing the regulations on co-insurance products management. According to the development of insurance industry and insurance practice, the New Administrative Measures increase the regulations on clauses premium rate under circumstance of co-insurance. Other insurance company may directly use the chief insurer’s insurance clauses and premium which was filed or approved by CIRC without separate application.

3. Strengthen the management of compliance chief officer and actuary chief officer. Firstly, the New Administrative Measures require insurance companies to increase management level, establish internal accountability system and report relevant management system to CIRC. Secondly, this New Administrative Measures raise the thresholds of being a compliance chief officer. The compliance chief officer must be a formal staff of the insurance company and shall be at least a department officer in the company with more then 3 years consecutively domestic insurance or legal experiences. Thirdly, the New Administrative Measures impose some administrative penalties on insurance company for illegal acts.

4. Establishing standard products data base system. This reversion clarified that Insurance Association of China and all insurance companies shall positively promote the popularization and standardization of insurance clauses and premium rates. They shall establish an industry basic data platform and standard products data bases to improve the quality of products and to regulate the market.

After publishing the New Administrative Measures, CIRC schedules to creat a training program covering whole insurance industry to explain this new regulation and to improve the products management capability of insurance companies.

Can Foreign Capital "Drink" China's Oldest White Wine?

Dr. Zhan Hao — Mon, 08 Mar 2010 15:09:39 +0800

In early March, 2010，Diageo, the world’s leading spirits maker signed a deal whereby it acquires majority shares of SiChuan Quanxing Group, a holding company that owns Shui Jing Fang(水井坊), reputedly China’s oldest white wine. What is remarkable about the transaction is that it is the first case in which foreign capital takes over Chinese white wine. To further make the deal unique is how surreally the white whine came into being. In 1998, Quanxing Group discovered a relic site when its workers were in the process of renovating factories. Archeological excavation showed that the site was originally a wine making workshop that dates back to Yuan Dynasty, over 600 years ago. With state-of-art bio technology, several active microbes were obtained from the workshop and used to produce the white whine, branded Shui Jing Fang(水井坊). The relic site was also listed by Guinness World Records as the world’s oldest wine making workshop.

On a rough look, the Diageo/Shui Jing Fang deal is remarkably similar to the Coca-Cola bid for Hui Yuan . For example, both involve world famous brands buying Chinese famous local brands, in effort to tap into the ever increasing beverage market in China. Given the doomed Coca Cola/Hui Yuan transaction on antitrust account, one is tempted to ask whether history will not repeat itself this time. Meanwhile, media report says Diageo is preparing regulatory filing with MOFCOM, which is the authority charged with policing merger market to prevent anticompetitive consequences. There are also market speculations on the fate of the deal in the hand of MOFCOM.

Market Definition

The first interesting issue to explore is market definition. Like other jurisdictions, and perhaps even more so, market definition plays a key role in Chinese enforcement of Anti-Monopoly Law (“AML”). On 7 July, 2009, the Anti-monopoly Commission of the State Council, the apex entity in China’s hierarchical structure of AML enforcement, promulgated the Guidelines on the Definition of Relevant Market. The Guidelines provide that defining relevant market is the starting point for analyzing competitive conduct and constitutes an important part of AML’s enforcement.

The Guidelines provide for two methodological approaches to market definition, i.e., the demand/supply substitution analysis and SSNIP. According to the Guidelines, however, it seems that the demand/supply substitution test takes precedence over SSNIP, as the latter applies only when the market scope is unclear or too difficult to define.

There are three likely candidates for the relevant market analysis in this case: spirits, Chinese spirits or premium Chinese spirits.The author is inclined to think that the relevant market in this case will be carved out around the premium Chinese spirits. As the Guidelines point out, market definition test will be done mainly by reference to consumer’s point of view. In that spirit, MOFCOM will probably look to a set of parameters, namely functions, qualities, price and market access to commodities in performing market analysis.

In China, the white whine market is highly stratified. On the top is the premium market, which is characterized by hefty price, high brand recognition, enhanced status embodiment and nationwide distribution. Market study also uses price as benchmark to classify the white whine market. For example, there are market study reports which state that in the premium white wine market, defined by price range above 300RMB, Mao Tai（茅台） (the white wine served in Chinese state banquets) has market share of 37.5%, Wu Liang Ye （五粮液）32.95%, Lu Zhou Lao Jiao (泸州老窖) 11.77% and Shui Jing Fang（水井坊） 7.9%. On top of that, a large body of Chinese spirits occupies the middle category, which has lower price range than the premium, and are distributed and consumed mainly in local markets where they are made. By all means, from the consumers’ viewpoint, it’s hard to imagine that the second category spirits are substitutable with the premium category, because the latter has greater margin of pricing power without fearing to lose business such that the price increase is unprofitable.

Conglomerate Merger

The issue of market definition is important also because it determines how to characterize the deal. If foreign spirits are found to constitute part of the relevant market together with Chinese white wine, the analytical framework is going to be horizontal merger. If not, conglomerate merger analysis will probably prevail. Given the author’s inclination to think that the market is going to be defined as Chinese premium spirits, MOFCOM will pursue a conglomerate merger analysis.

Notably, the Coca-Cola/Hui Yuan is horizontal merger by nature, because MOFCOM found that both compete in Chinese fruit juice market. However, the theory upon which MOFCOM rejected the deal comes from conglomerate merger paradigm, namely market power transfer theory. According to MOFCOM, Coca-Cola has 60 percent in carbonated soft drink market (CSD market). Under AML, the figure suffices to establish a prima facie case that Coca-Cola has dominant position in CSD market. Without showing its reasoning, MOFCOM further presumed that Coca-Cola might transfer the dominant power in CSD market to fruit juice market by virtue of tying and bundling, thus eliminating incumbent fruit juice makers. It’s not clear whether MOFCOM follow the due process rule by affording Coca-Cola to rebut the presumption. Even if it does, it is obvious that Coca-Cola failed in the task.

In other jurisdictions, conglomerate merger is treated with more leniency than horizontal, because of its great efficiency potentials. Even if they might be susceptible to harmful effects in the relevant market, it is usually the scrutinizing authorities’ burden to expose its ex post reasoning and prove that the harmful effects are more likely than not to happen. Where circumstances allow, the authorities would resort to “natural test” to show that the party has committed the anticompetitive conducts in question in the past and thus has the incentive and inclination to repeat it after the merger. However, the Coca-Cola/Huiyuan merger filing has created a precedent that should one party is found to have dominant position in market other than the one relevant to the merger, a prima facie case of anticompetitive effect is established and the burden of proof is shifted to the party to rebut the presumption.

Whether MOFCOM would apply the same analysis in Diageo/Shui Jing Fang case remains to be seen. To do so, MOFCOM would have to look at the foreign spirits market in China and test the market position of Diageo. At the risk of premature conclusion, the author is inclined to think it’s negative. There are already several key players in Chinese market of foreign spirits, i.e., Diageo, Pernod Ricard and Hennessy of France, Brown Forman of the United States and other whisky makers from Scotland. According to market report, Pernod Ricard has traditionally held the upper hand in the Chinese spirits market. The Shui Jing Fang deal will surely going to help Diageo to catch up, but there is a long distance to close between them.

Brand

Brand issue has several important implications in the current deal. As a foremost matter, the deal would not have been possible under Chinese current foreign investment policy. According to China’s Catalog for the Guidance of Foreign Investment in Industries, “Famous Brand” Chinese spirits are off limit to foreign capital, such as Mao Tai (茅台) and Wu Liangye(五粮液). Luckily, Shui Jing Fang (水井坊) isn’t one of them and that’s why the deal is possible under current foreign investment regime.

Brand is also relevant to market entry analysis in merger review. In its published reasoning of not clearing the Coca-Cola/Hui Yuan deal, MOFCOM cited that the post-merger Coca-Cola may greatly enhance its market power by controlling two well known brands: Mei Zhiyuan（美知源）owned by Coca-Cola and Huiyuan (汇源) owned by Huiyuan. According to MOFCOM, Coca-Cola’s ownership of two most famous brands in Chinese fruit market would constitute a formidable market entry barrier, lessening the restraint of potential market entry on Coca-Cola’s perceived inclination to raise price post merger. However, that concern is not applicable in the present case, because Diageo doesn’t compete in the Chinese white wine market.

The high brand recognition of Shui Jing Fang（水井坊）may also pluck the nerve of Chinese authorities’ industrial policy considerations. According to MOFCOM’s recently published Measures on Review of Concentrations of Undertakings, it may consult with and seek opinions from, among others, relevant government authorities and industry associations. It indicates that MOFCOM does not operate in an institutional vacuum. As a matter of fact, in its published opinions on two high profile cases, i.e., InBev/Anheuser Busch and Coca-Co/Huiyuan, MOFCOM mentioned that it did receive inputs from other relevant government authorities. Thus this gives rise to legitimate concern whether MOFCOM’s competition-oriented policy is subject to influences from other government bodies which harbor industrial policy concerns.

There are several indications that brand name factor is an important dimension in Chinese industrial policy. For example, the Outline of the National Intellectual Property Strategy, released by the State Council in 2008, makes reference to famous brands for Chinese companies as strategic goal of government action. Also, in the pre-AML period, when acquisition of Chinese companies by foreign investors was regulated under the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, MOFCOM required a separate filing procedure where the acquisition involved the “transfer of actual control in a domestic company holding famous trademarks or time-honored Chinese trade names.” From the above it is clear that China’s industrial policy aims to promote the creation and preservation of famous brand names by Chinese companies. It’s hard to predict whether the concern will not have an effect on MOFCOM’s final calculus.

However, that concern can be somehow allayed in this case by the supposition that Diageo lacks motives to hurt the brand name of Shui Jing Fang. In a highly brand-conscious spirits market in China where the price is determined by the extent of brand recognition and the perceived status it represents, Diageo has every commercial incentive to invest in the promotion of the brand in Chinese market. As illustrated in the above, premium Chinese white wine is a highly protected industry. Shui Jing Fang is probably the only choice left to Diageo to invest in the Chinese rapidly expanding premium market. Further, Diageo doesn’t compete in the Chinese white wine market. Thus it gains no economic interest to take the brand out of the market, as a direct competitor would otherwise do. Diageo’s CEO in charge of Chinese market is also quoted to say that it intends to enhance the market presence of Shui Jing Fang in foreign markets. If so, why not let the foreign customers get their share of China’s oldest white wine?

Brief Summary of Circumstances of Terminating an Insurance Contract by Insurance Companies

Dr. Zhan Hao — Thu, 04 Mar 2010 08:56:09 +0800

Where the law stipulates or conditions that the parties to a contract agree on are met, an insurance contract may be rescinded if the parties to the contract reach a consensus through consultation or either a party to the contract executes the termination right to cancel the insurance contract. Usually, without consent of insurance companies, the insured may cancel the insurance policy unilaterally at any time. That because the insureds buy an insurance product is to protect them from unknown risks, so they have right to choose how and when to protect themselves. The Insurance Law (2009) stipulates that otherwise stipulated by other laws and regulations, or agreed by both parties in insurance contract, after the formation of insurance contract, the insurance contract may be rescinded by the insured. On the contrary, to protect the interest of insureds, the Insurance law (2009) generally prohibits the insurer to terminate the contract casually. Only under some special circumstances, the insurer may be allowed to cancel the insurance contract. Here we simply give a brief summary of those circumstances.

1. Right to terminate the contract given by statute

（1）Provided by Insurance Law (2009) Article 16, if the policy applicant deliberately, or due to gross negligence, fails to perform its obligation of disclosure as mentioned in the preceding paragraph which failure could influence the insurer on its decision as to whether or not to agree to insure or whether or not to raise the premium rate, the insurer shall have the right to terminate the insurance contract.

（2） Provided by Insurance Law (2009) Article 27, if an insured event has not occurred but the insured or beneficiary falsely claims that such an event has occurred, and lodges a claim with the insurer for the payment of indemnities or insurance benefits, the insurer shall have the right to terminate the contract and not return the insurance premiums.

（3）Provided by Insurance Law (2009) Article 27, if the applicant or the insured deliberately causes an insured event, the insurer shall have the right to terminate the contract and shall not be liable for the payment of indemnities or insurance benefits. Unless otherwise provided in Article 43 of Insurance Law (2009), it will not refund the insurance premiums. Article 43 of Insurance Law (2009) provides that if the applicant deliberately causes the death, injury, disability or illness of the insured, the insurer shall be liable for payment of insurance benefits. Where the applicant has already fully paid insurance premiums for two or more years, the insurer shall refund the cash value of the insurance policy to the other entitled beneficiaries in accordance with the contract.

（4）Provided by Insurance Law (2009) Article 32, if the age of the insured reported by the applicant is false and the insured’s true age does not comply with the age restriction specified in the contract, the insurer may terminate the contract and refund, in accordance with the contract, the cash value of the policy.

（5）Provided by Insurance Law (2009) Article 36 and 37, if the personal insurance contract provides for the payment in installments of the insurance premium, and the applicant, after payment of the initial installment of the insurance premium, fails to pay an installment within 30 days after the date of a reminder from the insurer or within 60 days after the specified time limit, the validity of the contract shall be suspended or the insurer shall reduce the insured amount in accordance with the conditions specified in the contract, unless otherwise provided in the contract. If the validity of the personal insurance contract is suspended, its validity shall be restored after the insurer and the applicant reach agreement thereon through consultations and the applicant pays the outstanding insurance premium. However, if the parties fail to reach an agreement within two years from the date on which the validity of the contract was suspended, the insurer shall have the right to terminate the contract.

（6）Provided by Insurance Law (2009) Article 49, if the transfer of the insured object of property insurance contract appreciably increases the degree of risk, the insurer may, in accordance with the contract, increase the insurance premium or terminate the contract within 30 days of the date of receipt of the notice of transfer. If the insurer terminates the contract, it shall refund to the proposer the insurance premium collected minus, in accordance with the contract, the portion to which it is entitled for the period between the date of commencement of its insurance liability and the date of termination of the contract.

（7）Provided by Insurance Law (2009) Article 51, if either the applicant or insured fails to fulfill its/his/her due diligence requirements towards the safety of the subject matter of insurance in accordance with the contract, the insurer shall have the right to request an increase in the insurance premium or terminate the contract.

（8）Provided by Insurance Law (2009) Article 52, if the degree of risk to the insured object increases appreciably during the term of the contract, the insured shall notify the insurer in accordance with the contract in a timely manner and the insurer may, in accordance with the contract, increase the insurance premium or terminate the contract. If the insurer terminates the contract, it shall refund to the proposer the insurance premium collected, minus, in accordance with the contract, the portion to which it is entitled for the period between the date of commencement of its insurance liability until the date of termination of the contract.

（9）Provided by Insurance Law (2009) Article 58, If part of the insured object suffers a loss, the applicant may terminate the contract within 30 days of compensation from the insurer; and, unless otherwise provided by the contract, the insurer may also terminate the contract but shall notify the applicant 15 days in advance. If the contract is terminated, the insurer shall refund to the applicant the insurance premiums for the portion of the subject matter of insurance that did not suffer a loss, minus, in accordance with the contract, the portion to which it is entitled for the period between the date of commencement of its insurance liability until the date of termination of the contract.

2. Right to terminate the contract given by contract

As provided by Article 15 of Insurance Law (2009), the parties to insurance contract may agree in the insurance contract the specific cancellation circumstances. In practice, many insurance companies will use this article to enlarge their right to terminate the contract. They may set some contractual rights to terminate the contract in standard form contract. For example, in some property insurance contracts, parties may agree that if the applicant or insured fails to maintain the security of insured object, the insurer may terminate the contract.

The Subjects of Insurance Funds Investment in Stock Market

Dr. Zhan Hao — Tue, 02 Mar 2010 09:47:21 +0800

According to the Administration of Stock Investments by Insurance Institutional Investors Tentative Procedure (hereinafter referred to as “Tentative Procedure”),as the “insurance institutional investors”, qualified insurance companies and insurance asset management companies are entitled to invest in stocks. Insurance companies include the insurance group companies and the insurance holding company. The difference of qualification requirements for insurance companies and insurance asset management companies[1] is, if the insurance asset management companies satisfy article 5 of the Tentative Procedure, they can invest in stocks directly without CIRC’s approval and if the insurance companies satisfy article 7 of the Tentative Procedure and get approval from CIRC, they can invest in stocks directly as well.

For some medium and small sized insurance companies failing to get approval from CIRC for direct investment in stocks, if they satisfy article 6 of the Tentative Procedure, they can trust a qualified insurance asset management company to invest in stocks on behalf of them.

For the qualified insurance institutional investors, there are nine insurance asset management companies including PICC Asset Management, China Life Asset Management, Ping An Asset Management, China Re Asset Management, CPIC Asset Management, New China Asset Management, Tai Kang Asset Management, Hua Tai Asset Management and China Tai Ping Asset Management. Additionally, AIA China is a special one. As the branch of foreign insurance company, AIA China was approved by CIRC to establish an insurance funds use centre to invest in stocks directly. For qualified insurance companies approved by CIRC to invest in stocks directly, there are Union Life, An Bang Insurance, Chang Jiang Pension Insurance and Sunshine Insurance. These four insurance companies establish insurance funds use center to deal with the stock investment issues rather than by internal investment department. This insurance funds use center is regarded as interim for establishing their own insurance asset management companies.

[1] According to the Tentative Administrative Provision for Insurance Asset Management Companies, at least one of the shareholder or sponsor of the insurance asset management companies shall be insurance company or insurance holding (group) company.

The Issuing of Subordinated Debt of Insurance Companies in China

Dr. Zhan Hao — Thu, 25 Feb 2010 11:23:37 +0800

As we all know, capital is crucial for insurance company. Only with enough funds can an insurance company have ability to cover the exposures. With adequate capital, an insurance company may better develop the business, i.e. release more ads, or establish more branches, to make more profits. It is possible that during the operation, an insurance company has no sufficient capital to support its business, and under such circumstance, the insurance company will need to raise funds to replenish its capital.

Generally speaking, there are four ways for an insurance company to supplement its capital:1. IPO or Seasoned Equity Offering; 2. getting additional investment by current shareholders; 3.getting money from private offer; and 4. allotting subordinated debt. For Chinese insurance companies, the first three ways may encounter hurdles or difficulties in practice. First of all, IPO is not easy for insurance companies, because many of them, especially small and medium-sized insurance companies, may not be able to meet the high standard of IPO. Secondly, current shareholders may be more willing to use financial vehicle, rather than funds of their own, to run the insurance company. It might be very difficult to raise money from current shareholders. Lastly, due to the financial crises, many institutions have insufficient funds to make the investment. Then issuing subordinated debt becomes a practical option for many insurance companies. According to the CIRC, 10 insurance companies were approved in 2009 to issue subordinated debt. The total amount of debt reaches RMB 18 billion.

Subordinated debt may have its advantages for Chinese insurance companies under current Chinese insurance law framework. First, the reimbursement of such debt shall be subordinate to the insurance coverage and other debts, but superior to the security capital of the company. That is to say, the interests of the insured will be fully protected. Secondly, the cost of issuing subordinated debt is low in China. Thirdly, subordinated debt may offer insurance company with long term fund support, because such debt should not be reimbursed in a fixed term.

According to the Interim Measures for the Administration of Subordinated Debt of Insurance Companies, the following points are worthy of being underscored:

▲ Insurance companies, including domestic company, joint venture and foreign insurance companies in China are all qualified to issue subordinate debt;

▲ The issuing of subordinated debt should be approved by the CIRC and must be to targeted sources;

▲ The term of the debt may not be less than 5 years;

▲ The funds raised by the debt can be used only for the reported purpose.

An insurance company must meet the threshold provided in the Interim Measures for the Administration of Subordinated Debt of Insurance Companies, when it applies for allotting subordinated debt:

▲ The audited net assets should be no less than RMB 500 million;

▲ After issuing the debts, the aggregated unpaid principal and interest should not be exceeding the unaudited net assets of last year;

▲ Having good corporate governance structure;

▲ Having good internal control system and all the internal control regulations have been strictly complied with;

▲ The capital and asset does not be impropriated by the natural person, legal person, or other institutions and their affiliated parties;

▲ No serious violation of law or regulations in the last two years; and

▲ Other conditions set by the CIRC.

A Look At the New Rule On Financial Integrated Operation: From the Perspective of Competition Law

Dr. Zhan Hao — Mon, 22 Feb 2010 09:17:09 +0800

On November 26, 2009, China’s Banking Regulatory Commission (CBRC) issued the Pilot Administrative Measures for Commercial Banks to Make Equity Investment in Insurance Companies (the “Measures”). The Measures cover several key aspects of commercial banks’ equity investment in insurance companies, i.e., market access, risk control and regulatory supervision. Its enactment marks the official recognition of cross-sector operations within the banking and insurance industries. By and large, the Measures establishes the regulatory framework for enhanced partnership between the banking and insurance industry. Interestingly though, it has streaks of competition law in its provisions, which has the effect of fostering healthier competition in the future financial market of integrated operation.

First, the Measures prevent interlocking directorates. Article 10 provides that senior managers (including but not limited to president, vice president and CFO) appointed by investing commercial banks to sit in invested insurance companies must terminate salary and labor contract with the investing commercial banks. They shall not hold offices in both the investor and the investee. Couple that with the Measures’ requirement that each commercial bank may invest in only one insurance company and one can clearly see that the Measures are strict with the anticompetitive risk of interlocking directorates posed on financial sector. From the view point of antitrust law, the potential danger with interlocking directorates is that it will hypothetically enable or cause otherwise competing companies to coordinate their activities through common directors. For instance, a controlling bank investor may appoint the same group of persons to sit in both boards of directors of the two investee insurance companies. The directors may cause the competing insurance companies to engage in collusive activities. Through severing the interest relationship between the appointed senior managers and the investor banks and one-bank-one-insurance-company requirement, the Measures ensure that the anticompetitive risks brought by interlocking directorates are minimized.

Second, the Measures prohibit tying and bundling. Article 12 provides that investor commercial banks must not require customers to purchase the products of the investee insurance companies as a precondition of furnishing banking services. Tying and bundling without legitimate justifications are prohibited by the Anti-Monopoly Law of PRC. To be liable, the perpetrator must have market dominant position in the relevant markets. The dominance requirement, however, is absent in the Anti-Unfair-Competition Law of PRC. Thus, the two laws are broad enough to catch all bundling and tying committed by commercial banks with investments in insurance companies, regardless their market status. Article 18 further prohibits investee insurance companies from selling insurance products at the premises of investor commercial banks to some extent. As one commentator points out, reading the two provisions together reveal the law maker’s intention to protect consumers’ choice, enhance competition in financial markets and prohibit the combination of market powers from the different financial sectors.

Last but not the least, the Measures forbid discriminatory measures that may be taken by investor commercial banks to the similarly situated clients. Article 12 provides that investor commercial banks must not provide credit against insurance policy as security in terms more favorable to those issued by investee insurance companies than by non-affiliated parties.

Corporate Governance Structure of Insurance Companies

Dr. Zhan Hao — Sat, 20 Feb 2010 12:05:03 +0800

The shareholders’ qualification and the appointment qualification of directors, supervisors and senior management personnel of an insurance company shall, in accordance with the Provision on the Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies newly revised by CIRC on January 8^th, 2010 and Administration of Insurance Companies Regulation newly revised by CIRC on September 25^th, 2009 and other regulations, be submitted to CIRC for examination and approval thereof. If they fail to perform their duties or there are significant negligence of duty, CIRC may order the insurance company to replace such personnel or cancel their appointment qualifications.

The insurance company’s directors, supervisors and senior management personnel shall strengthen their learning of the related information and capabilities and take part in training in accordance with relevant regulations.

The significant resolutions of the shareholders’ general meeting and the board of directors of an insurance company must be submitted to CIRC within thirty days after such resolution have been made.

The insurance company’s board of directors shall submit to CIRC the internal control evaluation report, risk evaluation report, regulation compliance report and others each year.

The internal control evaluation report shall include the implementation circumstance of the internal control system, the existing problems, the corrective and improvement measure and others. The risk evaluation report shall contain the evaluation of the insurance company’s solvency risk, investment risks, product pricing risks, provision of reserve funds risk, interest rate risk and others as well as corrective and improvement measures thereof. The regulation compliance report shall include significant non-compliance matters, the problems existing in regulation-compliance management, the corrective and improvement measure and others.

2010 Shall Be An IPO Year For Insurance Companies

Dr. Zhan Hao — Wed, 17 Feb 2010 12:21:30 +0800

During Christmas holiday of 2009, China Pacific Insurance (Group) Co., Ltd was listed in the Stock Exchange of Hong Kong Limited, with the stock code”02601” and the stock name of “CPIC”. It became the forth insurance companies which were listed in foreign Stock Exchange in China. The other three are PICC, China Life, Ping An Insurance. The IPO of CPIC gives more hope for insurance companies to IPO in 2010. PICC just finished the reform to establish a joint stock system for enterprises and its CEO Wu Yan said in public that PICC will choose appropriate time to be listed in A share in future. Besides, China Reinsurance (Group) Corporation, Tian Ping Insurance Company, New China Life Insurance Company all show their ambitious to IPO. It can be seen in 2010 that we will face to a wave of insurance companies IPO in 2010.

Just like other companies, insurance companies need large capital to assure the security of operation. Adam Smith said in its well-known An inquiry into the nature and causes of the wealth of nations, Volume 2 :

“The trade of insurance gives great security to the fortunes of private people, and, by dividing among a great many that loss which would ruin an individual, makes it fall light and easy upon the whole society. In order to give this security, however, it is necessary that the insurers should have a very large capital.”

That means an insurance company shall have larger capital than normal business company. In principle, those capitals shall make sure public believe that the insurance company is “insured” and it has enough solvency capability. The capital of an insurance company shall match with the risks which it controls. Then, IPO is a good way to find more capital for rapidly developing insurance companies. Through IPO, the insurance company can own those capitals permanently without return and also can increase its stock finance revenue by issuance shares at a price above par value.

However, those four insurance companies which were listed in A shares or H shares are not lacking of capitals. “They were listed to get a name of “insurance shares” which is rare right now and for a better competitiveness”, an insider of insurance company said. IPO for an insurance company can improve its inter control management, increase its insolvency capability, enhance its risk resistance capacity and promote its name. From that view, IPO for an insurance company is not only a way for finding capitals but a fantastic opportunity to reform and improve.

Although, the voice of IPO is high, some professionals still express cautiously optimistic. Since a long time, for whole insurance industry, the capital market is a necessary part. At the moment, many insurance companies have low profits or even loss, especially for property insurance companies. In the last three years, the amount of loss of domestic property insurance companies almost equals with theirs net worth. Most of property insurance companies feed on investment revenue and capital supplement. In one word, those insurance companies can not be survived by premium. As an insurance company, it is terrible that insurance business is not the pillar business. Here is the problem, what shall those insurance companies do when they are listed and get so much money? Do they still use the money to invest or use the money to build up its insurance business? If it is the former, we should say the IPO is not good for the insurance industry eventually. China insurance companies need to be more mature to use money properly.

Two Antitrust Cases in Insurance Law Area

Dr. Zhan Hao — Sun, 14 Feb 2010 13:42:07 +0800

I focus mainly on two legal areas: insurance law and anti-monopoly law. Both these two areas experienced a dramatic progress in 2009. In my personal practice, I see some interesting overlapping of these two areas. In this article, I will address two cases in vehicle insurance market regarding the accusation of violation of China Anti-Monopoly Law (AML).

Background: the current competition in vehicle insurance market

Because China insurance market is still under developed, vehicle insurance is one of the core businesses of the property insurance companies now. There are many insurance companies who can provide vehicle insurance, and in order to gain advantage in competition, many insurance companies have to employ low price strategy. This strategy leads twofold outcomes, on one hand, the consumer may purchase vehicle insurance at a preferential price; on the other hand, the normal competition order is hard to be established

Case 1, Insurance Association of Chongqing was sued for fixing the price

In 2009, Insurance Association of Chongqing was sued for fixing the price thus violates the China Anti-Monopoly Law (AML). In 2009, Insurance Association of Chongqing promulgated the Self-discipline Regulation on Chongqing Vehicle Insurance Industry. This regulation stipulates that the discount the insurance companies offer should be no more than 20%, otherwise the companies will be punished. According to Article 16 of AML, any trade association may not organize the business operators in its own industry to implement the monopolistic conduct as prohibited by AML. Furthermore, Article 13 of the AML prohibits the competitors from fixing the price through monopoly agreements. The notice of the Insurance Association of Chongqing has directly fixed the price and such conduct can be deemed as a violation of the AML.

Case 2, Some local insurance association were accused of engaging in monopoly agreement as to divide the market.

The function of the Insurance Association is challenged once again in 2009. According to the CIRC’s Notice, it had received some claims on the co-underwriting model on vehicle insurance. The nature of such kind of cooperation is to divide or assign the market shares, thus restrict the competition amongst the property insurance companies and keep a higher price. According to the claims, such action was under the organization of local Insurance Associations. According to Article 13 of AML, the competitors should not engage in monopoly agreement on dividing the selling market or purchasing market of raw materials. The associations are strictly prohibited from facilitating the formation of such agreements.

Arguments raised by Insurance Association

The insurance association argues that according to global antitrust experience, the insurance industry should be exempted from antitrust law. For example, in EU, some agreements and concerted actions amongst insurance companies are exempted from antitrust review, in consideration of the special nature of insurance industry on managing risks and promoting public welfares.

Besides international experience, the insurance association also bases its arguments on the local experience. According to the association, the character of China Insurance Association and its local branch, as many of other associations in China, may not be so simply as organizations formed by the business operators of the same industry sector. Theoretically speaking, insurance association is a self-discipline and none-profit organization with no compulsory power over its members. However, China Insurance Association is supervised by the CIRC, and as a supplementary administrative measure, it has carried on some supervision powers which are authorized to administrative institution.

Due to the chaos and unhealthy price competition in the vehicle insurance market, China Insurance Association and its local offices argue that some of their anti-competition conducts are justified by the goal.

Competition is the best medicine

It is true that the insurance market is under developed in China. It is also true that in today’s Chinese insurance market, the insurance association should carry on parts of administrative power. However, competition is always the best medicine to the development of the mature market. The insurance association should know where the red-line between the administrator and the servant to the business operators is. In China, some of the current conducts which was undertook by insurance association can not be justified by the goal and may not be exempt from anti-monopoly law.

Will Rio Tinto and BHP Billiton Make It This Time? A Few Comments From The Perspective Of Antitrust Law

Dr. Zhan Hao — Mon, 08 Feb 2010 10:04:35 +0800

On 25 January 2010, European Commission said that it is ready to review a plan by the world’s second and third largest iron ore miners, Rio Tinto and BHP Biliton, to combine some iron ore mining operations in Australia. The European antitrust watchdog said that it would investigate whether the companies’ plan to pool iron ore mining in western Australia would affect the global prices or supply for iron ore transported by sea, known as seaborne iron ore. The Commission set no deadline for completion of the investigation, citing the complexity of the case, cooperation from the companies involved and exercise of the rights of defense, among other factors, to justify the open-ended time limit.

The transaction only involves formation of production joint venture between Rio Tinto and BHP Biliton in Western Australia. The joint venture will be responsible for mining iron ores without Rio Tinto and BHP Biliton’s participations. The output of iron ore will be transferred to the two parent companies and marketed separately. This transaction came after the complete takeover bid for Rio Tinto by BHP in 2008. But it was aborted because of the intensifying financial crisis around the globe. The joint venture project was announced in June, 2009.

According to Reuters report, the two parties originally hoped that the transaction would obtain EC clearance by the middle of 2010. They now project the deal to be cleared towards the end of the year. The expected delay is due to the leadership transition going on in the European Commission—Netherland’s Neelie Kroes, former competition commissioner is replaced by Spain’s Joaquin Almunia. Despite the significance of the joint venture for the international iron ore and steel trade, it is not likely to be prioritized by the new commissioner, who will probably devote much of his attention and the administrative resources to deal with restructuring the European economy from the angle of competition policy.

Can China Review the Transaction?

Iron ore is distributed globally. Each year, the world’s largest three suppliers of iron ore, namely, Companhia Vale do Rio Doce of Brazil (“Vale”), Rio Tinto and BHP Billiton, engages in vigorous negotiation with worldwide iron ore users on, among other terms, price for next year’s supply. China has risen as a super powerhouse of economic growth. With that has come China’s huge demand for iron ore. If the transaction gets completed, China will have a harder time getting a good price for future iron ore supply. Given China’s position as a large stake holder in the transaction, one is tempted to ask if China can scrutinize the transaction.

Theoretically speaking, the answer is affirmative. In line with all major antitrust law jurisdictions, China’s Anti-Monopoly Law (AML) has extraterritorial jurisdiction: insofar as economic activities in foreign territories affect competition in relevant market in China, AML applies. Given the two companies’ giant international operations and the significant iron ore trade volumes with China, the transaction can easily surpass the turnover threshold. Given that, whether the transaction triggers concentration review in China then depends on whether the joint venture in production constitutes “concentration” within the meaning of AML.

In March 2009, Ministry of Commerce, the Chinese concentration regulator, released a draft of Measures on Concentration Filing for public opinion. The draft expressly provided that establishing joint venture by two companies is a form of concentration within the meaning of AML. However, the finalized version of the Measures, issued in November 2009 and effective on January 1 2010, deleted the provision on formation of joint venture as concentration. Instead, it merely sets forth three occasions as giving rise to concentration: (1) merger; (2) acquiring control over other undertakings by purchasing equity shares or assets; (3) acquiring control over or exerting decisive influence on other undertakings through contractual arrangement. On a superficial reading, formation of joint venture doesn’t fall into any of the three occasions giving rise to concentration. However, it doesn’t take much to understand that the second scenario, i.e. acquiring control over other undertakings by purchasing equity shares or assets, is broad enough to cover establishing joint venture. To read joint venture as a form of concentration is also consistent with the fundamental rationale why certain concentrations should be scrutinized by antitrust law, because they bring about long-lasting structural change in the competitive landscape of the market. By merging productions of iron ore into one entity, Rio Tinto and BHP Billiton recede from the production markets they occupied previously. Thus the market structure is permanently changed. What’s more, on a practical front, the Ministry’s practice is to treat joint venture as concentration. What’s done is that parties involved in forming joint venture are encouraged to conduct pre-filing consultation with the Ministry. After hearing the descriptions, the Ministry usually offers its opinion, in no writing, whether the joint venture constitutes concentration or not.

However, hypothesis may be paled by reality in this case. Granted, China can proceed to scrutinize the transaction under AML no matter the companies filed submission or not. The Ministry can even slap serious measures against the two companies, including divestiture of the newly formed joint venture, should they illegally carry forward the transaction. However, the ruling is unenforceable, because Rio Tinto and BHP Billiton don’t have many meaningful assets for enforcement in China—their commercial presence in China is limited to set-up of offices. That’s why, according to media report, Chinese steel makers are teaming up to go to Europe and address their opposition to the transaction to the European Commission, instead of doing that home.

Several Issues in the EU Investigation

A. Market Definition

The first issue relates to the product market definition in EU’s probe. From the antitrust perspective, the initial step in concentration review is to define the product market. Products found to form a product market are substitutable with each other. Differently put, they are in competitive relationship with each other. Often, a product market consists of aggregate of all substitutable products with no qualification. Then why in the EU’s probe, the focus is on iron ore transported by sea? According to a public report, of all the iron ores produced globally in 2007, over half was exported and traded via sea freight. Much of the iron ore that is not exported is produced at mines with integrated or co-located steel-making facilities. Iron ore mines that are co-located with, or wholly owned by steel makers and iron ore mines that do not have access to appropriate transport infrastructure are unlikely to provide an effective competitive constraint on iron ores transported by sea. Therefore, it is a sound approach for the European Commission to zoom in on what’s called the seaborne iron ores.

B. Full-function Joint Venture?

The second issue relates to whether the transaction in question is a full-function joint venture. According to EU merger regulation, a full-function joint venture has elements of independence, permanence and joint control. Otherwise, a joint venture is not regarded as full-function joint venture, thus not subject to merger regulation. Rather, it is taken as coordination between parent companies, reviewed by rules applicable to horizontal agreements. The distinction makes sense because sometimes, a joint venture can be utilized as a sham to facilitate anti-competitive coordination between parent companies. In one extreme example, two competitors form a joint venture which handles marketing of the goods produced by the parent companies. Through the joint venture, the two competitors engaged in coordination of prices, which is tantamount to horizontal price fixing agreement. In most antitrust jurisdictions, this type of agreement is illegal in its own right.

How to determine the absence of coordination between the parent companies in forming joint ventures? According to EU merger regulation rules, if there is no risk of coordination, it is because the parent companies withdraw from the market on which the joint venture operates and there is no possibility of them re-entering it for a certain period of time. Clearly the test in this case is whether the two parent companies have withdrawn from the market on which the joint venture operates. To recall, the Rio/BHP joint venture only covers mining iron ore in Western Australia. Marketing of the produced iron ore will be kept separate by the two companies. To determine whether BHP Billiton and Rio Tinto have completely and genuinely receded from the production market of iron ore, EU will look to a number of elements, which include (1) whether there are non-competition clause in the joint venture agreement that prevent the two parent companies from engaging in mining activities (the existence of non-competition clause is an indicator that the parent companies decide to withdraw from the market which is occupied by the joint venture); (2) whether there are contracts that concern the transfer of relevant property rights necessary for carrying out mining activity by the joint venture (if not, it is hard to believe that the joint venture has the necessary capability to operate in areas defined by the joint venture agreement) and (3) whether there exist barriers or deterrent to market re-entry by parent companies, such as excessive economic cost of re-entry (Excessive economic cost of re-entry may dampen the incentives of parent companies to re-enter the market and compete with the joint venture, indicating that the parent companies are serious about withdrawing from the joint venture’s market).

C. Coordinated Anticompetitive Effects

After the joint venture in question is certified by EU as a full-function joint venture, it will be scrutinized under EU’s substantive merger regulation rules. One test the transaction will be subject to is whether the formation of the joint venture facilitates tacit or express collusion between Rio Tinto and BHP Billiton in selling iron ores separately. Alarm goes off if the joint venture is likely to increase the likelihood of coordination among Rio Tinto, BHP, Vale and other sellers in marketing iron ore in the international market or the joint venture increases the likelihood that any existing coordinated interaction among the said sellers would be more successful, complete or sustainable.

To determine whether a certain transaction increases the danger of tacit or express collusion is a multi-factor integrated analysis. Generally speaking, the following factors are relevant to the determination:

(1) Relatively high barriers or impediments to entry: High barriers to entry prevent the collusion from being undermined by new market entrants, which are attracted by the raised price due to the collusion.

(2) A relatively high level of concentration: High level of concentration means fewer competitors. The fewer competitors, the easier it is to form and manage collusion.

(3) A low level of product differentiation: Lower level of product differentiation facilitates collusion because it is easier for competitors to reach agreement over the price increase and output restriction.

(4) A relatively inelastic demand for the products in question: A more inelastic the demand is, the less alternative choice a customer has to switch to in response to collusive price increase.

(5) Similar cost-price ratios in the industry: Again, the more similar is cost-price ratios, the easier it is for competitors to reach agreement over standard price increase and output restriction.

(6) A large number of small buyers: It means the collusion faces less countervailing power occasioned by large buyers.

(7) A high degree of transaction frequency and visibility: the more frequent and visible are the transactions in market, the easier to detect defectors who cheat on the collusion and exercise discipline.

(8) Relatively stable and predictable demand and supply conditions: It means it is easier to keep the collusion stable, without being undermined by the fluctuating market conditions. It also means that competitors tend to have less incentive to deviate from the collusion.

Without delving into detailed facts, iron ore industry is pretty much consistent with the above conditions. For example, market barrier in iron ore market is high, because it involves discovery of new, commercially viable iron ore mines and building infrastructures to haul the mines to sea ports. The seaborne iron ore market is also highly concentrated. It is reported that the three largest global supplier of irons ores, Vale, Rio Tinto and BHP Billiton, control 70% of the market. Iron ores are relatively homogeneous, as compared with other types of commodities. Steel making’s demand for iron ore is also highly inelastic, because only iron ore can be used to produce steel. Through the joint venture, Rio Tinto and BHP Billiton achieve equal production cost. With full knowledge of each other’s production cost, the two companies will find it easier to reach tacit agreement over the final price. To sum, the two companies have highly similar operations in terms of the quality of deposits, scale, cost base and distance to key customers. The danger of coordinated anticompetitive effects arising out of the joint venture is not to be ignored.

D. Efficiency Justification

Under EU merger regulation rules, despite the anticompetitive potential a transaction entails, in theory, it can be justified by efficiency derived from the transaction that balances out the anticompetitive effects. To do so, the efficiencies must benefit consumers, be merger-specific and be verifiable.

In its public announcement that unveiled the transaction, Rio Tinto and BHP Billiton cited synergy as underlying the transaction. Namely, the synergies are anticipated to come from (1) combining adjacent mines into single operations; (2) cost reduction; (3) capital utilization efficiency and (4) management efficiency.

Without necessary facts and datas, it is difficult to verify the assertion. However, at this stage, it suffices to ask even though the claimed synergies can be achieved through the formation of the joint venture, will consumers get their share of benefit? To recall, the transaction entails no small risk of coordinated anticompetitive effects. If it happens, consumers will suffer by having to pay higher price to purchase iron ores, not to mention that they will get a lower price. Unless Rio Tinto and BHP Billiton can prove and gurantee that the transaction will necessarily benefit consumers and in what form, the efficiency justification should not be available.

CIRC Published New Measures for Administrative Reconsideration of CIRC

Dr. Zhan Hao — Fri, 05 Feb 2010 13:55:35 +0800

Considering new problems generated in recent years, CIRC revised current Measures for Administrative Reconsideration of CIRC (hereinafter as “Old Measures”), and published the new one (hereinafter as “New Measures”). The New Measures has changed some significant aspects of procedures of administrative reconsideration and it will be effected from 1^st of March.

1. The New Measures has changed the scope of administrative reconsideration. The Old Measures listed six circumstances under which citizens, insurance institutions and other legal persons or organizations may apply administrative reconsideration. The New Measures, however, changes the way of representation, and replaces with a broader concept. It stipulates that “Citizens, legal persons and other organizations may apply to CIRC if they consider that their lawful rights and interest have been infringed upon by a specific administrative act made by CIRC and its dispatched organizations, providing that this specific administrative act meets the requirement of Article 6 of Administrative Reconsideration Law of China.”

2. The New Measures adds specific articles on scope of applicants. If a partnership enterprise applies for administrative reconsideration, the applicant shall be the registered enterprise and the executive partner shall represent the enterprise to participate the application. If the General Shareholders’ Meeting or Board of Directors thinks CIRC or its dispatched organization infringe the legal rights of enterprise, they can apply administrative reconsideration in name of enterprise. Additionally, after approving by CIRC, any citizen, legal person or other organization who has interests with the specific administrative act may participate the administrative reconsideration as the third party.

3. The New Measures adds new contents concerning letters and visit. In recent years, CIRC received many administrative reconsideration applications, but those applications were in fact complaints. Usually, CIRC deals with complaints by letters and visit system which citizens and organizations can write to or call at relevant departments of CIRC to complain. In the past, if CIRC received the application of administrative reconsideration which is in deed a kind of complaint, CIRC had to call applicant to withdraw the application and raise letters and visit proceeding. Now, under the New Measures, CIRC can directly transfer the application to letters and visit dealing department. The new method may use manpower and material resources sparingly.

4. The New Measures adds two circumstances of refusing to accept application. If the applicant applies for administrative reconsideration because the respondent doesn’t perform his/her duty, but after dealing with application, CIRC finds that the respondent does not have such duty or has performed the duty, CIRC may refuse the application. And, if CIRC finds the application does not meet the requirement of Administrative Reconsideration Law of China, Regulation on the Implementation of the Administrative Reconsideration Law of China and this New Measures, CIRC may refuse the application.

5. The New Measures strengthens the supervision on administrative officers. It clarifies that the administrative reconsideration department is entitled to suggest human resources and supervision department to punish on administrative officers who has illegal acts. It is also entitled to directly transfer relevant materials of administrative officer who has illegal acts to relevant supervision departments.

According to the New Measures, citizens, insurance companies and other relevant organization may protect their legal rights efficiently and the CIRC also can establish a better supervision system on insurance industry.

Revised Provision On The Qualifications Of Directors, Supervisors And Senior Managers Of Insurance Companies Published

Dr. Zhan Hao — Wed, 03 Feb 2010 10:17:47 +0800

The new revised Provision on the Qualifications of Directors, Supervisors and Senior Managers of Insurance Companies was published by CIRC and it will be effected on 1^st of April. It could be seen as a storm of supervision blowing from CIRC at the beginning of the year. This provision adjusts the scope and manners of CIRC’s qualification management system, strengthens the qualification of directors, supervisors and senior managers, and improves the long lasting supervision regulation.

Firstly, the CIRC’s qualification management system has extended its scope of approving and changed the supervision method of senior mangers management. Now, supervisors and the head of auditing of insurance companies need to be checked and approved by CIRC under the new provision. For the aspect of senior managers management method, the examination and approval system has transited to check and approval system. Additionally, the supervision method for mangers of branch companies and sales departments has changed from reporting system to check and approval system.

Secondly, this provision strengthens the requirement of compliance to make the setting of qualification more strategic and appropriated. For example, a qualified general manager of insurance company shall have 8 years financial experiences or 10 years economic experiences rather than 5 years financial experiences or 8 years economic experiences as stipulated in old provision and he/she must have insurance experiences before. Further more, this provision adds an insurance legal and relevant knowledge test for all directors, supervisors and senior managers. However, for introducing high quality elite into this industry, this provision also set a general item that all persons who has desired knowledge, capability and experiences could be the general manager without restrains of working length and education level.

Finally, in order to avoid the problem of “focusing on check and approval but ignoring supervision”, this provision details the long lasting supervision system of directors, supervisors and senior managers. It clarifies the principal of auditing on the departure of Principal of board of directors and senior mangers and requires directors, supervisors and senior mangers to attend the training held by CIRC. In addition, under the new provision, CIRC will establish a complete directors, supervisors and senior mangers management information system. This system will record all basic information of all directors, supervisors and senior managers including basic application materials, position change information, auditing reports on departure, risk warning letters, CIRC talk records, criminal and administrative penalty records and other required information by CIRC. Those records will be seen as evidence for supervising frequent job-hopping of senior managers. Besides from above-mentioned changes, this provision also completes circumstances of suspending position and appointing interim person in charge.

The new provision sets new qualification requirements for directors, supervisors and senior managers. Therefore, it must be good for insurance institutes to improve its staff quality and internal control system. The insureds will also get benefits from the developing of insurance industry.

The First Chinese Seller/Buyer Warranty And Indemnity Insurance Policy Is Underway

Dr. Zhan Hao — Thu, 28 Jan 2010 11:47:12 +0800

The Seller/Buyer Warranty and Indemnity Insurance is a new type of insurance in the global insurance market. The Purpose of this insurance is to against the risks involved in the M&A process, especially those risks generated by the misrepresentation of the parties. The insured target of the Seller/Buyer Warranty and Indemnity Insurance is the representation and warranty provision in the M&A contract.

As we all know, representation and warranty provision, as well as indemnification provision, are the core content of an M&A contract. Generally speaking, both the acquirer and the acquired promise in the representation and warranty provision that it has provided all truthful information it possesses pertaining to the relevant issues to the other party, otherwise it will be liable for any damages caused by its misrepresentations.

Where one party applies for the Seller/Buyer Warranty and Indemnity Insurance, if there are damages caused by the other party, the insured may make a claim to the insurance company to get the indemnification. This will help the insured to prevent from the damages caused by the intentional failure of disclosure and other incidental damages caused by the uncertain factors.

From a global perspective, the Seller/Buyer Warranty and Indemnity Insurance is never the main product for the insurance companies. However, taken the huge amount of the fund which will be involved in the M&A into consideration, the premium of the insurance is still hard to be ignored. The current average premium rate of the Seller/Buyer Warranty and Indemnity Insurance is 1%-3%. In the last 10 yeas, the highest limitation of indemnification is USD500 million.

Now, the Seller/Buyer Warranty and Indemnity Insurance is emerging on the Chinese insurance market: two foreign-invested insurance companies: Chartis Insurance and Zurich Insurance have filed this product to the CIRC. According to the information provided by Chartis, the first policy in China is underway.

The underlying reason for the two insurance companies to import these two insurance companies is to meet the increasing needs of the Chinese giant companies for this product.

Since the financial crisis exerts less influence on Chinese market, and Chinese corporations developed rapidly in recent years, a lot of Chinese corporations have accelerated their steps towards the global market. According to some unofficial statistics, Chinese corporations are parties in over 50% the important M&A transactions in recent years. However, as new player in the global financial market, one of the biggest concerns of Chinese undertakings is that they may not so familiar with the rules and tricks of the M&A transaction. They need a kind of insurance which will cover them from the overall risks involved in M&A. Then, the Seller/Buyer Warranty and Indemnity Insurance is the very choice for these corporations. Many insurance companies, especially those foreign insurance companies, take this need as the new opportunities for their development in Chinese insurance market.

In one word, when more and more Chinese corporation engages in M&A in the global market, the Seller/Buyer Warranty and Indemnity Insurance will have a promising future in china.

Chinese Readers Upset Over No-Discount Rule

Dr. Zhan Hao — Mon, 25 Jan 2010 12:00:27 +0800

On January 8^th, the China Publishers Association（中国出版工作者协会），the China Book Distribution Industry Association（中国书刊发行业协会）and the China Xinhua Bookstore Association（中国新华书店协会）(collectively the “Three Associations”) jointly published the “Book Fair Trade Rules” (“BFTR”). Its enactment generated widespread outcry at its suspected violation of China’s Anti-Monopoly Law (“AML”). BFTR became effective upon its release.

At the center of the controversy is one article that puts a ban on discount for books within first year of publication. Only under several limited circumstances can discount be offered for books published within one year, but by no means over 15%. In addition, all distributors are required to seek supply from licensed suppliers and refrain from placing orders to, among others, retailers and individuals. Suppliers are also required not to sell to retailers, online bookstores, non-profit organizations and individuals at prices lower than general distributors and retailers. Noteworthy is that BFTR is non-enforceable, because the Three Associations don’t have legislative powers and Chinese book publishers and distributors are only called upon to abide by the rule in doing business. Where book suppliers and distributors violate the rule, they are subject to sanctions no more serious than being refused to pass annual inspection by publication authority, as recommended by the Three Associations. Under BFTR, an entity will be established to implement the rule.

The above cited rules are a clear violation of Article 16 of AML, which explicitly prohibit trade associations from organizing members to engage in monopolistic conducts. Under Article 14 of AML, undertakings are prevented from entering into vertical agreements that fixes price or puts a floor on the price of products sold to third parties. AML also prohibits competitors to engage in collective refusal to deal. If the Three Associations are found to violate AML, it will be subject to fine of RMB500 thousand and in serious case, being de-licensed from operation. Where undertakings operating in the book industry adjust their competitive conducts in respond to BFTR, they may also be found to have entered into monopoly agreement and are subject to fines ranging from 1% to 10% of the turnover of the preceding year. According to the rule of work division among Chinese antitrust enforcement authorities, the National Development and Reform Commission will have the jurisdiction to investigate and impose sanctions.

To a large extent, the opposition to BFTR centers on its effect of hurting the interest of Chinese readers. It is argued that Chinese readers are denied the opportunities to purchase books from outlets that offer competitively low price. The enactment of BFTR is nothing more than a naked attempt by dominant book publishers and distributors to prevent their business from being encroached by low cost book distributors, such as online bookstores. BFTR also furnishes opportunities to companies in book industry to engage in concerted action that diminishes or eliminates competition between them.

The Three Associations responded to the criticism by launching a massive, high-profile campaign to justify BFTR. On January 22, the Three Association called on a press conference, in which the Deputy Secretary-General at the Publishers Association, Huang Guorong, said that the no-discount rule is necessary to protect the interest of readers in the long run. He explained that when books are sold at discounted price, retailers often use their “monopolistic position” to get as many discounts as possible from book suppliers. It hurts book suppliers and authors alike, because their incentives to publish and write books would be diminished. It in turn hurts the interest of the readers. He also cited that ban on discount in first year publication of books is also common practice in western countries. Mr. Huang’s theory seemed to have been lent support by media report that nowadays, bricks and mortar book shops are increasingly becoming “display rooms” for new books—readers read books in the shops and buy them online. The thriving online book shops are a massive threat to traditional book distribution system.

The above-cited justification reminds one of the “evil competition” argument familiar in countries well experienced in antitrust law enforcement. However, it has been rejected as false many times by courts and enforcement authorities, because competition is generally held to be the most effective means of production and distribution. Innovation is the very thing protected by antitrust law, because it spurs the development of business and technology. By all means, antitrust law doesn’t give room for leisure over hard work. Technically speaking, vertical agreements have been increasingly scrutinized under the rule of reason in countries like United States and Europe, because sometimes their pro-competitive values outgrow anti-competitive effects. However, China’s AML condemns vertical agreements that fixes resale price as per se illegal, unless they can be exempted under Article 15 of the law. Among the rigorous conditions required to be met before a monopolistic agreement can be found to be exempted is that consumers must get their share of benefit from the agreement. Then it becomes clear that the issue, inter-alia, is whether BFTR’s purported consumer protecting value measure up to the mandate of the AML that consumers also benefits from monopolistic agreements? At the time of writing, no report has been made that the National Development and Reform Commission has responded to BFTR.

China Chapter:The International Comparative Legal Guide to: Cartels & Leniency 2010

Dr. Zhan Hao — Fri, 22 Jan 2010 17:23:53 +0800

This article appeared in the 3rd edition of The International Comparative Legal Guide to Cartels and Leniency 2010; published by Global Legal Group Ltd, London(www.iclg.co.uk)

You can aslo download a bookmarked PDF version of this guide book at the following link:

http://www.iclg.co.uk/index.php?area=4&show_chapter=3380&ifocus=1&kh_publications_id=128

1 The Legislative Framework of the Cartel Prohibition

1.1 What is the legal basis and general nature of the cartel prohibition, e.g. is it civil and/or criminal?

The principal legal basis for cartel prohibition is the Anti-Monopoly Law (AML) and the Price Law (Price Law). At the time of writing, two of China’s antitrust enforcement authorities—the State Administration for Industry & Commerce ( SAIC) and the National Development and Reform Commission (NDRC)—have also promulgated a series of implementing regulations for public comments: the Draft of the Regulations on Prohibiting Monopoly Agreements (SAIC) and the Draft of the Regulations on Prohibiting Price Monopoly (NDRC).

In China, violation of cartel prohibition carries administrative as well as civil liabilities. No criminal liability is provided for cartels in China.

1.2 What are the specific substantive provisions for the cartel prohibition?

Article 13 of the AML provides “The following monopoly agreements among undertakings in competitive relationship shall be prohibited:

(1) fixing or changing the price of commodities;

(2) limiting the outputs or sales volume of commodities;

(3) allocating the sales markets or the raw material purchasing markets;

(4) restricting the purchase of new technology or new equipment or restricting the development of new products;

(5) jointly boycotting transactions; or

(6) other monopoly agreements determined by the Anti-Monopoly Law Enforcement Authority under the State Council.

Article 14 of the Price Law provides “Undertakings must not engage in the following unjustified price conducts:

(1) to act in collaboration to control market price to the detriment of the legitimate interests of other undertakings or consumers…”

Article 4 of the Draft of the Regulations on Prohibiting Price Monopoly provides that “the price monopoly agreement under this regulation refers to written or oral agreement, decision or other parallel behaviour among more than two undertakings, which excludes or restricts competition in price”.

Article 5 of the Draft of the Regulations on Prohibiting Price Monopoly provides that “the following elements can be considered in ascertaining existence of parallel behaviour:

(1) Whether the pricing conducts of the undertakings are similar. Similarity can be identified where the undertakings fix or change prices for similar types of commodities by virtue of identical or similar standards or margins.

(2) Whether the undertakings have engaged in communication.

In ascertaining parallel behaviour, the fact finder shall also consider whether the similarity in the prices of the undertakings have justifications in the context of the market structure and change.

Article 6 of the Draft of the Regulations on Prohibiting Price Monopoly provides “undertakings in competitive relationship are barred from reaching the following price monopoly agreements:

(1) fixing or changing the price of commodities

(2) fixing or changing the margin of price change

(3) fixing or changing fees and discounts that influence price

(4) using uniform price as basis to negotiate with third parties

(5) agreeing on standard formula for the calculation of price

(6) agreeing that no price can be changed without approvals of other undertakings

(7) fixing or changing price by agreeing to limit production quantities or divide sales or purchase market

(8) other monopoly agreements determined by the Anti-Monopoly Law Enforcement Authority under the State Council.

Article 9 of the Draft of the Regulations on Prohibiting Price Monopoly provides that “trade associations are barred from engaging in the following conduct:

(1) formulating and publishing rules, decisions and notifications to fix or change price

(2) assembling undertakings operating in the industry to discuss and formulate agreements, resolutions, minutes and memorandums to fix or change price

(3) facilitating undertakings to reach price monopoly agreement

(4) other monopoly agreements determined by the Anti-Monopoly Law Enforcement Authority under the State Council

Article 5 of the Draft of the Regulations on Prohibiting Monopoly Agreements provides “the following monopoly agreements among competing business operators shall be prohibited:

(1) Limiting output or sales of products, including limiting total output and sales by limiting or ceasing production or hoarding goods, or limiting output or sales of a certain product type or model;

(2) Allocating sales market or raw materials supply market, including dividing region for the sales of products, targets of sales or categories of products for sale, and dividing purchasing regions and suppliers of raw materials and etc. Raw materials include materials, semi-finished goods, parts and components, related equipment, etc,. necessary for the production and operation of an undertaking;

(3) Limiting the purchase of new technologies and equipment or limiting the development of new technologies and products, including limiting investment, development, use of new technologies, new equipment or new products and the leasing of new equipment, etc.;

(4) Jointly boycotting transactions, including jointly refusing to provide or sell products to certain business operators, jointly refusing to purchase or sell the products of certain business operators, and jointly demanding certain business operators not to conduct transactions with competing business operators;

(5) Collusive bidding, including agreements made among bidders to decide a bid winner, win the bid in turn and conduct collusive actions regarding matters other than the quotation price; and

(6) Other monopoly agreements determined by the State Administration for Industry and Commerce.

1.3 Who enforces the cartel prohibition?

In China, NDRC enforces prohibitions against price-related monopoly agreements. The SAIC enforces prohibitions against non-price related monopoly agreements. For example, prohibiting price cartels belong to the jurisdiction of NDRC, while SAIC has jurisdiction to combat market division agreements. In addition, China’s courts also have jurisdictions to hear civil cases involving cartels.

1.4 What are the basic procedural steps between the opening of an investigation and the imposition of sanctions?

At the time of writing, only SAIC has promulgated specific procedural rules on conducting investigation of monopoly agreements and abuse of market dominance. Otherwise, the proceedings to conduct cartel investigation are governed by general rules provided in the Administrative Penalty Law of PRC. In the context of the SAIC rules, known as “the Regulation on Investigating Monopoly Agreements and Abuse of Market Dominance by SAIC Agencies”, the basic procedural steps include:

First, SAIC may decide to carry out investigation by itself. It may also delegate the investigation power to SAIC agencies at provincial level if the cartel takes place in the province in question.

Second, SAIC may take the following investigatory measures:

(1) Enter the operation site or other sites to investigate;

(2) Question the investigated undertakings, interested parties or any other relevant undertakings or individuals and demand them to offer explanations;

(3) Survey and make copies of documents, agreements, accounting books, fax and emails and electronic data and etc. of the investigated undertakings, interested parties or any other relevant undertakings or individuals;

(4) Seal up and seize relevant documents

(5) Check into bank accounts of the undertakings

In addition, SAIC may also order the investigated undertakings to produce such documents in writing as it may deem necessary for the investigation.

Third, the investigated undertakings may request to suspend the investigation by making commitments that the effects of the conducts in question be eradicated within the time period endorsed by SAIC. After the request is granted, the investigated undertakings shall make report in writing on how the commitments are implemented.

Finally, if the undertakings object to the administrative penalties imposed by SAIC, they may request for administrative review or bring actions to court.

1.5 Are there any sector-specific offences or exemptions?

According to AML, it doesn’t apply to the alliance among or concerted actions by farmers and the farmers’ economic organizations in connection with the production, processing, sales, transportation and storage of agricultural products ad other business activities related to agricultural products.

1.6 Is cartel conduct outside [Country] covered by the prohibition?

Yes, AML has extraterritorial jurisdiction over cartel conducts when they have eliminative or restrictive effects on competition in the domestic market of the People’s Republic of China.

2 Investigative Powers

2.1 Summary of general investigatory powers.

Please use an “*” after your “yes” answer to indicate that a power can, as a general rule, only be exercised with external authorisation (i.e. with the authorisation of a court or independent supervisory body).

Table of General Investigatory Powers

Investigatory power	Civil / administrative	Criminal
Order the production of specific documents or information	Yes
Carry out compulsory interviews with individuals	Yes
Carry out an unannounced search of business premises	Yes
Carry out an unannounced search of residential premises	Yes
· Right to ‘image’ computer hard drives using forensic IT tools	Yes
· Right to retain original documents	Yes
· Right to require an explanation of documents or information supplied	Yes
· Right to secure premises overnight (e.g. by seal)	Yes

Please Note: * indicates that the investigatory measure requires the authorisation by a Court or another body independent of the competition authority

2.2 Specific or unusual features of the investigatory powers referred to in the summary table.

The “yes” answers are applicable to administrative investigations only. Under AML and SAIC’s procedural rules, reports must be made to the head of the antitrust enforcement authorities. Approvals are also necessary for exercising the above investigative powers. For civil procedures, however, no private parties may take the above measures or without a Court’s authorization. For example, when there is a risk that evidence may be destroyed, lost or would be difficult to obtain later on, the parties must apply to the court for evidence preservation. The court can also order evidence preservation on its own initiative.

2.3 Are there general surveillance powers (e.g. bugging)?

No.

2.4 Are there any other significant powers of investigation?

No.

2.5 Who will carry out searches of business and/or residential premises and will they wait for legal advisors to arrive?

According to AML, it is the antitrust enforcement authorities who have the investigative power, including carrying out searches of business and/or residential premises. Specifically, SAIC and NDRC are charged with, among other things, investigating cartels.

There are no general or specific rules that require the arrival of legal advisors before searches of business and/or residential premises can be carried out.

2.6 Is in-house legal advice protected by the rules of privilege?

No.

2.7 Other material limitations of the investigatory powers to safeguard the rights of defence of companies and/or individuals under investigation.

According to AML, the investigated undertakings and the interested parties have right to make statement. In addition, the investigating authorities and their staffs must keep the trade secrets learnt in the course of investigation confidential.

According to the Administrative Penalty Law of PRC, which provides general rules on administrative penalty proceedings, the investigated party also has a right of defence. Besides, no penalties shall be levied without notifying the investigated parties of the facts, reasons and proofs on which the penalty decisions are based.

2.8 Are there sanctions for the obstruction of investigations? If so, have these ever been used?

The antitrust enforcement authorities may order the perpetrators of obstructions to correct its behaviour. In addition, a fine less than RMB20,000 can be levied on an individual and less than RMB200,000 on entities. Where the obstructions are serious, a fine in the range of RMB 20,000 and RMB100,000 can be levied on an individual and a fine in the range of RMB200,000 and RMB one million can be levied on an entity. Obstruction of investigations may also be criminally prosecuted when they constitute crimes.

To the best of our knowledge, the sanctions have not been used in cartel investigations, due to the limited number of investigations actually carried out so far.

3 Sanctions on Companies and Individuals

3.1 What are the sanctions for companies?

The antitrust enforcement authorities shall order the undertakings to stop such illegal act, confiscate their illegal gains and impose fines of more than 1% and less than 10% of their sales in the preceding year. If the Monopoly Agreement has not been implemented, fines less than RMB 500,000 may be imposed.

3.2 What are the sanctions for individuals?

There are no special sanctions for individuals. The above sanctions applicable to companies will also apply to individuals.

3.3 What are the applicable limitation periods?

There is no special limitation period for the prosecution of cartels. According to the Administrative Penalty Law of PRC, illegal act can be prosecuted within two years after it is perpetrated. However, if the conduct is of continual or continuous nature, the limitation period will be counted from the date when the conduct terminates.

3.4 Can a company pay the legal costs and/or financial penalties imposed on a former or current employee?

There are no special provisions on this issue in AML or any other relevant regulations. To the best of our knowledge, in real practice, where a company elects to do so, it can pay the legal costs and/or financial penalties imposed on a former or current employee.

4 Leniency for Companies

4.1 Is there a leniency programme for companies? If so, please provide brief details.

As a general provision, the AML provides that the antitrust enforcement authorities may have the discretion to reduce or exempt defendants’ penalties if they volunteer to report cartels to the authorities and provide key evidence. So far, SAIC has also issued the Draft of the Regulations on Prohibiting Monopoly Agreements that spells out detailed rules on leniency programme.

According to the Draft, SAIC may grant exemption of penalties to the first whistleblower who makes the voluntary move to report the cartel and provide key evidence. Key evidence is the one that can trigger investigation or is dispositive in establishing the cartel.

For other whistleblowers, SAIC has discretion to reduce penalties. The decision is based on a comprehensive set of factors, i.e., the sequence of whistle blowing, the significance of the evidence proffered, circumstances of the cartel agreements and the level of cooperation. Specifically, the second voluntary whistle blower is reduced by 50% of the penalties; the third voluntary whistle blower is reduced by 30% of the penalties.

Under no circumstances can SAIC grant reduction or exemption of penalties to the undertakings that organize, initiate or coerce others to carry out the cartel agreements.

4.2 Is there a ‘marker’ system and, if so, what is required to obtain a marker?

No.

4.3 Can applications be made orally (to minimise any subsequent disclosure risks in the context of civil damages follow-on litigation)?

Neither AML nor the SAIC’s draft regulation specifically requires that the applications must be made in writing. We are inclined to believe that applications for leniency can be made orally.

4.4 To what extent will a leniency application be treated confidentially and for how long?

Neither AML nor the SAIC’s draft regulation addresses the issues.

4.5 At what point does the ‘continuous cooperation’ requirement cease to apply?

Neither AML nor the SAIC’s draft regulation addresses the issues, although according to the latter draft regulation, the level of cooperation is a factor considered by SAIC to decide whether exemption or reduction of penalties should be granted.

4.6 Is there a ‘leniency plus’ or ‘penalty plus’ policy?

Judging from SAIC’s Draft of the Regulations on Prohibiting Monopoly Agreements, “leniency plus” policy seems to be available. But since the draft regulation hasn’t been officially enacted, no definitive answer can be given. There are no “penalty plus” policy under the AML.

5 Whistle-blowing Procedures for Individuals

5.1 Are there procedures for individuals to report cartel conduct independently of their employer? If so, please specify.

No.

6 Plea Bargaining Arrangements

6.1 Are there any early resolution, settlement or plea bargaining procedures (other than leniency)?

No.

7 Appeal Process

7.1 What is the appeal process?

According to AML, undertakings levied administrative penalties can request administrative review or bring actions to court. The review request can be made within sixty days after the undertaking is notified of the penalty levied. The undertakings may bring actions to court within three months after it is notified of the penalty levied.

7.2 Does the appeal process allow for the cross-examination of witnesses?

According to the judicial interpretation rendered by the Supreme People’s Court, with court’s approval, the parties and their representatives may cross-examine witnesses. However, the cross examination must bear relevance to the facts. Misleading, coercive or derogatory languages or methods must not be used.

8 Damages Actions

8.1 What are the procedures for civil damages actions for loss suffered as a result of cartel conduct?

Firstly, the plaintiff files the complaint with a people’s court with jurisdiction. There are two types of jurisdictions in relation to civil actions: (1) territorial and (2) hierarchical jurisdiction. The general rule with regards to territorial jurisdiction is that civil proceedings can be brought to the courts where the defendants have domiciles or where the tortious acts take place. Where multiple defendants are involved, any of those courts can hear the case. As far as hierarchical jurisdiction is concerned, four levels of courts exist in China: basic courts, intermediate courts, high courts and the Supreme Court. It is still unclear which level of court has proper jurisdiction to hear civil suits brought under the AML. However, the few private actions brought so far under the AML’s prohibition of abusing market power in China are heard by intermediate courts as trial court.

Secondly, where necessary, the plaintiff can request for interim remedies under the Civil Procedure Law of PRC, including the preservation of evidence and preservation of properties. When a risk exists that the evidence may be destroyed, lost or will be difficult to obtain later on, the parties can apply to the court to preserve evidence. The court can also take initiative to do so. As far as property preservation is concerned, where the enforcement of a judgment is against a particular property, and where such enforcement may be impossible or difficult because of the acts of either party or for other reasons, the court may order to preserve the property at the request of the plaintiff, or do so of its own volition. In granting property preservation measures, the court may require the applicant to provide a security to cover any losses that the respondent may suffer as a result of the preservation measures.

After weighing the evidence submitted by both parties, a court will decide on the liability and damage issues of defendants. To date, there have not been any AML cases going through the whole process of civil proceedings. However, since claims brought under the AML are of tortuous nature, it is expected that remedies such as cessation of infringements and damages will be available.

8.2 Do your procedural rules allow for class-action or representative claims?

Yes, the Civil Procedure Law of PRC provides representative action. It applies where a joint action has a large number of parties and the multiple plaintiffs or defendants elect to be represented by representative plaintiff(s) or defendants to litigate on their behalf. There are two types of representative actions: (1) representative litigation in which the number of litigants can be determined at the time the case if filed; (2) representative litigation in which the number of litigants can not be determined at the time the case is filed. In such cases, the court may issue a public notice and claimants can “opt in” by registering with the court. The court’s decision is binding on all those who register with the court, and on those who do not register with the court but bring similar claims within the limitation of period.

8.3 What are the applicable limitation periods?

Claims brought under AML are subject to two-year limitation period. It commences when the claimant knows or should know his or her right has been infringed.

8.4 What are the cost rules for civil damages follow-on claims in cartel cases?

Litigation fee charged by court for hearing cases is undertaken by the party losing the case. As for other costs, such as lawyer fee and witness fee, the general rule is that the party who uses the services will undertake the fees. However, in real practice, China’s courts may award reasonable amount of lawyer fee and witness fee to the winning plaintiff.

8.5 Have there been any successful follow-on or stand alone civil damages claims for cartel conduct?

No.

9 Miscellaneous

9.1 Provide brief details of significant recent or imminent statutory or other developments in the field of cartels and leniency.

Noteworthy are the two drafts of administrative regulations published by SAIC and NDRC for public comment: the Draft of the Regulations on Prohibiting Monopoly Agreements (SAIC) and the Draft of the Regulations on Prohibiting Price Monopoly (NDRC).

In terms of cartels and leniency, both regulations supplement and elaborate on the scope of cartel agreements provided under the AML. They also provide guidance for identifying parallel behaviours and specify the prohibited cartel conducts carried out through trade associations. However, only SAIC’s draft regulation provides detailed rules on leniency program, while NDRC’s draft regulation merely makes a reference to Article 46 of AML, which is a general provision on cartel leniency.

Both SAIC and NDRC are charged with, among other things, combating cartels. They are now in the process of revising and updating the two draft regulations. Their enactments will mark the milestone in China’s effort of fighting cartelistic conducts in collaboration with other members of the international community.

Legal Case Study：Sufficient Explanation Obligation on Exemption Clauses for Insurance Companies

Dr. Zhan Hao — Thu, 21 Jan 2010 14:03:11 +0800

Exemption clauses are restrictions on the insurer’s insurance liability, and define the scope within which an insurer bears no liability to compensate or pay the insurance proceeds. Article 19 of new Insurance Law provides that the insurer shall, when concluding an insurance contract, provide on the application form, insurance policy document or other insurance certificate a reminder sufficient to draw the attention of the proposer to the exemption clauses in the insurance contract and shall expressly explain the contents of such clauses to the proposer in writing or orally. If no such reminder or express explanation is given, such clauses shall not enter into effect. The old Insurance Law provided a similar provision on this issue, but less practicable. This provision, in practical, has become an ultimate weapon to insurance companies. As of the occurrence of accident which is included in exemption clauses, lots insureds use this provision to claim their rights. They claim that the insurance company did not give them sufficient notice to draw their attention to the exemption clauses. The court, in practical, also adopts strict interpretation on these clauses to insurance companies.

A case Nanyun XX Information Company V. XX Property Insurance Company may demonstrate this theory clearly. Jin Yuan Lee is a self-employed business man who bought a Dongfeng brand dump wagon. He gave the title of this dump wagon to Nanyun XX Information Company (hereinafter “the Information Company”). On July of 2009, Lee use the name of the Information Company to bought vehicle damage insurance for this dump wagon in XX Property Insurance Company (hereinafter “the Insurance Company”). On 6, September 2009, when Lee was driving this dump wagon in Jialing District, Nanyun City, this dump wagon was damaged because of vehicle rollover. Lee immediately called the Insurance Company and the staffs of the Insurance Company examined and checked the accident circumstance in a timely manner. At last, the staffs refused to pay because the carriage of the dump wagon was in a lifting state, which just belongs the circumstances listed in a item of exemption – “The insurer shall not be liable for any losses, expenses or liabilities caused by … (5)dump vehicle was derived and operated in a lifting state;” But Lee did not remember that he saw this item in the insurance contract. After checking whole articles of the insurance contract, Lee found this item was double printed with another article and is too blurred to recognize. Lee told this information to the Information Company. Then the Information Company sued the Insurance Company to claim for compensation as the item of exemption was invalid. The plaintiff claimed that the defendant intended to print the key-point item blurred so it can evade its responsibility. The defendant defended that the insured known this item of exemption and the print mistake was introduced in oral to the insured when they signed the insurance contract. Unfortunately, the Insurance Company could not provide enough evidence to support its opinion. Finally, the Court applied strict interpretation on the item of exemption and the judgment was against the defendant. The Court believed the item of exemption must be printed clearly enough to draw insured’s attention and the insurer must provide enough evidence to prove that it has sufficiently notified the insured the exemption clauses.

In practice, many insurance companies have tried to solve this problem. They print those clauses in black and bold to draw insured’s attention. Besides telling the insured orally, they also print those exemption clauses solely and design questionnaire under those items to examine whether or not the insured know those clauses. Or some insurance company sent a handbook of exemption clauses freely to their customers. However, even by using such manners, the insured may not be notified the importance of those exemption clauses or the really meaning of those exemption clauses and some courts may don’t recognize the effectiveness of those claims or introductions. Insurance companies still need improvement on solving this problem.

Establishing Representative Office of Insurance Company in China (2)

Dr. Zhan Hao — Mon, 18 Jan 2010 13:53:29 +0800

Governmental supervision of financial industry is very strict in China. For CIRC’s examination of the foreign investors who want to establish representative office in its jurisdiction, the following documents shall be presented in front of CIRC:

(1) A formal application form. The information regarding the applicant and the representative to be set up shall be covered in the form. In respect of the applicant, it includes jurisdiction of incorporation, head office address, total assets as of the end of immediately preceding year, paid up capital, incorporation date and the registered office address, incorporation date and the registered office address, names of members of the Board of Directors and name of the General Manager. In respect of the representative office, it includes full name of the representative office, Address, zip code, telephone number, and fax number of the representative office, Name of the chief representative (the chief representative shall only work for one representative office), Names of other staff of the representative office (the number of the foreign staff working in the representative office shall be limited to a maximum of 3).

(2) An application letter addressed to the chairman of CIRC, signed by the chairman of the Board of Directors or the General Manager. The application letter shall cover Brief introduction to the Applicant, Purpose for the establishment of the representative office, Full name of the representative office, introduction to all staff in the representative office, Operational scope of the representative office, term of existence of the representative office, Address of the representative office, Other relevant information concerning the representative office.

(3) A notarized (and authenticated) copy of the business license or lawful certificate of incorporation or registration certificate issued by competent authority in the applicant’s home country.

(4) The articles of association, a name list of the members of the board of directors, and

(5) A name list of the management personnel or main partners.

(6) Annual reports for the 3 years prior to the application date;

(7) Opinion issued by the relevant competent authority in the applicant’s home country or region regarding the applicant’s establishment of representative office in China, or a letter of recommendation issued by relevant industry association. Such opinion shall or letter of recommendation shall refer to the applicant’s record of penalties received for the three years prior to the date of issuing the opinion or letter of recommendation and such opinion shall be notarized and authenticated.

(8) A Feasibility Report for establishment of the representative officel;

(9) A power of attorney for the chief representative executed by the chairman of the Board of Directors or General Manager of the Applicant;

(10) A declaration made by the Applicant, stating that the chief representative has no record of penalty(ies) due to any serious violation of law or regulation within the 3 years prior to the application date.

(11) Resume of the chief representative. In the chief representative’s resume, his or her name, Birth date, Nationality, Marital status, Summary of academic record and work experience commencing from high school to date shall be included.

(12) Other documents required by CIRC.

For the chief representative of the representative office, he or she shall have at least 5 years working experience; shall obtained a university bachelors degree or higher; If the chief representative has not obtained a bachelors degree or higher, they must have at least 10 years work experience.

Will It Be A Death Sentence For Small Insurance Intermediaries?

Dr. Zhan Hao — Thu, 14 Jan 2010 15:57:07 +0800

The new Notification issued by CIRC may sentence the death of lots of small and medium- size insurance intermediaries.

On the last day of 2009, CIRC promulgated the Notification on Implementing the Supervision Regulation on Corporate Insurance Agency, the Supervision Regulation on Insurance Brokerage and the Supervision Regulation on Insurance Adjustment Institution (hereinafter referred to as three supervision regulations). According to this notification, the capital of all insurance intermediaries must reach the threshold provided on the three supervision regulations before October 1st, 2012.

The three supervision regulations were revised in 2009, in order to coordinate with the enforcement of the new Insurance Law. The most important revision is that the requirement for the registered capital is substantially raised. For corporate insurance agencies, the registered capital was raised from RMB 0.5 million to RMB 2 million. What is more, for those corporate insurance agencies who want to do the business outside the province, autonomous region or municipality directly under the central government where they registered, their capital must reach RMB 10 million. For insurance brokerage, the registered capital should reach RMB 10 million, twice as much as provided on the old regulation rule. For insurance adjustment institutions, the registered capital raised from 0.5 million to 2 million. The new standards have taken effect on October 1st, 2009. However, the three supervision regulations did not specify whether and when the insurance institutions established before October 1st, 2009 should also meet the same benchmark.

CIRC’s new notification has released clear signal for those intermediaries established before October 1st, 2009 that they must increase their registered capital to meet the requirement in the next 2 years.

The purpose of this notification is to keep the orders of the insurance intermediary market and protect the rights of the insured. However, this requirement is not easy to reach for many small and medium size intermediaries. When the intermediaries can not meet the requirements of CIRC, they will have to withdraw from the insurance market.

There are two ways for the insurance intermediaries to increase their registered capital. One is to seek some financing. However, due to the financial crises, few enterprises have funds to invest in the insurance intermediaries, especially when such intermediaries are hard to be listed in the Chinese GEM. The other way for the intermediaries is to subordinate to big insurance group or giant insurance companies, which means the intermediaries may have to give up the license and the independence. Nevertheless, most insurance groups or giant insurance companies are reluctant to accept the small intermediaries. They are afraid that the culture or business model of such small intermediary is in tension with their own.

It can be predicted that before October 1st, 2012, the insurance intermediaries market may experience an earthquake.

Second Chinese "Abusing Dominant Market Position" Case Decided

Dr. Zhan Hao — Mon, 11 Jan 2010 09:14:31 +0800

On December 18, 2009, Beijing No.1 Intermediate People’s Court (the “Court”) reached a decision in favor of defendant in China’s second “abusing dominant market position” case.

BACKGROUND

The Plaintiff, Tangshan Renren Information Service Company (“TRISC”) operates an online platform that brokers deals between pharmaceutical companies and distributors and consumers. The Defendant, Baidu, which is allegedly the largest Chinese search engine company is accused of artificially lowering TRISC’s ranking in Baidu search results in order to coerce TRISC into continuing to purchase bid ranking service from Baidu. It is alleged to have caused TRISC to lose traffic and revenue. TRISC brought the case to the Court under Paragraph 1 of Article 17 of Chinese Anti-Monopoly Law (“AML”), namely, the exclusive dealing provision that prohibits a firm with market dominance position from restricting a third party to dealing with itself or selected third parties exclusively without valid justification. TRISC petitioned the Court to grant an order to enjoin Baido from the conduct and asked for $163,000 in damage for lost revenues. Baidu defended itself by arguing that lowering TRISC’s ranking in its search result was a response to the “junk links” practice TRISC engaged in, i.e. TRISC created a robot to automatically post junk posts on websites and forums and sent out spam messages to elevate its ranking in Baidu’s search results. According to Baidu, it adopts “anti-junk links” policy and made it sufficiently clear to the outside world by putting it on its website.

After the trial, the Court ruled in favor of Baidu, on the ground that (1) the evidence advanced by TRISC is insufficient to establish Baidu has market dominance position in relevant market; (2) even if Baidu has market dominance position, Baidu has valid justification in blocking TRISC from gaining access to potential customers, because TRISC sent out junk links on a massive scale, thus violating Baidu’s policy that prohibits the practice disruptive of online integrity; (3) TRISC failed to prove causation link between loss of revenue and Baidu’s lowering its search result ranking.

HIGHLIGHTS OF THE DECISION

1. Market Definition

For the first time in cases of “Abusing Dominant Market Position”, Chinese court staked out its position in defining relevant market. The Court recognized that market definition is the springboard for abusing market position analysis. In this dispute, relevant market is a much contested issue. TRISC claimed that the product market is search engine market. However, Baidu argued that there is no such product market in the dispute. According to Baidu, search engine market has two subcategory markets, natural search market and bidding search market. Product markets within the meaning of antitrust law necessarily refer to those in which products and services are traded for profit. Inasmuch as the natural search service is offered for free and that dispute in question centered around natural search service only, no product market exists.

The Court dismissed Baidu’s argument. Though it didn’t spell out its detailed analysis in the opinion, the Court suggested that in search engine market, natural search service is so closely linked with bid search service that any attempt to separate them is a denial of business reality. To be specific, as free as natural search service is, it is offered as a vehicle to attract firms to bid for their rankings in bid search market, which is a for-profit market. Stripped of each other, the two sub-markets couldn’t have existed at all.

Noteworthy is that the Court defined the market as search engine market. It implies that the Court didn’t think other media market is relevant for its market definition analysis, such as newspaper, TV or even gateway website. The Court attempted to sit in the position of customers and survey all media ad markets by reference to such parameters as characteristics, applications, substitutability and etc. How the Court defined the product market indicates that Chinese courts have gained sophisticated knowledge and know-how in handling complex market definition analysis.

2. Burden of Proof

In its opinion, the Court expressly puts the burden of proof on TRISC to substantiate its claim that Baidu has dominant market position in the relevant market. As it turns out, failure to discharge the burden is one of the leading causes that sink TRISC’s antitrust challenge against Baidu. The issue is important, because viewed in context, there are a lot of speculations going on in the legal community as to the burden of proof in antitrust civil litigation. One theory argues that the burden should be shifted to the defendant alleged to have abused its market position, because otherwise it constitutes an insurmountable task for ordinary citizens and companies to meet the burden, damping the prospect of active private enforcement of AML. The theory has met a lot of oppositions. It has been argued that private enforcement of AML is no exception to the general rule that plaintiff carries the burden of proof to establish its claim. Otherwise, it will engender the danger of frivolous litigations aimed solely to disrupt normal competitive conducts of competitors. Burden of proof in civil antitrust litigation has been included in the Supreme People’s Court’s ongoing effort to promulgate legal interpretation specifically designed for antitrust civil litigation. The Court’s holding TRISC’s accountable for its failure to meet the burden of proof foretells that the legal interpretation to be introduced by the Supreme People’s Court later on will not depart from the general rule.

Establishing Representative Office of Insurance Company in China (1)

Dr. Zhan Hao — Thu, 07 Jan 2010 11:33:08 +0800

As to a foreign insurance company, if it wants to invest in Chinese insurance market or run business pertaining to insurance within China, it can (1) cooperate with a Chinese insurance company by executing strategic cooperation agreement, under which both parties agree to do extensive cooperation in the field of underwriting reinsurance, developing new insurance products, exclusively choosing the other as the potential partner, providing training and technique assistance to the Chinese insurance company;(2) establish a consultant company in China, through which the foreign insurance company can provide some counseling;(3) establish a foreign founded insurance company ( the foreigner’s shares shall exceed 25%) or purchase the equity of a Chinese insurance company ( the foreigner’s shares shall exceed 25%) or establish a branch of the foreign insurance company in China.

But according to CIRC’s regulation, the precondition for the foreign investors to process the previous option 3 is that at least one representative office has been established by the foreign insurance company and existing in China for at least two years. The following focus on the requirements by CIRC to establish representative office.

According to the Administrative Provision for the Representative Office of Foreign Insurance Institution, the A foreign insurance institution that applies for establishment of a representative office in China shall meet the following conditions:

(1) Have strong business performance;
(2) Have conducted insurance for at least 20 years;
(3)Have no record of any serious violation of laws or regulations in the 3 years prior to the application date;
(4) Other prudential conditions required by CIRC.

In the abovementioned clause, the reference to “having conducted insurance for at least 20 years” means that the foreign insurance institution shall have continuously operated its insurance business for at least 20 years. If the foreign insurance institution establishes a representative office in China through a subsidiary, the subsidiary itself must meet the 20-year operational requirement. If the foreign insurance institution establishes a representative office in China through its insurance group, the manner of calculation for the 20-year operational requirement is as follows (whichever of the following occurs earlier):(a) the date on which the group has started to conduct insurance business; or (b) the date on which any subsidiary in the group has started to conduct insurance business.

The reference to “other prudential conditions prescribed by CIRC” herein includes but is not limited to the following:

(a) the total assets of the Applicant shall exceed Two Billion Renminbi (RMB 2,000,000,000.00) or approximately Three Hundred Million US Dollars (US$300,000,000.00) by the end of the preceding year;

(b) it is necessary and feasible for the foreign insurance institution to establish a representative office in China;

(c) the proposed chief representative shall have knowledge of laws and regulations pertaining to insurance and management of the representative office;

(d) the country in which the foreign insurance institution is incorporated and exists has a stable political and economic situation and has a valid and strong financial regulation system;

(e) the applicant and its affiliate(s) shall have a sound corporate governance structure, have formulated rules for risk management, operated in compliance with relevant laws and regulations, and have potential for sustainable growth.

Items (a) and (e) are not applicable to non-profit foreign insurance institutions.