China Law Vision

Nestlé's filing of acquiring Hsu Fu Chi is cleared by MOFCOM

Dr. Zhan Hao — Sun, 11 Dec 2011 22:18:51 +0800

On 7^thDecember 2011, Nestlé’s intended purchasing 60% shares of Hsu Fu Chi by Rmb1.51bn ($234m) was cleared by MOFCOM officially. By this news, all clouds of doubt and debates from a variety of societies in last months are dispelled. In particular, Nestlé/Hsu Fu Chi decision from MOFCOM cleans up the school of worries from foreign enterprises that antitrust enforcement of PRC is inclined to protect national brand, as they derived from Coca-Cola/ Huiyuan case. It is believed that MOFCOM’s clearance in Nestlé/Hsu Fu chi must have an encouraging effect on foreign enterprises’ incentive to march into Chinese market by the means of concentration.

Without many disputes, Nestlé’s market share in Chinese confectionary market would be much higher ex post this transaction. According to the market sources, Hsu Fu Chi’s greatest strength lies in bulk sales, while Nestlé is good at package sales. It is highly anticipated that combination of Nestlé and Hsu Fu Chi would give rise to a synergy effect, hence would influence Chinese confectionary market in a significant degree.

A spokesman from Nestlé publicly expressed there would not be major changes on the company’s development direction and employee after the concentration. Nevertheless, when asked if Hsu Fu Chi has the plan to develop high-end product after Nestlé joins in, he said, there existed various possibility.

China Unicom and China Telecom submitted the application for suspension of investigation to NRDC

Dr. Zhan Hao — Sat, 03 Dec 2011 11:21:51 +0800

The Price Supervision, Inspection and Antitrust Bureau of NRDC has confirmed to the public on 2^nd December 2011, that they have received applications from China Unicom and China Telecom for the suspension of probe on alleged abuse of dominant position by the parties in last month. In addition, China Telecom also submitted a proposal of rectifying and reforming to NRDC, with the expectation to be awarded a leniency treatment. The proposal of rectifying and reforming is comprised of mainly the following aspects:

First, China Telecom undertakes to expand the capacity which is connected to other backbone telecommunications operators such as China Unicom and China Tietong as soon as possible.

Second, China Telecom undertakes to lower the price of connecting to China Tietong and enhance the quality of interconnection in the further step, so as to achieve a full-degree of interoperability.

Third, it will standardize the tariff management of ISP, conduct commercial activities in accordance with fair trading principle on the market and review currently existed agreements to cut the tariff level in a proper degree,

Fourth, China Telecom will immediately take measures to enhance the fiber access penetration and the broadband access rate, with the end of lowering the price for per unit of bandwidth for public customers of internet access by around 35%.

Whether NRDC would be charitable to the state-owned enterprises and suspend concerning investigation after above-mentioned application and proposal, is still open and the response of NRDC thereto is looked forward to.

High-level MOCFOM Visit to US Antitrust Agencies

Dr. Zhan Hao — Sat, 03 Dec 2011 11:16:28 +0800

On 29^th November 2011, an official meeting was held between Chinese delegations led by MOFCOM’s vice minister Gao Hucheng and delegations of US antitrust agencies, Federal Trade Commission (FTC) and Department of Justice (DOJ). It is the first official high-level talk between public enforcement agencies of China and US, since DOJ and FTC signed an antitrust memorandum of understanding (MOU) with China's three antimonopoly agencies in July 2011, therefore, afforded with profound significance in terms of enhancing bilateral communication and cooperation among them.

By taking this opportunity, both sides reaffirmed and emphasized the cooperation concurred in the MOU this July, including significant issues of cooperation on investigations of two sides, confidentiality obligations, exchange of information and so on.

Consensus was reached between both sides that this meeting was of help to deepen the mutual understanding of antitrust agencies of two countries, with respect to competition policies and antitrust enforcement, to share experience and promote a further-step cooperation between the two biggest economic territories.

Conditional clearance offers further insight on concentrations

Dr. Zhan Hao — Thu, 01 Dec 2011 11:27:21 +0800

On October 31 2011 the Ministry of Commerce posted Notice 73 in its website, announcing the clearance of a proposed concentration between Penelope Co Ltd and Savio Macchine Tessili SpA on certain conditions. The ministry's reasoning and analysis shed light on its approach to the review of concentrations on anti-monopoly grounds.

The notice states that the would-be acquirer, Penelope, was incorporated specifically as a tool for the transaction. Alpha Private Equity Fund V is Penelope's wholly-owned controlling shareholder - it invests in non-ferrous metal recycling and the production and sale of textile and home textile machinery. Alpha V is the largest shareholder in Uster technologies Co Ltd, holding 27.9% of the equity shares.

Savio, the proposed target, is a manufacturer of textile machinery. It produces electronic yarn clearers for winders, twisters and rotor-spinning frames. Phenanthrene Brothers Co Ltd is a wholly owned subsidiary of Savio.

In its preliminary investigation the ministry found that Uster and Phenanthrene Brothers are the world's only two manufacturers of electronic yarn clearers for automatic winders (with market shares 52.3% and 47.7%, respectively). Furthermore, the ministry found that the market for electronic yarn clearers for automatic winders constitutes an independent relevant market. It confirmed the possibility that Alpha V might coordinate the business operations of Uster and Phenanthrene Brothers following the concentration, thereby eliminating or restricting competition in the market; similarly, Uster and Phenanthrene Brothers might engage in anti-competitive practices to eliminate or restrict competition in the market through their intermediary, Alpha V.

In early October 2011 the ministry and the parties to the concentration engaged in several rounds of communication about measures to alleviate the ministry's competition concerns. The final consensus was sufficient for clearance by the ministry on the following conditions. Alpha V must:

transfer its equity in Uster to one or more independent third parties within six months;
inform the ministry of the identity of transferee, the transaction volumes and the trading date, in order to ensure that the transfer does not result in the further elimination or restriction of competition;
refrain from participating in or influencing Uster's business operations before the transfer; and
appoint an independent supervising trustee to supervise the equity transferee.

Tmall's price rise: free economic behaviour or abuse of dominant position?

Dr. Zhan Hao — Thu, 17 Nov 2011 11:24:46 +0800

On October 10 2011 one of China's largest retail websites, Taobao Mall - known as Tmall - announced a new set of rules, which included the imposition of a high annual technical service fee and an increased security deposit for its vendors. Tmall stated that the new rules were intended to ensure the provision of high-quality goods and services and to discourage counterfeiting and price wars.

The previous minimum annual fees of Rmb6,000 were raised to between Rmb30,000 and Rmb60,000, while the security deposit was raised from Rmb10,000 to Rmb50,000, Rmb100,000 or Rmb150,000, depending on the size of the business-to-consumer vendor. Smaller vendors protested by disrupting the online platform, using communication tools such as YY Voice to attack companies with a larger presence on Tmall. The incident sent ripples through the worlds of business, academia and politics, with many critics arguing that the price-rise policy may constitute an abuse of dominant position under the Anti-Monopoly Law.

Determining dominant position in a given market is problematic; in most cases, it requires comprehensive market research and subtle, detailed analysis. The answer may be the length of an academic paper and may take weeks to compile and express clearly. If it is assumed that Tmall holds a dominant position, there remains the question of whether its behaviour can be deemed an abuse under the law.

Article 17(1) states that an abuse consists in imposing unfairly high sale prices or unfairly low purchase prices. On the sale side, "excessive" prices may be unfair. Excessive pricing is the most obvious way in which a monopolist can exploit its position to the detriment of consumers in the short term. However, it is often argued that a free market economy needs the lure of monopoly pricing. On this analysis, the opportunity to charge monopoly prices - at least for a short period - is what attracts business acumen in the first place, encouraging the risk taking that produces innovation and economic growth.

Furthermore, excessive prices may be pro-competitive, as high prices and profits may act as a signal to attract new competitors to the market. Therefore, high prices - within reasonable limits - should not automatically be deemed excessive or unfair.

It is unquestionably difficult to decide what constitutes an excessive or unfair price. Given that it is rarely possible to ascertain what the price might have been in a more competitive market, what other yardstick can be used? How should competition policies be balanced against state policies in other sectors, given China's macroeconomic background? Should such a policy protect small and medium-sized businesses or encourage emerging business? All of these questions should be considered when deciding whether Tmall's price-rise policy should be classified as abusive.

Nestlé's Filing of Acquiring China' Largest Listed Confectionery Company is Accepted

Dr. Zhan Hao — Thu, 22 Sep 2011 09:50:10 +0800

A spokeswoman from the Ministry of Commerce publicly declared in the recent, that the Ministry has officially accepted the notification on Nestlé’s acquisition of Hsu Fu Chi. If the Ministry turns on the green light for this filing it could be one of the biggest foreign takeovers of a Chinese undertaking historically.

Founded in 1866 by Henri Nestlé in Vevey, Switzerland, Nestlé is the world's leading Nutrition, Health and Wellness company. Nestlé’s product lineup covers from baby food, bottled water, cereals, chocolate & confectionery, coffee, culinary, chilled & frozen food, dairy, drinks to food service, healthcare nutrition, ice cream, petcare, sport nutrition, and further to weight management.

Hsu Fu Chi is China’s largest listed confectionery company, with more than 16,000 sales outlets and 100 sales affiliates. In connection to its revenue, the first quarter of 2011 alone was Rmb1.51bn ($234m). Hsu Fu Chi focuses itself on chocolates, pastries and other sweets markets, and particularly is famous for a breakfast bar called Sachima. It should be recognized that Hsu Fu Chi already developed into a national brand within two decades. Voices from different communities, hence, expressed their worry that this event may ignite nationalist outcries just as it did with Coca-Cola's negotiations with Huiyuan.

From a legal point and preliminary view, this concentration may bring about many anticompetitive effects. Firstly, both Nestlé and Hsu Fu Chi are strong market players in Chinese market with regard to their own products, respectively. (Without exact and concrete market share statistics though). Secondly, there is horizontal overlap between the two “Mr big”, namely, on the product market of confectionery. In a further consideration, the occurrence of penetrating effects between different markets of Nestlé and Hsu Fu Chi cannot be excluded from concerns in any means. Therefore, Nestlé’s action also triggered a school of worries that it may encounter the same judgment as Coca-Cola (KO) and juice maker China Huiyuan Juice Group in 2009.

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

Firstly, Hsu Fu Chi has not such a powerful market position as Coca cola has in consideration of the situation of confectionary market. (6.6% in 2009) Besides, it has been seen that the trend of mergers and acquisitions in China's confectionery industry recent years has facilitated cooperation in many creative levels, and accordingly inflamed more fierce competition and more pressure on local players. Consequently, concerned acquisition here also give rise to many precompetitive effects on the relevant market.

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.

Taiyuan Railway Bureau is Sued by Private Enterprises Alleged Monopoly

Dr. Zhan Hao — Thu, 15 Sep 2011 10:00:49 +0800

On September 7^th, 2011, an antitrust litigation against Taiyuan Railway Bureau was brought to Taiyuan Xinghualing Court on the ground that Taiyuan Railway Bureau violated Anti-monopoly Law and Unfair Competition Law of PRC by its administrative omission.

The trigger for this lawsuit lands on the claim that Taiyuan Railway Bureau (“A” hereinafter) has not responded to the application from Shanxi transport Group Co., Ltd, (“B” hereinafter) of additional tickets outlet, in spite that B has been applying for the authorization since 2007.

According to the case description presented by B in the Indictment, the key points decisive to the case analysis are summarized as follow by sequence number:

1) Party A is an administrative body, exercising administrative functions granted by laws and administrative regulations and in the connection to the said litigation, A is responsible and holds the power to authorize to set up ticket outlets within the its jurisdiction.

2) Party B owns 13 of 40 ticket outlets until May of 2006, hereafter while, a total of 74 new outlets authorized by Party A without exception are established by service-oriented enterprises owned by Party A themselves.

3) Party B has been applying for approval of setting up additional outlets for 4 years since 2007, but yet received reply from Party A.

4) Failing to get sufficient access to the essential facility of distribution (distribution right) has significantly affected Party B’s service quality and further consumers’ interests, as a consequence, a healthy competition process in the market for distribution service of rail tickets in Taiyuan is distorted and restricted in a large degree.

In view of the long history of antitrust enforcement in the States and its Atlantic counterpart, European Union, suing the public agency with administrative function on the ground of antitrust is not common in both U.S. and EU considering the reason that the main job of antitrust law is to regulate conducts of undertakings, instead of that of administrative bodies. Nevertheless, it has its own existence significance in China, which is classified to the concept of “administrative monopoly”.

Administrative monopoly is defined as the executive abuse of administrative power to eliminate or restrict market competition. Except for the general features of economic monopoly, it is caused in most cases by the pursuit of local or sector interests related to the administrative body, hence, could incur greater harm to competition. Given that the unique situation of China, Anti-monopoly Law of PRC (AML) specifically entrenched itself with the concept of “administrative monopoly” in Chapter 5. It enumerates the most frequent illegal act of this class, such as administrative forcing deal, regional blockage, and administrative force of anticompetitive conduct and so forth. Meanwhile, it also prohibits the abstract administrative act with anticompetitive elements. But it is worth noting that there are not specific provisions in relation to negative administrative monopoly existed, such as the circumstance discussed in this article.

For that reason, we have a lot of expectations to observe how the court will decide the case as well as correspondingly how the court will argue for its judgment, which shall play the role of guidance for the judicial practice afterwards with respect to administrative monopoly.

The First Guideline For Reviewing Concentrations in China Was Freshly Baked

Dr. Zhan Hao — Fri, 09 Sep 2011 12:14:30 +0800

With already more than 3 years of practice experience concerning antitrust review to concentrations, the Ministry of Commerce of the People’s Republic of China in recent publicly announced its first set of guideline thereof on August 29, 2011, namely, “Provisional Regulation on the Assessment on the Competitive Effects of Concentration of Undertakings ( it would be abbreviated as “the Regulation” hereinafter)

It should be recognized that the Regulation reflects great significance in many facets without doubt. For one thing, the substantive process of reviewing and assessing concentrations by the Ministry of Commerce is tranparentized in a large degree. As a result, relevant competitors, consumers and other stakeholders of interest could obtain much more convenience for the purpose of supervising antitrust enforcement.

In the second place, the Ministry took this opportunity to standardize in the Regulation, which factors that they will take the most account into in principle, which interests they will consider principally when balancing the pro-competitive and anti-competitive effects of concentration concerned. In this connection, the Regulation would possess the function of conducting, standardizing as well as facilitating the work of antitrust control to concentrations of the Ministry.

For another, as the role of “Guidelines on the Assessment of Horizontal Mergers” of EU, the Regulation is also anticipated to take the responsibility of directing enterprises themselves to pre-assess competitive effects of their concentrations before notification in a proper way, therefore, is meant to lower the cost of concentration as much as possible, both for enterprises and for the Ministry (administrative costs). In any sense, consequently, we have to say that this Regulation fresh out of the oven on August, 29, 2011 is good news, meanwhile, enhances the enforcement of China’s control of concentration to a new phase.

Taking a closer sight on its content, throughout the Regulation, no other articles occupy more importance than Article 3 and Article 4, which are the soul and core of this guideline. Article 3 sets out the main factors specifically, by which the Ministry assesses the competitive effects of concentrations.

In Article 4 the Ministry highlights the most commonly occurring example of a significant impediment to effective competition, that is, the creation or strengthening of ability, incentive and possibility to prevent and restrict competition. What worth noting is that Article 4 paragraph 2 clarifies that, for oligopolistic market, it is sufficient for a refusal to clear a concentration if the above-mentioned ability, incentive and possibility to prevent and restrict competition are collectively possessed by two or undertakings. In other words, the creation or strengthening of a collective dominant position is also the target of Chinese control of concentration.

Except for Article 3 and Article 4, Article 5 to Article 10 are mainly detailed and unfolded explanation of Article 3. Article 5 is the elaboration of Article 3 (1); it indicates the significance of identifying market share and market power as well as the elements that determination of market power would rely on, such as the substitutability of products or services between undertakings of concentration. Similarly, Article 6 gives more details to Article 3 (2), regarding what is the concept of market concentration degree and two instruments (HHI and CRn index) that usually could be employed to conduct a quantitative analysis of market concentration degree.

In addition, another feature in the Regulation is well-marked, namely, consumer welfare is paid much attention, in line with the revolutionary tendency of antitrust law in a lot of jurisdictions. In recent decades, more and more countries have started to add consumer welfare into the objectives of their antitrust law, even the number one objective in some jurisdictions. Both Article 8, 9 and 10 mentioned that concentrations of undertakings will promote the interests of consumers from different aspects, for example, consumers could benefit from upgraded technologies, higher quality, lower price resulted from concentration of undertakings, and so forth. On the contrary, the Ministry may also take the damage of consumer welfare as the reason not to clear a concentration.

Whether antitrust law should only perform its economic regulatory function, or should also help realize some social goals, like guarantee of employment? This issue is still very controversial in many countries. In Europe, some scholars take the view that antitrust law should not take more load than it is supposed to take, that is, economic aims. However, Article 12 of the Regulation specifically makes clear that public interest is also one factor to assess the competitive effects of concentrations in China. This point should in any means draw the attention of foreign investors. In case that one enterprise is facing bankruptcy, then the acquisition of such an enterprise may solve the potential problem of unemployment, hence is beneficial to public interest. In this case, even concerned concentration would give rise to some anticompetitive effects, clearance is not impossible absolutely.

Last but not least, Article 13 provides that in case the concentration has effect of preventing and restricting competition on relevant market, the Ministry of Commerce shall not be cleared, unless undertakings are able to prove the adverse effects are weighed out by beneficial effects or concerning concentrations are in accordance with public interest.

All in all, this freshly baked regulation set out standards to direct the Ministry’s work in terms of assessing the competitive effects of concentration in Chinese market, which is beneficial both for promoting the enforcement quality and for conducting undertakings’ notification process.

China and US move closer on antitrust collaboration

Dr. Zhan Hao — Mon, 08 Aug 2011 17:40:08 +0800

On July 27 2011 China's three anti-monopoly agencies - the Ministry of Commerce, the National Development and Reform Commission and the State Administration for Industry and Commerce - signed an antitrust and anti-monopoly memorandum of understanding with the US Federal Trade Commission and the US Department of Justice in Beijing, with the aim of promoting international communication and cooperation between the agencies.

Federal Trade Commission Chairman Jon Leibowitz stated:

"From the first suggestion to this final signed [memorandum of understanding], both countries has been preparing for two years. During the preparation period, we have established a mutual and steady trust relationship, and made the encouraging goal on market competition."

In establishing a framework for enhanced cooperation between the Chinese and US agencies, the memorandum of understanding will allow China and the United States to move to the next stage in their collaboration on competition law and policy matters. Provision has been made for periodic high-level consultations involving all five agencies, as well as separate communications between the individual agencies.

Specific avenues for cooperation include:

exchanging key information and advice about anti-monopoly law enforcement and
competition policy developments;
providing training programmes, workshops and other assistance to enhance agency effectiveness;
sharing experiences of anti-monopoly law enforcement;
providing views on anti-monopoly laws, regulations and guidelines;
exchanging views on multilateral competition law and policy; and
enhancing the exchange of experience among industries, government departments and the general public on competition law and policy.

The memorandum of understanding does not change the law in either country; rather, it describes a bilateral agreement between China and the United States and expresses a shared goal of effective antitrust and anti-monopoly enforcement. The two countries will cooperate on training programmes, workshops, study missions and internships. Each of the agencies plans to nominate a point of contact to facilitate the liaison work.

The Ministry of Commerce received more than 130 M&A applications in 2010; worldwide, China is the third largest competition review jurisdiction. Once new regulations on penalties for illegal concentration are promulgated, the review of concentration filings will become even more rigorous. Despite the fast pace at which China's anti-monopoly legislation has been implemented, its competition culture is still developing. For the State Council and the three anti-monopoly agencies, the priority is to establish legislation and guidelines that will provide for effective anti-monopoly regulation. The regulators' views in this area raise serious concerns for foreign regulators and investors. Thus, the ability to foresee and comment on trends in Chinese legislation will become increasingly vital for foreign governments in protecting their country's investments in China. As the biggest investor in China outside of Hong Kong and Taiwan, it is clearly in the United States' interest to cooperate with China, so that the latter continues to be an attractive jurisdiction for foreign investment.

Nestlé faces anti-monopoly review in Hsu Fu Chi deal

Dr. Zhan Hao — Tue, 26 Jul 2011 10:03:43 +0800

Nestlé has announced that it plans to commit around $1.7 billion to the acquisition of a 60% share in confectionery manufacturer Hsu Fu Chi. The turnovers of the undertakings involved in the transaction are above the threshold for concentration filing and the deal is subject to anti-monopoly review.

Nestlé plans to purchase a 43.5% stake in Hsu Fu Chi from the two shareholders that are not part of the Hsu family. If these shareholders agree with the stock purchase plan, Nestlé will buy a further 16.5% share from the 56.5% share held by the Hsu family. In 2010, Nestlé's sales in China rose by 15% - the most rapid rate of growth of all of its sales regions. However, the company still lags far behind rivals such as Kraft General Foods and Unilever. For Nestlé, purchasing a famous quality brand is the best way to catch up.

Pursuant to the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings, the undertakings concerned must file a prior notification with the relevant commerce department of the State Council if:

"the combined worldwide turnover of all undertakings concerned in the preceding financial year was more than Rmb10 billion, and the nationwide turnover within China of each of at least two of the undertakings in the preceding financial year was more than Rmb400 million."

A spokesperson for the Ministry of Commerce announced at a press conference that on the basis of the information held by the ministry, the turnover figures of both parties reach the relevant thresholds.

The acquisition could significantly change the composition of the Chinese confectionery market. Nestlé is the fifth biggest manufacturer in China's domestic confectionery market(See 21st Century Business Herald); Hsu Fu Chi, with a market share of more than 7%, is in second place. If its plan succeeds, Nestlé will become the market leader. The potential impact of the deal makes it sensitive. It is too early to predict whether the ministry will approve the acquisition, with or without conditions.

Documents and materials have been submitted to the ministry and will be officially filed once the ministry is satisfied with the sufficiency of the documents and materials.

Can companies avoid filing concentrations?

Dr. Zhan Hao — Tue, 21 Jun 2011 15:49:22 +0800

When a merger, acquisition or joint venture is connected to the Chinese market and is treated as a concentration under China's Anti-monopoly Law, a company's first question to its lawyer is likely to be whether the transaction must be filed with the Ministry of Commerce.

The reason for the problem is clear. The law and relevant regulations state that a concentration which meets the filing threshold must be filed. However, the low threshold for filing a concentration in China means that the understaffed ministry has a large number of filings to review. As a result, filing is a time-consuming process. Chinese competition lawyers will also be aware that there are no specific provisions of law that penalise failure to file. Some undertakings weigh the risk of being caught against the potential time saving and choose to not to file, instead discreetly proceeding with the transaction. This practice has become an open secret in China.

On June 13 2011 the ministry published the Provisional Rules on the Investigation of Concentrations of Business Operators without Legal Filing (Draft Rules). A brief consultation period closed on June 23 2011. The publication of this set of rules closely follows the release of the Provisional Rules on the Assessment of Effects of Concentrations on Competition (Draft Rules). Both regulations represent further progress in the enforcement of China's anti-monopoly legislation.

The Provisional Rules on the Investigation of Concentrations of Business Operators without Legal Filing (Draft Rules) elaborate on the procedure for investigating violations of the law, including the assessment of liability and penalties for violations. They state that in addition to the ministry's right to investigate an unfiled concentration on its own initiative, any institution or person can report to the ministry to initiate an investigation. Articles 6 to 8 state that investigated operators must submit relevant evidence regarding the concentration, which the ministry will start to review within 60 days.

The draft rules provide that if operators are found to be participating in an illegal concentration, the ministry may:

block the concentration;
require the operators to dispose of the shares or assets involved in the concentration;
transfer the business within a prescribed period;
take steps to require the operators to restore their operations to the situation that existed before the concentration; and
fine an undertaking up to Rmb500,000.

Although the maximum fine is insignificant compared to the value of many concentrations, the potential damage to a company's reputation and its relationship with the regulatory authorities is likely to be a greater deterrent. This draft regulation should provide the definitive answer to the question of whether to comply with a filing obligation.

Jurisdiction for private anti-monopoly litigation

Dr. Zhan Hao — Fri, 20 May 2011 23:40:10 +0800

Since the Anti-monopoly Law was passed, around 50 private anti-monopoly litigations have been brought and the courts' jurisdiction over such cases has become a key issue.

Under the internal organisation of the Supreme Court, No 3 Civil Division is in charge of hearing anti-monopoly cases and directing anti-monopoly litigations at local level. This responsibility is no surprise. Previously, No 3 Civil Division focused on IP cases. Ostensibly, competition issues have an indispensable connection with IP rights; thus, on promulgation of the Anti-unfair Competition Law, No 3 Civil Division became responsible for anti-unfair competition cases. No 3 Civil Division has now become the full-time anti-monopoly court within the Supreme Court.

Kong Xiangjun is the director of No 3 Civil Division. Before becoming a Supreme Court judge, Kong was an official in the State Administration for Industry and Commerce, which deals with cartels and abuse of dominance. Although it will be some time yet before the Anti-monopoly Law is promulgated, Kong had already published a book regarding antitrust law.

Article 50 of the Anti-monopoly Law states that where another entity or an individual suffers loss due to a business operator's monopolistic conduct, the business operator shall assume civil liabilities. However, as Article 50 does not cover jurisdiction, damages, plaintiffs, burden of proof or other practical issues that relate to private antimonopoly litigation, some local courts have accepted anti-monopoly litigation without a detailed judicial interpretation.

Practice shows that so far, local courts have handled the issue of jurisdiction for private anti-monopoly litigation based on the regulations relating to IP litigation. The Supreme Court has issued judicial interpretations relating to jurisdiction for IP cases. The Civil Procedure Law stipulates that the Chinese court system consists of four levels: district, intermediate (municipal), high (province) and supreme. In regard to IP litigation, only intermediate courts and district courts specifically designated by the Supreme Court can accept IP claims as first instance courts.

In accordance with this regulation, some intermediate courts and district courts have heard anti-monopoly cases; such cases have mostly been heard by IP panels. In the opinion of the legal profession, the judgments and verdicts in these litigations are unsatisfactory. The courts seldom provide detailed reasoning in their decisions and rarely permit economic analysis in private anti-monopoly cases.

Therefore, this has cast doubts over private anti-monopoly litigation. When the Supreme Court drafted the exposure draft of its judicial interpretation on civil anti-monopoly litigation, the jurisdiction issue was explictly considered. To simplify matters, the exposure draft does not grant jurisdiction to courts at district level. Even at municipal level, not all intermediate courts can hear anti-monopoly cases; only the intermediate courts located in the capitals of provinces and autonomous regions, municipalities with independent planning status and municipalities directly under the central government, as well as intermediate courts designated by the Supreme Court, are competent to hear anti-monopoly cases.

This stipulation regarding jurisdiction has satisfied the legal profession to a degree because the courts should now treat anti-monopoly cases more carefully than IP cases. Thus, the judicial interpretation bodes well for enforcement of the Anti-monopoly Law by the courts.

The Supreme Court Issued Judicial Interpretation on the Anti-monopoly Civil Procedure

Dr. Zhan Hao — Thu, 05 May 2011 10:17:01 +0800

On April 25^th, the Supreme Court issued Provisions On a Number of Issues Applicable to the Trial of Monopoly Civil Dispute Cases (the “Exposure Draft”) for public comments.
　　　　

Totalling 20 articles, this Exposure Draft are based on the Anti-Monopoly Law (“AML”), the Civil Law, the Civil Procedure, the Contract Law, the Torts and other related laws. Primarily, the basic construction and detailed rules of the anti-monopoly civil procedure are summarised in the 4 parts below：

(1) About the centralized jurisdiction and transfer rule

Anti-monopoly civil dispute cases have their own features, which can be summarized as professionalism, complication and significant effect. Such features may explain why we believe the standard and quality of judgment will improve and there will be greater degree of consistency with the judgments, if the hearing of the cases is centralized to the courts which are well known for their excellent and with numerous judges with rich experience in AML.

From a practical perspective, regulation of the cause of action of the civil cases, which was issued by the Supreme Court on April 1st,2008, has moved the monopoly disputes and various unfair competition disputes into the category of intellectual property right dispute and the intellectual property right courts are in charge of the hearing of the monopoly civil disputes cases. That is to say, monopoly civil disputes cases are the same as the intellectual property rights cases where centralized jurisdiction is to apply.

The Exposure Draft also establishes the rule of transfer. Regarding to the monopoly agreements, the disputes between the parties may arise out of their own monopoly agreements. The defense or counterclaim formed based on AML in contractual disputes may affect the validity of contracts directly. Under this circumstance, if the court does not consider the defense or counterclaim based on monopoly just because it has no jurisdiction over monopoly dispute case, the judgment from different courts on the validity of the same contract may be in conflict. Therefore, the Article 2 and Article 3 provide that when the defendants raise their defense or counterclaim based on AML, even if the court who has accepted the case does not have jurisdiction over the anti-monopoly civil dispute case, it shall not reject the cases or require the plaintiff to file another law suit due to its lack of jurisdiction. According to Article 3 of the Exposure Draft, under such circumstance, the court that has no jurisdictions over the anti-monopoly cases shall transfer the case to the court that has such jurisdiction.

(2) Natural persons, legal persons and other associations including the operators and consumers could be the plaintiffs, if they are infringed by the monopoly acts.

Article 4 of the Exposure Drafts states natural persons, legal persons and other association whose rights are infringed by the monopoly acts, including operators and consumers, may file a suit according to the Article 50 of the AML. That is the first time for relevant regulations to specify that consumers as indirect victims are entitled to make an anti-monopoly dispute case.

According to Article 50 of the AML, as long as a person’s rights are infringed by the monopoly acts, the operators shall assume civil liabilities. But this article does not specify the qualification of the plaintiff. Theoretically speaking, those operators and consumers who suffered losses directly or indirectly as a result of monopoly acts are qualified to be plaintiffs. The indirect victims, especially the indirectly injured consumers, are always the ultimate victims, who may be in better position to discover and expose monopoly acts. Therefore, as plaintiffs, the consumers may enhance the possibility of disclosing and preventing the monopoly acts. What is more, this will also ensure that the victims can get the compensation.

(3) Both direct litigation and litigation after administrative procedure are recognized by the Exposure Draft

There are two approaches to deal with breaches to the AML: (1) administrative law enforcement and civil procedure; (2) civil law enforcement system. In the monopoly civil dispute cases, the plaintiffs always have difficulties with collection of evidence, understanding the professional knowledge and so on. If the acts have been confirmed as the monopoly acts by the administrative departments, a plaintiff may file a suit after the decision made by the administrative department becomes effective. That will relieve the plaintiff from its heave burden of proof and benefit plaintiffs in the protection of their legal rights and ultimately obtain compensation.

However, the said procedure also has it disadvantage. For example, the administrative procedure may need more time. Therefore, Article 6 of the Exposed Draft clearly denies the administrative methods must be adopted first. In fact, civil procedure litigation and administrative law enforcement are two separate procedure, the courts shall make the judgment through reviewing the plaintiffs’ claim independently if the investigation by the administrative departments failed to confirm acts in dispute as monopoly acts.

(4) The burden of proof

After two years of experience with anti-monopoly civil litigation, the problems regarding the difficulties of the plaintiffs to collect evidence and prove anti-monopoly conducts are blocking the development of the anti-monopoly civil procedure. If we could not find a way to resolve this situation, the rights and interests of the victims may hardly be protected.

The Exposure Draft explains the issue about the distribution of burden of proof between plaintiffs and defendants in detailed and there are different distributions of the burden of proof for different types of monopoly acts.

For example, Article 8 states that if the monopoly agreements fall within Article 13(1) to (5) and Article 14 (1) and (2) of the AML, and if the operator cannot provide enough counter evidence to prove the monopoly agreements is not with the obvious purpose of restraining and excluding the competition, the victims would not be required to provide evidence relating to such issues. According to Article 9, the public enterprises and the operators with exclusive qualifications may be deduced to have market dominance position, except where they have evidence to prove that the contrary. The same article states that the disclosure information of public listed companies, recognition from the operations who are sued to engage in monopoly actions and market investigation, economic analysis, research and statistic can be employed as the preliminary evidence to prove the dominant position. Furthermore, Article 12 states about the condition for applying to the court ordering defendants to submit evidence and the consequences of failing to provide the evidence ordered by the court. Article 13 also allows the parties to seek assistance from and to call experts witnesses. All of these measures would alleviate the difficulties faced by the plaintiffs in proving their claims.

We believe this Exposure Draft, which is drafted with the experience from monopoly civil dispute cases and the related litigation would be the important legal basis for the anti-monopoly litigation in the future.

Revised Unfair Competition Law responds to changing economy

Dr. Zhan Hao — Thu, 05 May 2011 10:11:22 +0800

Introduction

The Unfair Competition Law, which was enacted in 1993, has been described as the constitution of the market economy. However, China's rapid social and economic development has given rise to new forms of unfair competition that the legislature did not foresee. The law is now in the final stages of amendment; the State Administration for Industry and Commerce (SAIC) has completed a revised draft and has submitted it to the Legislative Affairs Office of the State Council.

Information released by the SAIC suggests that the changes focus on:

identifying the competent enforcement agency to ensure uniform enforcement standards; and
idefining new forms of unfair competition to extend the scope of administrative enforcement.

Identifying competent enforcement authorities

Various forms of unfair competition have led industry groups to bring claims to demand fair, well-ordered and legitimate competition. In recent times Google's domain name leaving for Hong Kong, the so-called 'circumvention affairs' between milk manufacturers Mengniu and Yili regarding tainted milk products and the dispute between Tencent and Qihu in the internet sector have all been cited as examples of the Chinese commercial environment becoming increasingly unstructured. In disordered markets, new forms of unfair competition may slip through the gaps in the existing law.

A compromise in the Tencent and Qihu dispute was finally reached following mediation conducted by the Ministry of Industry and Information Technology. The matter was subsequently resolved by the parties apologising to the public. Both parties may have been in breach of the law throughout the period in question, but the SAIC unfortunately chose to remain silent, despite being the main enforcement agency.

The main issues surrounding implementation of the law are how to manage the relationship between the SAIC and related industry departments and how to clarify each authority's administrative and enforcement functions to ensure consistent enforcement.

Article 3 of the law states that the administrative departments for industry and commerce at or above county level have the right to supervise and inspect acts of unfair competition. The article further states that "where laws, administrative rules and regulations provide that other departments shall exercise the supervision and inspection roles, those provisions shall apply". Thus, in addition to administrative departments for industry and commerce, such acts may be monitored and inspected by other entities, such as:

administrative departments of quality supervision, inspection and quarantine;
pricing departments;
health departments; and
departments of culture.

This provision of the law leaves broad scope to apply other laws and regulations. For example, the Insurance Law, the Law on Commercial Banks and the Tendering and Bidding Law all contain provisions identifying enforcement agencies which are not mentioned in the Unfair Competition Law. This creates conflicts between laws and regulations in practical terms. The provisions on enforcement agencies in the Unfair Competition Law are unclear, as is the division of enforcement rights and responsibilities. This seriously weakens the law as an instrument of competition enforcement.

An expert who participated in the drafting of the revised law has disclosed that it assigns responsibility for enforcement to the administrative departments for industry and commerce. It states that "the SAIC and administrative departments for industry and commerce at various local levels exercise rights of supervision over, and inspection of, acts of unfair competition". This provision seeks to ensure consistency not only in identifying the correct agency, but also in the standards to be applied. This change will support the development of the market economy, encouraging and protecting fair competition and preventing acts of unfair competition.

Greater rights for consumers

On January 14 2011 the Ministry of Industry and Information Technology published a consultation draft of the Interim Measures on the Supervision and Management of the Internet Information Service Market Order. It states that entities which, without reasonable excuse or authorisation, provide products or services that are incompatible with competitors' legal products or services may be liable for a fine of between Rmb100,000 and Rmb1 million. In particularly serious cases, an operator may be required to cease operations while it rectifies the problem.

The consultation draft acknowledges that the internet era has resulted in new technical methods of unfair competition. Some software manufacturers have tried to change or inhibit the normal downloading and installation of their competitors' software by blocking the set-up process or deleting notification windows. The problem is becoming increasingly serious and widespread, but the existing law has no definitive answer to the question of whether such tactics are legal.

The revised draft addresses the issue by listing more acts of unfair competition in the field of information technology and e-commerce, including:

the counterfeit use of another party's domain name or a commonly used abbreviation of the company name;
the use of identical or similar marks with others which are well known to the public, but are registered in another country or area; and
the amendment of another party's brand label and the placement of its products on the market without authorisation.

Moreover, the revised draft empowers the SAIC to identify other acts of unfair competition. Article 2 of the existing law provides that 'unfair competition' refers to the violation of the law by operators' acts "which infringe other operators' lawful rights and interests and disturb the socio-economic order". The revised draft adds 'the consumers' as potential injured parties, which expands the scope of protection. Unfair competition acts are always harmful to consumers' rights and interest. In future, consumers may be able to bring suit and protect their rights and interests on the basis of the new law.

Comment

The revised draft contains many more changes. An overhaul of the law could be a big step forward for market operations in China; it promises reasonable regulation of unfair acts and stronger protection of consumers' rights and interests.

Draft of the New Rules on Administration of Representative Offices of Foreign Insurance Institutions is Inviting Public Comments

Dr. Zhan Hao — Tue, 05 Apr 2011 12:55:09 +0800

On 22^nd March 2011, the CIRC released a draft of the new Rules on Administration of Representative Offices of Foreign Insurance Related Institutions(“New Draft Rule”). This New Draft Rule shall replace the Rules on Administration of Representative Offices of Foreign Insurance Institutions (Baojianhuiling [2006]No.6) published on 1^st September 2006 (“Rule of Baojianfa [2006] No.6”) and the Interpretations of the CIRC on Rules on Administration of Representative Offices of Foreign Insurance Institutions (Baojianfa [2008]No.101) published on 25^th November 2008. Foreign insurance institutions should pay attention to this New Draft Rule because it significantly raised the threshold for foreign insurance institutions entering into Chinese insurance market.

To Whom does the New Draft Rule Apply to?

According to Article 2, the New Draft Rule shall apply to insurance group companies, insurance companies, insurance intermediaries, insurance associations and other insurance institutions which are registered outside China (including Hong Kong, Macau and Taiwan). Foreign insurance intermediaries in the aforesaid Article 2 means insurance brokerage institutions, insurance agency institutions and insurance surveyors and adjustors institutions registered outside China. Other insurance institutions are defined as nonprofit institutions registered outside China which focuses on insurance academic research, training and cooperation.

Compared with Baojianfa [2006] No.6, insurance group company is added to the New Draft Rule and reinsurance organisation has been deleted from Draft Rule. That means reinsurance companies will not need to comply with the higher standards set out in the New Draft Rule.

Requirements for foreign insurance institutions to establish a representative office in China

In accordance with Article 5 of the New Draft Rule, Foreign insurance institutions applying to establish a representative office (“Applicant”) in China shall satisfy the following requirements：

(1) Has been established for over 20 years;

(2) The home country or area of the Applicant has a stable economic and political environment and has a comprehensive financial supervision system;

(3) No record of being severely punished in the 3 years prior to the application date;

(4) Has a clear and reasonable feasible scheme to establish representative office in China;

(5) The proposed Chief Representative shall be qualified according to this New Draft Rule;

(6) Other prudential requirements stipulated by the CIRC.

Besides the requirements set out in Article 5, foreign insurance group companies and foreign insurance companies applying to establish a representative office shall also satisfy the following requirements:

(1) The Applicant has been operating an insurance business continuously for over 20 years; absorbing other companies or establishing a new insurance company by merging with other companies will not be taken into account in the calculation of Applicant’s insurance business operation period;

(2) The total capital of Applicant was over 2 billion US dollar in the last year prior to the application date;

(3) Applicant and its affiliated companies shall have a complete governance and risk control system, and shall operate in a lawful manner and with stable development. (Article 6 of the New Draft Rule)

For insurance group company, the business operation period shall be calculated from the earlier of the 2 followings:

(1) from the time the group company began to operate an insurance business;

(2) from the time a subsidiary of the insurance group company began to operate an insurance business. (Article 7 of the New Draft Rule)

Besides the requirements set out in Article 5, foreign insurance intermediary institutions applying to establish a representative office in China shall also satisfy the following requirements:

(1) The Applicant has been operating an insurance intermediary business continuously for over 20 years; absorbing other companies or establishing a new insurance intermediary institution by merging with other companies shall not be taken into account in the calculation of the Applicant’s insurance intermediary business operation period;

(2) The total capital of the Applicant was over USD200 million in the year prior to the application date;

(3) Applicant and its affiliated companies have a comprehensive governance and risk control system, and operate in a lawful manner with steady growth. (Article 8 of the New Draft Rule)

Requirements on the proposed Chief Representative of Insurance Institutions’ Representative Office

(1) graduated with a bachelor degree or above;

(2) have at least 8 years of experience in insurance;

(3) have at least 2 years of managerial experience or other proof that it has the necessary knowledge, capability and experience for the proposed duties;

(4) has no record of being been severely punished in the 3 years prior to the application date;

(5) Other requirements stipulated by the CIRC. (Article 14 of the New Draft Rule)

What documents shall be submitted by Applicant to CIRC?

The applicant shall submit two copies of the following documents to CIRC:

(1) Formal application forms;

(2) A letter of application addressed to the Chairman of CIRC and signed by the Chairman of the Board of Directors, General Manager or person in charge of the concerned Applicant;

(3) A photocopy of the business license, lawful business operation certificate or the registry certificate issued by the relevant regulatory authorities of the Applicant’s home country or area;

(4) Applicant’s articles of association;

(5) (5) a list of the members of the Board of Directors, management personnel or principal partner;

(6) Annual reports of the last 3 years prior to the application;

(7) If there is a supervising authority in Applicant’s home country or area, Applicant shall submit a letter of opinion issued by this authority regarding to the Applicant setting up a representative office in China; if there is no authority in the Applicant’s home country or area, Applicant shall submit a letter of recommendation from the industrial association of which the applicant is a member, and both types of letters shall contain information as to whether the Applicant received any penalty within 3 years prior to the application;

(8) A feasible scheme to establish representative offices in China;

(9) Identification, educational qualifications and resume of the proposed Chief Representative;

(10)A power of attorney signed by the Chairman of the Board, General Manager or person in charge of the Applicant for the chief representative proposed;

(11)A declaration made by the Applicant which provides that the proposed Chief Representative did not receive any severely punishment 3 years prior to the application;

(12)Other documents and materials required by CIRC. (Article 9 of the New Draft Rule)

Basically the requirements on submission of documents resemble with the rule of Baojianfa [2006] No. 6, the differences between the 2 are:

(1) Besides of Chairman of the Board of Directors, General Manager, the person in charge of the Applicant can also issue the letter of application to the Chairman of CIRC and sign the power of attorney for the chief representative proposed.

(2) In the rule of Baojianfa [2006] No. 6, both a letter of opinion issued by the supervision authority of Applicant’s home country or area, or a letter of recommendation from the industrial association of which the applicant is a member are acceptable by CIRC. In this New Draft Rule, a letter of opinion issued by the authority of Applicant’s home country or area should be submitted first. Only if there is no such authority in the Applicant’s home country or area, a letter of recommendation from the industrial association of which the applicant is a member is acceptable.

(3) The Applicant does not need to submit the necessity and feasibility report of establishing a representative office, but has to provide a feasible scheme.

(4) Besides of resume of the proposed Chief Representative, Applicant shall also submit the identification and educational qualifications of the proposed Chief Representative.

Although this New Draft Rule is just a draft, foreign insurance companies would note the signal from the CIRC that is: CIRC wants to raise the thresholds of entering into Chinese insurance market. This is understandable because the near-collapse of the global financial system in the fall of 2008 and the credit crisis that followed gave rise to widespread calls for changes in the regulatory system. Foreign insurance companies shall seize the opportunities before the New Draft Rule come into force or shall carry out an internal review before coming to China.

Market dominance and the Internet: new industry, new rules?

Dr. Zhan Hao — Sat, 02 Apr 2011 16:20:08 +0800

China's biggest encyclopaedia website, Hudong.com, has requested an anti-monopoly review of Baidu, the leading Chinese internet search engine. Hudong.com is asking the State Administration for Industry and Commerce (SAIC) to fine Baidu a total of Rmb79 million.

This is not the first complaint about monopolistic behaviour by Chinese internet enterprises. In November 2010 the SAIC received a request for a review of internet service portal Tencent and sought submissions regarding Tencent's abuse of dominance. However, just as the online marketplace differs from the traditional economy, unfair competition issues are perceived differently in the fields of conventional business and e-commerce. The development of China's internet industry and the ongoing abuse of market dominance by the country's oligopolies have made the definition of a 'monopoly' a hot issue.

The Tencent investigation revealed that at the end of 2010, the company's share of the instant message software market was around 76.5%, making it unquestionably dominant in statistical terms. Tencent was alleged to have abused its market dominance mainly through bundled sales and the exclusion or restriction of transactions. Baidu's market share in the search engine software market at the same time was around 72%; however, the accusations of market dominance against Baidu relate primarily to alleged discriminatory treatment and the conclusion of monopolistic agreements.

Article 3 of the Anti-monopoly Law defines 'monopolistic conduct' to include:

monopoly agreements between operators;
abuse of market dominance; and
elimination or restriction of competition by concentration among operators.

Under Article 19, market dominance is presumed to exist if:

one operator's market share represents one-half of the relevant market;
two operators have a combined market share of two-thirds of the relevant market; or
three operators have a combined market share of three-quarters of the relevant market.

Under these provisions, internet companies such as Baidu and Tencent could be presumed to enjoy market dominance. However, in the field of e-commerce, market dominance should not be assessed purely on the basis of market share; rather, assessing an operator's position requires a synthesis of elements, including technical standards and barriers to market entrance. The internet industry has a number of special characteristics: rapidly changing technologies, low barriers for market entrants and general cooperation between enterprises. Arguably, these characteristics could be used to demonstrate that enterprises with a high market share do not necessarily enjoy market dominance in the conventional sense. In online commerce and related high-tech industries, old technologies are constantly updated or replaced; as a result, an internet enterprise may break up (or at least alter) its market share in the course of its business development. It makes little sense to determine market dominance in the same way as in traditional sectors and the anti-monopoly legislation in this field still has room for refinement.

Time Limits in Property Insurance Litigation in the People's Republic of China

Dr. Zhan Hao — Tue, 22 Mar 2011 16:01:59 +0800

This article is written by Kate Chan, the Senior Foreign Counsel of Grandall Legal Group with Contribution from Dr. Zhan Hao.

This article summarises the time limits that are relevant to the exercise of rights and defences by property insurers in claim-related disputes and in the claim process generally.

Termination by the insurer for non-disclosure

Article 16[1] of the Insurance Law[2] provides a right to the insurer to terminate an insurance contract for non-disclosure of material facts. The time limit for the exercise of the right by the insurer is 30 days, beginning from the day the insurer has knowledge of the cause giving rise to its right to terminate i.e. the breach of duty to disclose by the applicant for insurance. A contract of insurance cannot be terminated for non-disclosure 2 years after it had been entered into, this is so even in the case where the insurer had only discovered the breach by the applicant less than 30 days prior to the expiration of the 2 year period. Article 13 of the Insurance Law provides that an insurance contract comes into existence when an insurer agrees to underwrite the risk.

The time period prescribed by Article 16 is known as a period of exclusion of right (除斥期), usually such period cannot be extended for any reasons and once it begins to run there is no suspension of the period.

The 30 days and 2 years time limits specified in Article 16 is also applicable to an insurer with a right to terminate a life insurance policy under Article 32 where the applicant had falsely declared the age of the insured.

Limitation of action period of the insured’s or beneficiary’s right to claim payment of indemnity and insurance money

Besides a plead for non-disclosure and that the claim is not within coverage of the insurance contract, the defence that a claim for payment under a policy is time barred is also available to an insurer under the PRC laws.

Article 26 of the Insurance Law provides that for non-life insurance, an insured’s or beneficiary’s right to demand the insurer to pay indemnity or insurance money has a limitation of action period of 2 years, the period begins to run from the day the insured or beneficiary knows or should have known of the insured event. For life insurance, the relevant limitation of action period is 5 years.

The time limit specified in Article 26 is expressly defined as the “limitation of action period”, this period is distinguishable from the time period in Article 16, it may be suspended, discontinued and extended. This description was inserted in the present amendment of the Insurance Law to clarify the confusion over the nature of this time limit in the old law.

A general limitation of action period for civil claims is 2 years[3] as specified in the General Principles of Civil Law (“the Civil Law”). The period begins from the day a claimant knows or should have known that his rights had been violated. This period may be

- suspended (中止)[4], during the last 6 months of the limitation of action period, if a claimant cannot exercise his right due to force majeure (不可抗力) or other obstacles (其他障碍), the limitation of action period shall be suspended. The running of the period resumes when the reason for suspension has disappeared;

- discontinued (中断)[5], the period may be “discontinued” and re-run for a period of a 2 years if (a) a claimant issues proceedings in the court, (b) a claimant requests the potential defendant to perform his obligation; or (c) the party with the obligation to perform agrees to perform his obligation; and

- extended (延长)[6], the court is empowered to extend a period of limitation of action in special circumstances.

The maximum time limit to bring proceedings in a PRC court is 20 years from the date of the infringing act and this maximum period of limitation of action is not subject to the rules for suspension and discontinuance but may be extended by the court.

Time limit for termination after transfer of ownership of the insured property “subject to the insurance contract”

Article 49 of the Insurance Law deals with the transfer of ownership of the insured property. The insured or the transferee of the insured property should notify the transfer of the insured property to the insurer in a timely manner (及时). If the transfer leads to a significant increase of risk, the insurer has the right to increase the premium or terminate the policy in accordance with the policy within 30 days after receipt of the notice of transfer. If the insured or transferee failed to report any transfer to the insurer and an insured event occurred due to the increased risk as a result of the transfer, the insurer shall be not obliged to provide indemnity. Where an insurance contract does not provide for increase of premium or termination upon transfer of the insured property, there are support for the view that if this is the case, the insurer has no right to terminate the contract nor demand additional premium under Article 49[7].

Termination of insurance contract for partial destruction of the insured property

Article 58 provides a right to terminate the policy for partial loss of the insured property. Within 30 days after the insurer had provided indemnity for partial loss of the insured property, the applicant may terminate the policy and unless otherwise agreed in the insurance contract, the insurer may terminate the contract but should give 15 days’ notice to the applicant when exercising its right to terminate.

Other rights of the insurer to terminate an insurance contract that do not have a time limit

In a situation where an insured or beneficiary had lied about the happening of an insured event or intentionally caused the occurrence of an insured event, the insurer under Article 27[8] has the right to terminate the insurance contract and shall not be obliged to provide indemnity for the insured event.

Article 51 provides the insurer a right to demand increase of premium or termination of contract for the applicant’s and insured’s failure to ensure safety of the insured property in accordance with the contract. Disputes regarding this article frequently arise between the insured and the insurer in practice.

Article 52 provides that where there is a significant increase of risk to the insured property during the period of insurance, the insured has a duty to advise the insurer of the increase of risk in accordance with the contract in a timely manner, the insurer may in accordance with the contract increase the premium or terminate the contract.

Time limits for responding to a claim imposed by the Insurance Law

If the readers thought the above time limits are rather short, you may also like to know about the time limits for response and payment in the claim process “recommended”in the Insurance Law:

Stages in the Claim Process	Time Limits	Article No.
After receipt of a claim for payment of indemnity or insurance money, time within which the insurer shall complete assessment of the claim	Straight forward claims - the insurer shall assess the claim in a “timely manner”, as the time suggested for assessment of complicated claims is 30 days, “timely manner” here implies a period of less than 30 days.	23.1
	Complicated claims - 30 days unless otherwise agreed in the contract	23.1
After the insurer had completed the assessment of the claim, for claims which are outside coverage, time within which the insurer should notify the insured of the rejection of the claim with reasons	3 days	24
After receipt of the claim together with all claim information and proof of the claim, time within which the insurer should make payment	If within 60 days the insurer is still unable to ascertain the total amount of the claim, it should first pay for the portion of the claim which could be ascertained and pay for the outstanding amount of the claim after it could ascertain the total amount of the claim.	25
After agreement has been reached between the insured/ beneficiary and the insurer, time within which payment should be made	Within 10 days or if the insurance contract stipulates otherwise, payment should be made in accordance with the terms agreed in the contract	23.1
Consequences if the insurer failed to fulfil its obligation within time	If the insurer failed to fulfil its obligation under Article 23.1 in a timely manner, it is liable to compensate the insured / beneficiary for loss suffered as a result.	23.2

These time limits are “recommendations” rather than compulsory requirements, insurers could extend these time limits as long as they deem necessary by expressly providing for these time limits in the policy. However, insurers may face challenges from the court who may rule against such extension of time for obvious unfairness to the insured.

[1]Article 16 is within Section I “General Rules” of Chapter 2 “Insurance Contract” of the Insurance Law and is applicable to both life and property insurance contracts.

[2]In force from 1 October 2009

[3] Article 135 of the General Principles of Civil Law. Article 136 of the Civil Law provides a shorter limitation of action period of one year for 4 specific types of claims namely, personal injuries, sales of substandard goods without warning, payment of rent and loss or destruction of property in care of another.

[4] Article 139 of the General Principles of Civil Law

[5] Article 140 of the General Principles of Civil Law

[6]Article 137 of the General Principles of Civil Law

[7] Dr Zhan Hao “The New Insurance Law Interpretation on Practice Highlights and Case Analysis”, Law Press (2010) at page 324

[8] Article 27 is applicable to both life and property insurance contracts.

Grandall was awarded the "Insurance Law Firm of the Year"

Dr. Zhan Hao — Mon, 28 Feb 2011 10:24:05 +0800

On 24th February 2011, one of the world most influential legal services ranking organisation Chambers & Partner held its second Chambers China Awards in Beijing and Grandall Legal Group was awarded the Insurance Law Firm of the Year. The award which honours the work of law firms in China consists of 20 categories and 18 of which were practice specific. It has been a tremendous encouragement for the members of the Insurance Law Department to have received the same award for 2 consecutive years which reflects the excellent work and continuous effort of the Department. Dr Zhan Hao, the head of the Insurance Law Department and Executive Partner of Grandall (Beijing) received the award on behalf of the firm.

New Notice Strengthens National Security Review

Dr. Zhan Hao — Fri, 25 Feb 2011 15:58:03 +0800

Recently, General Office of the State Council issued the Notice of Launching the Security Review System for Acquisitions of Domestic Enterprises by Foreign Investors (“the Notice”). The Notice will come into effect on March 5, 2011.

Security review system for acquisition of domestic enterprises by foreign investors (hereinafter referred to as "Security review") is neither created by China, nor meaning to deter foreign investment. A lot of developed countries have set up M&A Security review for many years to protect their own national security related interests. China already started Security review a few years ago, but it hasn’t yet released the formal regulations until now. The Security review system covers two sectors:

i) foreign investors' acquisition of military industrial enterprises or military industry related supporting enterprises, enterprises located near key and sensitive military facilities, and other entities relating to national defense;

ii)foreign investors' acquisition of key domestic enterprises in areas such as agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, etc., whereby the foreign investors might acquire the actual controlling right thereof.

Here we need to clarify the two concepts mentioned above, the “foreign investors' acquisitions” and the “actual controlling right”.

In accordance with the Notice, “Foreign investors’ M&As” means:

i) A foreign investor's purchase of the equity of a non-foreign-invested enterprise in China, or subscription of the capital increase of a non-foreign-invested enterprise in China, thereby transforming said enterprise into a foreign-invested enterprise;

ii) A foreign investor's purchase of the equity held by Chinese shareholders in a foreign-invested enterprise in China, or subscription of the capital increase of a foreign-invested enterprise in China;

iii) A foreign investor establishes a foreign-invested enterprise, purchases by agreement the assets of a domestic enterprise through said foreign-invested enterprise, and operates such purchased assets, or purchases the equity of a domestic enterprise through the said foreign-invested enterprise; or

iv) A foreign investor directly purchases the assets of a domestic enterprise and uses the purchased assets to invest and establish a foreign-invested enterprise for operation of such assets.

“Actual controlling right” means:

i) Ownership of 50% or more equity interest by the foreign investor, its controlling parent company and controlled subsidiaries;

ii) Ownership of 50% or more equity interest by multiple foreign investors;

iii) Ownership of less than 50% of equity interest but having the voting right to exert major influence at shareholders’ or directors’ meetings; or

iv) A transfer of actual control, including control over business decisions, finance, human resources, technology, to foreign investor(s).

According to the Notice, the contents of Security review are:

i) Impact of the M&A transactions on the national security, including the domestic product manufacturing capacity, domestic service provision capacity, and relevant equipment and facilities needed for the national security;

ii) Impact of the M&A transactions on the stable operation of national economy;

iii) Impact of the M&A transactions on the basic living of the people; and

iv) Impact of the M&A transactions on the R&D capacity for key technologies related to the national security.

Foreign investors engaging in M & A activities in China need to pay more attention to the newly announced Notice. There is no doubt that the Notice will add complexity and uncertainty to foreign investor’s M & As in China.

Think again before going to China

Dr. Zhan Hao — Wed, 09 Feb 2011 14:52:47 +0800

Great news for Chinese insurance industry is from CIRC’s Chairman Mr. Wu Dingfu. In a recent press conference in January 2011, Mr Wu introduced the situation of the development of the Chinese insurance market, during his speech he said, in the last 5 years, the insurance premium income of the country has increased 24.2% per year on average and has reached 720.12 billion yuan, the income from investment has been over 6% per year on average. China has become the most important newly developing country for the insurance industry where the number of insurance companies had increased by 53 since 2005 and there are now a total of 146 insurance companies in China.

On the back of the glorious Chinese insurance market, for most of the foreign insurance companies, 2010 had still been a difficult year. In 2010, the market share for foreign life insurance companies is only around 5% and the market share for foreign property insurance companies is only around 1%. Apparently, foreign insurance companies in China did not share the benefits of the fast developing Chinese insurance market.

Foreign insurance companies are facing various problems in China. Stagnant market share, heavy pressure on premium income and difficulties on attracting and retaining employees are the three most common problems. Firstly, due to the unwritten rule of CIRC, CIRC only approve opening of one branch for each foreign insurance company per year. So foreign insurance companies cannot open multiple branches in a short term and then cannot have more market shares as they wished. For example, AXA-Minmetals Assurance Co., Ltd. a joint-venture established in 1999, only opened 7 branches during past 10 years. Secondly, most of the foreign insurance companies face great premium pressure because they cannot use the most efficient way, such as bank-insurance link, to sell their products. The main reason may be because most of the foreign insurance companies do not have close relationships with Chinese banks. If foreign insurance companies can solve this problem, then the premium income will rapidly increase. For example, the major shareholder of AXA-Minmetals Assurance Co., Ltd. has changed to ICBC, a giant bank in China, at the end of 2010. That means this company may sell its products through its shareholder ICBC’s branch network and can develop market rapidly in 2011. Thirdly, personnel in foreign insurance companies are very unstable. Most of the sales persons in foreign insurance companies have low level of education or have no insurance related experiences. They choose foreign insurance company as the first step to gain working experiences and as a springboard to a better job. Furthermore, some foreign insurance companies put too much focus on the short-term premium income. So the short-term premium income takes a big part of KPI of sales persons. Many excellent sales persons cannot work under such heavy pressure and finally choose leave.

To have a better 2011, foreign insurance companies shall take its own advantages such as differentiation of competitive advantage. Compare to domestic insurance companies, they have more diversified products and can provide more specialized services to customers. For example, some foreign life insurance companies are prompting high-level medical insurance products which target towards foreigners in China and the high income class Chinese. Those products are selling very well in China and gain good reputation in aforesaid classes.

For those foreign insurance companies which are still out of China and want to enter into the Chinese insurance market, the best advice from us is doing more investigations on the Chinese insurance market, think about how to solve those common problems, consider your advantages and your expansion plan.