Authors: Zhan Hao, Song Ying, Yang Zhan

On January 2, 2020, the State Administration for Market Regulation (“SAMR”) officially published the Draft Amendment to the Anti-Monopoly Law (“Draft Amendment”) in order to solicit public opinions, showing the authority’s sharp claws toward monopoly behaviors. This significant development is based on a 12-year-long experience of antitrust enforcement ever since the Anti-Monopoly Law (“AML”) has been enacted in 2008. The Draft Amendment conveys the signal to the public that the Chinese authority will increasingly strengthen enforcement on monopoly conducts. This article provides a summary of main changes in the Draft Amendment together with some comments, as well some practical implications thereof.


I. Monopoly agreement

Article 17 prohibits undertakings from organizing or assisting other undertakings to conclude monopoly agreements.

Article 53 provides that undertakings which (i) have no turnover in the preceding year or (ii) conclude but not implement monopoly agreement can be imposed fines at no more than RMB 50 million. For undertakings which implement monopoly agreements, the authority shall order to cease monopoly conducts, confiscate illegal gains and impose fines at 1%-10% turnover in the preceding year. The foregoing provisions are also applicable to those organizing or assisting other undertakings to conclude monopoly agreements.


First, hub-and-spoke conspiracy has been only implied in the scope of monopoly agreement in the current AML , but now the Draft Amendment provides an explicit legal basis of the “hub”part. It is expected that further provisions on hub-and-spoke conspiracy will be provided in lower-level legislation, such as regulations by SAMR, if this provision is included in the final Amendment.

Second, the Draft Amendment increases hundredfold top fines from RMB 500 thousand yuan up to RMB 50 million yuan for punishing those undertaking that concluded but not implements yet the monopoly agreements.

Third, according to the Draft Amendment, undertakings with no turnover will also receive the fine. The current AML has no specific wording addressing such scenario. In practice, in some cases in 2019 (e.g. penalties on horizontal monopoly agreements among 3 vehicle safety technology testing companies in Xianning, Hubei Province, and horizontal monopoly agreements among 8 concrete companies in Hengzhou, Zhejiang Province), SAMR confiscated illegal gains and ordered to cease monopoly conducts, but did not impose fines against undertakings which have no turnover in the preceding year. However, the Draft Amendment will retake the exemption of fines from those undertakings with no sales.

Fourth, undertakings assisting the conclusion of monopoly agreement are also explicitly prohibited under the Draft Amendment.


II. Abuse of market dominance

Article 21 of the Draft Amendment provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should also be considered in determining market dominance of internet undertakings.


In recent years, competition issues in internet sector have attracted much attention from the antitrust authority. Published on July 1, 2019 and effective on September 1, 2019, the Interim Provisions for Prohibiting Abuse of Market Dominance (the “Interim Provisions”) has embodied a provision specific on internet sector. Specifically, it provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should be taken into consideration when determining the market dominance in internet sector, which is consistent with the Draft Amendment.


  • Merger control review

Article 23 defines “control” as the right or actual status of a business operator that has or may have a decisive influence, directly or indirectly, individually or jointly, on the production and operation activities or other major decisions of other business operators.

Article 24 provides that the authority can formulates and updates filing thresholds according to economic development, scale of the industry and other factors and shall make it public in a timely manner.

Article 30 provides that the time required under the following circumstances shall not be included in the time limit for the merger review procedures:

  • suspension period of merger review procedures upon application or consent of the filing parties;
  • period of submitting supplementary documents and materials by undertakings as required by the authority;
  • period of negotiating restrictive conditions between the authority and the filing parties

The specific provisions on stopping the clock of merger review shall be separately formulated by the anti-monopoly authority under the state council.

Article 55 Under any of the following circumstances, the anti-monopoly law enforcement agency shall impose a fine of not more than 10% of business operators’ turnover in previous year: (i) implementing a concentration with failure to file, (ii) implementing a concentration after filing but not receiving clearance, (iii) violation of additional restrictive conditions; (iv) implementing a concentration in violation of blocking decision.


First, the Draft Amendment emphasizes that when defining ‘control’, the key point is to assess whether there are controlling/veto rights over the business operations of the target.

Second, SAMR might be authorized to update filing thresholds since they have been established in 2008. With no further detailed provisions, some expect that the SAMR might annually adjust the filing thresholds, which would be similar to antitrust authorities in other main jurisdictions.

Third, “stop the clock” rule might be introduced in Chinese antitrust legislations for the first time. SAMR would have greater discretion to extend the review period for non-simplified or conditionally-cleared cases. The authority may have less needs to request filing parties to withdraw in order to gain more time to deal with complex and high-profiled cases.

Last, for gun-jumping cases, the current AML provides the legal liability could be a fine capped with RMB 500,000 on the party which is obliged to pre-file to SAMR. In the Draft Amendment, SAMR can impose no more than 10% of the sales turnover in the preceding year, which is similar to that for monopoly agreements and abuses of dominance. For those large-scale companies with fully-integrated production lines, the cost of closing without approval from the authority would be extremely high.


III.Implications of the Draft Amendment

Although the Draft Amendment has not been effective so far, the implications conveyed by the authority is still very impressive. Market players active in China should pay more attention to the development of China anti-monopoly laws, especially given the potential significant changes and lifted liability. The regulation boundaries of anti-monopoly behaviors are increasingly refined. Cooperation with the authority’s investigation will be expected and required more as a legal baseline rather than a simple attitude. Furthermore, the introduction by Draft Amendment of new types of monopoly conduct, such as hub-and-spoke, will urge the market players and their outside and in-house legal counsel to borrow more experience form international precedents like in the EU and U.S. Obviously, the China antitrust legislation and enforcement is expected to be further enhanced in future.

2019 is the first year since the re-organization of China’s antitrust enforcement agency was completed. New legislations and enforcement actions during the past year have thus attracted much attention from practitioners and in-house counsels, with a view to gaining an insight into the enforcement trends and priorities, if any, of the new agency. This article is intended to underline the most significant developments in legislation, public enforcement and private litigation in 2019.

I. Legislative Developments

A.The Anti-Monopoly Law (Draft Amendment)

To respond to the challenges encountered in the enforcement of AML and to satisfy the actual needs of China’s evolving economic activities, the new antitrust agency of China, the State Administration for Market Regulation (“SAMR”), expended a great amount of efforts on the amendment of the Anti-Monopoly Law (“AML”) in 2019. Immediately after the close of 2019, SAMR published the draft amendment to AML on January 2, 2020, to solicit public comments (“Draft Amendment”). Although the Draft Amendment is far from the final version, changes in the draft version are worthy of close examination, as it will shed light on possible future enforcement trends and business operators are advised to conduct internal risk assessment by considering those possible changes.

Five key changes in the Draft Amendment are summarized below.

First, a provision pertaining to factors for determination of dominance in the internet sector is added in the Draft Amendment to AML. The proposed factors include network effects, economy of scale, lock-in effect, and capability of controlling and processing data. As such, it is once again highlighted that the internet sector has become, and may continue to be for some period, one of the enforcement priorities in China.

Second, for the merger control regime, a new rule to stop the clock of the review process is introduced in the Draft Amendment, although details are absent on the stop-the-clock rule. This revision may be against the backdrop that in cases where remedies are negotiated, it turns out the statutory review period is usually not adequate for SAMR to reach a final decision.

Third, pursuant to the Draft Amendment, antitrust enforcement agencies could seek assistance from public security personnel in the course of antitrust investigation. The explicit provision for the use of police force signals a potential reinforcement of inspection and investigation measures in the public enforcement of the AML, especially for dawn raid investigations.

Forth, statutory punishment is more stringent for unimplemented monopoly agreements. Under the current AML, business operators which have concluded but not implemented the monopoly agreement shall be assessed a fine of no more than RMB 500,000 (approximately USD 70,000) together with confiscation of illegal gains. Under the Draft Amendment, the statutory fine will be increased to RMB 50,000,000 (approximately USD 7,000,000) for unimplemented monopoly agreements and for business operators with no revenue in the preceding year.

Fifth, statutory punishment becomes harsher for gun-jumping in merger control regime. It is frequently under criticism that the current level of punishment has no deterring effect at all, as the amount of fine is limited to RMB 500,000 (approximately USD 70,000). The Draft Amendment has lifted the penalty level to “below 10% of the turnover in the preceding year”.

B.Three New Regulations

The most remarkable legislative achievement in 2019 is the promulgation by SAMR of three new antitrust regulations, which took effect on September 1, 2019.

The three new regulations are the Interim Provisions on Prohibition of Monopoly Agreements (“Monopoly Agreement Regulation”), the Interim Provisions on Prohibition of Abuse of Dominant Market Positions (“Abuse of Market Dominance Regulation”), and the Interim Provisions on Prohibition of Abuse of Administrative Power in Eliminating or Restricting Competition (“Administrative Abuse Regulation”).

The purposes of issuing the three new regulations are for one thing unifying the fragmented rules prior to the re-organization of antitrust agencies, and for another providing clear guidance both for business operators in complying with China’s antitrust rules, and for enforcement agencies in taking enforcement actions by a uniform standard.

Compared with the old rules, the three new regulations are more self-contained in that they combine both substantive and procedural provisions. Before the re-organization, the former antitrust agencies, NDRC and SAIC, issued separate regulations to deal with substantive and procedural issues respectively.

Furthermore, based on experience accumulated from past enforcement actions, the new regulations have clarified SAMR’s position on a few old issues. For example, the Monopoly Agreement Regulation implicitly clarifies that the per se approach is to be taken for the five types of horizontal monopoly agreement and resale price maintenance, which are explicitly enumerated in the AML, and the rule of reason approach for other types of monopoly agreement which are not enumerated in the AML. Furthermore, it is made clear that the commitment regime is not applicable to a few hardcore restrictions, including price fixing, restriction of sales and market partitioning between competitors. Detailed rules on the leniency regime are also added in the Monopoly Agreement Regulation.

In addition, SAMR’s increasing attention to a few emerging issues could also be observed in the new regulations. For instance, in the Abuse of Market Dominance Regulation, there is one provision specifically addressing determination of market dominance in the internet sector and another provision solely pertaining to assessing market dominance in the area of intellectual property. The Abuse of Market Dominance Regulation also outlines factors the agencies will take into consideration in determining collective dominance, such as market structure, market transparency, product homogeneity and behavior uniformity.

C.Notice of SAMR on Authorization of Antitrust Enforcement

Before the re-organization, the provision on authorization of antitrust enforcement by the national agency to provincial agencies is discrepant between NDRC and SAIC. SAIC took a case-by-case authorization approach, while NDRC took the general authorization approach. At the beginning of 2019, SAMR released a notice to adopt the general authorization approach, which established China’s two-level antitrust enforcement system involving the national and provincial level enforcement agencies in parallel.

This notice also sets up the working mechanism for authorization, including general authorization to provincial level enforcement departments, designation of enforcement powers, commissioned investigations, and cooperation in investigations. These rules are also incorporated in the Monopoly Agreement Regulation and Abuse of Market Dominance Regulation to some extent.

It should be noted that the unified general authorization system will confer more autonomy on provincial antitrust agencies to initiate investigations. As such, implicit competition between provincial agencies may encourage more enforcement activities going forward.

D.Antitrust Guidelines (Draft for Public Comment)

No official version of antitrust guidelines was released in 2019, but legislative efforts were indeed made in guideline drafting. On November 28, 2019, SAMR published the draft Guidelines on Antitrust Compliance of Business Operators to solicit comments from the public. This legislative activity implies SAMR attaches great importance to the advocacy of antitrust compliance, in parallel with enforcing the AML by investigating and penalizing business operators.

The Antitrust Compliance Guidelines are mainly composed of general principles, compliance management system, key compliance risks, management of compliance risks, and safeguard of compliance management. These guidelines serve the purpose of providing business operators with more guidance on establishing a sound internal antitrust compliance system. However, in what way a sound compliance system may affect business operators in antitrust enforcement is not articulated. For instance, whether the establishment of a sound internal compliance system could reduce legal liabilities of business operators in the course of antitrust investigation is not clear yet.

II. Enforcement Developments

A.Merger Control

Despite the adversities of China-US trade friction and sluggish global economic growth, the number of merger filings is approximately the same as that in 2018. In total, SAMR completed review of 432 merger filings in 2019, slightly lower than 448 cases in 2018. In 2019, remedial conditions were imposed in five cases (four remedy cases in 2018) and no prohibition decision was made.

The 5 remedy cases are (1) the KLA Tencor/Orbotech case; (2) the Cargotec/TTS case; (3) the II‐VI Incorporated/Finisar case; (4) the Zhejiang Huayuan Biotechnology/ Royal DSM case; and (5) the Novelis/Aleris case. In all of these cases, the filing parties withdrew and refiled with SAMR, with the average time from submission of filing to issue of approval being 387 days. Of the five remedy cases, hold-separate remedy was imposed in three cases, structural remedy was imposed in one case and behavioral remedy was imposed in one case. The supervision period was set as 5 years in three cases and 3 years in one case. For a comparison between 2019 and previous years, please refer to the following figure.

Enforcement against gun-jumping was continuously strengthened in 2019, with 17 fine tickets being issued. This trend is reflected in the below figure, which depicts the number of enforcement cases in each year since 2014 when penalties on gun-jumping were first made public. Although the penalty on gun-jumping is limited RMB 500,00 (approximately USD 70,000) under existing laws, the potential reputational harm on gun-jumpers may produce some deterring effects. Specifically, as SAMR publishes every penalty decision on its official website, the violators’ corporate image will be more or less damaged. If the penalized company is a listed company, its stock prices may react negatively. Even for non-listed companies, such penalty may also affect their future financing. 

B.Enforcement Against Monopoly Agreement and Abuse of Market Dominance

In 2019, SAMR published enforcement decisions on 18 cases in total, most of which were issued by provincial Administration for Market Regulation (provincial “AMR”). The 18 decisions include two investigation termination decisions, three investigation suspension decisions, and 13 penalty decisions. Seven cases involved abuse of market dominant position, eight cases were related to horizontal monopoly agreements and three cases pertained to vertical monopoly agreements. Sectors involved in the investigations include pharmaceuticals, automobile, construction materials, public utilities and consumer goods.

Penalties imposed on foreign-invested companies include Jiangsu AMR’s fine ticket against Toyota China for resale price maintenance and Shanghai AMR’s fine ticket against Eastman China for abuse of market dominance. The former fine was fixed at 2% of Toyota’s turnover in the preceding year in Jiangsu province or RMB 87,613,059.48 (approximately USD 12,516,100). The latter fine amounted to 5% of Eastman China’s turnover in the preceding year or RMB 24,378,711.35 (approximately USD 3,482,600).

With regard to the behaviors being investigated in 2019, the Eastman decision showcased novelty to some extent. Specifically, this is the first case where minimum purchase requirement and take-or-pay clause were found in violation of the AML in China. In addition, the investigation termination decision on Horien and Hydron by Shanghai AMR and the investigation suspension decision on Lenovo by Beijing AMR evidenced that the commitment regime is applicable to vertical monopoly agreements in practice.

III. Antitrust Litigations

One significant change in antitrust judicial practice in 2019 is that the Supreme People’s Court has become the second-instance court for all antitrust litigation cases from January 1, 2019 onward, regardless of whether the first instance court is an intermediate people’s court or a high people’s court.

There is no official statistics on the number of China’s antitrust litigations in 2019 yet. According to public sources, substantive judgments in antitrust litigations are not many, and most of high-profile cases, such as the Hitachi Metal case and the MLily Case, are still pending.

One milestone case is the Hainan Yutai case in which the Supreme People’s Court addressed the long-existed conflict of approach between enforcement agencies and Chinese courts in treating resale price maintenance. Specifically, antitrust agencies in past enforcement actions have taken a per se illegal approach to resale price maintenance, while Chinese courts adopted a rule of reason approach, as manifested in cases such as the Johnson-Johnson case, the Hankook case and the Gree case. In the Hannan Yutai case adjudicated in an administrative retrial by the Supreme People’s Court (published in 2019), the Supreme People’s Court recognized that the legal standards applicable to vertical monopoly agreements are different in public enforcement and private proceedings, which in a sense dispelled a lot of expectations for the SAMR to change its per se approach.

Another landmark jurisdictional ruling was rendered by the Supreme People’s Court in the Shell case and addressed the issue of arbitrability of antitrust civil disputes. For a few years, the topic of whether antitrust civil disputes could be arbitrated had been hotly debated in China. While there were few precedential decisions in connection with this issue for people to better understand what China’s judicial position is, the local courts have presented discrepant attitudes toward this issue in the past. Nevertheless, the Supreme People’s Court made clear its stance in the above-mentioned ruling that arbitration clauses could not preclude the jurisdiction of Chinese courts over antitrust civil disputes. The ruling can be viewed as an official judicial voice in this regard and may be relied upon.

IV. Outlook

In 2020, the internet, automobile, public utilities and consumer goods sectors are still expected to be on the radar of China’s enforcement priorities. Public enforcement is foreseen to be more active, given that the provincial AMRs had been completed their institutional reform and are ready to flex muscles, many publicized high-profile cases may come to an end, and improvements have been made to the reporting and leniency regimes to facilitate finding of antitrust violations. Merger control activities are expected to be stable with enforcement against gun-jumping likely strengthened further. In the judicial arena, courts’ opinions on complicated issues, such as the essential facility doctrine, platform market and pass-on defense, may be looked upon closely in those high-profile cases.

Authors:Chen Lin, Han Jinwen


In a recent landmark decision, the China Supreme People’s Court (“SPC”) overturned its previous views of the last decade and held that branded products produced through OEM may constitute trademark infringement if a third party owns the registered trademark in China.

In the previous Pretul case (2015) and Dongfeng case (2017), SPC held that OEM products do not constituted trademark infringement since the products were all exported abroad rather than entered into the Chinese market, thus it should not be considered as “use of a trademark” and would not cause confusion to consumers in China.  This was the mainstream opinion of the last decade in China.  However, in this recent judgment, the SPC overturned the previous opinion and concluded that OEM products might also cause confusion to the public since the consumers were able to get to the OEM products due to development of e-commerce, Internet and China’s economy.

The changed opinion of the SPC will provide possibilities to trademark rights owners in China to seize branded products “authorized” by pirated trademark owners in foreign countries.  It also shows a firm attitude of the Chinese government in all-round protecting intellectual property rights.

Case Background

The claimant, Honda Motor Co., LTD (“Honda”), is the owner of “”, “” and “” trademarks, which have been registered on vehicles, motorcycles, etc. in class 12 goods since late 1980s.

The defendant is Chongqing Heng Sheng Group Limited (“Heng Sheng”).  Heng Sheng contracted with a Burma company named Meihua Company Limited (“Meihua”) and was requested to produce 220 sets of motorcycle parts bearing “HONDAKIT” trademark.  According to the contract, the produced motorcycle parts would be exported by Heng Sheng’s affiliate Chongqing Hengsheng Xintai Tradding Co., Ltd. (“Xin Tai”).  To prove its trademark rights, Meihua provided “HONDAKIT” trademark registration on “vehicle” etc. class 12 goods, which is in the name of the managing director of MEIHUA.

In June 2016, Kunming (provincial capital of Kunming) customs seized these “HONDAKIT” products on the grounds of infringement on Honda’s trademarks.  However, after realized that the seized motorcycle parts were OEM products, Customs expressed that they could not decide whether the products were infringing because of the SPC’s attitude on OEM products.

To get a clear answer, Honda filed a civil litigation against the OEM manufacturer Heng Sheng and exporter Xin Tai on the grounds of trademark infringement in September 2016. In the first instance, the intermediate court of Dehong Dai and Jingpo Autonomous Prefecture ruled that these OEM products constituted trademark infringement and the 2 defendants should pay RMB300k (USD42,681) to Honda.  However, in the second instance the Yunnan Higher People’s Court overturned the first instance judgment by exactly following the SPC’s earlieropinion on OEM products.

Honda chose to keep fighting and filed a retrial application with the SPC.  On September 23, 2019, the SPC issued the retrial judgment and made the aforesaid change.  The SPC firstly demonstrated that, although Meihua owned the registered trademark for “HONDAKIT” in Burma, in this case the trademark in actual use was confusingly similar with Honda’s Chinese trademarks “”, “” and “”, because (1) “HONDA” was in bigger fonts than “KIT”, (2) “H” was in initial letter, and (3) there was also a wing device on the products.  Obviously Meihua was using its trademark in bad faith.  Secondly, the SPC emphasized that although it was OEM products and were not sold in China directly, they may still cause confusion to Chinese consumers, because with development of e-commerce, Internet and China’s economy, as well as frequent overseas travel, the Chinese consumers had accessed to these OEM products. As a conclusion, the SPC decided to reverse the second instance judgment and affirmthe first instance judgment.

Significance of the SPC’s Judgment

Obviously the SPC’s judgment is good news to owners of Chinese trademarks.  China is no longer a hotbed for overseas pirated trademark owners.  Rights owners of Chinese trademarks can enforce their rights against infringing products in processing in China rather than wait for the OEM products to be sold in other countries/ areas where the rights owners have registered trademarks too.  Manufacturers in China will be more careful when accepting international orders, and as a result it will also reduce the occurrence of infringing OEM products.

In addition, the burden of proof of Chinese trademark holder is likely to be relieved because the SPC also specified in the judgment that (1) a mark used on the products should be considered as “use of a trademark”, as long as the mark has the function of identifying the source of products, (2) the “relevant public” should be defined as people related to OEM products, include manufacturers, exporters as well as consumers, (3) it is not necessary to prove that confusion actually happens.

It should also be noted that the SPC clarified in the judgment that the OEM case should be reviewed case by case, which means that the “HONDAKIT” is not likely to become a guide case at this moment.

However, it is still an example of China’s endeavor to protect intellectual property.  In November 2019, the General Office of the CPC Central Committee and the General Office of the State Council jointly published “Opinions on Strengthening Protection on Intellectual Property” (“the Opinions”), and clearly put forward two goals (1) significantly reduce IP infringement by 2022, and (2) achieve higher level of social contentment on IP protection..  The opinions also clearly listed specific measures for achieving the goals, include improving damages, enforcing punitive damages systems, preventing bad faith trademark filings, establishing and publishing repeated infringers and intentional infringers etc. It is predictable that there will be more and more encouraging judicial results in the following several years in China.

Authors: Zhan Hao、Wan Jia

Regarding the premium revenue, now China is the second biggest insurance market in this world, but regulators and insurance undertakings always feel cross due to the lack of insurance innovation, especially for the insurance product. More specifically, most of sold insurance products in China were transplanted from the foreign markets, and the so-called localization only means translation in some cases. China insurance regulator, the former CIRC and now CBIRC, occasionally criticized PRC insurers in this regard: some insurers plagiarized the coverage, structure and actuarial model from the foreign products, yet cast the least weight to the Chinese business environment and consumer practice.

In the meantime, PRC insurers feel puzzled when facing such criticism. In a market with short insurance history and shallow-rooted insurance culture, the innovation is not an easy piece.

Finally, the occurrence of the liability insurance for the conservatory measure in civil proceedings, a.k.a., Litigation Property Preservation Liability Insurance (hereinafter referred to as “LPPL”) changed such practice and it has become a typical insurance innovation to satisfy the market demand and address PRC insurance specialty that well tallies with its judicial system.

In accordance to PRC civil procedure law and arbitration law, before or in the course of the civil litigation or arbitration, plaintiffs or claimants could apply the competent court to take the conservatory measures against defendants or respondents, i.e., to freeze the real asset, banking account, creditor’s right against third party, IPR, stock and other assets owned by the opposing parties. The purpose of such measure is to prevent defendants and respondents from transferring assets, and to facilitate the coming enforcement of judgment and arbitral award. PRC procedure law stipulates that, when applying for the conservatory measure prior to the proceedings, plaintiffs or claimants shall provide the guarantee before the proceedings. When applying for the conservatory measure in the proceedings, the court would normally request plaintiffs or claimants to provide the guarantee as well. Theoretically speaking, such guarantee should be equal to the claim amount. When the proceeding is over, if plaintiffs or claimants lost the case and such conservatory measures caused damage to the opposing parties, the opposing parties could claim the compensation in another proceeding.

Previously, plaintiffs and claimants intended to rely on the banks or the guarantee companies to provide such guarantee to courts in case their own asset is not adequate to provide a full guarantee. After some years, banks were reluctant to be involved in such business because this guarantee obligation would be reflected on its balance sheet. As to the guarantee companies, the court were to reluctant to accept guarantee from the guarantee companies due to its limited insolvency capacity and some scandals for this industry. Meanwhile, the litigation and arbitration cases soar in China because China society faces fundamental changes that citizens would prefer to resort to court rather than community or working unit (Chinese traditional dispute resolution means), to resolve disputes. Thus, it is not unnatural for courts and relevant parties to look for the appropriate means to minimize the giant gap between the fierce demand for guarantee and insufficient provider for such service.

Taking those conflicts into account, Jintai P&C insurer located in Yunan, the hinterland of China, innovated LPPL, which distinguished itself from the traditional liability products and is collective products to satisfy the dual demand from court and insured.

After plaintiffs and claimants (insurance applicant. also insured) and insurer reach an agreement, insurer will give the guarantee letter (similar to bond in other jurisdictions) to court, to ensure court to take the conservatory measures against the opposing parties. In the guarantee letter, insurer shall pledge to compensate the loss suffered by the opposing parties if such conservatory measure is proved to be wrongdoing and cause damages. After the end of litigation or arbitration, if the opposing parties claim damages from insured (plaintiffs or claimants) due to the wrongful conservatory measure, insurer shall assume the liability within the coverage.

Precisely speaking, LPPL is dual-function product, which combines the guarantee and liability coverage, and facilitate the litigation and arbitration proceedings. The giant demand gap gives incentive to China insurers to compete in this emerging market, and Ping An pioneered nationwide. Since LPPL is a long-tail product, the occurrence of insurance claim would materialize after the two or three years, even longer, since the issuance of policy. When the opposing parties claim the damages based on the wrongful conservatory measure, the opposing parties have to initiate another litigation, thus this new proceeding would dramatically prolong the insurance benefit payment process. For this reason, loss ratio for Ping An was quite low during the beginning years, and this profitable prospect stimulated other competitors to participate in the competition soon.

For the lobby from CIRC, China Supreme Court published a judicial interpretation to intentionally address LPPL, and this act encouraged the competition for this new product. Now the main PRC insurers contribute huge resources to this product, and fierce competition makes the premium rate decrease a lot.

During the past, China insurance authority was concerned that P&C market is homochromy, in which over 70% of revenue is from motor insurance, and liability product line is not mature at all. The emergence of LPPL demonstrates the space for the growing of liability product in China, and shows the necessity for the product innovation based on the local market.

Authors: Lan Li and Jiayue Zhang

China is looking to strengthen its export control mechanisms by introducing a new Export Control Law. The draft Export Control Law (“Draft Law”) was issued in 2017 for public comments.  In recent months, the “State Council’s 2019 Legislative Work Plan” has clearly included the “Export Control Law” in its 2019 legislative plan, which might be read as China’s desire to codify the new law within 2019.

  1. Highlights of the Draft Law

Export: Defined as the “transfer of controlled items from China to a foreign country or region,” including Hong Kong, Macao and Taiwan.

Re-Exports: The transfer of an item from a country outside of China to a third country.

Deemed Exports: The provision of regulated goods or technologies to non-Chinese citizens (or to residents of Taiwan, Hong Kong, or Macao) whether within or outside of China would be considered an export for which an authorization may be required. This newly expanded definition of “export” appears to regulate activities such as non-citizens who work in China viewing controlled equipment or technical data.

Transit, Transshipment and Export via Special Customs Supervision Areas: The transit and transshipment of controlled items and the export of controlled items via a special customs supervision area, such as a Foreign Trade Zone, will also be subject to China export controls.

Embargo: This allows the Chinese regulatory authorities to impose a complete ban on the export of certain controlled items, or prohibit the exports of certain controlled items to specified destinations, individuals or entities.

Blacklist: The Chinese authorities may place foreign importers and end users violating Chinese export control laws on a blacklist. Such action would prohibit the export of controlled items to those foreign importers and end users. They also may revoke the export licenses related to transactions with such foreign importers and end users.

Retaliatory Measures: Authorizes corresponding retaliatory measures against countries or regions that implement discriminatory control measures on the Chinese authorities.

Enforcement and Penalties

The Draft Law grants the Authorities significant investigative powers which includes entering the business premises of parties under investigation for violation of the Export Control Law, conducting interviews with the relevant parties, accessing and copying relevant documents, inspecting shipments, seizing assets, and even freezing bank accounts of the exporters found to be in violation.

The Draft Law provides the following key penalties :

  • Export without a Permit – The operator may receive a warning from Authorities, as well as an administrative penalty of no more than 10 times the illegal business revenues and confiscation of any illegal gains derived from such activity.  In addition to the penalties on the company, the responsible persons may be fined up to RMB 300,000 ( about USD 45,000).
  • Fraudulent Acquisition or Trading of a Permit – In addition to the above penalties, Authorities may withdraw the license of any party that obtains it by fraud, bribery or other illegal means, or falsifies, alters, leases, lends, or trades a license for the export of controlled items.
  • For exporters and individuals who violate the Draft Law, their information may be added to the national credit database and made public.  Export control agencies may deny applications for export licenses filed by these companies or individuals for three years after the penalty decisions.
  1. Implications 

The Draft Law will strengthen the government’s authority to regulate the export of military, nuclear, biological, chemical and dual-use items. It also includes new restrictions on the transfer of cross-border technical data relating to controlled items.  Once the Draft Law passes, the new law will bring China’s system closer to other export control mechanisms, such as the US.  For example, the Draft Law introduces tough new penalties against violators. It also allows Beijing to retaliate against any discriminatory export controls targeted at China.

  1. What exporting companies should know

The Draft Law provides comprehensive provisions on the subject, conduct, control methods, law enforcement supervision, and legal responsibility of export control with the aim to establish a complete Export control system in China.

Specifically, exporting companies or the multinationals are suggested to do the following :

First, continue to track the legislative development, and be aware of how the Law might affect the business in terms of production, sale, and operation actions. At the same time, be ready to establish a competent and long-term export compliance program.  Also, pay attention to the guidance and operational guidelines issued by the Authorities to ensure that the company’s compliance management meets the requirements of the export control system.

Second, in the relevant export business activities, ensure the retention of records, working documents, and relevant document information, including memoranda, contracts, books, correspondence, financial data, books, etc., in case they are needed in the future to prove that the company has fulfilled the good management and review obligations of the items they export.

Third, establish a sound internal corporate compliance mechanism and implement it effectively to make it easier to obtain licenses.  Employees should be trained in export control compliance policies to ensure that personnel are familiar with relevant compliance policies.

Authors: Ren Gulong、Zhang Jiaqi

On 23 October 2019, the State Administration of Foreign Exchange (“SAFE”) issued a Circular on Further Promoting Cross-border Trade and Investment Facilitation (关于进一步促进跨境贸易投资便利化的通知) (“Circular No. 28”) which introduced 12 measures to further facilitate cross-border trade and investment. Among them, there are three key reforms in respect of foreign investment, foreign debt and sale of non-performing credit assets.


All foreign-invested enterprises are permitted to make equity investments in the mainland with its capital funds. Previously, only foreign-invested investment companies, whose business is equity investment (the “Investment Enterprise”) were entitled to making equity investment with its capital funds. Other foreign-invested enterprises (the “Non-investment Enterprise”) were only allowed to invest with its profits from its operation in China.

Pursuant to Circular No. 28, a Non-investment Enterprise is now allowed to make domestic equity investment with its capital funds, provided that (i) the investment does not violate the existing special administrative measures for foreign investment access (negative list); (ii) the projects invested are real and in compliance with law; and (iii) the investment is in conformity with the national macro-control policies.

With this reform, all foreign-invested enterprises, whether or not established to conduct investment businesses, will be able to make domestic equity investment. As there are less than 3,000 Investment Enterprises in China, accounting for less than 1% of all foreign-invested enterprises, a great number of Non-investment Enterprises will benefit from this reform.


Since 2016, People’s Bank of China (PBOC) and SAFE adopted the policies of full-coverage macro-prudent management of cross-border financing, which allows any company in China to borrow foreign debt within the limit of twice of its net assets. Since then, prior approval from SAFE for such foreign debt had been abolished and replaced by post filing to local branch of SAFE (“SAFE Filing”).

Circular No. 28 further simplifies the SAFE Filing process from two aspects:

  • A non-financial enterprise in Guangdong-Hong Kong-Macau Greater Bay Area (“GBA”) or Hainan will not be required to do the SAFE Filing each time when borrowing a foreign debt. Companies in GBA and Hainan may apply for a one-off SAFE Filing.
  • Banks are authorized by SAFE to conduct the SAFE Filing so that the borrower does not need to go to the office of local branch of SAFE.


In 2017, SAFE authorized its Shenzhen Branch to set up a pilot program for cross-border transfer of non-performing loans. On 8 May 2018, the pilot program was enhanced by (i) removing the expiration date of the program; (ii) replacing the “pre-approval” of cross-border transfers with a “pre-filing” process; and (iii) allowing receipt of trading deposits from foreign investors via foreign debt accounts.

Circular No. 28 further upgraded the pilot program by: (i) expanding the geographical scope to cover GBA and Hainan; (ii) allowing banks to sell non-performing credit assets directly to foreign investors, instead of through the asset management companies; and (iii) expanding the scope of assets to non-performing trade finance assets, in addition to loans. This reform will provide more opportunities for foreigners to participate in China’s non-performing market.


Circular No. 28 grants more autonomy to banks and enterprises and make it more convenient and efficient for honest enterprises to carry out cross-border business activities.

According to the press conference of SAFE, the regulatory authorities will, continuously promote the liberalization and facilitation of cross-border trade and investment, and steadily advance the opening-up regarding capital accounts. It will be expected that further regulations may be launched in the near future, including for example (i) improving the pilot program on foreign exchange settlement and sales businesses of securities companies so that more participants may take part in the foreign exchange market; (ii) supporting the development of trading rules on “Sci-Tech Innovation Board” and enhancing the cross-border fund management of depository receipts under the “Shanghai-London Interconnection”; and (iii) standardizing the administration of bond issuance on the mainland by foreign institutions. We will keep a close eye on it.

Author: Zhan Hao、Wan Jia

Insurance subrogation is an important legal mechanism for the insurers to reduce their losses after the insurance indemnities are paid. However, there are different opinions about the application of reinsurers’ right of subrogation. Whether the subrogation can be directly exercised by the reinsurers against the liable third party? Should the reinsurance indemnities be deducted from the amount claimed by the direct insurer when it exercises subrogation against the third party? Can the third party refuse to indemnify the direct insurer if the direct insurer has been partially for fully covered by the reinsurance indemnities? The answers for those questions will be discussed in this article under the framework of PRC law.

I. A Landscape of the Views in Foreign Jurisdictions

Under the insurance legislation in the countries of civil law system (China also is one of them), there are generally corresponding provisions regulating insurance subrogation and reinsurance, but there are no clear provisions on whether insurance subrogation is applicable to reinsurance. The courts in the countries of civil law system have been trying to use the method of legal hermeneutics to interpret the laws and legislative intent. For example, according to the general view in Japan, the reinsurer can subrogate the rights of the direct insurer against the third party according to Japan Commercial Law. In the case delivered in 1938, the Japanese court held that the provisions of subrogation under Commercial Law were “arbitrary laws” and could be excluded by special agreement. In another case delivered in 1940, the Japanese court held that insurance subrogation is applicable in reinsurance, but by way of exercise, due to the “trust relationship” between the reinsurer and the direct insurer, the direct insurer had to subrogate on behalf of the reinsurer and then pay proportionally to the reinsurer what it obtained from the third party. That is to say, on the basis of recognizing the reinsurers’ right of subrogation, the court justifies the rationality of alternative method for the reinsurers to exercise subrogation.

In common law countries, there are a number of cases support the application of subrogation in reinsurance. In Assicruzioni Generali de Trieste v. Empress Assurance Co. Ltd in 1907, the British court held that the reinsurer has the right to claim against the direct insurer for the reinsurance indemnities it paid. In Universal Ins. Co. v. Old Time Molasses Co., the reinsurer paid half of the loss of the goods and tried to intervene in the lawsuit initiated by the insured against the liable third party, the U.S. court supported the reinsurer’s assertion. In Glacier General Assurance Co. v. G. Gordon Symons Co. Ltd, the U.S. court held that the reinsurer did have the right of subrogation, but the direct insurer should actually subrogate all the losses, and then the corresponding amount of the recovery income shall be paid to the reinsurer.

II. Reasons and Rationales Behind the Rulings of Courts

From the above court rulings both in civil law countries and common law countries, it can be found that reinsurers’ right of subrogation is well recognized by some jurisdictions, but when determining the way of subrogation, the courts adopted the approach that the reinsurers’ right of subrogation shall be exercised by the direct insurer, the direct insurer is responsible for subrogating against the third party for all the insurance indemnities paid, and then the direct insurer shall amortize the recovery income (if any) back to each reinsurer according to the corresponding proportion. Most courts in Britain, the United States, Germany, France, Japan adopt the above approach, mainly based on the following reasons and considerations:

First, the direct insurer exercising the subrogation on behalf of the reinsurer confirms with the functional position of insurance and reinsurance.

As a rational economic man, the purpose of thedirect insurer and reinsurer engaging in the insurance and reinsurance business is to make profits. The direct insurer will charge the reinsurer the reinsurance commission in consideration for the insurance business that the insurer cedes to the reinsurer. This reinsurance commission fee is mainly used to cover the direct insurance operating expenses of the direct insurer, such as setting up branches or retaining agencies to solicit business, setting up and training full-time claims settlement personnel, and also for carrying out subrogation after indemnities are paid. After the reinsurer assumes the insurance risks, it is not necessary for the reinsurer to carry out the relevant external marketing, operation and training for the above purposes.

Based on the principle of following the settlements and the principle of utmost good faith, the direct insurer must also fulfill its duty of care and deal with all the related work from underwriting to settlement of claims, and handling of subrogation should also be part of insurer’s duty. Therefore, reinsurer’s right of subrogation exercised by the direct insurer is not only because the direct insurer has collected the reinsurance commission from the reinsurer, but also because it is conducive for the reinsurer to focus on the realization of the core functions of reinsurance, such as risk re-transfer and risk diversification.

Second, the direct insurer exercising the subrogation on behalf of the reinsurer confirms with the principle of economic efficiency.

In practice, all of the direct materials and documents concerning underwriting and claim settlements are retained by the direct insurer, while the reinsurer does not have access to a complete record of the underwriting and settlements information without specific requirement. Therefore, the direct insurer has a better understanding of the third party liable to the insurance accident and the related circumstances. In order to simplify the procedures, in practice, the direct insurer has the full power to deal with the matter of subrogation, which is more convenient for both the direct insurer and the reinsurer.

Generally speaking, although the liability of the reinsurer and the direct insurer arises at the same time, the interval between the direct insurer and the reinsurer fulling their obligation of indemnity is quite long. Normally, the direct insurer pays the insured/beneficiary in advance, and then the direct insurer asks the reinsurer to share its portion of the indemnities. In certain types of reinsurance business, the time for the reinsurer to share its portion will be very long, especially for long tail business. In the above circumstances, if the reinsurer has to wait until the corresponding reinsurance liability is determined, then the reinsurer will face a series of risks such as the expiration of the statute of limitation, which is not conducive for the protection of the reinsurer’s rights.

Internationalization is also one of the characteristics of reinsurance. The reinsurer is often a foreign insurance company, and it is inconvenient and inefficient for the reinsurer to exercise subrogation worldwide. In addition, usually there are multiple reinsurers participate in the same insurance project. If different reinsurers exercise subrogation against the third party at different times or even at different jurisdictions, it will increase the burden on part of the third party to prepare the defense against the subrogation from various reinsurers.

Third, the direct insurer exercising the subrogation on behalf of the reinsurer confirms with the principle of relativity of contractual relationship.

Although there is a connection between the direct insurance and reinsurance, but contractual relation between insured and the direct insurer is distinct from the one between the direct insurer and reinsurer. This doctrine is well recognized by some jurisdictions worldwide. For example, according to Article 29 of the PRC insurance law, the direct insurer shall not refuse or delay to perform its obligation of indemnity to the insured on the ground that the reinsurer fails to perform the obligation under reinsurance contact. Similarly, a third party may not claim to deduct the amount of subrogation on the ground that the direct insurer has coverage from reinsurance. If the liability of the third party will be different depending on whether the insurer has reinsurance or not, it is not only difficult to determine the amount of compensation, but also goes against the relativity of the contractual relationship between the insured and the third party.

Therefore, the insurer’s claims for subrogation should be judged between the insurer and the insured. As for whether the insurer has additional coverage from reinsurance, it is not within the scope of consideration in the subrogation claims.

III. The Majority View in Chinas Legal Practice

In the legal practice in China, the courts at different level also hold the same or similar view as above. For example, in the Understanding and Application of The Supreme People’s Court’s Judicial Interpretation (4) of Insurance Law, the Supreme People’s Court holds that in the dispute of insurance subrogation, the reinsurer shall not directly exercise the subrogation right against the third party, but shall be recovered after the direct insurer exercises the subrogation against the third party, which also conforms with the common practice of international insurance practice.

Shanghai High People’s Court and Zhejiang High People’s Court also hold the similar view as the Supreme People’s Court that according to the principle of contract relativity, the insurer may exercise the right of subrogation against the third party in respect of the total amount, and the compensation from the third party shall be apportioned to the reinsurer according to the reinsurance contract. In the dispute of insurance subrogation, because the reinsurer has no right to exercise subrogation against the third party, the court does not need to review the execution and performance of the reinsurance contract.

In sum, even though the legislation on the applicability of subrogation by reinsurers is not clear so far, the views hold by the courts provide sufficient guidance to the future cases. It is nonetheless recommended that the parties set forth in details regarding the right of subrogation by the reinsurer in the reinsurance agreement so as to avoid ambiguities and uncertainties.

For a few years, the topic of whether antitrust civil disputes could be arbitrable had been hotly debated in China. There were few precedents in connection with this issue for people to better understand what China’s judicial position is, and local courts presented discrepant attitudes toward this issue in the past. Nevertheless, the Supreme People’s Court of China (the “Supreme Court”) has made clear its stance in one of its recent adjudications, rendered in August 2019, that the arbitration clause could not exclude jurisdiction of Chinese courts over the antitrust civil disputes, which could be viewed as an official judicial voice on this regard and could be relied on.

This landmark adjudication is related to a dispute between one of Shell’s Chinese subsidiary Shell China and one of Shell China’s distributors Huili. Specifically, Huili brought an action against Shell China before the Intermediate People’s Court of Huhehot, on the ground that Shell China organized several of its distributors to collude in the bidding process, thereby had concluded and implemented horizontal monopolistic agreement, in violation of China’s Anti-Monopoly Law. Shell China then challenged the court’s jurisdiction over this litigation, by asserting that Shell China and Huili had agreed to solve any disputes arising from the distribution agreement thereafter through arbitration, rather than litigation. As such, one of the key procedural issues in this case is, as mentioned at the beginning, if antitrust civil disputes are arbitrable at all or not.

Both the first instance court, the Intermediate People’s Court of Huhehot, and the appellate court, the Supreme Court, found that the arbitration clause cannot negate the court’s jurisdiction over antitrust civil disputes. One main ground of the Supreme Court is that antitrust law in nature is under the umbrella of public law, and determination of monopolistic conducts is beyond the contractual relationship of  the contract parties. As such, antitrust civil disputes should not be categorized as disputes between parties with equal standing, thus are out of the arbitrable scope provided in the Arbitration Law of China. The other key argument that the Supreme Court relied on to render its ruling is the fact that arbitration is not specifically stipulated in the Anti-monopoly Law or other relevant laws and regulations as the means for resolution of antitrust civil disputes, while only public enforcement by antitrust authority and private enforcement by Chinese courts are clearly articulated. Therefore, given the above two reasons, the Supreme Court in the end maintained the ruling of the first instance court that the arbitration clause cannot exclude the court’s jurisdiction on antirust civil disputes.

Although the aforesaid adjudication has provided clarity regarding Chinese courts’ jurisdiction over antitrust civil disputes, even where an arbitration clause exists in the concerning contract, things are not that straightforward. Potential conflict may rise to the surface in specific scenarios.

For instance, it may not be uncommon that one party to the contract applies to the agreed arbitration institute for an arbitration in accordance with the arbitration clause, for the purpose of solving relevant antitrust civil disputes between the parties, while at the same time the other party ignores the arbitration clause or the already-initiated arbitration procedure and bring an private antitrust litigation before a Chinese court to its advantage. This scenario frequently happens to disputes in connection with IP infringements and FRAND (fair, reasonable and non-discriminatory) rate setting of standard essential patents (“SEP”).

For example, when a Chinese licensee breaches its contractual obligation of paying royalties or holds out to pay the royalties to the licensor, the licensor may apply for an arbitration based on the previously agreed arbitration clause. In the meantime, for the strategic reason, the licensee very often lodges an antitrust action in parallel at a court of its home country, claiming that the licensing rate offered by the licensor with a dominance market position in each SEP market is not FRAND, thereby the licensing terms violated the Anti-Monopoly of China and should be invalidated . Sometimes one party requests the arbitration tribunal, while the other party requests the court bench to decide the FRAND rate, which may be very different in practice.

In consequence, the problem comes. Especially when the arbitration award is rendered by a foreign arbitration institute , there exist high risks of the arbitration award cannot be recognized and enforced by Chinese courts, on either the ground that the concerning disputes are not arbitrable according to the laws of the place of enforcement, or the reason that recognition and enforcement of the award will lead to violation of the public policies of China .

Even though, the above-mentioned scenario is not scarcely seen in practice, because the litigation or arbitration proceeding that is brought subsequent to the prior proceeding very often plays the role of increasing bargaining power of the claiming party to its business counterpart. For a fair amount of such cases, it turned out that the parties end up with a settlement.

Lastly, it can be concluded that China’s Supreme Court had articulated the non-arbitrability of antitrust civil disputes. However, in view of the evolvement of views in a lot of jurisdictions that have a longer history of competition law enforcement, such as the US. EU and Germany, which have recognized the arbitrability of antitrust civil disputes some period after the initial rejecting attitude, we may not exclude that China may change its stance in future towards the issue of arbitrability of antitrust civil disputes as well. After all, competition policies in specific jurisdiction evolve with the development of its national economy.

Now the Judicial Interpretation of PRC Anti-monopoly Private Litigation is under scrutiny by China’s Supreme Court for a modification, thus this new Judicial Interpretation will determine the tendency of Chinese private antitrust action in the coming days, and influence the enforcement of AML in the long term.

China requires mandatory notification of mergers that meet certain thresholds. This notification duty is coupled with a standstill obligation, that is an obligation not to put a merger into effect until it is approved. Violation of the obligation to notify a merger and of the standstill obligations are commonly called gun-jumping and can subject to severe legal consequences. Business sometimes still have big incentives to partly or fully implement the merger before approval, even being aware of those negative effects of being penalized. Especially when there is no detailed provision about what amount to gun jumping, it creates incentives for businesses to test the limits of gun jumping prohibitions and circumvent standstill rules. Through explaining the Canon/Toshiba Medical case, this article introduces the legal consequences of Gun-jumping in China and exemplify the risks of implementing the transaction by steps with the view to circumvent the standstill rules. Lastly, recent tendency of strengthened enforcement observed is briefly noted.

I. Legal Consequences of Gun-Jumping

To be specific, gun-jumper faces three types of punishments in China. Firstly, it is monetary punishment, which is the fine of no more than 500,000 RMB, roughly 70,000 US dollars.  Can such tiny amount of fine produce deterring effects? In reality, there indeed had been a lot of voices in China advocating to lift the statute fine level for gun-jumping. The Anti-monopoly Law is in the process of modification right now, and whether the statute fine amount will be changed deserves further observation.

The second type of potential punishment is behavioral, including divestitures or dissolution of the unlawful concentration, such as transfer of shares or assets, or adopting other measures to return to status before the concentration. Although this punishment sounds terrifying, they have not been used yet by Chinese authorities so far, because it is only applied for concentrations with the serious competition concerns, and such cases after all are in the very minority.

The third type of punishment is reputational, which means that SAMR will publish every penalty decision on its official website. This practice started since May of 2014, and indeed impelled a larger number of merger filings since then.

In spite that the statue fine level is low, penalties on gun-jumping do have a few spill-over negative influences on companies that could produce some deterring effects. For instance, if the merging parties filed the notification but partly or fully implemented the merger during the waiting period, and during that period SAMR initiated an investigation, then the merger review procedure will be slowed down because of the parallel time-consuming investigation procedure. In addition, since the penalty will be released, company reputation will be more or less damaged. If the penalized company is a listed company, its stock prices may react negatively. Even for unlisted companies, such penalty may also affect their future financing.

II. Canon/Toshiba Medical Case: Transaction by Steps Being Found Gun-Jumping

In China, there had been three precedents where the merging parties deliberately designed the transaction by steps and implemented a few steps before the approval, but unfortunately were still found as gun-jumping. They are the acquisition of Toshiba Medical by Canon, the acquisition of CiMing Health Checkup by Meinian Da Jiankang; and the acquisition of Tokuyama Malaysia by South Korea OCI. In the following, the Canon/Toshiba Medical case is illustrated as an example in detail, to help the reader’s better understanding of China’s approach on gun-jumping enforcement.

In order to solve financial difficulties, Toshiba intended to sell its 100% equity shares in Toshiba Medical. On March 9, 2016, Canon obtained the exclusive right to negotiate this transaction. The relevant parties made the following pre-transaction preparations: On March 8, three natural persons established a special purpose vehicle call company “M”. One week later, Toshiba converted all the issued ordinary shares of Toshiba Medical into three types of shares: (i) 20 shares with voting right, called A-type Shares; (ii) 1 share without voting right, called B-type Shares; and (iii) 100 warrants, with the option to purchase ordinary shares.

On March 17, the SPV, Company M, signed an agreement with Toshiba to purchase the 20 A-type shares of Toshiba Medical with voting right; Canon signed an agreement with Toshiba to purchase 1 B-type Share without voting right and 100 warrants of Toshiba Medical. And they implemented the above agreements on the same day. This is illustrated as “Step One”, which has been implemented before Toshiba Medical filed the notification with the MOFCOM, China’s former merger review authority.

In addition, according to the agreement between Canon and Toshiba, after obtaining anti-monopoly approvals from various jurisdictions, including China, Canon would exercise the right to reserve new shares (the consideration is 100 Japanese yen, approximately RMB 5.76), and the warrants would be converted into ordinary shares with voting right. Toshiba Medical would repurchase A-type Shares and B-type Shares from company M and Canon respectively and cancel these shares. At this point, Canon would have completed the acquisition of 100% equity shares in Toshiba Medical. The aforesaid is depicted as “Step Two” and has not been implemented before the investigation.

The transaction in this case is the acquisition of entire equity in Toshiba Medical by Canon. MOFCOM considered that although the transaction is divided into two steps, but the two steps are closely related, which are both integral parts of Canon’s acquisition of entire equity in Toshiba Medical, which constitutes one concentration. When Step One has been implemented, since the entire equity and the rights to reserve new shares of Toshiba Medical have been transferred, and all the corresponding payments have been paid, the implementation of the concentration therefore already commenced, even though not fully completed yet, which is in violation of Chinese Anti-Monopoly Law.

As such, MOFCOM imposed a fine at RMB 300,000 on Canon by taking the following factors into account. Firstly, the investigation was initiated by whistleblower, and the parties agreed to notify and receive the clearance globally and in China before the Step One has been implemented. The purpose of the package transactions is to solve Toshiba’s financial difficulties, which proves that the parties fully understood their filing obligations and escaped the notification intentionally.

III. Conclusion: Strengthened Gun-Jumping Prohibition in China

The Canon/Toshiba Medical case indicates designing the transaction by Steps may not well circumvent Standstill rules of China, since the authority had made clear its standpoint in several precedents. In addition, based on the published information on penalties since 2014, there were in total 15 penalties being issued in 2018, which is nearly the same as the total sum of previous three years, from 2015 to 2017. In this year to date, there were also already 13 penalties being released. As such, it can be observed that the gun-jumping prohibition in China had been strengthened from last year, after the new agency, SAMR, was established. Business having operation in China or appreciable turnover from China are therefore suggested to be more cautious in this regard when planning big deals.

Concurrences in partnership with Fordham Competition Law Institute will hold the inaugural Antitrust in Life Sciences on Monday, 23 March, 2020 from 1:30 to 6:30 pm at Fordham Law School in New York.Confirmed keynote speakers are:

(1) FTC Commissioner Noah Joshua Phillips,

(2) Paul Csiszár, European Commission – DG COMP’s Head of Antitrust Unit for Pharma and Health Services,

(3) Gail Levine, FTC Deputy Director, Bureau of Competition in charge of Healthcare cases, and

(4) Scott Hemphill, NYU Professor and former NY AG Antitrust Chief.

There will be three panels:
• Panel 1: Generics Exclusion: What Conduct Crosses the Lines? – Product Hoping, Patent Settlement, Class Certification…
• Panel 2: Do Pharmaceutical Mergers Harm Consumers?
• Panel 3: The Counsel’s Perspective: How to ensure Antitrust Compliance?

You can see all confirmed speakers, and register for free on the dedicated website: