“Fork in the Road” (“FITR”) clauses, included in significant investment treaties, “provide that the investor must choose between the litigation of its claims in the host State’s domestic courts or through international arbitration and that the choice, once made, is final”.[1]  Hence, the fork in the road clauses result in that the investor has a choice of forum that is irrevocable.[2]

For a long time, Fork in the Roadclauses have remained dormant within international investment law (“IIL”). It was not until 2009 that the sole arbitrator, Jan Paulsson, in Pantechniki v. Albania for the very first time, declined his jurisdiction on the basis of the FITR clause contained in the Albania-Greece BIT.[3] When it came to the application of the FITR clause, Mr. Jan Paulsson invested his emphasis on the normative sources of the claims concerned and the question of whether the claim brought before the investor-state arbitral tribunal has an “autonomous existence” from the claim submitted to the other court or arbitral tribunal instead of merely focusing on whether the dispute brought before the investor-state arbitral tribunal and the dispute submitted to another court or tribunal are the same. However, such an approach did not gain widespread acceptance, as many other tribunals continued to adhere to a rigid and formalistic interpretation regarding the application of FITR clauses.

In this article, three recent Chinese cases in relation to the application of the FITR clause will be examined. Based on these examination, we will then subsequently discuss why the emphasis regarding the FITR clause should be shifted from formalism to substantialism.

The Origin and Objectives of FITR Clauses

The increasing number of bilateral investment treaties (“BITs”), multilateral investment agreements and other international conventions provide the cross-border investors with ample instruments to seek remedies in cases where their rights and investments have been infringed by host states. However, when observed from the perspective of host states, the landscape of investor-State dispute settlement (“ISDS”) undergoes a significant transformation. Host states have increasingly found their measures and policies subject to the scrutiny of international tribunals, and the local courts’ jurisdiction over certain investment disputes arising out of foreign direct investment are frequently exercised by these international tribunals.

The ever-lasting struggle between the investors’ demands for international remedy and the host states’ insistence on sovereignty eventually gave birth to the FITR clause which can be found in most investment treaties nowadays. Within the envisagement of the drafters, this clause, as a compromised solution, is anticipated to serve, at least, two main purposes: to harmonize the different interests surrounding the ISDS; and to address the concerns of re-litigation or parallel proceeding and the potentially ensuing conflicting outcomes. However, as the following three cases would reveal, the FITR clause has significantly deviated from its intended purposes due to the rigid and formalistic approach adopted by international tribunals.

Three Chinese Cases Pertaining to the Application of the FITR Clause

On 26 March 2021, a three-member tribunal issued an award in Zhongshan Fucheng v. The Federal Republic of Nigeria. In this award, the arbitral tribunal rejected the jurisdictional objection raised by Nigeria on the basis of the FITR clause. Subsequently, on 10 January 2022, another tribunal, in the case of Wang Jiazhu v. Republic of Finland, ruled against Finland’s jurisdictional objection on the grounds that the FITR clause is inapplicable in the current case. One year later, on 16 February 2023, in the case of Asiaphos Limited and Norwest Chemicals v. People’s Republic of China, the tribunal came with a majority award in favour of China and this award, once again, touched upon the issue of FITR-based jurisdictional objection.

Despite the varying merit issues addressed in the aforementioned three Chinese-related Investment-Treaty cases, the tribunal in each case faced a shared procedural issue, namely, FITR-based jurisdictional objection. Ultimately, all three tribunals arrived at a consistent determination regarding the effect of the FITR clause. In light of this, the tribunals’ findings concerning the application and effect of the FITR clause deserve close attention.

Zhongshan Fucheng v. The Federal Republic of Nigeria[4]

In this case, the dispute concerns the unilateral termination by the Nigerian Ogun State of the joint venture agreement (“JVA”) signed with Zhongfu, a subsidiary of the Chinese company Zhongshan Fucheng (“Zhongshan”). The Claimant alleged that Nigeria had thereby breached its obligations under the China-Nigeria BIT (2001)[5] and commenced the arbitration. During the arbitral proceeding, Nigeria invoked the FITR clause on the basis that Zhongfu had previously opted to initiate legal proceedings in the state court against Ogun State. As a result, this invocation triggered the application of the FITR clause and thereby prohibited Zhongshan from pursuing the international arbitration proceeding.

In detail, the tribunal primarily relied on the “triple identity tests”,which requires tribunal to determine whether claim is the same from parties, course of action, and relief sought, in reaching its decision. First, the parties are different as neither of the parties, Zhongshan and Nigeria in this arbitration, is party to the court proceedings where Zhongshan’s subsidiary Zhongfu and Nigerian Ogun State are involved. Secondly, the course of action is different as the court proceedings are based on the alleged breaches of JVA and domestic law while this arbitration is based squarely on China-Nigeria BIT (2001). Thirdly, the relief sought is different as in the court proceedings Zhongfu seeks declaratory and injunctive relief, whereas in this arbitration, Zhongshan seeks compensation.

Based on the tribunal’s reasoning, concerns may arise that under the well-established and widely accepted “triple identity tests”, investors could potentially gain a significant advantage or even end up being invincible when confronted with the FITR-based jurisdictional objections raised by host states. One could reasonably imagine that initiating legal proceedings against the host state in its own courts, based on the provisions of the BIT can be challenging or practically impossible.

Wang Jiazhu v. Republic of Finland [6]

This arbitration was brought by the Claimant against the Republic of Finland and concerned the latter’s alleged extensive raid of Claimant’s investment center, the subsequent detention of Claimant and the effective appropriation of Claimant’s investments in Kouvala Finland.

It is noteworthy, prior to the commencement of the arbitration, Claimant has originally chosen to submit the dispute at hand to the competent courts of Finland. Starting from 13 June 2013, the Claimant’s domestic legal proceedings went through the District Court, then the Court of Appeal and finally reached to the Finish Supreme Court. In this regard, Finland raised the FITR-based jurisdictional objections, arguing that under Article 9 of the China-Finland BIT (2004)[7], a typical FITR Clause, the Claimant no longer have recourse to international arbitration.

In the Ruling on Respondent’s Jurisdictional Objection issued by the Tribunal on 10 June 2022, the Tribunal concluded that the Republic’s Jurisdictional Objection failed and therefore proceeded to a consideration of the merits claims raised by the Claimant. Among this 12 pages ruling, one key finding raised by the Tribunal is that the significant factual basis relied upon by the Claimant during the arbitration is his denial of justice claim. To be more specific, Claimant alleged that throughout the ruling and adjudication of Claimant’s Tort Claims heard in the Finland domestic courts, the courts had failed to give sufficient reasoning or neglected to address key issues. Such actions committed by the domestic courts fell within the scope of issues concerning fair and equitable treatment to investor during investmentand further gave rise to the Claimant’s denial of justice claim.

Though Claimant had also initiated other claims such as protection and security, protection against expropriation which were likely to be overlapped with the claims raised in domestic courts, the very nature of the denial of justice claim eventually enabled the Claimant to circumvent the application of FITR clause. Because at the time when the Tort Claims were heard, the alleged denial of justice committed by the domestic court had not yet occurred. This case was settled on 24 October 2023, but an interesting hypothetical question worth considering. If the Tribunal later determines the denial of justice claim should be dismissed after considering the merits, would they revisit the jurisdictional aspects of the dispute and invoke the FITR clause? This issue appears to be insurmountable in practical application. Since it is commonly recognized that tribunal, especially international tribunal constituted based on treaty, has the power of competence-competence to determine its own jurisdiction, it has wide discretion to decide whether to deal jurisdiction issue in merits or not. Once the objection to FITR jurisdiction is adjudicated concurrently with the merits, the host state will largely be compelled to become involved in the substantive defense of the case.

Asiaphos Limited and Norwest Chemicals v. People’s Republic of China[8]

If the Zhongshan case stands for a prevailing view on how to interpret the FITR clause in international investment law, the Asiaphos case serves as a unique example, from the host state’s perspective, providing guidance to investors on how to circumvent one.

The dispute of this case relates to the shutdown, sealing and mandatory “exit” of investors’ mines and associated mineral rights as China adopted a new policy which prohibited mining in and around the nature reserve. The Claimants initiated this arbitration primarily alleging the state’s new policy has expropriated investors’ investment which led to the violation of the Singapore-China BIT (1985)[9]. The core issue pertains to the determination of the scope of the state’s arbitral consent on the basis of article 13 (3) of the BIT “if a dispute involving the amount of compensation resulting from expropriation [……], it may be submitted to an international tribunal established by both parties”. The FITR clause, in this case, plays a significant role in the interpretation of the terms “dispute involving the amount of compensation resulting from expropriation”.

To establish the Tribunal’s jurisdiction to hear the dispute not only the compensation resulting from the expropriation but also the existence and lawfulness of the expropriation, Claimants advocated that these two issues were inseparable and if Claimants are required to first file a claim in the court proceedings regarding the existence of an expropriation, then it would be precluded from seeking recourse to international arbitration regarding the compensation because of the FITR clause. Contrary to the Claimants’ position, the host state argued that the FITR clause would not be triggered if the domestic litigation is appropriately filed. The Tribunal eventually adopted the state’s position and elaborated that the investors could limit their request for relief before the national court to the question of legality of the measure in dispute and defer the question of appropriate amount of compensation to the subsequent arbitral proceedings. Then there would be no risk of triggering the FITR clause and giving rise to contradicting decisions as the two proceedings deal with different issues.

Inspired by the Tribunal’s above reasoning, the investors in other cases may utilize the tactic of “claim-splitting”, which is dividing a single cause of action or claim into multiple ones and pursuing each one separately in different legal proceedings, to easily avoid triggering the FITR clause and then having a second bite at the cherry. In the end, the tribunal may find the award’s initial purpose of avoiding parallel proceedings and the ensuing contradictory decisions is satisfied at the cost of rendering the finality of the results of dispute settlement moot.

Concluding thought: shifting the Emphasis from Formalism to Substantialism

Overall, the aforementioned three cases primarily adhere to the “triple indentity test” method to determine whether the FITR provisions should be triggered. However, Before deciding whether such test should be applied to interpret FITR clauses or not, the very fundamental issue to solve is determining which rules to be applied. Since FITR clauses are treaty texts, Vienna Convention on the Law of Treaties (“VCLT”) is of certain to govern, of which Art. 31 referring that object purpose are to be considered when interpreting treaty texts gives a guideline to follow. In this regard, any test adopted by the tribunal should not deviate from the requirements regulated by VCLT. It is not difficult, however, to determine the actual role played by FITR clauses. As illustrated at the beginning of this article and has been observed by the ICSID tribunal in H&H v. Egypt, the purpose of a FITR provision is “to ensure that the same dispute is not litigated before different fora.”[10] i.e., to avoid parallel proceedings, where Claimant would enjoy second opportunity to present their cases. Thus, conclusion can be drawn that FITR clauses are drafted to prevent various detrimental effects of parallel proceedings and balance unequal position between host state and investor.

Based on the foregoing analysis, the formalistic approach exemplified by the triple identity test exhibits significant deficiencies, rendering the application of the FITR clause virtually impossible. It is self-evident that investor-state arbitration is initiated based on treaty (namely treaty claim), while picture is far different in domestic litigation or arbitration, where majority of them are initiated solely and squarely based on domestic law or contracts (namely contract claim). If triple identity test is to be strictly followed, a foreseeable result is that FITR clause would enter a dormant state, which is also in violation of the interpretive principle of effectiveness.[11]

Let’s revisit interpretation method provided in VCLT, since ordinary meaning of FITR clauses in many BITs are neutral, triple identity test is then applied as a supplementary tool to assist the tribunal determining the application of FITR clauses. However, This method of interpretation appears to have produced a contrary effect in practice, resulting in investor easily evading application of FITR clauses and having a second bite of the apple to present their case in different forums. Such interpretation is evidently contrary to the object and purpose of the FITR clauses.

Standing in the current era of expanded ISDS and ample remedies available for investors, it is therefore of significant importance to shift the emphasis from a rigid formalistic identity test to a substantial overall assessment of the parties involved, the legal grounds invoked, the objects pursued and underlying facts or a measures/injuries oriented approach. With this transformation, a tribunal is required to dig deeper to find out whether the measure, adopted by the host state, which gives rise to the investors’ claim or the injury that formed the foundation of the claim, is the same in both proceedings.

For example, if an investor pursues a case in domestic court proceedings seeking restitution in integrum for alleged expropriation by the host state based on contractual obligations, but subsequently seeks compensation in international proceedings relying on a BIT, the tribunal is expected to conduct a comprehensive and fact-intensive analysis to determine whether in both cases, the measures claimed or the injuries suffered by the investor are identical, i.e., both lead to host state’s commitment of expropriation. If the determination is affirmative, it is much likely that the FITR clause would be triggered.

Undoubtedly, the real case presented before the tribunal would be much more complicated. However, it is only when the emphasis regarding the FITR clause is shifted from formalism to substantialism that the two main purposes surrounding this clause can be truly satisfied.


[1] Dolzer, R. and Schreuer, C., Principles of International Investment Law, Oxford University Press, 2nded., 2012, p. 267.

[2] Billiet, J.,International Investment Arbitration: A Practical Handbook, 2016, pp. 187-188.

[3] Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, Award, ICSID Case No. ARB/07/21

[4] Zhongshan Fucheng v. The Federal Republic of Nigeria, Award, Case 1:22-cv-00170.

[5] China-Nigeria BIT (2001)

available at: https://www.italaw.com/sites/default/files/laws/italaw170107.pdf

[6] Wang Jiazhu v. Republic of Finland, Ruling on Respondent’s Jurisdictional Objection.

[7] China-Finland BIT (2004), available at China – Finland BIT (2004) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

[8] AsiaPhos Limited and Norwest Chemicals Pte Ltd v. People’s Republic of China, Award, ICSID Case No. ADM/21/1.

[9] Singapore-China BIT (1985), available at China – Singapore BIT (1985) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub

[10] H&H Enters. Invs., Inc. v. Arab Republic of Egypt, Award, ICSID Case No. ARB/09/15.

[11] For a discussion of the meaning and scope of the principle of effectiveness, see Richard K. Gardiner, Treaty Interpretation, pp. 66-68 (2d ed. 2015).

The new PRC Company Law, which comes into effect on July 1, 2024, has drawn significant attention, particularly regarding the adoption of a series of new rules for registered capital contribution made by shareholders. However, detailed answers for some practical questions are not addressed in the new PRC Company Law. In order to effectively implement the new rules, the State Council issued the Provisions on the Implementation of the Registered Capital Registration and Management System under the Company Law (“Provisions”), which are implemented concurrently with the new Company Law on July 1, 2024.

The Provisions specifically address how the new registered capital contribution system (“New System”) applies to companies newly established under the new Company Law (“New Companies”) and companies already established before its implementation (“Existing Companies”).  

Below is a summary of the New Company Law and the Provisions with respect to the System for these two categories of the companies.

Ⅰ. New Companies

    Shareholders of all New Companies must fully complete the registered capital contributions within 5 years from their establishment date.

    Ⅱ. Existing Companies

    1. Transition Period

    The Provisions provide for a uniform transition period of 3 years, from July 1, 2024 to June 30, 2027. During this period, the Existing Companies whose registered capital has not been fully paid up may need to adjust their registered capital.

    2. Adjustments

    • If its remaining contribution period, as stipulated in its original charter documents, is less than 5 years following July 1, 2027, the Existing Company is not required to make any adjustment. If its remaining contribution period, as stipulated in its original charter documents, is more than 5 years following July 1, 2027, the Existing Company must make adjustments to ensure that the revised contribution period will conclude no later than by June 30, 2032.
    • If the contribution period or the registered capital amount stipulated in the charter document of any Existing Company contravenes the principles of authenticity and rationality, local registration authority (“AMR”) is authorized to intervene, at its sole discretion, by initiating an independent assessment, and then order the Existing Company to revise its charter document to shorten the contribution period or to reduce the registered capital. The key determinants guiding the AMR’s decision include business scope, operation conditions, shareholders’ contribution capability, actual businesses, and asset scale, etc.

    3. Risks

    If any Existing Company fails to adjust its contribution period and/or registered capital as stipulated, AMR will, among the other things, make a special notation on the file of such company and publish it on the Credit Publicity System. It would adversely affect the company’s social credibility, and result in obstacles for the company when financing, participating biddings or applying for any administrative approvals.

    Ⅲ. Publication

      The Provisions and the new Company Law further specify that New Companies and Existing Companies shall disclose information related to their registered capital on the Publicity System within 20 working days from the date of its formation or change. This information includes, (i) subscribed and paid-in capital; (ii) method of contribution; (iii) contribution period; (iv) date of contribution; (v) changes in shareholding. This kind of information had not been mandated for disclosure under the previous Company Law. According to the new laws, failure to publish may lead to a fine of up to CNY 200,000. Additionally, the responsible executives and other directly responsible personnel may also encounter a fine of up to CNY 100,000.

      In light of the aforementioned new regulations, it is advisable to conduct a further verification and confirmation of the payment status regarding the registered capital of subsidiaries in China. Please ensure that any necessary adjustments are made in a timely manner during the designated transition period.

      *            *           *

      This publication has been prepared for clients and professional associates of AnJie Broad Law Firm.

      While every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and AnJie Broad Law Firm accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material in this publication. Please seek the services of a competent professional advisor if advice concerning individual problems or other expert assistance is required.

      On July 1, 2024, the highly anticipated amended PRC Company Law (the “New Company Law”) has officially taken effect. The New Company Law ushers in some significant transformations in the way firms are established and run in China, a change that extends to foreign firms investing in the country. In this article, we will delve into the key amendments made to the provisions governing limited liability companies, considering that the majority of foreign-invested companies in China adopt this particular form.

      Ⅰ. Changes to Capital Contribution System

      1. Time Limit for Capital Contribution

        The previous Company Law allows shareholders to have flexibility in determining the schedule for capital contributions in a company’s articles of association. In theory, shareholders are not required to fully pay the registered capital until the company’s business term ends, which could span several decades. However, the New Company Law introduces a significant change by imposing a 5-year time limit for capital contributions. Shareholders are now obligated to fully pay the registered capital within 5 years after the company is established. Additionally, the company is required to disclose the subscription and paid-up status of the registered capital through the registration information system, ensuring transparency to the public.

        2.Acceleration of Capital Contribution

        In accordance with the aforementioned provision, the articles of association of a company can allow a timeframe of up to 5 years for shareholders to fully pay up their registered capital. However, it is important to note that the New Company Law introduces a caveat to this arrangement. If the company fails to repay any of its debts as they become due, both the company itself and its creditors have the right to demand that shareholders expedite their capital contributions. This requirement applies even if the scheduled payment of registered capital has not yet become due as specified in the company’s articles of association.

        3. Other Responsibilities Related to Capital Contribution

        • According to the New Company Law, shareholders have not only the obligation to make their own capital contributions promptly, but they are also responsible for ensuring that other shareholders duly fulfill their contribution obligations as well. In cases where any shareholder fails to make the required contribution as specified in the articles of association, the other shareholders may be held jointly and severally liable.
        • Directors have a duty to verify the capital contributions made by each shareholder and are required to urge shareholders to rectify any instances where their contributions are not made in full or in a timely manner, as specified in the articles of association. Directors may be held personally liable if they fail to properly fulfill this obligation.
        • If a shareholder fails to make the contribution within the prescribed time frame and after urged by the directors, but still fails to pay within a grace period of no less than 60 days, the company’s board may forfeit such shareholder’s equity interests by issuing a forfeiture notice.

        Ⅱ. Changes to Provisions on Share Transfer

        1.Other Shareholders’ Consents Not Required by Law

          Under the previous Company Law, any share transfers require obtaining consents from more than half of the shareholders. However, the New Company Law has eliminated this requirement. According to the new law, non-transferring shareholders now only have the right of first refusal but no veto power over proposed transfers by other shareholders. Although the shareholders’ consents are not required for the share transfer by the new law anymore, shareholders are entitled to different mechanism and limitations over the share transfer so long as these are specified in the articles of association of the company.

          2. Effective Date of Share Transfer

          Under the new law, the shareholder register of a company carries greater importance, requiring it to record the dates when each shareholder becomes and ceases to be a shareholder. Additionally, the law specifies that a transferee of shares can exercise their shareholder rights once their name is officially entered into the shareholder register. As a result, the effective date of a share transfer is typically when the transferee’s name is recorded as the company’s shareholder in the register, which is also the date when the company issues the investment certificate to the transferee. There is no doubt that the provision in the previous law, which stipulates that amendments to the articles of association related to changes in shareholders and shareholdings do not necessitate shareholder resolutions, will gain enhanced enforceablility under the new law.

          3. Transfer of Shares with Corresponding Registered Capital Uncontributed

          Similar to the previous Company Law, the New Company Law allows for share transfers even if the registered capital corresponding to those shares has not been fully contributed. However, the New Company Law now specifies that the transferee must contribute the full amount for the transferred shares in a timely manner. If the transferee fails to fulfill this obligation, both the transferor and transferee will be jointly and severally liable.

          Ⅲ. Protection of Minor Shareholders

          1.Redemption by Company

            Under the new law, if the controlling shareholder abuses their shareholder rights and causes significant harm to the interests of the company or other shareholders, the other shareholders have the right to demand that the company redeem their shares at a reasonable price.

            2. Joint Liability of Controlling Shareholders

            According to the New Company Law, if controlling shareholders instruct any directors and senior management personnel to engage in actions that harm the interests of the company and other shareholders, these shareholders will be held jointly liable along with those directors and senior management personnel.

            Ⅳ. Corporate Governance

            1. Relaxing Corporate Governance Structure

              Under the New Company Law, for small-sized companies or companies with few shareholders, it is now possible for the company to operate without the position of a supervisor, as long as all shareholders unanimously agree. This means that in such cases, a shareholder can appoint a single individual to be both the director and the general manager of the company concurrently. This provision acknowledges the flexibility required for small-sized companies and reduces the administrative burden on them.

              For medium-sized companies or companies with many shareholders, it is not mandatory to have the position of a supervisor. Instead, these companies can choose to establish an audit committee within the board of directors which will fulfill the role similar to that of supervisors or board of supervisors. This committee will be responsible for overseeing financial reporting, internal controls, and other related matters, ensuring transparency and accountability within the company.

              2. Employee Representative at Board

              It is mandated in the new law that if a company employs over 300 individuals, it must have an employee representative as one of its directors. This representative is required to be elected through a democratic method.

              3. Compensation for Departing Director

              Under the provisions of the New Company Law, directors are granted the right to request compensation if they are removed from their position by the shareholder(s) without justifiable reasons. This provision aims to safeguard directors from arbitrary or unfair removals and encourages responsible decision-making by shareholders.

              4. Disqualification from Decisions on Connected Transactions

              Under the New Company Law, if a director, supervisor, senior management personnel, or any relatives or affiliates of the aforementioned individuals enter into transactions with the company, they are required to report it to the board or shareholder’s meeting. These transactions can be direct or indirect.

              When it comes to voting on resolutions related to these transactions, the directors involved in the transaction are disqualified from participating in the vote. This is to ensure impartiality and avoid conflicts of interest.

              Additionally, if the number of unrelated directors present at a board meeting is less than three, the matter should be submitted for review and approval by the shareholder’s meeting. This requirement ensures that decisions regarding related transactions receive appropriate scrutiny and oversight.

              Please contact the author listed below if you request additional information or have any questions regarding the issues raised in this article

              *            *           *

              This publication has been prepared for clients and professional associates of AnJie Broad Law Firm.

              While every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and AnJie Broad Law Firm accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material in this publication. Please seek the services of a competent professional advisor if advice concerning individual problems or other expert assistance is required.

              A Brief Analysis on the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance

              1. Introduction and Background

                On June 18, 2024, the National Medical Products Administration of People’s Republic of China issued the List of Typical Application Scenarios of Artificial Intelligence for Drug Governance (the “List”), presenting fifteen application scenarios that can play a leading demonstration role, possess characteristic of development potential, address pain points during the work, and tailor to more urgent needs. 

                It is noted from the beginning of the List that, the following guiding regulations adopted previously are playing a fundamental role in framing the List:

                No.Guiding OpinionsIssuing Governmental AuthorityIssuance Date
                1The 14th Five-year Plan for National Economic and Social Development of the People’s Republic of China and the Outline of the long-range goals for 2035The National People’s CongressMarch 12, 2021
                2Development Plan on the New Generation of Artificial IntelligenceThe State CouncilJuly 8, 2017
                3Guiding Opinions on Enhancing Scene Innovation and Promoting High-quality Economic Development with High-level Application of Artificial IntelligenceMinistry of Science and Technology, Ministry of Education, Ministry of Industry and Information Technology, Ministry of Transport, Ministry of Agriculture and Rural Affairs, National Health CommissionJuly 29, 2022
                4Drug Governance Network Security and Information Construction “14th Five-Year Plan”National Medical Products AdministrationApril 24, 2022

                It is widely and notably recognized that application scenarios are pivotal when considering artificial intelligence (“AI”) empowering and supporting a variety of industrial sectors.  According to the above-listed guided opinions and plans, issuance of a list describing various application scenarios have been underscored as a standardized approach, aiming to integrate AI into traditional industrial fields such as drug research, production and operation. 

                The Circular Regarding the Issuance of the List (the “Circular”), promulgated by the General Affairs Department of the National Medical Products Administration also sets the goal of the List as follows:

                • promoting the research and exploration of AI-backed technology in the field of drug governance,
                • enhancing the deep integration of AI and drug governance as the main line,
                • standardizing and guiding drug regulatory authorities at all levels to carry out research and application of AI technology,
                • guiding the focus of resources and promote the AI-enabled drug monitoring system, and
                • providing reference and guidance for related research and application of other scientific research institutions, technology companies and pharmaceutical enterprises.

                2. Specific Guidance on AI-powered Application Scenarios

                In order to thoroughly address the current issues regarding AI-backed drug and medical device, the detailed application scenarios have been initially divided into four major categories, which further encompass several specific scenarios in each group.  The below table shows headlines of those major categories along with scenarios elaborated in each type. 

                No.CategoryApplication Scenarios
                 1Admittance and ApprovalProcedural review
                Auxiliary review and evaluation
                Batch arrangement and processing
                 2Routine SupervisionRemote supervision
                Onsite supervision
                Auxiliary sampling for examination
                Auxiliary inspection and case handling
                Drug alert
                Network transaction governance
                 3Public ServiceService processing and policy consulting
                Elderly-oriented modification on instruction
                 4Auxiliary Decision-makingService data query
                Data analysis and forecast
                Work scheme inspection
                Risk management

                Pursuant to the List, the category regarding admittance and approval is related to threshold of entering the circle, which is likely to draw much of market players’ attention.  In this regard, however, the List provides that we, people use AI technology to build a large language model (the “LLM”) based on relevant laws and regulations, in order to (i) realize the automatic intelligent review of the electronic application materials for the registration of drugs and medical devices, (ii) expediently determine the compliance of application materials, and (iii) analyze and compare the research data of the declared products, which in turn determine the authenticity of data in question at a preliminary phase, and then provide the specific basis regarding non-compliance.[1]  With more AI embraced in the preliminary review and screening of application material, it merits further attention that pertinent applicants shall draft and submit the material in accordance with the instructions provided by the National Medical Products Administration so as to pass the AI review and screening model smoothly.  Though the List, namely, is mainly focusing on drug governance, procedural review on medical device and cosmetics are also covered in this part, which could enhance efficiency and productivity in the relevant process.[2]

                What’s more, worthy of mention is the emphasis of AI-powered LLMs in the List.[3]  It is well-noted that the LLM has emerged as a bright spot for today’s AI advancements.  The list actively responds to this development trend by directly referring to the application of LLM for several times, encouraging people to harness the LLM capacity in aspects of information searching and analyzing, generating initial draft of certain types of documents, data processing and forecast, and even the auxiliary review work, aiming to improve the working quality and efficiency, thereby boosting the high-quality development. 

                Last but not the least, the List makes clear the auxiliary aiding function of AI-related technology served in pertinent work, indicating roles and continuous efforts of staff involved like inspectors on such matter.  For instance, with respect to onsite supervision and sampling for examination, certain work will still be primarily conducted by inspectors or reviewers.[4]  This is not hard to believe since those work may require substantial discretion to occasionally decide on an ad hoc basis whether a particular activity should be penalized or excused under the routine scrutiny and surveillance.  Similarly, during the decision-making process, AI’s aiding role is determined while individuals involved are highly encouraged to harness its strong computing capacity and data process abilities, even generating the initial draft of certain analysis and inspection reports.[5] 

                3. Guiding List and Open-ended Approach

                AI-powered technology has become increasingly important in the development of pharmaceutical industry.  For instance, AI-backed drug discovery has experienced boom in recent years.  Meanwhile, it goes without saying that the pharmaceutical industry holds significant importance in terms of public well-being, people’s health conditions and human’s lifespan.  In order to fully take advantage of the cutting-edge technology, maximizing its benefits brought to key industrial sectors, the guiding opinions, regulations or list in question can catalyze the process, facilitating the actual application in particular scenarios. 

                Admittedly, the network security and data security also merit emphasis.  The Circular underlines that all related units shall pay attention to issues associated with the network security and data security.  According to the category and classification-based protection requirements of data resources subject to governance rules and the computing capacity requirements required by the AI model, appropriate application deployment schemes shall be selected.  In the meantime, system and data access rights shall be reasonably set to avoid the risk of data leakage and abuse, so as to ensure the safe and steady application and development of AI technology concerning drug governance, which has been fairly elaborated in existing laws and regulations like Network Security Law, Data Security Law and Personal Information Protection Law. 

                In addition, it is worth noting that the List, pioneered by the Chinese pharmaceutical authority, is the first guiding regulation on the national level that navigates the AI application scenarios in a vertical industry.  Prior to issuance of the List, some governmental authorities in local level have delved into the discussion regarding application scenarios of AI or similar digital technology, granting some pilot projects in this regard.[6]  Those local-level attempts mainly focus on the implementation while the List is crafted to offer higher-level guidance covering the pharmaceutical industry.   

                Due to its attribution, relevant policy makers have strived to employ an approach combining a typical specific list with a comparatively broad guideline.  Certainly, market players involved shall comply with the existing legal framework in respect of network and data security as a whole.  But the List concentrates on offering instructions empowering AI-backed technology in various subdivision of drug governance, leading to increasing application in practice.  Undoubtedly, the List develops a sensible legal and policy response to the actual application of AI by listing possible scenarios.  The implementation of the List along with realization of the aspirations implied in the Circular are well worth expecting and hope to open more opportunities in a variety of industrial sectors. 


                [1] See Application Scenarios No. 1 of the List.

                [2] See supra note 1.

                [3] See Application Scenarios No. 1, 2, 7, 9, 10, 11, 12, 13 and 14 of the List.

                [4] See Application Scenarios No. 5 and No. 6 of the List.

                [5] See Application Scenarios No. 9 and No. 13 of the List.

                [6] According to the First Batch and the Second Batch of Key Construction Projects on Artificial Intelligence Application Scenarios in Hangzhou, issued by Hangzhou Municipal Bureau of Economy and Informatization on April 25, 2021 and June 29, 2021, respectively, specific projects were listed to facilitate the AI application scenarios in certain type of industries, such as fintech, smart healthcare, smart education, and so forth. 

                On 7 June 2024, the State Administration for Market Regulation (“SAMR”) released its decision against Shanghai Highly (Group) Co. Ltd. (“Shanghai Highly”) and Qingdao Haier Air Conditioning Co. Ltd. (“Qingdao Haier”) for their failure to obtain the SAMR’s prior approval before setting up a joint venture that was caught by China’s merger control regime (the “Decision”). The SAMR found that the concentration at issue would not have the effect of restricting or excluding competition and, as a result, fined each of the undertakings RMB 1.5 million (roughly USD 206,733) pursuant to the increased penalty cap under Article 58 of the Amended Anti-Monopoly Law (“AML”).

                It is worth noting that this is the first publicly available enforcement case against gun-jumping after the increased penalty cap came into effect in August 2022, nearly two years ago. This case therefore may help companies to some extent understand how the SAMR gauges the fine in the individual case pursuant to the new law.

                Background

                Shanghai Highly is a company principally engaged in the manufacture, research and development of household appliances, core components for new energy automobiles and related cooling and heating appliances. Qingdao Haier mainly specializes in the production and sale of air-conditioners, household appliances, cooling equipment as well as the development and promotion of air-conditioning technology.

                On 19 January 2023, the parties entered into a joint venture agreement for the purpose of setting up Zhengzhou Highly Electric Appliances Co. Ltd. (“Zhengzhou Highly”), a joint venture that would engage in the production and sale of rotor compressors of air-conditioners. According to the parties’ arrangement, Shanghai Highly would hold 51% of the equity interest in Zhengzhou Highly whereas Qingdao Haier would hold the rest. On 13 March 2023, Zhengzhou Highly obtained the business license without obtaining prior approval from the SAMR.

                The SAMR’s Findings

                As Shanghai Highly and Qingdao Haier obtained joint control over the newly established joint venture, SAMR found it falling into the scope of concentration under the AML. SAMR further examined the parties’ global and domestic turnovers (sum not disclosed in the Decision) and found that the arrangement at issue was notifiable and must be declared to the SAMR for approval before being implemented. Consequently, SAMR found that the joint venture registered on 13 March 2023 violated Article 26 of the AML as the parties (i.e. Shanghai Highly and Qingdao Haier) had not obtained the prior approval from the SAMR.

                That said, the SAMR then found that the concentration at issue would not restrict or eliminate competition by effect, taking into account the non-exclusive factors listed in Article 33 of AML, which include: –

                • the market share of concentration undertakings and their control over the market;
                • the degree of concentration;
                • the impact of the concentration on market access and technological advancement;
                • the impact of the concentration on consumers and other relevant undertakings; and
                • the impact of the concentration on the development of national economy; etc.

                Factors considered by the SAMR to determine the amount of fines

                Under Article 58 of AML, sanctions for gun-jumping can vary depending on the effect of the concentration on competition. Where no anticompetitive effects are found, the SAMR will impose a fine capped at RMB 5 million (roughly USD 689,110) at its discretion. However, if the opposite is found, the cap of fines will rise to 10% of the turnover in the preceding year and the undertakings involved will also face non-pecuniary sanctions such as the order to cease concentration, transfer or dispose of the shares or assets and restore the pre-concentration status. Moreover, all administrative penalties will be recorded in the National Enterprise Credit Information Publicity System – a publicly accessible credit database – in accordance with Article 69 of the Provisions on the Review of Concentrations of Undertakings (the “Provisions”).

                In determining the specific amount of fines, the SAMR must take into account “such factors as the nature, degree and duration of the illegal acts and the elimination of consequences of the illegal acts” as prescribed in Article 59 of AML.

                In the current scenario, as no anti-competitive effects were found, the SAMR imposed 30% of RMB 5 million cap on each of the concentrated entity, taking into account: –

                • that the case did not involve any aggravated factors;
                • that it was the first time that the parties jumped the gun;
                • that the parties cooperated with SAMR’s investigation and provided the evidence materials in a proactive manner; and
                • that the parties actively rectified the conduct by effectively establishing and implementing an anti-monopoly system in concentration, etc.

                Implications

                China has long been at the forefront of sanctioning gun-jumping. Besides the RMB 1.5 million fines imposed on both parties, the Decision has some other implications that may help companies better navigate the compliance landscape of merger control.

                First, gun-jumping may unnecessarily stagnate the transactions. From the particulars posted on Shanghai Administrative for Market Regulation’s website dated 17 March 2024, we understand that the concentration in question probably was eligible for a simplified review, which in practice would normally take no more than two months, often a shorter time. However, in the current case, the gun-jumping investigation took approximately eight months (i.e. from 25 September 2023 to 28 May 2024), quadrupling the time needed for a simplified review. Although the current case is not representative of all circumstances as the length of investigations and merger reviews may vary from case to case, it can provide companies with a helpful reminder that gun-jumping may put companies in a uncertain situation for a long time, and might even lead to an increased risk of stagnation of transactions if the regulator calls stop of the concentration, besides the intensified pecuniary sanctions. Therefore, it is advisable for companies to attach more attention on the pre-closing merger filing analysis and filing requirement pursuant to the AML.

                Secondly, companies are encouraged to develop an effective anti-monopoly compliance system. In the current case, the SAMR specified its considerations in determining the amount of fines, where it regarded the effective adoption of an anti-monopoly system as an important mitigating factor. That approach aligns with Article 36 of the newly promulgated Anti-monopoly Compliance Guide for Undertakings which empowers the anti-monopoly enforcement authority to “lighten or mitigate the administrative penalties at its discretion as appropriate” if the company “actively establishes or improves its anti-monopoly compliance management systems and effectively implements the same” before the issuance of the penalty decision. Moreover, the SAMR’s approach in the current case is consistent with the regulatory trend to encourage proactive compliance with the anti-monopoly regime. Therefore, we would strongly recommend companies to establish and implement an effective anti-monopoly compliance system proactively. 

                Thirdly, in the current case, only the undertakings directly engaged in gun-jumping were penalized. Thoughit remains not completely clear from the written rules and precedents if and in which scenario the liabilities may be extended to parent companies, in the current case, the SAMR imposed fines on the direct perpetrators only. Therefore, it at least can be observed that SAMR is cautious to extend the liability to the parent entities of the companies directly signing the concentration agreements. That said, continuous observation on SAMR’s attitude toward this issue is recommended.

                Finally, gun-jumping may negatively affect an undertaking’s credit. In the current case and pursuant to Article 69 of the Provisions, the administrative penalties incurred from the said gun-jumping were kept in the parties’ credit record accessible to the public. This would inevitably cause reputational damage to the company to some extent, which may add extra costs and difficulties in client maintenance, business operation, bidding, commercial procurement, etc. Therefore, we would advise that companies also beware of the reputational risks triggered by gun-jumping. 

                To summarize, as the current case suggests, trying to deviate from the merger control regime of China can trigger unnecessary costs and risks. Hence, it is advisable for companies to plan the timing of integration carefully and develop anti-monopoly compliance systems proactively.

                This writer recently encountered a case: a company (hereinafter referred to as “Company A”) with a large amount of registered capital, felling such large, registered capital was unnecessary, reduced it. In the process of reduction, the capital reduction information was only announced in local newspaper but not notified to every single creditor. One shareholder of Company A is a limited partnership (hereinafter referred to as “Partnership B”). After the capital reduction, Partnership B was also deregistered through summary dissolution.

                Later, Company A fell into financial difficulties. Many creditors sued Company A and applied for enforcement. Soon, they found Company A had no asset for paying debts. Therefore, the creditors sued all shareholders of Company A at the time of capital reduction, asking them to bear supplementary compensation liability within the scope of capital reduction. Further, because Partnership B had been deregistered through summary dissolution, creditors sued all partners of Partnership B at the time of the summary dissolution, requiring them to jointly bear the supplementary compensation liability of Partnership B within the scope of Company A’s capital reduction.

                With the imminent implementation of the new Company Law[1], a large number of companies with high registered capital subscription are busy on reducing their registered capital. The increased fiduciary duties of senior management, directors and supervisors under New Company Law also make many companies busy on liquidating and dissolving themselves. In this process, a little carelessness may trigger huge liability. Regardless capital reduction or dissolution, governing laws’ core lies in protection of creditors. Only strict compliance with procedure laws to provide full protection to creditors, can possible compensatory liabilities under substantive laws be avoided.

                1. Legal Risks in Process of Capital Reduction

                Article 177 of current Company Law[2] provides that, when a company needs to reduce its registered capital, it must prepare a balance sheet and an assets list. The company shall notify creditors within 10 days from the date of making the reduction resolution, and make a public announcement in newspaper within 30 days. The creditors shall, within 30 days from the date of receipt of the notice, or within 45 days from the date of public announcement if they have not received the notice, have the right to require the company to pay off their debts or provide corresponding security.

                According to provisions of the Third Judicial Interpretation of the Company Law[3], if the company fails to comply with the notice or public announcement requirement during the reduction process, the capital reduction shall be regarded as illegal withdrawal of capital contribution, and creditors of the company shall have the right to require all shareholders of the company at the time of capital reduction to bear supplementary compensation liability for any unpaid debts within the scope of illegal capital reduction.

                Chinese company law adopts a principle of capital maintenance. Shareholders’ contribution to the company constitutes assets of the company and the basis for external creditors to trust in and deal with the company. If shareholders want to get back their capital contribution, they must follow the statutory capital reduction procedure. The core of the statutory procedure is protection of creditors. Therefore, in the reduction process, notice to every knowing creditor and public announcement are two independent steps.

                As to whether public announcement can replace the notification to creditors, the Supreme Court in case Wuhan Sinochem Fuel Oil Co., Ltd. v Yueyang Tianyu Industrial Co., LTD [4] held that, improper reduction of company’s registerred capital shall not have legal effect on creditors who have not notified the announcement. If this leads to that the company has no sufficient assets to fully pay creditors’ debts in judicial enforcement procedure, shareholders of such company shall bear supplementary compensation liability for any unpaid debts within the scope of the capital contribution. In practice, most courts hold the same opinion.

                Therefore, in the process of capital reduction, all knowing existing and possible creditors, including all creditors recorded in the company’s financial books, all counterparties in the contracts signed by the company but not yet fully performed, and any party of transactions the company being involved in, shall be notified one by one. Failure to follow the notifying procedure may lead to shareholders of the company bearing supplementary compensation liabilities.

                It is worth noting that Article 226 of the new Company Law provides that, where the registered capital is reduced in violation of laws, the shareholder who have received reduced funds shall return such funds, and such shareholder’s contribution shall be restored to the original state. If any loss is caused to the company, such shareholder and any responsible director, supervisor and senior manager shall be liable for compensation. This Article 226 only requires the shareholder return funds he illegally received from the company, and bear compensation liability to the company, but is silent in whether such shareholder should bear the compensation liabilities to creditors. Theoretically, after the returning of funds, the company’s capital is enriched, and creditors can further obtain repayment from the company. However, from perspective of creditors, it is obvious that the direct compensation to creditor is more protective. Therefore, after the new Company Law comes into effect, will the shareholders’ supplementary compensation liability to creditors under current the Third Judicial Interpretation of the Company Law still apply? This needs to be further clarified in judicial practice.

                • Legal Risks in Process of Dissolution

                Current Company Law, Partnership Law[5] and Market Entity Registration Regulations[6] provide two ways for market entity’s dissolution: liquidation dissolution and summary dissolution.

                In terms of liquidation dissolution, Articles 183 to 189 of current Company Law, Articles 86 to 90 of the Partnership Law, and Article 3 of Guidelines on Enterprise Dissolution[7] require that a company or a partnership shall set up a liquidation panel within 15 days from the date of dissolution, and within 10 days from setting up the liquidation panel, publicly announce the information of liquidation panel through the National Enterprise Credit Information Publicity System (the “NECIPS”), and notify all creditors.

                The liquidation information announcement shall be circulated through NECIPS and newspapers within 60 days from setting up the liquidation panel. On completing of liquidation, the liquidation report shall be submitted to the competent registration authority to apply for deregistration of the market entity.

                Similar to the company’s capital reduction procedure, notifying creditors in liquidation process is a necessary procedure, and such notification cannot be replaced by dissolution announcement. According to Article 10 of the Second Judicial Interpretation of the Company Law[8], if the liquidator fails to notify creditors and circular liquidation announcement as required by law, and resulting in creditors failing to declare their claims in a timely manner further leading to their debts not being fully paid off, the creditors have the right to require the liquidation panel to assume compensation liability for the resulting losses.

                Further, According to Article 18 of the Second Judicial Interpretation of the Company Law, if shareholders of a limited liability company fail to fulfill their liquidation obligations or deregister the company without liquidation, which results in the loss of the company’s assets, account books, or important documents, etc., and further leads to liquidation not being able to be initiated or completed, the creditors have the right to require shareholders of the company to bear joint and several liabilities for the company’s debts.

                In terms of “failing to fulfill liquidation obligations”, the nineth Minutes on National Courts Civil and Commercial Trial Conference (Law [2019] No. 254) (hereinafter referred as the “Nineth Minutes”) elaborates that, “failing to fulfill liquidation obligations” shall refer to the company shareholders, after the occurrence of liquidation, in the case of being able to perform liquidation obligations, either deliberately delay or refuse to perform liquidation obligations, or negligently fail to initiate the liquidation. However, if a shareholder can prove any one of the following, the shareholder shall not be jointly and severally liable for the repayment of the company’s debts:

                • he has taken positive steps to fulfill his liquidation obligations;
                • all these conditions are satisfied:
                • he is only a minority shareholder;
                • he is neither director nor supervisor of the company;
                • he didn’t elect any person to serve as director or supervisor of the company; and
                •  he has never participated in the operation and management of the company; or
                • there is no causal link between his passive inaction of “failing to fulfill liquidation obligations” and the result of “loss of the company’s assets, account books, or important documents, etc. which leads to liquidation not being able to be initiated or completed”.

                As to summary dissolution, Article 33 of Market Entity Registration Regulations and Article 4 (2) of Guidelines on Enterprise Dissolution provide that, if all following conditions are satisfied, a market entity may be deregistered without liquidation:

                • all investors of the market entity have signed a deregistration application and a letter of commitment, promising that:
                • the market entity has not incurred any claim, debt or expense;
                •  any claim, debt or expense of the market entity (if any) has been fully paid off;
                • all investors are willing to bear all legal liabilities;
                •  such deregistration application and letter of commitment have been announced through NECIPS for 20 days.

                Article 20 of the Second Judicial Interpretation of the Company Law provides that, if a shareholder of a limited liability company, in the process of summary dissolution, commits to assume liability for the company’s debts, the creditor shall have the right to require such shareholder to assume “corresponding liabilities” . From the Article 20’s wording, a shareholder commits to assume “corresponding liabilities” does not necessarily mean that shareholder undertakes to assume joint and several liability for the company’s debts. As Article 178 of PRC Civil Code provides, joint and several liability shall only be imposed by law or by agreement entered by parties. Therefore, in absence of any provision which articulates “joint and several liability”, any person shall not bear such liability.

                As we can see, in practice, where there is a summary dissolution, the registration authority usually requires all investors of the applying entity to sign a standard template commitment letter as being exhibited in Annex 2 of Notice of SAIC and SAT on Strengthening Information Sharing and Joint Supervision, the last paragraph of which is: “all investors of the company shall be responsible for the authenticity of the commitments, and if anyone violates the law, all investors shall bear corresponding legal responsibilities, and voluntarily accept the constraints and punishments from competent administrative or legal enforcement departments.” From this wording, we cannot find that the signatory undertakes to assume the joint and several liabilities for the company’s debts.

                Given there is no judicial interpretation of the Partnership Law, in practice, judicial institutions usually apply the judicial interpretations of Company Law to partnerships by analogy. However, such analogy application may face some practical problems:

                First, if the partnership liquidation panel fails to notify creditors and make a liquidation announcement in accordance with the provisions of the Partnership Law, resulting in any creditor failing to declare their claims in a timely manner and not being fully paid off, is the creditor of such partnership entitled to require all member of the partnership liquidation panel to bear compensation liability for the resulting losses suffered by creditors?

                It is certainly that, in a general partnership, all partners shall bear joint and several liabilities for the debts of the partnership. In a limited partnership, only the general partner bears unlimited joint and several liability for the debts of the partnership, and the limited partner shall only bear limited liability for the debts of the partnership to the extent of its capital contribution. This writer understands that, if the limited partner participates in the liquidation of partnership as a member of the liquidation panel, the limited partner shall be jointly liable for the liquidation panel’s liabilities.

                Second, if partners of a partnership fail to perform the liquidation obligations, or the partners directly deregister the partnership without liquidation, should the partners, like shareholders of a limited liability company, be jointly and severally liable for the debts of the partnership?

                As discussed afore, all partners of a general partnership, as well as general partners of a limited partnership, shall bear unlimited joint and several liability for the debts of the partnership. What about the limited partner of a limited partnership?

                In Nineth Minutes, the Supreme Court holds that, the nature of liability arising from shareholders’ failing to fulfill their liquidation obligations is tort. Therefore, there must be a causal link between the behavior of the shareholder and the result of company’s failing to liquidate which leads to losses of creditors.

                This writer understands that, the nature of liability arising from partners’ negligence in performing liquidation obligations shall similarly be tort. Hence, for a limited partner to assume tort liability, under tort laws, four components shall be satisfied under:

                • the limited partner shall commit infringement, i.e. being negligent in performing liquidation obligations;
                • there must be objective consequences from that infringement, i.e., the partnership is not able to liquidate which leads to losses of creditors;
                • the limited partner shall be subjectively at fault;
                • there is a causal link between the limited partner’s subjective fault and the objective consequences of the infringement.

                Usually, in a limited partnership, the limited partner does not participate in the day-to-day operation of the partnership, and the partnership affairs are solely shouldered by the executive partner (general partner). If the partnership agreement stipulates that, the general partner is responsible for all affairs (including the liquidation affair) of the limited partnership, then the limited partner is not at fault for failing to perform the liquidation obligations, and there is no causal link between his non-action behavior and the damage consequences. Hence, the limited partner shall not be jointly liable for the partnership’s debts.

                However, Article 86 of the Partnership Law presumes that, the liquidation penal of a partnership, regardless general partnership or limited partnership, shall be constituted by all partners. Therefore, if the partnership agreement is silent in liquidation panel’s specific composition, the limited partner will be legally presumed to be liquidator, and if he fails to perform the liquidation obligations at the time of liquidation, his joint and several liability will be triggered.

                Third, if a partnership goes through summary dissolution, shall all partners be jointly and severally liable for the debts of the partnership?

                Article 91 of the Partnership Law provides that, after the dissolution of the partnership, the general partner shall still bear unlimited joint and several liability for the debts incurred during the existence of the partnership. Accordingly, all partners of a general partnership and general partners of a limited partnership shall bear unlimited joint and several liability for the debts of the partnership, while the limited partners of a limited partnership shall only bear liability for the debts of the partnership up to the limit of their contributions, unless otherwise undertaken by the limited partner. As mentioned above, if the limited partner signs a template “All Investors Commitment Letter”, such letter doesn’t direct confer a joint and severally liability to the limited partner.

                It is worth noting that, Article 240 of the new Company Law provides that, if the company has not incurred debts during its existence, or has paid off all its debts, upon the commitment of all shareholders, it may be deregistered after summary dissolution procedure. The summary dissolution shall be announced through NECIPS, and the announcement period shall not be less than 20 days. If there is no objection after the expiration of the time limit for the announcement, the company may apply for deregistration within 20 days. If a company deregisters through summary dissolution, and the content of shareholders’ commitment during this is untrue, shareholders shall bear joint and several liability for the debts incurred before the deregistration. Accordingly, the new Company Law directly confers joint and several liability to shareholders who make untrue statement in summary dissolution, and this provision is likely to be applied by analogy to all partners of partnership.

                After the new Company Law comes into effect, shareholders and partners should pay special attention to the potential joint and several liability risks which may be triggered in summary dissolution. This writer suggests that, after the new Company Law comes into effect, unless the company or partnership has never carried out any business activities, a company or partnership, when going into dissolution, shall always follow a liquidation procedure rather than summary procedure to avoid potential legal risks.


                [1] Refers to the Company Law of the People’s Republic of China (amended in 2023).

                [2] Refers to the Company Law of the People’s Republic of China (2018 Amendment).

                [3] Refers to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III) (2020 Amendment).

                [4] (2019) Supreme Court Ruling No. 5203.

                [5] Refers to Partnership Enterprise Law of the People’s Republic of China (Revised in 2006)

                [6] Refers to Regulations of the People’s Republic of China on the Administration of Registration of Market Entities

                [7] Refers to Guidelines on Enterprise Cancellation (Revised in 2023), jointly issued by the General Administration of Market Regulation, the General Administration of Customs and the General Administration of Taxation on 21 December 2023 (Announcement No. 58 of 2023 of the General Administration of Customs for Market Regulation).

                [8] Refers to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (II) (2020 Amendment).

                “[W]ith regret, this is one such case in which I have found that the conduct of the arbitrator in the course of the hearing is so egregious, that Lee has been denied due process and deprived of his right to a fair hearing.” By addressing the aforementioned reasoning in the case of SONG LIHUA v. LEE CHEN HON [2023] HKCFI 2959, the Honorary Judge Mimmie Chan refused to grant leave to appeal and upheld her decision rendered in the case of SONG LIHUA v. LEE CHEN HON [2023]HKCFI 2540, (Song v. Lee) wherein the enforcement of an arbitral award, issued by a Chinese arbitral commission for the sum of RMB 300 million, was refused on the ground of violating the public policy in Hong Kong.

                As a pro-arbitration and pro-enforcement jurisdiction, Hong Kong courts have consistently endeavored to uphold the recognition and enforcement of the arbitral award and constrained themselves to interfere only in exceptional and rare circumstances. In contrast to this prevailing trend, the Song v. Lee case serves as a unique sample for the outside to take a closer look at the Hong Kong courts’ stance regarding applying the public policy in interfering with the recognition and enforcement of arbitral awards. This uniqueness is further compounded by the fact that the supervisory court, the Chinese  court, rendered an opposing decision by refusing to annul the award despite facing similar complaints pertaining to arbitrator Q’s conduct throughout the arbitral hearing. Three distinctive pairs of concepts surrounding the predictability of public policy reflected in this case and their implications are briefly elaborated below.

                I. Annulment Actions v. Recognition Actions

                Regrettably, the decision rendered by the Chinese supervisory court regarding the non-annulment of the arbitral award is not accessible, the submissions made by Song during the Hong Kong proceedings indicate that Lee had previously raised a similar complaint concerning the conduct of arbitrator Q in front of the Chinese supervisory court. Notably, Honorary Judge Mimmie Chan clarified that whilst the Chinese supervisory court decided to uphold the award, the public policy ground was not raised. However, an hypothetical question arises regarding the predictability of public policy in these parallel proceedings. If the public policy ground were indeed raised during the annulment proceedings, would the judges give same weight to or apply the same threshold to public policy in both the annulment and enforcement actions, or could the scope of public policy potentially differ between these two proceedings?

                From the author’s view, though the concept of public policy in the two actions have close parallels and courts worldwide have consistently underscored that the application of public policy should be limited to exceptional circumstances, the scope of public policy in annulment actions, in theory, should be broader and more intervening compared to enforcement actions. Such differences are rooted on the different sources relied upon when the public policy is invoked. In the annulment proceedings, the source referred by the judges would be their own national laws. In the absence of the international conformity imposed by the New York Convention, judges are given wider discretion to cater the public policy to the specific requirements of their own nation. An example can be found in the Chinese Arbitration Law, where,under Article 58, public policy is actually defined as the concept of public interest. However, in the recognition actions, the primary source, as reflected in the case, would be the New York Convention, namely article V (2) (b). When judges refer to such international conventions, the convention’s structures and objectives of facilitating the international conformity and the recognition of international awards would inevitably impose un-waiveable international constraints on judges’ ability to invoke public policy, which renders this concept more circumstanced than that in an annulment action which is primarily based on national law.

                II. Substantive Public Policy v. Procedural Public Policy

                As revealed in the Song v. Lee case, the public policy invoked by Honorary Judge Mimmie Chan to refuse the enforcement of the award can be more specifically categorized as procedural public policy namely the rights to be heard as shrined in the natural justice. The second question surrounding the predictability of the public policy is that is it proper to extend the scope of Article V (2) (b) to procedural public policy or instead to limit it to substantive public policy.

                From the autho’s perspective, the creation of the concept of “procedural public policy” may inevitably open the Pandora’s Box and further exacerbate the public policies’ unpredictability. Unlike violations of substantive issues and distinct from the litigation process, most of the procedural irregularities can actually be waived or cured on the basis of the parties’ autonomy. For the remaining limited procedural irregularities that are too sever to be waived or cured, those circumstances have been well reflected under Article V (1) (b) and (d) which can be invoked by parties as grounds for resisting the enforcement of the award. By doing so, the New York Convention, by not referring to the terms of “public policy”, have granted parties adequate remedies in cases of serious procedural violations. More importantly, such remedies are seized on the hand of the parties themselves in accordance with Article V (1) instead of the competent authority.

                Inspired by the case at hand, if the procedural pubic policy has to be invoked, the judges, by providing their detailed reasoning, should ensure that the public is fully aware of what is exactly contained under the scope of procedural public policy and such scope should be exhaustive. The prevailing commentators’ view is that procedural public policy overlaps substantially with denial of a party’s right to be heard which is identical to the Song v. Lee case. Thus, for avoiding opening the Pandora’s Box, an alternative approach worth considering is to treat the party’s right to be heard as a sui generis substantive right thereby limiting the scope of public policy solely to substantive aspect.

                III. International Limitation v. Domestic Relevance

                As long as the public policy remains an open-ended and undefined term under the New York Convention, serving as an escape mechanism, the debate pertaining to its predictability would never come to an end. New York Convention as an international convention or more broadly as an international law is doomed to go back and forth between two extremes. On the one hand, the convention is supposed to respect the interests of the contracting states. In light of this, Article V (2) (b) of New York Convention explicitly refers to public policy as the public policy of “that country.” Yet at the same time, the convention must take the interests of international community or international uniformity into account if only some interests override of those of contracting states.

                Therefore, the ever-lasting debate regarding the predictability of public policy, in essence, can be seen as a continuous struggle between international limitations and domestic relevance. When judges are in face of the circumstance where the public policy may be invoked, a diligent case-by-case analyze should be conducted to balance such struggle. For instance, if a case involves significant domestic elements within the jurisdiction of the forum court (such as parties based in that forum, the contract being performed in that forum, or the contract affecting the local market etc), then the domestic relevance prevails over the international limitations which grants the judge more discretion to intervene the case. Whereas if the case does not have much connections to that forum (parties are foreign, contract being performed abroad etc), the international limitations may take precedence over the domestic relevance which would impose more international constraints on judge’s capacity to invoke purely national law to construe public policy. However, no matter which circumstance arises, the public policy applied for recognition of foreign awards under New York Convention should always be narrower than is applied to domestic awards.

                IV. Concluding Thoughts

                The struggle between the sound national policy and the objectives of the Convention may never be well harmonized but efforts can be made to ensure when we ride on this unruly horse, which direction would it lead us to. Just as the U.S Supreme court reasoned in Mitsubishi Motors Corp v. Soler Chrysler-Plymouth Inc. “[t]he utility of the New York Convention in promoting the process of international commercial arbitration depends upon the willingness of national courts to let go of matters they normally would think of as their own.”

                The views expressed in this article are the authors’ own and do not represent the others.

                This article was originally published on the Lexology on 14 May 2024.

                Ⅰ . Background

                    With the further aging of the population, the pension issue has gradually become a focus of attention in CHina, prompting the insurance industry to explore and develop life insurance products with long-term coverage  and pension features. Meanwhile, due to the impact of the scheduled interest rate reduction, in addition to developing new products, insurers have also begun to consider converting the coverage of existing life insurance policies to pension annuity or nursing care insurance (hereinafter referred to as “policy conversion”).

                    Ⅱ. Legal Basis for Policy Conversion

                        In general, from the legal and compliance perspective, PRC[1] insurance regulator has only enacted regulations on the conversion of life insurance to long-term care insurance and has not clarified whether life insurance can be converted to other types of insurance products. Currently, there are no prohibitive or restrictive regulations stipulated by PRC insurance regulator towards the conversion of life insurance products to other types of insurance products, nor has the PRC insurance regulator imposed any penalties on insurers due to such conversion. In practice, life insurance products with the conversion option are relatively common in PRC insurance market.

                        Policy conversion is not a legal concept under PRC laws and regulations. Although it can be understood as a conversion between two insurance contracts (hereinafter referred to as “existing insurance contract” and “new insurance contract”), given that the conversion is based on the legal relationship of the two insurance contracts  categorized as civil and commercial contracts, in the absence of explicit provisions in laws and regulations, the conversion between two insurance contracts shall be mainly based on the contract freedom between the contracting parties.

                        The legal basis for policy conversion can be divided into three categories:

                        Based on explicit provisions in laws and regulations

                        Converting life insurance to long-term care insurance is currently the only type of conversion that has a clear regulatory basis.

                        When purchasing insurance products for the elderly, many commercial health insurance products are unavailable because the insureds are over the age limit for coverage, or their health conditions do not meet the underwriting requirements. As a result, it is difficult for elderly people  to pursue thenursing care protection. In order to improve the supply capacity of long-term care insurance and alleviate the pressure of care costs for the disabled, in 2023, PRC insurance regulators issued the Circular on Launching the Pilot Business for the Conversion of Life Insurance and Long-term Care Insurance/关于开展人寿保险与长期护理保险责任转换业务试点的通知 (the “Circular”) and the Rules for Conversion of Life Insurance into Long-term Care Insurance Coverage /人寿保险与长期护理保险责任转换业务规则 (the “Rules”), which encourage insurers to make full use of their existing life insurance policies to carry out the pilot program for conversion between life insurance and long-term care insurance.

                        Based on the conversion option provision under the existing insurance contract

                        From market practice we have learned so far, many life insurance products contain a conversion option clause which entitles customers the right to apply for policy conversion under certain circumstances. It can be understood that as long as the customer applies for policy conversion, the insurer shall cooperate with the policy conversion in accordance with the existing insurance contract, otherwise, it will constitute a breach of contract.

                        the insurer and the customer can negotiate the policy conversion in case of the existing policy without the conversion option clasue

                        If there is no conversion option clasue in the existing insurance contract,  policy conversion is still feasible for the following reasons:

                        Firstly, from the legal perspective, policy conversion is essentially the termination or alteration of an existing insurance contract (i.e. surrendering the policy or reducing the sum insured), followed by the conclusion of a new insurance contract (i.e. purchase of a new insurance product). Even if the existing insurance contract does not contain a conversion option clasue, the policyholder may also rescind or change the existing insurance contract in accordance with Articles 15[2] and 20[3] of PRC Insurance Law (the “Insurance Law”), and then voluntarily enter into a new insurance contract by negotiation with the insurer in accordance with Article 11[4] of the Insurance Law.

                        Secondly, from the insurance regulatory perspective, there is a view that if the existing insurance contract does not include a conversion option clause and the insurer additionally grants the customer the right to convert the policy, such grant may be regarded as a change to the original insurance terms. However,  according to Articles 35[5] and 36[6] of the Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers/人身保险公司保险条款和保险费率管理办法, and the Administrative Judgment (Yue 19 Xing Zhong [2023] No.354)[7] issued by the Dongguan Intermediate People’s Court of Guangdong Province, if there is no change to the standard  insurance terms filed within or approved by PRC authority, premium rates or other filing/application materials, but only supplementary agreements on matters not included in the standard insurance terms, no re-filing or re-approval procedure is required for insurers. In other words, if there is no conversion option clause in the existing insurance contract, and both parties have made  negotiations with respect to matters not stipulated  in the existing insurance contract, which have not materially changed the standard insurance terms and premium rates filed within or approved by PRC authority , there is no need for re-filing or re-approval.

                        In addition, with reference to the Rules, PRC insurer regulator states that insurers may select certain type of life insurance products for conversion, without mentioning whether these products must be life insurance products that already contain a conversion option. To some extent, it can be observed that using existing life insurance policies without conversion option clause to carry out policy conversion is also acceptable to the regulator.

                        Meanwhile, when process such conversion, insurer shall not take advantage of its market power to exploit the insurance consumer or to abuse its market power.

                        Ⅲ. Conclusion

                          Converting existing life insurance policies to pension annuity insurance or long-term care insurance can effectively relieve the pressure of elderly care, however, the policy conversion has not been  popularized and there are many gaps in regulations. Therefore, when carrying out policy conversion , insurers should prudently design the conversion model and be cautious to  the regulatory redline.


                          [1]  The People’s Republic of China, for the purpose of this Advice, exclusive of Hong Kong SAR, Macao SAR and Taiwan.

                          [2] Article 15 of Insurance Law: Unless otherwise stipulated in this Law or otherwise agreed in an insurance contract, upon conclusion of the insurance contract, the policyholder may rescind the contract but the insurer shall not rescind the contract.

                          [3] Article 20 of Insurance Law: The policyholder and the insurer may negotiate on amendments to the contents of the contract. For amendments to an insurance contract, the insurer shall insert a remark on the insurance policy document or any other insurance certificate or attach a rider thereto, or the policyholder and the insurer shall enter into a written agreement on the amendments.

                          [4] Article 11 of Insurance Law: Conclusion of an insurance contract shall be subject to negotiation and agreement, and the rights and obligations of the parties shall be determined pursuant to the principle of fairness. Except where insurance is stipulated by laws and administrative regulations, the conclusion of an insurance contract shall be voluntary.

                          [5] Article 35 of Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers: If an insurer amends any insurance clause or premium rates having been examined and approved or recorded, modifying its insurance liability, type or pricing, it shall submit the revised insurance clause and premium rates for examination and approval and record.

                          [6] Article 36 of Administrative Measures on Insurance Clauses and Premium Rates of Life Insurers: If an insurer amends approved or recorded insurance clauses and premium rates without any change to insurance liability, type or pricing, it shall submit the following documents to the regulator for record within 10 days beginning from the date of amendment:

                          1. List of Documents Submitted for Record Amendments

                          2. Comparison on amendment reasons and major amendments;

                          3. Approved or recorded insurance clauses;

                          4. Relevant amended documents;

                          5. Statement of Chief actuary;

                          6. Statement of Legal Principal; and

                          7. Other documents required by the regulator.

                          If personal insurance naming is modified due to name change of an insurer without amendments to others, such insurer may not submit the documents as required in the aforesaid 3, 4 and 5.

                          [7] The court held that according to Article 18(2) of the Insurance Law: “The policyholder and the insurer may agree on other matters relating to insurance”, the policyholder and the insurer have the right to agree on matters relating to the insurance contract. It is not improper for both parties to agree in the insurance policy that tin houses, simple buildings, temporary buildings or tin houses and simple sheds attached to the main building, as well as the property placed in the above buildings, are not covered by the insurance liability of this policy. The aforesaid special agreement clause is a specification of the subject matter of the insurance and does not change the content of the filed insurance terms.

                          Interpretation of the Guidelines on Antitrust Compliance for Undertakings (Draft for Public Comments)

                          On September 18, 2020, the State Administration for Market Regulation (“SAMR”) released the Guidelines on Antitrust Compliance for Undertakings. On March 21, 2024, SAMR released a draft for public comments of the revised Guidelines on Antitrust Compliance for Undertakings (the “New Compliance Guidelines”), which provided more detailed explanations and recommendations on how undertakings should establish antitrust compliance management systems and offered a significant number of highly relevant examples. The most prominent feature of the New Compliance Guidelines is the addition of the antitrust compliance incentive mechanism, which considers the establishment and implementation of antitrust compliance management systems as a discretionary factor for the antitrust enforcement agency when making decisions regarding the handling of undertakings’ antitrust behaviors.

                          This article intends to focus on how undertakings should understand and apply the rules of the New Compliance Guidelines, pertaining to antitrust compliance incentive mechanisms, in practice. In an effort to provide a reference for undertakings to establish and improve internal antitrust compliance management systems.

                          1 Antitrust Compliance Incentive Scenarios

                          Articles 34 to 37 of the New Compliance Guidelines specify four scenarios of antitrust compliance incentives: (1) Pre-Investigation Compliance Incentives; (2) Compliance Incentives in Commitment Mechanism; (3) Compliance Incentives in Leniency Mechanism; (4) Compliance Incentives within the Discretionary Range of Fine Imposition.

                          1.1 Pre-Investigation Compliance Incentives

                          Article 34 of the New Compliance Guidelines stipulates Pre-Investigation Compliance Incentives as follows: “Where undertakings have ceased suspected monopolistic behaviors before being investigated by the antitrust enforcement agency, and the suspected monopolistic behaviors are minor and have not caused competitive harm, the enforcement agencies may consider the undertakings’ establishment and implementation of antitrust compliance management systems as a factor in determining whether the undertakings have promptly corrected their behaviors or whether there is subjective fault, and may exercise discretion not to impose administrative penalties in accordance with Article 33 of the Administrative Penalty Law of the People’s Republic of China (hereinafter referred to as the ‘Administrative Penalty Law’).”

                          Article 33 of the Administrative Penalty Law of the People’s Republic of China (“Administrative Penalty Law”) specifies three circumstances where administrative penalties may not be imposed: (1) Where the illegal behavior is minor and is promptly corrected without causing harmful consequences, administrative penalties may not be imposed; (2) For first-time minor violations that are promptly corrected, administrative penalties may not be imposed; (3) Where the party has evidence to prove the absence of subjective fault, administrative penalties may not be imposed; where otherwise provided by laws and administrative regulations, such provisions shall apply.

                          The above provisions of the New Compliance Guidelines consider the establishment and implementation of antitrust compliance management systems as a factor to be considered when applying the “administrative penalties may not be imposed” in antitrust investigation cases. The conditions for its application include the following:

                          1.1.1    The suspected monopolistic behavior has been terminated before the administrative investigation.

                          Undertakings have terminated suspected monopolistic behavior before being investigated by the antitrust enforcement agency. If the undertakings’ suspected monopolistic behavior has not been terminated at the time of investigation by the antitrust enforcement agency, the pre-investigation compliance incentive mechanism cannot be applied. In the antitrust enforcement practice of China, the investigation procedure of suspected monopolistic behavior of parties involved two stages: (1) verifying the clues of suspected monopolistic behavior; (2) filing a formal investigation case. Whether the application conditions for pre-investigation compliance incentives are strictly limited to before the stage of verifying clues of suspected monopolistic behavior needs further clarification.

                          During the process of verifying the clues of suspected monopolistic behavior, the antitrust enforcement agency usually conducts preliminary investigations into relevant issues with the parties involved. Most parties involved, upon realizing that such behaviors are still being implemented, would usually terminate relevant behaviors suspected of violating the Anti-Monopoly Law of the People’s Republic of China (“AML”) before the antitrust enforcement agency filing a formal investigation case. In such cases, the parties involved usually can argue to the antitrust enforcement agency to consider the fact that the suspected monopolistic behavior has been terminated, as a discretionary factor in the administrative penalty decision.

                          • For example, in the administrative penalty decision made by the Beijing Administration for Market Regulation (“Beijing AMR”) on September 1, 2023, against the Beijing Chess Association for organizing its members to reach and implement a monopoly agreement, the Beijing AMR initiated an investigation into the suspected monopolistic behavior of the parties involved from January 2022 and formally launched a case investigation on August 4, 2022. In the final administrative penalty decision, the Beijing AMR considered the fact that the parties “voluntarily terminated the monopoly agreement before the case was formally filed and mitigated the harmful consequences” as a factor in determining the percentage of the fine based on sales revenue..[1]

                          Furthermore, according to Article 36 of the Administrative Penalty Law, which sets out the statute of limitation for administrative penalties, “where the illegal act is not discovered within two years, the administrative penalty shall not be imposed; if the illegal act involves life, health, and safety of citizens, financial security, and causes harmful consequences, the above-mentioned period shall be extended to five years, which does not apply if otherwise provided by law. The period specified in the preceding paragraph shall be calculated from the date the illegal act occurs; if the illegal act is in a continuous or ongoing condition, it shall be calculated from the date the act ends.” Therefore, if the monopolistic behavior investigated by the antitrust enforcement agency has exceeded the statute of limitations for administrative penalties, the parties involved can directly invoke this provision to argue that they are not liable for administrative penalties.

                          1.1.2    The suspected monopolistic behavior is minor and has not caused competitive harm.

                          Article 34 of the New Compliance Guidelines stipulates that, based on the provisions of Article 33 of the Administrative Penalty Law regarding “minor illegal acts” and “no harmful consequences”, “suspected monopolistic behavior that is minor and has not caused competitive harm” is a condition for the application of the pre-investigation compliance incentive mechanism.

                          With regard to interpreting Article 33 of the Administrative Penalty Law and determining what constitutes “minor illegal acts” and “no harmful consequences”, factors considered in enforcement and judicial practice typically include; the duration of the illegal behavior, the existence of illegal gains and the amount involved and whether the illegal act has caused other parties to incur losses or merely constituted a procedural violations. To regulate the non-imposition of administrative penalties for minor illegal acts, in accordance with the law, many local law enforcement agencies have released corresponding “lists of minor illegal acts that are not subject to administrative penalties“.

                          • For example, the List of Minor Illegal Acts in the Field of Ecological Environment in the Yangtze River Delta Region, for which Administrative Penalties Shall Not Be Imposed According to Law, jointly formulated by the ecological environment departments and the judicial departments of Shanghai, Jiangsu, Zhejiang, and Anhui, covers 22 items across 7 ecological environment areas, including construction project management, prevention and control of atmospheric pollution, prevention and control of solid waste pollution, prevention and control of noise pollution, emergency management of environmental incidents, pollutant discharge permits, and environmental management systems. These are divided into two categories: minor offenses (1 item) and first-time offenses (21 items).[2]

                          Monopolistic illegal behavior typically has a significant impact on market competition, consumer interests, and/or public interests. Regarding how to determine whether suspected monopolistic behavior constitutes a “minor suspected monopolistic behavior that has not caused competitive harm”, further clarification is needed from relevant regulations and enforcement practices. For example, for the imposition of unreasonable trading conditions through the abuse of market dominance position, if the parties only agree on the content of the suspected unreasonable trading conditions in the agreement but do not strictly implement them and do not gain unfair competitive advantages as a result, could it be argued that it constitutes a ” minor suspected monopolistic behavior that has not caused competitive harm”? Similarly, for vertical price monopoly agreements, if the market share of the undertaking does not meet the criteria for the application of the “safe harbor” mechanism but is relatively low, could it be argued that it constitutes a “situation where suspected monopolistic behavior is minor and has not caused competitive harm”?

                          1.2 Compliance Incentives in Commitment Mechanism

                          Article 35 of the New Compliance Guidelines stipulates the “Compliance Incentives in Commitment Mechanism”: “If an undertaking commits to taking specific measures to eliminate the consequences of suspected monopolistic behavior within a period recognized by the antitrust enforcement agency, the agency may consider the undertaking’s anti-monopoly compliance management system when deciding whether to suspend the investigation, and assess the implementation of the anti-monopoly compliance management system when deciding whether to terminate the investigation. The specific criteria and procedures for undertakings to apply for suspension or termination of the investigation may refer to the provisions of the Prohibition of Monopoly Agreement Regulations, the Prohibition of Abuse of Market Dominance Regulations and the Guidelines for Operators’ Commitments in Monopoly Cases and other regulations.”

                          Article 53, Paragraph 1 of the AML stipulates: “If the undertaking under investigation for suspected monopolistic behavior commits to taking specific measures to eliminate the consequences of such behavior within a period recognized by the antitrust enforcement agency, the agency may decide to suspend the investigation. The decision to suspend the investigation shall specify the specific content of the commitments made by the undertaking under investigation.” Paragraph 2 of Article 53 states: “If the antitrust enforcement agency decides to suspend the investigation, it shall supervise the performance of the commitments by the undertaking. If the undertaking fulfills the commitments, the antitrust enforcement agency may decide to terminate the investigation.

                          The above provisions of the AML establish the “Commitment Mechanism” in the anti-monopoly investigation procedure, which suspends the administrative enforcement investigation procedure for suspected monopolistic behaviors by taking specific measures to eliminate such behaviors within a certain period, with the ultimate goal of terminating the investigation. In the practice of anti-monopoly enforcement, the establishment and implementation of anti-monopoly management systems by the parties have become key factors considered by the antitrust enforcement agency when making decisions to suspend or terminate investigations. Article 35 of the New Compliance Guidelines further clarifies this consideration factor, reinforcing the important role of anti-monopoly compliance system construction and implementation in the application of the commitment mechanism.

                          • For example, in the decision to suspend the investigation commenced by the Beijing AMR on September 16, 2019, regarding suspected monopolistic behavior by Lenovo (Beijing) Co., Ltd. (“Lenovo Beijing”), the remedial measures pledged by Lenovo Beijing include “organizing legal training, strengthening training and guidance on competition laws and regulations for all employees, especially those in marketing, sales, legal, regional, and service departments, advocating and fostering a culture of competition, enhancing awareness of fair competition in accordance with the law, strictly eliminating monopolistic behavior, and making legal training a prerequisite for employee onboarding.”[3]

                          1.3 Compliance Incentives in Leniency Mechanism

                          Article 36 of the New Compliance Guidelines stipulates the “Compliance Incentives in Leniency Mechanism”: “If an undertaking voluntarily reports to the antitrust enforcement agency the relevant information of reaching a monopolistic agreement and provides important evidence, and can prove that the undertaking has actively established or improved its anti-monopoly compliance management system and effectively implemented it, and has played an important role in mitigating or eliminating the consequences of illegal behavior, a larger reduction may be applied within the leniency scope. The specific criteria and procedures for undertakings to apply for leniency treatment may refer to the provisions of the Prohibition of Monopoly Agreement Regulations and the Guidelines for the Application of Leniency Programs in Horizontal Monopoly Agreement Cases and other regulations.”

                          Article 56, Paragraph 3 of the AML stipulates: “If an undertaking voluntarily reports to the antitrust enforcement agency the relevant information of reaching a monopolistic agreement and provides important evidence, the antitrust enforcement agency may, at its discretion, reduce or exempt penalties against the undertaking.” Article 37, Paragraph 1 of the “Prohibition of Monopoly Agreement Regulations” stipulates: “If an undertaking reaches or organizes other undertakings to reach a monopolistic agreement or provides substantive assistance to other undertakings in reaching a monopolistic agreement, and voluntarily reports the relevant circumstances to the antitrust enforcement agency and provides important evidence, it may apply for a reduction or exemption from punishment in accordance with the law.” To provide guidance on how to apply the above mechanism in horizontal monopoly agreement cases, the State Council Anti-Monopoly Commission issued the Guidelines for the Application of Leniency Mechanism in Horizontal Monopoly Agreement Cases, explicitly defining this mechanism as the “Leniency Mechanism” in horizontal monopoly agreement cases.

                          The above provisions of the AML establish the “Leniency Mechanism” for horizontal monopoly agreement cases. This mechanism permits the reduction or exemption of penalties for entities that voluntarily report their involvement in a suspected monopolistic agreement to the antitrust enforcement agency, along with providing evidence related to the case. According to Article 47, Paragraph 1 of the “Prohibition of Monopoly Agreement Regulations”, different degrees of mitigation or exemption from penalties are established in the sequence of successful leniency applicants:

                          • For the first applicant, the antitrust enforcement agency may exempt penalties or reduce that by no less than 80%
                          • For the second applicant, penalties may be reduced by 30% to 50%
                          • For the third applicant, penalties may be reduced by 20% to 30%.

                          Based on Article 47, Paragraph 1 of the Prohibition of Monopoly Agreement Regulations and Article 36 of the New Compliance Guidelines, in the case of successful application for the leniency mechanism, if an undertaking can simultaneously prove that it has “actively established or improved its anti-monopoly compliance management system and effectively implemented it, and it has played an important role in mitigating or eliminating the consequences of illegal behavior”, then the antitrust enforcement agency may, according to the sequence of leniency application, apply a larger reduction within the leniency scope. For example, for the second applicant who meets the conditions for leniency mechanism compliance incentives, penalties may be reduced by nearly 50%.

                          1.4 Compliance Incentives within the Discretionary Range of Fine Imposition

                          Article 37 of the New Compliance Guidelines stipulates the “Compliance Incentives in the Range of Discretionary Fines”: “Before the antitrust enforcement agency makes an administrative penalty decision, if an undertaking actively establishes or improves its anti-monopoly compliance management system and effectively implements it, and it plays an important role in mitigating or eliminating the consequences of illegal behavior, the antitrust enforcement agency may, in accordance with the provisions of Article 32 of the ‘Administrative Penalty Law’ and Article 59 of the ‘Anti-Monopoly Law’, exercise discretion to impose lighter or reduced administrative penalties.”

                          Article 32 of the “Administrative Penalty Law” states: “If a party falls into one of the following situations, the administrative penalty shall be mitigated or reduced: (1) voluntarily eliminating or mitigating the harmful consequences of the illegal act; (2) being coerced or deceived by others to commit the illegal act; (3) voluntarily confessing illegal acts unknown to the administrative agency; (4) cooperating with the administrative agency in investigating and dealing with illegal acts and showing meritorious performance; (5) other circumstances specified by laws, regulations, and rules where the administrative penalty shall be mitigated or reduced.” Article 59 of the AML stipulates: “When determining the specific fines amount prescribed in Articles 56, 57, and 58 of this Law, the antitrust enforcement agency shall consider factors such as the nature, severity, duration of the illegal conduct, and the consequences of eliminating the illegal behavior.”

                          According to the provisions of Article 37 of the New Compliance Guidelines, even if an undertaking has not previously established a comprehensive anti-monopoly compliance management system, if it actively establishes or improves its anti-monopoly compliance management system and effectively implements it before the antitrust enforcement agency makes an administrative penalty decision which plays an important role in mitigating or eliminating the consequences of illegal behavior, that can still be used as a reason to argue for lighter or reduced administrative penalties.

                          2  Review of Applications for Antitrust Compliance Incentives

                          2.1 Substantive Review of the Antitrust Compliance Management System

                          According to Article 38 of the New Compliance Guidelines, undertakings applying for compliance incentives need to undergo substantive review. The antitrust enforcement agency primarily conducts substantive reviews of undertakings’ antitrust compliance management systems in terms of completeness, authenticity, and effectiveness:

                          • Whether the undertaking’s antitrust compliance management system includes systematic management systems, independent compliance management bodies, proportional compliance risk management mechanisms, and stable compliance assurance mechanisms.
                          • Whether the undertaking has genuinely fulfilled its commitments to antitrust compliance, invested necessary resources in establishing compliance management systems, and strictly enforced these systems.
                          • Whether the undertaking has established a comprehensive mechanism for investigating violations, whether it can promptly detect violations, effectively control the implementation of violations and the expansion of risks, hold violators accountable, and whether it has a mechanism for post-remediation to mitigate or eliminate the consequences of illegal behavior.
                          • Other factors requiring examination.

                          Undertakings applying for compliance incentives under the New Compliance Guidelines are subject to a necessary compliance inspection period by the antitrust enforcement agency before substantive review. The specific duration, methods, subjects of inspection, and whether there are differences in inspection periods for different compliance incentive situations remain to be clarified by relevant regulations and enforcement practices.

                          2.2 Circumstances Not Eligible for Compliance Incentives

                          Article 39 of the New Compliance Guidelines stipulates that the antitrust enforcement agency shall not grant compliance incentives to undertakings in the following circumstances:

                          • If the information provided by the undertaking during the compliance inspection period is incomplete or untrue.
                          • If there is a significant change in the facts relied upon for the compliance inspection decision.
                          • If the undertaking fails the substantive review of compliance.
                          • If the undertaking engages in monopolistic behavior again after obtaining compliance incentives.
                          • Other circumstances determined by the antitrust enforcement agency.

                          Regarding the circumstance of “If the undertaking engages in monopolistic behavior again after obtaining compliance incentives,” clarification is needed by relevant regulations and enforcement practices on whether it exclusively refers to relevant monopolistic behaviors that have already been investigated by the enforcement agency. For example, if an undertaking receives compliance incentives for suspected abusive practices related to imposing unfair trading conditions after the investigation concludes, clarification is required on whether it would be ineligible to apply for compliance incentives in another investigation initiated by the enforcement agency for other abusive behaviors after the conclusion of the previous case.

                          2.3 Discretionary Power of the Enforcement Agency in Applying Compliance Incentive Mechanism

                          Pursuant to Articles 34 to 37 of the New Compliance Guidelines, when the undertaking furnishes evidence substantiating its compliance with the conditions for the application of the antitrust compliance incentive mechanism, the enforcement agency retains discretion to apply the mechanism, indicated by the term “may ”rather than a mandatory “shall”. To maximize the chances of applying the compliance incentive mechanism, it is advisable for undertakings to, proactively communicate with the antitrust enforcement agency at the earliest juncture of an antitrust investigation, advocate for the application of the compliance incentive mechanism and furnish the requisite supporting evidence.

                          3  Establishing Compliance Management Systems in Compliance with Antitrust Incentive Requirements

                          The New Compliance Guidelines provides numerous detailed suggestions and case studies on how undertakings can establish effective antitrust compliance management systems. It is recommended that undertakings use the New Compliance Guidelines as an important reference when establishing and improving their own antitrust compliance management systems. This will effectively enhance the capacity for preventing and controlling antitrust compliance risks and ensure that the antitrust compliance management system adheres to the substantive review standards for antitrust compliance incentives.

                          3.1 Principles of Antitrust Compliance Management

                          Undertakings should conduct targeted antitrust compliance management based on market competition conditions, industry characteristics, and their own key points of risks. For example, in industries such as food, beverages, and household appliances that directly target a wide range of end consumers, products are typically sold through numerous agents, wholesalers and distributors, and may involve multiple sales entities in different stages. Therefore, there is a higher risk of antitrust compliance in areas such as vertical price-fixing agreements. Similarly, for undertakings holding proprietary research and production technologies for certain non-substitutable raw materials, they need to pay more attention to the risk of abusing market dominance in agreements signed with downstream entities.

                          Antitrust compliance management shall cover all business areas, departments, and employees. It should be integrated into various aspects such as decision-making, execution, supervision, and feedback. Furthermore, it must be reflected in decision-making mechanisms, internal controls, business processes and other regulations. Based on this foundation, undertakings of different scales have different compliance resources and needs. Undertakings should establish suitable compliance systems according to their own scale. Large-sized undertakings typically need to establish comprehensive compliance management systems, while medium-sized and small-sized undertakings may establish compliance management systems that are adapted to their own development stage and capabilities based on their actual situations.

                          3.2 Antitrust Compliance Management Organization

                          Establishing an antitrust compliance management organizational system composed of an antitrust compliance management body, business departments, and functional departments is essential. Article 6 of the New Compliance Guidelines provides the following explanations:

                          • The antitrust compliance management body is responsible for coordinating, organizing, and promoting antitrust compliance management work.
                          • Business departments are responsible for the daily antitrust compliance management work of their respective departments.
                          • Functional departments such as auditing, legal, internal control, risk control, and supervision perform antitrust compliance management duties within their authority.

                          Articles 7 to 12 of the New Compliance Guidelines respectively provide explanations and examples on the requirements for a compliance management body, compliance governance body, compliance managers, leading departments for compliance management, compliance management responsibilities of business and functional departments, and construction of compliance teams. These can serve as important reference standards for undertakings when establishing their own antitrust compliance management organizations.

                          3.3  Compliance Risk Management

                          Due to the specialized and complex nature of identifying and assessing antitrust compliance risks, Article 13 of the New Compliance Guidelines provides the following explanations:

                          • Risk Identification: Undertakings can highlight key areas, key processes, and key personnel, strengthen the identification of antitrust compliance risks based on factors such as market competition conditions, industry characteristics, business scale, business models, and core business.
                          • Risk Assessment: Based on risk identification, undertakings can assess the sources, likelihood of occurrence, and consequences of antitrust compliance risks, and classify and manage compliance risks accordingly. In the event of changes in industry conditions, laws and regulations, undertakings need to promptly conduct risk assessments again.
                          • Reference to Industry Guidelines: Undertakings in specific fields can refer to industry-specific antitrust guidelines such as the Antitrust Guidelines for the Pharmaceutical Industry, the Antitrust Guidelines for the Automotive Industry, the Antitrust Guidelines for the Platform Economy, and the Antitrust Guidelines for the Intellectual Property Field to enhance targeted identification and assessment of antitrust compliance risks.

                          Article 14 of the New Compliance Guidelines suggests that undertakings can conduct regular risk assessments based on the differences in compliance risks among different positions and levels. High, medium, and low-risk personnel should be provided with risk reminders accordingly to enhance the targeted and effectiveness of risk prevention and control:

                          • High-risk personnel: Mainly include senior management, business department managers, sales personnel, personnel familiar with competitively sensitive information, procurement personnel, business personnel, marketing personnel, and personnel responsible for pricing decisions, outward investment decisions, and specific implementation.
                          • Medium-risk personnel: Mainly include production department personnel, research and development personnel, and personnel who have less contact with other undertakings.
                          • Low-risk personnel: Mainly include logistics department personnel who generally do not have contact with other undertakings.

                          To facilitate undertakings in identifying and assessing antitrust compliance risks, Articles 15 to 19 respectively provide explanations and examples of identifying compliance risks related to monopolistic agreements, abuse of market dominance, concentration of undertakings, administrative monopolistic behavior, and refusal to cooperate with inspections and investigations. Articles 20 to 21 provide prompts on legal liability risks and overseas risks, and Article 22 provides suggestions on establishing effective risk disposal mechanisms.

                          3.4 Operation and Guarantee of Compliance Management

                          Chapter Four of the New Compliance Guidelines provides explanations and examples regarding the operation and guarantee of antitrust compliance management systems, including the following main points:

                          • Antitrust Compliance Review: Encourage undertakings to incorporate compliance reviews as a necessary procedure for significant matters such as cooperation agreements with competitors. The initial review responsibility should be carried out by business and functional departments, with subsequent reviews conducted by the antitrust compliance management leading department to promptly address non-compliance issues and prevent antitrust compliance risks.
                          • Antitrust Compliance Consultation: Encourage undertakings to seek opinions from the antitrust compliance management leading department, external legal advisors, or third-party professional organizations based on the specific circumstances of each matter. In cases involving undertakings’ concentration-related matters, undertakings can consult with the State Administration for Market Regulation or relevant provincial-level administration for market regulation.
                          • Antitrust Compliance Reporting: Encourage the antitrust compliance management responsible person to regularly report on the status of antitrust compliance management to the compliance governance organization and promptly report antitrust compliance risks. Undertakings are encouraged to report on antitrust compliance situations and progress to the antitrust enforcement agency.
                          • Compliance Training: Encourage undertakings to include antitrust compliance training in employee training plans and provide compliance training support to third parties that may pose antitrust compliance risks to the undertakings.
                          • Compliance Commitments and Safeguards: Encourage undertakings to publicly commit to antitrust compliance, clarify the adverse consequences of violating compliance commitments in internal personnel management systems, and demonstrate support for antitrust compliance through practical actions.
                          • Compliance Rewards and Penalties: Encourage undertakings to establish robust assessment, reward and penalty mechanisms for employee behaviors related to antitrust compliance. The results of these antitrust compliance assessments should be a critical component of employee and departmental performance evaluations. Undertakings should promptly handle violations, motivate, and supervise employees to voluntarily comply with antitrust compliance requirements.
                          • Internal Compliance Supervision Mechanism: Undertakings can conduct regular or irregular compliance self-inspections or organize or hire third-party organizations to conduct special compliance inspections. Undertakings can establish internal antitrust compliance reporting mechanisms, conduct investigations into reported information, and ensure the confidentiality of whistleblowers to prevent any adverse effects on whistleblowers due to their reporting behavior.
                          • External Compliance Supervision Mechanism: Encourage undertakings to establish external antitrust compliance supervision mechanisms. Undertakings can strengthen the antitrust compliance assessment of business partners through conducting due diligence investigations, performing post-assessment evaluations and adhering to other relevant regulations. These efforts help promote antitrust compliance and collaboratively foster a market environment characterised by fair competition.
                          • Compliance Management Evaluation and Improvement: Encourage undertakings to regularly evaluate the effectiveness of antitrust compliance management and continuously improve it. In the event of significant antitrust compliance risks or violations, undertakings should promptly conduct effectiveness evaluations of antitrust compliance management.
                          • Information Technology Construction: Encourage undertakings to strengthen their compliance management infrastructure by integrating compliance requirements, recommendations, and risk control mechanisms into business processes through the application of information technology and  stringent process controls. In addition to the use of big data, artificial intelligence, and other digital technologies lawfully to enhance the monitoring and analysis of business management behaviors for compliance.

                          * Intern Haiyin YUAN and Ezzulddin Nooruldeen contributed to this article.


                          [1] https://www.samr.gov.cn/fldys/tzgg/xzcf/art/2023/art_9bb052c99dff40c49e4a8e3f9186bf2a.html

                          [2] https://sthj.sh.gov.cn/hbzhywpt2022/20230703/6529eabf952c4274ac41ca857741b2ec.html

                          [3] https://www.samr.gov.cn/zt/qhfldzf/art/2019/art_a7928d50862047bba2fb57f7b58bb73c.html

                          Introduction

                          On 22 March 2024 at 2000 hours, the Cyberspace Administration of China (“CAC”) released the long-awaited Regulations for Promoting and Standardising Cross-Border Data Transfer (“CBDT Regs”), which took effect immediately. The CBDT Regs undo or further clarify some of the requirements under:

                          • Article 38 of the Personal Information Protection Law (“PIPL”);
                          • Measures for the Security Assessment of Outbound Data Transfers (“Security Assessment Measures”); and
                          • Measures for the Standard Contract for Outbound Cross-Border Transfer of Personal Information (“Standard Contract Measures”).

                          This article explores the CBDT Regs in detail and discusses their practical implications for organisations with cross-border data transfers (“CBDT”) to and from China.

                          Important Data

                          For a number of years, Important Data was a nebulous concept in Chinese law. In the context of CBDT, the primary definition was found within the Security Assessment Measures, which provide:

                          “For the purposes of these Measures, the term “Important Data” means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, etc.”

                          The above definition of Important Data is risk-based. The consequences of this were:

                          • Data had to be considered on an element-by-element basis and collectively;
                          • Important Data could, in theory, lose its important status (for example, the value of market data typically decreases with time);
                          • Ordinary data could, in theory, become Important Data if, among other things, it was combined with other data or if the data became strategically important to China;
                          • Important Data could vary from entity to entity, which meant the source of data could be a significant indicator of Important Data; and
                          • Identifying Important Data required an understanding and analysis of all data held by an organisation.

                          Due to the factors listed above, Data Processors could not be sure that their views on what constituted Important Data would align with those of regulators. This, in turn, made data compliance activities challenging.

                          Article 2 of the CBDT Regs simplifies the identification of Important Data by stating:

                          “Data Processors shall identify and declare Important Data in accordance with relevant regulations. Where a Data Processor has not been notified or relevant departments or regions have not publicly announced that data is Important Data, the Data Processor need not declare such data as Important Data for a Security Assessment.”

                          Moreover, during a Q&A Session on 22 March 2024 (“CBDT Q&A”), the CAC stated:

                          “According to the Provisions, Data Processors shall identify and declare Important Data in accordance with relevant provisions. Where data has not been notified by the relevant departments or regions or publicly released as Important Data, Data Processors do not need to apply for a security assessment for data export as Important Data.”

                          Based on the CBDT Regs and the CBDT Q&A, unless a public authority tells a Data Processor or announces that data is Important Data, the data in question is not Important Data. Accordingly, Article 2 gives Data Processors much-needed clarification to help them understand how to identify Important Data.

                          Exemptions from 3 CBDT Paths

                          The CBDT Regs introduce several data export scenarios which are exempt from the Security Assessment, concluding the Standard Contract or obtaining Certification (the Security Assessment, Standard Contract and Certification are each a “CBDT Path” and collectively the “3 CBDT Paths”). These exemptions will presumably be welcomed by businesses and include:

                          Exemption 1: Exporting data other than Important Data and Personal Information

                          Article 3 of the CBDT Regs provides:

                          “Where a Data Processor exports data (which does not contain Personal Information or Important Data) collected and generated in international trade, international transportation, academic cooperation, transnational manufacturing, and marketing activities, it is exempt from the requirement to apply for a Security Assessment, conclude the Standard Contract or obtain Certification.

                          This provision is actually not new. Data not classified as Important Data or Personal Information has never been required to follow the 3 CBDT Paths. We understand the CAC merely reiterates this point to clarify some misunderstandings of the outside world.

                          Exemption 2: Exporting imported overseas Personal Information

                          Article 4 of the CBDT Regs state:

                          “Where Personal Information collected and generated by a Data Processor overseas is transmitted to China for processing and then provided overseas, and no domestic Personal Information or Important Data is introduced in the processing, it is exempt from the requirement to apply for a Security Assessment, conclude the Standard Contract or obtain Certification.”

                          In other words, Personal Information not originating from China is exempt from the 3 CBDT Paths. A typical scenario that this exemption covers is when a foreign entity engages a Chinese entity to analyse the Personal Information of overseas individuals and then transfer the analysis results to the foreign entity. Other scenarios may also fall under this exemption but will need to be considered on a case-by-case basis.

                          Exemption 3: Contract Exemption

                          Article 5, Paragraph 1, Item 1 of the CBDT Regs exempts Data Processors from having to follow a CBDT Path in relation to “necessary” exports of Personal Information for the following purposes:

                          “(1)… for the conclusion or performance of a contract to which an individual is a contracting party, such as cross-border shopping, cross-border delivery, international remittances, cross-border payment, cross-border account opening, flight and hotel reservations, visa processing, examination services, etc. (“Contract Exemption”)

                          The wording of the Contract Exemption mirrors the first part of Article 13, Paragraph 1, Item 2 of the PIPL. However, it also provides illustrative examples that appear to be part of an open list. Based on the plain wording of the Contract Exemption, two key requirements must be met to rely on it: (1) there is a genuine necessity to export Personal Information to conclude or perform a contract, and (2) the concerned individual must be a party to such a contract.

                          Exemption 4: Employee Exemption

                          Article 5, Paragraph 1, Item 2 of the CBDT Regs exempts Data Processors from having to follow a CBDT Path in relation to “necessary” exports for the following purposes:

                          (2)… the export of employees’ Personal Information… for carrying out cross-border human resources management under an employment policy legally established or a collective contract legally concluded. (“Employee Exemption”)

                          The wording of the Employee Exemption matches the second part of Article 13, Paragraph 1, Item 2 of the PIPL. Two key requirements must be met to rely on the Employee Exemption: (1) there is a genuine necessity to export Personal Information for human resources management, and (2) an employment policy has been legally established or a collective contract has been legally concluded which specifies the Personal Information export.

                          Currently, no guidance exists on the meaning of necessity for human resources management. However, in our experience of the Security Assessment and Standard Contract, the CAC has generally accepted filings where the issue of necessity was addressed from the perspective of achieving centralised and unified personnel management within a global organisation.

                          As for the requirement of a legally established employment policy, a Data Processor will need to follow some specific provisions in relevant employment laws and regulations to meet this requirement. Such provisions relate to the specific content of relevant employment policies and the procedures for drafting and issuing them, including consultations with employees and work unions.

                          Exemption 5: Emergency Exemption

                          Article 5, Paragraph 1, Item 3 of the CBDT Regs exempts Data Processors from having to follow a CBDT Path in relation to “necessary” exports of Personal Information for the following purposes:

                          (3)… to protect the life, health, and property safety of natural persons in the case of an emergency. (“Emergency Exemption”)”

                          The wording of the Emergency Exemption matches part of Article 13, Paragraph 1, Item 4 of the PIPL. This is not a situation that every company will come across every day. However, it would be impractical for any company to follow any of the 3 CBDT Paths if a real emergency arose. Two key requirements must be met to rely on the Emergency Exemption: (1) there is a genuine necessity to export Personal Information for saving life, health or property, and (2) an emergency threatening life, health or property has occurred or will likely occur.

                          Exemption 6: De Minimis Exemption

                          An exemption from the 3 CBDT Paths exists in Article 5, Paragraph 1, Item 4 of the CBDT Regs, which provides:

                          “(4) Where a Data Processor (which is not a critical information infrastructure operator) has exported the Personal Information of less than 100,000 individuals (excluding sensitive Personal Information) since 1 January of the current year. (“De Minimis Exemption”)”

                          The De Minimis Exemption can be understood by reference to volumes of ordinary Personal Information exported within a calendar year. The wording of the De Minimis Exemption also excludes exports containing sensitive Personal Information from its scope. In other words, a single item of sensitive Personal Information among 99,999 or fewer individuals’ Personal Information is enough to void the exemption.

                          Regarding Article 7 of the CBDT Regs, which also requires a consideration of data quantities, Question 11 of the CBDT Q&A states that if “it falls under the circumstances specified in Article 3, Article 4, Article 5, Paragraph 1, Items 1 to 3, or Article 6 of the Regulations, it shall not be included in the cumulative quantity.” This suggests that Data Processors may first deduct the scenarios covered by exemptions under other provisions of the CBDT Regs when calculating the quantity of individuals for the purpose of the De Minimis Exemption. In other words, it seems that exemptions may be stacked together. However, this point remains untested for the De Minimis Exemption.

                          Exemption 7: Data not on FTZ Negative Lists

                          Article 6 of the CBDT Regs provides:

                          “Within the national framework for the classified and graded data protection system, a Free Trade Zone (“FTZ”) may establish its own list of data (“Negative List”) that shall be managed through the Security Assessment, the Standard Contract or Certification mechanisms. A Negative List shall be approved by the [relevant] provincial-level cyberspace authority and filed with the national cyberspace and data management authorities.

                          Where a Data Processor within a Free Trade Zone exports data not on the [applicable] Negative List, it is exempt from the requirement to apply for a Security Assessment, conclude the Standard Contract, or obtain Certification.”

                          Data processors in an FTZ who provide data not included on a Negative List are exempt from the 3 CBDT Paths.

                          Please note that according to the CBDT Q&A, until an FTZ issues a Negative List, data export activities in an FTZ should be carried out in accordance with national laws and regulations, including the CBDT Regs.

                          CBDT Path Quantity Thresholds

                          Articles 7 and 8 of the CBDT Regs, as well as Article 5, Paragraph 1, Item 4 that we introduced above, have changed the previous Personal Information quantity thresholds for the 3 CBDT Paths. We summarise these new thresholds below:

                          Articles 7 and 8 provide that where a conflict exists with Articles 3, 4, 5 and 6, Articles 3, 4, 5 and 6 prevail. Furthermore, as discussed, the CAC has stated for Article 7 that if “it falls under the circumstances specified in Article 3, Article 4, Article 5, Paragraph 1, Items 1 to 3, or Article 6 of the Regulations, it shall not be included in the cumulative quantity.” We understand that this means exemptions and export scenarios should be considered when calculating export quantities for the purpose of Article 7. Moreover, and for internal consistency, it seems that this approach should also apply elsewhere in the CBDT Regs, though this view is presently untested.

                          Security Assessment Results Extension

                          Article 9 of the CBDT Regs states that the results of a Security Assessment are valid for 3 years from the date they were issued. It then states that if a Data Processor needs to continue making exports and has not triggered a reassessment, it may seek an extension of the validity period via its local provincial-level CAC “within 60 working days before the expiration of the validity period.” 

                          Compliance Obligations

                          Article 10 of the CBDT Regs contains generic compliance requirements for Data Processors conducting data export activities, regardless of whether any of the 3 CBDT Paths would apply or not. However, it explicitly provides the following illustrative examples:

                          “… giving notifications, obtaining separate consent and conducting Personal Information protection impact assessments.”

                          Based on our experience, the above examples tend to be focal points of CAC review during Security Assessment and Standard Contract filings, as well as other types of examination. Therefore, we suggest that Data Processors conducting data export activities should pay close attention to such matters and improve their compliance work in these areas in particular.

                          Investigations and Penalties

                          Article 12 of the CBDT Regs provide:

                          “Local cyberspace authorities shall strengthen their guidance and regulation of data exports by Data Processors, improve the Security Assessment mechanism, optimise the assessment process, and enhance their supervision in all aspects before, during and after the data exports. If a cyberspace authority discovers significant risks in a data export or a data security incident occurs, it shall require the Data Processor to rectify and eliminate any risks. If the Data Processor refuses to rectify matters or serious consequences are caused, it shall be held liable in accordance with the law.”

                          Based on our experience, the CAC may become aware of risks to exported data through a number of channels. If the CAC discovers a significant risk in a data export or a data security incident occurs, it may require a Data Processor to take remediation measures to rectify and eliminate any risks. If the Data Processor refuses to take remediation measures or serious consequences are caused, further action may be taken against the Data Processor.

                          Based on our experience assisting clients with CAC inspections, the CAC is willing to discuss reasonable remediation measures with Data Processors. However, Data Processors need to maintain open communication channels with the CAC and demonstrate a willingness to cooperate with enquiries if they hope to enter meaningful discussions.

                          Conflicts with CAC’s Previous Regulations

                          Where any other regulations of the CAC conflict with the CBDT Regs, the CBDT Regs prevail.

                          Ongoing and Completed CAC Filings

                          Completed Security Assessments

                          The CBDT Q&A explicitly states that “Data Processors may continue to carry out data export activities” if they passed the Security Assessment before the CBDT Regs took effect.

                          Where a Data Processor failed or partially passed the Security Assessment before the CBDT Regs took effect, it may rely on any applicable reporting exemptions under the CBDT Regs or, if applicable under the CBDT Regs, the Standard Contract or Certification.

                          Ongoing filings

                          Where a Security Assessment or Standard Contract filing was initiated before the CBDT Regs were issued, and any alternative CBDT Path or exemptions are now available under the CBDT Regs, a Data Processor may:

                          • choose to continue their ongoing filing procedure;
                          • withdraw their filing and make use of any applicable alternative CBDT Path; or
                          • withdraw their filing if the Data Processor is exempt from the 3 CBDT Paths.

                            Conclusions  

                          The CBDT Regs fine-tune and, to some extent, relax some restrictions on data exports from China. Based on the CBDT Regs, Data Processors in China may be able to mitigate their overall CBDT compliance obligations if they can adjust their processing activities to take full advantage of the exemptions offered by the CAC. This may involve revisiting legal bases, restructuring commercial arrangements, updating their internal policies, and optimising their overall data compliance framework.