AnJie Partners Zhan Hao and Song Ying were once again invited to pen the China chapter for Global Legal Insights: Cartels 2022 (“Cartels 2022”), which has been published recently. Cartels 2022, published by the Global Legal Group (“GLI”), aims at providing global legal professionals with an overview and insights into the laws and practices relevant to cartels (referred to as “monopoly agreements” in China) in different jurisdictions.

Based on the relevant rules and enforcement practices of monopoly agreements in China, Zhan Hao and Song Ying, who were recommended as antitrust and competition attorneys by Chambers & Partners, Who’s Who Legal, the Legal 500 and other leading rating agencies, introduced in detail the regulatory framework, general legal system and typical monopoly agreements cases from 2020 to 2022, deeply analyzed the latest enforcement policy, administrative investigation process and compliance standards, and shared insights together with their outlook on future legislative and enforcement developments.

GLI is a leading global legal media organization providing legal analysis and industry solutions to top corporate executives, legal counsel, law firms and government agencies worldwide, and has been an important platform for the international legal community to connect and share. The invitation to the AnJie antitrust team for many years is a recognition by the market of its strength in the field and pushes the team to continue to lead the way in the antitrust and competition law profession.

Foreign investor seeking to exit from its foreign invested enterprises (including joint venture companies and wholly foreign owned companies) (“FIE”) in China may consider transferring all its shares in the FIE to others, requesting the FIE to return capital by reducing the FIE’s registered capital or voluntary dissolution of the FIE. This article will focus on the introduction of voluntary dissolution under the current Chinese legal mechanism.

The dissolution of a FIE used to be a time-consuming and complicated procedure according to the previous laws and practice. However, in the wake of promulgation of several policies and regulations, the dissolution procedure has been simplified as the required time and costs are significantly reduced. In the recent FIE dissolutions that we have helped with, it took approximately 3 to 5 months to complete the entire process.

The entire process of voluntary dissolution is generally comprised of three major procedures, namely dissolution, liquidation and deregistration as follows:

  1. Dissolution
  • Resolutions on Dissolution and Liquidation Committee Formation

The dissolution shall commence upon its highest authority (normally the shareholders’ meeting or the sole investor) adopting a resolution on the voluntary dissolution.  Pursuant to the Company Law, the resolution regarding dissolution shall be approved by shareholders representing at least two-thirds of the voting rights. That been said, we understand according to the articles of association of most FIEs, dissolution must be approved by all shareholders unanimously.

The resolution regarding the dissolution shall state (i) the cause of the dissolution (for example, expiration of operation term, serious loss or revoking of business license by government); and (ii) the formation of a liquidation committee, as well as the appointment of members and principal of the liquidation committee.

The laws do not provide for any requirement on the members and principal of the liquidation committee. Normally, the committee is comprised of 2 to 3 members including 1 principal; the principal can be the chairman of board or the general manager, while other members may include directors and finance head of the FIE. The shareholders of the FIE may also designate external legal counsel or accountants to be the members of the liquidation committee. If the FIE is a joint venture company, each shareholder would better appoint its own representative to the liquidation committee.

  • Announcement of Formation of Liquidation Committee

The FIE should then announce to the public the formation of the liquidation committee and the information about the members of the liquidation committee through the national enterprise credit information publicity system within 10 days of the liquidation committee’s establishment.

  1. Liquidation

In accordance with the Company Law, the day on which the liquidation committee is formed is the commencement date of the liquidation. The liquidation committee should carry out the following liquidation activities since then:

  • Notification to Creditors

The liquidation committee should notify creditors within 10 days of its formation. In addition, the liquidation committee should additionally make a public announcement via the national enterprise credit information publicity system within 60 days of its formation. The purpose of both the direct notification and the public announcement is to request the FIE’s creditors to register their rights with the FIE for settlement.

  • Inventorying of Assets (including Existing Contracts)

The liquidation committee should run an inventory of all remaining assets and existing contracts, and then prepare balance sheets and property inventories. The liquidation committee may engage an appraiser to appraise the assets to build up value basis for disposal of the assets later.

In order to save costs and time spent on the liquidation procedure, it is advisable for FIE to start to dispose assets and terminate the business contracts even before the FIE enters into the dissolution and liquidation procedures

  • Termination of Employment of Employees

The FIE shall notify its employees of the decision and shall discuss with them in respect of the termination date and the severance payment on a timely and transparent basis.

To facilitate implementation of liquidation, the FIE may want to maintain one or two staffs who are familiar with the financial situations of the FIE until the completion of the liquidation procedure, because he/they will be required to assist the liquidation committee to handle the liquidation works, especially balance sheet preparation, assets disposal and tax clearance.

  • Preparation of Liquidation Plan

After the liquidation committee clearly understand the status of the FIE’s assets and creditor’s rights and indebtedness (including the ones arising from employment and business contracts), the liquidation committee shall prepare a liquidation plan setting forth, among other things, liquidation expenses and costs, taxes to be paid, list of creditor’s rights and indebtedness, list of assets, disposal plan for assets and indebtedness, plan of termination of employment.

The liquidation plan is not required to be filed with the governmental authority but shall be approved by the FIE’s shareholders.

  • Implementation of Liquidation Plan

Once the liquidation plan is approved by the shareholders, the liquidation committee shall carry out the liquidation as per the plan.

The account balance and the proceeds from the disposal of the assets must be used to settle outstanding costs and debts in the following order:

  • liquidation expenses;
  • employees’ salaries, social insurance fees and severance fees;
  • outstanding taxes; and
  • other indebtedness.

Please be advised that tax clearance is usually the most complicated and time-consuming step in the entire liquidation procedure. As soon as the liquidation starts, the liquidation committee shall apply for a pre-review of the outstanding liabilities to the tax bureau. The tax bureau would issue a “One-Time Notice of Tax Matters” setting forth all the outstanding tax liabilities owed by the FIE. The liquidation committee should settle these liabilities one by one according to the notice. In the course of this process, the FIE shall be prepared to answer questions in relation to the balance sheet and/or make up taxes in arrears as per tax bureau’s requests.

  • Liquidation Audit

Since the foreign exchange administration will require the liquidated FIE to provide a liquidation audit report when it distributes remaining fund to foreign shareholders, the liquidation committee shall engage a qualified auditor to conduct an audit and issue an audit report.

  • Liquidation Report

After the tasks above have been completed, the liquidation committee shall prepare a liquidation report setting forth, among the other things, the situation and the result of the actual implementation of the liquidation plan. The liquidation report needs to be approved by the shareholders and submitted to the registration authorities for recordation.

  1. Deregistration

After the liquidation, the FIE shall carry out the following deregistration with various relevant governmental authorities:

  • deregistration with corporate registration authority;
  • social insurance deregistration;
  • housing fund deregistration;
  • deregistration of enterprises for foreign exchange receipts and payments for trade of goods; and
  • deregistration with customs.

These de-registration processes are often relatively simple and straightforward. The liquidation committee can normally complete the processes by only submitting a few application forms to the relevant authorities or filling out forms online.

In addition, after the completion of the deregistration with the corporate registration authority as mentioned above, the FIE will need to handle the following matters simultaneously at its bank in order to distribute the remaining fund to the FIE’s foreign shareholders:

  • cancellation of foreign exchange registration with the foreign exchange administration;
  • provision of the “Notice of Company Deregistration” issued by the corporate registration authority and the liquidation audit report issued by auditor; and
  • closure of the bank accounts after the remaining fund has been distributed.
  1. Conclusion

In the circumstances where a FIE encounters deadlock between shareholders, lack of market competitiveness, significant increase in expenses and costs or regulatory obstacles, voluntary dissolution may become an inevitable exit option. A more effective and streamlined dissolution mechanism has been adopted by the recent laws and practices. A FIE can be dissolved and deregistered within a period much shorter than the time required under the previous mechanism; and the documents required for dissolution and deregistration become less. Despite of the simplification, foreign investor seeking exit via voluntary dissolution still needs to ensure its strict compliance with the procedures set forth in the applicable regulations as failing to do so, it would expose itself to several and joint liabilities towards the FIE’s indebtedness.

* * *

Please contact the authors listed below if you request additional information or have any questions regarding the issues raised in this brief:

Simon Li

Liting Ren

 

+86 10 8567 2989

 

+86 10 8531 1450

lixiameng@anjielaw.com

 

renliting@anjielaw.com

 


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

 

In December of 2021, the Standing Committee of the National People’s Congress of China published the Draft Revision to the Company Law of China (the “Draft Revision”).

The Draft Revision has made significant changes to the current Company Law which was promulgated in 1993, after which being revised for several times with the latest revision in 2018 (the “Current Company Law”). The changes are mainly reflected in the following aspects:

  • improvements to capital contribution system;
  • relaxing consent requirements for equity transfer;
  • optimization of corporate governance;
  • imposing more responsibilities on directors, supervisors and senior management; and
  • simplification of companies’ exit process.

The Draft Revision, if passed and implemented, would bring profound influence on not only domestic companies but also foreign invested companies as the Foreign Investment Law coming into force in 2020 has already brought the foreign investment regime in line with the Company Law.

In this article, we will highlight some of the noteworthy changes made by the Revision Draft to the Current Company Law, especially those regarding the limited liability companies, which have long been seen as the most common vehicles for foreign investors who engage in businesses in China.

  1. Improvements to Capital Contribution System
  • Equity Interests and Creditors’ Rights are Expressly Accepted to be Used as Capital Contribution

According to the Current Company Law, shareholders may make capital contributions in cash, in kind, or in intellectual property right, land use right, or other non-monetary properties which can be assessed with value and of which the ownerships can be transferred. The Draft Revision, on this basis, expressly adds two more non-monetary properties, namely equity interests and creditors’ rights, which could be used as capital contribution.

Using the equity interests and the creditors’ rights as capital contribution is not prohibited by law at present, but it is not expressly recognized by any law either. The Draft Revision first ever recognize these two kinds of methods for capital contribution at the level of law. The transactions in the forms of equity swap and debt-equity conversion would be given more solid legal basis. On the other hand, it should be noted that the equity interests and the creditors rights being used as the capital contribution shall strictly follow the assessment requirements which are also imposed on the other non-monetary properties.

  • Accelerated Maturity for Shareholders’ Capital Contribution Obligation is Introduced

In principle, China now adopts the subscription registration system for the registered capital, which means that the shareholders may subscribe their respective capital contribution first and then are obliged to pay in full the amount of their subscribed capital contributions within a term agreed by the shareholder(s). The laws in general do not provide for a mandatory deadline for the capital contribution. However, the Draft Revision introduces an accelerated maturity mechanism, under which if a company is unable to pay off any of its indebtedness and it becomes obviously insolvent, the company or its creditors shall be entitled to request the shareholders who have subscribed but not yet made the capital contribution to pay the capital contribution immediately, no matter whether the agreed term of capital contribution of such shareholders has expired or not. Shareholders would then be exposed to the risks of acceleration of their capital contribution responsibilities, where they intend to subscribe capital contribution first and make actual contribution in the future according to a time schedule.

  1. Relaxing Consent Requirements for Equity Transfer

According to the Current Company Law, where a shareholder intends to transfer his equity interest to anyone other than the shareholders of the company, he is required, as a prerequisite, to obtain the consent of more than half of the other shareholders (a shareholder shall be deemed to have consented to the transfer if he fails to reply within 30 days after it receives the notice of the said equity transfer, or if he objects to the equity transfer but refuses to purchase the equity interest proposed to be transferred). Only if such prerequisite has been satisfied, the said equity could be transferred while the other shareholders have the right of first refusal on such equity interest. The Draft Revision takes out such prerequisite of obtaining the consent before equity transfer, while keeping the right of first refusal of the other shareholders. In other words, the transferring shareholder before the proposed transfer only needs to notify the other shareholders; and he can transfer the equity even if the other shareholders object but decide not to exercise the right of first refusal.

This mechanism provided by the Draft Revision is relatively simpler, and shareholders have more freedom in carrying out equity transfers in practice. However, a company, especially a limited liability company, is established and maintains on the basis of trust and willingness of corporation of the shareholders. Lack of control over transferring shareholders’ transfer may adversely impact non-transferring shareholders’ interests and the company’s interests. The lawmakers may have considered this side effect. Therefore, the Draft Revision allows shareholders to negotiate and agree upon tailored restrictions (e.g. consent requirements) on proposed equity transfer and to add them in the company’s charter documents with binding effects.

  1. Optimization of Corporate Governance  
  • Settings regarding Directors and Board are Adjusted

Firstly, the Draft Revision adjusted the concept of the “executive director”. According to the Current Company Law, small-scale limited liability companies may have one executive director instead of setting up board of directors. The executive director, as provided in the Current Company Law, may concurrently serve as the manager of the company. The Draft Revision stipulates that small-scale limited liability companies may only have a director (such position is not named as “executive director”) or a general manager to take the role of a board of directors. The position of “executive director” in the Draft Revision is exclusively set for joint stock limited companies. The “executive director” in the Draft Revision refers to the director concurrently taking the role of daily management of the company, which is the counterpart of the “non-executive director”.

Secondly, the Draft Revision no longer sets out any specific functions and powers of the board as the Current Company Law does; instead, it only states that the board shall exercise the functions and powers other than those of the shareholders’ meeting granted by the law. Accordingly, the shareholders will have greater discretion in designing and allocating the functions and powers of each level of the corporate governance of the company by articulating them in the charter documents.

  • Position of Supervisor is No Longer Mandatorily Required

According to the Current Company Law, the companies must set up a board of supervisor, or at least have one or two supervisors. The Draft Revision proposes that a company may choose to set up an audit committee underneath the board which shall be composed of the directors, responsible for supervising the company’s finances and accounting; if the company choose to do so, it will not be required to set up the position of supervisor.

  • Functions and Powers of General Manager are Adjusted

Like the adjustment made to the functions and powers of board of directors, the Draft Revision does not set forth any specific functions and powers ascribed to general managers, but uses a more general stipulation instead, which only states that the general managers shall exercise the functions and powers in accordance with the articles of association or as authorized by the board of directors.

  • Control over Related Party Transaction is Strengthened

The Draft Revision requires that the following parties shall disclose their interests in the proposed transactions (if any) to the board or shareholders when the transactions are submitted for their deliberation and decisions:

  • directors;
  • senior managers;
  • supervisors;
  • close relatives of directors, supervisors and senior managers;
  • enterprises controlled directly or indirectly by directors, supervisors and senior managers or their close relatives; and
  • the others in related relationship with the directors, the supervisors and the senior managers.

The Draft Revision also requires the relevant directors to excuse themselves from voting process on these transactions. All these requirements are not stipulated in the Current Company Law.

  1. Imposing More Responsibilities on Directors, Supervisors and Senior Management

The Draft Revision imposes stringent obligations on directors, supervisors and senior managers in safeguarding the company’s capital. They will be held accountable in the following circumstances:

  • shareholders fail to pay the capital contribution in full and on time, or the actual value of the non-monetary property as the capital contribution is significantly lower than the subscribed capital contribution, and the directors, supervisors and senior managers know or should have known such misbehaviors but fail to take necessary measures;
  • shareholders illegally withdraw their registered capital after the incorporation of the company, and the directors, supervisors and senior managers know or should have known such misbehaviors but fail to take necessary measures;

In addition, if

  • any profit is distributed to shareholders in violation of law; or
  • the registered capital of the company is reduced in violation of law,

the responsible directors, supervisors and/or senior managers shall have indemnification liabilities.

The Draft Revision also brings forward that if directors and senior managers in performing his duties have caused any damage to any parties due to his intentional acts or gross negligence shall bear joint and several liability with the company.

As stipulated in the Draft Revision, if controlling shareholder or ultimate controller of a company takes advantage of its influence on the company to instruct any director or senior manager to engage in the acts that harm the interests of the company or the shareholders and causes losses to the company or shareholders, such controlling shareholder or ultimate controller of the company shall bear joint and several liability with the director or the senior manager.

  1. Simplification of Companies’ Exit Process  

The rules of simple de-registration process for the company with no outstanding debts are set out in the Draft Revision. Compared to the general de-registration process, in the simple de-registration process, the steps such as the establishment of the liquidation committee and the serving of notice to creditors are not required, and the prescribed announcement period is shortened from forty-five days to twenty days.

Please note even if the company is de-registered through the simple de-registration process, the shareholders shall guarantee the de-registered company has no outstanding debt and shall undertake to bear joint and several liability for any debts of company which arise before the de-registration. As a consequence, the shareholders would bear heavier risks under the simple de-registration process.

* * *

The Draft Revision has made a series of substantive changes to the Current Company Law. However, it is still not clear when the revised Company Law would be officially promulgated and to what extent the changes made in the Draft Revision would be reflected in the final version eventually taking effect. No information is available up to now about whether any grace period will be given for the existing companies to adjust according to the revised Company Law after it is promulgated, and what penalty would be if the companies fail to make the adjustments.

We will continue to closely monitor the development and inform you of any progress regarding the revisions to the Company Law.

Please contact the authors listed below if you request additional information or have any questions regarding the issues raised in this brief:

Simon Li

Linda Gao

 

+86 10 8567 2989

 

+86 10 8567 5913

lixiameng@anjielaw.com

 

 

gaojialin@anjielaw.com

 


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

Key Issues:

  • What are the criteria for determining a horizontal monopoly agreement?
  • Will a settlement agreement reached by the parties to settle a patent dispute constitute a monopoly agreement?
  • Should the motive, purpose and context of the contracting parties be considered in determining monopoly agreements?
  • Can the Supreme People’s Court (“SPC”) determine a settlement agreement is void that has been found valid by the People’s Court in another case, based on the Anti-Monopoly Law (“AML”)?

Preamble

Recently, AnJie Law Firm’s (“AnJie”) attorneys represented the appellant, a power equipment company, in a horizontal monopoly agreement dispute concerning “transformer changer” that heard by the Intellectual Property Court of the Supreme Court (“IP Court of the SPC”). AnJie successfully obtained a verdict in the second instance, which reversed the first instance judgement and invalidated the settlement agreement in question as it violates AML. [Docket No.: (2021) Zui Gao Fa Zhi Min Zhong No. 1298, A Horizontal Monopoly Agreement Dispute Concerning Transformer Changer]. In this case, the agreement in question is a settlement agreement entered by the parties to settle a patent dispute in another case. In the hearing, the IP Court of the SPC particularly examined whether a patent dispute settlement agreement constitutes a monopoly agreement and what are the criteria for determining a monopoly agreement, among others.

In the “Interview on the Third Anniversary of the Establishment of the IP Court of the SPC” published by People’s Daily Online on February 28, 2022, ZHU Li, the Deputy Chief Judge of the IP Court of the SPC, particularly remarked on the case when presenting the work of the IP Court of the SPC since its establishment: “in the case of a horizontal monopoly agreement dispute concerning transformer changer, the court determined the settlement agreement in question constituted a horizontal monopoly agreement and therefore the whole agreement was void. The Court has strictly regulated the acts of restricting the production quantity or sales volume of commodities, dividing the sales market or the raw material supply market, fixing or changing the price of commodities in the guise of an “patent infringement settlement agreement.”

Horizontal monopoly agreement is a core violation strictly regulated by AML in many jurisdictions. In the judicial and administrative enforcement practice in China, there have been a number of cases involving horizontal monopoly agreements. However, this case should be the first one in China’s anti-monopoly litigation to discuss in detail whether a settlement agreement in a civil litigation constitutes a monopoly agreement, how the elements of a horizontal monopoly agreement should be determined, and how to solve the conflict between the adjudicative documents of the previous patent dispute and that of the latter anti-monopoly civil litigation.

I. Case Background and Hearing

1. Case Background

In this case, the plaintiff, a power equipment company (“PEC“), and the defendant, a transformer charger company (“TCC“), are both engaged in the production and sale of transformer tap changers and are competitive operators. in 2015, TCC filed a lawsuit in the People’s Court (“Patent Lawsuit“) on the ground that the technical features of the shielding cover product of a certain type of transformer tap changer (“Transformer Charger“) produced and sold by PEC fell into the scope of protection of the rights of a certain patent right held by it. TCC requested the court to order PEC to cease the production of such product and compensate for its economic losses.

During the trial of the patent infringement dispute, PEC applied to China National Intellectual Property Admission for a declaration of invalidity of the patent right in question and applied to the court hearing the case for a stay of the trial. In 2016, TCC and PEC entered a settlement agreement. Thereafter, TCC applied for the withdrawal of the Patent Lawsuit, and PEC applied for the withdrawal of the request for invalidation of the patent right involved.

2. Main Contents and Performance of the Settlement Agreement

The main contents agreed by the parties in the settlement agreement involved in the case are as follows:

  • The transformer charger in question was divided by type, and it was agreed that except for one type of the transformer charger in question, PEC shall not manufacture or commission any third party (or purchase from it) other than TCC to manufacture all other types of transformer charger bodies and related parts in question. Meanwhile, PEC shall be the overseas market agent for TCC’s shareholding company, and undertakes not to manufacture on its own in the overseas market, nor to act as agent for similar products of other enterprises.
  • For the quotation of the transformer charger involved in the case entrusted to TCC, PEC should first confirmTCC’s price of main part of transformer charger before deciding the quotation by itself, and then quote the price to TCC with the purchase of the main part. In addition, the parties agreed that, for substitutable imported chargers and special chargers, if one party informs the other party of the price information, the transaction price of the informed party cannot be lower than that of the actively informed party.
  • If PEC breaches the above agreement, it shall compensate TCC all losses incurred therefrom and separately pay a high amount of liquidated damages.

After the parties reached the settlement agreement involved in the case, PEC did not fulfill the said agreement, and TCC filed a lawsuit to the People’s Court in January 2017 on the ground that PEC had violated the settlement agreement by selling the transformer charger involved in the case to a third party. TCC requested the court to order PEC pay liquidated damages. In this contract dispute case, the People’s Court of the first and second instance both found the settlement agreement in question was legal and valid, without examining whether the settlement agreement in question violated the AML. After the above judgment came into effect, the People’s Court of the first instance initiated the enforcement of the effective judgment of the case and enforced the execution money from PEC.

In June 2018, TCC again filed a lawsuit with the People’s Court on the ground that PEC had breached the settlement agreement by selling the transformer charger in question to a third party, and requested PEC to pay liquidated damages. During the trial of the case, PEC applied to suspend the trial on the grounds that the validity of the settlement agreement in question was disputed and filed a separate lawsuit accordingly. In June 2019, the trial court ruled on suspension of the trail.

3. Litigation Procedure and Holding

In May 2019, PEC filed a lawsuit with the People’s Court (“Court of First Instance“), requesting to confirm that the settlement agreement in question was void due to its violation of the AML and that TCC should compensate PEC for economic losses and reasonable expenses for the litigation. After hearing the case, Court of First Instance issued a judgment in December 2020, holding that the settlement agreement did not violate the AML and dismissing all PEC’s claims.

PEC appealed to the SPC against the trial judgment, requesting that the trial judgment be reversed and that all of PEC’s claims in the trial be upheld instead. After hearing the case, the SPC issued a judgment in February 2022, holding that the relevant provisions of the settlement agreement in question constituted a horizontal monopoly agreement by restricting the production quantity or sales volume of commodities, dividing the sales market or the raw material supply market, fixing or changing the price of commodities which are expressly prohibited by Article 13(1) of the AML, and that the settlement agreement in question was void.

As mentioned above, the agreement that PEC sued to confirm as void due to the violation of AML was a settlement agreement entered between it and TCC in another case to settle their patent dispute. During the trial of this case, the Intellectual Property Court of the SPC focused on the issues of whether the context of the agreement signed affected the determination of the monopoly agreement; whether the settlement agreement reached in the patent dispute constituted a monopoly agreement; and the elements of a monopoly agreement. The Court’s analytical approach is worth studying.

II. Approach to Determining Whether a Settlement Agreement Reached as a Result of a Patent Dispute Constitutes a Monopoly Agreement

1. The core criterion for determining a monopoly agreement is whether it has the effect of excluding or restricting competition, and the context in which the agreement was entered into is only a reference factor

(1) Court of First Instance: The settlement agreement in question was signed for the purpose of settling patent infringement disputes, not for the purpose of restricting market competition, and should not be deemed as a monopoly agreement

The court of first instance held that the purpose of the settlement agreement was to resolve the patent infringement dispute between the parties and to avoid the recurrence of that dispute, and that the settlement agreement did not aim to induce the parties to enter into an alliance to compete in the competitive market. On this basis, the Court of First Instance, after analyzing the terms of the agreement and the effect of its performance, held that the terms of the settlement agreement in question did not have the attributes of a monopoly agreement and should not be deemed as a monopoly agreement.

In this regard, PEC appealed that AML regulates the acts that exclude or restrict competition in the market, and neither the circumstances that constitute horizontal monopoly agreement, which are explicitly prohibited by the law in the form of enumeration, nor the factors that should be considered in determining other circumstances that constitute horizontal monopoly agreement, mentioned the context or subjective purpose of the parties to reach the agreement. Therefore, it was an error in the application of the law to hold that the settlement agreement in question did not constitute a horizontal monopoly agreement based on the context of its conclusion.

(2) The Intellectual Property Court of the Supreme Court: To determine whether the settlement agreement in question constitutes a monopoly agreement, the core criterion should be whether the agreement has the effect of excluding or restricting competition. The context in which the agreement was signed is not sufficient to determine or deny how the settlement agreement in question influences market competition

The IP Court of the SPC held that according to Article 13(2) of the AML, a monopoly agreement is an agreement, decision or other concerted act to exclude or restrict competition. Therefore, whether the agreement reached between operators is a monopoly agreement prohibited by AML should be based on the core criterion of whether the agreement has the effect of excluding or restricting competition. The context of the settlement agreement and the subjective motives of the parties in entering into the settlement agreement are only reference factors, and it is not sufficient to determine or deny the effect of the settlement agreement on market competition.

2. The scope of the patent settlement agreement exceeds the scope of protection of patent rights and/or the dispute involved, which in fact pursues the effect of excluding or restricting competition and violates AML

(1) Court of First Instance: The settlement agreement in question restricts the production and sale of specific types of products by the parties to the agreement, in order to avoid falling into the scope of protection of the rights of the patentee, and should not be deemed as a monopoly agreement

The Court of First Instance held that the commitment of PEC to produce only one type of transformer charger in the settlement agreement in question was because other types of transformer chargers might fall into the scope of protection of the patent right in question, and therefore the terms of the relevant agreement were to avoid being sued again for patent infringement and should not be deemed as a monopoly agreement.

In this regard, PEC appealed, claiming that the aforementioned determination of the trial judgment had omitted facts, and that the scope of the agreement in the settlement agreement in question far exceeded the scope of protection of the rights of the patent in question and the scope of dispute in patent infringement cases, which had the obvious effect of excluding and restricting market competition and constituted a horizontal monopoly agreement.

(2) The IP Court of the SPC: The settlement agreement in question lacks substantial relevance to the scope of protection of the patent right in question, and the agreement has the effect of excluding and restricting competition and constitutes a horizontal monopoly agreement

The IP Court of the SPC held that the settlement agreement in question lacked substantial relevance to the scope of protection of the patent right of correction in question, and that its core did not lie in the protection of the patent right, but in the exercise of the patent right as a cover, in fact pursuing the effect of horizontal monopoly agreement, which was an abuse of patent right and violated the provisions of AML. Specific bases include:

  • The technical effect of the patent right in question mainly lies in reducing the manufacturing cost of the charger and enhancing the stability and reliability of the use of the charger, which belongs to the improvement of the transformer charger in question and is not a basic patent that cannot be avoided. The scope of protection of the patent right in question does not involve the specific shape or type of the transformer charger in question, while the settlement agreement in question divides the product by the type of the transformer charger.
  • In overseas markets, the settlement agreement in question divides the products into chargers produced by the transformer charger company’s participating companies and chargers produced by other companies, limiting the scope of chargers produced by PEC, but this limitation is not substantially related to the scope of protection of the patent in question.
  • The settlement agreement in question divided the market in which the transformer charger in question was located, and in doing so, restricted the sales price, production quantity, sales quantity, sales type and sales territory of the products covered by the agreement, which excluded and restricted competition among operators.

In addition, the IP Court of the SPC also pointed out that since the settlement agreement in question was not substantially related to the scope of protection of the patent right in question, and the content of the settlement agreement in question exceeded the disputed content of the patent infringement dispute, whether the products involved in the settlement agreement in question included the products suspected of infringing the patent right in the patent infringement dispute did not, in principle, affect the judgment of whether the settlement agreement in question constituted a monopoly agreement.

3. The standard of review of monopoly agreements specified in this case is the same as the standard of anti-monopoly review of reverse payment agreements in another Supreme Court case

It is worth mentioning that on December 17, 2021, the Supreme Court ruled on the application for withdrawal of appeal in the case of AstraZeneca v. Jiangsu Aosaikang Pharmaceutical [Docket No.: (2021) Zui Gao Fa Zhi Min Zhong No. 388] and made the first preliminary anti-monopoly review of the “reverse payment agreement for pharmaceutical patents.”

In the case, the disputed agreement is the settlement reached between the third-party Bristol -Myers Squibb (“BMS”) and Jiangsu Vcare PharmaTech Co., Ltd (“Vcare”) to settle the patent dispute in respect of “Saxagliptin”. In accordance with the settlement, Vcare shall withdraw the request for patent invalidation within five days from the effective date of the settlement, and BMS and the subsequent patentee (AstraZeneca in the case) undertake not to claim responsibility of any action of Vcare and its affiliates (Aosaikang in the case) which infringe the disputed patent after January 1, 2016 (the duration of the disputed patent right will expire on March 5, 2021).

Vcare withdrew the request for invalidation after the reaching of the settlement, and its affiliate Aosaikang applied for registration, manufactured, used, authorized for sale and sold Salagliptin tablets after the aforesaid agreed date. AstraZeneca filed a lawsuit to the Intermediate People’s Court of Nanjing City, Jiangsu Province (“Nanjing Intermediate Court”), accusing that Aosaikang infringed its patent. The Nanjing Intermediate Court held that Aosaikang, as an affiliate of Vcare, is entitled to exploit the disputed patent pursuant to the settlement, and dismissed all claims of AstraZeneca. AstraZeneca filed an appeal to the SPC, but applied to withdraw the appeal later on the basis of the settlement with Osaikang.

In the process of reviewing the withdrawal of the appeal application, the IP Court of the SPC found that the Settlement Agreement in question was in line with the appearance of a “drug patent reverse payment agreement”, i.e. the drug patent right holder promises to compensate the generic applicant for direct or indirect benefits (including disguised compensation such as reducing the generic applicant’s non-benefits), and the generic applicant promises not to challenge the validity of the drug-related patent rights or delay entering the market of the patented drug. The applicant promises not to challenge the validity of the patent right of the drug or delay the entry into the market of the patented drug. The IP Court of the SPC pointed out that the arrangement of such agreements is generally special and often hidden, which may have the effect of excluding or restricting competition and may constitute a monopoly agreement regulated by the AML, and the core judgment criterion is whether the agreement in question is suspected of excluding or restricting competition in the relevant market.

In this case, the IP Court of the SPC clarified the analysis path for the antitrust review of the “reverse payment agreement for pharmaceutical patents”: by comparing the actual situation where the agreement was signed and fulfilled with the hypothetical situation where the agreement was not signed or fulfilled, the focus was on the possibility of the generic applicant’s invalidation request not being withdrawn. The possibility that the patent right related to the drug is invalidated by the invalidation request, and then use it as a basis to analyze whether and to what extent the agreement in question has caused competitive harm for the relevant market.

In AstraZeneca v. Aosaikang, and the horizontal monopoly agreement dispute case concerning transformer changer, the parties entered into the disputed agreements for the same background, that is, for the purpose of settling patent disputes. The core standard adopted by the IP Court of the SPC in determining whether the concerned agreement constitutes a monopoly agreement in the two cases is the same, i.e., whether the relevant agreement has the effect of eliminating or restricting competition. The analytical approach adopted by the IP Court of the SPC in the two cases may also be applied or referred to in determining whether other settlements of patent disputes executed under other circumstances constitute monopoly agreements.

III. Other Important Legal Issues

1. To determine whether an agreement constitutes a horizontal monopoly agreement explicitly listed in AML, a comprehensive analysis of the agreement, rather than a mechanical comparison between the agreement and the law, shall be adopted.

As to whether the settlement agreement in question constitutes a horizontal monopoly agreement, the IP Court of the SPC held that, in determining whether the agreement in question conforms to the forms of horizontal monopoly agreements listed in Article 13(1) of AML, it is not appropriate to compare the content of the agreement with the five types of horizontal monopoly agreements listed in the same paragraph, but to analyze the content of the agreement as a whole from the perspective of market competition order, and to consider the content of the relevant provisions of the agreement and their relevance, and the actual or potential effects of excluding or restricting competition. The agreement should be analyzed as a whole from the perspective of the market competition order, and the content and relevance of the relevant provisions of the agreement, and the actual or potential effect of the exclusion or restriction of competition should be considered comprehensively.

Upon a comprehensive analysis of the content of the settlement agreement, the IP Court of the SPC held that the settlement agreement in question agreed on the terms of stopping the production of specific varieties of goods, limiting the sales of specific varieties of goods, coordinating and fixing prices, and reinforcing the effect of dividing the sales market, limiting the production and sales quantities of goods, and fixing the prices of goods by means of information liaison and penalties for breach of contract. Therefore, the relevant provisions constitute horizontal monopoly agreements to restrict the quantity of commodity production, divide the sales market and fix commodity prices, which are expressly prohibited by Article 13 of AML, and the settlement agreement in question is invalid in its entirety.

2. The principle of “per se violation” applies to horizontal monopoly agreements explicitly listed in the Anti-monopoly Law, and the burden of proof should be on the defendant that the agreement in question does not have the effect of excluding or restricting competition.

The first instance judgment found that the settlement agreement in question, if performed, did not have the monopoly effect regulated by Article 13 of AML, and held that the electric PEC should bear the burden of proof that the performance of the settlement agreement in question might lead to the monopoly effect. In this regard, PEC appealed and claimed that the settlement agreement constituted a horizontal monopoly agreement under Article 13(1) of AML and that the “per se violation principle” applied and that PEC did not need to provide evidence to prove its competitive effect; on the contrary, TCC should bear the burden of proof that the agreement did not have the effect of excluding or restricting competition. Therefore, the trial verdict was wrong in allocating the burden of proof.

The IP Court of the SPC pointed out that, according to Article 7 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Cases of Civil Disputes Arising from Monopoly Acts” (“Judicial Interpretation of Civil Disputes on Monopoly”), the five types of monopoly agreements expressly listed in the Article 13(1) of AML, including restricting the production quantity or sales volume of commodities, dividing the sales market or the raw material supply market, fixing or changing the price of commodities, are typical horizontal monopoly agreements that have the effect of eliminating or restricting competition. Once formed, such agreements generally have the actual or potential effect of harming market competition, unless the defendant can prove that the agreement has the effect of promoting competition and that the effect exceeds its effect of excluding or restricting competition.

Specifically in this case, the IP Court of the SPC held that the relevant burden of proof in the first instance judgment was improperly allocated and should be corrected. PEC had proved that the settlement agreement in question constituted a horizontal monopoly agreement to limit the quantity of production of goods, divide the sales market and fix the price of goods as prohibited by Article 13(1) of AML. Therefore, the burden of proof should be on TCC to prove that the settlement agreement in question does not have the effect of excluding or restricting competition. Since TCC did not have sufficient evidence to prove that the settlement agreement in question had the effect of promoting competition and that the effect exceeded its effect of excluding or restricting competition, the settlement agreement in question should be found to have the effect of excluding or restricting competition.

3. If a party to a monopoly agreement claims reasonable expenses from other parties to the agreement for investigating and ceasing the monopoly, the people’s court will analyze the case on a case-by-case basis

In this case, PEC claimed that the settlement agreement was invalid, and TSC should bear the compensation therefrom. PEC, therefore, claimed that TSC should compensate PEC for economic losses and reasonable expenses for safeguarding rights. With respect to the economic losses claimed by PEC, the IP Court of the SPC took the same view as the monopoly dispute case of “Brick and Tile Association” [Docket No.: (2020) Zui Gao Fa Zhi Min Zhong No. 1382] it handled previously, that is, a participant in a horizontal monopolistic agreement has no right to claim compensation. Therefore, the IP Court of the SPC did not support the economic losses claimed by PEC.

The IP Court of the SPC, while rejecting the request of the electric equipment company regarding the compensation of economic losses, supported the request of the electric equipment company regarding the compensation of reasonable expenses for the maintenance of rights in this case, on the following explicit basis:

  • Article 14(2) of the Judicial Interpretation of Civil Disputes on Monopolies provides that “upon the plaintiff’s request, the people’s court may include the reasonable expenses paid by the plaintiff for investigating and stopping the monopoly in the scope of compensation for damages.”
  • The reasonable expenses claimed by PEC for the defense of its rights in this case are the expenses for hiring a lawyer for this lawsuit. PEC filed a lawsuit requesting to confirm that the settlement agreement in question was invalid due to the violation of AML, and requested damages, and the attorney’s fees it claimed to have spent for this lawsuit were expenses paid to stop the monopoly.
  • Although the request for damages is not supported, in view of the fact that horizontal monopoly agreements are usually hidden, the support for reasonable expenses is conducive to the initiative of the participants of the monopoly agreement to reveal the monopolistic behavior, which helps to timely discover and stop the monopolistic behavior, protect fair competition in the market and maintain the order of market competition, so the reasonable expenses claimed by PEC in this case will be considered.
  • Considering the complexity of this case and the participation of the attorney representing PEC in this litigation, the reasonable expenses claimed by PEC are still reasonable.

The decision of the IP Court of the SPC in this case makes it clear that, after a horizontal monopoly agreement is reached, although a party to the monopoly agreement has no right to claim damages from other participants of the agreement in accordance with AML, a party to the monopoly agreement may claim reasonable expenses paid to other participants of the agreement for investigating and stopping the monopoly, and the People’s Court may support it according to the specific situation.

4. The parties have filed a contract dispute lawsuit and a monopoly dispute lawsuit against the same agreement, which do not constitute repeated litigation

After the settlement agreement in question was reached, TCC filed contract dispute lawsuits in 2017 and 2018 on the ground that PEC did not fulfill the settlement agreement by selling the transformer charger in question to a third party. In the two contract dispute lawsuits and the transformer charger horizontal monopoly agreement dispute cases, the parties filed lawsuits based on the settlement agreement in question, and in the 2017 contract dispute case, the effective judgment has determined that the settlement agreement in question is legal and valid, and TCC has obtained the liquidated damages through the execution procedure.

Therefore, for the transformer charger horizontal monopoly agreement dispute case, it involves the question of whether the prior contract dispute case and the monopoly dispute case constitute “repeated litigation”. According to the opinion of the IP Court of the SPC in another ruling, since the legal relationship and the subject matter of the lawsuit are different, the transformer charger horizontal monopoly agreement dispute does not constitute a duplication of litigation with the prior contract dispute case.

In the monopoly agreement dispute case of Shangqiu Longxing Pharmaceutical Co., Ltd. v, Hubei Tuosi Medical Co., Ltd. [Docket No.: (2021) Zui Gao Fa Zhi Min Xia Zhong No.187] heard by the IP Court of the SPC on August 19, 2021, the focus of dispute between the parties was whether the monopoly agreement dispute case and the contract dispute case with an effective ruling that has been previously heard by a people’s court constitutes repeated lawsuits. In the case, the IP Court of the SPC ruled that, as contract dispute case and monopoly agreement dispute case of the same contract involve a contractual legal relationship and anti-monopoly legal relationship respectively. They have different subject matters. Even if the parties involved are the same or the claim of the later case substantially negates the ruling of the former case, they do not constitute repeated lawsuits. However, it is appropriate in principle that these cases should be jointly tried by one court.

IV. Cases in Foreign Jurisdictions, Insights and Practical Significance of this Case

1. Cases in Foreign Jurisdictions: How to Determine Whether a Reverse Payment Agreement Violates AML

In patent disputes, the parties often settle the case by settlement. However, whether the settlement or settlement agreement of the relevant patent dispute will violate AML has become a key issue of concern for the antitrust enforcement agencies and judicial authorities in the United States, the European Union and jurisdictions, and the issue has gradually been addressed in the judicial practice in China.

The EU has established its own review discourse (including the analysis of purpose limitation and effect limitation) through relevant cases (especially the reverse payment case), which can be found in the Lundbeck reverse payment case and the Servier reverse payment case. The Lundbeck reverse payment case, due to its similarity to the transformer charger horizontal monopoly agreement dispute, was included in the compilation of cases prepared by the Anti-Monopoly Bureau of the State Administration of Market Supervision and Administration, which was provided as a reference material to the panel of the Supreme Court in the second trial proceedings.

The U.S. courts have developed in judicial practice an antitrust analysis model based on the per se violation principle and the reasonableness principle for such monopoly agreement cases. On this basis, for the sake of efficiency, the principle of expedited review has been developed on the basis of the traditional principle of reasonableness, which is a simplified principle of reasonableness. In response to the conflict between patent law and antitrust law embodied in reverse payment agreement cases, the courts have also specifically applied the special patent scope test principle.

Among other things, the patent scope test principle emphasizes the consideration of the exclusivity of patent rights when conducting antitrust review of reverse payment agreements. The U.S. Court of Appeals for the Second Circuit, the Eleventh Circuit, and the Federal Court of Appeals have used the patent exclusivity test, taking into account the legislative purpose and standards of the patent and antitrust laws.

The purpose of the settlement agreement is determined by categorizing whether the settlement agreement is in the context of a “patent infringement litigation settlement” and applying the different principles of review described above.

  • If the settlement agreement is in the context of a patent infringement litigation settlement, the rules of the exclusive scope of patent rights test apply. Assuming that the patent in dispute is valid, determine the scope of protection of the rights of the patent in dispute and the scope of exclusivity of the agreement, compare the two scopes, and determine whether the agreement exceeds the scope of protection of the patent rights. If it exceeds, it constitutes monopoly; if it does not, it does not constitute monopoly.
  • If the settlement agreement is not in the context of a patent infringement litigation settlement, it is judged mainly on the basis of the antitrust law, and the principle of reasonableness, the principle of per se violation, and the principle of expeditious review are applied by situation according to the analysis of the reasonableness of the provisions of the settlement agreement for restrictive conduct and the impact on competition.

In general, the exclusive scope of patent rights test rule takes into account the unique nature of pharmaceutical patent antitrust litigation in reverse payment and enables judges to apply it in a way that more fully takes into account the scope of patent rights protection in their decisions.

In summary, the U.S. court’s analysis of whether a “reverse payment” agreement constitutes a monopoly agreement is summarized as follows:

Analysis Principles Judgment Logic
Principle of per se violation Some of the reverse payment agreements are themselves agreements that only have the effect of restricting competition (e.g., horizontal market division agreements), which can be directly ruled as a violation of the antitrust law.
Reasonable Principle First determine whether a restriction of competition is both economic and efficient; and if so, whether it can be further found to be reasonable and justified.
Expediated Review Principles (The presumption (through common sense) that a reverse payment agreement that clearly prevents competition is illegal can be rebutted by defense and proof, after which the judge must conduct a full and reasonable analysis.
Patent Scope Test Principles Reverse payment agreements do not violate antitrust laws when the anticompetitive effects of the agreement do not extend beyond the patent rights.

 

It should be said that the above-mentioned extraterritorial cases and doctrines are worthy of our consideration.

2. Insights and Practical Implications of this Case: Antitrust Compliance Recommendations in Patent Settlement

This adjudication by the Supreme Court is well reasoned and logically clear, giving a clear judicial view on some key frontier issues, and the determination of the monopoly agreement strictly follows the intent of AML, while also incorporating domestic and international judicial and law enforcement practices, reflecting the level of adjudication by the highest judicial authority in China in civil anti-monopoly litigation.

Antitrust and patents are a pair of long-standing entangled legal issues, and the antitrust risks faced in patent settlement agreements are enormous. AnJie provides the following compliance advice for companies’ reference in practice:

  • In the process of negotiating with a competitor for settlement of a patent dispute, attention should be paid to the necessity and confidentiality of the scope of information exchange, especially in relation to competitively sensitive information such as the cost, price or customers of the product (or technology), to avoid being found to have committed a violation of AML when other evidence is combined (e.g., having increased the price of the product at the same or similar time as the competitor).
  • The restrictive clauses agreed in the settlement agreement should be strictly examined to confirm whether the relevant content exceeds the scope of protection of the patent right in question and/or the scope of the dispute, especially for the content of the clauses involving restrictions on the use, production and sale of certain types of products by the parties to the agreement, such as whether the scope of products agreed to be produced by the infringing party necessarily fall within the scope of protection of the patent in question.
  • Analyze, with the assistance of in-house professionals or external legal counsel, whether the content agreed to in the settlement agreement constitutes a monopoly agreement and/or an abuse of dominant market position, especially whether the relevant content may go beyond the scope of protection of patent rights and/or the scope of the dispute.
  • For the settlement agreement reached in the patent right litigation procedure, according to the specific circumstances of the case, companies may apply to the People’s Court to confirm the validity of the settlement agreement. People’s Court will make a ruling to confirm the validity of the settlement agreement after examination.

 

*Thanks Caili ZHAN and Chenyi WANG for their contributions in English translation.

On March 1, 2021, DAWKINS, a professional rating agency of Accurate Media, officially released the ranking of China’s top ranked law firms and top ranked lawyers in its A Client’s Guide 2022 Edition. AnJie Law Firm has made the list in 6 sectors, including VC, PE, overseas listing, consumption, high-tech and new economy. Attorney Cai Hang, partner of AnJie, is recommended in the sectors of VC, high-tech and new economy, and Attorney Guo Jinglian, partner of AnJie, is recommended in the sector of overseas listing.

China Business Law Journal, a well-known international law journal, published the Deals of the Year 2021 on February 22, 2022. With its constant reporting of the China market, China Business Law Journal selected the deals that stand out as the Deals of the Year 2021, in terms of the overall significance, complexity, and innovative nature of the deals and cases, as well as deal size.

Five projects represented by AnJie win Deals of the Year 2021 of China Business Law Journal, covering the sectors of Investment & Financing, M&A, IP, Bankruptcy Reorganization, Capital Market, New Energy, Insurance, and Internet Technology.

Founder Group’s USD11bn restructuring(CATEGORIES: Bankruptcy reorganisation)

KEY POINTS: Under the guidance of the State’s major strategies of encouraging insurance funds to support the development of the real economy and promoting the reform of university-run enterprises, an investor consortium comprising Ping An Life Insurance, Zhuhai Huafa, and Shenzhen Special Economic Zone Development Group participated in the RMB69.7 billion merger and reorganization of Founder Group and four other companies. The consolidated new Founder Group, set up with retained assets, is majority-owned by Ping An. The judicial reorganization of Founder Group is one of the largest bankruptcy cases of non-financial institutions since the founding of the People’s Republic of China, involving a massive scale of claims and touching on financial stability, which also concerns the standardization of university-run enterprises, and thus has significant social effect, making it a tough task. The restructuring was as complex as it was extensive, involving an innovative sale-based reorganization model, designed to shield investors from Founder Group’s potential debts or risks, change of actual controller of listed companies, and third-party benefit trust of property rights.AnJie law firm provides special legal services for Ping An Life Insurance, and the leading partners are lawyers Zhan Hao, Chen Jun and Song Ying.

HT Aero’s series A financingCATEGORIES: Financing; new energyn

KEY POINTS: HT Aero, an urban air mobility company and an affiliate of Chinese electric vehicle manufacturer Xpeng Motors, raised more than USD500 million in its series A financing, the largest single-tranche fundraising by far for low-altitude flying vehicle space start-ups in Asia. The company says the proceeds will be used to acquire talent and R&D.

AnJie law firm provides legal services for Wuyuan capital, and the leading partners are lawyers Cai hang and Gu Long.

Weichai’s acquisition of Lovol HeavyCATEGORIES: M&A

KEY POINTS: Weichai Power, one of the largest diesel engine suppliers in China, bought 39.31% of diversified machinery manufacturer Lovol Heavy Industry in July 2021 from Arbos Technology Group and Qingte, becoming the second-largest shareholder of Lovol Heavy after its holding company Weichai Group.

Six months earlier, aided by the Shandong provincial government, Weichai Group accomplished a strategic reorganisation of Lovol Heavy, holding about 60% of the total issued shares of the company.

AnJie law firm acts as the agent of Arbos technology group, and the leading partners are lawyers Wang Yu and Wang Xuelei.

Bilibili’s secondary Hong Kong listing(CATEGORIES: Hong Kong listing; internet

KEY POINTS: Bilibili, one of the largest video streaming websites in China, completed its secondary listing on the Hong Kong stock exchange, with a market value of USD2.5 billion. Bilibili is the first company to complete a secondary listing, following the Hong Kong Listing Rules as a “non-grandfathered Greater China issuer” with a weighted voting rights structure.

AnJie law firm acts as the legal adviser of BiliBili China, and the lead partner is lawyer Guo Jinglian.

SPC jurisdiction finding in SEP dispute(CATEGORIES: Intellectual property; jurisdiction dispute

KEY POINTS:Sharp and OPPO negotiated on the licensing of Sharp’s standard essential patents (SEPs), but no agreement was reached. Sharp then initiated a patent infringement lawsuit against OPPO in Japan and Germany, which OPPO considered violations of FRAND (fair reasonable and non-discriminatory) obligations, and therefore filed a lawsuit with the Shenzhen Intermediate People’s Court (SIPC), requesting it to make a decision on the global rate for licensing of relevant SEPs owned by Sharp to OPPO.Sharp filed a jurisdictional objection to the case.This is the first time that the Supreme People’s court has made it clear in the standard essential patent litigation that Chinese courts have jurisdiction over the dispute over the global licensing conditions of a package of standard essential patents.The two companies eventually agreed to enter into a patent licensing agreement in October 2021, and ended their global litigation.

AnJie law firm acts as sharp’s agent. At the same time, it also acts as sharp’s wholly-owned subsidiary SAIN Beiji Co., Ltd. together with another law firm. The leading partners are lawyers Liu Qinghui, Wu Li and Chen Zhixing.

 

Regulation continues to be tightening in the insurance industry, with lesser and lesser tolerance for violations of laws and regulations in 2022. Many new law compliance issues are emerging, such as how to understand and apply the corporate governance regulation rules, what are the challenges in compliance management, what are the employment risks and how to implement the PIPL in the insurance industry. Meanwhile, insurance claim disputes ensue from this rapid development of the insurance industry, seeing more cases of dispute over overlapping insurance, assignment of claims, subrogation of insurers, etc.

AnJie will hold an online workshop with respect to the regulatory updates in insurance compliance management and risk control and the new issues and most discussed topics in insurance litigation and arbitration cases. Insurance colleagues are welcome to join us for in-depth discussion and exchange. Looking forward to your active participation.

This workshop will have two sessions respectively on March 23 and 24, hosted by Attorneys Yu Dan and Wang Xuelei, and Attorney Zhan Hao will deliver speeches. In the Session of Most Discussed Topics concerning Insurance Law Compliance Management, Attorneys Xiang Danyang, Li Gang, Cui Yana and Yang Hongquan will make presentations. In the Session of Most Discussed Topics concerning Insurance Litigation and Arbitration, Attorneys Liu Guangfu, Qi Shengmiao, Chen Lei and Yan Bing will make presentations. AnJie Insurance Team will share its undertaking on the latest insurance regulation policies and legal issues and its analysis of the difficult dispute resolution cases handled recently.

Registration method:
1、March 23 – Session of Most Discussed Topics concerning Insurance Law Compliance Management:
https://lnkd.in/gw8h_VGY

2、March 24-Session of Most Discussed Topics concerning Insurance Litigation and Arbitration:
https://lnkd.in/gkGhEuYa

Recently, UK legal publisher Lexology officially released the latest edition of Getting the Deal Through: Insurance Litigation 2022. The book brings together top lawyers and experts in the field of insurance litigation from 15 jurisdictions around the world to share their latest litigation experiences and predictions for the future.

AnJie Partners Zhan Hao, Wang Xuelei and Wan Jia were invited to contribute the China chapter of the book, through which the three partners introduced relevant laws and regulations on China’s insurance litigation and provided their insights on the dynamic development and trends in China’s insurance litigation.

Besides the China chapter, the book also introduces insurance litigation developments in other jurisdictions in detail, which are of high reference value for multinational insurance companies, insurance professionals and insurance litigation scholars and experts.

On January 13, 2022, The Legal 500, an international legal rankings service, released The Legal 500 Asia Pacific 2022. Among its rankings of law firms in the field of antitrust and competition, AnJie, recognized for its outstanding performance and excellent reputation in the market, scored a Tier 1 ranking.

With its abundant practice experience in areas including merger review, antitrust investigations, antitrust litigation, and antitrust compliance, AnJie has provided clients with quality legal services. AnJie has, as a result, been honored as a leading law firm in the area of antitrust and anti-unfair competition in China by a number of international legal ranking services including Chambers & Partners, Global Competition Review, Who’s Who Legal, The Legal 500, China Law and Practice, Asian Legal Business, Expert Guides, and China Law and Practice, among others. In addition, AnJie lawyers have routinely been recognized as recommended lawyers in the area of competition/antitrust by Chambers & Partners between 2012 and 2022.

What are China’s merger review priorities? [1]

China’s merger control regime has been a topic of discussion for some time now.

Some commentators interpret Chinese merger control as being influenced by political factors; namely, more than encourage competition, it is yielded by authorities to stop foreign competitors from flooding China’s market. [2]

But is that really the case?

What is the merger control regime like in China?

In China, like in the EU and the US, merger control regulates mergers, acquisitions and other transactions involving concentrations of undertakings. Since a concentration of undertakings may lead to concentration of market power, merger control is an important ex ante regulatory tool employed by antitrust authorities to keep markets healthy in many jurisdictions, and China is no exception.

If Chinese antitrust authorities decide that a concentration has the effect of eliminating or restricting competition in the relevant market, they may decide to prohibit the concentration, or more often approve it but with remedies imposed.

According to the 2008 Anti-Monopoly Law of the People’s Republic of China (“AML”), if a transaction involving a merger, acquisition (including equity or asset deals) or establishment of a joint venture meets the notification threshold prescribed by the State Council, the parties concerned must notify the State Administration for Market Regulation (“SAMR”). Otherwise, the transaction violates the AML, and SAMR may initiate an investigation and impose a penalty against the transacting entities.

To date, the notification thresholds for merger control in China are (generally) as follows[3]:

  • At least two of the concentration parties each has an annual turnover (within China and during the last fiscal year) which exceeds CNY 400 million (approx. USD 63 million); and
  • The aggregate turnover in the last fiscal year of all concentration parties exceeds
    1. (Globally) CNY 10 billion (approx. USD 1.58 billion); or
    2. (Domestically, within China) CNY 2 billion (approx. USD 315 million).

Because the determining factor is turnover, the above notification standards apply regardless of the nationality of the undertaking. In other words, a company’s status as a Chinese or foreign company is not a consideration that triggers Chinese merger control review. Merger review is also required for mergers between foreign entities operating in the PRC. For example, where an American company acquires 100% of a German company — both foreign entities in China — and either their global or Chinese turnover meets one of the standards above, the transaction must be notified to SAMR.

Failure to file a notification of concentration of undertaking renders it illegal, exposing the entities involved to regulatory penalties. Pursuant to the current AML, SAMR may decide to impose a fine of up to CNY 500,000 (approx. USD 72,000). This, limit however, may increase under the expected amendments to the AML (currently under review by the Chinese legislative branch). The penalties SAMR may impose against an illegal concentration of undertakings also include ordering the undertakings to cease the concentration, dispose of shares or assets, divest from the business, or adopt other necessary measures to restore the market situation before the concentration within a prescribed period of time. However, practically speaking, fines are the enforcement tool of choice and SAMR rarely imposes structural or behavioral remedies on illegal concentrations of undertakings. Since the introduction of AML in 2008, such remedies were imposed only in one case, namely the acquisition of China Music Corporation by Tencent Holdings Limited (who was ordered to give up its exclusive music rights to restore competition to the market).

These penalties apply without regard to the nationality of the undertaking. As in the example above, a foreign company operating in China which fails to notify a necessary transaction may be subject to such penalties even when the transaction involves only foreign-owned entities.

For concentrations falling below notification thresholds, Chinese antitrust authorities have the power to initiate an investigation if there is evidence indicating that the concentration has or is likely to have the effect of eliminating or restricting competition; additionally, undertakings may also voluntarily file notice of the concentration. Currently, under Chinese merger regulations, proactive investigation and voluntary filing are mainly used for “killer acquisitions” of startups by larger companies, especially in the Internet industry.

Chinese merger control is used to maintain domestic market competition.

Antitrust law and accompanying legislative intent vary across economic regions[4]. That said, generally speaking merger control rules are designed to prevent excessive concentration of market power within a given market. Since the implementation of the AML, Chinese antitrust authorities have published regulations, guidelines, and other documents to clarify China’s AML standards.

Accordingly, in China there usually are six main factors to be considered during the review of a concentration:

  • The market share (in the relevant market) of each undertaking involved in theconcentration and their existing control over the market;
  • Existingmarket concentration in the relevant market;
  • The effect of the concentration ofundertakings on market entry and technological progress;
  • The effect of the concentration ofundertakings on consumers and other relevant undertakings;
  • The effect of the concentration ofundertakings on the development of the national economy; and
  • Other factors affecting market competition, such as the effect of the concentration on the public interest, and whether the undertakings involved in the concentration are enterprises on the verge of bankruptcy.

In practice, Chinese antitrust authorities apply these factors to review merger filing cases regardless if a foreign entity is involved.

In fact, in recent years Chinese antitrust authorities have shown they typically approve merger filings involving foreign entities. According to the 2020 annual report published by SAMR[5], it approved 85 merger filings for transactions between domestic and foreign entities. These approvals included 37 foreign acquisitions of domestic entities; 15 domestic acquisitions of foreign entities; and 33 joint ventures between domestic and foreign entities. For filings between foreign entities, SAMR approved 179 concentrations of undertakings.

For concentrations involving only domestic entities and no foreign entities, the numbers speak for themselves. Failure to notify typically leads to an investigation and then penalties. In 2021, SAMR published 107 penalty decisions against concentrations which failed to notify under Chinese law. Among these penalties, 105 were applied only against domestic entities (98% of all cases). In other words, domestic (and not foreign) firms overwhelmingly bear the brunt of SAMR’s merger controls and accompanying penalties.

One interpretation of these numbers is that SAMR is significantly more lenient in its application of merger control rules towards foreign investors than it is towards domestic entities. Another interpretation is that foreign investors are typically more antitrust aware (even to the point of adopting China-specific market strategies), and as such are more likely to retain experienced antitrust counsel when considering large transactions. Both theories appear to have at least some traction in academia.[6]

Merger review across different jurisdictions is mainly based on whether the transaction will raise competition concerns within the jurisdiction. As a result, the same transaction may face different competition concerns and merger decisions across different countries and areas.

For example, in 2017, Chinese antitrust authorities unconditionally approved ChemChina’s acquisition of Syngenta, a global business operating in the agrochemical sector with its headquarters in Switzerland. However, this same concentration received only conditional approval from authorities in the EU, which had major reservations about the deal’s effect on competition in the European market.

A more nuanced understanding of Chinese merger control helps better predict merger approvals

It is common for analysis surrounding Chinese developments to be overly simplified, and merger control is no exception. This includes the facially appealing but flimsy argument that Chinese merger control is a political exercise, an argument that saw its apogee after the failed acquisition of Huiyuan by Coca-Cola in 2009.

In 2009, China’s Ministry of Commerce (“MOFCOM”, the predecessor to SAMR) blocked Coca-Cola’s acquisition of Huiyuan, a popular Chinese fruit juice producer. The decision was brief, and as a result The Economist ran an article titled “Coca-Cola in China — Squeezed Out” quoting Coca-Cola as describing MOFCOM’s decision as protectionist. The Economist bemoaned the outcome as “unfortunate […]  in an industry that has no economic or national-security significance.”

This decision ignited tremendous controversy that the AML was introduced to insulate Chinese companies from overseas competition. One theory, reported as the “Huiyuan test”, emerged to describe what foreigners could expect when acquiring targets in China’s market.[7]

However, the Huiyuan merger occurred while China’s anti-monopoly regime was still in its infancy. The test, while illustrative of the controversy, wariness, and disappointment among foreign investors in response to the decision, is not particularly helpful to predict or understand which mergers will ultimately receive approval.

One insight from the Huiyuan case is that in order to better understand and predict merger results in China, adopting a European competition policy lens may be more helpful than a US lens. MOFCOM had explained that Coca-Cola’s acquisition of Huiyuan failed merger review on three major grounds. [8] According to a case study on the Huiyuan deal, two of these reasons mirror the portfolio effects theory that the European Commission employs when intervening in conglomerate merger cases (namely the Tetra Laval/Sidel and Guiness/Grand Metropolitan cases). The third reason strongly resembles another approach, also used in EU cases, to maintain a competitive market structure. [9] It is thus more likely that the Huiyuan decision reflected a divergence between US and EU approaches (with MOFCOM preferring the latter, at least during the AML’s early years) rather than a divergence between Chinese and Western approaches. With the benefit of hindsight, commentators increasingly consider the concerns following Huiyuan unjustified.[10

Moreover, with China’s increasing antitrust enforcement experience since the introduction of the AML in 2008, published decisions present specialized economic and antitrust analysis that is much closer to western standards. For example, on December 22, 2021, SAMR published the decision conditionally clearing the acquisition by SK Hynix of the NAND memory and storage business of Intel. In the decision, SAMR used the Herfindahl-Hirschman Index (HHI) to analyse the concentration level in the relevant market and the market power of the merged entity post-deal. Another example of an Chinese antitrust authority using economic tools in its decision in 2021 was the penalty imposed against Sherpa (a popular food takeout app among foreigners in Shanghai) for abuse of dominance on April 12. In  that case, the Shanghai Administration for Market Regulation published detailed reasons applying the small but significant non-transitory increase in prices (SSNIP) test to define the relevant market, and explained how the SSNIP test was applied within its monopoly theory.

Chinese merger review authorities understand that Chinese corporate champions are forged in the crucible of healthy, fair, and transparent domestic competition. In fact, the “regulatory windstorm” of 2021 against Chinese tech companies was a powerful statement to this effect. That windstorm was almost entirely directed against home-grown tech champions, particularly in the platform economy, and not foreign investors.

Allegations of protectionism against the application of competition law are common when those on the receiving end of a regulatory decision are unhappy with the result. However, the differences between Chinese merger control regulation and the US approach (which is influenced more by the Chicago school) [11] do not amount to a protectionist agenda. Overseas investors in China who spend the time and resources necessary to become more familiar with China’s regulatory concerns typically reap rewards from their efforts.

Large foreign companies active in China need to understand and become familiar with Chinese merger control

Like the EU and the US, Chinese merger control regulation is used to ensure a well-functioning market and benefit consumers. To analyze and decide whether a concentration raises concerns of eliminating or limiting competition, numerous factors may be involved, such as market share and market concentration, market competition structure, potential unilateral and coordinated effects, foreclosure and conglomerate effects, the relevant industry’s maturity, and so forth. Like in other jurisdictions, when a foreign transaction or cross-border investment raises competition concerns within the relevant market, it may be blocked or approved with conditions.

For foreign companies running merger deals in China, it is necessary to retain counsel with an in-depth understanding of Chinese merger control and to consider the potential market impacts that may result from the transaction.

 

Authors: Hao ZHAN, Ying SONG, Libo ZHU, Yuhui YANG, Hannibal El-Mohtar


 [1] For the purpose of this article, China here refers to Mainland China which does not include Hong Kong, Macau, and Taiwan.
[2] Angela Huyue Zhang, “Problems in Following EU Competition Law: A Case Study of Coca-Cola/Huiyuan”, 3 Peking U J Leg Studies (2011) 96 at 97. Foreign multinationals were also concerned that they would be the primary targets under the AML, see ibid.
[3]  Note that turnover thresholds may change in the near future. In addition, there is a special threshold for financial sectors.
[4]  In the US, the stated objective of antitrust law is consumer welfare. See Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979) (floor debates “suggest that Congress designed the Sherman Act as a ‘consumer welfare prescription.’”) However, this stated objective has given rise to competing interpretations. See Barak Orbach, “Antitrust’s Pursuit of Purpose” Fordham L Rev vol 81 No. 5 (2013) 2151 at 2151.
In the EU, the stated objective of antitrust law is to ensure the proper functioning of the EU’s internal market. See European Parliament, “Fact Sheets: Competition Policy”, online: </www.europarl.europa.eu/factsheets/en/sheet/82/competition-policy>. See also Treaty on the Functioning of the European Union, Arts 3(3) and 101–109; Protocol No 27 on the internal market and competition; the Merger Regulation (Council Regulation (EC) No 139/2004) and its implementing rules (Commission Regulation (EC) No 802/2004);  Treaty on the Functioning of the European Union Arts 37, 106 and 345  (public undertakings), together with arts 14, 59, 93, 106–108 and 114 (public services, services of general interest and services of general economic interest).
[5] http://www.gov.cn/xinwen/2021-09/24/content_5639102.htm
[6] See Sandra Marco Colino, “The Internationalization of China’s Foreign Direct Investment Laws”, 45:2 Fordham Intl L J 275 at 288 (“the increased presence of overseas investors in China suggests that they are getting the hang of corporate negotiations in the country, and that perhaps enforcers afford them greater latitude”).
[7] Sandra Marco Colino, “The Internationalization of China’s Foreign Direct Investment Laws”, 45:2 Fordham Intl L J 275 at 284, n 40 citing David Wolf, The Huiyuan Test, Silicon Hutong (Sep. 8, 2008), http://siliconhutong.com/2008/09/08/the-huiyuan-test/ [https://perma.cc/2P4HGYJH] (quoting Steve Michael Dickinson’s China Law Blog originally published in 2008, which is no longer available). The Huiyuan test posited that:
(1) Foreigners are permitted to purchase small established Chinese companies where the government is too busy to be concerned with the management of the small company.
(2) Foreigners are permitted to purchase large established Chinese companies suffering from financial problems, provided that the foreign purchaser will restructure the company and assume the company’s obligations to workers and creditors.
(3) Foreigners are permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets.
(4) Foreigners are not permitted under any circumstances to purchase a majority interest in a large and successful established Chinese company.

[8] The three main reasons in the MOFCOM’s decision were:
(1) After the completion of the concentration, Coca-Cola will be able to transfer its dominant position in the carbonated soft drinks market to the juice drinks market, which would have the effect of excluding and restricting competition to the existing juice drinks enterprises and thus harm the legitimate rights and interests of beverage consumers.
(2) The brand is a key factor affecting the effective competition in the beverage market, after the completion of the concentration, Coca-Cola through the control of “Juice Source” and “Huiyuan” two well-known juice brands, the control of the juice market would be significantly enhanced, coupled with its dominant position in the carbonated beverage market and the corresponding transmission effect, the concentration would make potential competitors to enter the juice beverage market barriers significantly increased.
(3) Concentration squeezed the domestic small and medium-sized juice enterprises living space, inhibiting the ability of domestic enterprises to participate in the juice beverage market competition and independent innovation, to China’s juice beverage market effective competition pattern caused by adverse effects, is not conducive to the sustainable and healthy development of China’s juice industry.
[9] Angela Huyue Zhang, “Problems in Following EU Competition Law: A Case Study of Coca-Cola/Huiyuan”, 3 Peking U J Leg Studies (2011) 96 at 101.
[10] In addition to ibid, see Sandra Marco Colino, “The Internationalization of China’s Foreign Direct Investment Laws”, 45:2 Fordham Intl L J 275 at 285–6 (who noted that while the decision may not have “encapsulated the sophisticated theories of harm expected of well-established competition agencies”, many foreign concerns that emerged from Huiyuan were not justified).
 [11] See Richard A Posner, “The Chicago School of Antitrust Analysis” (1979) 127(4) U Penn Law Review 925; Peter M Gerhart, “The Supreme Court and Antitrust Analysis: the Near Triumph of the Chicago School” (1982) Supreme Court Rev 319; Sandra Marco Colino, “The Internationalization of China’s Foreign Direct Investment Laws”, 45:2 Fordham Intl L J 275 at 287.