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.

            Directors and Officers Liability Insurance, also known as D&O Insurance, (hereinafter referred to as “D&O Insurance”), constitutes a form of professional liability insurance which covers the civil liabilities incurred by directors, supervisors, and senior executives (hereinafter referred to as “Directors and Officers”) in defending against the claims brought by companies, shareholders or third parties. It serves as a crucial cornerstone of corporate governance for listed companies. Originating from the Common Law system, D&O Insurance provides coverage for directors and senior executives. Notably, within the civil law system and the Chinese corporate governance system, D&O Insurance coverage has expanded to encompass a company’s supervisors.

            The enactment of the revised Securities Law (2019 revision) marked a significant milestone in China’s regulatory and restraint mechanism, continuously strengthening oversight and liability restraint mechanism on Directors and Officers. Consequently, there is a growing recognition among companies, both listed and non-listed, of the imperative nature of D&O Insurance as a safeguard against potential liabilities. Thus, the demand for D&O Insurance as a risk protection for Companies, including listed and non-listed ones, as well as Directors and Officers continues to intensify.

            On December 29, 2023, the 7th Session of the Standing Committee of the 14th National People’s Congress voted to adopt the newly revised Company Law of the People’s Republic of China (hereinafter referred to as the “2023 PRC Company Law”), which came into effect on July 1, 2024. The 2023 PRC Company Law, for the first time, explicitly encourages companies to purchase D&O Insurance and requires the board of directors to report the relevant details regarding the D&O Policy purchased at the shareholders’ meeting.

            The legislation pertaining to D&O Insurance represents a proactive response to market demands aimed at encouraging and promoting its adoption. It further underscores the importance of securing D&O Insurance for Chinese companies. In order to elevate the corporate governance standards, the 2023 PRC Company Law systematically clarifies the liabilities of Directors and Officers. From the application scope, coverage subjects and approval procedure, the 2023 PRC Company Law constantly expands and refines the liabilities of Directors and Officers while establishing the D&O Insurance system. Notable changes include the extension of the application scope to encompass non-listed companies, broadening coverage to include all directors rather than solely independent directors, and modifying the approval process from shareholder meeting approval to post-purchase reporting to shareholders. The evolving business environment has prompted the continuous enhancement of the D&O Insurance system.

            I. The Legislation of D&O Insurance System

            Article 193 A company may, during the term of office of a director, purchase the liability insurance for the compensation liability to be borne by the director in performing the duties.

            After the company purchases liability insurance or renews the insurance for the director, the board of directors shall report the insured amount, coverage and premium rate etc. of the liability insurance at the shareholders’ meeting.

            It was first provided in the Guiding Opinions on the Establishment of Independent Director System by Listed Companies (hereinafter referred to as the “Guiding Opinions”) in 2001 that “listed companies may establish necessary Independent Director liability insurance systems in order to mitigate the risks that may arise in the normal performance by Independent Directors of their duties and responsibilities”. Subsequently, the Guidelines on Governance of Listed Companies (2018 Revision) (hereinafter referred to as the “Governance Code”) and the Several Opinions of the State Council concerning the Reform and Development of the Insurance Industry encouraged the establishment of the D&O Insurance system, but the aforementioned provisions were only reflected in policy documents and regulatory documents. The 2023 PRC Company Law, represents the first legislative endorsement of D&O Insurance, encouraging companies to purchase D&O Insurance to transfer directors’ management risks.

            In accordance with Article 193 of the 2023 PRC Company Law, the coverage subjects of D&O Insurance have extended from independent directors to all directors, and the application scope of D&O Insurance has also extended from listed companies to non-listed companies. The approval procedures have shifted from “approval by a shareholders’ meeting” prescribed in the Governance Code to “the board of directors shall report to the shareholders’ meeting”. The 2023 PRC Company Law further clarifies the insurer’s obligation to inform the shareholders’ meeting of the insured amount, coverage and premium rate of the insurance purchased.

            In the past, listed companies were the major purchasers of D&O Insurance in China. With the enactment of the 2023 PRC Company Law and the Securities Law and growing recognition of the importance of D&O Insurance, broader uptake of D&O Insurance by non-listed companies is anticipated. This trend signals a positive outlook for insurance companies seeking to expand their presence in the D&O Insurance market.

            II. The Clarification and Elaboration of the Duties of Loyalty and Diligence of Directors and Officers

            Under the modern corporate governance system, the Directors and Officers shall assume the duty of loyalty and duty of diligence. In practice, breach of such duties by Directors and Officers may result from either intentional acts, such as fraud and intentional concealment, or unintentional acts, such as mistakes, negligence or omissions. It is noteworthy that the D&O Insurance only covers losses arising out of the unintentional breach of duties of loyalty and diligence by Directors and Officers, namely the negligent violations. Typically, intentional acts such as fraudulent behavior, intentional illegal acts or crimes committed with intent are excluded from the coverage of D&O Insurance through the exclusion clauses.

            Due to the absence of detailed and explicit standards regarding the duty of loyalty and diligence in the 2018 Company Law, judicial practice often involves assessing whether the actions of Directors and Officers violate laws, regulations, or company bylaws at a formal level. Some courts may additionally delve into a substantive examination to determine whether Directors and Officers have “exercised the reasonable care that a prudent person should exercise.” The inconsistency in examination standards, coupled with the lack of legal standards for the duty of loyalty and diligence, rendered D&O Insurance vulnerable to opportunistic behavior by management personnel.

            Article 180 Directors, supervisors and senior executives shall assume the obligation of loyalty to the company and take measures to avoid the conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

            The directors, supervisors and senior executives shall assume the duty of diligence to the company. When performing their duties, they shall, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager.

            The provisions of the preceding two paragraphs shall apply to the controlling shareholder or actual controller of a company who does not serve as a director but actually executes the affairs of the company.

            Article 180 of the 2023 PRC Company Law has refined the core elements and defining criteria of the duties of loyalty and diligence over the 2018 Company Law, explicitly clarifying that the core of the duties of loyalty revolves around refraining from “seeking any improper interests by taking advantage of their powers”, and its essence is to avoid conflicts between personal interests and the those of the company. When conflicts arise between the interests of the company and those of Directors and Officers, the interests of the company shall prevail. Similarly, the core of the duties of diligence is defined as “when performing their duties, …, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager”. This duty primarily aims to define the standard of reasonable care in their performance of duties.

            Article 181 to 184 of the 2023 PRC Company Law specifically sets forth restrictive or prohibitive provisions on normal behaviors by Directors and Officers that may harm the company’s interests, such as related-party transactions, corporate opportunities, and non-competition agreements. Theoretically, any acts by the Directors and Officers that breach the duties of loyalty and diligence as specified in Article 181 to 184 of the 2023 PRC Company Law may constitute the “intentional illegal acts” as exempted by the exclusion clauses in the D&O Insurance Policies. It is imperative for insurance companies to carefully tailor the Exclusion Clause according to market demand, avoiding the inclusion of intentional illegal acts within the coverage scope, while ensuring they do not indiscriminately exclude all risks associated with Directors’ and Officers’ breaches. Failure to do so may lead to a dysfunctional D&O Insurance market. In practice, a detailed analysis and differentiation should be applied to the provisions specified in the 2023 PRC Company Law. The specific provisions of the 2023 Company Law are referred to as follows:

            Article 181 No director, supervisor or senior executive may have any of the following acts:

            (I)embezzling the property or misappropriating the funds of the company;

            (II) depositing the funds of the company into an account opened in his/her own name or in the name of any other individual;

            (III) giving bribes or accepting any other illegal proceeds by taking advantage of his/her power;

            (IV) taking commissions from the transactions between the company and any other person into his/her own pocket;

            (V) unlawfully disclosing the confidential information of the company; or

            (VI) other acts in violation of the obligation of loyalty to the company.

            Article 182 Where any director, supervisor or senior executive directly or indirectly concludes a contract or conducts a transaction with his/her company, he/she shall report the matters relating to the conclusion of the contract or transaction to the board of directors or shareholders’ meeting, which shall be subject to the resolution of the board of directors or shareholders’ meeting according to the articles of association.

            Where any of the near relatives of the directors, supervisors or senior executives, or any of the enterprises directly or indirectly controlled by the directors, supervisors or senior executives or any of their near relatives, or any of the related parties who has any other related-party relationship with the directors, supervisors or senior executives, concludes a contract or conducts a transaction with the company, the provisions of the preceding paragraph shall apply.

            Article 183 No director, supervisor or senior executive may take advantage of his/her position to seek any business opportunity that belongs to the company for himself/herself or any other person except under any of the following circumstances:

             (I) where he/she has reported to the board of directors or the shareholders’ meeting and has been approved by a resolution of the board of directors or the shareholders’ meeting according to the articles of association; or

            (II) where the company cannot make use of the business opportunity as stipulated by laws, administrative regulations or the articles of association.

            Article 184 Where any director, supervisor or senior executive fails to report to the board of directors or the shareholders’ meeting and obtain an approval by resolution of the board of directors or the shareholders’ meeting according to the articles of association, he/she may not engage in any business that is similar to that of the company where he/she holds office for himself/herself or for any other person.

            Following the amendment of the 2023 Company Law, considerable discrepancies exist among insurance companies with regard to the coverage remit of D&O Insurance. Further discussion is merited on whether the circumstances set forth in Articles 181 to 184 should be incorporated into the Exclusion Clause.

            In light of this, we propose the following advice:

            1. Intentional breaches of the duties of loyalty and diligence, especially those involving serious illegal acts and intentional crimes, shall undoubtedly be deemed as an exclusion term, such as embezzlement and misappropriation of company funds by Directors and Officers.
            2. It is not advisable to directly include the miscellaneous provision such as “other acts in violation of the obligation of loyalty to the company” stipulated in Article 181 (VI), as an Exclusion Clause when concluding a D&O policy. Exclusion clauses shall be explicit and specific so as to avoid disputes; otherwise, the People’s Court and arbitral tribunals may apply the “contra proferentem” principle when interpreting such clauses, which is unfavorable to the insurer.
            3. As stipulated in Article 183of the 2023 PRC Company Law, Directors and Officers shall not take advantage of their position through seeking business opportunities, that belongs to the company, for themselves or any other person. In practice, related disputes often arise due to the lack of sophisticated corporate governance in China, especially when the directors, recommended by shareholders, seek business opportunities that belong to the company. If such circumstances are included in Exclusion Clauses, it may deviate from the expectation of the policyholders. This issue merits further discussion among insurance companies.
            4. The “principle of insurable interest” shall be taken into account when designing the Coverage and Exclusion Clauses in accordance with the 2023 PRC Company Law. Unlawful interests shall not be covered to avoid regulatory concerns.

            III. Controlling Shareholders and Actual Controllers as the “Shadow Directors” in D&O Insurance Policy

            Article 180 Directors, supervisors and senior executives shall assume the obligation of loyalty to the company and take measures to avoid the conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

            The directors, supervisors and senior executives shall assume the duty of diligence to the company. When performing their duties, they shall, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager.

            The provisions of the preceding two paragraphs shall apply to the controlling shareholder or actual controller of a company who does not serve as a director but actually executes the affairs of the company.

            Article 180 Clause 3 of the 2023 PRC Company Law specifies that controlling shareholders and actual controllers who do not hold the position of director but execute the company’s affairs shall also assume the duty of loyalty and diligence to the company.

            Currently, the D&O Insurance Policy typically defines the actual controllers and controlling shareholders as the “shadow directors”, included as the insured individuals. Under the 2023 PRC Company Law, losses incurred by the controlling shareholders or actual controllers due to a failure to perform their duties of loyalty and diligence may also fall within the coverage of a D&O Insurance Policy, thereby increasing the risk of triggering policy liabilities.

            Notably, unlike their counterparts in Common Law jurisdictions, the PRC’s laws and regulations have not specified the definition and scope of “shadow directors”. It is usually necessary to determine whether controlling shareholders or actual controllers of an insured company constitute the shadow directors in the D&O Insurance Policy according to the specific policy definition.For example, the definition of shadow directors in the D&O Liability Insurance policy of an insurance company defines shadow directors as “individuals who, although not holding the position of directors, are accustomed to acting under their instructions or directions”. According to this policy, such controlling shareholders and actual controllers may fall within the scope of the aforesaid “shadow directors” due to their significant influence on the company’s resolutions or significant control of the company’s operations.

            We recommend that insurance companies, when designing a D&O Insurance Policy, take into full consideration the definition of “shadow directors” and draft the policy terms in a more specific way so as to prevent potential disputes.

            IV. Impact of Controlling Shareholders and Actual Controllers’ Joint and Several Liability on Insurers’ Subrogation Recourse

            Article 192 Where any controlling shareholder or actual controller of a company instructs any director or senior executive to carry out any act damaging the interests of the company or the shareholders, it shall bear joint and several liability with the director or senior executive.

            Article 192 of the 2023 PRC Company Law adopts the logic of joint and several tortious liability in civil law jurisdictions,requiring the controlling shareholders and the actual controllers to be jointly and severally liable with the Directors and Officers for acts that damage the interests of the company or the shareholders through their manipulation or instructions. Such regulatory measures could prevent the interests of the company and minority shareholders from being infringed upon by the Directors and Officers in pursuit of their own interests.

            There existed a few feasible ways and routes for insurers’ subrogation against a third party after making payouts pursuant to the D&O Insurance Policy in the past. The above-mentioned provision on the joint liability provides a legitimate premise for the insurer to seek subrogation after making compensation, against the company’s controlling shareholders and the actual controllers who are truly liable or bear a higher proportion of liability.

            As part of an insurance company’s wider sales strategy, it chooses to accommodate a client’s specific requirements in the terms of the insurance policy. Thus, flexibility of an insurer is a highly valued attribute for clients.

            V.  Scope of the Insurance Applicant’s Duty of Truthful Disclosure

            1. Illustration of Related Party Transactions

            Article 182 Where any director, supervisor or senior executive directly or indirectly concludes a contract or conducts a transaction with his/her company, he/she shall report the matters relating to the conclusion of the contract or transaction to the board of directors or shareholders’ meeting, which shall be subject to the resolution of the board of directors or shareholders’ meeting according to the articles of association.

            Where any of the near relatives of the directors, supervisors or senior executives, or any of the enterprises directly or indirectly controlled by the directors, supervisors or senior executives or any of their near relatives, or any of the related parties who has any other related-party relationshipwith the directors, supervisors or senior executives, concludes a contract or conducts a transaction with the company, the provisions of the preceding paragraph shall apply.

            Article 182 of the 2023 PRC Company Law introduces the following modifications to the related-party transaction restriction system of the 2018 Law:

            1. Including Supervisors to be subjected to the related-party transaction system;
            2. Stipulating the duty of truthful disclosure for Directors and Officers;
            3. Allowing the company’s stipulation of approval process for related-party transactions through bylaws, and to be resolved by the board of directors or shareholders’ meeting;
            4. Providing illustrative provisions on related parties, including the near relatives of the Directors and Officers, or any of the enterprises directly or indirectly controlled by the Directors and Officers or any of their near relatives, or any of the related parties who has any other related-party relationship with them stipulated by the miscellaneous provision.

            Insurance companies commonly include related-party transactions as a key inquiry when applicants seek to purchase D&O Insurance. Insurance applicants shall perform the duty of truthful disclosure pursuant to Article 16 of the Insurance Law. The expansion and detailing of related-party transactions in the 2023 PRC Company Law provides a clearer legal basis for insurance applicants and insurers to assess the performance of truthful disclosure obligations and the elements for exercising the right to rescind an insurance contract.

            Based on our experience, the questionnaires designed for D&O Insurance by insurance companies are relatively deficient; in that, they lack coverage of key issues. It is advisable to further optimize the questionnaires in alignment with the 2023 PRC Company Law.

            2. Obligation of Listed Companies to Disclose Information of Shareholders and Actual Controllers

            Article 140 A listed company shall disclose the information about its shareholders and actual controllers according to law, and the relevant information shall be authentic, accurate and complete.

            It is prohibited to hold the stocks of any listed company on an agency basis in violation of laws and administrative regulations.

            Article 140 Clause 1 of the 2023 PRC Company Law introduces a new provision on duty of disclosure which requires listed companies to truthfully disclose the information of its shareholders and actual controllers. This aims to prevent the actual controllers from harming the interests of the company, minority shareholders and creditors through improper related-party transactions, thereby undermining the transaction order. The establishment of this provision legislates and specifies the duty of truthful disclosure prescribed in the Administrative Measures for the Registration of Initial Public Offerings of Stocks, the Administrative Measures for the Information Disclosure by Listed Companies, and the Securities Law, providing insurers with a clearer legal basis to determine whether the insured has performed the duty of truthful disclosure.

            VI. Refinement and Expansion of the Compensation Liability of Directors and Officers under the 2023 PRC Company Law

            The amendments of the 2023 PRC Company Law have gradually refined and expanded the obligations and liabilities of Directors and Officers. Compensation liability under the D&O Insurance Policy may be triggered where (1) the Directors’ or Officers’ failure to perform their obligations in accordance with the law incurs losses to the company, or (2) the gross negligence by the Directors or Officers results in damage to a third party. Consequently, the scope of claims made by the insured company has been broadened, increasing the underwriting risks of the insurers. The improvements of legislation and the changes in market demand impose higher standards on the insurers’ policy design and underwriting assessment.

            1. Compensation Liability for Losses Caused by Directors and Officers to the Company

            Article 51 After a limited liability company is established, the board of directors shall verify the capital contributions of shareholders. If it finds that any shareholder has not made capital contributions on schedule and in full amount as provided for in the articles of association, the company shall send a written notice of call to the shareholder to call up capital contributions.

            Where any loss is caused to the company due to failure to fulfill the obligations as prescribed in the preceding paragraph in a timely manner, the responsible director shall make compensation.

            Article 53 After a company has been established, none of the shareholders may illicitly withdraw the capital contributions.

            In the case of violation of the provisions of the preceding paragraph, the shareholder shall return the capital contributions withdrawn. If it causes any loss to the company, the responsible directors, supervisors and senior executives shall bear the joint and several liability with the shareholder.

            Article 163 No company may provide gifts, loans, guarantees or other financial aids for others to obtain the shares of the company or the parent company thereof unless it carries out an employee stock ownership plan.

            For the benefits of the company, the company may, upon a resolution by the shareholders’ meeting or by the board of directors under the articles of association or the authorization of the shareholders’  meeting, provide financial aids for others to obtain the shares of the company or the parent company thereof, provided that the total accumulative amount of the financial aids shall not exceed 10% of the total issued share capital. A resolution by the board of directors shall be adopted by two thirds of all the directors.

            Any director, supervisor or senior executive who is liable for any loss to the company due to violation of the provisions of the preceding two paragraphs shall make compensations.

            Article 211 Where a company distributes profits to shareholders in violation of the provisions of this Law, the shareholders shall refund the profits distributed to the company, and the shareholders and the liable directors, supervisors and senior executives shall be held liable for compensation if any loss is caused to the company.

            Article 226 When a company reduces its registered capitalin violation of the provisions of this Law, its shareholders shall refund the funds they have received, and if the capital contributions of the shareholders are reduced or exempted, such capital contributions shall be restored to the original status; if any loss is caused to the company, the shareholders and the liable directors, supervisors and senior executives shall bear the liability for compensation.

            Article 232 Where a company is dissolved according to the provisions of Item (I) (II) (IV) or (V) of Paragraph 1 of Article 229 hereof, it shall be liquidated. The directors, who are the liquidation obligors of the company, shall form a liquidation group to carry out liquidation within 15 days from the date of occurrence of the cause of dissolution.

            The liquidation group shall be composed of the directors, unless it is otherwise provided for in the company’s articles of association or it is otherwise elected by the shareholders’ meeting.

            The liquidation obligors shall be liable for compensation if they fail to fulfill their obligations of liquidation in a timely manner, and thus any loss is caused to the company or the creditors.

            The 2023 PRC Company Law further clarifies the scope of compensation liability of the Directors and Officers through Article 51, Article 53, Article 163, Article 211, Article 226 and Article 232.

            Article 51 stipulates the capital adequacy responsibility of the board of directors revealing the directors’ fiduciary duty to creditors and granting the board of directors the right to call up capital contributions. The board of directors are required to verify the details of and call up shareholders’ capital contributions. Failing to perform such obligation would results in liability for compensation.

            Article 53 underlines the system of illicitly withdrawing capital contributions, extending a single shareholder’s liability for compensation to Directors and Officers. It also provides that the liability shall be jointly and severally borne by the Directors and Officers and the shareholders.

            Directors’ and Officers’ liability could also be seen in Article 163, Article 211, Article 226, and Article 232 which respectively refer to the circumstance in which the Directors and Officers are responsible for (1) providing financial aid for any person obtaining the company shares, (2) illicitly distributing profits, (3) illicit capital reduction and (4) failure to fulfill the obligations of liquidation in a timely manner. The 2023 PRC Company Law, through reinforcing the obligations and liabilities of Directors and Officers, promotes the alignment between their management rights and duties.

            2. Compensation Liability for Damages Caused by Directors and Officers to A Third Party

            Article 191 Where any director or senior executive causes any damage to any other person in the performance of duties, the company shall be liable for compensation. If any director or senior executive is intentional or grossly negligent, he/she shall also be liable for compensation.

            Whilst the 2018 Company Law only stipulates compensation liability to the company for damages caused by Directors and Officers in their performance of duties, it lacks remedy provisions for third parties whose interests were infringed upon by the Directors and/or Officers. According to Article 191 of the 2023 PRC Company Law, Directors and Officers shall be liable for damages caused to third parties by intentional or gross negligence when performing their duties, which provides a remedy for harms caused to third parties.

            D&O Insurance Policy usually excludes intentional acts of the insured individual through the “confirmed illegal acts” clause. However, acts with gross negligence are not included in the Exclusion Clause, i.e., where the insured acts with gross negligence, that commonly triggers compensation liability under the policy.

            The promulgation of the 2023 PRC Company Law has significantly increased the duty of diligence of Directors and Officers and, consequently, the probability of D&O Insurance claims. It is advisable for insurance companies to conduct further investigations on related issues arising accordingly.

            Additionally, insurance companies require more considerations when designing D&O Insurance Policies in light of the obligations borne by the Directors and Officers. For instance, the board of directors’ capital adequacy responsibility stipulated in Article 51 of the 2023 PRC Company Law reflects directors’ fiduciary duty to creditors and grants the board of directors the right to call up capital contributions. Failure to perform this duty, to verify and call up the capital contributions, will result in compensation liability. Whether the insured is obliged to promptly inform the insurer of any significant increases in underwriting risks is to be considered when the Insurance companies are designing D&O Insurance Clauses in accordance with the 2023 PRC Company Law; a case in point would be a shareholder delaying payment after the board of directors calls up capital contributions.

            3. Establishment of A Dual Derivative Action System

            Article 189 Where any director or senior executive is under the circumstance as mentioned in the preceding Article, the shareholders of a limited liability company or the shareholders of a joint stock limited company separately or aggregately holding 1% or more of the total shares of the company for 180 consecutive days or more may request the board of supervisors in writing to initiate a lawsuit in the People’s court. If any supervisor is under the circumstance in the preceding Article, the aforesaid shareholders may request the board of directors in writing to file a lawsuit with the People’s court.

            Where the board of supervisors or the board of directors refuses to initiate a lawsuit after it receives a written request of the shareholders as mentioned in the preceding paragraph, or fails to file a lawsuit within 30 days upon receipt of the request, or in an emergency, the failure to initiate a lawsuit immediately will cause irreparable damage to the interests of the company, the shareholders in the preceding paragraph shall have the right to directly initiate a lawsuit in the people’s court in their own name for the interests of the company.

            If others infringe upon the legitimate rights and interests of a company and cause losses to the company, the shareholders stipulated in the first paragraph of this Article may initiate a lawsuit in the people’s court in accordance with the provisions of the preceding two paragraphs.

            If a director, supervisor or senior executive of a wholly-owned subsidiary of the company is under the circumstance specified in the preceding Article, or if the legitimate rights and interests of a wholly-owned subsidiary of the company are impaired by any other person, thus causing any losses, the shareholders of a limited liability company or shareholders of a joint stock limited company separately or aggregately holding 1% or more of the total shares of the company for 180 consecutive days or more may request the board of supervisors or the board of directors of the wholly-owned subsidiary in written form to initiate a lawsuit in the people’s court or directly files a lawsuit with the people’s court in their own name.

            Article 189 Clause 4 of the 2023 PRC Company Law establishes the dual Derivative Action system, expanding the scope of the defendants in the derivative action to the directors and senior executives of the company’s wholly-owned subsidiaries.

            In view of the common practices of D&O Insurance policies, the parties included within a subsidiary relationship are usually companies wholly controlled by the insured company. In the prevailing D&O Insurance policies, the definition of “Insured Company” comprises any subsidiaries of the insurance applicant, and accordingly, the “Insured Individual” also comprises the Directors and Officers of any subsidiary of the insurance applicant. In accordance with the dual Derivative Action system, Directors and Officers of a wholly-owned subsidiary may also serve as the defendants in a claim, which may trigger insurance liability under the policy and expose the insurer to higher underwriting risks.

            VII. Cross-claims between Insureds

            As mentioned above, in accordance with Article 51, Article 53, Article 163, Article 211, Article 226 and Article 232 of the2023 PRC Company Law, the insured Directors and Officers will be liable for the losses caused to the company due to their breach of duties. Disputes concerning compensation between a company and its Directors and Officers constitute “a cross-claim between the insured”, typically considered an “exclusion” under the D&O Insurance in the common law system. It usually refers to the lawsuit brought by a company against its Directors and Officers, or that between directors and senior executives, who are the insured individuals. The foregoing claims can be excluded from the policy coverage so as to prevent malicious collusion between the insured parties to harm the interests of the insurer.

            However, there is usually no explicit term excluding cross-claims between the insureds in domestic D&O Insurance policies.

            In view of the potential risks posed by “cross-claims between the insureds” to the insurer, it is advisable to draw on the experience of the Common Law system when drafting the policies, and to negotiate with the insurance applicant to include such exclusions in the insurance contract. It is noteworthy that, with respect to the potential risk of malicious collusion and conspiracy between the insured parties, Article 154 of the Civil Code prescribes that where a person colludes with his counterparty to perform an act impairing another’s legitimate rights and interests, such act shall be null and void. Therefore, even without explicitly excluding such risk, the insurer may contend that there is malicious collusion between the insurance applicant and the insureds to impair the insurer’s interests and thereby such act shall be deemed invalid.

            VIII. Development and Solutions of D&O Insurance Terms under 2023 PRC Company Law

            With the adoption and implementation of the 2023 PRC Company Law, Directors and Officers are held to a higher standard of liability. As the first law of its kind, the D&O Insurance system has actively responded to market demands through providing a protective mechanism for companies and their Directors and Officers, facilitating modern corporate as well as governance standards. The domestic market is increasingly cognizant of the significance of D&O Insurance.

            1. Clarification of Duties and Obligations

            The 2023 PRC Company Law clearly defines the duty of loyalty and diligence of Directors and Officers and enumerates the related parties’ transactions, affording insurance companies up-to-date knowledge on the duties and obligations of their Directors and Officers. Consequently, it tenders more prudent coverage advice and reasonable assessments during the process of underwriting, policy issuance, and claims handling.

            • Increasing Underwriting Risk

            The expanding insurance coverage and increasing underwriting risks arise coupled with the amendments on Directors’ and Officers’ duties and obligations, such as (1) the underlining duty of performance, (2) the refinement and expansion of Directors’ and Officers’ liabilities, (3) the establishment of the dual Derivative Action System, and (4) the breakthrough legislation of the D&O Insurance System. Therefore, insurers shall be equipped with higher professional capabilities and risk awareness in the process of negotiation, assessment, verification, underwriting, claim settling, and pursuing subrogation. Faced with an evolving D&O Insurance market, insurers are encouraged to make flexible adjustment on underwriting conditions, develop insights in accordance with commercial changes, reasonably balance risks and interests, and be better positioned to recognize and seize business opportunities.

            3. Insurance Policy Design

            In terms of policy design, insurance companies can employ several approaches to enhance their risk assessment capacity:

            1. Multi-dimension assessment, as well as quantification of policy terms.
            2. Explicit definitions and detailed expressions.
            3. Related experience leveraging from international insurers.

            Meanwhile, exclusion clauses shall be utilized to balance the interests and risks between the insurers and the insureds. Namely, an insurance company may consider the drafting of clauses from the following perspectives:

            1. The coverage of the insureds.
            2. The definition of shadow directors or de facto director.
            3. The standards for related-parties transactions.
            4. The standards for identifying intentional acts.
            5. Adjustment regarding exclusion clauses and limitation of liability clauses.
            6. Inclusion of acts with gross negligence in the exclusion clauses.
            7. Inclusion of cross-claims between the insureds in the exclusion clauses.
            8. Distinctive protection methods for D&O.

            4. Consideration of the Differences Between Listed Companies and Non-listed Companies

            The promulgation of the 2023 PRC Company Law creates a great opportunity for D&O Liability Insurance, by virtue of the extension of the coverage to include non-listed companies. Currently, the domestic insurance market predominantly offers D&O Liability Insurance tailored for listed companies, with a limited range of specialized products available for non-listed companies. The revision of the 2023 PRC Company Law, particularly its enhancement and clarification of directors’ liability for both listed and non-listed companies, fosters a conducive environment for the growth and success of insurance companies offering D&O Liability Insurance in China.

            In response to the evolving business landscape and market demand, the legislation governing D&O Liability Insurance, as a special risk mechanism, provides comprehensive risk protection for companies, their directors, supervisors and senior executives. Furthermore, it incentivises transfer of management risks and consolidates sound corporate governance standards, and stabilises the market.

            Given the existing legal framework and socioeconomic conditions, the adaptations and innovations of the D&O Liability Insurance system are expected to amplify its relevance and impact in the Chinese market. We eagerly anticipate the timely introduction of market-adapted D&O Liability Insurance products that align with domestic conditions and laws.

            1. Introduction: when PRC court encounters AIGC[1]

              On November 27, 2023, the Beijing Internet Court made a judicial ruling on a case regarding the AI-generated images (the “First AI-image Case”).[2]  This case is noted to be the first of its kind in China, involving a plaintiff surnamed Li and a defendant surnamed Liu.  Li claimed that Liu used an image of a woman in her personal webpage without his permission in February 2023.  Li mentioned that he had generated the image using Stable Diffusion, an open-source software and posted it on his own social media account at Xiaohongshu, a social media platform widely regarded as the Chinese version of Instagram.

              Liu argued that she found the image by using a search engine and did not see any watermark or information about its copyright owner.  She also said she was not using the image for commercial purposes.  However, the Beijing Internet Court eventually ruled in favor of Li, pointing out that the image showed “intellectual achievements” by Li.  The court said that Li had input keywords on the expectations of the image, such as the appearance and posture of the young woman, filter of the image, and even the lighting. Li had also invested in adjusting the draft images to get the ultimate image that he had chosen.

              *Note: The above figure as a whole shows the operating interface of Stable Diffusion, and the image embedded displays the output generated.

              2. Key analysis: AI-generated image regarded as work

              According to the ruling and like other copyright infringement disputes, the main issues typically addressed include: (i) whether the picture in question constitutes a work under the Copyright Law of the People’s Republic of China and what type of work it constitutes; (ii) whether the plaintiff owns the copyright on the disputed picture; and (iii) whether the defendant’s behavior shall constitute an infringement.  Compared to traditional copyright cases, particularly the ones occurring prior to the advent of artificial intelligence (the “AI”) and Large Language Model (the “LLM”), two terms “intellectual achievements” and “originality” are intensively discussed in the ruling of the current case. 

              According to the ruling, the court defined the term “intellectual achievements” as the results of intellectual activities, which reflects the intellectual input of a natural person.  Compared to the operating model and logic of the LLM at issue, the court emphasized the “intellectual investment” the plaintiff made in the disputed picture, demonstrating that designing the presentation of the character, selecting prompt words, arranging the order of prompt words, setting parameters, and selecting the intended picture shall all be regarded as the “intellectual investment”. 

              With respect to the term “originality”, the court stated that “to meet the ‘originality’ requirement, the work shall be completed independently by the creator, reflecting such creator’s personalized expression.”[3]  Historically speaking and even in the global legal landscape, the standard of “originality” is relatively low.  In copyright cases, when pondering such subtle issue, it is commonly understood that the first of the two requirements encompassed by the term “originality” is independent creation and creativity.  In the present case, the court claimed that “if (i) a work is completed based on a certain order, formula, or structure and (ii) different people would yield same results, the work does not have originality since the expression at issue is the only effective way of conveying a particular idea”.[4]  Similarly, such principle already underlies the merger doctrine in the context of the western copyright system.  According to the ruling of the present case, however, “when people use the Stable Diffusion model to generate images, diverse needs and expectations will be reflected in the picture once they specify and describe details of elements, layout, and compositions of the image”.[5]  In this case, as the court finally determined that “there are identifiable distinctions between the picture in question and prior works”.[6]  As a result, the court concluded that the work in question satisfied the requirement of originality. 

              It is also worth noting that the court forthrightly tied its ruling to a general policy argument, highlighting that the primary purpose of the copyright system is to encourage creation.  Only if the copyright regime and legal methods could be properly applied, simulating more people to use the most up-to-date tools for creation process, more work will be cultivated, and the development of the AI technology will be enhanced.  In addition, such policy analysis was heavily examined in the Research on Legal Feature and Copyright Attribution of AI-generated Images, where the presiding judge of the First AI-image Case continued to stress the competing considerations like the creator’s rights and interests as well as the industrial development shall be balanced when making the judgement.[7]

              3. Different angles: when “Originality” interpreted in another jurisdiction   

              By coincidence, the United States Copyright Office (the “USCO”) tackled a seemingly identical case on December 11, 2023.[8]  Below are two figures respectively showing an original photograph taken by Mr. Sahni (i.e. the base image) and the Work titled “SURYAST” generated by an AI app (i.e. “RAGHAV Artificial Intelligence Painting App”) (i.e. the output of AI) involved in this case.  The Work, not hard to perceive, was derived from the style image (Vincent van Gogh’s The Starry Night). 

              In this case, the USCO refused to register the Work because it “lack[ed] the human authorship necessary to support a copyright claim.”[9]  The USCO examined the application by demonstrating the following guidance: “[Whether the ‘work’ is basically one of human authorship, with the computer [or other device] merely being an assisting instrument, or whether the traditional elements of authorship in the work (literary, artistic, or musical expression or elements of selection, arrangement, etc.) were actually conceived and executed not by man but by a machine.”[10]

              The USCO further argued that all of the Work’s “traditional elements of authorship” are generated by AI.  As a result, the work lacks human authorship.  If, however, a work containing AI-generated material also contains sufficient human authorship to support a claim to copyright.

              4.  Concluding observations

              (a) Creative efforts vs. “Sweat of the Brow”

              When in an age the AIGC indeed promises to facilitate the content production process, the regimes structures designed hereto may serve as a catalyze rather than an obstacle to realization of that technological hope.  In the digital era and for the time being, the court has been profoundly playing an essential role in reinterpreting laws and regulations as well as tackling and addressing such daunting challenges posed in those unprecedented cases. 

              When analyzing and elaborating IP issues, it is inevitable that in the past we used to check verdicts about similar or even equivalent cases in other jurisdictions, mainly the U.S. and the EU, even taking their decisions as a reference when evaluating how it is dealt with worldwide.  Followed by the development of globalization as well as technology itself, issues relating to evolvement and advancement in terms of the science and art usually emerge simultaneously in various countries.  According to the foregoing case analysis in both China and the U.S., the USCO finally refused to extend copyright protection to such works when denying the so-called “sweat of the brow” theory.  In practice, it’s not so clear that an individual’s labor does him no good when seeking copyright protection.  Despite the formal repudiation of the sweat of the brow theory in the global legal landscape, in borderline cases, the effort that authors have invested in their works may still merit attention.  Nevertheless, if one day the current AI technology becomes a generic tool or our perception, labor, and effort might be deemed as the traditional knowledge, would the ruling in similar cases reverse?  At least, the outcome would be unknown or to some extend unpredictable. 

              Based on our observation and analysis of AI-generated contents, it is likely an increasingly considerable amount of work could be done by AI in the future.  Nevertheless, it is of greater significance that we, human being, are actively engaged in identifying searching word, designing the outline, selecting, assembling, and structuring the entire work.  Though it is understandable that we tend to express our concern about the AI’s replacement in certain work particularly in the short term, mankind’s involvement in such process should not be ignored.  More importantly, those involvements are not only reflected in starkly visible and superficial parts but closely tied with people’s prior experience in a specific task, perception of the industrial circle, and aesthetic sensibilities of the cultural vibe. 

              (b) Copyright owners’ private benefits vs. public interests

              It has been historically witnessed that the emergence of IP law and the technological evolution intensively collide worldwide.  The prior industrial revolutions have shaped the legal landscape, sparking the concept of intellectual property.  The IP law, in turn, shall function as a powerful driver to the new economy. 

              How the legal regime responds to such constantly evolving society?  For one thing, apart from worrying about the replacement of humankind work by AI, there, as a matter of fact, are more issues triggered in terms of interest allocation mechanism under the current IP law.  For another, it goes without saying that human and AI will continue to collaborate for completing more and more tasks, especially cumbersome, routine and repetitive ones.  By embracing such trend, we could focus more on what mankind is able to contribute to the society and further stimulate and cherish such contribution. 

              On this front, even if we rarely see the policy analysis in verdicts of the PRC courts, it is worth noting that the presiding judge in the First AI-image Case has published some articles, actively participated in a number of academic discussions and accepted interviews to articulate how the judgement was exercised and more specifically to convey the backed concept of this case.  According to the Research on Legal Feature and Copyright Attribution of AI-generated Images, the presiding judge highlighted that by exercising the judgement of the First AI-image Case, the court has fully considered a variety of factors such as interests from different stakeholders, attempting to seek legislators’ value orientation as well as social and public benefits.[11]  Again, the economic philosophy of the copyright law is to advance public welfare by encouraging individual effort through personal gain. 

              While reviewing the First AI-image Case, it is also noted that several weeks ago, in the U.S. the Sora has succeeded in directly generating video outputs followed with human descriptive instructions.  By examining present cases, it is not hard to imagine more copyright-related arguments will rise in the upcoming future.  How the legal disputes may gradually come out will remain to be seen.  But we can hardly deny that the legal outcome is more likely to depend on a case-by-case basis, instead of a bright-line rule for dealing with this ever-changing digital age.  In this scenario, if lawmakers and policy implementors wish to prevent any unfortunate outcome, they have to act in some way, to provide a special stimulus for the creation of public goods, continuously maintaining the delicate balance between the authors’ private rights and the public interests.

              [1] AIGC is the abbreviation of Artificial Intelligence Generated Content.

              [2] See the Civil Judgement of the Beijing Internet Court, file no.: (2023) Jing 0491 Min Chu No. 11279 (2023),  https://english.bjinternetcourt.gov.cn/pdf/BeijingInternetCourtCivilJudgment112792023.pdf

              [3] See supra note 2.

              [4] See supra note 2.

              [5] See supra note 2.

              [6] See supra note 2.

              [7] ZHU Ge, The Research on Legal Feature and Copyright Attribution of AI-generated Images, Intellectual Property, 1 (2024)

              [8] See Re: Second Request for Reconsideration for Refusal to Register SURYAST (SR # 1-11016599571; Correspondence ID: 1-5PR2XKJ), https://www.copyright.gov/rulings-filings/review-board/docs/SURYAST.pdf.

              [9] See supra note 5.

              [10] See supra note 5.

              [11] See supra note 4.

                I. AnJie Broad’s News on Int’Commercial Dispute Resolution

                  • AnJie Broad Partners An Shouzhi, Wan Jia, and Wu Shanshan Listed on the First Legal 500 Arbitration Powerlist China 2023
                    Recently, the Legal 500, an internationally renowned and authoritative legal rating agency, announced the first Arbitration Powerlist China 2023. With extensive practical experience in the field of arbitration and high-quality client feedback, AnJie Broad Partners Dr. An Shouzhi , Wan Jia and Wu Shanshan were listed in it.
                  • AnJie Broad Partner Wang Xiaojun Appointed as Arbitrator of Several Arbitration Commissions 1
                    In 2023, AnJie Broad Partner Wang Xiaojun was appointed as arbitrator of several arbitration commissions, including Nanjing Arbitration Commission, Langfang Arbitration Commission, Xuchang Arbitration Commission, Quzhou Arbitration Commission, Rizhao Arbitration Commission, Jingmen Arbitration Commission, Xiangyang Arbitration Commission and Fuzhou Arbitration Commission.
                  • AnJie Broad Partner Chen Gui Appointed as Arbitrator of Shanghai International Economic and Trade Arbitration Commission 2
                    In 2023, Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center) published a new version of Penal of Arbitrators, on which, AnJie Broad Partner Chen Gui, is listed as one of the new arbitrators. The appointment commences on January 1, 2024, and will expire on April 30, 2026.
                  • AnJie Broad Partner Yan Bing Appointed as Arbitrator of Tianjin Arbitration Commission 3
                    On 29 December 2023, Tianjin Arbitration Commission announced its new list of the Panel of Arbitrators, and AnJie Broad Partner Yan Bing was listed as one of the arbitrators, whose appointment will last three years, from December 29, 2023 to December 28, 2026.
                  • AnJie Broad Assisted in the Forum of New Technology, New Cooperation and New Development – Improving the Service Level of Maritime Arbitration during Shanghai Arbitration Week
                    On 21 November 2023, the forum of New Technology, New Cooperation, New Development – Improving the Service Level of Maritime Arbitration, co-organized by AnJie Broad Law Firm Shanghai Office, was successfully held in Shanghai. AnJie Broad Partner Chen Lei, attended the forum and presented a speech, pointing out that with the rapid development of the e-commerce industry, some new forms of cooperation in the shipping industry and the new risks brought by them, and the continuous improvement of the digitization of shipping has put forward new requirements for relevant conventions such as electronic bills of lading. It is believed that there will be new development trends in the “blue economy” such as offshore wind power and marine fishery in the future.
                  • AnJie Broad Partner Dr. An Shouzhi Attended the 2023 International Congress of Maritime Arbitrators (ICMA XXII) and Present Keynote Speech
                    From 5 to 10 November 2023, the XXII International Congress of Maritime Arbitration (ICMA 2023) was held in Dubai, United Arab Emirates. AnJie Broad Partner Dr. An Shouzhi was invited to attend and give a special report as a representative of arbitrators of the Singapore Court of Maritime Arbitration. With the theme of Issues on the Identification of B/L Carrier-Judicial Practice, Theories and the Proposed Revision on China’s Maritime Law, Dr. An Shouzhi focused on the identification of B/L carriers under China’s Maritime Law, conducted an empirical analysis of the judicial practice of China’s B/L carrier identification, discussed the theoretical issues, advantages and disadvantages of carrier identification methods in China’s judicial practice, as well as proposed advice on amendments to Article 89(2) of China’s Draft Revision of the Maritime Law.
                  • AnJie Broad Partner Dr. An Shouzhi Appointed as Singapore International Arbitration Center (SIAC) Panel of Arbitrator and Arbitrator of Court of Arbitration for Sport
                    In October, 2023, AnJie Broad Partner Dr. An Shouzhi was appointed as Singapore International Arbitration Center (SIAC) panel of arbitrator. In May, Dr. An was re-appointed as an arbitrator of the Court of Arbitration for Sport for the years 2023-2026.
                  • AnJie Broad Partner Dr. An Shouzhi Appointed as Domestic and International Arbitrator of Several Arbitration Institutions
                    In 2023, AnJie Broad Partner Dr. An Shouzhi was appointed as arbitrators of several international arbitration institutions, including Singapore International Arbitration Center (SIAC) panel, Arbitration Institute of the Stockholm Chamber of Commerce and Singapore Chamber of Maritime Arbitration, and will continue to serve as an arbitrator of Russian Arbitration Center. In May, Dr. An was re-appointed as an arbitrator of the Court of Arbitration for Sport for the years 2023-2026.
                    Besides, Dr. An was also appointed as arbitrator of several domestic arbitration institutions, including the Arbitration Center Across the Straits, China Commission of Arbitration for Sport, and Chongqing Arbitration Commission.
                  • AnJie Broad Partner Chen Lei Selected as Expert of Shanghai International Maritime Arbitration Expert Tank
                    Justice Bureau of Shanghai Municipality released the list of experts in the Shanghai International Maritime Arbitration Expert Tank (the second batch). AnJie Broad Partner Chen Lei was selected as an expert in the tank. The establishment of the Shanghai International Maritime Arbitration Expert Tank is aimed at strengthening the construction of Shanghai’s international maritime arbitration talent team, promoting the enhancement of maritime arbitration service capacity, and assisting Shanghai accelerate the building of a globally oriented Asia-Pacific Arbitration Centre to provide better services to guarantee the construction of Shanghai international shipping centre.
                  • AnJie Broad Partner Chen Lei Appointed as the Deputy Director of Maritime and Logistics Professional Research Institute, Shanghai Arbitration Association
                    The first meeting of the second session of the General Assembly of Shanghai Arbitration Association was successfully held, and AnJie Broad Partner Chen Lei was appointed as the deputy director of Maritime and Logistics Professional Research Institute, Shanghai Arbitration Association. The Institute shall follow the footsteps of Shanghai Arbitration Association to help Shanghai accelerate the building of a globally oriented Asia-Pacific Arbitration Centre.
                  • AnJie Broad Partner Chen Lei Appointed as an Arbitrator of Shanghai International Economic and Trade Arbitration Commission
                    Following a rigorous selection by Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center, “SHIAC”), AnJie Broad Partner Chen Lei has been appointed as an arbitrator of SHIAC for a period beginning on 1 January, 2024 and ending on 30 April, 2026.
                  • AnJie Broad Partner Chen Lei Hosted Seminar on Hot Issues of Maritime Arbitration in Singapore
                    On 25 October 2023, a delegation from Singapore Chamber of Maritime Arbitration visited Shanghai to exchange views on the hot issues of maritime arbitration in Singapore. AnJie Broad Partner Chen Lei hosted the seminar. At the meeting, the industry insiders had an in-depth discussion on the relevant hot issues to further promote the friendly cooperation and communication between the two sides.
                  • AnJie Broad Partners An Shouzhi, Wan Jia, and Liu Hongchuan Invited to Participate in FDI Moot Shenzhen 2023
                    In August 2023, FDI Moot Shenzhen 2023 hosted by Shenzhen Court of International Arbitration (SCIA) came to a successful end. Anjie Broad, as the supporting law firm, has actively engaged in the tournament, exerting its legal expertise and sharing legal practice experience. AnJie Broad Partners An Shouzhi and Wan Jia acted as referees in the online tournament, providing precise guidance and comments for the competitors and injecting professional strength into the competition. AnJie Broad Partner Liu Hongchuan acted as the chief referee of the offline contests, to ensure the fairness and professionalism of the competition.
                  • Seminar on International Arbitration Practice of Jiangsu Lawyers Association Arbitration Committee Successfully Held
                    On 12 August 2023, the seminar on international arbitration practice of Jiangsu Lawyers Association Arbitration Committee, organized by Anjie Broad Law Firm, was successfully held in Nanjing. AnJie Broad Partners Wang Xiaojun and Wei Xueping presented the keynote speeches on the Application of International Arbitration in Cross-border Intellectual Property Dispute Resolution, and the Recognition and Enforcement of Foreign Arbitral Awards in Chinese Courts respectively.
                  • AnJie Broad’s Dispute Resolution Team Invited to Co-write the Latest Work of The International Arbitration Review
                    AnJie Broad Partners Wan Jia, Cui Wei, Wu Shanshan, and Associate Zhu Bingjing, were invited as Chinese experts and responsible for drafting the Chinese chapter of the latest work of The International Arbitration Review. This chapter provides an overview of China’s laws and regulations on international arbitration, analyzes the dynamic development of international arbitration in China, and forecasts the future development.
                  • AnJie Broad Partner Sun Xumin Appointed as Arbitrator of Dongguan Arbitration Commission 4
                    In August, 2023, Dongguan Arbitration Commission published the new list of the Panel of arbitrators. AnJie Broad Partner Sun Xumin has been appointed as arbitrator of the Commission.
                  • AnJie Broad Partners Ding Zhenyu and Jiang Yading Invited to Participate in Frankfurt Investment Arbitration Moot Court [Chinese Circuit] Competition
                    From 8 May to 10 May, 2023, Frankfurt Investment Arbitration Moot Court CIETAC Chinese (Mainland) National Rounds were held in Jiangwan Campus of Fudan University in Shanghai. AnJie Broad Partners Ding Zhenyu and Jiang Yading participated in the competition as the referees in 7 matches. They graded the participants in terms of their understanding of the facts and laws, logic of debate, ability of expression, preparation, and answering skills, and also actively communicated with the participants.
                  • Several AnJie Broad Partners Appointed as the 6th Session of Nanjing Arbitration Commission
                    In April 2023, the Nanjing Arbitration Commission announced the new Panel of Arbitrators of Nanjing Arbitration Commission. AnJie Broad Partners Liu Hongchuan, Wang Xiaojun, Wang Xiujuan, Wang Yong, Zhan Hao and Zhang Haixiao were appointed as arbitrators of the 6th session of Nanjing Arbitration Commission. Among them, Zhan Hao and Wang Yong are reappointed. The new arbitrators of Nanjing Arbitration Commission commence their duties on 4th March 2023, and the term of appointment is five years.

                  II. AnJie Broad’s Observations on Int’Commercial Arbitration

                  • Arbitration Case Review

                  1. AnJie Broad Represents a Private Fund to Recover All the Performance Commitment Compensation for the Actual Controller of the Portfolio Company and the Interest and Fee Thereon

                  AnJie Broad Partners Liu Hongchuan, associate Yan Fang and Wang Shijia filed for arbitration before Shenzhen International Court of Arbitration and assisted a private fund to successfully recover all the performance commitment compensation to the actual controller of a portfolio company in a total amount of more than RMB42 million in cash compensation, interest and fee thereon.

                  【Case Background】

                  The fund, as an investor, made equity investment in a high-tech company, of which the respondent is the actual controllers, and has set forth performance commitment, valuation adjustment and compensation arrangement in the Capital Increase Agreement. Subsequently, the portfolio company failed to fulfill its performance commitment, and the fund requested the actual controller to make equity compensation and entered into the Equity Compensation Agreement with the actual controller, which has not been actually performed. Thereafter, the fund and the respondent entered into the Cash Compensation Agreement regarding cash compensation in lieu of equity compensation, providing that the respondent shall pay a certain amount of cash compensation to the fund in lieu of equity compensation. The fund has exited the portfolio company by way of equity transfer, but the respondent has not paid most of the cash compensation and interest accrued thereon.

                  【Arbitration Process and Significance of the Case】

                  After being engaged by the fund, AnJie Broad Partner Liu Hongchuan, associate Yan Fang and Wang Shijia submitted an arbitration application to Shenzhen International Court of Arbitration to request the actual controller of the portfolio company to pay the remaining cash compensation and interest thereon. The respondent filed its reply in respect of the validity of the Cash Compensation Agreement, breach of the fund, and the cash compensation agreement terminated due to the fund’s exit from the target company, etc.

                  By collecting and combing various agreements, letters, bank payment vouchers, e-mails, WeChat records and other evidence between the parties, the AnJie Broad team forcefully proved to the tribunal that it is a reasonable business arrangement agreed by the parties to replace the original equity compensation, and the parties have never reached any consensus with respect to the rescission or termination of the Cash Compensation Agreement. The Claimant has performed the obligation in accordance with the Cash Compensation Agreement, which is legitimate and valid. Moreover, the Cash Compensation Agreement is a termination and replacement of the original legal relationship between the parties with respect to the earn-out and compensation, which is independent of other transaction documents and is irrelevant to the shareholder status of the Claimant. Therefore, the Respondent shall continue to perform the obligation and pay the Claimant the remaining compensation and interest thereon.

                  Finally, the tribunal supported the Claimant’s claims, ruling that the Respondent shall pay the remaining compensation and interest thereon in a total amount of more than RMB42 million in accordance with the Cash Compensation Agreement and pay all attorney fees and arbitration fees to the Claimant.

                  2.AnJie Broad Successfully Provided Domestic Enterprises with Arbitration Service in Hong Kong Enriching the Practice of the Maritime Silk Road International Commercial and Maritime Dispute Preferred Seat

                  AnJie Broad received the Consent Award by a tribunal consisting of Mr. Philip Yang, Mr. Patrick O’Donovan and Mr. Danny Mok, international arbitrators from the United Kingdom and Hong Kong, successfully saving domestic enterprises from losses of nearly RMB10 million and enriching the legal practice of the Maritime Silk Road International Commercial and Maritime Dispute Preferred Seat.

                  In this case, the domestic enterprise, as agent, entered into a shipbuilding contract on behalf of a domestic shipyard and an Indonesian buyer. In the case, the shipbuilding contract was one given up by the previous Indonesian buyer, and was to be performed again with a new buyer. Accordingly, the domestic shipyard signed a shipbuilding contract with the new buyer according to the introduction of the previous buyer, and agreed on the advance payment made by the previous buyer as the advance payment of the shipbuilding contract. After the signing of the shipbuilding contract, due to market changes and the downturn of the international marine engineering market, the new buyer failed to pay for the subsequent shipbuilding, and the domestic shipyard fell into bankruptcy for the market reasons. The new buyer retained a Singapore Law Firm and initiated an ad hoc arbitration in Hong Kong, the arbitration place stipulated in the arbitration clause. The new buyer claimed termination of the shipbuilding contract and restitution of the advance payment of the contract and the liquidated damages. The arbitration place of the case was the Hong Kong SAR, with the Arbitration Ordinance of Hong Kong as the procedural law, and English law as the substantive law.

                  Upon entrustment by the client, AnJie Broad formed a legal service team, led by Partner An Shouzhi, Wang Yong, Yang Manzhen, Xu Kun, Han Ziwei and Liu Xueqi as members, to provide the client with whole-process arbitration legal services. With full understanding of the facts of the case, the attorney team reviewed in detail the performance of the contract by the former buyer as well as the details of the takeover by the new buyer, pointed out to the tribunal that the new buyer had not actually paid any advance payment, and was not entitled to claim for the advance payment paid by the former buyer, and that the new buyer failed to make payment in the currency agreed upon in the contract, which constituted a breach of contract. In addition, AnJie Broad team took full advantage of the rules of evidence discovery in international arbitration proceedings. By requesting the new buyer to disclose the relationship between it and the former buyer as well as the transaction documents, they brought the new buyer back to the negotiation table and finally reached a settlement agreement of US $330,000, upon which the tribunal rendered a Consent Award, successfully saving losses of nearly RMB10 million for the domestic company.

                  III. News on Int’Commercial Dispute Resolution

                  • Arrangements for Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases Between Courts of the Mainland and Hong Kong SAR Officially Implemented in Hong Kong SAR 5
                    On 29 January 2024, the Secretary for Justice of the Hong Kong SAR has appointed the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (the “Ordinance”) officially comes into operation, and the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Rules (the “Rules”) concluded in accordance with Article 35 of the Ordinance shall come into effect on the same day. The Ordinance establishes a comprehensive mechanism for reciprocal enforcement of judgments in civil and commercial matters between Hong Kong and the Mainland, clarifying the mechanism for the registration of civil and commercial judgments in Hong Kong, and for the issuance of certified texts and certificates in respect of civil and commercial judgments made in Hong Kong. The Rules further set forth provisions regarding the application for the registration, enforcement, issuance of certificates and payment of relevant fees with respect to civil and commercial judgments of the Mainland. Through the specific mechanism of the Ordinance and the Rules, the Arrangements for Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases between Courts of the Mainland and Hong Kong SAR will officially come into effect in Hong Kong SAR.
                  • The 2024 China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules Comes Into Force on 1 January 2024 6
                    On 2 September 2023, the China Council for the Promotion of International Trade and the China Chamber of International Commerce approved the revision of the Arbitration Rules of the China International Economic and Trade Arbitration Commission, which only reflects the direction of the Commission’s integration with international arbitration practices and continuous internationalization, and also reflects the Commission’s practical commitment to implement the concept of facilitating arbitration users and “user friendly” at the rule level. Further improvement and innovation of arbitration rules will certainly play a positive role in enhancing the competitiveness of China’s arbitration in the global arena. The revised Arbitration Rules have come into effect on 1 January 2024.
                  • The Supreme People’s Court Promulgated the Guidelines for “One-Stop” Diversified International Commercial Dispute Resolution Platform (for Trial Implementation) 7
                    On 29 December 2023, the Supreme People’s Court promulgated the Guidelines for “One-stop” Diversified International Commercial Dispute Resolution Platform (for Trial Implementation) (the “Guidelines”). The Guidelines provide specific operational guidelines for optimizing the diversified dispute resolution mechanism for international commercial disputes which organically connects litigation with mediation and arbitration, better giving play to the function of the “one-stop” diversified dispute resolution platform for international commercial disputes, and solving the bottlenecks and difficulties in the development of the diversified dispute resolution mechanism for international commercial disputes. The Guidelines officially comes into force on 30 January 2024.
                  • The 2023 Annual Conference of the China Academy of Arbitration Law and the Sixteenth Forum of China Arbitration and Justice Held Successfully 8
                    From 23 to 24 December 2023, the Annual Conference of the China Academy of Arbitration Law and the Sixteenth Forum of China Arbitration and Justice with the theme of “High-quality Development of Arbitration in the New Era” was held in Kunming. The forum was hosted by China Arbitration Law Research Society, hosted by Kunming Arbitration Commission, and co-organized by CIEC and China Maritime Arbitration Commission. The participating experts spoke freely on hot and focal issues of international and domestic arbitration, expressed their insights and suggestions for promoting the high-quality development of arbitration in China.
                  • The Symposium on Recent Trends in International Commercial Arbitration and Attorneys’ Representing Skills Held Successfully 9
                    On 21 December 2023, the symposium on “The Recent Development Trend of International Commercial Arbitration and Lawyer Agency Skills” co-sponsored by CIETAC Hubei Branch and Wuhan Lawyers Association was successfully held in Wuhan. More than 100 people from central part of China, including arbitrators, judges, lawyers, corporate lawyers and university teachers and students, attended the symposium. This event invited a number of international commercial arbitration theory and practice experts to discuss, analyze and judge the development trend of international commercial arbitration and the development direction of China’s arbitration, and aimed to help lawyers improve the skills and practical expertise in representation in commercial arbitration.
                  • The Central Asia Trial Center of CIETAC Held Its First Trial 10
                    On 14 December 2023, the Central Asia Trial Center of the CIETAC held its first hearing of two foreign-related arbitration cases. The two cases are disputes over contracts for the international sale of goods, involving Chinese companies importing agricultural products from Kazakhstan and Russia respectively. The Central Asia Trial Center held its first trial in less than 45 days after its establishment, reflecting the urgent needs of parties involved in Xinjiang and neighboring countries and regions for dispute resolution, and further demonstrating the necessity of establishing a Central Asia trial Center in Xinjiang. At the same time, the active choice of the parties to conduct the trial in the Central Asia Trial Center also demonstrates the recognition and trust of the parties to the credibility and reputation of the center in the field of dispute resolution.
                  • The 2023 Belt and Road High-level Dialogue on International Commercial Arbitration Held Successfully 11
                    On 7 December 2023, the 2023 Belt and Road High-level Dialogue on International Commercial Arbitration was successfully held. The Dialogue was co-hosted by ICC China, CIETAC, China Maritime Arbitration Commission (CMAC), and ICC International Court of Arbitration (ICC Court). With the subject of “International Commercial Arbitration Advances New Development in BRI”, focusing on three topics, namely, “Path to Openness: Hot-button Issues of Arbitration under the Belt and Road Initiative”, “Path to Innovation: Intellectual Property and Diversified Dispute Resolution” and “Path to Sustainable: Energy Transition and International Arbitration”, speakers and presenters shared and exchanged their views. More than 300 people, including experts, scholars, representatives of business associations and entrepreneurs from the legal, economic and arbitration sectors, attended the conference.
                  • Beijing Arbitration Commission and Asian-African Legal Consultative Organization Work Hand in Hand to Promote the Development of International Arbitration Cooperation 12
                    On 5 December 2023, Beijing Arbitration Commission (or Beijing International Arbitration Center) and Hong Kong Regional Arbitration Centre of Asian-African Legal Consultative Organization (AALCO-HKRAC) jointly signed a Cooperation Memorandum during the “AALCO Annual Arbitration Forum 2023”, with the expectation to advance the cooperation and development in the field of international arbitration together. AALCO-HKRAC was jointly established by AALCO and the Chinese government. It is the sixth regional arbitration center established under AALCO, which was established in November 2021. AALCO-HKRAC aims to promote the development of arbitration and other alternative dispute resolution services, to facilitate ad hoc arbitration in and outside China, and to promote diversified alternative dispute resolution.
                  • Shanghai Arbitration Commission Obtained First Investigation Order in Assisting Arbitration Institution 13
                    On 1 December 2023, on the first day of the implementation of the Decision of the Standing Committee of the Shanghai Municipal People’s Congress on Revising the Regulations of Shanghai Municipality on Optimizing the Business Environment, the Primary People’s Court of of Minhang District of Shanghai Municipality, upon the application of the Shanghai Arbitration Commission, handled the first case involving the issuance of an investigation order by a court upon the application of an arbitration institution, giving judicial support to arbitration, which is an active practice optimizing the active the business environment.
                  • Memorandum Signed among Hainan International Arbitration Court, Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution 14
                    On 27 November 2023, the China-Hainan Free Trade Port-Malaysia Two-Way Cooperation Promotion Conference on the theme of “Sharing New Opportunities for the Free Trade Port and Creating a New Future for RCEP” was held in Kuala Lumpur, Malaysia. Hainan International Arbitration Court entered into a Cooperation Memorandum with Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution respectively. In accordance with the Memorandum, the Parties will cooperate in sharing hearing venues and facilities, recommending arbitrators and mediators to each other, jointly promoting international arbitration systems, and holding international arbitration forums and seminars.
                  • SIAC and SCIA Jointly Hosted a Keynote Symposium in Qianhai International Arbitration Tower 15
                    On 15 November 2023, the keynote symposium on “Innovations in International Arbitration Rules and Resolution of Cross-border Bankruptcy Disputes” co-hosted by Singapore International Arbitration Centre (“SIAC”) and Shenzhen Court of International Arbitration (“SCIA”) was held at the SCIA Tower. This symposium, focusing on two themes, namely “Latest Developments in International Arbitration: Reform, Innovation and Trends of Systems and Rules” and “The Role of Arbitration in Resolution of Cross-border Bankruptcy Disputes”, invited many guests from enterprises, law firms, arbitration institutions and other places from Singapore, Beijing, Shanghai, Hong Kong and Shenzhen to discuss the latest developments in arbitration rules in China, especially in the Greater Bay Area, and in Singapore, as well as the role and function of arbitration in resolution of cross-border bankruptcy disputes.
                  • A Cooperation Memorandum Signed among Beijing Arbitration Commission, Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution 16
                    On 14 November 2023, the Beijing Arbitration Commission/Beijing International Arbitration Center, the Asian International Arbitration Center (“AIAC”) and the Asian Institute of Alternative Dispute Resolution (“AIADR”) jointly signed a Cooperation Memorandum during the Asia-Pacific Regional Arbitration Group (APRAG) Conference. In accordance with the Memorandum, the Parties will jointly promote international arbitration cooperation and advance the international development of diversified dispute resolution services by establishing a mechanism of expert recommendation and academic sharing and strengthening information exchange and cooperation, to realize resource sharing.
                  • International Arbitration in Changing Times: Meeting Challenge, Bridging Divide —Successful Convening of the APRAG Conference 2023 17
                    From 13 to 15 November 2023, the 8th Asia Pacific Regional Arbitration Group (APRAG) Conference, hosted by the Beijing Arbitration Commission/Beijing International Arbitration Center (“BIAC”), themed “International Arbitration in Changing Times: Meeting Challenge, Bridging Divide,” took place successfully held in Beijing. The conference focused on issues of arbitration reform, user expectations in arbitration, and the construction of international arbitration hubs confronted with the Asia-Pacific region, and looked ahead to the future development of investment arbitration, artificial intelligence, and big data in the Asia-Pacific region. Anjie Broad Law Firm participated in the conference as a Gold Sponsor, and Partners Liu Hongchuan, Cheng Mingzhu, Wan Jia and Cui Wei attended several seminars.
                  • Report on AI in IA: The Rise of Machine Learning Released 18
                    On 9 November 2023, Bryan Cave Leighton Paisner LLP issued a report titled AI in IA: The Rise of Machine Learning. According to a survey conducted among 221 lawyers, arbitrators and in-house counsels from various jurisdictions. The report analyzes certain issues, including the expected benefits and risks of utilizing artificial intelligence (AI) tools, the necessity to disclose information on the use of AI tools, the impact of AI tools on the integrity of evidence, and the necessity to apply AI tools in arbitration.
                  • The Fujian Province Cross-Strait Maritime Dispute Resolution Center Established
                    On 9 November, 2023, the Fujian Province Center for Resolution of Maritime Disputes Involving Taiwan (the “Center”) was officially established in Xiamen. As the first center for resolution of maritime disputes involving Taiwan in China, the Center aims to provide a “one-stop” legal service offering maritime legal consultations, public legal education, dispute resolution, and other services for Taiwanese residents and businesses. Furthermore, the Center will explore innovative legal services for cross-strait maritime affairs, promote the establishment of diverse dispute resolution mechanisms, enrich experiences in public legal services concerning cross-strait affairs, provide legal support for economic and trade exchanges and close personnel interactions across the strait, and aid Fujian’s exploration of new paths for integrated development across the strait and the construction of a demonstration zone for cross-strait integrated development.
                  • The 5th Shanghai International Arbitration Forum Held Successfully 19
                    On 8 November 2023, the 5th Shanghai International Arbitration Forum & Shanghai Arbitration Week 2023 Opening Ceremony was held successfully. Themed “New Technologies, New Tracks and New Momentum, New Advantages”, the Forum invited more than 400 domestic and foreign well-known international organizations, arbitration institutions, arbitrators, lawyers, experts and scholars, relevant chambers of commerce (associations) and industrial organizations, and representatives of the trade group of the Sixth China International Import Expo from more than ten countries and regions to participate in the activities online and offline. The opening ceremony of Shanghai Arbitration Week 2023 was also successfully held at the Forum. With exchanges and discussions centering on commercial dispute resolution, digital arbitration and talent development, presenters jointly introduced the legal system of arbitration to enhance the international community’s understanding and recognition of arbitration in Shanghai and promote the international credibility, attractiveness and impact of Shanghai arbitration.
                  • HKIAC + SHIAC | Renewing the Cooperation Between the Two Places and Jointly Promoting the Development of Arbitration 20
                    On November 4, 2023, the signing ceremony for the 20th anniversary of the Shanghai-Hong Kong cooperation conference mechanism was held in Shanghai. Yang Ling, Deputy Secretary-General of HKIAC, and Zhou Minhao, Chairman of SHIAC signed the Cooperation Agreement on behalf of the two institutions. Since the signing of the Cooperation Agreement for the first time in 2018, the two institutions have carried out multi-dimensional cooperation in promoting the development of international arbitration and diversified dispute resolution in the two places, which yielded good results. The two parties have agreed that the renewed Cooperation Agreement would deepen the communication and connection between the two institutions, and establish closer cooperative partnership in further promoting the cooperation in organizing professional forums and activities, mutually sharing arbitration information and research results, recommending arbitrators and legal experts. Additionally, it will help reciprocally provide court trial facilities, boost high-quality development of the economic and trade cooperation between Shanghai and Hong Kong.
                  • HIAC Promulgated Rules for Assisting Ad Hoc Arbitration 21
                    On November 1, 2023, Hainan International Arbitration Court Rules for Assisting Ad Hoc Arbitration (Provisional) (the “Rules”) was promulgated and came into effect simultaneously. The promulgation of the Rules provides convenient and efficient assistance and services for ad hoc arbitration, and facilitates the complementary functions between institutional arbitration and ad hoc arbitration. With detailed and practical content, the Rules is an important achievement of the HIAC in improving the arbitration system and optimizing the arbitration mechanism, which will consequently further enhance the international influence and international image of the HIAC.
                  • SIAC-HIAC Seminar: Ten-Year Review on BRI Disputes Successfully Held 22
                    On 24 October 2023, the Singapore International Arbitration Centre (SIAC) and the Hainan International Arbitration Court (HIAC) co-organized a seminar on “Ten-Year Review on BRl Disputes: Trends and Opportunities Ahead” at Maxwell Chambers. This seminar delved into critical topics shaping the world of international arbitration and dispute resolution, with a particular focus on the Belt and Road initiative (BRl). Distinguished experts and practitioners from China and Singapore came together to explore key issues through a compelling keynote address and insightful discussions. The seminar compared the arbitration and mediation systems of the two countries, which enabled the online and offline participants to further understand the differences in the “arbitration + mediation” models of the two countries, the reasons for the formation of the two countries, and the emphasis of their respective issues, so as to jointly concrete a new chapter of international cooperation in arbitration.
                  • The United Nations Commission on International Trade Law Issues the UNCITRAL Code of Conduct for Arbitrators in International Investment Dispute Resolution, the UNCITRAL Guidelines on Mediation for International Investment Disputes and the UNCITRAL Model Provisions on Mediation for International Investment Disputes 23
                    On 15 September 2023, the United Nations Commission On International Trade Law (the“UNCITRAL”) issued the the UNCITRAL Code of Conduct for Arbitrators in International Investment Dispute Resolution (the “Code for Arbitrators”). As an important part of the reform of the investor-state dispute settlement system, the adoption of the Code for Arbitrators helps regulate the conduct of arbitrators, clarify the relationship between arbitrators and parties to arbitration proceedings, and emphasize the values that arbitrators should share and express.
                    On the same day, the UNCITRAL issued the UNCITRAL Guidelines on Mediation for International Investment Disputes (the “Guidelines”) and the UNCITRAL Model Provisions on Mediation for International Investment Disputes, to encourage the parties to resolve international investment disputes by means of mediation. In particular, by listing and briefly explaining the issues to be considered in investment mediation, the Guidelines provide practical guidance for parties to use mediation.
                  • The Law Commission Published the Review of the Arbitration Act 1996: Final Report and Bill and Draft Law Revision 24
                    It has been more than 25 years since the Arbitration Act 1996 of England came into force. To further consolidate London’s position as the first choice for international arbitration, the UK government requested a review to see if there was a need for amendment. On 6 September 2023, the Law Commission of the UK published the Review of the Arbitration Act 1996: Final Report and Bill. The Review discusses and proposes changes to ten major issues including confidentiality of arbitration, independence of arbitrators and the disclosure regime, discriminatory issues in arbitration, immunity of arbitrators, Ad Hoc Rulings in apparent lack of merit, courts’ powers in support of the arbitral procedures, emergency arbitrators, challenges to awards on the ground that the tribunal lacks substantive jurisdiction, appeals on matters of law, and the applicable law to the arbitration agreement.
                  • A United States District Court Case: “Submitting to CIETAC Beijing or to Any Other Courts of the United States Capable of Settling International Arbitrations” Is Valid25
                    On 31 July 2023, the United States District Court for the Eastern District of Pennsylvania rendered a judgment, holding that the arbitration clause which provides that “disputes shall be submitted to CIETAC in Beijing or to any other courts of the United States capable of resolving international arbitrations and shall apply CIETAC’s rules” is valid. Since the parties cannot unanimously agree on the selection of an arbitration institution and application of CIETAC’s rules in the United States, the court will, according to the terms of the agreement, mandate an arbitration in CIETAC and stay the case until it is resolved.
                  • Hong Kong Courts: Arbitrators Are Entitled to Immunity 26
                    On 31 July 2023, the Court of First Instance of Hong Kong made its judgment in the case of Song Lihua v Lee Chee Hon [2023] HKCFI 1954 (31 July 2023). Judge Mimmie Chan held that, in the absence of fraud or bad faith, arbitrators are generally entitled to immunity, which means that arbitrators should enjoy immunity from suit for any act performed by them and should not be compelled to testify as to their exercise of the arbitral function. This case is of great significance to arbitrators in Hong Kong and other jurisdictions, since it confirmed that arbitrators generally enjoy immunity from liability and will not be sued or compelled to testify as a result of exercising the arbitral function.
                  • Hong Kong Court: Whether Pre-conditions of Arbitration Clause Have Been Met Generally Does Not Concern the Tribunal’s Jurisdiction 27
                    On 30 June 2023, the Court of Final Appeal in Hong Kong made a leading judgment on whether the “prerequisites” for arbitration set out in the multilevel dispute resolution clause involved the jurisdiction of the tribunal or merely the admissibility issue in the case of C v D [2023] HKCFA 16.
                    A majority of judges noted that, whether the parties have performed the pre-obligations set out in the arbitration clause (such as negotiating in good faith) is an issue relating to the admissibility of the claims in the arbitration, and generally does not involve the issue of jurisdiction of the tribunal in the case. As a result, generally, the dispute will be finally referred to the tribunal for decision and the court will not interfere, nor will it re-examine the merits of the tribunal’s award. Besides, as the dispute does not generally involve the issue of jurisdiction of the tribunal, the Hong Kong court will not set aside the award on that ground.
                  • Australian Courts: Insolvency Disputes Can Be Arbitrated 28
                    In May 2023, two Australian courts handed down judgments as to whether insolvency disputes can be submitted to arbitration under a pre-exist arbitration agreement in different circumstances. The judgments focused on the following two issues:
                    (1) the types of insolvency matters that should be resolved by arbitration; and
                    (2) under what circumstances, a third party may participate in an arbitral proceeding and present a claim or defence “through or under” the parties to the arbitration agreement.
                    The judgments confirmed the sophisticated and nuanced approach taken by Australian courts in balancing the arbitration regime and the insolvency proceedings.

                  Footnotes:

                  [1] https://lfac.org.cn/zxdt/808.jhtml

                  http://zcb.rizhao.gov.cn/art/2023/8/24/art_30732_10281679.html

                  http://fzzcw.org.cn/#/detail/60?categoryName=%E5%85%B3%E4%BA%8E%E6%88%91%E4%BB%AC&subCategoryName=%E9%80%9A%E7%9F%A5%E5%85%AC%E5%91%8A

                  [2] https://www.shiac.org/pc/SHIAC?moduleCode=experts

                  [3] http://tjac.org.cn/wap/article/index.html?id=927

                  [4] http://www.arbdg.com/user/list_1_4_349.html

                  [5] https://mp.weixin.qq.com/s/5um1NBv5y3aZSfaM2vH2iw

                  [6] https://www.junhe.com/legal-updates/2263

                  [7] https://mp.weixin.qq.com/s/d6pVGJ_smjqswnYrO31I6g

                  [8] https://mp.weixin.qq.com/s/3yxCRoJjECD855QNnyiL_w

                  [9] https://mp.weixin.qq.com/s/sM-x_BXy8S1LQ_LVPUKHaA

                  [10] https://mp.weixin.qq.com/s/KubQLfY_2bq6AQqe6v8iYw

                  [11] https://mp.weixin.qq.com/s/wuDa9dVXR6VwKfr-EI5Lvg

                  [12] https://mp.weixin.qq.com/s/XyaScslfh9ewZNhyIca-QA

                  [13] https://mp.weixin.qq.com/s/15kBt-2SdZE8zD9VrdzMnA

                  [14] https://mp.weixin.qq.com/s/OBq6dEmVtx_kBRJ0TZLm7A

                  [15] https://mp.weixin.qq.com/s/m0yghJ9O7Q59GZNBzbG8wg

                  [16] https://mp.weixin.qq.com/s/G9amoGBgPK9XSFjpQf9BzA

                  [17] https://mp.weixin.qq.com/s/A-tCU9OHGJel0g-3RIpYLA

                  [18] https://mp.weixin.qq.com/s/xhxob4sIHxlwWKSw8Sj9vw

                  [19] https://mp.weixin.qq.com/s/TbkBfINW-TeslOSG9bv_jQ

                  [20] https://mp.weixin.qq.com/s/mC0BGxdAaqwRrHdNKta3kg

                  [21] https://mp.weixin.qq.com/s/Yb_N-6PrM9M4Ct02t0yXaQ

                  [22] https://mp.weixin.qq.com/s/fiv9B9-k2iYK7O4_DzUMlw

                  [23] https://mp.weixin.qq.com/s/_mRJZMFYbYnp_Er_sNSe9w

                  [24] https://mp.weixin.qq.com/s/HbOleMrIj1sufsd1RcKkig

                  [25] https://mp.weixin.qq.com/s/heUcdesG-jDziQzvpXDL1A

                  [26] https://mp.weixin.qq.com/s/Bu4GbgiAA23OnlLMM8udIg

                  [27] https://mp.weixin.qq.com/s/vAX98EPtXe4BW2RcqeccXA

                  [28] https://mp.weixin.qq.com/s/vxfU_zm2RkesKXibHAtbtw

                  In an era dominated by digital connectivity, safeguarding the integrity of networks and information systems has become a global imperative. China, recognizing the critical importance of cybersecurity, has introduced the draft Management Measures for Cybersecurity Incident Reporting (the Measures). The Measures outline a comprehensive approach to reporting cybersecurity incidents, aiming to minimize losses, incentivize legal compliance, protect national cybersecurity, and align with existing legal frameworks. Samuel Yang, Chris Fung, and Bill Zhou, from AnJie Broad Law Firm, explore key provisions in the Measures, shedding light on the intricacies of China’s evolving cybersecurity landscape.

                  Purpose

                  Article 1 of the Measures describes the rationale behind the Measures. It emphasizes the Measures’ alignment with foundational privacy, data, and cybersecurity laws in China, such as the Cybersecurity Law, the Data Security Law, the Personal Information Protection Law (PIPL), and the Regulations on the Protection of the Security of Critical Information Infrastructure.

                  Scope

                  Article 2 of the Measures sets out the Measures’ scope of application to entities involved in constructing, operating, or providing services through networks within the PRC (Operators).

                  Regulators

                  Article 3 of the Measures provides, the central cyberspace administration coordinates and supervises national cybersecurity incident reporting. In contrast, local cyberspace administrations coordinate and supervise cybersecurity incident reporting within their administrative regions.

                  Timely reporting and incident classification

                  Article 4 of the Measures contains requirements for the expeditious activation of emergency response plans by Operators and mandates reporting significant, serious, and particularly serious incidents within an hour.

                  Annexe 1 to the Measures provides meticulously granular guidelines for incident classification. Focusing on severity and impact, Annex 1 categorizes incidents into the strata of particularly serious, serious, significant, or general, as described below, in descending order of severity.

                  Particularly serious cybersecurity incidents can be identified by important networks and systems facing widespread failure, precipitating a consequential shutdown and loss of functionality, national security facing a particularly serious threat, and the occurrence of other particularly serious threats such as:

                  • disruption to key Government websites or major news platforms exceeding a day;
                  • critical infrastructure interruptions persist for over six hours or significant function disruption for over 24 hours;
                  • impact felt by over 30% of a province’s populace;
                  • impact on transport and utilities affecting over 10 million individuals;
                  • leakage of important data posing a particularly serious threat to national security;
                  • disclosure of personal information affecting over 100 million individuals;
                  • impact on information systems resulting in the widespread dissemination of harmful information;
                  • direct economic losses exceeding CNY 100 million (approx. $13.9 million); and
                  • other particularly serious threats.

                  Serious cybersecurity incidents can be identified by important networks and systems facing partial failure, impacting operational functionality, national security facing a serious threat, and the occurrence of other serious threats, such as:

                  • disruption to key Government websites or major news platforms exceeding six hours;
                  • critical infrastructure interruptions persist for over two hours or significant function disruption for over six hours;
                  • impact felt by over 30% of a city’s populace;
                  • impact on transport and utilities affecting over one million individuals;
                  • leakage of important data posing a serious threat to national security;
                  • disclosure of personal information affecting over 10 million individuals;
                  • impact on information systems resulting in the dissemination of harmful information;
                  • direct economic losses exceeding CNY 20 million (approx. $2.8 million); and
                  • other particularly serious threats.

                  Significant cybersecurity incidents can be identified by important networks and systems facing significant system losses, impacting operational capabilities, national security facing a significant threat, and the occurrence of other significant threats, such as:

                  • disruption to key Government websites or major news platforms exceeding two hours;
                  • critical infrastructure interruptions persist for over 30 minutes or significant function disruption for over two hours;
                  • impact felt by over 10% of a city’s populace;
                  • impact on transport and utilities affecting over 100,000 individuals;
                  • leakage of important data posing a significant threat to national security;
                  • Ddsclosure of personal information affecting over one million individuals;
                  • impact on information systems resulting in some dissemination of harmful information;
                  • direct economic losses exceeding CNY 5 million (approx. $695,500); and
                  • Other particularly serious threats.

                  General cybersecurity incidents can be understood as not meeting the criteria of any of the above categories. This is, in essence, a residual category.

                  The grade of severity experienced during a cybersecurity incident may also serve as a benchmark that allows Operators to comprehend the regulatory significance of cybersecurity incidents.

                  Detailed reporting requirements

                  Article 5 of the Measures outlines what Operators must include in their reports, ranging from incident details, impact, and harm to preliminary analyses of causes and proposed countermeasures. Specifics related to ransomware attacks, such as ransom amounts and payment details, are also mandated.

                  A translation of the form is provided below for reference:

                  Cybersecurity Incident Information Report Form

                  Report Time: [year/month/day/hour/minute]

                  Report Number: [report number]

                  Issued by: [signatory]

                  Organizations with operations in China may wish to include the above fields in any internal forms they use for incident reporting to facilitate reporting to regulators afterward.

                  Rigid reporting timeframes

                  Article 6 of the Measures acknowledges that certain incidents may require more time for a comprehensive assessment, including particularly serious or significant incidents. In such circumstances, Operators must provide initial reports within one hour, focusing on certain essential details, such as the basic information about the unit where the incident occurred, including the facilities, systems, and platforms involved, and the time, location, type, impact, and harm caused by the incident, the remedial measures taken and their effectiveness, and ransom amounts and payment details for ransomware incidents. After providing essential information within the mandated one-hour timeframe, Operators should submit supplementary information within 24 hours.

                  The Measures are silent on the timescales for reporting general cybersecurity incidents. However, Operators may wish to consider adopting the 24-hour standard because it is featured in other legal sources of general application and may apply to general cybersecurity incidents.

                  Post-incident analysis

                  Article 7 of the Measures mandates Operators to conduct a thorough analysis and summary within five working days of the incident’s resolution. This comprehensive report should cover incident causes, emergency response measures, damages, liability management, rectification status, lessons learned, and other relevant matters.

                  Community involvement

                  Article 8 of the Measures encourages organizations and individuals providing services to Operators to remind them of reporting obligations. In cases of intentional concealment or refusal to report, organizations and individuals are empowered to escalate the matter to local or national authorities.

                  Public reporting and recognition

                  Article 9 of the Measures actively encourages social organizations and individuals to report significant cybersecurity incidents, fostering a collective approach to cybersecurity.

                  Enforcement and consequences

                  Article 10 of the Measures outlines the basis for penalties for Operators failing to comply with reporting requirements, ensuring accountability. Severe violations resulting in significant harm may, in principle, lead to more stringent penalties.

                  We note that one basis for penalties is the PIPL, which states the following:

                  ‘If the illegal activity[…] is of a grave nature, the violator will be ordered to make a correction, confiscated of any illegal gain, and fined up to [the higher of] CNY 50 million (approx. $6.95 million), or 5% of last year’s annual revenue[…] and may also be ordered to suspend any related activity or to suspend business for rectification, and/or be reported to the relevant authority for the revocation of the related business permit or the business license; and any person in charge or any other individual directly liable for the violation will be fined [and banned from certain roles for a time].’

                  Exemptions for responsible Operators

                  Article 11 of the Measures provides leniency to Operators who have implemented reasonable and necessary protective measures, actively reported incidents, and mitigated the situation’s impact. Such Operators may be exempted or face reduced penalties based on the circumstances. Article 11 can be viewed as an incentive for developing a robust internal compliance framework.

                  Defining cybersecurity incidents

                  Article 12 of the Measures clarifies that cybersecurity incidents include events caused by human factors, software or hardware defects, failures, and natural disasters, resulting in harm to networks, information systems, or data, with negative societal consequences.

                  Handling state secrets

                  Article 13 of the Measures acknowledges that incidents involving State secrets need to follow specific reporting procedures defined by relevant departments. For the avoidance of doubt, State secrets are not limited to information held by State organs or emanations. State secrets can, in principle, include (without limitation) other types of information, such as health and genetic information and mapping data, etc.

                  Conclusion

                  China’s proactive stance in formulating a comprehensive cybersecurity incident reporting framework reflects its commitment to securing digital infrastructure. As the global community grapples with escalating cyber threats, understanding and adapting such measures becomes imperative for fostering a secure and resilient digital environment.

                  The ongoing public feedback and potential refinements to the Measures will hopefully contribute to their effectiveness in addressing the dynamic challenges of the digital age.