1. Overview of the Provision on the Unreliable Entities List

On September 29th, the PRC Ministry of Commerce has promulgated the Provisions on the List of Unreliable Entities, with immediate effect.

The purpose is establishing a list of foreign entities, i.e. foreign companies, other organizations or individuals, who are deemed to “have endangered China’s sovereignty, security and development interest” to a certain degree and who “violated the principles of market operations, interfering with regular transactions with Chinese enterprises” or have adopted discriminatory measures towards Chinese enterprises, organizations or individuals.

An investigation procedure shall still be devised, but the Provisions already stipulate that any target company or individual shall in any case be informed of commencement of such investigation and shall be granted the right of defense. The announcement to include a foreign entity in the List of Unreliable Entities shall be made public.

Other than publicly identifying unreliable entities as entities with which the risk of carry out transactions is high, the competent authorities may prevent or restrict them from engaging in import/export with China, from investing in China, imposing the obligation to require a specific government approval to any Chinese entity who intend to conduct any transaction with such companies; other measures may consist of restricting travelling and staying in China by personnel of such companies or even imposing fines.

 

2. The purpose

The Provisions are sending a loud message, bouncing from Beijing to Washington.

The background of the Provisions lies in art. 3, which stresses that the Chinese government adheres to the basic principles of international relations which are mutual respect of sovereignty, non-interference into each other’s internal affairs, as well as equality and mutual benefit, the Chinese government opposes unilateralism and resolutely safeguards China’s core interests and promotes the establishment of an open world economy.

Since May the Central Government has anticipated the establishment of such a list, indicating that such initiative is the reaction of the PRC to those government who are taking decisions in the business field, which affect Chinese companies and Chinese citizens’ interests, where such decisions are driven merely by political reasons.

Beijing is thus firing back in a formal manner, before taking actual and concrete actions mirroring US initiatives against Huawei. A prudent approach, which actually shows to be quite different from that of the US President. We shall now monitor how the situation develops, to understand which entities will eventually be included in the Unreliable Entities List.

IP Infringement Complains towards e-platforms: guidance by the Supreme People’s Court

E-commerce continues to be in the focus of PRC Supreme Court, who issued the Official Reply on Several Issues concerning the Application of Law to Disputes over Network-related Intellectual Property Infringement (最高法关于审理涉电子商务平台知识产权民事案件的指导意见 法发〔2020〕32号) (“SPC Reply”), effective as of yesterday, September 14, 2020, thus judges of the Chinese People’s Court shall abide by such guidelines in trying cases involving network-related intellectual property infringements.

The principle restated in the SPC Reply is that People’s courts hearing cases involving intellectual property rights disputes on e-commerce platforms shall adhere to the principle of strict protection of intellectual property rights.

The SPC Reply provides a clarification about how the People’s Court shall determine whether the conduct of an e-commerce platform operator may be deemed as “self-operating business” (“自营业务”) and thus whether the operator shall bear the civil liability, as the product seller or the service provider; the following factors shall be considered by the People’s Court: the “self-operating” information indicated on the page where the products are sold; the information regarding the sales entity affixed on the physical product; the information regarding the sales entity affixed on the invoice and other transaction documents, etc.

If an e-commerce platform operator knows or should be aware of an infringement of intellectual property rights by an operator on the platform, it should take necessary measures in a timely manner based on the nature of the right, the specific circumstances and technical conditions of the infringement, and the preliminary evidence that constitutes the infringement and the type of service. In case of repeated infringement, the platform has the right to take measures to terminate the operators’ transactions and services.

Quite interestingly, the Supreme Court also identifies certain circumstances upon which the e-commerce platform operator shall be deemed as it were aware of the existence of the infringement:
(1) when it fails for fulfill its legal obligations such as formulating intellectual property protection rules and reviewing the qualifications of operators on the platform;
(2) when it does not review the proof of rights of operators whose store types on the platform are marked as “flagship store”, “brand store”, etc.;
(3) when it fails to adopt effective technical means to filter and block infringing product links containing words such as “high imitation”, and infringing product links that are re-listed after a complaint has been verified as supported;
(4) other circumstances where reasonable review and care obligations are not performed.

A few paragraphs of the SPC Reply are dedicated to specifying the circumstances and methods according to which notices regarding infringement on ecommerce platform are issued by owners of infringed intellectual property rights to the platform and by the platform to the prospective infringers in order to clarify such procedure. At the same time the SPC mentions malicious submission of claims and indicates case upon which the local court may identify “bad faith” in submitting such claims: to submit forged or altered certificates of rights; to submit false infringement comparison evaluation opinions and expert opinions; knowing that the rights status is unstable and still issue a notice; knowing that the notice is wrong but failing to withdraw or correct it in time; repeatedly submit wrong notices, etc.. In these cases, as per the E-commerce Law art. 42, the compensation liability shall be doubled.

An important clarification is delivered in connection to the coordination between the complaint procedure to be followed by rights owners and the platforms to deal with infringement complaints and the recourse to the People’s court. The SPC Reply clarifies that, in case of urgent circumstances, if an e-commerce platform operator does not immediately take measures, such as taking the products off the shelf, causing irreparable damage to the right holder’s legitimate interests, the intellectual property right holder may rely on Articles 100 and 101 of the Civil Procedure Law of the People’s Republic of China, and apply to the People’s court for preservation measures.

The process of acquisition is identified as the acquisition of control or, at least, of the majority of the capital of a company or of its assets (or a portion of the company’s assets which form an independent business unit).

This process consists of different phases and requires, in particular, the completion of a proper due diligence, to be intended as the detailed examination of the company subject to attention (the “Target Company”) in term of its corporate structure, economic and financial data, tax and legal aspects and potential risks (in other words financial due diligence, legal due diligence, tax due diligence, operational due diligence, environmental due diligence, etc).

In the text here below we’ve identified the main issues that shall be identified and addressed by a foreign investor who intends to face the process and engage into a legal due diligence in Italy.

 

          1. What are the main stages of an acquisition process in Italy?

Each acquisition process goes through three main phases: 1) preliminary phase of expression of interest, 2) analysis and evaluation of the company or of the target business unit and 2) negotiation and closing. The modalities with which each phase shall develop are oriented by the specific case.

The consultants involved may be receive the assignment by “buyer side” or “seller side”.

 

          2. Key issues of the preliminary phase

A prospective acquisition derives from the interest that a foreign company may have into the business or into a business unit of an Italian company. Such interest is usually required to be expressed in writing, even if within a non binding notice of interest.

In this regard, foreign investors shall be aware that, even if a contract is not signed yet, the general principle of good faith shall apply under the Italian Civil Code, and breach of such principle is sanctioned by law. To enter into a negotiation, acquiring key information about a company and then interrupt the negotiation without reason, could lead to civil responsibilities for the damages caused, in case such behaviour may be qualified as in breach of the principle of good faith.

WARNING – Special attention shall thus be paid upon writing of the expression of interest in order to clarify the non binding nature of the statement, and the discretionary choice that shall in any case be left to the prospective purchaser to decide or not in favour of the acquisition.

The expression of interest may be drafted as a letter of intent. The same comments above shall apply to a letter of intent, where the intent shall be specified as non binding. Civil responsibility shall still apply, under the Italian Civil Code for bad faith conduct.

It is suggested to specify, in the letter of intent, the exclusivity of the transaction, at least for the duration of the letter of intent, in order to avoid that the seller conducts more than one negotiation at a time.

WARNING – a “standstill clause” shall thus be added in the letter of intent, providing that for a certain period of time both parties shall not negotiate with other parties on the same or similar transaction.

The expression of interest and / or letter of intent is always followed by the request by the seller to the prospective purchaser to enter into a confidentiality agreement, in order to compel the latter to keep confidential any information obtained and utilization thereof for any purpose which is not strictly related to evaluation of the transaction by the prospective purchaser. It is common to include such confidentiality commitment within the letter of intent.

WARNING – the confidentiality commitment shall be reciprocal, binding not only the prospective purchaser, accessing the confidential information of seller, but also the seller, in order to ensure confidentiality of the information disclosed by the prospective purchaser about is business, financial situation and investment plans.

Following execution of the letter of intent and / or of the confidentiality commitment, the prospective purchaser may usually access the business information of the company.

 

          3. What are the goals of the second phase of “analysis and evaluation”?

The second phase aims at understanding the target company or, in many cases, at identifying the business or business unit to be the object of the acquisition.

The first object of the acquisition could, in fact, be the company and shall be completed by means of an equity / share acquisition or could be the assets of the company or parts thereof (asset deal). In both cases, identifying the assets of the company could be useful to exclude the purchase of certain assets, in which case the seller may be required to dispose of them before the acquisition or to reorganize them within the different business units of the company, so that they do not enter within the scope of the acquisition.

The second key purpose of the analysis phase is to reach a consensus between the parties about the assets to be transferred and their accounting value, in order to identify the prospective transfer price.

This analysis and verification process involves the following steps:

• external analysis of the sector and of the competition;
• internal analysis, i.e. the due diligence of the target company.

 

          4. What does the due diligence activity consist of?

This analysis can be carried out internally or by a consultancy company with the aim of achieving the following objectives to:

• identify the legal, economic and fiscal aspects to be considered for the conclusion of the purchase contract;
• verify the actual value of the company’s assets;
• verify the profitability of the company, its capital situation and financial solidity;
• identify the item which shall contribute to form the final price.

 

          5. How is the due diligence process structured?

The due diligence process is normally structured in the following phases.

• A preliminary session for the definition of the objectives and the determination of the investigation areas.
• The request for documents to be examined.
• Contacts with the consultants of the Target Company for clarifications.
• The real and actual verification phase thorough a deep examination of the documents.
• The final draft report to be discussed with the client.
• The drafting of a final document delivered only to the client.

WARNING – it is suggested to conduct the due diligence by means of a virtual data room: such mean allows the parties to track the documents which are shared between them and who has accessed to them, thus strongly limiting the unauthorized disclosure of information and tracking of access to and utilization of the information.

 

          6. How do you identify the assets of the Target Company?

In the due diligence process, the individual assets of the company and their ownership situation must first be identified.

With regard to real estate, it is appropriate to request the Target Company not only to produce an exhaustive and orderly list of assets, but also to show the deeds of origin, the related cadastral certifications and the certificates of urban destination. It is further advisable to carry out investigations at the competent conservatories and at the real estate registers to verify the existence of mortgages or other constraints or charges on the properties themselves.

With regard to movable productive assets, the main machinery must be taken into consideration to identify the legitimate origin of such assets, the property status, whether any burden has been established on them and any other legal constraints or burdens.

With regard to production activities and production buildings, it is of utmost importance to identify any permits, authorizations which the specific production activities and / or products require under any respect, including, safety, environmental and health.

Under many circumstances, the assets of the target company might not be entirely at its premises, being them equipment or tools located at third parties suppliers. In this event, the assets and tools shall be specifically identified, in their actual status and location, while, at the same time, the relationship between the target company and the third party supplier shall be verified, to ascertain the right to easily recover actual control over such assets and tools.

With respect to intangible assets, a specific consultant shall be engaged to verify their origin and status in each countries where such rights came into existence or were acquired.

 

          7. Which contracts should be examined during the legal DD?

Normally the analysis of the contracts has the purpose of verifying their legitimacy and the conformity of their clauses to civil code and the special laws applicable. The analysis is aimed at verifying the specific obligations assumed by the Target Company to ascertain the possible existence of clauses that impose excessively burdensome obligations or that may prevent or influence the success of the acquisition (for example clauses that impose exclusive rights or automatic renewals or express termination clauses or particularly serious liability clauses or non-competition clauses or clauses that provide for certain effects in case of change of control).

WARNING Given the detailed regulations existing within the Italian Civil Code and within a vast number of other laws and regulations about any kind of contracts, it is strongly suggested to involve an Italian lawyer in the analysis of the status of assets and contracts, so as to ensure that not only the written terms are taken into due consideration, but also the way the Italian laws integrate automatically such contracts or even replace their clause, being the relevant law provisions mandatory.

Under Italian law, the transfer of a business or of a business unit is specifically regulated, allowing the seller and the prospective purchaser to reach an agreement for the sale, which may or may not identify the specific object of the sale, thus what contracts are included in the business or business unit. In case the parties shall not identify the contracts, such contracts shall be transferred automatically with the business unit, provided that they are essential of the transferred business and they are not of personal nature. It is however to be noted that the other contractual parties have three months’ time to object to such transfer and to terminate the contract, but only in case a just cause exist (for example, in case the third contractual party considers that the purchaser of the business or of the business unit does not enjoy adequate financial solidity, which may materially impair performance of the contractual obligation by the business unit after the transfer to the prospective purchaser).

WARNING – it is of key importance to secure the written consent of the other contractual parties of the existing contracts or to require a specific analysis of prospective just causes of termination that such parties may trigger upon transfer of the business or of the business unit, in order to avoid the purchase of the business or of the business unit, where key contracts may be then terminated.

 

          8. How to deal with personnel issues?

Italian law related to employees are extremely complex and require special attention.

It is worth noticing that the contracts with the personnel are transferred automatically, ope legis, in case of transfer of the company, of the business or of the business unit. However, under certain circumstances and after addressing the relevant matters with the labour union and relevant personnel, the prospective purchaser buyer may propose the employees of the company to accept termination of the existing contracts and signature of new labour contracts, in any case without affecting in any manner the employees’ accrued rights.

In case of transfer of the labour contract, jointly with the other contracts of the company. Specific attention shall be dedicated to:

• verifying the human resources used by the Target Company and the compliance with the applicable mandatory laws, national collective agreements and any supplementary company agreements.
• ensuring whether full payment of welfare contribution and mandatory insurance by the company during the employment relationship has been made; under this respect the target company may require to the competent Italian authorities a document proving compliance status (the so called DURC) or, in case of failure to comply to the relevant obligations, a statement issued by the competent Italian authorities. It is to be noted that, such documents often do not show the delay accumulated buy the company upon payment of welfare of its employees, in case in this regard an agreement has been reached with the competent authorities to pay the due amounts by instalments;
• ensuring the transfer, together with employees, to the purchaser of the TFR (trattamento di fine rapporto, a portion of the  salary that the employer shall put aside for the whole duration of the employment relation, to remit such amount to the employee upon termination of the labour relationship);
• obtaining a clear understanding of the personnel’s position and work scope in order to ensure coherence of such position and work scope for the purchaser.
• checking whether there exist any pending or threatened dispute, which could be very long and burdensome on the employers.

The examination must concern not only those who are bound to the target company by a subordinate work contract but also all those who are connected to the company of contractual relationships of different nature and who in any case perform their activities in favor of it in a continuous and organic way, with the risk of being ascertained as employees of the company.

 

          9. How to deal with accounting, tax and financial issues?

The financial due diligence shall be conducted by experienced Italian auditors, checking;

• the economic situation and assets and liabilities, through examination of the balance sheet and P&L;
• compliance of the accounting system to the applicable law;
• compliance of the company to the relevant tax laws and timely payment of the relevant due amounts; the prospective buyer shall verify whether specific agreements have been reached by the target company with respect to overdue taxes;
• financing, from banks (including credit lines), shareholders or other institutions; banks may issue specific documents showing the position of the company with Italian banks (the so called, centrale rischi)
• existing credits, their origins and status (whether any dispute exist), whether they may be actually collected or not, whether adequate funds have been put aside for bad debts, what is the actual timing of payment by the clients and which clients are sued to timely fulfil their payment obligations and which clients are not;
• existing debts and prospective hidden liabilities;
• guarantees obtained or granted by the target company (including performance bond, etc.).

In case the company has engaged an auditor, specific attention shall be paid to the relation the auditor is called to issue with respect to the yearly financial statements of the company.

 

          10. Addressing litigation

Within the due diligence, the prospective purchase shall verify the existence of civil, tax and administrative labor lawsuits in which the company has been involved, is likely to be involved and could be involved, and from which liabilities may arise. The Target Company must therefore provide all useful information and essential documentation in relation to all pending legal disputes, arbitration proceedings or any other proceedings in Italy or abroad of any nature. Generally it is requested to provide a brief information report on each of the disputes with a judgment on the probabilities of a favourable outcome by the professionals in charge of the dispute by the Target Company.

 

          11. Have privacy laws any relevance in an acquisition?

The prospective purchase must verify such aspects and, in particular, compliance to the applicable Italia and European law by the Target Company. Verifying these aspects is mainly justified by the large sanctioning framework envisaged in the applicable legal framework, by virtue of which failure to comply with these provisions is sanctioned not only administratively but also, in the most serious cases, criminally.

 

          12. What constitutes the second phase of “negotiation and closing”?

Upon conclusion of the due diligence, the prospective purchaser shall express its intention either to proceed to the acquisition or to stop any further activities. In case the acquisition process shall continue, the second phase is characterized by the drafting, negotiating and signing the Equity Purchase Contract or the Assets Purchase Contract.

With such contract both parties punctually define a binding way for all economic-financial and legal aspects of the transaction, including the overall price of the sale, the indication of any down payment for the price as well as the methods for the final payment, the delimitation of the assets included (usually a detailed list of assets and contracts is identified), the guarantees to be borne by each party, the non-competition obligations, any contracts connected with key managerial, etc.

The parties may also agree upon a mechanism of price adjustment, which shall apply during an agreed period of time, to guarantee the purchase from discovery of hidden liabilities.

Alternatively, or concurrently, the Equity Transfer Agreement or Assets Transfer Agreement may provide for a bank guarantee to be issued by the seller to guarantee that the assets shall be actually transferred in the same conditions identified in the relevant transfer contract. Another solution often used in order to protect the prospective purchaser is the payment of a portion of the price in an escrow account, to be freed upon expiry of a given period of time and upon achievement of a number of conditions.

In many cases the actual transfer of equity, share or assets is subject to achievement of a number of preconditions, such as securing the consent of those parties whose consent is necessary to complete the transfer (including antitrust authorities, banks, creditors of the company, etc.).

WARNING – The actual transfer of equity share or assets shall occur by means of a notary deed, i.e. a contract signed in front of an Italian notary, producing its effects upon signing. Therefore, the actual transfer of the title of the object to the acquisition (including transfer of property title over assets, the transfer of all contracts, etc.) occurs upon execution of this contract in front of the notary.

***

This article shall not be intended as legal advice rendered by this firm or by the authors. Should you consider any such information useful, we invite you to contact the authors in order to obtain further advice, tailored on your specific requirements. This firm and the authors do not take any responsibility for any consequences deriving from using in any manner any of the above information.

The China Cyber Security Law (hereinafter “CSL”), which came into force on 1 June 2017, is a general rule concerning the control of cyberspace information security and the protection of personal information in China.
With this rule, data management and the regulation of the use of Internet have been reformed with the imposition of new requirements for network security.
With the entry into force of the Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 (GDPR), we face the problem of a comparison between such Regulation and the Chinese law.
We shall thus analyze the main contents of the China Cyber Security Law.

 

1. The definitions of personal information and network operator

The CSL provides a definition of “personal information” and “network operators” to determine its scope of application.
«Personal Information» refers “to all kinds of information, recorded electronically or through other means, that taken alone or together with other information, is sufficient to identify a natural person’s identity, including but not limited to natural persons’ full names, birth dates, national identification numbers, personal biometric information, addresses, telephone numbers, and so forth” (art. 76 (5) CSL).
It is clear that the definition of “personal information” is quite similar to the definition of “personal data” in the GDPR where “personal data” means any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person”.
In the CSL «Network operators» refers to “network owners, managers, and network service providers” (Article 76 (3) CSL).
This definition clearly includes not only network service providers, but every entity that owns and manages a network, both internally and externally. For example a company that manages its network for its internal operations or that uses its own website.
The CSL also identifies a further specific category of subjects that deal with data, the “critical information infrastructure” («CII») (art. 31 CSL).
This definition, which is very general and undetermined, includes the structures operating in particular sectors, for example for information services, power, traffic, water resources, finance, public service, e-government, and other critical information infrastructure which—”if destroyed, suffering a loss of function, or experiencing leakage of data—might seriously endanger national security, national welfare, the people’s livelihood, or the public interest” (see art. 311¹).
For these infrastructure, the CSL formulate specific security protection measures as described below in par. 4 (art. 34 CSL).

 

2. Data collection and storing

The CSL imposes a series of general obligations that must be respected by the «network operators» (art. 21 and from art. 40 to art. 50).
Among these, the duty:

• to strictly maintain the confidentiality of user information they collect, and establish and complete user information protection systems (art. 40 CSL),
• to abide by the principles of legality, propriety, and necessity,
• to publish rules for collection and use, explicitly stating the purposes, means, and scope for collecting or using information,
• and to obtain the consent of the persons whose data is gathered.

Network operators must not gather personal information unrelated to the services they provide (art. 41). These provisions recall the corresponding priciples relating to processing of personal data stated in GDPR (art. 5), or the duty of Information to be provided (articles 13 and 14 GDPR) and the regulation of consent. The consent, however, appears in CSL as the only legal basis of the treatment without alternative, such as the necessity to process for the performance of a contract or for compliance with a legal obligation as provided in GDPR (Article 6).
With reference to the security of personal information the CSL provides that when a leak, destruction, or loss of personal information occurs, or might have occured, remedial measures shall be immediately taken, and provisions followed to promptly inform users and to make a report to the competent departments in accordance with regulations (art. 42 CSL). This provision recall the regulation of the data breach in the GDPR (Article 33).
With regard to the rights of the data subject, provided in artt. 15-22 of the GDPR, under the CSL, measures must be taken to ensure, where individuals discover that network operators have violated the provisions of laws, administrative regulations, or agreements between the parties to gather or use their personal information, to demand their personal information and to demand the network operators to make corrections where discovering that personal information gathered or stored by network operators has errors (art. 43 CSL).

 

3. The rules for Critical Information Infrastructure

In addition to the measures set out above, the CII, are subject to further obligations.
First of all, CII that gather or produce personal information or important data during operations within the mainland territory of the People’s Republic of China, shall store it within mainland China.
Where, due to business requirements, it is truly necessary to provide it outside the mainland, they shall follow the measures jointly formulated by the State cybersecurity and informatization departments and the relevant departments of the State Council to conduct a security assessment (art. 37 CSL).
This provision appears immediately different from the GDPR regulation that expressly governs the conditions for the lawful transfer of personal data abroad, also for archiving, such as transfers on the basis of an adequacy decision (Articles 45 GDPR) or transfers subject to appropriate safeguards (art. 46 GDPR), or on the basis of the consent or for other specific cases (art. 49 GDPR).
Again with reference to the territorial scope, it is necessary to highlight another important difference between the two provisions.
As known, the GDPR has adopted some specific choices of “extra-territoriality” as it is applicable not only to the processing of personal data of a controller or a processor in the European Union, but it also applies to the processing of personal data of data subjects who are in the EU by a controller or processor not established in the Union This happens where the processing activities are related to the offering of goods or services to such data subjects in the Union or when the monitoring of their behaviour as far as their behaviour takes place within the Union (Art. 3 GDPR).
The CSL does not have a provision of this kind by arranging its application only in the mainland territory of the People’s Republic of China (art. 2 CSL²).
A Chinese operator, therefore, who is dealing with personal data not only of Chinese subjects but also of subjects belonging to the EU will be subject to both regulations and will have to follow different procedures for the mutual transfer of these personal data from one place to another or for even storing the data.

 

4. Conclusions

After this brief examination it can be noted that, despite some similarities, the laws display important differences.
At this stage both these laws will have to be implemented by the operators and complemented by specific regulations to effectively verify the way in which they can co-exist.
In general, though, the CSL seems to be based on a vision of “state protection” rather than being oriented to a system of protection of the individual right of the individuals to protect their data.
Moreover, from a point of view of substantial enforcement, while the GDPR is based on the protection of personal data, the CSL tends to unify in a single text the cybersecurity and the regulation of personal data. With the subsequent definition of the rule by the implementing regulations, it cannot be excluded that the CSL could assume an approach where, the concepts not clearly defined, aimed at protecting the personal data, as right of the individual (such as consent, rights of the interested party, communication of data, etc.) can be further extended.
This solution is certainly desirable from the point of view of the companies that will have to adopt compliance systems from the point of view of both the Chinese and the European legislation.
Below is a brief comparison table of the two laws.

 

Comparison summary

Entry into force

GDPR | 25 May 2018

CHINA CSL | 1 June 2017

Territorial Scope

GDPR | Some specific choices of “extra-territoriality” (Art. 3 GDPR)

CHINA CSL | Applicable within the mainland territory of the People’s Republic of China (art. 2 CSL)

Information

GDPR | Information to be provided (articles 13 and 14 GDPR)

CHINA CSL | Network operators shall explicitly state the purposes, means, and scope for collecting or using information (art. 41)

Consent

GDPR | The consenti is one of the legal basis of the treatment together with the other legal basis defined in art. 6-9 GDPR

CHINA CSL | The consent appears as the only legal basis of the treatment (art. 41 e 42)

Security of processing

GDPR | The GDPR, according to the principle of accountability, makes the data controller in charge for the security measures to be taken

CHINA CSL | The CSL tends to impose a series of rules for cybersecurity

Penalties

GDPR | Subject to administrative fines up to 20 000 000 EUR, or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher

CHINA CSL | Subject to fine up to the amount of 1 to 10 times the purchase price; the persons who are directly in charge and other directly responsible personnel shall be fined between RMB 10,000 and 100,000 (art. 64 CSL)

Right of data subject

GDPR | Artt. 15 – 22 GDPR: right of access, to rectification, to erasure, to restriction of processing, to data portability, to object, not to be subject to a decision based solely on automated processing, including profiling

CHINA CSL | Individuals have the right to demand the network operators delete their personal information; where discovering that personal information gathered or stored by network operators has errors, they have the right to demand the network operators make corrections (art. 43 CSL).

Authority

GDPR | National authorities and European Data Protection Board

CHINA CSL | The law does not establish an authority for data protection in China. The relevant offices are: the Cybersecurity Administration of China, the Public Security Bureau and the supervisory authority responsible for telecommunications (Ministry of Industry and Information Technology) working together.

 

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¹ Article 31 CSL: “The State implements key protection on the basis of the cybersecurity multi-level protection system for public communication and information services, power, traffic, water resources, finance, public service, e-government, and other critical information infrastructure which—if destroyed, suffering a loss of function, or experiencing leakage of data—might seriously endanger national security, national welfare, the people’s livelihood, or the public interest. The State Council will formulate the specific scope and security protection measures for critical information infrastructure.The State encourages operators of networks outside the [designated] critical information infrastructure systems to voluntarily participate in the critical information infrastructure protection system”.

 

² Art. 2 CSL: “This Law is applicable to the construction, operation, maintenance, and use of networks, as well as to cybersecurity supervision and management within the mainland territory of the People’s Republic of China”.

Provisions (V) of the Supreme People’s Court relating to the application of the Company Law of the PRC

The Supreme People’s Court on April 22, 2019 issued Provisions (V) relating the application of the Company Law (“the New Provisions”) to guarantee the correct interpretation and proper application of the Company Law promulgated in 2006 and last modified in 2018.

The New Provisions, formed by 6 articles, concern in particular the following main topics.

1. Protection of the share of shareholders

As we know, some majority shareholders or company management may force the company to enter into affiliated transactions that may damage the interests of the company and negatively impact the minority of shareholders or creditors.
The Company Law already prohibits such actions and regulates ensuing responsibility (art. 21 of the PRC Company Law) but the New Provisions have specified new aspects stating that, in case of these violations, the interested party will not be exempted from liability even if a legitimate procedure has been implemented to approve the transaction, such as the approval of the shareholders or of the board of directors.

Furthermore, the New Provisions provide that the any shareholder of a limited liability company or shareholders of a joint stock company who have held, individually or in aggregate, 1% or more of the shares of the company for more than 180 consecutive days , may act in their own name upon verification of the conditions settled out in Section 1 of Article 151 of the PRC Company Law, i.e.:
1) any related party transaction infringes the company’s interests and the company did not initiate a lawsuit; or
2) the contract for the party-related transaction is deemed to be invalid or rescindable and the company has no started a lawsuit against the counterparty of such contract1.

2. Dismissal of Directors

Since the directors are appointed by the shareholder, the general opinion in the legal practice is that the shareholder can also remove the directors at any time and without reason. Article 3 of the New Provisions now confirms such interpretation. A company has the right to remove a director before the expiry of his mandate, through effective decisions taken by the shareholders meeting.

However, the removal without cause might give rise to the right of the director to claim an indemnity to be paid by the company.

Art. 3 provides that “Where a director who is dismissed by a valid resolution of the board of shareholders or the general meeting of shareholders before expiry of his/her term of office claims that the dismissal is not legally effective, the people’s court shall not uphold such claim. If, after being dismissed, a director files a lawsuit due to a dispute over indemnity with the company, the people’s court shall, according to laws, administrative regulations, the articles of association of the company or the contract, determine whether the company shall give indemnity and the reasonable amount of indemnity by taking into account the factors such as the reasons for dismissal, the rest of his/her term of office and his/her remuneration”.

3. Provisions about distribution of profits

The New Provisions provide new rules for the distribution of profits and establish a maximum term of one year to execute such decisions.

Article 4 states that: “After a resolution on distribution of profits is made by the board of shareholders or the general meeting of shareholders, the company shall complete the profit distribution within the period specified in the resolution. If no period is specified in the resolution, the Provisions of the articles of association shall apply. If no period is specified in either the resolution or the articles of association or the period specified therein exceeds one year, the company shall, within one year from the date when the resolution is made, complete the profit distribution.
If the period for completion of profit distribution as specified in the resolution exceeds that specified in the articles of association, the shareholders may apply to the people’s court for revoking the Provisions on such period in the resolution according to the Provisions of Paragraph 2 of Article 22 of the Company Law”.
The Provisions also regulate in a more detailed manner decisions for the distribution of profits and the power of the people’s courts to revoke such such decisions.

4. Alternative ways of resolving disputes between shareholders

The Provisions provide also new ways of resolving disputes.
Article. 5 in fact provides that: “In hearing a case involving major disputes between shareholders of a limited liability company, the people’s court shall attach importance to mediation. If the parties agree to settle their disputes in any of the following ways not violating the mandatory provisions of laws or administrative regulations, the people’s court shall uphold such agreement.
(1) buy-back of the shares of some shareholders by the company;
(2) transfer of the shares of some shareholders to other shareholders;
(3) transfer of the shares of some shareholders to others;
(4) reduction in capital of the company;
(5) division of the company; or
(6) any other way that can resolve the disputes, resume the normal operation of the company and avoid dissolution of the company”.

5. Entry into force

According to the art. 6, the Provisions shall come into force on April 29, 2019 and apply to any case that has not been finalized yet after the effectiveness of them but shall not apply to any case that has been finalized before the effectiveness date or is subject to retrial under the trial supervision procedures.
In case of discrepancy between any juridical interpretation previously promulgated by the Supreme People’s Court and the New Provisions, the New Provisions shall prevail.

 

–

 

Art. 1 provides that “for an affiliated transaction harming the interests of a company, if the plaintiff company claims that the controlling shareholder, the actual controller, directors, supervisors or senior executives shall compensate for the losses caused thereby in accordance with the Provisions of Article 21 of the Company Law, but the defendant defends only on the grounds that it has performed the procedures as prescribed by laws, administrative regulations or the articles of association of the company, including information disclosure, the consent of the board of shareholders or of the general meeting of shareholders, etc. for the transaction, the people’s court shall not uphold such defence. If the company does not file a lawsuit, any shareholder meeting the requirements specified in Paragraph 1 of Article 151 of the Company Law may initiate legal proceedings with the people’s court in accordance with the Provisions of Paragraph 2 or 3 of Article 151 of the Company Law”. Article 2 provides that: “Where an affiliated transaction contract falls under any of the circumstances of invalidation or revocability, and the company does not take legal actions against the contract counterparty, any shareholder meeting the requirements specified in Paragraph 1 of Article 151 of the Company Law may lodge a lawsuit with the people’s court in accordance with the Provisions of Paragraph 2 or 3 of Article 151 of the Company Law”.

April 24th 2019 has been a long awaited date, when changes eventually occur, after years of expectations. On such date, the new PRC, Trademark Law has been promulgated, taking effect on November 1st 2019.

We have been striving for years and years against the so-called “Chinese trademark squatters”: agents, entrepreneurs and companies who registered in China trademarks, actually belonging in other countries, if not worldwide, to other entities, who created, developed, use and promote such trademarks, with great investments and efforts.

Chinese consumers have been so many times cheated, convinced to purchase a given well-known brand, instead buying a “made in China”, “designed in China” item, with absolutely no relation with the style, quality and soul of the identical international brand.

Such absurd situation was compliant to the PRC, Trademark Law, because the “first-to-file” rule was grating exclusive right of use of a trademark to the first entity registering it with the China Trademark Office, whatever the situation of the identical trademark could be abroad.

Bad faith registrations are regulated under the currently effective PRC, Trademark Law, but within such a narrow scope that it has always been actually impossible to make recourse to such clause of the law to recover a “squatted” trademark. According to the current PRC, Trademark Law, no bad faith would be ascertained and could prevent registration of a trademark or cause its cancellation, unless the applicant could prove the specific relationship occurred between him and the owner of the trademark in China. When no relation ever existed (because the Chinese registrant simply heard about the international trademark at some exhibition or found it by travelling abroad or by searching on the web), no bad faith could be ascertained to provoke cancellation of such Chinese trademarks.

The spirit of the New Trademark Law goes in a different direction.

From the very first few articles of the amended Trademark Law, while stating the very basic principle of trademark registration (“If a natural person, legal person or other organization needs to obtain the exclusive right to use a trademark for its goods or services in its production and business activities, it shall apply to the Trademark Office for trademark registration”), the amended law specifies that “When the applications for registration of a trademark is not filed for the purpose of utilizing it, such malicious application shall be rejected.¹” It might seem a peculiar clause, addressing the purpose for which a trademark application is filed, but it is actually aimed at tackling those entities who register other’s trademark, not to use it, just waiting for the foreign owner to claim it and pay to purchase it back (art. 4).

Of course not all squatted trademarks remain unused and can be cancelled on such new legal basis, some of them are e exploited, leveraging on their international fame, but in most cases they remain unused, because the only purpose of registration is retaliating the foreign owner.

Malicious registrations under art. 4 have now became one of the legal basis upon which opposition may be filed against an application to register a trademark as well as cancellation may be required.

Penalties for counterfeiting have been increased (even if yet not to amounts which could really be deemed satisfactory) and an act of registration of malicious trademark under art. 4 may give rise to criminal responsibility.

Last but not least, in case of malicious registration of a trademark, administrative penalties such as warnings and fines shall be given according to the circumstances and, if a lawsuit is filed in connection with such malicious trademarks, such penalties shall be imposed by the people’s court. The intention is clearly that of preventing those entities who succeeded in registering others’ international trademark, with no intention to use it, to even seek protection of such trademark in court.

The rules are not detailed, penalties not clearly quantified and, to define a trademark registration “malicious” only on the basis of the lack of the intention to use it, seems quite a simplification of a much complex problem; however, those who have been fighting to recover “squatted” trademarks for years, with no weapons at all, other than the impossible attempt to prove a certain degree of fame of the international trademark in China, to gain the right to some protection, will have a new ground of action and attack against such registrations. We except the competent authorities, like CTO and Trademark Review and Adjudication Board, as well as the competent courts, to impose onto owners of such malicious registrations the burden of proving, at least, utilization of the trademark.

We thus consider the latest amendment to the PRC, Trademark Law a very welcome change in the law, a step forward eliminating certain unfair and unbalanced situations and a new weapon made available by the law against trademark “squatters”.

¹ 不以使用为目的的恶意商标注册申请，应当予以驳回。

Legal ref. No. Cai Shui [2017] No. 88

Promulgation Date: December 21 th 2017
Effective Date: January 1 st , 2017

How much China foreign investment environment has changed in the past decade, the “New Regulation on Withholding Income Tax for Overseas Investors in China” proves it.

In the past, China was one of the preferred investment area of world, able to collect rivers of funds. The main issue was to choose where such funds could be invested and where they could not be directed or where investment was subject to cooperation with a Chinese party, controlling the invested Chinese entity. Instead, China has recently come somehow closer to all those countries who have to strive to attract and keep foreign investments. At the same time, China is endeavoring to establish a better and more competitive tax environment for
foreign investments.

The new regulation on dividend tax deferral is one of the measures adopted to such purposes.

The concept of the dividend tax deferral regime was first introduced by the State Council in a circular (i.e. Guo Fa [2017] No. 39) dated August 8 th 2017 as a measure to encourage foreign
investors to expand their investments in China. According to such Circular, subject to certain prescribed conditions, dividends that are derived by a foreign investor from a resident
enterprise within China and are then directly invested into an encouraged investment project, should be eligible for the tax deferral policy, i.e. are not subject to immediate withholding tax.
But, in such Circular, this is only a principle, with no detailed rules.

Eventually, four months after Guo Fa [2017] No. 39 was issued, on December 21 th 2017, the Ministry of Finance, the State Administration of Taxation (SAT), the National Development
and Reform Commission and the Ministry of Commerce jointly released Cai Shui [2017] No. 88, concerning deferral of withholding tax on dividends when directly re-invested by foreign
investors (Notice 88 or the Regulation).

Notice 88 allows a non-resident enterprise (NRE) to defer payment of tax on dividends derived from a Chinese enterprise, if the NRE directly reinvests such dividends into industries

“encouraged” by the Chinese government. Notice 88 further specifies the conditions for enjoying this policy.

According to the Enterprise Income Tax Law of PRC and Regulation on the Implementation of the Enterprise Income Tax Law of the PRC, dividends distributed from a Chinese
subsidiary to a NRE’s shareholder are subject to 10% enterprise income tax, when a double taxation treaty does not stipulate a reduced rate. However, on the basis of Notice 88, when a non-resident enterprise meets certain conditions, it can “defer” tax payments on re-invested dividends, that is to say that EIT shall not be withheld. “defer” means not that EIT shall not be paid at all or that the Regulations grant a permanent tax exemption: EIT shall not be paid upon distribution of dividends, but only at a future time, when the dividends re-invested are eventually recovered by the overseas shareholder (because, for example, the invested company is liquidated or its shares transferred), EIT shall be paid off in accordance with
prescribed procedures stipulated in Notice 88.

The purpose of the Regulation is thus clearly that of encouraging overseas companies to keep their dividends in China in the long term. Under this respect, timing of Notice 88 does not
seem a coincidence, but appears to be a reaction to the measures adopted by US government in order to encourage US investors to repatriate their profits.

“Reinvestment” means that the foreign investor shall use the dividends received for direct investment, including for equity investments such as capital increase into an existing enterprise, formation of a new enterprise and share acquisition of an enterprise from an unrelated party, but excluding capital increase into and share acquisition of a listed company (unless the investment constitutes a qualified strategic investment into the listed company).
Profit which can be re-invested are those obtained by the overseas investors on or after January 1 st , 2017. For those overseas investors who are entitled to but have not received the benefit, they may apply for the tax refunds within three years after the actual payment of tax. Thus, it appears that overseas investors could ask for reimbursement of the paid tax, until 2019.

With regard to “encouraged projects”, reference shall be made to the Guidance Catalogue, classifying the fields and project where foreign investments are encouraged, limited or forbidden (the most updated Guidance Catalogue has been promulgated on 2017.

Foreign investors should carefully manage the re-investment transaction structure and prepare the relevant documentation to apply for the above mentioned tax temporary relief, in order to avoid certain pitfalls created by Notice 88 and loose the relevant tax benefit.

In conclusion, Notice 88 reflects the Chinese government’s attention to foreign investment, to establish a more attractive tax regime and, in general, to welcome foreign-funded enterprises under the trend of globalization.

Appendix
– Notice 88 (Chinese official version)
– Notice 88 (Unofficial translation, prepared by Backer and Mckenzie):
Link
– Guidance catalogue (Chinese official version)

 

Riproduzione riservata Avv. Paola Bernardi

When creating a new retail network in China, through the cooperation of local distributor or partner, a cooperation framework shall be agreed upon, within a Distribution Agreement, a Franchising Agreement, a Master License Contract or within any other retail agreement which best fit the specific project. However, the critical points of such agreements are recurring and affect many contracts aimed at creating at retail networks in China, with negative, costly and time-consuming consequences.

APPLICABLE LAW

Many retail agreements are subject to foreign law, like Italian law, and prospective disputes are referred to Italian judges or to arbitration in Italy, in Hong Kong, in Switzerland. Unfortunately, no choice can be more ineffective: foreign laws are inadequate to regulate commercial issues arising in China, which are peculiar.
Besides, laws on franchising in China are mandatory, and may not be eluded by simply applying foreign laws to the retail agreement; therefore, you might chose foreign law trusting to be protected, while you end up squeezed between inapplicable foreign laws and mandatory local laws; under such circumstances, your chosen Italian judge or arbitrator will thus be called to resolve disputes related to retail in China, coordinating foreign laws and mandatory Chinese law and practice; quite a hard task for any judge and definitively a strong enemy against effectiveness and timesaving.

When your Chinese partner commences to sell other products under your insignia, to sell low quality products, to amend your concept store according to Chinese tastes, or simply fails to pay the goods you sold him, at that time you do not want to litigate in Geneva, in Milan or in Hongkong, waiting months even years to obtain a judgement or a decision in your favor, to then commence again a new proceeding to enforce it. At that time you want to act directly against your ex-partner, to obtain urgent protection measures and to seize its assets, if needed, in a few days’ time. This, you can achieve only by applying Chinese law to your contracts and to refer dispute to Chinese judges.

TRADEMARK

Before taking any action in China, even before starting to plan it, you must ensure that your trademark has been well registered with the China Trademark Office, the Hong Kong Trademark Office, the Macao Trademark Office and the trademark authorities of any neighboring country where you might plan to expand.
Should you discover that your trademark has already been registered in China by a local company, a so called “trademark squatter”, take all actions you can to have it cancelled, but, at the same time, plan a backup solution with an alternative trademark, because you will need years to recover your trademark, if you will ever be able to recover it.

SELL OFF PERIOD

You shall monitor orders made by your partner on the basis of your experience and ERP, to understand whether the partner is overestimating his purchasing needs with respect to sales forecasts.

In the retail contract you shall ensure to stipulate a Sell Off period, during which your partner is allowed to continue the sale of your brand products’ stock, even after
termination of the retail agreement, but only for a limited period.

A penalty shall be applied in case of breach of such clause, because to prove the damages that your partner, by continuing the sales of your products, may cause to your new overall retail strategy with a new partner, could be extremely burdensome.
Without such clause and relevant penalty, and without a Chinese court to enforce it, the conspicuous stock accumulated by your ex-partner, due to its overestimated sales forecast, will continue to be sold in China long after termination of your cooperation and you will not be able to stop him, due to the principle of exhaustion of trademark rights: in brief, you may not attack a company in China, who is selling your genuine products, lawfully acquired from you, even if such company is no more your partner or your licensed retailer; the reason is that the goods have been legally obtained and entered the market, and thus they can be sold.
You may stop your ex-partner, exclusively if you have a sell off clause in the retail contract and a judge to apply it.

CALL OPTION

You shall ensure to obtain, under the retail contract, a call option over the retail network. If your partner is successful, upon development of the retail network, you will find yourself, at the end of the cooperation, without a valid contract and with your full precious retail network in the hands of your partner, compelled to renegotiate cooperation terms. Your trademark ownership might not be enough to save you from a lengthy and risky negotiation.
To avoid such unpredictable outcome, it is advisable to request your partner, since first entering into the retail agreement, to establish the new retail network by means of an ad hoc new corporate vehicle, who shall enter into all the contracts forming the retail network, from lease contracts from goods purchase contract, from decoration contracts to labor contracts.
The best solution would be to use a corporate retail vehicle registered in Hong Kong or Singapore. Under such “umbrella”, you would be able to enter into a shareholder agreement with your partner, under a “foreigners friendly law”, granting you an enforceable call option right on the shares held by your partner in the vehicle.

In future, should you decide to continue alone the retail project in China, you may trigger such call option, knowing that it shall work, and, by paying the fair price, you may get to own and control 100% of the vehicle and, thus, the Asia retail network.
Be aware that, call and put option clauses, in China, do not operate automatically, thus breach of the obligation of the Chinese partner to sell his equity under a call option, will result in you acquiring the equity, but merely obtaining an damage compensation.

 

Riproduzione riservata Avv. Paola Bernardi