Haworth & Lexon Law Newsletter (201108)

Haworth & Lexon Law Newsletter
No.8 2011 (Total:No.115) Sep.15, 2011
Edited by Haworth & Lexon
 

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Haworth & Lexon Law Newsletter is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, E-commerce, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.
 

Guidelines:


Latest News:

•Legend of Start from Scratch—On Corporate Evolution (Fa Shuo Shui Hu), a new book written by Mr. Chambers Yang was published

Latest Laws and Regulations:

•Provisions of the Ministry of Commerce on Implementing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors

•Interim Provisions on Evaluating the Impact of Concentration of Business Operators on Competition

•Pilot Foreign Exchange Control Guidelines and Implementing Rules for Trade in Goods

•Administrative Measures for Examination, Approval and Supervision of Asset Appraisal Institutions

•Interim Measures for Administration of Transfer of Insurance Business by Insurance Companies

•Circular on Enhancing the Capacity of State High & New Technology Industrialization Bases

•Interim Measures for the Participation of Foreigners Employed in China in Social Insurance

•Interim Measures for Administration of Investment Fund of Enterprises Participating in the New Industry Venture Capital Investment Program

•Administrative Measures of Shanghai Municipality for Drug Prices (for Trial Implementation)

Legal Practices:

•Watch Your Mouth in this MicroBlog Age (I)

•An Overview into the Government Pricing System for Drugs

•How Could the Shareholder’s Right to Know Be Protected by Law

 

Latest News

Legend of Start from Scratch—On Corporate Evolution (Fa Shuo Shui Hu), a new book written by Mr. Chambers Yang was published

“Legend of Start from Scratch—On Corporate Evolution” (“Fa Shuo Shui Hu”), the sixth book written by Mr. Chambers Yang was recently published by China Legal Publishing House. With Chinese classic story “Water Margin” as the background, this book introduces to readers the knowledge on corporate evolution with humorous and vivid wording, which will be a great delight for readers to get some legal knowledge on enterprise restructuring, corporate governance, merger and acquisition and anti-takeover, separation, dissolution and liquidation, etc. In addition to storytelling, Mr. Chambers Yang also made a column of interpretation on company laws and regulations to further readers’ understanding in this connection.

 

Latest Laws and Regulations

Provisions of the Ministry of Commerce on Implementing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors


The Ministry of Commerce (MOFCOM) promulgated the Provisions of the Ministry of Commerce on Implementing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors (hereinafter referred to as the Provisions) on August 25, 2011 and put it into effect as of September 1, 2011.

If the merger and acquisition (M&A) of domestic enterprises by foreign investors falls within the following scope, the foreign investors shall file an application for M&A security review to the MOFCOM: (1) foreign investors’ M&A of domestic military industry enterprises and military industry support enterprises, enterprises around key and sensitive military facilities, and other entities that have impact on national defense security; (2) foreign investors’ M&A of domestic enterprises that have impact on national security, in fields of important agricultural products, important energy and resources, important infrastructure, important transport services, key technologies and major equipment manufacturing, etc. and such M&A that may result in foreign investors’ acquirement of actual control of the enterprises. Where the foreign M&A involves two or more than two foreign investors, such foreign investors can jointly submit the application to MOFCOM for security review or designate one of them to do such application.

Where a foreign investor merges or acquires a domestic enterprise, and a relevant department of the State Council, a national industry association, enterprises in the same industry and upstream & downstream enterprises deem that a M&A security review is necessary in this respect, they may propose a M&A security review to MOFCOM along with an explanation of the relevant actualities, and MOFCOM may request the parties interested to submit explanations in that respect. If the transaction falls within the scope of M&A security review, MOFCOM shall submit a proposal relating to such transaction to the joint meeting within five (5) working days. If the joint meeting deems it necessary to conduct a M&A security review, MOFCOM shall, based on the resolution of the joint meeting, request the foreign investor to file an application for M&A security review in accordance with the Provisions.

Where the transaction falls within the scope of M&A security review, MOFCOM shall notify the applicant in writing within fifteen (15) working days, and within five (5) working days thereafter, submit it to the joint interdepartmental meeting of M&A security review for review. The applicant shall not implement the M&A transaction within 15 working days from the date of written notification of acceptance of application, and the local department of commerce shall not examine and approve the M&A transaction. If MOFCOM does not notify the applicant in writing within fifteen (15) working days, the applicant may proceed with relevant formalities in accordance with the laws and regulations of China.

Pursuant to the Provisions, no foreign investor shall by any means substantially evade the M&A security review, including but not limited to holding shares on behalf of others, trust, multi-level reinvestment, leasing, loans, agreement-based control and overseas transactions, etc.

 

Interim Provisions on Evaluating the Impact of Concentration of Business Operators on Competition


The Ministry of Commerce (MOFCOM) promulgated the Interim Provisions on Evaluating the Impact of Concentration Business Operators on Competition (hereinafter referred to as the Interim Provisions) on August 29, 2011 and put it into effect as of September 5, 2011.

Where MOFCOM conducts an review of business operator concentration, it shall, according to the specific circumstances and characteristics of individual cases, comprehensively take into consideration the following factors: (1) the market share of the business operators that participate in the concentration in the relevant market and their control over the market; (2) the degree of the relevant market concentration; (3) the impact of business operator concentration on the market access and technical progress; (4) the impact of the business operator concentration on consumers and other relevant business operators; (5) the impact of the business operator concentration on the national economic development; (6) other factors with an impact on the market competition that shall be taken into consideration. In assessing business operator concentration, in addition to the aforesaid factors, such factors as the impact of concentration on public interests, the impact of concentration on economic efficiency, whether the business operators participating in the concentration are enterprises on the brink of bankruptcy, and whether there is countervailing buyer power, etc., shall also be taken into full consideration.

The Interim Provisions have also specifically defined the adverse impact of business operator concentration on competition, market share, market concentration degree, etc., and clarified that both positive and negative impacts could possibly be caused by the business operator concentration on technical progress, consumers’ interests, market competition, national economic development, etc.

If any business operator concentration has or might have the effect of excluding or restricting competition, MOFCOM shall come up with a decision to prohibit such concentration. However, if the business operator can prove that the positive impacts of such concentration on competition will significantly outweigh the adverse impacts thereon, or such concentration will contribute to the public interests, MOFCOM may determine not to prohibit such concentration.

 

Pilot Foreign Exchange Control Guidelines and Implementing Rules for Trade in Goods

The State Administration of Foreign Exchange, State Administration of Taxation and General Administration of Customs jointly promulgated the Pilot Foreign Exchange Control Guidelines and Implementing Rules for Trade in Goods on September 9, 2011 and put it into effect on December 1, 2011 in provinces and cities like Jiangsu, Shandong, Hubei, Zhejiang (excluding Ningbo City), Fujian (excluding Xiamen City), Dalian, Qingdao, etc.

China sets no restrictions on international payment for trade in goods. Export proceeds may be transferred back to China or deposited overseas in pursuance of the relevant provisions. Foreign trade enterprises shall collect in time the loans in full or deposit it overseas in accordance with the pertinent contract after an export transaction is fulfilled, and shall also pay promptly the loans in full under the contract after an import transaction is completed.

In this reform of foreign exchange control for trade in goods, the most noteworthy point is that the regulatory measures for compliant and non-compliant enterprises will be clearly differentiated. On one hand, compliant enterprises will be entitled to the utmost convenience when handling the foreign revenue and expenditure in trade, e.g. compliant enterprises will be exempted from subjecting their foreign exchange receipts for exportation to online examination. But for non-compliant enterprises, regulation by the foreign exchange bureau on their foreign revenue and expenditure documents, business type, terms of settlement, handling procedures, etc. will be intensified, or if necessary, an on-site verification will be carried out. Moreover, the foreign exchange bureau of the pilot area will divide enterprises into three categories (A, B, C) in accordance with their regulatory compliance of foreign exchange revenue and expenditure in trade. For Category A, the document of foreign exchange payment for importation is simplified, under which circumstances Category A may handle direct foreign exchange payment in a bank with any single document that could prove the authenticity of the transaction, such as an import declaration, contract or invoice. Besides, it is not necessary for Category A’s foreign exchange payment for exportation to be subject to any online examination and the formalities for examination and approval of Category A’s foreign exchange receipt and payment by the bank will also be simplified. However, for Categories B and C, the regulation on their foreign exchange revenue and expenditure documents in trade, business types, terms of settlement, etc. will be much stricter, and for example, foreign exchange revenue and expenditure in trade of Category B will be subject to e-data verification by the bank and that of Category C will have to go through registration of each transaction by the foreign exchange bureau before any material examination is conducted.

The reform of foreign exchange control for trade in goods mainly includes:

Firstly, to enhance the administration of foreign exchange control for trade in goods. The authority of foreign exchange will carry out an overall examination on the import and export commodity flow and the cash flow of trade revenue and expenditure, and shall, subject to the compliance status of enterprises, maintain a classified administration of the said flows with the relevant classification result being revised from time to time.

Secondly, to simplify the formalities and operation flow of foreign exchange receipt and payment in trade. Enterprises no longer need to handle any verifying and writing-off after foreign exchange receipt and payment. For compliant enterprises, the foreign exchange payment document for importation is greatly simplified. Compliant enterprises may handle the foreign exchange payment in a bank with any single document that could prove the authenticity of the transaction, such as an import declaration sheet, contract or invoice. The procedures for examination of the foreign exchange payment documents by the bank are also simplified to a large extent and the foreign exchange receipt for exportation will not be subject to any online verification.

Thirdly, to simplify the tax refund voucher for exportation. During the pilot reform, where export enterprises in the pilot area declare tax refund, they will no longer provide any paper verifying and writing-off instrument of foreign exchange payment for exportation. The competent tax authority will, in accordance with the relevant provisions, examine the enterprise tax refund by referring to the information about the foreign exchange receipt for exportation and related classifications reported by the administrative department of foreign exchange.

Fourthly, to adjust the process for export declaration. In implementing the pilot reform, enterprises in the pilot area shall still provide a verifying and writing-off instrument of foreign exchange payment for exportation in pursuance of existing provisions when conducting export declaration. After the foreign exchange control system for trade in goods is extended to the whole nation, the State Administration of Foreign Exchange and the General Administration of Customs will adjust the process of export declaration and completely cancel the verifying and writing-off instrument of foreign exchange payment for exportation.

 

Administrative Measures for Examination, Approval and Supervision of Asset Appraisal Institutions

The Ministry of Finance promulgated the Administrative Measures for Examination, Approval and Supervision of Asset Appraisal Institutions (hereinafter referred to as the Administrative Measures) on August 18, 2011 and put it into effect on October 1, 2011.
An asset appraisal institution refers to a lawfully established social intermediary institution that is exclusively engaged in the asset appraisal business. The business scope of asset appraisal institutions mainly include: separate asset appraisals, asset portfolio appraisals, enterprise value appraisals, other asset appraisals and related consulting business.

An asset appraisal institution can be incorporated in the form of general partnership (including special general partnership) or limited liability company. The name of an asset appraisal institution shall also bear the word “asset appraisal”.

With regard to the establishment of a partnership asset appraisal institution, it shall not only meet the conditions as provided for in the relevant laws and regulations, but also comply with the following requirements: (1) having two (2) or more partners conforming with the provisions of the Administrative Measures as well as five (5) or more certified asset appraisers; (3) the total actual contributions of partners shall be no less than RMB 100,000 Yuan and in particular, the total actual contributions of partners in a special general partnership asset appraisal institution shall be no less than RMB300, 000 Yuan.

An asset appraisal institution in the form of a company shall not only meet the conditions as provided for in the relevant laws and regulations, but also satisfy the following requirements:(1) having 2 or more shareholders conforming with the provisions of the Administrative Measures; (2) having 8 or more certified asset appraisers; (3) having a registered capital of no less than RMB300, 000 Yuan.

Any partner or shareholder as mentioned in the Administrative Measures shall meet the following requirements: (1) holding a Certified Asset Appraiser Certificate of the People’s Republic of China (CAAC); (2) after the acquistion of a CAAC, having asset appraisal experiences on a full-time basis in an asset appraisal institution for approximately three (3) years; (3) within three years before becoming a partner or shareholder, receiving no self-disciplinary action or administrative punishment for appraising practices.

To establish an asset appraisal institution, the representative(s) designated or agent(s) jointly engaged by all partners or shareholders hereof shall file an application to the provincial department of finance with the pertinent application materials as set out in the Administrative Measures. After the provincial department of finance accepts the said application, it shall disclose the name of the asset appraisal institution, partners or shareholders, chief partners or legal representatives, certified asset appraisers and other information as specified in the application materials, and such disclosure shall last no less than five (5) working days. The provincial department of finance shall, within 20 working days after acceptance of the application for establishment by the asset appraisal institution and in accordance with relevant provisions, examine the application materials and make a decision of approval or disapproval.

After handling formalities for industrial and commercial registration and for acceding to the China Appraisal Society upon the strength of the approval document, the applicant shall apply to the provincial department of finance to obtain an asset appraisal certificate, and submit a photocopy of its business license together with its partnership agreement or bylaws filed at the administrative department for industry and commerce to the provincial department of finance for archival purposes.

An asset appraisal institution that intends to establish a branch shall meet the following conditions: (1) it has been three (3) years or more since it was lawfully established and it has a sound internal management system; (2) it has 20 or more certified asset appraisers, excluding those who plan to transfer to the to-be-established branch and those who are practicing in the already-established branches; (3) its aggregate incomes from appraisal business account for RMB 15 million during the 3 years before it files the application; (4) it has not received any self-disciplinary action or administrative punishment during the 3 years before it files the application. A branch shall have no less than six (6) certified asset appraisers and a fixed office. The examination and approval procedures for the branch equal those for the asset appraisal institution.

 

Interim Administrative Measures for Transfer of Insurance Business by Insurance Companies


China Insurance Regulatory Commission promulgated the Interim Administrative Measures for Transfer of Insurance Business by Insurance Companies on August 26, 2011 and put it into effect on October 1, 2011.

Where an insurance company intends to transfer the whole or part of its insurance business, it shall obtain the approval from China Insurance Regulatory Commission.

The transferee of the insurance business shall undertake the due obligations formerly borne by the transferor for insurance purchasers, the insured and the beneficiaries in accordance with the original insurance contracts of the transferor. The transferee of the insurance business shall meet the following conditions: (1) the transferred insurance business shall be within the transferee’s business scope; (2) the corporate governance structure is well framed, with a sound interior control system; (2) it is sufficiently solvent and its solvency after undertaking the transferred insurance business complies with the relevant provisions of China Insurance Regulatory Commission; (4) it has no record of any serious administrative penalty given by the financial regulatory body in the last two years; (5) it has a branch in the region where the insurance policy of the transferred insurance business was initially issued; (6) it has already been subject to the feasibility research on operation and administration of the transferred business; (7) other conditions as prescribed by China Insurance Regulatory Commission.

The transferor and transferee of the insurance business shall hire such professional intermediary institutions as law firms and accounting firms to conduct an assessment on the value, compliance, etc. of the transferred insurance business, and subject the assessment results to the approval by the board of directors and the shareholders’ meeting (general meeting of shareholders) of the insurance company.

After China Insurance Regulatory Commission approves the transfer of the insurance business, the transferor shall promptly inform the related insurance purchaser and the insured of the transferee’s basic information, the outline of the transfer scenarios and due liabilities, etc. and obtain the consent of the insurance purchaser and the insured. Where the insured party to the personal insurance contract dies, the transferor shall inform the beneficiary in writing of this and obtain its approval.

After China Insurance Regulatory Commission approves the transfer of the insurance business, the transferor and transferee concerned shall issue a joint announcement on the newspaper designated by China Insurance Regulatory at least three times and on their respective official websites for at least one month.

 

Circular on Enhancing the Capacity of State High & New Technology Industrialization Bases


The Ministry of Science and Technology (MOST) promulgated the Circular on Enhancing the Capacity of State High & New Technology Industrialization Bases (hereinafter referred to as the Circular) on August 29, 2011. According to the Circular, the focus of industrialization bases shall be placed on indigenous innovation and high & new technology industries (excluding modern service industries) encouraged by the State, the development trend of which shall accord with the provisions of the relevant departments of the State Council. Meanwhile, industrialization bases shall be governed within a relatively clear geographical scope, and theoretically, shall not surpass the regional and municipal jurisdictional boundaries.

With regard to the accreditation institution, the industrialization base that applies for accreditation shall be subject to the following procedures: (a) going through the preliminary examination by the provincial department of science and technology; (b) conclusions from the said examination are submitted to the Department of High & New Technology Development & Industrialization (DHNTDI) of MOST; (c) DHNTDI thereafter conducts a review of the application and accordingly puts forward a review opinion; (d) the provincial department of science and technology carries out the construction scenario and development plan in accordance with the review opinion; (e) the construction scenario and development plan are submitted for examination by the people’s government at levels of province, autonomous region, municipality directly under the Central Government and city under separate state planning and thereafter handed over to MOST; (e) MOST selects the industrialization base with the best construction scenario and development plan to accredit after taking all related factors into consideration.

Accreditation is subject to the following standards: (1) the industrialization base is specializing in the leading industry; (2) the overall capacity of the industrialization base is in a leading position in China; (3) the amount of sales shall cover a proportion of no less than 10% of all domestic products of the same category; (4) enterprises in the industrialization base shall have an annual gross income of no less than RMB 3 billion; (5) up-scale industrial enterprises shall be no less than 30 and accredited high & new technology enterprises shall be no less than five (5); (6) the industrialization base shall be a gathering of innovation factors, outstanding talents and strengths for transformation of technology and deliverables; (7) accredited research & development institutions at the provincial level or above shall be no less than three (3) and intermediary agencies of science and technology shall be no less than three (3); (8) the industrialization base is equipped with a special administrative organization and support policies formulated by the local government as well as a public service platform.

 

Interim Measures for the Participation of Foreigners Employed in China in Social Insurance

The Ministry of Human Resources and Social Security of the People’s Republic of China promulgated the Interim Measures for the Participation of Foreigners Employed in China in Social Insurance (hereinafter referred to as the Interim Measures) on September 6, 2011 and put it into effect on October 15, 2011.

For the purpose of the Interim Measures, foreigners employed in China means people without Chinese nationality who have obtained the “Employment Certificate for Foreigner”, the “Certificate of Foreign Expert”, the “Certificate of Permanent Foreign Correspondent” or other employment certificates and residence certificates for foreigners in accordance with the law, and have been granted the “Permanent Residence Certificate for Foreigner”, and have been lawfully employed in China.

Any foreign worker employed in accordance with the law by any employer incorporated or registered within the territory of China in accordance with the law shall participate in basic endowment insurance for employees, basic medical insurance for employees, work-related injury insurance, unemployment insurance and maternity insurance, and the social insurance premiums shall be paid by the employer and the particular foreign worker in accordance with the provisions. Any foreigner who, upon signing the employment contract with a foreign employer overseas, is dispatched to work in any branch or representative office of the foreign employer incorporated or registered in China shall participate in basic endowment insurance for employees, basic medical insurance for employees, work-related injury insurance, unemployment insurance and maternity insurance and the social insurance premiums shall be paid by the domestic employer and the particular foreign worker.

Where a foreigner leaves China before reaching the prescribed age for receiving pension, his or her personal social insurance account shall be retained, and if he or she returns to China for employment, the contribution period shall be calculated cumulatively. If the social insurance relationship is terminated upon a written application by the foreigner, the balance in the foreigner’s personal social insurance account may be paid to the foreigner in a lump sum. Where a foreigner dies, the balance in his or her personal social insurance account may be inherited in accordance with law.

 

Interim Measures for Administration of Investment Fund of Enterprises Participating in the New Industry Venture Capital Program

The Ministry of Finance and National Development & Reform Commission the Interim Measures for Administration of Investment Fund of Enterprises Participating in the New Industry Venture Capital Program (hereinafter referred to as Interim Measures) on August 17, 2011.

The new industry venture capital program as mentioned herein refers to any activity in which the central financial funds cultivate and promote the development of new industries through such means as making direct investments in venture capital enterprises and participating in the equity of the venture capital investment fund. The participation in the venture capital fund as mentioned herein refers to the venture capital fund that the central finance administration establishes through allocating funds from such special funds as the industrial technical research and development funds to, together with local government funds and social capital or through participating in any existing venture capital fund by means of capital increase.

Each participation fund shall focus on making investments in the following specific fields: energy conservation and environment protection, information, biological and new medicine, new energy, new materials, aerospace, ocean, manufacturing of advanced equipment, new energy automobiles, high-tech services (including services for information technology, biological technology, research, development and design, examination and testing, transformation of scientific and technological achievements, etc.) and other strategic new industries and fields of reforming and upgrading the traditional industries through high-tech means. The participation fund shall mainly make investments in innovative enterprises which have the capability to make original innovations, integrate innovations or make new innovations after digestion and absorption and are newly established or at the beginning or middle stage and the proportion of funds invested in such enterprises shall not be less than 60% of the registered capital or the promised capital contribution of the fund.

The participation fund comprises of participation fund enterprises, administrative bodies for participation funds and custodian banks. Administrative bodies for participation funds shall be registered within the mainland of China with a registered capital of no less than RMB five million Yuan. Besides, the said administrative bodies shall: (1) be capable of raising funds; (2) be well equipped with fixed premises as well as suitable software and hardware facilities; (3) have rich experience in investment management and excellent management performance, a sound process for venture investment management and risk control, normative mechanisms for project selection and investment decision-making, sufficient value-added services such as business start-up tutorship and consulting services for invested enterprises; (4) have at least three (3) senior management personnel with at least three (3) years of experience in venture investment or fund management; (5) have at least three (3) successful investments in venture enterprises; (6) have no record of penalties imposed by the competent administrative or judiciary organ. Those administrative bodies that have already set out to manage participation funds shall not raise or manage other venture investment funds before completing the entrusted investment in 70% of the participation funds.

In addition to the aforementioned provisions, the Interim Measures have also made some stipulations on the application of newly-established venture investment funds with the Central Treasury for contributions and capital increase to the existing venture investment funds. In the meantime, there are also some terms and conditions prescribed for entrusted regulatory authority for the contributed capital, for example, the entrusted regulatory authority shall have a registered capital of no less than RMB100 million Yuan and at least five (5)-year experience in investment management business, etc.

 

Administrative Measures of Shanghai Municipality for Drug Prices (for Trial Implementation)


Shanghai Municipal Development & Reform Commission (Price Information Bureau) promulgated the Administrative Measures of Shanghai Municipality for Drug Prices (for Trial Implementation) (hereinafter referred to as the Measures) on July 29, 2011 and put it into effect on September 1, 2011.

The Measures apply to all enterprises (including retail pharmacies) and medical institutions specializing in drug production and distribution in Shanghai.

Drug price control is subject to government pricing, government-guided pricing and market-regulated pricing. Prices of drugs that fall under the government pricing category pursuant to the provisions of National Development & Reform Commission (NDRC) and the competent price administration of Shanghai Municipality shall be fixed uniformly by the price control department. Prescription drugs (“RX”, including all dosage forms) that falls under the catalogue of state basic medical insurance drugs and state basic medical insurance drug catalogue and other little special drugs of which the production and operation are monopolized shall be subject to government-guided pricing by NDRC. In addition to the drugs subject to government-guided pricing by NDRC, OTC (including all dosage forms) that falls under the catalogue of state basic medical insurance drugs, drugs that fall under the catalogue of Shanghai basic medical insurance drugs (including all dosage forms) and traditional Chinese herbal slices and self-made drugs that fall under the scope of medical insurance reimbursement shall be subject to government-guided pricing by the competent price authority. Distributors may sell drugs by surrendering part of profits at a price below the maximum retail price fixed by the competent price authority of Shanghai Municipality.

When enterprises fix and adjust drug prices, they shall comply with the relevant principles as prescribed in the Measures. When the competent price authority fixes and adjusts drug prices, it adopts three approaches, i.e. routine declaration of drug prices, formulation of prices by concentrated bid invitation, establishment of a price trend adjustment mechanism. Price of drugs subject to government-guided pricing or market-regulated pricing shall be reasonably fixed by production and operation entities and medical and health institutions in accordance with actualities of the market. Drug operators shall establish and improve the interior price control system and correctly record the production and operation costs, purchase and sale prices and volume of drugs. Enterprises and other commercial organizations specializing in drug sales shall strictly stick to the principle of clearly marking prices in order to effectively protect consumers’ interest.

Legal Practices

Watch Your Mouth in this MicroBlog Age (I)

 

August 25 in the year of 2011 witnessed the final judgment made by Beijing No.1 Intermediate People’s Court for the “first mircroblog case”—Kingsoft sued Zhou Hongyi (CEO of Qihoo 360) for the latter’s infringement upon its “microblog right of reputation”. Beijing No.1 Intermediate People’s Court, i.e. the court of final appeal for this case, accepted part of Zhou Hongyi’s appellate claims and ordered to reduce the number of Zhou’s microblog text updates that ought to be deleted from 20 to 2 and to decrease the compensation payable by Zhou to Kingsoft from RMB80, 000 Yuan to RMB50, 000 Yuan. In addition to the trial and judgment of this case, both the judge of first instance and the judge of second instance have probed into the boundary of freedom of speech. The former deems that online speech does enjoy the “right of immunity” to a certain extent and the latter further added that this case concerned “is intended for creating rules to protect citizens’ freedom of speech”.

Traditional communications adopt the mass media model which generally disseminates information in the point-to-area form. Media always takes the initiative to disseminate information, i.e. it holds the absolute power of discourse. To some extent, network has weakened the monopolistic status of media, and the emergence and development of the microblog community has even eclipsed it. Indeed, the microblog community has facilitated free dissemination of information by the public, but it also poses some risks to the control of harmful information. In the verdict of the aforesaid court of final appeal, the microblog infringement has also been defined. “Every netizen shall safeguard the microblog community in light of its positive effects on their spiritual life and shall not attack others with microblog text updates. The microblog shall not be taken as a tool for criticizing and cursing other people, or otherwise, anyone could become the potential target of attacks.”

As a matter of fact, the subjects of microblog infringement usually cover a broader range and tend to be more unidentifiable. On the other hand, the targets of microblog infringement also are relatively diversified and complicated. In addition to the right of reputation involved in the “first microblog case”, the right of privacy, business secrets, copyrights and public interests, be it separately or jointly, are also the potential targets of infringement.

How to define the boundary of freedom of speech in the microblog community? When judging whether a microblog infringement has been invoked, the following elements shall be taken into consideration: (1) whether the microblog text update is original or is nothing but a fabricated truth; (2) what is the specific identity of the creator of a certain microblog text update? (3) what remedial measures can the microblog service providers take to prevent a potential infringement? (4) how to define the boundary of freedom of speech and the right of immunity in the microblog community? Generally, the characteristics of a certain microblog text update shall also be taken into consideration in respect of whether it constitutes an infringement, under which circumstances, however, a conflict between virtuality and reality consequentially occurs. How to choose between standards of virtuality and standards of reality when it comes to the judgment of microblog infringement? We are now confronted with some tricky issues, including, without limitation, how to regulate the microblog community and how to define the freedom of speech and infringement in the microblog community. The best solution lies in either a complete virtualization or actualization of the microblog community. However, both virtualization and actualization will pose hindrance to people’s freedom of expressing feelings and desires. It might be feasible that a virtual court is organized to hear the “virtual” case brought by the microblog and a “virtual” announcement is released to the public in respect of the microblog case, but it is always the human society that gives rise to all wrongs and rights, including those in the microblog community.

In fact, the provisions of Tort Law in principle also apply to the microblog infringement. However, pursuant to the definition of the subject of infringement as set out in Article 36 of Tort Law, the following aspects are still to be defined: (1) whether mircroblog users as subjects of infringement are merely creators of text updates? (2) whether netizens who reprint or comment on mircroblog text updates of creators are obliged to bear certain liabilities? (3) whether there are remedial measures for netizens who create, reprint or comment on microblog text updates to prevent potential infringement? (4) how shall service providers undertake the due obligations and what remedial measures shall be taken for the infringed, etc.

All things considered, some people might be engrossed in another question—is it necessary for the state legislative authority to enact a separate law for the microblog community? However, as for the microblog community, the microblog techniques and concepts precede the law and the correlations between the freedom of speech and other rights abound in complexities, so it is a big headache for any legislation to clarify the boundaries of all said rights. In this connection, an individual case, such as the “first microblog case”, has somewhat provided some judicial clues for restricting and regulating the microblog freedom of speech. The so-called “freedom of speech” and “do whatever one wants” boasted by the microblog service providers and users shall be always limited within a certain scope by the law. If you are fascinated with the microblog and wish to make status updates via the microblog community, you’d better hold yourself and watch your mouth.

(The author's contact information: baileyxu@hllawyers.com; celinechen@hllawyers.com)

 

An Overview into the Government Pricing System for Drugs

 

1. The basis and method for pricing of commodities and services within the territory of China

In order to regulate the prices of commodities and services within the territory of China, the Price Law of the People’s Republic of China (hereinafter referred to as Price Law) was put into effect as of May 1, 1998 to define the formation of pricing mechanism within the territory of China. Article 2 of the Price Law stipulates that the State shall introduce and gradually improve the mechanism of price regulation mainly by virtue of market force under a kind of macroeconomic control. Under such a mechanism, price fixing shall accord with the value law with most of the merchandises and services subject to market-regulated pricing while only a few of them subject to the government-guided pricing or government pricing.

Meanwhile, Article 18 of the Price Law also imposes a limit on the scope of commodities and services subject to government-guided or government pricing, i.e. the following commodities and services are subject to the government-guided pricing or government pricing, as the case may be:

1.The few merchandises that are of great importance to development of the national economy and the people’s livelihood;
2.The few merchandises that are in shortage of resources;
3.Merchandises of monopoly in nature;
4.Important public utilities;
5.Important services of public welfare in nature.
2. The formulation of the drug pricing system within the territory of China

As drugs are commodities of a special kind and closely related with human life, the drug pricing certainly falls under the administrative scope of the government. Despite the fact that drugs are generally subject to government pricing, this does not necessarily mean a blind control or decrease of drug prices, to the contrary, the drug pricing system in China, with a view to the actualities of the life and medical conditions of common people, places the focus on a reasonable drug price to satisfy the needs of common people for “super quality and competitive price”. On the other hand, to encourage more effective and safer drugs than or drugs of shorter therapeutic periods and lower prices than drugs of the same kind produced by other enterprises, it is permitted that some drugs are separately priced notwithstanding the government pricing system.

Opinions on the Reform of Drug Price Control

Based on the Price Law, the National Development and Reform Commission (NDRC) enacted the Opinions on the Reform of Drug Price Control (hereinafter referred to as the Opinions on the Reform) on July 20, 2000 with general and fundamental provisions on the reform of drug price control. Later on, the enactment and implementation by NDRC of drug price systems and regulations including the drug pricing system, price adjustment system, cost review system, etc. is actually a demonstration of the Opinions on the Reform.

The Opinions on the Reform include:

(a) Methods for Fixing Drug Prices

Article 1 of the Opinions on the Reform stipulates that pursuant to the principle of state macro-control policies coordinating with market mechanism, drugs are subject to government pricing and market-regulated pricing.

(b) Basis for Fixing Drug Prices

The competent price authority shall fix maximum retail prices for drugs subject to government pricing. Drug retail entities (including medical institutions) shall fix the actual sale prices of drugs without prejudice to maximum retail prices fixed by the government.

Methods for Government Pricing of Drugs

After the formulation of fundamental provisions on the determination and adjustment of drug prices in the said Opinions on the Reform, NDRC enacted and promulgated in the same year the Methods for Government Pricing of Drugs (Ji Jia Ge [2000] No.2142) (hereinafter referred to as the Methods for Government Pricing) which further define the principles, basis and methods for government pricing of drugs (including domestic-made drugs, imported repackaged drugs and imported drugs).

In addition to provisions on the principles, basis, etc. for government pricing of drugs, the Methods for Government Pricing also comes with a separate pricing system for some government-priced drugs. Article 7 hereof stipulates that government-priced drugs more effective and safer than or of shorter therapeutic periods and lower prices than drugs of the same kind produced by other enterprises may apply to the price fixing department for separate pricing. Separate pricing of drugs are subject to the demonstration method as prescribed, but shall still comply with the basis of government pricing of drugs as provided for in the said Opinions on the Reform, i.e. without any prejudice to maximum retail prices fixed by the government.

Methods for Examining and Approving Declaration of Government Pricing of Drugs

With respect to the separate pricing system implemented for some government-priced drugs as set out in the Methods for Government Pricing, NDRC thereafter promulgated the Methods for Examining and Approving Declaration of Government Pricing of Drugs (Ji Jia Ge (2000) No.2144) (hereinafter referred to as the Methods for Examining and Approving)

On the basis of the Methods for Government Pricing, the Methods for Examining and Approving further refined and practiced the separate pricing system for some government-priced drugs and defined the scope of drugs subject to the separate pricing system and the procedures for carrying out such system as well as the subjects of declaration for fixing and adjustment of different drug prices.

The above combs the fundamental sequence of the formation of government pricing system for drugs. An important fact is that, the government pricing system carried out on some drugs by the competent government department does not necessarily mean that there will never be a change in the drug prices fixed by the government. As a matter of fact, the main focus of the Opinions on the Reform, Methods for Examining and Approving and Basis for Pricing has always been the government-priced drugs, the prices of which shall be adjusted from time to time as the conditions of production of drugs and market supplies & demands vary.

(The author’s contact information: jasonxia@hllawyers.com)

 

How Could the Shareholder’s Right to Know Be Protected by Law

 

[Case Profile]

Jiangsu Jiade Real Estate Development Company Limited (hereinafter referred to as “Jiade Company”) was established in 2003. There were five shareholders then in the company, including Shi Yunsheng, Wang Guoxing and Zhang Yulin. In September 2007, Zhang Yulin transferred all his holding shares to Li Shujun.

On April 8, 2009, Li Shujun, Wu Xiang, Sun Jie and Wang Guoxing jointly submitted a written request to Jiade Company for review of the information about Jiade’s business operation, and due to the large amount of liabilities still owed by Jiade Company, they asked to review or duplicate the company’s books and records related to its financial condition. On April 20, 2009, Jiade Company replied to the four shareholders that as review of company’s books and records involved a number of legal issues, the company had engaged an attorney to handle this according to the law.

Actually, before Jiade Company replied, the four claimants had pleaded the People’s Court of Sucheng District, Suqian City on April 14, 2009 for their right to know against Jiade Company to be enforced. Such right to know covered Jiade Company’s accounting books, journals, covenants, correspondences, tax declaration forms (including original accounting vouchers, court summons, telexes, correspondence, telephone records, text updates, etc.) and other documents. On the same day, the People’s Court of Sucheng District accepted and heard such case. During the trial, Jiade Company defended itself that it never rejected the four claimants’ request to review or duplicate the company’s articles of association, minutes of shareholders’ meeting and financial and accounting reports, yet it pleaded the court for rejection of the four claimants’ claim to review or duplicate its accounting books just because they had not stated any proper purpose,

[Court Judgment]

The court of first instance deems that the focuses of this case were placed in two aspects. Firstly, was there any legal ground for the scope of execution of the right to know by the four claimants? Secondly, was there any unjustifiable purpose held by the four claimants when they asked to review and duplicate the company’s accounting books? As for the first, pursuant to the provisions of Company Law, except for review of accounting books and original evidences required for formulating accounting books, the claim of the four claimants has already gone beyond the scope of execution of the right to know, and the content beyond the scope shall not be accepted. As for the second, Clause 2 of Article 34 under the Company Law clearly stipulates that every shareholder may request to review the accounting books and records of the company but shall not have any improper motive. In this case, the former shareholder Zhang Yulin is now the Project Manager of Guangsha Construction Group Co., Ltd. (hereinafter referred to as “Guangsha Group”), the contractor of the “Yi Jin Hua Ting” project. The fact is that there is still a case unsettled between Jiade Company and Guangsha Group in respect of a huge sum of project payment, which has already constituted a material conflict of interest between Jiade Company and Guangsha Group. Therefore, written request mentioned above as well as the complaint for civil action and power of attorney submitted by the four claimants all had the signature of Zhang Yulin on and the four claimants could not prove that Zhang Yulin was not directly related to invoking the dispute over the right ot know. On the other hand, due to the close contacts and communications between the four claimants and Zhang Yulin, the four claimants are suspected of being taken advantage of by a third party or seeking illicit interests for themselves or for the third party. All things considered, the court of first instance accordingly dismissed the claim of the four claimants.

The four claimants, unconvinced, instituted another appeal against the judgment of first trial to the Intermediate People’s Court of Suqian City, Jiangsu Province. The court, after trial, deems that since Jiade Company rejected the four claimants’ request for reviewing company accounting books on the ground of their illicit motives and the potential detriment of its legitimate interests, Jiade shall bear the burden of proof in this respect, failing which, however, any statement of Jiade Company shall not be acknowledged by the court. With respect to whether or not the four claimants’ execution of the right to know conforms with the provisions of relevant laws, the court of second instance deems that in accordance with the legislative purpose, the scope of execution of the right to know by the four claimants shall cover accounting books (including general ledger, detailed ledger, book of first record and other subsidiary accounts) and accounting vouchers (including accounting vouchers, related original evidences and other books and records that shall be prepared as attachments to original evidences for future review). However, the Company Law does not have any provision approving duplication of the said accounting books and records, therefore the four claimants’ request was not supported with any legal ground and went beyond the provisions of the Articles of Association, and the court shall not render any support in this respect.

[Brief Analysis]

With respect to the shareholder’s right to know, Article 34 of the Company Law stipulates that every shareholder shall be entitled to review and duplicate the company’s articles of association, the minutes of the shareholders’ meetings, the resolutions of the board of directors’ meetings, the resolutions of the board of supervisors’ meetings, as well as the financial and accounting reports. Every shareholder may request to review the accounting books of the company concerned. Where a shareholder asks to review the company’s accounting books, it shall submit a written request that states a proper purpose for the review. If the company justifiably believes that the shareholder’s request for review is based on an improper motive and may impair the company’s legitimate interests, it may reply in writting with an explanation included to the request within 15 days after the shareholder submits such request. If the company sets aside any shareholder’s request for review of the accounting books, the shareholder may plead a people’s court to demand the company to open the related books and records for his review. The shareholder’s right to know refers to the right granted by the law for the shareholder to review company financial and accounting reports, accounting books and other data related to company operation, management, decision-making, etc. in order to make clear the company operating conditions and supervise over the company officers. From the legislative perspective, the focus of the shareholder’s right to know is placed on protecting the legitimate rights and interests of medium and minor shareholders. For the purposes herepof, the shareholder’s right to know is divided into the right to review, the right to request for selection and appointment of auditor and the right to raise inquiries and ask for replies. In the case concerned, the right of the four shareholders refers to the right to review. In the lawsuit where the shareholder claims for the right to know, the author holds that the following aspects shall be emphasized.

1)There shall be a precondition for the shareholder to file a lawsuit claiming for the right to know. Only when the shareholder submits to the company a written request for review of relevant books and records but the company rejects such request shall the shareholder be entitled to have his/her rights enforced in court. The purpose of such precondition is to provide remedial measures for the shareholder when his/her right to review relevant company books and records is violated as well as to prevent the shareholder from abusing his/her right of action in order to maintain the company’s normal operating conditions. In real practices, some courts would conduct a formal examination of the precondition before placing a case relating to the right to know on file so as to ensure that the shareholder, before filing the lawsuit, has already been rejected by the company for his/her request for review of company books and records.

2) The shareholder who performs the right to know shall not hold any improper purpose or prejudice the company’s legal interests. Given that the shareholder’s right to know involve the conflict between the interests of the sharehoder and that of the company, the two sides shall be properly balanced. In light of this, there shall be some restriction on the execution of the right to know, which includes that “the execution of the right to know is based on legitimate purposes”. The author believes that according to the provisions of relevant laws, whether execution of the right to know by the shareholder is based on improper purposes or not shall be adequately proved by the defendant, i.e. the company. Only when company produces the legal and valid evidence to prove that the excution of the right to know by the shareholder will prejudice the company’s interests will the court dismiss any claim of the shareholder in this connection.

3) The scope of materials permitted for review. In accordance with the provisions of the Company Law, company books and records that could be reviewed by the shareholder include the articles of association, minutes of the shareholders’ meeting, resolution of the board meeting, resolution of the board of supervisors, financial and accounting reports and accounting books. The purpose of the shareholder performing the right to know is simply to make clear what is going on in the company. However, to get a clear idea of the company’s operating conditions, shareholders, especially medium and minor shareholders, usually have to review the company’s original evidences. Therefore, the accounting books that could be reviewed by the shareholder shall include accounts (including general ledger, detailed ledger, book of first record and other subsidiary accounts) and accounting vouchers (including accounting vouchers, related original evidences and other books and records that shall be prepared as attachments to original evidences for future review), but the shareholder shall not refer to contracts, correspondences, telephone records, etc. produced in routine business operation. In addition, pursuant to the provisions of Company Law, accounting books could only be reviewed but not duplicated.

(The author’s contact information: kevincheng@hllawyers.com)