Haworth & Lexon Law Newsletter (201202)-Law Bridge-Shanghai Law Firm/Lawyer

Haworth & Lexon Law Newsletter
No.2 2012 (Total:No.120) March 8, 2012
Edited by Haworth & Lexon

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 of Haworth & Lexon

Haworth & Lexon Lawyers Give A Lecture on “Legal Analysis on the IPAD Trademark Dispute” in Shanghai World Financial Center

Haworth & Lexon lawyers Bailey Xu, Bruce Luan and Kevin Cheng gave a lecture on “Legal Analysis on the IPAD Trademark Dispute” in the multi-media conference hall on the 29th level of Shanghai World Financial Center on 23rd March, 2012. The subject of this lecture was the IPAD trademark dispute between Apple and Proview. Inspired by the “Thirty-six Stratagems” in the Master Sun’s Art of War, the lecturers of Haworth & Lexon made an analysis on the respective litigation strategies of Apple and Proview and on the corresponding legal issues to enlighten the audience on the countermeasures for enterprises to take against similar cases. The lecture attracted more than forty executives from foreign investment companies, luxury companies, real estate groups, the world’s famous consumer brands, foreign-funded banks, auto parts companies, equity investment management companies, etc.

Legal Updates Express

Provisions on the Pre-release Review on Advertisements Published by Mass Media

On February 9, 2012, the State Administration for Industry & Commerce, the Publicity Department of the Communist Party of China and the State Administration of Radio, Film and Television and other nine ministries and commissions jointly promulgated the Provisions on the Pre-release Review on Advertisements Published by Mass Media (hereinafter referred to as the Provisions) to regulate and define the pre-release examination responsibilities on the advertisement published via mass media.

Pursuant to the Provisions, mass media shall fulfill the statutory examination obligation on the advertisement to be released, and shall check relevant advertising supporting documents and verify advertising contents prior to the release of the advertisements to ensure that they are truthful and legitimate. The Provisions also provide for mass media on how to perform the advertisement examination obligations and make arrangements and stipulations on the advertisement examination procedures for mass media, e.g. a mass media entity shall be staffed with advertisement examiners to be responsible for specific examination tasks, the person in charge of the advertising management department shall be responsible for re-examination, while the leader in charge of advertisement examination work shall be responsible for verification.

The Provisions also require mass media to establish a registration, verification and archives management system for advertising business. A mass media entity shall order its advertisement examiners to make a new round of examination and verification of the advertisements in case of report and complaint from the public, and shall require the advertisers to address the issues reported or complained against and to provide supplementary supporting materials. Where the advertisers fail to provide supporting materials or where the supporting materials provided are insufficient to substantiate the truthfulness and legality of the advertising contents, the mass media entity shall immediately cease publishing of such advertisements.

In addition, the Provisions also provide that the administrative and supervisory departments of advertisements shall supervise over mass media entities in publishing advertisements and shall give warnings, cautions, criticisms, etc. to those mass media entities acting against the Provisions on the basis of the adverse effected actually caused thereby and hold the competent leaders and relevant responsible persons legally liable therefor.

Decision on Revising Articles 62 and 63 of the Measures for the Administration on Acquisition of Listed Companies

On February 14, 2012, the China Securities Regulatory Commission promulgated the Decision on Revising Articles 62 and 63 of the Measures for the Administration on Acquisition of Listed Companies which explicitly prescribes that for the tender offer arising from any of the following circumstances, the relevant party may be exempted from filing an application for exemption of tender offer and may apply directly with the securities exchange and securities depository and clearing institution for going through the formalities of shares transfer and ownership change registration:

Where the equity held by a party in a listed company reaches or exceeds 30% of the issued shares of that company, after one year as of occurrence of the foresaid fact, equity increased by such party in that company within each 12 months does not exceed 2% of the issued shares of that company; where the equity held by a party in a listed company reaches or exceeds 50% of the issued shares of that company, and the continuance of that party to increase its equity in that company does not affect the status of that company as a listed company; or where the equity held by a party in a listed company exceeds 30% of the issued shares of that company due to inheritance.

However, the relevant party shall make a public announcement within three days as of the act of equity change, the lawyer shall issue special verification and examination opinions with respect to such party’s act of equity change and the listed company shall disclose the above-mentioned opinions.

In the meantime, the revised Measures for the Administration on Acquisition of Listed Companies（hereinafter referred to as “Measures”） have specified and refined the requirements on information disclosure concerning a major shareholder holding more than 50% shares of a listed company in the event such major shareholder should increase its shareholding in the listed company and further specifies on the information disclosure obligation of the major shareholder holding more than 50% shares of a listed company in the event such major shareholder should increase 2% or more shareholding in the listed company.

Pursuant to the revised Measures, where the shareholder holding more than 50% shares increases its shareholding by adopting the way of centralized price bidding, and where, for each time, the accumulated increased shares by such shareholder reaches 1% of the issued shares of the company, such shareholder shall notify the listed company on the date of occurrence of the said fact, and the listed company shall make an announcement on the progress concerning relevant shareholders’ increase of shareholding in the company on the following trading day. Where, for each time, the accumulated increased shares by such shareholder reaches 2% of the issued shares of the company, such shareholder may not increase shareholding on the date when the said fact occurs and on the date when the listed company makes an announcement on the progress concerning relevant shareholders’ increase of shareholding in the company.

Administrative Measures for Information Disclosure of Commercial Franchise

On February 23, 2012, the Ministry of Commerce promulgated the Administrative Measures for Information Disclosure of Commercial Franchise (hereinafter referred to as the “New Administrative Measures”) (effective as of April 1, 2012). The New Administrative Measures have actually revised and refined some of the provisions in the original Administrative Measures effective as of May 1, 2007.

Compared with the 2005 Arbitration Rules, the 2012 Arbitration Rules have made new breakthroughs and attempts in the following aspects:

1. Addition of the “Consolidated Arbitration” System

Compared with the 2005 Arbitration Rules, the 2012 Arbitration Rules have newly added the system of “Consolidated Arbitration”. Pursuant to Article 17 of the 2012 Arbitration Rules, at the request of a party and with the agreement of all the other parties, or where CIETAC believes it necessary and all the parties have agreed, CIETAC may consolidate two or more arbitrations pending under these Rules into a single arbitration. In deciding whether to consolidate the arbitrations, CIETAC may take into account any factors it considers relevant, including whether the claims in the different arbitrations are made out of the same arbitration agreement, whether the different arbitrations are between the same parties, or nomination or appointment of the arbitrators of different arbitrations. Unless otherwise agreed by all the parties, the arbitrations shall be consolidated into the arbitration that was first commenced.

2. Addition of the “Interim Measure” System

The 2012 Arbitration Rules borrow ideas of the “Interim Measure” system I from international commercial arbitration and introduce this system into the arbitration rules. Pursuant to paragraph 2 of Article 21 of the 2012 Arbitration Rules, at the request of a party, the arbitral tribunal may order any interim measure it deems necessary or proper in accordance with the applicable law, and may require the requesting party to provide appropriate security in connection with the measure. The order of an interim measure by the arbitral tribunal may take the form of a procedural order or an interlocutory award.

But it is worth noting that the system still awaits more details and provisions on implementation and enforcement after being established.

3. New Provisions on “Cross-Examination”

Pursuant to the 2005 Arbitration Rules, for a case heard in arbitral sessions, the evidence shall be produced during the sessions for cross-examination by the parties concerned. Where an arbitration tribunal decides to accept the evidence submitted by the parties to a dispute after the hearing without holding further arbitral sessions, the arbitration tribunal may require the parties concerned to submit their written examination opinions within a prescribed time limit.

However, pursuant to the 2012 Arbitration Rules, where a case is examined by way of an oral hearing, the evidence shall be produced at the hearing and may be examined by the parties. Where a case is to be tried on the basis of documents only, or where the evidence is submitted after the hearing and the parties have agreed to examine the evidence by means of writing, the parties may examine the evidence without an oral hearing. In such circumstances, the parties shall submit their written examination opinions on the evidence within the time period specified by the arbitral tribunal.

Pursuant to the 2012 Arbitration Rules, it is up to the interested parties as to whether the evidence will be cross-examined at a court session. Besides, as for evidentiary materials submitted after the hearing, examination in writing could only be conducted with approval of the interested parties.

4. Addition of provisions on “Suspension of the Arbitration Proceedings”

The 2012 Arbitration Rules have added the provisions on “Suspension of the Arbitration Proceedings” that where parties request a suspension of the arbitration proceeding, or under circumstances where such suspension is necessary, the arbitration proceeding may be suspended. The arbitration proceeding shall resume as soon as the reason causing the suspension disappears or the suspension period ends. The arbitral tribunal shall decide on whether to suspend or resume the arbitration proceedings. Where the arbitral tribunal has not yet been formed, the decision shall be made by the Secretary General of CIETAC.

However, the 2012 Arbitration Rules do not make any further stipulation on the “reasons and bases” for the “circumstance” where an arbitration proceeding should be suspended or the interested parties may apply for suspension of the arbitration proceedings.

5. “Partial Award” and its legal force

The 2005 Arbitration Rules provide that “an arbitration tribunal may render an interlocutory award or partial award on any issue of the case at any time during the arbitration proceedings before the final award is made if it deems it necessary or if parties to the case so requests and the arbitration tribunal approves”.

However, the 2012 Arbitration Rules no longer mention the “interlocutory award” but provide that where the arbitral tribunal considers it necessary, or where a party so requests and the arbitral tribunal agrees, the arbitral tribunal may render a partial award on any part of the claim before rendering the final award. And a partial award is final and binding upon both parties. Failure of either party to implement a partial award shall not affect the arbitration proceedings, nor prevent the arbitral tribunal from making the final award.

6. Change of other provisions

(1) The 2012 Arbitration Rules specify the considerations of CIETAC in appointing arbitrators, providing that “when appointing arbitrators pursuant to these Rules, the Chairman of CIETAC shall take into consideration of governing laws, the place of arbitration, the language of arbitration, the nationalities of the parties, and any other factor(s) as the Chairman considers relevant”.

(2) The 2012 Arbitration Rules improve the conditions for the application of Summary Procedure, increasing the amount of dispute from “RMB 500,000 Yuan” in the 2005 Arbitration Rules to “RMB 2,000,000 Yuan”.

(3) The 2012 Arbitration Rules have also changed the time limit for a request raised by the parties concerned for a postponement of the oral hearing from “seven (7) days prior to the scheduled session” to “within three (3) days of receipt of the notice of the oral hearing”.

Guiding Opinions of the Supreme People’s Court on Effectively Standardizing the Exercise of Discretion during Adjudication and Enforcement to Ensure the Unified Application of Law

On February 28, 2012, the Supreme People’s Court printed and distributed the Notice on the Guiding Opinions of the Supreme People’s Court on Effectively Standardizing the Exercise of Discretion during Adjudication and Enforcement to Ensure the Unified Application of Law (Fa Fa [2012] No.7, hereinafter referred to as the Notice) to put forward guiding opinions for the people’s courts in exercising discretion during adjudication and enforcement.

The Notice, first of all, defines the scope and conditions for the people’s courts to exercise discretion. The people’s courts shall exercise discretion under the following circumstances in the adjudication of case: (1) where the people’s courts shall exercise discretion depending on the specific circumstances of the cases as prescribed by law; (2) where the law prescribes that the people’s courts shall exercise discretion by selecting one applicable circumstance from the several statutory circumstances or within the statutory scope or range; (3) where the people’s courts need to interpret the spirits, rules or provisions of the law according to the specific circumstances of the cases; (4) where the people’s courts need to interpret the rules of evidence or exercise discretion in the finding of the disputed facts according to the specific circumstances of the cases; and (5) where there are other circumstances under which the people’s courts need to exercise discretion according to the specific circumstances of the cases.

In the meantime, the Notice has regulated the discretion exercised by the people’s court in terms of the relevant factors and aspects involved in adjudication practices, e.g. correct application of the rules of evidence, proper employment of the methods for application of law, correct utilization of legal interpretation methods, correct use of methods to measure and weigh up the interests of all parties concerned, etc. It is worth noting that the Notice requires that the people’s courts shall place more emphasis on the reasoning of the grounds for finding the facts of cases in judicial instruments so that the parties concerned and the public are aware of the ground for determination and admission by the people’s courts of evidentiary materials. The judges shall openly invoke the applicable legal provisions, clarify the reasons for such application by referring to the facts of the cases, and fully discuss the legitimacy and reasonableness of the adjudication outcomes made out of the exercise of discretion, so as to raise the credibility and authority of the adjudication of justice.

In addition, the Notice has improved the role and status of “guiding cases” in adjudication practices, requiring that people’s courts at all levels shall collect and collate typical cases involving the exercise of discretion in a timely manner and report the same to the Supreme People’s Court level by level while the Supreme People’s Court shall summarize and announce such cases in the name of guiding cases, and that people’s courts shall improve the unity of adjudication standards and try to ensure that similar cases are handled in a similar manner.

Measures for Labeling Patent Marks

On March 8, 2012, the State Intellectual Property Office promulgated the Measures for Labelling Patent Marks (hereinafter referred to as the Measures) to regulate the method for labelling patent marks.

Pursuant to the Measures, during the validity period of the patent right after the granting of the patent right, the patentee or the licensee agreed by the patentee to enjoy the right to label patent marks may label patent marks on the patented products, products obtained directly according to patented methods, the packages of such products or materials such as the manuals of such products.

The content of a patent mark shall include the type of patent right specified in Chinese and the patent number for the patent right granted by State Intellectual Property Office. As prescribed by the Measures, in addition to the above content, other words and graphic marks may be added, however, the words and graphic marks added and the labelling method shall not mislead the public.

Pursuant to the Measures, if the products, the packages of such products or materials such as the manuals of such products are labelled before the granting of the patent right, the type of patent in application and patent application number in China as well as wording “Patent in Application, Not Been Granted Patent Right” shall be specified thereon.

Opinions on Strengthening the Administration of Business Activities with Respect to Online Group Buying

On March 12, 2012, the State Administration for Industry and Commerce promulgated the Opinions on Strengthening the Administration of Business Activities with Respect to Online Group Buying (Gong Shang Shi Zi [2012] No.39, hereinafter referred to as the “Opinions”) which, for the first time ever, explicitly lays down regulations on“online group buying”.

The Opinions define “online group buying” as “the business activities of gathering a certain number of consumers to form a group through the Internet channel and offering them a discount price for the purchase of the same type of goods or service”.

With regard to operators that provide online trading platform services, the Opinions have imposed a series of obligations and duties on them: an operator of a group buying website shall, in accordance with the law, register with the relevant administrative authority for industry and commerce, acquire a business license and disclose the information set out in the business license or the electronic connection identifier of the business license at a conspicuous place in the homepage of the website. An operator of a group buying website shall not provide services to suppliers of goods (services) for group buying that do not have business licenses; an operator of a group buying website shall perform the obligation to disclose for consumers where a transaction relationship has been built between the two sides, etc.

It is worth noting that, with regard to return of goods and refunds and consumers’ advance payment, the Opinions specify that the operator of a group buying website shall comply with the relevant provisions of the Law for the Protection of Consumer Rights and Interests in relation to the return of goods and refunds and shall not deprive consumers of their rights to return goods and receive refunds, etc. in accordance with the law. The operator of a group buying website that requires the receipt of advance payment for the sales of goods or services for group buying shall not impose restrictions such as refusing to refund the advance payment if consumption is not made within the specified time limit or specifying that funds can only be refunded to the website accounts. The Opinions have specifies the obligations of refund of goods and refunds that shall be borne by the operator of a group buying website under the above circumstances.

Pursuant to the Opinions, the issuance of an evidence for the purchase of goods or a service receipt by the operator of a group buying website to a consumer shall comply with the relevant provisions of the State or business practices. Upon the consent of the consumer, such documents may be issued in electronic form. An operator of a group buying website shall issue evidence for the purchase of goods or service receipts upon the requests of consumers. However, it is worth noting that the Opinions do not specify whether the evidence for the purchase of goods or a service receipt includes “invoice” or not, further provisions in this respect needs to be made by relevant supervisory authorities in order to avoid any possible dispute between consumers and the operator of a group buying website in real practices regarding the invoice issue.

Decision of the National People’s Congress on Amending the Criminal Procedure Law of the People’s Republic of China (2012)

On March 14, the Fifth Session of the 11th National People’s Congress of the People’s Republic of China promulgated the Decision of the National People’s Congress on Amending the Criminal Procedure Law of the People’s Republic of China, revising the Criminal Procedure Law.

It is sixteen years since the revision of the Criminal Procedure Law last time, so the revision this time involves more issues mainly covering the evidence system, compulsory measures, advocacy system, investigation measures, hearing procedures, enforcement and special procedures.

1. Regarding the evidence system

Article 49 has been added, i.e. for cases of public prosecution, people’s procuratorates shall bear the burden of proof to prove that the defendants are guilty, while for cases of private prosecution, private prosecutors shall bear the burden of proof to prove that the defendants are guilty. Besides, Article 43 of the original Criminal Procedure Law has been revised as Article 50, with an additional prescription that “no forced self-incrimination is allowed”.

Besides, the revised Criminal Procedure Law also adds the provision on exclusion of illegal evidence, confessions extorted from a criminal suspect or defendant by illegal means such as torture, testimony of witnesses and statements of victims collected by violent means, threat or other unlawful means shall be excluded. Physical evidence or documentary evidence that is not collected according to statutory procedures and is therefore likely to materially damage judicial justice shall be subject to correction or reasonable explanations, and shall be excluded if correction or reasonable explanations are not made. Evidence that shall be excluded as found during investigation, examination before prosecution and trial shall be excluded in accordance with the law, and shall not serve as the basis for making prosecution opinions, prosecution decisions and judgments.

2. Regarding the system of compulsory measures

A separate provision on “residential surveillance” has been added. Article 73 of the revised Criminal Procedure Law provides that residential surveillance shall be enforced at the domicile of a criminal suspect or defendant or at a designated place of residence if he/she has no fixed domicile. Where, for a crime suspected to endanger state security, crime involving terrorist activities and a crime involving significant amount of bribes, residential surveillance at the domicile of the criminal suspect or defendant may impede the investigation, it may, upon approval by the people’s procuratorate or the public security organ at the higher level, be enforced at a designated place of residence, provided that residential surveillance is not enforced in a detention house or a special venue for case investigation. Where a criminal suspect or defendant is placed under residential surveillance at a designated place of residence, his/her family shall be informed of the information related thereto within 24 hours upon enforcement of residential surveillance, unless notification cannot be processed. With regard to entrustment of defender by criminal suspects and defendants under residential surveillance, Article 33 of the revised Criminal Procedure Law shall apply.

Besides, the duration of the summons by force has been extended that “the summons by force shall not last longer than 12 hours” is revised as “the summons or summons by force shall not last longer than 12 hours. For complicated cases of grave circumstances where detention or arrest is necessary, summons or summons by force shall not last longer than 24 hours”.

3. Regarding the defense system

Article 33 and Article 96 of the original Criminal Procedure Law provide that a criminal suspect or defendant shall be entitled to entrust a defender in the examination stage and the public prosecution stage, and may only entrust lawyer to provide legal assistance during the investigation stage.

The revised Criminal Procedure Law provides that a criminal suspect shall be entitled to entrust a defender after he/she is interrogated for the first time by an investigating organ or as of the date on which compulsory measures are taken, provided that during investigation, the criminal suspect may only entrust lawyer as his/her defender. Defendants of cases shall be entitled to entrust defenders at any time. An investigating organ shall, during the first interrogation of a criminal suspect or the imposition of compulsory measures thereon, inform the criminal suspect of his/her right to entrust a defender.

In addition to the above, the revised Criminal Procedure Law has also made some alterations or changes in investigation measures, prosecution procedures, enforcement, special procedures, etc.

On February 15, 2012, the State Administration of Foreign Exchange promulgated the Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Abroad (Hui Fa [2012] No.7, hereinafter referred to the No.7 Document). Pursuant to the No.7 Document, as of the promulgation date, the Notice of the Department of General Affairs of the State Administration of Foreign Exchange on Printing and Distributing the Operating Instructions of Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plan and Share Option Plan of Overseas Listed Companies (Hui Zong Fa [2007] No.78) (hereinafter referred to as the No. 78 Document) and the Notice of the Department of General Affairs of the State Administration of Foreign Exchange on Delegating the Approval Authority concerning the Quota of Initial Foreign Exchange Purchase and Payment and Opening Foreign Exchange Account for Domestic Individuals Participating in Employee Stock Ownership Plan and Share Option Plan of Overseas Listed Companies (Hui Zong Fa [2008] No.2) were simultaneously nullified.

Compared with the No.78 Document, the No.7 Document first of all permits individuals to use their legitimate funds such as their self-owned foreign exchange or RMB in their foreign exchange savings account to participate in the equity incentive plan. In the meantime, the No.7 Document has simplified the documents and procedures for handling the relevant matters prescribed by the No.78 Document and cancelled the provision on opening a special foreign exchange account overseas as stipulated in the No.78 Document.

The No.7 Document has redefined and specified the several concepts involved in the foreign exchange administration of domestic individuals participating in the equity incentive plan of overseas listed companies:

1. “Companies listed abroad” or “Overseas Listed Companies” shall mean companies listed on an overseas stock exchange, including companies listed on stock exchanges of Hong Kong, Macao and Taiwan.

2. “Equity incentive plans” shall mean equity incentive plans provided by an overseas listed company to the directors, supervisors, officials and other employees of its domestic companies who have an employment or service relationship with such company by granting its own stocks to them, including employee stock ownership plans, employee stock option plans and other equity incentive programs permitted by relevant laws and regulations.

3. “Domestic companies” shall mean companies that are listed abroad that registered in China, or domestic branches (inclusive of representative offices) of companies listed abroad, or parent companies, subsidiary companies, partnerships or other domestic institutions that directly or indirectly control or are controlled by companies listed abroad.

4. “Domestic individual” (hereinafter referred to as “individual”) shall mean any directors, supervisors, officials or other employees of a domestic company falling within the scope stipulated in Article 52 of the Regulations of the People’s Republic of China on Foreign Exchange Administration, including Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) and foreign individuals.

5. A “domestic agency” shall be a domestic company participating in the equity incentive plan or a domestic institution that is qualified for asset custody business as appointed by the domestic company according to law.

The No.7 Document also provides that individuals who participate in equity incentive plans of the same overseas listed company shall, through the domestic companies they serve, collectively entrust a domestic agency to handle issues like foreign exchange registration, account opening, funds transfer and remittance, and entrust an overseas institution to handle issues like exercise of options, purchasing and sale of related stocks or equity, and funds transfer.

In the meantime, the No.7 Document has changed the “procedure of applying for the quota for purchasing foreign exchange for employee stock ownership or exercise of employee stock ownership plan or stock option plan” to the “foreign exchange registration procedure of individuals participating in stock option incentive plan” and in the meantime has reduced the number of materials to be submitted, deleting “the agreement (draft) signed by and between the domestic assets manager, the overseas trustee and the custodian institution”, “the template contract on employee stock ownership plan or share option plan” and “the internal control system of domestic agencies on risk control and information disclosure” stipulated by the No.78 Document.

With regard to subsequent management obligation of the domestic agency, the No.7 Document requires that the domestic agency shall file a Record-filing Form for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Abroad with the local office of the SAFE within the first three working days of each quarter. The deposit bank of a domestic agency shall file a Statements of Opening and Closure of Domestic Special Foreign Exchange Accounts for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Abroad and a Statements of Receipts and Expenditures of Domestic Special Foreign Exchange Accounts for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Abroad with the local office of the SAFE within the first three working days of each month.

Provisions on Certain Issues concerning the Trial of Cases of Disputes over Marine Freight Forwarding by the Supreme People’s Court

On February 27, 2012, the Supreme People’s Court promulgated the Provisions on Certain Issues concerning the Trial of Cases of Disputes over Marine Freight Forwarding (Fa Shi [2012] No.3, hereinafter referred to as the Provisions) which have defined and expounded several issues concerning marine freight forwarding disputes.

The Provisions, first of all, have specified their applicable scope: these Provisions are applicable to the following disputes which occur when freight forwarders accept clients’ entrustment to handle marine freight forwarding transactions:

1. Disputes arising from provision of cargo space booking, customs declaration, inspection reporting, quarantine reporting and insurance services;

2. Disputes arising from provision of cargo packaging, packaging supervision, unloading supervision, container loading and devanning, distribution and transfer services;

3. Disputes arising from making or delivery of relevant documents or settlement of fees

4. Disputes arising from provision of warehousing and land transport services; and

5. Disputes arising from handling other matters related to marine freight forwarding

Meanwhile, with regard to the status and determination of legal liabilities of a freight forwarding enterprise in issuing bills of lading, sea waybills, etc. in its own name or in the name of the carrier’s agent, the Provisions further specify that where a freight forwarder signs and issues bills of lading, sea waybills or other transport documents in its own name during handling marine freight forwarding transactions, and the client claims that such freight forwarding enterprise shall bear the carrier’s responsibilities, the people’s court shall support such claim. Where a freight forwarder signs and issues bills of lading, sea waybills or other transport documents in the name of the carrier’s agent, but cannot prove that the carrier’s authorization has been obtained, and the clients claims that such freight forwarding enterprise shall bear the carrier’s responsibilities, the people’s court shall support such claim. Therefore, for a freight forwarding enterprise, it shall define its own service scope and authority in subsequent freight forwarding services and issue the corresponding receipts to the client with due care in order not to assume the carrier’s responsibilities.

With regard to the effect of the agreement between the freight forwarding enterprise and the client that “the client shall pay relevant expenses for delivery of the documents”, the Provisions also acknowledge such agreement by providing that where a marine freight forwarding contract stipulate that the freight forwarder may deliver documents obtained from handling marine freight forwarding transactions on the condition that the client pays relevant expenses, and the freight forwarder refuses to deliver documents on the grounds that client has not paid relevant expenses, the people’s court shall support such claim. Where the above-mentioned matters are not agreed on or explicitly agreed on in a contract, the freight forwarder refuses to deliver documents on the grounds that client has not paid relevant expenses, the people’s court shall support such claim, except for bills of lading, sea waybills or other transport documents.

In the meantime, with regard to the circumstance that both the client and the actual shipper are involved in actual freight forwarding transactions, the Provisions provide that where a freight forwarder accepts entrustment from the contractual shipper to handle cargo space booking transactions and accepts entrustment from the actual shipper to deliver cargo to the carrier, the actual shipper requests the freight forwarder to deliver the bills of lading, sea waybills or other transport documents obtained by it, the people’s court shall support such request. Contractual shippers refer to persons that conclude marine freight transport contracts with carriers on their own, or entrust others to conclude such contracts in their names, or entrust others to conclude such contracts for them. Actual shippers refer to persons that deliver goods to carriers involved in marine freight transport contracts on their own, or entrust others to do so in their names, or entrust others to do so for them.

Legal Practices

Is a House Sale and Purchase Contract Still Valid in the event that a Certificate of Title Has Not Been Obtained for the House

[Case Brief]

On October 1, 2003, Mr. Zhang signed a House Property Transfer Agreement with A Company (hereinafter referred to as “Agreement A”), according to which Mr. Zhang purchased a house (hereinafter referred to as “the House”) from A Company at the price of RMB 1,000,000. Mr. Zhang paid off the house purchase price within ten days after execution of the Agreement A but the house property transfer formalities are not processed.

On July 2, 2006, Mr. Zhang signed a House Property Transfer Agreement with Mr. Tang(hereinafter referred to as “Agreement B”), covenanting: Mr. Zhang should sell the House purchased from A Company to Mr. Tang at the price of RMB 1,500,000; Mr. Tang should pay Mr. Zhang 80% of the house purchase price under Agreement B, i.e. RMB 1,200,000 upon effectiveness of the Agreement B and the remaining amount after obtainment of the house title certificate; and Mr. Zhang should bear all the taxes and dues for the house property title transfer. On the same day, both parties signed another supplementary agreement covenanting to transfer the rights and obligations of Mr. Zhang under the Agreement A to Mr. Tang.

In May 2007, Mr. Zhang obtained the title certificate of the House, but he went back on his words due to the housing price rise and finally filed a lawsuit with the court after multiple fruitless negotiations with Mr. Tang, claiming that 1) the Agreement B should be null and void; 2) Mr. Tang should return the House to him and pay the monthly rent of RMB 1,000 Yuan for each month from January 1, 2007.

[Court Judgement]

The court of first instance decided that the real estate which has not been registered in accordance with the law and for which the certificate of ownership has not been obtained shall not be transferred, pursuant to Article 38 (6) of the Law of the People’s Republic of China on the Administration of the Urban Real Estate. Mr. Zhang transferred the House to the defendant Mr. Tang under the circumstance where the certificate of title of the House has not been obtained, which is in serious breach of the state mandatory laws, hence the contract signed by and between Mr. Zhang and Mr. Tang shall be deemed invalid and the property obtained by each of the two parties from the contract shall be returned. In this case, the fault of the plaintiff Mr. Zhang is more serious than that of the defendant, and the plaintiff’s claim for the defendant’s payment for occupation of the House during such period shall not be supported. With regard to any further losses, both parties may otherwise negotiate or file another appeal.

Mr. Tang disagreed with this judgement and hence lodged an appeal to the court of last resort which decided after trail that “transfer of real estate refers to acts that an obligee of real estate transfers his real estate to another person through sale, donation or other legal means” pursuant to Article 37 of the Law of the People’s Republic of China on the Administration of the Urban Real Estate. The “transfer of real estate” mentioned in this case refers to the act of transfer of possession of the real estate, i.e. delivery of the real estate. Therefore, it is the real estate ownership (i.e. the real right) that is forbidden to be transferred pursuant to Article 37 (6) of the Law of the People’s Republic of China on the Administration of the Urban Real Estate. However, the right established under the Agreement B is the creditor’s right rather than the real right; it is the act of delivery of property in terms of transfer of personal property or the act of change of registration in terms of transfer of real property that is legal act that could directly leads to transfer of property. It was very inappropriate that the court of first instance ruled that the act of creditor’s right is invalid in accordance with the laws governing the juristic act of real right. Therefore, the court of last resort determined to revoke the judgement of first trial and ruled against Mr. Zhang’s claim.

[Case Analysis]

With regard to the effectiveness of the contract, Article 52 of the Contract Law provides that a contract is invalid under any of the following circumstances: (5) mandatory provisions of laws and administrative regulations are violated. Article 14 of the Judicial Interpretations (II) of Contract Law further provides that the “mandatory provisions” prescribed by paragraph 5 of Article 52 of the Contract Law is the mandatory provisions on validity. Notice of the Guiding Opinions on the Trial of the Cases Involving Disputes Arising from Civil and Commercial Contracts in the Current Situations by the Supreme People’s Court provides that the people’s courts shall distinguish the mandatory provisions on validity from those on administration. In case any of the mandatory provisions on validity is violated, the people’s courts shall hold the contract invalid; in case any of the mandatory provisions on administration is violated, the people’s courts shall recognize its validity in accordance with specific situations. From the perspective of orientation in law-making, the court tends to attach more importance to protection of the transaction safety and careful determination of the contact validity.

Accordingly, the author supposes that the key issue of this case (or any other similar case) lies in whether the provision “the real estate which has not been registered in accordance with the law and for which the certificate of the ownership has not been obtained shall not be transferred” as prescribed under Article 38 (6) of the Law on the Administration of the Urban Real Estate is a mandatory provision on validity or a mandatory provision on administration? However, the court of last resort failed to reason on this issue and thus could not sufficiently justify itself in the part of “the court determines that…”.

In the author’s opinion, the Law on the Administration of the Urban Real Estate falls under the state administrative legal norms. The house that is not transferrable as prescribed under Paragraph 6 of Article 38 of the Law on the Administration of the Urban Real Estate, in principle, refers to the house that could not be registered from the very beginning and the Paragraph 6 of Article 38 is mainly applied to those contracts that will fail the intent of law-makers and will prejudice the interest of the nation, collective organization, any third party as well as public interest if such contracts are not determined as illegal. Purpose of the Paragraph 6 of Article 38 is to restrict the transfer of house title and actual change of the title of the house and does not necessarily give rise to disapproval on the effectiveness of the house sale and purchase contract. In this case, Mr. Zhang has not obtained the house property title upon execution of the contract, but he firmly believed that he would, so did Mr. Tang. A expectant right to obtain future real right is created by the two parties by execution of a contract and such expectant right is a kind of creditor’s right, the contract so executed is not in breach of the prohibitive provisions of the laws and regulations and should not be deemed invalid then. If Mr. Zhang failed to obtain the real right after execution of the contract so as to cause Mr. Tang’s failure to obtain the expectedreal right, Mr. Zhang shall be deemed to have constituted a breach and shall bear the breaching liabilities. Mr. Zhang, as a breaching party, attempted to conceal its breach act by claiming the ineffectiveness of the contract, which is deceptive and unfair.

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

Legal Analysis on the “New Model of Online Drug Sales”

On February 27, 2012, Tmall Pharmacy (www.yao.tmall.com) started formal operation on Tmall. It was reported that Tmall Pharmacy now includes more than ten pharmaceutical companies including Nepstar Drugstore, For Me Pharmacy, Golden Elephant Pharmacy Chain Co., Ltd., Hangzhou Jiuzhou Pharmaceutical Group, etc. and about 20,000 kinds of drugs. In addition, the drug sales model launched by Tmall Pharmacy was recognized by the media as “new model of online drug sales” and “ushering in an e-commerce era for the medicine industry”.

The author intends to analyze the applicable provisions of China on the current online drug sales on ground of the sales model of Tmall Pharmacy.

I. The Drug Sales Model of Tmall Pharmacy

The drug sales model adopted by Tmall Pharmacy is as follows: Tmall Pharmacy makes a general exhibition of the drugs for the consumers to choose, and the consumers, after choosing the target drugs, click the “PURCHASE” button to skip to the homepage of the drug dealers via the registration account of Tmall to conduct order confirmation and settlement. As such, the transaction of the drugs is accomplished.

After studies on the sales model adopted by Tmall Pharmacy (hereinafter referred to as “Tmall Model”), the Tmall Model can be roughly divided into two stages: (1) drug information disclosure in Tmall Pharmacy and consumers’ selection of target drugs; (2) order submission and settlement of transaction price in the settlement system on the corresponding drug company’s website.

We know from public reports that Tmall Pharmacy claims that it provides drug information services only and it has obtained the Online Drug Information Service Qualification Certificate, and all drug entities actually transacting with consumers have their official websites and have obtained the Online Drug Information Service Qualification Certificate as well as the Online Drug Transaction Service Qualification Certificate. Therefore, such sales model of Tmall is compliance with the PRC existing laws and regulations.

II. Existing Legal Framework Applicable to Online Drug Sales

1. Online Drug Information Services

Article 2 of the Measures for Administration of Online Drug Information Services (hereinafter referred to as the Measures) stipulates that these Measures shall be applicable to the provisions of online drug information services within the territory of the People’s Republic of China. For the purposes of these Measures, online drug information services shall mean the activities of the provision, via the Internet, of drug (including medical appliances) information to online users.

Article 3 of the Measures further stipulates that online drug information services shall be classified into two categories: profit-making services and non-profit-making services. Profit-making online drug information services shall mean the activities to provide, via the Internet, such services as drug information, etc., for payment, for online users. Non-profit-making online drug information services shall mean the activities to provide, via the Internet, open or shareable drug information, for free, for online users.

2. Online Drug Transaction Services

Pursuant to Article 2 of the Interim Provisions on the Examination and Approval of Online Drug Transaction Services (hereinafter referred to as the Interim Provisions), these Provisions shall be applicable to the engagement of online pharmaceutical transaction services within the territory of the People’s Republic of China. For the purposes of these Provisions, “online pharmaceutical transaction services” shall mean the e-commerce activities of using the Internet to provide drug (including medical instruments, packaging materials and containers in direct contact with drugs) transaction services.

Article 3 of the Interim Provisions stipulates that the online drug transaction services include services provided for internet pharmaceutical transactions between pharmaceutical production enterprises, pharmaceutical sale enterprises, and medical institutions; online pharmaceutical transactions conducted by pharmaceutical production enterprises and pharmaceutical wholesale enterprises through their own websites with other enterprises (exclusive of their members) as well as the internet pharmaceutical transaction services provided to individual consumers.

Pursuant to the above Administrative Regulations and Interim Regulations, the drug information service providers need to obtain the Online Drug Information Service Qualification Certificate while the online drug transaction service providers need to obtain both the Online Drug Information Service Qualification Certificate and the Online Drug Transaction Service Qualification Certificate.

III. Summary

Tmall Model is innovative in that it seamlessly connects and combines drug information services with drug transaction services by means of the platform “Tmall Pharmacy”. However, it should be taken into account that whether the services provided by “Tmall Pharmacy” are limited within the scope of “drug information services” prescribed by the Administrative Regulations. Judging from the actual sales model and operating process of Tmall Pharmacy, Tmall Pharmacy not only exhibits and provides the drug information but also undertake partial functions and duties of drug sellers, such as online drug consulting and searching functions, and the users of Tmall can click to buy the target drugs (selecting quantity and specification) at Tmall Pharmacy based on their own actual needs; consumers can place orders and pay the purchase prices on the homepages of drug dealers qualified for providing online drug transaction services by virtue of the Tmall Pharmacy interlinkage.

To some extent, Tmall Pharmacy circumvents the Interim Regulations by technically binding itself with drug dealers while it does not possess the qualification of online drug transaction services and hence accomplish the online drug sales. Therefore, legal uncertainties and doubt remains on the nature of Tmall Model. There is not yet any legal boundary between “information services” and “transaction services”, thus it is still questionable in regard to the nature of the services provided by Tmall Pharmacy and the feasibility of Tmall Pharmacy. Therefore, other e-commerce enterprises shall carefully deliberate on any duplication or promotion of such model as Tmall Pharmacy and try to discuss and reach consensus with the regulatory authorities on the specific operating methods before carrying out such model in real practices, in order to avoid any unnecessary losses caused by blind follow.

To determine the nature or legitimacy of online drug sales model such as the “Tmall Model”, the following aspects may be taken into account: (1) the boundary between “drug information services” and “drug transaction services”; (2) way of profit distribution between “drug information services” providers and “drug transaction services” providers.

In addition to the nature of “Tmall Model” which is to be defined by the competent government department, how to determine the feasibility of “Tmall Model” directly relates to such issues as allocation of responsibilities (such as the drug quality problem and drug after-sales service problem) between “drug information services” providers and “drug transaction services” providers during operation of the new model of online drug sales. All these issues cannot be properly handled before the statuses and natures of all participating parties to this new model are cleared and determined. Therefore, before all the above issues are finally cleared and determined, it is still too early to arrive at any conclusion that “the medicine industry will enter into an e-commerce era”.

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

Analysis on Various Tax Issues Involved in Land Use Right Transfer Transaction

Land use right refers to the right of entities or individuals to occupy, use, profit from and dispose of (in a limited manner) the state-owned land or collective land pursuant to the law or other provisions. The right to use the state-owned land refers to the right of state-owned land users to utilize and profit from the land in accordance with the law. The right to use the state-owned land can be obtained through allocation, transfer, lease, share contribution, etc.. The right to use the state-owned land that was obtained with consideration can be transferred, leased, mortgaged and inherited in accordance with the law. The land use right of the original allocated land can be transferred, leased and mortgaged only after the supplementary transfer procedures, supplementary payment or set-off of the land use right assignment amount are accomplished. However, the transfer of the right to use collective land is relatively complicated at present without any systematic regulations by law and real practices of different local governments also differ. In principle, the right to use the land collectively owned by farmers shall not be allocated, transferred or leased for non-agricultural construction purposes. Therefore, at present, transfer of the right to use collectively owned land refers to the contracting and subcontracting that does not change the nature of the land for agricultural use.

The land use right transaction mentioned hereunder refers to the transfer of state-owned land use right that is obtained with consideration. The passage will make analyses and comparisons in the form of case studies on the taxes generated from land use right transactions through three different models.

[Case Instruction]

A Company has entered into a preliminary intent on assets purchase with B Company, according to which B Company is willing to purchase from A Company the right to use a certain plot of land at the price of RMB 25,000,000 Yuan in the form of assets. The par value of such right is RMB 15,000,000 Yuan and the fair value thereof is RMB 25,000,000 Yuan. Neither A Company nor B Company is a listed company. In fact, A Company and B Company bear no relations with each other. The land use right obtained by A Company is supposed to be obtained in the form of transfer, for which a transfer price of RMB 15,000,000 Yuan has been paid.

Model 1: Directly transfer of the land use right by purchase of assets

If B Company directly purchases from A Company the right to use this plot of land, under such circumstance when the par value of the said right is RMB 15,000,000 Yuan and fair value thereof is RMB 25,000,000, the taxes relating to the transaction in question are as follows (neglecting the intermediary agency fees payable during the transaction):
Taxpayers Tax Type Taxable Income Tax Rate Payable Tax Total Tax Amount
Transferor (A Company) Business Tax 1000 5% 50 516.953125
Urban Contruction Tax  50  7%  3.5
Educational Surtax 50  3%  1.5
Stamp Tax  2500  0.05%  1.25
Land Value Added Tax943.75 （2500-1500-50-3.5-1.5-1.25）  Progressive Rate 299.6875
Income Tax  644.0625（2500-1500-50-3.5-1.5-1.25-299.6875）  25%  161.015625
Purchaser (B Company) Stamp Tax  2500  0.05%  1.25  76.25
Deed Tax  2500  3%  75
593.203125

Model 2: A Company and B Company jointly establish a new company and the land use right will be contributed into the new company, and then equities of the new company corresponding with the land use right will be transferred to B Company

A Company and B Company jointly invest to establish C Company. A Company contributes with the land use right, the estimated value of which is RMB 25,000,000 Yuan, accounting for 70% of all the shares; B Company contributes with cash, the amount of which is RMB 10,720,000 Yuan, accounting for 30% of all the shares (the Company Law prescribed that a contribution in cash shall be no less than 30% of the registered capital), and the registered capital of C Company is approximately RMB 35,720,000 Yuan. Then A Company is confronted with the income tax and stamp tax payable for the value added investment in the land use right.

When the after-tax profits during the operation of C Company are distributed to A Company and B Company, no enterprise income tax shall be payable. Therefore, profit distribution before equity transfer helps reduce the tax. After a certain period of operation, B Company purchases the 70% equities of A Company in C Company at the price of RMB 25,000,000 Yuan. At the same time, C Company is now the wholly-owned subsidiary of B Company.

The relevant taxes in the whole transaction are as follows:
Transaction Stage  Taxpayers Tax Type Taxable Income  Tax Rate Payable Tax  Total Tax Amount
Investment Stage  Transferor (A Company)  Income Tax  1000  25% 250  326.25
Deed Tax  2500 3%  75
Share Transfer  Transferor (A Company)  Income Tax  0 0.05%  0
Stamp Tax 2500  0.05%  1.25
Purchaser (B Company) Stamp Tax  2500  0.05% 1.25  1.25
327.5

Model 3: B Company directly purchases the equities of A Company to indirectly obtain the land use right

If except for the land use right in question, A Company does not have any other major assets or engage in any other business activity and it has a clear-cut share structure and credit & debt relationship, B Company may consider obtaining the land use right by direct purchase of 100% equities from A Company.

But the premises for this model are relatively special. Firstly, A Company does not have other material assets or engage in other business activities except for the land use right, and A Company has a clear equity structure and a clear relationship of credits and debts; secondly, the shareholders of A Company have reached consensus on the proposed transfer of the 100% equities; furthermore, B Company is willing to bear the risks of purchasing the 100% equities of A Company, such as the problems and defects existing in the development of A Company.

Under such model, the relevant taxes are as follows:
Taxpayer  Tax Type  Taxable Income  Tax Rate  Payable Tax  Total Tax Amount
Transferor A Company Income Tax 1000 25%  250 251.25
Stamp Tax  2500 0.05%  1.25
Purchaser B Company  Stamp Tax  2500  0.05%  1.25  1.25
252.5

It shall be highlighted that the State Administration of Taxation explicitly provides in the Approval on the Levy of Land Value Added Tax on the Transfer of House Property in the Name of Transferring Equities (Guo Shui Han [2000] No.687) that: Local Taxation Bureau of Guangxi, we have received your application for instructions on the levy of land value added tax on the transfer of house property in the name of transferring equities (Gui Di Shui Bao [2000] No.32). Whereas Shenzhen Energy Group Co., Ltd. and Shenzhen Energy Investment Company Limited by Shares intend to jointly transfer the 100% equities of Shenzhen Energy (Qinzhou) Industrial Co., Ltd. at one time, and those assets in the form of equities are mainly land use right, buildings and other attached objects thereon. After study, the tax on the land shall be levied according to the regulations on the land value added tax.

Therefore, if an interested party adopts the model 2 and model 3 to obtain the land use right through an indirect approach of accepting equities, it will be deemed in real transaction as a transfer of land use right and a certain amount of value added tax needs to be paid for the transaction. Therefore, it is the best approach for the interested party to communicate and discuss with the competent tax authorities on the transaction details before choosing a specific model to realize the transaction in order to seek the authorities’ affirmation and judgement on the nature of the transaction.

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

Standards for Determining the Illegal Acts of Shareholders’ Capital Flight and Impairment of Corporate Rights and Interests

[Case Brief]

A Company was incorporated in 2004 and Mr. Xu was one of its shareholders. In August 2004, upon the request of Mr. Zhu who is legal representative of A Company, Mr. Xu paid RMB 500,000 Yuan on behalf of A Company for the purchase of some machinery equipment. Since shareholder’s individual capital was put into company operations, Mr. Xu and Mr. Zhu reached an oral agreement that the amount of RMB 500,000 Yuan paid by Mr. Xu would be deemed as his additional investment in A Company and would not be returned to him. To this end, A Company confirmed by means of a shareholders’ resolution in March 2005 that Mr. Xu increased RMB 500,000 Yuan as his additional investment in the company. After the shareholders’ resolution, Mr. Zhu independently handled such matters as regarding the capital verification and industrial and commercial registration change formalities with relevant administration of industry and commerce as required for the increase of capital.

Later, A Company was deteriorating day by day with mounting debt and was unable to repay its due debt. B Company, a creditor of A Company, filed an lawsuit against Mr. Xu with Shanghai Xuhui District People’s Court, claiming that Mr. Xu had committed flight of capital contribution and had prejudiced rights and interests of the company and should accordingly bear the liabilities for supplementary compensation for the debt of A Company to the extent of the RMB 500,000 Yuan as such amount is under flight of capital contribution. After investigation, it was made clear that when A Company applied for increase of registered capital in March 2005, Mr. Zhu did not produce a true and effective financial receipt at that time but completed capital verification in a manner of transferring via a third party the contributed capital to the company account for capital verification and then drawing out the same contributed capital from the company account.

[Lawyer’s Comments]

It is the fundamental obligation of a shareholder to fully make capital contribution to the company (or subscribe the increased contribution) and the revised Company Law put more emphasis on justifiability of such obligation to be brought to lawsuits. It is under such background that the Supreme People’s Court introduced the Judicial Interpretations (III) of Company Law specifying that flight of capital contribution by shareholder is a manifestation of the shareholder’s failure to fully perform the obligation of capital contribution. The original purpose of the Company Law and its Judicial Interpretations is to prevent the shareholders from conducting any illegal or improper act to cause an unreasonable decrease of the company’s actual assets and to ensure that the company legal person’s assets are independent and free from any impairment and that the rights and interest of the company’s creditor will not be harmed. This demonstrates the primary cause for which the laws make the compulsory requirement that the shareholder who fails to perform its legal obligations shall bear the liabilities for the debt of the company.

The Company Law and its Judicial Interpretations provide two different remedies with respect to violation by the shareholders in performing its capital contribution obligations, i.e., breaching liabilities in terms of internal aspect and tort liabilities in terms of external aspect. As for the breaching liabilities, such remedy focuses on performance of the internal contribution agreement executed by the shareholders and regulates each contribution by the shareholders, in the event the contribution made by a shareholder is not in compliance with the agreement reached by the shareholders, such shareholder shall be held for breaching liabilities. As for the tort liabilities, such remedy focuses on causality between non-performance of its obligation by the shareholders and loss sustained by the creditors of the company, in the event the shareholders have corrected its defect in capital contribution, the creditors of the company will lose their ground to challenge the previous defect by the shareholders.

Piercing the corporate veil in judicial practice is not to utterly deny the legal person status of a company but rather deny the legal person status of a company in a particular case. Therefore the court shall take a prudent attitude with respect to affirmation on relating facts in determining liabilities of a shareholder under circumstance similar with that of this case. As a matter of fact, similar prescriptions have been laid in the Opinions on Handling Several Questions Involving Corporate Litigation Cases by Shanghai Higher People’s Court that “for shareholders who have not made sufficient contribution as of formation of the company but later have made up the full contribution, and for shareholders of project companies who initially have not made sufficient contribution but have invested a total capital over the agreed registered capital in subsequent project operation, they shall be deemed as having made the due contribution in full amount. In determining whether a shareholder has committed flight of capital contribution or not, whether assets of the company have been undue reduced shall be made as standards.” Therefore, we are in a position to hold that Mr. Xu did not commit any act that has constituted flight of capital contribution or has prejudiced the right and interest of the company.

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