Patent Law of the People¡¯s Republic of China (Revised for the Third Time in 2008)

The Decision on Amending the Patent Law of the People¡¯s Republic of China was adopted at the 6th Session of Standing Committee of the 11th National People¡¯s Congress of the People¡¯s Republic of China on December 27, 2008. The revised Patent Law (third version) will be implemented as of October 1, 2009.

The revised Patent Law, comparing with the former Patent Law, has considerable changes in the following aspects:
I. The revised Patent Law has increased the patent authorization standard and lifted the threshold for patent authorization:

The condition of patent authorization in current Patent Law adopts the ¡°relative novelty standard¡±, while Article 22 of the revised Patent Law adopts the ¡°absolute novelty standard¡±, i.e. the patented technology must have not been known by the public in both China and abroad, which is aimed to prevent the application of patent for those technologies that have not been publicly issued in China but have been publicly used or have relevant products sold in foreign countries, so as to considerably improve the quality of the patented technologies in China.
Besides, the revised Patent Law expressly provides that no patent right shall be granted to ¡°the design, which is used primarily for the identification of pattern, color or the combination of the two on printed flat works¡±, which has expressly separate the protection scope between design patent and trademark, and may urge the designer to improve the design ability to have more concentration on the imprvement of the product itself.

II. The revised Patent Law has deleted the provision that the applicant shall fisrt file the patent application in China before filing the patent application in foreign countries shall:
The current Patent Law provides that for any patent in foreign countries for invention or creation made in China, the applicant shall first file an application for patent in China. However, the Article 20 of the revised Patent Law provides that any entity or individual may directly file an application in a foreign country for patenting an invention or utility model accomplished in China; however, it or he shall report in advance to the patent administrative department of the State Council for confidentiality review.

III. The revised Patent Law has strengthened the protection of patent rights:
To protect the reasonable interets of the patentee more efficiently, the revised Patent Law provides that the compensation for a patent infringement shall include the reasonable expenses that the patentee has paid for stopping the infringement. If it is difficult to determine the losses incurred to the patentee, the gains obtained by the infringer as well as the royalty obtained for the patent, the people¡¯s court may, by taking into account such factors as the type of patent, nature and particulars of the infringement, etc., decide a compensation in the sum of not less than 10, 000 Yuan but not more than 1 million Yuan.
As to design patent, the revised Patent Law has also granted the patentee the right to prohibit others to, without the permission of the patentee, promise to sell the patented product by such ways as ads or display in the store shelves or exhibition room and etc.
In addition, to crack the illegal acts that infringing patent rights, the revised Patent Law has lifted the fine against the act that counterfeits other¡¯s patent from three times the illegal gains to four times; if there is no illegal gain, the fine has been lifted from up to 50,000 Yuan to up to 200, 000 Yuan.

IV. Pursuant to the needs to urge the promotion of technology, the revised Patent Law provides that any of the joint pantentee may independently ly implement or license (common license) others to implement the joint patent:
To guarantee the legal rights of the joint patentee over the joint patent, as well as to urge the implementation of patent, the revised Patent Law provides that any of the joint pantentee may independently implement or license (common license) others to implement the joint patent. In the case of licensing others to implement the patent, royalties so charged shall be distributed among the joint owners.

V. The revised Patent Law provides that if the implemented technology belongs to existing technologies, no patent infringement is constituted:
The current Patent Law provides that where the defendant believes that the patent is void, it or he must request the Board of Patent Appeals and Interferences to make a review. Only after the Board of Patent Appeals and Interferences has declared that the patent is invalid may the people¡¯s court judge that the defendant has not constituted patent infringement. To prevent the possibility that some applicants may maliciously apply the publicly known existing technologies for patent registration to obtain illegal monopoly interest, the revised Patent Law provides that in a dispute over patent infringement, if the accused infringer has evidence to prove that the technology or design it or he exploits is an existing technology or design, no patent infringement is constituted.

VI. The revised Patent Law has added the circumstances that shall not be deemed as infringement:
The revised Patent Law adds that: where any entity or individual that intends to produce medicine or medicinal equipment produces the patented medicine or patented medicinal equipment for the purpose of providing the information as required for administrative examination and approval, no patent infringement is constituted.

VII. The revised Patent Law has increased the applicable scope of compulsory license:
This point mainly has the following two illustrations: first, compulsory license shall be granted if the patentee¡¯s act of exercising the patent rights is determined as a monopolizing act and the grant of compulsory license is aimed to eliminate or reduce the adverse consequences of the said act on competition; and second, for the purpose of public health, the patent administrative department of the State Council may grant a compulsory license for a patented medicine so as to produce and export it to the country or region which conforms to the provisions of the relevant international treaty to which the People¡¯s Republic of China has acceded.

VII. The revised Patent Law has deleted the division of foreign related and non-foreign related patent agency institutions:
Pursuant to current Patent Law, the patent agency institutions in China is divided into foreign related and non-foreign related patent agency institutions. Where foreigner (including foreign enterprises or other foreign organizations) applies for a patent, or has other patent matters to attend to in China, he or it shall appoint a foreign related patent agency institutions to act as his or its agent. The revised Patent Law has deleted such special provision, i.e. where a foreigner applies for a patent in China, he or it may appoint any patent agency institution to act as his or its agent.

In addition to the above major changes, the revised Patent Law has also added such provisions as evidence preservation before litigation, utilization methods of genetic resources in patent application and etc., and has made literal revisions to part of the articles.

The ¡°Rules on Handling the Arbitration of Labor and Personnel Disputes¡± (hereinafter ¡°the Rules¡±) is promulgated by the Ministry of Human Resources and Social Security on December 17, 2008 and shall come into force as of promulgation.

The Rules has uniformed the ¡°Rules of the Labor Disputes Arbitration Commions on Handling the Cases¡± that was promulgated by former Ministry of Labor on October 18, 1993 and the ¡°Rules on Handling Personnel Disputes¡± as promulgated by former Ministry of Personnel on September 6, 1999, and added ¡°disputes arising from the resignation, dismissal as well as the performance of the employment contract between a public institution and its staff member¡± that should have been settled by personnel disputes rules and ¡°disputes arsing from (a) dismissal, discharge or lay-off of workers
and employees by enterprises, or resignation by workers and employees or leaving their jobs of their own volition; (b) implementation of relevant State policies on wages, insurance, welfare, training and labor protection; and (c) performance of the labor contract¡± that should have been setlled by labor dispute rules into the applicable scope of mediation and arbitration of the Rules, and has made integration on such aspects as scope of acceptance, working procedure, examination term, judical link and the like.

The Rules has divided into four parts, including general principles, general rules, arbitration procedure and supplementary rules, which has made detailed provisions on such content as applicable targets, arbitration provision, arbitration procedure and the related items, and has strengthened the regulation of various detailed sections in the process of disputes, for example, the application of avoidance during the process of arbitration, the collection and submission of evidences, the suspension of arbitration prescription, modification of employer and the like, such as:
I. Article 4 of the Rules provides that for disputes to which the party of the employees are more than ten persons, or for the labor disputes arising out of the performance of collective employment contract, the arbitration commission may register and examine the case in priority; Article 6 provides that: when there are more than ten employees with the same grievances as one of the parties, the employees involved shall nominate 3 to 5 representative to participate the arbitration. Comparing the former provisions ¡°when there are more than three employees with the same grievances as one of the parties, the employees involved shall nominate their representative to participate the arbitration. The number of the representatives shall be determined by the arbitration commission¡±, the Rules has a) strengthened the regulation concerning the application and acceptance of labor dispute arbitration; b) made provisions over the number of employees participating the dispute arbitration; and c) provided that the labor disputes arising from collective employment contract shall be accepted in priority.

II. Article 8 of the Rules provides that: where the employer in dispute has been withdrawn the business license, ordered to close, cancelled or where the employer decides to dissolve or wind up in advacne, and cannot assume relevant liabilities, the investor, opening entity or the supervisory department shall be the joint party. Comparing the former provision ¡°the legal representative of the enterprise legal person shall participate in the arbitration, and the major head of other legally established enterprises and entity shall participate in the arbitration¡­¡­where the legal agent or interested party is not clear, the arbitration commission may designate agent¡±, the Rules has expressly provided the obligation of former entity or head when the employer has been changed.

Article 44 of the Rules provides that: where the arbitration tribunal rules a case, it shall finish the case within 45 days after the daty when arbitration commission has accepted the case. Where if the case is complex and need extension of ter, it may, after the approval of the chairman of the arbitration commission, extend the term and inform the parties in writing, however, the extension of term shall not exceed 15 days. Article 50 of the Rules provides that: for claims involving labor compensation, medical expenses for working injury, economic reimbursement or compensation, the arbitration tribunal may, as applied by the party, decide to enforce in advance and transfer the enforcement to people¡¯s court. Comparing the former provision ¡°the case shall be finished within 60 days after the establishment of arbitration tribunal. Where the case is complex and need extension of term, it may apply to the arbitration commission for reasonable extension of term, however, the maximum extension of term shall not exceed 30 days¡±, the Rules has revised the term of acceptance of arbitration application, the term of establishment of arbitration tribunal and the term to make decisions, which has, by reducing the term, efficiently prevent such acts as willful delay of case examination.

IV. Article 26 of the Rules provides that: the arbitration commission shall set up the system to read the case registration record. For contents that are not confidential, the parties and their agent shall be allowed to read and copy. Comparing the former provision ¡°the copy of arbitration records shall not be borrowed or read except for arbitration institutions¡± and ¡°the parties to the case and the entity or individual that have interests to the parties shall not read the arbitration records¡±, the Rules has set up the system for parties to read the record, which has increased the clarity of labor and personnel dispute arbitration and is helpful to the self-regulation of arbitration institutions.

 

The ¡°Administrative Provisions on Special Examination and Approval of New Drug Registration¡± (hereinafter ¡°the Provisions¡±) is promulgated on January 7, 2009 by the State Food and Drug Administration and shall come into force as of promulgation.

Pursuant to Article 45 of the Measures for the Administration of Drug Registration, new drugs that fall under the following 4 circumstances shall be subject to special examination and approval: (1) the effective components extracted from the plants, animals, minerals and other materials that haven¡¯t been marketed within China and the preparations thereof, the newly found drug materials and preparations thereof; (2)The chemical raw material medicines as well as the preparations and biological products thereof that haven¡¯t been approved for marketing home and abroad; (3)The new drugs that are used in treating AIDS, malignant tumors and rare diseases etc; and (4)New drugs treating the diseases that can¡¯t be cured by effective means yet. The Provisions further introduces that: new drugs whose indications are not collected in the function and indication of traditional Chinese medicine as approved by the State shall be deemed as the new drug of diseases that can¡¯t be cured by effective means. If fall under the item (1) and (2), the applicant for drug registration may apply for special examination and approval when filing the new drug for clinical trial, and the drug examination and review centre shall confirm the application materials so submitted within 5 working days. If fall under the item (3) and (4), the applicant shall not apply for special examination and approval until the report for production, and the drug examination and review centre shall organize experts meeting to examine the application within 20 days after receipt of the application for special examination and approval, so as to confirm if special examination and approval is applicable.

The Application Sheet for Special Examination and Approval of New Drug Registration and the relevant materials shall be registered independently, and be submitted to drug registration acceptance departments together with other application materials, who shall later submit the documents to the drug examination and review centre under the State Food and Drug Administration. If fall under the item (1) and (2) as abovementioned, the drug examination and review centre under the State Food and Drug Administration shall examine and confirm within 5 days after receipt of the application for special examination and approval. If fall under the item (3) and (4) as abovementioned, the drug examination and review centre under the State Food and Drug Administration shall organize experts meeting to examine and confirm within 20 days after receipt of the application for special examination and approval.

The Provisions still allow applicant to supplement new technical materials under certain circumstances and has built the working mechanism for the communication with applicant.

Notice on Further Regulating the Business Acts of Drug Retail Enterprises

The ¡°Notice on Further Regulating the Business Acts of Drug Retail Enterprises¡±¡± (hereinafter ¡°the Notice¡±) is promulgated on December 17, 2008 by the State Food and Drug Administration.

On the ground of the Special Rules of the State Council on Strengthening the Supervision and Management of the Safety of Food and Other Products (Order of the State Council No. 503), the Notice has made further regulation in respect of the business acts of drug retail enterprises and requests that the sales documents issued by drug retail enterprises shall not only include the types, specifications, quantities, flow and etc. as required by the Special Rules, but also indicate the name, specification, quantity, manufacturer, price and etc. on all of the products.

Besides, the Notice expressly provides that drug retail enterprises shall not sell products that do not have approved certificates, certified product quality inspection certificate, product name, manufacturer¡¯s name, and address in Chinese; nor shall sell non-drug products that are similar in package with drugs, or have the same or similar name or advertised function and indication with drugs.

Food and drug administrations at various levels shall, according to the seriousness of the circumstances that do not conform to the provisions, cancel the drug business license pursuant to the law.

 

¡°2nd Supplementary Provisions to the Interim Measures for the Administration of Sino-foreign Equity Joint and Cooperative Joint Medical Institutions¡± (hereinafter ¡°the Provisions¡±) is promulgated on January 1, 2009 by the Ministry of Health and the Ministry of Commerce and shall come into force as of promulgation.

The Provisions has made extra provisions concerning the founding of clinics in Guangdong province by service providers from Hong Kong SAR and Macau SAR as provided in the Interim Measures for the Administration of Sino-foreign Equity Joint and Cooperative Joint Medical Institutions. Pursuant to the Provisions, service providers from Hong Kong SAR and Macau SAR may set up clinics in Guangdong province by sole proprietorship and the investment amount to clinics are not limited; the investment amount, as well as the investment proportion, to clinics founded in Guangdong province and inland China by service providers from Hong Kong SAR and Macau SAR by equity joint or cooperative joint are not limited.

In procedure, the application to set up clinics in Guangdong province by sole proprietorship, equity joint or cooperative joint by service providers from Hong Kong SAR and Macau SAR shall be submitted to the health administrative departments in Guangdong province for examination, approval and practice registration. Having been licensed by the health administrative departments in Guangdong province, the applicant may file application to the commerce administrative department in Guangdong province for examination and approval.

The ¡°Notice on the Relevant Provisions on the Administration of the Mainland Enterprises¡¯ Investment Projects in the Taiwan Region¡± (hereinafter ¡°the Notice¡±) is promulgated on December 15, 2008 by the National Development and Reform Commission and the Taiwan Affairs Office of the State Council.

The Notice, at first, has affirmed the principle to encourage mainland enterprises to positively and steadily invest in Taiwan Region.

In procedure, to invest in the Taiwan region, a mainland investor shall lodge an application with the National Development and Reform Commission according to relevant laws and shall meet the following three conditions: (1) It shall be an enterprise legal person legally registered and run in the mainland; (2) It shall have the capital, industrial background, technology and management capacity for the investment project so applied; and (3) It shall be favorable to the peaceful development of cross-strait relations and shall not compromise the national security and unity.

Normally, the applications will be received by the development and reform commission at the provincial level, and shall, after preliminary examination by the Taiwan affairs office at the same level, be submitted to the National Development and Reform Commission. The National Development and Reform Commission inspect, approve and manage the applied project according to the ¡°Interim Measures for the Administration of Examination and Approval of Overseas Investment Projects¡±. Before examination and approval, opinions from the Taiwan Affairs Office of the State Council shall be considered.

The mainland enterprises shall, on the ground of the certified documents from the National Development and Reform Commission, apply to the Taiwan Affairs Office of the State Council to handle the formalities for its personnel to Taiwan. In the occurrence of the following circumstances, the National Development and Reform Commission, together with the Taiwan Affairs Office of the State Council, shall take disposals on a case by case basis: (1) participation in activities against the laws and regulations; (2) failure to perform relevant activities according to the content of the application as approved by the National Development and Reform Commission within 6 months after finishing such formalities as foreign exchange, customs, exit-entrance of the territory, tax and etc.; (3) the approved project has been terminated; and (4) other circumstances that are believed by the National Development and Reform Commission and the Taiwan Affairs Office of the State Council to be not suitable to be operated in Taiwan Region.

The ¡°Notice on Printing and Distributing the Working Guidelines for the Chinese Interested Parties Related to the Abnormal Pullout of Foreign Investment to Conduct Transnational Investigation and Litigation¡± is promulgated by the respective General office of the Ministry of Commerce, the Ministry of Foreign Affairs, the Ministry of Justice and the Ministry of Public Security on November 19, 2008.

In the occurrence of abnormal pullout of foreign investment, the Chinese party concerned shall apply to the court or investigation department for acceptance of civil or commercial or criminal cases. Thereafter, the competent departments will claim for judicial assistance through competent central agency from foreign countries according to the internal procedure inside the system and the Treaty on Judicial Assistance in Civil and Commercial Cases and the Treaty on Judicial Assistance in Criminal Cases between China and foreign countries. Till now, there are 42 countries such as Singapore, France, Poland, Italy, Spain and the like that have signed the Treaty on Judicial Assistance in Civil and Commercial Cases with China, and U.S.A., Mongolia and Egypt have signed the Treaty on Judicial Assistance in Criminal Cases with China.

As to the loss caused to the creditor from failure of fulfillment of normal liquidation, Article 18 of the Provisions on Some Issues about the Application of the Company Law of the People¡¯s Republic of China (II) provides that, the shareholder of limited liability company, the controlling shareholder and director of stock equity company and the actual controller who is a foreign enterprise or individual shall assume corresponding civil liabilities according to the law, which shall be the joint and several compensation liabilities for the debt of the company.

As to the enforcement of judgment, if the Chinese party who brings the lawsuit wins the litigation and the losing foreign party has no available property in China, the wining party may request foreign court to accept and enforce the effective judgment and award according to the Treaty on Judicial Assistance in Civil and Commercial Cases between China and foreign countries or the law at the place where the losing party¡¯s property is located.

As to a very few suspected party who maliciously avoids large amount of taxes, the competent department in China may claim for extradition or transfer of criminal litigation through competent central agency from the destination country of the criminal suspect, so as to take the greatest legal action against the criminal suspect.

 

Reply of the Supreme People¡¯s Court on Whether People¡¯s Court will Accept the Litigation Brought by the Parties regarding the Disputes arising from the Content of the Notarized Creditor Documents that Has Compulsory Enforcement Validity

The ¡°Reply of the Supreme People¡¯s Court on Whether People¡¯s Court will Accept the Litigation Brought by the Parties regarding the Disputes arising from the Content of the Notarized Creditor Documents that Has Compulsory Enforcement Validity¡± is promulgated by the Supreme People¡¯s Court on December 8, 2008 and shall come into force as of December 26, 2008.

The notarized creditor document that states the payment and the commitment of the debtor to accept the forcible enforcement shall have the legal compulsory enforcement validity. If the creditor or debtor directly bring civil lawsuit to the people¡¯s court for disputes arising from the content of such creditor document, the people¡¯s court may not accept the case. However, where there are mistakes in the notarized creditor document and the people¡¯s court decides not to enforce such document, the parties and the interested person of the notarial matters may bring civil lawsuit to the people¡¯s court in respect of the disputed content.

 

Decision of the State Council on Revising the Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to Be Retained

The ¡°Decision of the State Council on Revising the Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to Be Retained¡± (hereinafter ¡°the Decision¡±) is promulgated by the State Council on January 29, 2009 and shall come into force as of promulgation.

According to the Decision, ¡°the examination and approval of establishment and modification of the credit guaranty institutions for trans-provincial or trans-regional or relatively large-scaled small and medium enterprises¡± is revised as ¡°the examination and approval of establishment and modification of the financial guaranty institutions¡±, and the approval agency is changed from the State Development and Reform Commission to the department confirmed by the people¡¯s government of various provinces, autonomous regions and municipalities directly under the central government.

 

Reply Letter of the State Council on Promoting the Development of Service Outsourcing Industry

The ¡°Reply Letter of the State Council on Promoting the Development of Service Outsourcing Industry¡± (hereinafter ¡°the Reply Letter¡±) is promulgated by the General Office of the State Council on January 15, 2009, which has given replies to the policies and measures made by the Ministry of Commerce and other relevant ministries and commissions on promoting the development of the service outsourcing industry.

The Reply Letter has approved 20 cities such as Beijing, Tianjin, Shanghai, Chongqing, Dalian, Shenzhen, Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi¡¯an, Jinan, Hangzhou, Hefei, Nanchang, Changsha, Daqing, Suzhou and Wuxi as the example cities on service outsourcing in China.

According to the Reply Letter, a series of preferential measures will be taken in these 20 cities, including tax preferences, fiscal fund support, training of practical personnel, special labor time, financial support, protection of intellectual property, improvement of investment environment and the like. In the same time, the promotion of the development of service outsourcing industry shall be an important way to the adjustment of China¡¯s industry structure, the transformation of export development mean, the increasing of job opportunities for university graduates. Still, the Reply Letter agrees to establish the international service outsourcing personnel base and the service outsourcing personnel internet recruitment long effective mechanism, and establish service outsourcing research and industrial organization.

Substantive & Procedural Needs for Shanghai Enterprises to Lay off Employees

The coming of financial crisis has forced many enterprises to lower the salary of the employees or to lay off the employees so as to decrease the cost and expense of the enterprises. However, when using such methods to deal with the crisis, many enterprises fail to strictly comply with the statutory conditions and procedures, which not only infringes the legal rights and interests of the employees, but also pushes the enterprises into unnecessary disputes. For this reason, this article will collect the substantive and procedural needs that are necessary for shanghai enterprises to lay off the employees under the provisions of laws and regulations and local rules in Shanghai, and provide certain opinions for their reference.

Article 41 of China Labor Contract Law provides that, the layoff by enterprises refers to such an act that the enterprises lay off 20 or more employees, or the employees to be laid off account for 10% of the total number of the employees. We could see from this provision that the act ¡°layoff¡± as provided by law only refers to the act that the enterprises dissolves labor contracts with a large number of employees in one time. As such an act will cause a large number of employees to lose their job and may be possible to influence the stability of the society, the law, therefore, provides that the layoff by enterprises must achieve certain substantive and procedural conditions.

The substantive conditions necessary for the layoff by enterprises refers to any of the following circumstances:
1. The enterprise is under revitalization according to the Enterprise Bankruptcy Law;
2. The enterprise encounters serious difficulties in production and business operation;
3. The enterprise changes products, makes important technological renovation, or adjusts the methods of its business operation, and is still necessary to lay off the number of employees after changing the labor contract; or
4. The objective economic situation, on which the labor contract is based, has changed considerably and the employer is unable to perform the labor contract.

I believe that, the business difficulties caused by financial crisis to many enterprises shall belong to the second circumstance above, therefore, the enterprises may adopt to lay off employees to decrease the business costs. However, I believe that, the enterprises shall, as one party to lay off the employees, be obligated to provide materials evidencing the occurrence of above circumstances. For example, an enterprise that lays off employees for reason of bankruptcy shall prove the start of bankruptcy procedure; an enterprise that lays off employees for reason of serious production and business difficulties shall provide financial reports to prove that it is difficult to maintain the production and business. In this connection, the layoff by enterprise may not meet the substantive conditions if it fails to provide relevant evidences.

In addition to the substantive conditions, the layoff by enterprises shall also satisfy certain procedures, the Labor Contract Law provides that the enterprise shall make an explanation to the labor union or to all its employees by 30 days in advance. After it has solicited the opinions from the labor union or of the employees, it may lay off the number of employees upon reporting the employee reduction plan to the labor administrative department. In order to further confirm the formalities necessary for enterprise to make layoffs, Shanghai Municipal Human Resources and Social Security Bureau issued the ¡°Notice of Shanghai Municipal Human Resources and Social Security Bureau on Reporting Layoff Plans by Employers¡± (Document Number: SH Ren She Guan Fa (2009) 3). According to the Notice, the employee reduction plan made by the enterprises shall be reported to municipal or district labor administrative department together with the following materials:

1. Duplicate of the Enterprise Business License (Copy) and the Labor Union Legal Person Qualification Certificate. If the labor union has not been established, evidences proving the election of employee representatives with the signature or seal of all the employees shall be presented.
2. Personal materials of the labor union representative or the employee representative, including name, personal ID number, post and term of labor contract, etc.
3. Written employee reduction plan, which may include the number of employees to be laid off, the percentage of the number of employees to be laid off with the number of all of the employees, the name list of employees to be laid off (name, ID, term of labor contract), preparation of economic compensation, and the statement of the enterprise on whether or not remedial measures have been taken.
4. Materials proving the explanation by the enterprise to the labor union or the employees and the opinions from the labor union or of the employees, which may include the reason of layoff by the enterprise, the date of explanation to the labor union or employees and the method, the circumstances concerning the solicitation of opinions from the labor union or employees.

After receiving the employee reduction plan with complete set of materials, the labor administrative department will make an acceptance and issue the receipt.

In consequence, I believe that the layoff of employees by enterprises shall not only meet certain substantive conditions, but also require high procedural needs. Usually, when the enterprises have issued the employee reduction plan to the employees, the employees will normally reject the plan. At the same time, the application for examination and approval to labor administrative department will face certain obstacles. Therefore, layoff of employees will be highly difficult if such statutory procedures are strictly followed. In addition, I have to remind that, if the layoff of employees fails to meet such substantive conditions or fails to operate according to the legal procedures, it will be held as illegal dismissal of employees. Under such circumstances, the employees are able to request for recovery of employment relationship or claim for double payment of economic compensation, which, as a result, will cause high legal risks to the enterprises. Therefore, It is suggested that, the enterprises shall, in comprehensive, consider the feasibility to dismiss employees by layoff before lying off the employees, and at the same time consider if there is any other alternatives, such as dissolution of labor contract by mutual consultation or discontinuance of labor contract after it matures and other possible means, which will not only avoid the complex procedures that are necessary for the layoff of employees, but also decrease the risks faced by the enterprises.
£¨Contact of Author£ºkevincheng@hllawyers.com£©

Correctly Master the Scope of the Right to Information of the Shareholders in Limited Liability Companies

Attorney Gary Gao and Attorney Bruce Luan have represented a British listed company A to sue a shanghai company B in a case concerning the dispute of shareholder¡¯s right to information. After examination, Shanghai First Intermediate People¡¯s Court made a judgment of first instance that supports company A¡¯s right to consult all the original documents such as the full set of financial reports and accounting records and the resolutions of board meetings that are available since the establishment of company B; later, company B was not satisfied with the judgment of first instance made by Shanghai First Intermediate People¡¯s Court and appealed to Shanghai Superior People¡¯s Court. After examination, Shanghai Superior People¡¯s Court made a final decision on December 18, 2008 to uphold the judgment of first instance.

During the examination process of this case, the attorneys of the parties made aggressive court debate concerning the following arguments: (1) whether the shareholder who has defects in contribution has the right to information? (2) whether original financial documents are contained in the scope of the right to information of the shareholders in limited liability companies? (3) whether company A, who is the shareholder of company B and is dealing in businesses that are competitive with company B, has the right to information? At last, the people¡¯s courts of both the intermediate level and the superior level adopt to accept the opinions of our law firm. We believe that such a case shall be a representative case after the implementation of new Company Law and the judgment of the people¡¯s court shall be able to afford representative lessons to the shareholders of companies (especially the minority shareholders) for them to protect their legal rights and interests. Now we will make a introduction in connection of this case.

[Summary]
Company A established a joint venture company B that deals in the business of production and sale of electronic products in the year 2000 with a local enterprise at Shanghai Songjiang District, in which, they both held 50% of the shares. Since the establishment of company B to the year 2006, the actual operation of company B is controlled by the Chinese investor. As company A and company B have the same business, company A knows that the industry that company B is dealing in has gross profit at above 10%. However, the truth is that company B is in loss or minor profit under the control of Chinese investor and there are a lot of affiliated transactions. In 2007, company A requested to hold the board meeting and consult the original financial documents for many times, which, however, were rejected by the Chinese investor. At last, company A has to entrust attorneys to bring lawsuits to Shanghai First Intermediate People¡¯s Court to claim for execution of shareholder¡¯s right to information.

[Brief Comments]
Immediately after company A had brought the lawsuit concerning shareholder¡¯s right to information, company B entrusted attorneys to bring a lawsuit to the same people¡¯s court, claiming that company A shall perform the shareholder¡¯s obligation of full contribution and requiring on the above ground to suspend the examination of company A¡¯s lawsuit and wait for the judgment of other lawsuit to decide if company A has shareholder¡¯s right to information. We hold that, (a) the registration information in industry and commerce administration indicates that company A is the shareholder that holds 50% of the shares of company B since the establishment of company B. The registration information in industry and commerce administration shall be public, to which the Chinese investor has not made any objections ever; (b) only after company A has claimed for the right to information to people¡¯s court did company B suspect company A¡¯s capacity as the shareholder, which is essentially aimed to set obstacles to shareholder¡¯s right to information; and (c) without other opposite public information, the registration information in industry and commerce administration shall be deemed as the proof of company A¡¯s capacity as shareholder, and the examination of other lawsuit shall not influence the examination of this case. Shanghai First Intermediate People¡¯s Court adopts our opinion and decides to examine the case.

During the process of first instance, the attorneys of company B claimed that: (a) Article 34 of Company Law provides that shareholders are able to consult the financial report and accounting records of the company, however, it does not provides that shareholders are able to consult the original financial documents; and (b) it is not expressly stipulated in the articles of association of company B that shareholders have the right to consult the original financial documents. Therefore, original financial documents are not covered by the scope of company A¡¯s right to information. We hold that: (a) shareholder¡¯s right to information is an important right for shareholders to know and realize company¡¯s business circumstances. Comparing with minority shareholders (or those not actually participating in the business activities of the company), major shareholders (or those actually controls the company) has absolute advantage in occupying company¡¯s business information; (b) shareholder¡¯s right to information is a good right protection mechanism to restrict such a situation, so as to fully achieve the purpose of the shareholder¡¯s entrance into the company; (c) viewing from the purpose of new Company Law on setting up the right to information, if shareholders are permitted to consult the original financial document, the legal rights and interests of shareholders will be better protected; and (d) company B is in loss for a long term under the control of Chinese investor and there are a lot of affiliated transactions, under such circumstances, company A shall, as the shareholder of company B, have the right to consult the materials at any time of the company. Shanghai First Intermediate People¡¯s Court adopted our opinion and held in the fist instance that company A should be allowed to consult company B¡¯s financial materials, including the original financial documents.

Company B was not satisfied with the judgment of first instance made by Shanghai First Intermediate People¡¯s Court and appealed to Shanghai Superior People¡¯s Court. During the process of second instance, the attorneys of company B again claimed that, company A is dealing in the business that are competitive to that of company B, and company A has also set up a joint venture that is dealing in the same business in Ningbo, therefore, company B has reasonable ground to believe that company A¡¯s execution of shareholder¡¯s right to information is unjust. In this connection, company B shall have the right to reject company A¡¯s claim of shareholder¡¯s right to information according to Paragraph 2 of Article 34 of new Company Law. We hold that: (a) company B has not given any proof to the people¡¯s court to prove that the execution of shareholder¡¯s right to information by company A will certainly infringe the interests of company B. The competitive relationship between company A and company B is clear and exists since the establishment of company B. Therefore, the rejection of company A¡¯s right to information shall be putting the cart before the horse; and (b) upon the approval from company A, we promise to the people¡¯s court that we will legally keep confidential any trade secret of company B that we have known during the consultation of company B¡¯s financial and accounting materials and will not take it for any commercially competitive usage. At last, Shanghai Superior People¡¯s Court made a final decision to uphold the judgment of first instance.
(Contact of Author£ºbruceluan@hllawyers.com)

[Summary]
Applicant of re-trial (defendant of first instance): Guangdong Dasheng Culture Communication Co., Ltd. (hereinafter ¡°Dasheng Company¡±); Defending party of the re-trial (plaintiff of first instance, appellee of second instance): Hong Ruding, Han Wei; Defendant of first instance: Guangzhou Audiovisual Press, Chongqing Sanxia Disc Development Co., Ltd., Liansheng Commercial Chain Shareholding Co., Ltd. (former Jiujiang Liansheng Plaza Supermarket Co., Ltd., hereinafter ¡°Liansheng Company¡±); Cause of action: disputes concerning copyright infringement.

The original people¡¯s court found that: the song ¡°Da Qi Song Gu Chang Qi Ge¡± is a musical work composed by Shi Guangnan and worded by Han Wei. After the death of Shi Guangnan, his successor Hong Ruding and the writer Han Wei respectively authorized their rights on this musical work to the Music Copyright Society of China (hereinafter ¡°MCSC¡±). On July 5, 2004, Luo Lin (art name ¡°Dao Lang¡±) and Dasheng Company entered into a contract, in which Luo Lin authorized Dasheng Company to reproduce and publish audio products on the basis of the musical album ¡°Kashgar Hu Yang¡± that is produced by Luo Lin who owns the copyright of such a album. On December 3, 2004, Dasheng Company and Guangzhou Audiovisual Press entered into a contract, which stipulates that Guangzhou Audiovisual Press shall be obligated to reproduce and publish the audio products of the album ¡°Kashgar Hu Yang¡±. Later, Guangzhou Audiovisual Press entrusted Sanxia Company to reproduce 900,000 copies of the audio products of the album ¡°Kashgar Hu Yang¡±. In December 2004, Guangzhou Audiovisual Press paid use fees to MCSC for the song ¡°Da Qi Song Gu Chang Qi Ge¡±, which involves 200,000 copies of the album ¡°Kashgar Hu Yang¡±. In 2005, Hong Ruding, Han Wei bought the above audio product in Liansheng Company, which contains the disputed song ¡°Da Qi Song Gu Chang Qi Ge¡±.

The people¡¯s court of first instance Jiujiang Intermediate People¡¯s Court held that: Guangzhou Audiovisual Press, Dasheng Company shall obtain the license from the copyright owner of the disputed musical work and pay the fees before publishing the disputed audio product. MCSC had licensed Dasheng Company and Guangzhou Audiovisual Press to reproduce and publish 200,000 copies of the disputed audio products, however, Guangzhou Audiovisual Press entrusted Sanxia Company to reproduce 900,000 copies of the album. As to the part that exceeded the license of the MCSC, such three parties had infringed the right of license and the right of payment owned by the right owner, and therefore shall jointly assume the infringement liabilities. As the purchase channel of the disputed audio product sold by Liansheng Company was legal, Liansheng Company shall not assume the legal liability to cease the sale of such product.

Sanxia Company was not satisfied with the above judgment and appealed that: the disputed audio product accepted and actually reproduced by Sanxia Company were 200,000 copies, which had not violate any relevant provision, therefore, it shall not assume any legal liabilities.

The people¡¯s court of second instance Jiangxi Superior People¡¯s Court basically affirmed the judgment of first instance.

In the application for re-trial, Dasheng Company claimed that: it had paid the use fees for the first issued 200,000 copies of the disputed audio products, and the use fees for the exceeding 700,000 copies of the audio products shall be paid according to the Interim Provision on the Payment Standard of Audio Statutory License rather than the statutory remuneration.

[Final Judgment]
After examination, the Supreme People¡¯s Court held that: the Copyright Law provides that an audio producer who, for the production of a sound recording, exploits a musical work which has been lawfully recorded as an audio product by another, does not need to obtain permission from, but shall, as provided in regulations, pay remuneration to the copyright owner. Although such a provision provides that the exploitation of a musical work which has been lawfully recorded as an audio product by another does not need to obtain permission from the copyright owner, the purpose of the legislation is to promote the broadcasting of musical work. Therefore, as to the production and publication of audio products made on the basis of such musical work, Paragraph 3 of Article 39 of the Copyright Law shall still apply. In a work, once the audio product of the musical work that is licensed by the copyright owner has been published, the exploitation of such musical work by another to reproduce and publish audio product does not need permission from the copyright owner of the musical work, however, remuneration shall be made to the copyright owner. In this case, the song ¡°Da Qi Song Gu Chang Qi Ge¡± has been widely broadcasted in many audio products made by others before the publication of the disputed album, and the copyright owner have not declared that such exploitation is not permitted. Therefore, the production and publication of such musical work by such four companies in the audio product of the album ¡°Kashgar Hu Yang¡± are covered by the provisions in Paragraph 3 of Article 39 of the Copyright Law, and have not constituted any infringement. As the law does not provide that the payment of remuneration must be made before the exploitation of musical work, the ¡°payment after use¡± by the user may not violate the law to the extent that the right of the copyright owner to obtain remuneration has not been harmed. In consequence, Dasheng Company, Guangzhou Audiovisual Press, Sanxia Company shall pay remuneration to Hong Ruding and Han Wei according to the law. As to the use fee paid by Guangzhou Audiovisual Press to MCSC for the 200,000 copies of the musical work, Hong Ruding and Han Wei may claim their rights toward the MCSC; as to the unpaid use fee of the 700,000 copies of the musical work, the use fee may be calculated according to the Interim Provision on the Payment Standard of Audio Statutory License.

[Brief Comments]
Article 41 of the Copyright Law provides that a producer of audio or video products shall have the right to permit others to reproduce, distribute, lease and disseminate to the public through information network such audio or video products and shall have the right to receive remuneration for it. At the same time, Paragraph 1 of Article 39 and Paragraph 2 of Article 41 of the Copyright Law still provide that if a producer of audio or video products exploits a work created by another for the production of a audio and video products, or if the licensee reproduces, distributes, leases or disseminates to the public through information network audio and video product shall obtain permission from and pay remuneration to the copyright owner. But, Paragraph 3 of Article 39 has set up a system to limit the rights of the copyright owner of musical work, i.e. ¡°an audio producer who, for the production of a sound recording, exploits a musical work which has been lawfully recorded as an audio product by another, does not need to obtain permission from, but shall, as provided in regulations, pay remuneration to the copyright owner¡±. The provision does not in itself expressly provides that whether the audio producer can, after it has exploited a musical work which has been lawfully recorded as an audio product by another, reproduce and publish the audio product. However, we can see from the judgment of this case that, the statutory license provided in Paragraph 3 of Article 39, rather than Paragraph 2 of Article 41 of the Copyright Law, still apply to the reproduction and publication of audio products made by exploiting a musical work which has been lawfully recorded as an audio product by another. As the Copyright Law and other relevant laws and regulations do not require that the user must pay the use fee before the exploitation of work, therefore, payment after use is available.
£¨Contact of Author: juliazhu@hllawyers.com£©

[Background]
In March 2003, company A was established for the production and sale of liquefied natural gas. The registered capital is RMB 800 million Yuan, in which company B from Xinjiang Uygur Autonomous Region contributed RMB 780 million Yuan, which accounts for 97.5% of the registered capital; company C from Urumqi contributed RMB 20 million Yuan, which accounts for 2.5% of the registered capital.

In July 2006, company B transferred 33.32% of the shares of company A it held to a Barbados company D, for which company D paid USD 33.8 million to company B as the payment of stock transfer. Later, company B further contributed RMB 266 million Yuan to company A. In consequence, the registered capital of company A was changed to RMB 1,066 million Yuan, in which company B accounts for 73.13%, and company C 1.88%, company D 24.99%.

In June 2007, company D transferred 24.99% of the shares of company A it held to a company B in the price of USD 45.968 million. We could see from this transaction that company D, within one year, earned USD 12.168 million by purchasing and selling the shares of company A.

Company D believed that, according to the bilateral tax treaty between China and Barbados, the above profit from the transfer of stock was only taxable in Barbados. However, Xinjiang Uygur Autonomous Region Taxation Bureau and Urumqi National Tax Bureau took an investigation in respect of the concrete situation of this case, the confirmation of the residence identity and the application of the tax treaties and started the tax information exchange mechanism. As a result, it is confirmed that company D was not a tax resident in Barbados, and therefore the provisions in the tax treaties between China and Barbados shall not apply. At last, the government levied tax on the above profit from the stock transfer according to relevant provisions in Chinese law.

[Analysis]
1. The tax treaty between China and Barbados
The Government of the People¡¯s Republic of China and the Government of Barbados entered into the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter ¡°the Tax Agreement¡±) in October 2000, which was implemented since January 1, 2001. Paragraph 4 of Article 13 of the Tax Agreement provides that the profit from the transfer of the property other than those stated in Paragraph 1, Paragraph 2 and Paragraph 3 of this Article shall only be taxed by the Contracting State where the transferor is a resident. While, Paragraph 1, Paragraph 2 and Paragraph 3 of this Article has respectively provides the taxation method in respect of the profit from the transfer of real property located in one Contracting State by a resident in the other Contracting State, the transfer of chattels in the business property of a permanent institution located in one Contracting State by an enterprise in the other Contracting State or the chattels of a fixed base for individual labor work located in one Contracting State by a resident in the other Contracting State, and the transfer of ships or planes engaging in international transportation or the chattels thereof.

In this case, the profit earned by company D from the stock transfer shall be covered by the Paragraph 1, Paragraph 2 and Paragraph 3 of Article 13 of the Tax Agreement therefore, company D held that the tax shall, according to Paragraph 4 of such Article, be levied by the Contracting State where the transferor is the resident, i.e. by Barbados.

2. Tax resident
The key of this case is the recognition of the resident identity of company D, i.e. whether company D is a Barbados resident that is capable to enjoy the Tax Agreement between China and Barbados. Article 4 of the Tax Agreement has given a definition of the word ¡°Resident¡± used under the Tax Agreement, which provides that the term "Resident of a Contracting State¡± means any individual, company or other entity who, under the laws of that Contracting State, is liable to tax therein by reason of his/its domicile, residence, place of head office, place of management or any other criterion of a similar nature.

The companies registered in Barbados is divided into the following two types: one is the local company with actual business in Barbados; the other one is the off shore companies registered in Barbados that has no actual business therein. The rate of the income tax levied by the government of Barbados on its local company reaches as high as 35%, while normally on the other hand no tax is levied on off shore companies. Besides, there is no capital gain tax in Barbados and there is no foreign exchange restriction to off shore companies.

In this case, company D, as investigated by Chinese taxation administrations, is an enterprise registered in Barbados by American NB investment group in May 2006. The directors of company D are all Americans without any permanent residence place in Barbados. According to the information received from the tax information exchange mechanism between China and Barbados, company D is in fact an off shore company registered in Barbados, who has no tax obligation in Barbados under the off shore laws and structures in Barbados. Therefore, even if company D is registered under the laws of Barbados, it shall not be deemed as the ¡°Resident of Barbados¡± as defined in the Tax Agreement between China and Barbados as it has no tax obligation in Barbados, in this connection, it cannot enjoy the preferences provided in the Tax Agreement between China and Barbados.

[Revelation]
This case has brought certain revelation to the enterprises and individuals who want to avoid the tax by off shore companies.

Off shore companies refer to companies established in off shore jurisdiction under local off shore company law by foreign investors, and such a company can only engage in the business out side the off shore region. The major off shore regions in the world include British Virgin Island, Cayman Island, Seychelles Island, Island of Niue, Bahamas Island, the Republic of Panama, the Republic of Mauritius and the like. As off shore companies generally do not have tax obligations in the registered place, therefore, many individuals or companies will adopt to avoid the tax by setting up off shore companies. Normally, these off shore regions are called tax havens.

However, the abuse of tax havens has caused great losses to the tax revenues of various nations. In this connection, many countries have issued a lot of measures in recent years to prevent the abuse of tax avoidance in off shore regions. For instance, the Enterprise Income Tax Law of China that is implemented on January 1, 2008 provides that an enterprise which is established under the law of a foreign country (region) but whose actual office of management is inside China shall be deemed as Chinese resident enterprise, who shall therefore pay the tax according to the standard of resident enterprises. Still, many countries have made a black name list of tax havens, by which special supervision and administration will be paid to the revenue from or the expenses into such countries in the name list. At the same time, the countries has, in order to strengthen international cooperation, set up information exchange mechanism and made such stipulations in the bilateral or multilateral tax agreement, so as to avoid the occurrence of tax evasion as far as possible.

The above restrictions upon off shore companies have reminded us that more closed arrangement shall be taken against unnecessary tax burdens before using off shore companies for investment, M&A or tax plan.
(Contact of Author£ºkarenliu@hllawyers.com)