21 January 2021
China’s new Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (《阻断外国法律与措施不当域外适用办法》) (the “Rules”) create a new framework to mitigate the impact of foreign legal measures, including economic sanctions and information requests, on Chinese economic and security interests. They are the latest among a series of regulations—including legislation promulgated in 2019 and 2020 restricting assistance with foreign criminal and civil proceedings and China’s new sanctions and export controls regimes promulgated in October and November 2020 (see our prior client alert)—all aimed at counteracting extraterritorial actions by foreign governments, particularly in light of the past six months of aggressive actions toward China under the Trump Administration. Both Chinese companies and foreign companies with operations in China need to consider the implications of the Rules in light of the recent spate of U.S. sanctions, export controls, and other government measures with extraterritorial effect.
Background
On January 9, 2021, China’s Ministry of Commerce (“MOFCOM”) announced the promulgation of the Rules, effective on the same day. The Rules are expressly intended to safeguard China’s economic and security interests against foreign governments’ unilateral legal regimes that seek to restrict business dealings between Chinese and third-country parties.
The Rules create an interagency mechanism (the “Task Force”) headed by MOFCOM and joined by other agencies, including the National Development and Reform Commission. The Task Force will assess whether a particular extraterritorial application of foreign law (“Extraterritorial Measure”) is unjustified and will issue a Prohibition Order to restrict its application. Besides adjudication, the Task Force also provides guidance and support to Chinese Parties (as defined below) in counteracting unjustified extraterritorial application of foreign laws.
MOFCOM observed that it drew from the experience of the European Union and other countries in formulating the Rules. The Rules contain notable parallels with the European Union’s blocking statute both of which: (i) impose an obligation on persons subject to an Extraterritorial Measure to proactively notify relevant authorities; (ii) create a basis for persons harmed by the Extraterritorial Measure to claim compensation from the party that caused harm by complying with it; (iii) allow the imposition of civil penalties on parties that fail to comply with the Rules; and (iv) create a mechanism to permit compliance with an Extraterritorial Measure on a case-by-case basis.
Who is Covered by the Rules
The Rules create obligations and remedies for “Chinese citizens, legal persons or other organizations” (collectively, “Chinese Parties”). Chinese companies organized under Chinese law—including branches outside of China that form part of the same “Chinese legal person”—are covered. Also covered as “Chinese legal persons” are foreign companies’ subsidiaries organized under Chinese law, meaning that non-Chinese multinational companies will need to be mindful of the compliance obligations of their Chinese subsidiaries under the Rules. The Chinese branches or representative offices of non-Chinese companies are not traditionally considered “Chinese legal persons.” However, it is likely that such non-legal persons would be considered “other organizations” in China, which, under the Chinese Civil Code, include unincorporated associations and civil organizations.[[1]]
Lastly, overseas subsidiaries of Chinese companies, historically, would not be considered “Chinese legal persons” nor fit the definition of “other organizations” in China.
Reporting Obligations and Adjudication
Article 5 requires Chinese Parties to report to MOFCOM within 30 days of becoming subject to an Extraterritorial Measure and thereby restricted from normal economic activities with third-country parties. The reporting party may request confidential treatment of the reported matter.
The Task Force will assess, pursuant to Article 6, whether the Extraterritorial Measure is unjustified based on a set of factors that include principles of international law and potential impact on Chinese national or private interests.
If the Task Force determines that the Extraterritorial Measure is “unjustified,” it may issue (through MOFCOM) an order (“Prohibition Order”) to prohibit Chinese Parties from complying with it. The Task Force is empowered to suspend or withdraw Prohibition Orders on a case-by-case basis.
Penalty for Non-Compliance, Civil Remedies, and Government Support
Where any “party” complies with an Extraterritorial Measure and causes harm to a Chinese Party, Article 9 enables the latter to initiate civil claims against the former in Chinese court. Article 9 has already drawn a great deal of attention from non-Chinese multinationals because of the liability it creates. Notably, the “parties” who could face a claim are not expressly limited to Chinese Parties or even parties located in China. Therefore, this theory of liability potentially extends to companies located in third countries that, for example, stop doing business with a Chinese Party due to U.S. secondary sanctions. It is unclear how Chinese courts would enforce their judgments in favor of a Chinese Party against an overseas defendant; for example, it remains to be seen whether a Chinese court might enforce a judgment against the overseas defendant’s subsidiary or assets in China.
Harmed Chinese Parties also have two avenues of support directly from the Chinese government. First, Article 10 requires the Task Force to provide “guidance and service” in relation to unjustified Extraterritorial Measures. Second, Article 11 permits the Chinese government to provide “necessary support.” However, the Rules do not specify the nature of this “guidance,” “service,” and “support,” or the mechanisms for seeking or providing them.
Article 13 empowers MOFCOM to issue warnings, order remediation, and impose fines on Chinese Parties who (1) fail to make a truthful report or (2) fail to comply with a Prohibition Order.
Exemption from Prohibition Orders
Article 8 provides that a Chinese Party may apply for exemption from compliance with a Prohibition Order by submitting a written application outlining the reasons for the application and the scope of exemption. A decision will be issued within 30 days, or sooner in the case of emergency applications.
Analysis and Outlook
As discussed in our previous alert on the UEL, in the last two years China has adopted a string of measures that place restrictions and liabilities on parties seeking to comply with foreign governments’ extraterritorial measures deemed to harm Chinese economic and security interests. The Rules are the latest of these defensive measures.
As noted above, a number of key aspects of the Rules need to be clarified in future implementation regulations or as the first Prohibition Orders are issued—including whether Chinese branches or offices of foreign companies and Chinese overseas subsidiaries are subject to the Rules, and how compensatory judgments against overseas companies could be enforced. Additionally, it remains to be seen what types of Extraterritorial Measures will be within the Rules’ scope. For example, U.S. secondary sanctions—i.e., sanctions that do not involve U.S. persons or other U.S. touchpoints—imposed by the U.S. government are clearly extraterritorial by design and are well within scope. Other measures that could be covered include extraterritorial application, in China or third countries, of U.S. primary sanctions, export controls, and investment restrictions.
For further information, please contact:
B. Chen Zhu, Partner, Morrison Foester
chenzhu@mofo.com
