21 January 2021
China’s recently promulgated Measures to Block the Improper Extraterritorial Application of Foreign Laws and Measures (the “Measures”) has established a new framework for mitigating the impact of foreign legal measures, including economic sanctions and requests for information, on China’s economic and security interests. This measure is the latest in a series of regulations to counter foreign governments’ extraterritorial actions, especially considering the Trump administration’s aggressive actions against China in the past six months. Previously, such regulations issued by China include the "blocking regulations" issued in 2019 and 2020, which restricted assistance to foreign criminal and civil litigation, and the new sanctions and exports issued by China in October and November 2020 Control system (click here to view the previous legal newsletter of Meifu). In view of the recent US sanctions, export controls and other government measures with extraterritorial effects, both Chinese companies and foreign companies operating in China need to consider the impact of this approach.
Background introduction
On January 9, 2021, the Ministry of Commerce of China announced the measures, which will take effect on the date of publication. The measures clearly aim to safeguard China’s economic and security interests and prevent foreign governments’ unilateral legal systems from restricting China’s commercial exchanges with third-country parties.
The Measures established an inter-departmental mechanism ("working mechanism") led by the Ministry of Commerce and the participation of other institutions such as the National Development and Reform Commission. The working mechanism will assess whether the extraterritorial application of a foreign law ("extraterritorial measures") is inappropriate, and will issue an injunction to restrict its application. In addition to rulings, the working mechanism also provides guidance and support for the Chinese (as defined below) to counter the inappropriate extraterritorial application of foreign laws.
The Ministry of Commerce drew on the relevant experience of the European Union and other countries when formulating the measures. This measure has obvious similarities with the EU’s blocking regulations. Both of them: (i) stipulate that entities affected by extraterritorial measures have the obligation to proactively notify relevant authorities; (ii) that entities affected by extraterritorial measures are obliged to comply The parties to the extraterritorial measures provide a basis for their claims; (iii) impose civil penalties on the parties that do not comply with the measures; and (iv) establish a mechanism that allows compliance with extraterritorial measures based on specific circumstances.
Subject covered by this approach
The Measures stipulate the obligations and relief measures of "Chinese citizens, legal persons or other organizations" (collectively referred to as "Chinese"). Chinese companies formed under Chinese laws-including overseas branches of Chinese companies that are part of the same "Chinese legal person." "Chinese legal person" also covers the subsidiaries formed by foreign companies in accordance with Chinese law, which means that non-Chinese multinational companies need to pay attention to the compliance obligations of their Chinese subsidiaries under this measure. Chinese domestic branches or representative offices of non-Chinese companies are not traditionally regarded as "Chinese legal persons." However, these unincorporated persons may be regarded as "other organizations" in China. According to the Civil Code of the People's Republic of China, such organizations include unincorporated organizations and civil organizations. [ [1] ]
Finally, overseas subsidiaries of Chinese companies have traditionally not been regarded as "Chinese legal persons", nor do they meet China's definition of "other organizations."
Reporting obligations and rulings
Article 5 requires China to report to the Ministry of Commerce within 30 days after being restricted by extraterritorial measures so that it cannot engage in normal economic activities with parties in third countries. The reporting party may require that the reported matters be kept confidential.
The working mechanism will assess whether extraterritorial measures are inappropriate in accordance with Article 6, based on factors including the principles of international law and the potential impact on China’s national or private interests.
If the working mechanism finds that the extraterritorial measure is indeed "improper", it can issue an order ("injunction") (through the Ministry of Commerce) to prohibit China from complying with the extraterritorial measure. The working mechanism has the power to suspend or revoke the ban based on specific circumstances.
Violation penalties, civil remedies and government support
In the event that any "party" complies with extraterritorial measures and causes damage to the Chinese side, Article 9 gives the Chinese side the right to bring litigation against the "party" in Chinese courts. Article 9 has received extensive attention from non-Chinese multinational companies because of the legal liabilities it generates. It is worth noting that the "parties" that may face claims are not explicitly limited to the Chinese side, or even the parties located in China. Therefore, this theory of liability may involve companies located in third countries, such as foreign companies that have cut off business with China due to secondary sanctions imposed by the United States. It is not yet clear how the Chinese court will enforce the Chinese verdict against the foreign defendant; for example, whether the Chinese court will enforce the judgment against the foreign defendant’s Chinese subsidiary or assets remains unclear.
The injured China has two ways to obtain support from the Chinese government. First, Article 10 requires the working mechanism to provide "guidance and services" for improper extraterritorial measures. Second, Article 11 allows the Chinese government to provide "necessary support." However, the Measures did not specify the nature of such "guidance", "service" and "support", nor did it specify the mechanism for seeking or providing it.
Article 13 authorizes the Ministry of Commerce to give warnings, order corrections and impose fines on the Chinese parties that (1) fail to report truthfully or (2) fail to comply with the ban.
Exemption from prohibition
Article 8 stipulates that China may submit a written application summarizing the reasons for applying for exemption and the scope of exemption to apply for exemption from compliance with the prohibition. The decision will be issued within 30 days from the date of acceptance, and a timely decision shall be made in an emergency.
Analysis and outlook
As discussed in our previous legal newsletter on the "Unreliable Entity List" , China has taken a series of measures in the past two years to deal with parties seeking to comply with foreign government extraterritorial measures that are deemed to harm China’s economic and security interests. Impose restrictions and legal liabilities. This approach is the latest of these defense measures.
As mentioned above, several key contents of the measures still need to be clarified in the implementation rules to be issued in the future or when the first batch of bans are issued, including whether the measures are applicable to Chinese branches or offices of foreign companies and overseas Chinese companies. Subsidiaries and how to enforce compensatory judgments against overseas companies. In addition, the types of extraterritorial measures covered by the measures remain to be seen. For example, the secondary sanctions imposed by the U.S. government (that is, sanctions that do not involve U.S. personnel or other U.S. contact points) are clearly designed to be applied outside the territory and are within the scope of coverage. Other measures that may be covered include: extraterritorial application of US-level sanctions, export controls and investment restrictions in China or third countries.
For further information, please contact:
B. Chen Zhu, Partner, Morrison Foester
chenzhu@mofo.com
