China Legal Update Issue 1 of 2013: February

Amendment of the PRC Civil Procedure Law

5 years after the amendment of the People's Republic of China Civil Procedure Law ("PRC Civil Procedure Law", "《中华人民共和国民事诉讼法》") in 2007, 2012 witnessed another round of significant amendments of the PRC Civil Procedure Law. These new amendments ("Amendments") officially took effect on January 1, 2013.

Major highlights of the Amendments are summarized as follows:

Public Interest Litigation

Under the previous version of PRC Civil Procedure Law, one may not institute civil proceedings for protection of public interest. Only parties who have direct interest in the subject matter may institute civil proceedings in the PRC.

The Amendments (Article 55) make a breakthrough to introduce the concept of public interest litigation in the PRC. However, to avoid possible abuses, only governmental agencies and/or social institutions authorized under relevant laws (excluding individuals) are entitled to institute proceedings on the grounds of protection of public interest including proceedings regarding environmental pollution, infringements of consumer rights or other public interest matters.

That said, major issues including jurisdiction, burden of proof and calculation of damages are not specified in the Amendments. It is however clear that legal consequences of jeopardizing public interest would include damages and other civil liabilities apart from merely administrative penalty.

Injunctive Relief
According to the Amendments (Art 100), the courts are conferred with powers to order a party to perform certain acts, or refrain from performing certain acts if a party creates difficulties to enforcement of a judgment or causes damages to the other party in a proceeding. Previously, such powers of the courts were mainly restricted to asset preservation situations.

Some people regard this as the first injunctive relief in China. In fact, similar provisions could be found in other specific areas of laws like intellectual property law.

Whether this new power of the court would make a huge impact on the civil litigation system would depend on the future practice and possible detailed regulations governing the use of such powers by the courts.

Time Limit for Evidence Production

The Amendments (Article 65) give the courts discretionary power to admit evidence even if such evidence was not furnished within the time limit agreed by the parties or designated by the court.

Electronic Evidence

In response to the increasing amount of electronic communications in modern life, the Amendments (Article 63) recognise electronic evidence as one of the statutory forms of evidence.

Further implementation rules are expected to detail the requirements for admission of electronic evidence in China.

"Fast Track Litigation"

The Amendments (Articles 196 and 197) set out a fast-track special procedure for realization of secured interest. To institute proceedings to realize collaterals pledged by a debtor, a creditor may file an application with the basic people's court (基层人民法院) where the collateral is registered or physically located. The basic people's court (基层人民法院), having considered the merits of the case, has powers to order disposal of the collateral. The ordinary enforcement procedures may then commence.

If the court dismisses the application, the party may return to the traditional track of litigation. The above fast-track procedure for realization of secured interest may be made by one judge within 30 days upon the acceptance of the case.

Small Claim

The Amendments establish dedicated procedures for small claims (Article 162). For disputes with simple facts and claim amount less than 30% of the annual salary of locally-employed workers in the preceding year in the relevant area, a basic people's court (基层人民法院) may hand down the final judgment for such kind of small claims.

Forensic Investigation and Establishment

According to the Amendments (Articles 76 and 78), parties may apply to the court for forensic investigation and establishment in relation to certain facts in the civil proceedings. The court may designate the technical investigation and establishment institution if necessary. The appraiser or expert who issues the investigation and establishment report shall appear before the court as witness if: (1) a party to the proceedings raises objection to the said report (with or without cause); or (2) the court considers it necessary.

Judicial Recognition of Mediation Settlement

Under the previous legal regime, a private settlement outside the court room is considered a contract. The breach of such settlement may bring the case back to litigation proceedings all over again. Pursuant to the Amendments (Articles 194 and 195), the parties may, in accordance with the People's Mediation Law, apply to the basic people's court (基层人民法院) where the mediation institution locates for judicial recognition of the mediation settlement within 30 days after such mediation settlement becomes effective.

If the court considers the mediation settlement complies with the law, such mediation settlement so recognized is capable of serving as a basis for commencing mandatory enforcement proceedings directly.

This is a breakthrough in recognition of mediation as a means of dispute resolution. However, it is questionable whether private settlement without involving a mediation institution would be eligible for judicial recognition under the Amendments.

Consolidation of Domestic and Foreign Related Cases

Another highlight of the Amendments is the consolidation of domestic and foreign cases in terms of jurisdiction and asset preservation.

With such amendment, both domestic and foreign related contractual or monetary related disputes shall be submitted to courts with substantive connection to the dispute. Factors for deciding connection to a dispute include without limitation the domicile of the plaintiff and the defendant, the forum where the contract is executed or performed, or where subject matter locates.

According to the Amendments, there is no more distinction between asset preservation for domestic or foreign cases. The time limit to file a claim after pre-trial asset preservation is now the same for domestic or foreign cases, i.e. 30 days. Also, the court may grant asset preservation order for foreign related cases if necessary and if the court deems appropriate.

We have not sought to introduce here all amendments made to the PRC Civil Procedure Law.

Other amendments including service of legal documents, pre-trial evidence preservation, pre-trial asset preservation in arbitration, prevention of malicious actions are all worth-noting.

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Headquarters : Where-to-go?

To increase economic competitiveness, Shanghai and Shenzhen, both major cities in China, issued preferential policies in August 2012 to attract multinational corporations ("MNCs") to establish headquarters in these cities.

Shanghai Policy

On August 8, 2012, Shanghai government issued the "Implementing Opinion on the Shanghai Municipality, Provisions on Encouraging the Establishment of Regional Headquarters by Multinational Corporations" ("Implementing Opinion","《关于<上海市鼓励跨国公司设立地区总部的规定 >的实施意见》") to encourage MNCs to set up regional headquarters in Shanghai. Key points are summarized below:

• Allowance. Qualified regional headquarters, upon establishment as an investment holding company, would be entitled to a cash allowance or subsidy of rental payments, which would be made by installments.

  For MNCs recognized as the national regional headquarters of MNCs, regional headquarters of management company or regional headquarters of investment company, cash reward in the range from 5 million to RMB 10 million would be granted (by installments), provided that certain turnover volume has been achieved. For newly established Asian headquarters in Shanghai meeting certain requirements, cash reward of RMB 8 million is available (by installments). Cash reward of RMB 3 million is available for upgrading existing headquarters in Shanghai to cover operations in other part of Asia / Asia-Pacific / World when certain other criteria are met.

• Centralized Financial Management: Regional headquarters are encouraged to establish centralized financial management system for domestic investment in China. Commercial banks are encouraged to provide financial settlement service in Shanghai.
• Flow of Personnel: The immigration process, including the temporary entry of foreign personnel, long term or permanent residence of the management or personnel of the regional headquarters, residence and work permits, emigration entry, etc have been simplified. The personnel hired by research and development centers of the regional headquarters may be eligible for "household registration" ("办理户籍") of Shanghai.
• Customs, Quarantine and Inspection: Qualified regional headquarters are eligible to apply for simplified and prioritized procedure for customs clearance and duty assessment.

Shenzhen Policy

On August 31, 2012, Shenzhen government issued the "Provisional Measures on Encouraging the Development of Enterprise Headquarters" ("Provisional Measures",《深圳市鼓励总部企业发展暂行办法》）. According to the Provisional Measures, "Enterprise Headquarters" means headquarters that perform functions including investment, investment holding, operation decision, centralized sales and financial management.

Standards for Enterprise Headquarters

Companies registered and operated in Shenzhen for less than 1 year may be granted the status of "Enterprise Headquarters" if:

• For newly set up companies: (1) the paid-up registered capital is no less than RMB 500 million, (2) the total assets of the parent company is no less than RMB 10 billion; (3) the operating revenue taken into statistical accounting of Shenzhen for the preceding year is no less than RMB 10 billion; (4) the newly set up company committing to operating revenue for the next year of no less than RMB 5 billion and financial contribution to Shenzhen of RMB 60 million;
• For companies relocated to Shenzhen: (1) the operating revenue taken into statistical accounting of Shenzhen for the preceding year is no less than RMB 5 billion; (2) the registered paid-up capital is no less than RMB 500 million, and (3) committing to operating revenue for the next year of no less than RMB 5 billion and financial contribution to Shenzhen of no less than RMB 60 million;
• Companies registered and operated in Shenzhen for more than 1 year may be granted "Enterprise Headquarters" status if the operating revenue of the preceding year is no less than RMB 2 billion and financial contribution to Shenzhen is no less than RMB 40 million.

Governmental Support

The following major governmental support would be provided to an Enterprise Headquarters:

• A lump sum reward of RMB 10 million. If the operating revenue taken into statistical accounting of Shenzhen for the year subsequent to the grant of Enterprise Headquarters status exceeds RMB 5 billion, RMB 5 million will be rewarded for every RMB 2 billion in excess of such threshold, subject to a cap of RMB 50 million.
• The company may apply for a "contribution award" since the third year of the grant of Enterprise Headquarters status. The award amount will be calculated by reference to the financial contribution to Shenzhen City, subject to a cap of RMB 20 million.
• If the company does not own office premise, allowance of rent in the standard of RMB 500 per square meters (capped at RMB1.5 million) will be granted within the first 3 years since the grant of Enterprise Headquarters status.

• If the company purchases office premise within 3 years, a lump sum of 5% of the purchase price will be rewarded. If the operating revenue taken into statistical accounting of Shenzhen is no less than 10 billion and the financial contribution to Shenzhen is no less than RMB 100 million, the company may apply to build a "headquarters building"(solely or jointly with other companies, depending on the operating revenue and financial contribution to Shenzhen).