dla piper & kpmg present : joint ventures in china

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DLA PIPER & KPMG PRESENT:

JOINT VENTURES IN CHINA –NAVIGATING THE CHALLENGES DLA Piper, Silicon Valley

Thursday, October 19, 2017

www.dlapiper.com0

BEYOND LEGAL:

MAKING SENSE OF CHINA

DLA Piper, Silicon Valley


Qiang Li – Co-Regional Managing Partner, Asia; Co-Country Managing Partner, China

*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

www.dlapiper.com1 www.dlapiper.com

1 How different is China and why? 2

2 Why and how to give China special treatment? 11

3 How to monetize foreign technology in China? 16

4 About the firm 21

Contents

1 How different is China and why?

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� Highly regulated – approval based (not disclosure based) capital market designed to protect retail investors for social stability purposes (“similar to Hong Kong”)

� Regime worked well in the early days to deliver limited liquidity to strategic industries

� Extensive liberalization expected under the Xi administration's 2nd term?

How to explain the prominent absence of public M&A in China

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� In the age of high liquidity, regime is causing massive inefficiencies in capital allocation as evidenced by:

– high price-earning ratios (industry-blind) (sometimes used as benchmark by sellers in private deals)

– rampant speculation

– enormous backlog of private companies queuing for IPO

– corruption in IPO approval

– rampant insider-trading

– follow-on offerings as challenging as initial IPO offerings

– public M&A close to impossible without government support and intervention

– no penalty on poor management or failed public companies

– limited role of professionals leading to poor quality of disclosures

– prominent Chinese high-growth companies opt for offshore listings (and delistings): Alibaba, Tencent, etc.

How to explain the prominent absence of public M&A in China (cont’d)

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� Much less regulated than public M&A – national approval threshold now as high as US$300 million

� MOFCOM’s role is somewhat on the decline

� Role of professionals less subdued

� Merger control regime

� Add to watch list – Chinese "CFIUS" (national security review)?

� M&A as major form of exit until Chinese stockmarkets get their acts together

Why do we have thriving private M&A in China?

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� “China is a partnership with a general partner (GP) called the Communist Party and everyone else is a limited partner (LP)…”

Source: http://www.ft.com/cms/s/0/cbd89828-4c44-11e0-82df-00144feab49a.html#axzz2S1NDLd4Z

How is China so “different?”

GP

LP

LP

LP

LP

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� Diverse country governed centrally

– how is diversity celebrated?

� Case in point: the relative decline of Shanghai under the prior Hu-Wen administration

– Shanghai and other more developed areas largely governed in the same way as remote areas controlled by “local tribes”

How is China so “different?” (cont’d)

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� It charges a lot of “carried interest…”

� Nevertheless, it has been delivering results since 1949

How would you rate the performance of the “GP?”

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� Has China developed its own jurisprudence while “crossing the river by feeling the stones?”

� Domineering role of government directly results in high compliance costs for multinationals

China’s existing legal system introduced by the “GP” – the “Great Patchwork” in China’s half-baked market economy

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� Role of lawyers

� The highly inefficient financial system

� The judicial system and its lack of independence

� Corporate governance, fiduciary duty, due diligence, supervisors of LLCs, etc.

� Anti-commercial bribery rules

The Great Patchwork - examples

2 Why and how to give China special treatment?

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Shareholding structure of IMAX China

�IMAX China (Hong

Kong), Limited

IMAX Shanghai Mulimedia Co., Ltd.

��

100%

100%

Offshore

Onshore

Equity ownership

*

* Reported Chinese Investors of IMAX China:

1.China Media Capital ��2.Fountainvest Partners ��

IMAX China Holding,

Inc.

(Cayman Islands)

100%

IMAX Shanghai Service Co., Ltd.

�� !��"# ��

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Shareholding structure of GLP China

�GLP China

�(e.g. Lowa China Offshore

Holdings (Hong Kong) Limited)

Subsidiariese.g. $%&'()*+,-

./012

100%

100%

Offshore

Onshore

Equity ownership

�Global Logistic Properties

Limited

�(Singapore)

�China Consortium

�*

Reported Chinese Investors of GLP China:

1.China Life Insurance �34�567�2.China Development Bank �489:;<�3.Bank of China Group Investment �3;=>��4.China Post �34?@�5.HOPU Funds �AB��

CLF I ,-CDEFG

H

CLF II ,-CDEFI

H

China JVsJK,-L(MN

56% ~58%

3 How to monetize foreign technology in China?

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Option 1: HK JV – WFOE subsidiary structure

Tech Inc.

Tech SPV(Cayman)

JV

(Hong

Kong)

Chinese investors

WFOE(China)

100%

50%50%

100%

Offshore

China

VIE(China)

Contractual Control

Nominees

game development (foreign ownership

allowed)

game publishing & operations (foreign

ownership prohibited)

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Option 2/3: onshore EJV/CJV (China)

Tech Inc.

Tech SPV(Cayman)

Chinese investors

EJV/CJV

(China)

100%

50%50%

Offshore

China

VIE(China)

Contractual Control

Nominees

game development (foreign ownership

allowed)

game publishing & operations (foreign

ownership prohibited)

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Option 4: IP license

Tech Inc.

Tech SPV(Cayman)

100%

Offshore

China

OpCo(China)

IP license

Chinese investors

game development / publishing & operations

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� Flexibility of IPO options

� Flexibility of license of IP as capital contribution

� Tax benefits

� Corporate governance

� ESOP

� PRC "outbound" approval required?

� Re option 1, how to create offshore JV structure with a local partner who is not able to move funds offshore?

Considerations for the various options

4 About the firm

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Global Coverage

AustraliaAustriaBahrainBelgiumBrazilCanadaChinaCzech RepublicDenmarkFinland

FranceGermanyHungaryItalyJapanKuwaitLuxembourgMexicoMoroccoNetherlands

New ZealandNorwayOmanPolandPortugalQatarRomaniaRussiaSaudi ArabiaSingapore

Slovak RepublicSouth AfricaSouth KoreaSpainSwedenThailandUkraineUnited Arab EmiratesUnited KingdomUnited States

DLA PIPER OFFICES RELATIONSHIP FIRMS

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� Qiang Li is a Partner in the Corporate team, based in DLA Piper's Shanghai office. Qiang has been practicing law in Hong Kong and Shanghai since 1997. His practice covers mergers and acquisitions, private equity investment and corporate finance. He advises multinational and Chinese corporate and fund clients on their cross-border M&A and direct investments projects.

� Qiang frequently counsels international investors on China’s foreign investment laws and has served as Counsel to the Board of The American Chamber of Commerce in Shanghai. He is a leading authority on China’s myriad legal reforms in the areas of market access, corporate finance, corporate governance and general corporate matters.

� Qiang has significant experience in representing Chinese airline companies in aviation matters. He is also the founding board member of the Aviation Law Society of Shanghai Law Society.

Qiang LiPartnerco-Regional Managing Partner, AsiaO: +86 21 3852 2168 E: [email protected]

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*This presentation is offered for informational purposes only, and the content

should not be construed as legal advice on any matter.

PATH TO SUCCESS IN CHINA

DISPUTE RESOLUTION OPTIONS WHEN CONDUCTING BUSINESS IN CHINA

Cedric Chao

DLA Piper LLP (US)

555 Mission St., Suite 2400

San Francisco, CA 94105

Tel: (415) 615-6008

Email: [email protected]

www.dlapiper.com1

�China is the Wild East – no laws and anything goes!

�Chinese law is increasingly similar to US law – we can just use our US law forms and concepts

�We should be fine if we just read up on the regulations

Three dangerous misconceptions

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�Chinese courts

�Courts outside of China

�International arbitration

�Chinese administrative remedies

Dispute resolution options

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Comparing US and Chinese courts

US China

Legal system Common law Civil law

Legal issues Case precedent Statute-based

Fact finder Jury Judge

Pretrial discovery Yes No

EvidenceMore credence to oral

testimonyMore credence to written

evidence

Consequential damages Larger Smaller

Punitive damagesAvailable for business

tortsUnheard of

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�Favoritism towards the local Chinese party

�Lack of transparency, especially in the remote provinces

�Chinese court’s lack of experience with complex international commercial and IP disputes

�Proceedings in Mandarin

�Unfamiliar court procedures

�Enforcement issues

Concerns about the Chinese courts

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One large US technology company requires its Chinese vendors and customers to bring disputes to local Chinese courts

� Reasoning

� Its factory is one of the largest employers in the province

� It enjoys good relations with local officials

� Disputes are not company-threatening

� Availability of attachment procedures

� Requires close supervision of local counsel

� Clearly the minority view

Some US companies favor Chinese courts

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�Chinese law recognizes foreign court judgments only from countries with which China has an international treaty or a reciprocal relationship

�US court judgments are unlikely to be enforced because no treaty or reciprocal relationship exists between the United States and China

US courts?

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�Control risk

�Minimize favoritism toward local party

�Ability to select arbitrator – fairness, expertise

�Mechanism for enforcement of final award

International arbitration: advantages

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�Arbitration (and mediation) commonly used in China

�Foreign arbitral awards recognized and enforceable

�Arbitration must be mandatory to avoid judicial resolution in China

�China is a signatory to the UN Convention on Recognition and Enforcement of Arbitral Awards (New York Convention), which requires enforcement of foreign arbitration awards

�However, the New York Convention has a public policyexception which is sometimes used to shield China parties

International arbitration

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�Once the parties accept arbitration as the dispute resolution mechanism, the details must be ironed out

�Arbitration can vary greatly depending upon what clauses are included in the contract documents

Negotiating ADR provisions

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�Institution: CIETAC or HKIAC, SIAC, ICC, ICDR

–Emergence of new PRC regional arbitration charters

�Venue: China, United States or third country

�Governing law: Chinese law, US law, or third country law

�Language: English or Mandarin

�Arbitrator selection

–Chinese or non-Chinese

–Subject matter expertise


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�Three arbitrator tribunal, not single arbitrator

–Reason: risk mitigation

�Provide that each party can nominate one arbitrator, and that the parties nominate the chair by agreement absent which the institution appoints

�Provide that chair be of a nationality other than that of the parties

–Reason: avoid having two PRC arbitrators

�Incorporate “IBA Rules on Taking Evidence in International Arbitration”

–Reason: IBA rules provide limited discovery and witness evidence which otherwise may be unavailable in PRC arbitrations


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�Arbitration laws of the seat of the arbitration govern arbitration procedure

�Local courts have supervisory jurisdiction over the arbitration, will enforce those laws, and will hear actions to vacate the award

�Non-Chinese parties with sufficient bargaining leverage typically seek a venue in a neutral third country

�Chinese parties are comfortable with Hong Kong and Singapore as venues

�US parties sometimes question whether Hong Kong is a neutral seat when it is part of China

Our view: Hong Kong has an autonomous legal system and sophisticated arbitrators who are familiar with common law systems

International arbitration: venue in China?

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�Chinese law prohibits parties from agreeing to arbitrate outside China unless the dispute is “foreign related”

�If foreign party is a foreign investment vehicle incorporated and operating in China, it may be considered a “domestic” company and thus cannot agree to an offshore seat with another Chinese incorporated company

�Chinese law may bar enforcement of the resulting award in China

�Foreign-owned companies incorporated and operating in China should agree to arbitration in China

International arbitration: venue in China?

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�Key concern: will the Chinese courts enforce an arbitral award against a PRC company?

�Anecdotal stories of prevailing foreign parties unable to obtain enforcement, notwithstanding New York Convention

�Improved record: new reporting system requires Supreme People's Court to review any lower court decision declining to enforce an award that is foreign related

�Special arrangements to facilitate enforcement of awards made in Hong Kong

�Heightened risk: seek commercial protections in contract

International arbitration: Will awards be enforced against Chinese companies?

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�Foreign related IP civil cases, as a share of total cases dropped from 1.9% (2013), to 1.8% (2014), to 1.2% (2015)

�Central government aims to transform China into one of the world’s most innovative countries by 2020 → more IP litigation

�Some foreign companies are reluctant to sue PRC infringers

� Risk/reward ratio: perceived difficulty in proving liability, statutory damages limit, bad publicity

�By contrast, total administrative cases in 2015 were 10,926, of which 4,928 were foreign (about 45%)

IP litigation in Chinese courts

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�China’s dual-track system: parties can enforce IP through judicial or administrative means

�The three main PRC bodies responsible for conducting administrative enforcement are:

�State Administration for Industry and Commerce (AIC) –trademark, trade secrets and unfair competition matters

�State Intellectual Property Office (IPO) – patent issues

�State Copyright Office – copyright infringement

�Each administrative body has state and local offices

PRC administrative enforcement

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�Advantages of administrative enforcement:

�Proceedings are usually quick and inexpensive

�Proceedings can be useful means of obtaining evidence for use in subsequent civil litigation

� IPO and Copyright Office actions, particularly in more advanced cities, can be effective means of enforcement

� In areas with a high level of foreign investment, Chinese authorities may be more willing to take action to encourage further foreign investment

PRC administrative enforcement

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� Cedric Chao is a trial partner and co-head of the global international arbitration practice of DLA Piper, a global firm of 4,200 lawyers. Cedric, a former federal prosecutor, has a unique skill set, having first-chaired numerous high-stakes U.S. jury and court trials (business and criminal), as well as international arbitration disputes. He has represented clients, as first chair, in five business disputes where the amount in controversy exceeded $1 billion, and in multiple others where the amount in controversy was in the hundreds of millions of dollars. His clients have spanned many industries and countries.

� Cedric has appeared in U.S. District Courts in a number of federal judicial districts and in the trial courts throughout California. He has argued thirteen times before the Ninth Circuit Court of Appeals, including once to an en banc panel, once before the U.S. Supreme Court, and four times before the California State Court of Appeal. He has second-chaired four additional arguments before the Ninth Circuit and one additional argument in the U.S. Supreme Court. Cedric has led teams in international arbitration proceedings under the rules of the ICC, ICDR, LCIA, UNCITRAL, AAA, and JAMS, and has represented parties in court proceedings to enforce or set aside arbitral awards. Cedric has sat as an arbitrator under the rules of the ICC and SIAC.

� Cedric is a U.S. member of the ICC Arbitration Commission, and serves on the Governing Council of the American Arbitration Association. He is one of 31 Advisors to the American Law Institute project to draft the Restatement of the U.S. Law of International Commercial Arbitration. Cedric is a former chair of the U.S. Magistrate Judge Screening Committee of the Northern District of California and of the California State Bar Litigation Section.

� Cedric is listed in Best Lawyers in America (for arbitration, mediation, and business litigation), and has been named by that publication as “2018 San Francisco Arbitration Lawyer of the Year.” He is named a leading lawyer by Chambers USA and Chambers Global, among other rating publications.

Cedric C. ChaoPartner

O: +1 415 615 6008E: [email protected]

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DLA PIPER PRESENTS:

DOING BUSINESS IN CHINA



*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com1

Onshore JV

JV

(PRC)

HoldCo

(HK)

PRC

customers

Sales

50%50%

RMB fund

(PRC)

PRC IP

IP HoldCo

(Cayman)ROW IP

US parent

(US)US IP

Offshore

Onshore

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Offshore JV

JV

(Cayman)

IP HoldCo

(Cayman)ROW IP

Sales

50%50%

HoldCo

(HK)

USD Fund

(US)

US parent

(US)US IP

OpCo

(PRC)

PRC

customers

PRC IP

Offshore

Onshore

www.dlapiper.com3

� Peng Tao is a Partner with DLA Piper's Hong Kong office. He focuses his practice on China tax, transfer pricing, mergers and acquisitions, foreign direct investment, and general corporate and commercial issues concerning operations in China, offshore investment from China and other cross-border transactions.

� Peng also has experience in working across DLA Piper's offices in Shanghai, Silicon Valley, and New York, where he was the Head of the China Desk for Tax.

� Prior to joining DLA Piper, he also worked in the Palo Alto and Beijing offices of two other leading international law firms.

� Before entering private practice, Peng worked at the Fiscal and Financial Department with the Bureau of Legislative Affairs of the State Council of the People’s Republic of China from 1992 to 1997. He had drafted and reviewed banking and tax laws and regulations that were applicable nationwide in China including the Provisional Regulations on Value Added Tax, the Law on People's Bank of China and the Law on Commercial Banks.

� Peng has published numerous articles and spoken on China tax and transfer pricing issues.

Peng TaoPartner

O: +852 2103 0511 E: [email protected]

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CHINA / ASIA CYBERSECURITY AND DATA LAW UPDATE

*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com1

ASIA PACIFIC CYBER AND DATA REGIMES AT-A-GLANCE 2011 VS 2017

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China's new CyberSecurity Law

Most comprehensive privacy and cyber law in the world?

� Privacy / Internet sovereignty / Data security driven?

� Regulates:

� Network operators

� Key information infrastructure operators ("KIIOs")

� Providers of network technology

� "Personal data" and "Important data"

� Data localization is a key requirement:

� Absolute offshore transfer prohibition for certain data sets and for all KIIOs

� Security assessments and data subject consents otherwise required

� Mandatory breach notifications

� Provision of system access for Chinese authorities

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What does this mean for US businesses operating in China?

� Data localization is also driven by legal, commercial and

operational needs:

– "Personal data and “important data" may be legally

required to remain in China

– The "Great Firewall" of China

– China customers demanding in country solutions

� PRC based infrastructure brings practical challenges:

– Local ICP, ISP and IDC licensing requirements

– China hosting partners

– .CN domain name ownership concerns

– Fragmentation of global data pooling strategies

– Expensive duplicate / segmented systems

www.dlapiper.com4

Recent Data security Enforcement Trends

Fines, Civil claims, PR damage and Prisons

China, 5 years of inaction; and since June 1, 2017:

� 22 US technology company employees detained

� 7 US content companies shut down

� Baidu, Tencent and Sina allegedly fined RMB 500,000

Hong Kong: First ever privacy related jail sentence

South Korea: Privacy Law used to shut down credit

card issuers following cyber event

Singapore : Dozens fined for inadequate data security

www.dlapiper.com5

DLA Piper CyberCert

www.dlapiper.com6

Scott ThielPartner

Location Head

O: +852 2103 0519

E: [email protected]

� Scott Thiel's background in engineering and dual qualifications in both intellectual property law and

computer science provide him with a unique opportunity to understand the technical aspects of client's

ICT and outsourcing projects. An understanding of the issues faced by both sides of a transaction enables

Scott to seek innovative solutions to resolve negotiation deadlocks and deliver completed deals for his

clients.

� He advises both users and suppliers of IT outsourcing services on all aspects of the procurement process.

He also advises on complex technology transactions. His work usually involves him on business critical

projects frequently valued in the tens or hundreds of millions of dollars. He advises clients across a range

of sectors including technology, banking, transport, energy and sport.

www.dlapiper.com 0Thursday, October 19, 2017


DLA PIPER & KPMG PRESENT:

DOING BUSINESS IN CHINADLA Piper, Palo Alto

*This presentation is offered for informational purposes only, and the content

should not be construed as legal advice on any matter.


� Panel 1 Topic: China Joint Ventures and Alliances

– Moderator: Paul Chen (Partner, DLA Piper)

– Panellists: Li Qiang (LQ) (Partner and Co-Regional Managing Partner, DLA Piper, Asia), Cedric Chao (Partner and Co-Head, International Arbitration, DLA Piper) and Peng Tao (Partner, DLA Piper)

� Panel 2 Topic: Tech Transfer, Antitrust and Regulatory issues in China JVs

– Moderator: Sherman Chu (Partner, DLA Piper)

– Panellists: Scott Thiel (Partner and Head of Technology & Telecoms practice, DLA Piper, Asia) and William (Skip) Fisher (Partner and Head of Patents, DLA Piper, Asia) Nathan (Nate) Bush (Partner and Head of Investigations and Antitrust & Competition, DLA Piper, Asia)

AGENDA

2CROSS-BORDER LICENSING AND TECHNOLOGY TRANSFER WITH CHINESE CHARACTERISTICS

William (Skip) Fisher, Partner, DLA Piper, ShanghaiOctober 2017


Business Is Booming!

� PRESSURE – for foreign companies to commercialize IP, for Chinese companies to innovate and globalize

� CONFIDENCE – in China's business and legal environment (foreign companies), in themselves (Chinese companies)

� NECESSARY – for foreign companies to enter/succeed in China market, for Chinese companies to compete

� US-China licensing and tech transfer is big business, but still lopsided in favor of inbound – China is a huge net tech importer!

� WHY will upward the trend continue (with increasing levels of tech export)?

– China wishes to increase value of technology contracts from $130 billion in 2013 to $330 billion in 2020

– China wishes to increase licensing export revenue from $1.36 billion in 2013 to $8 billion in 2020

– More foreign R&D in China and more JVs and other technology collaborations


Licensing/Tech Transfer Cycle

US Co has background IP/tech

US Co licenses/transfers

background IP/tech to PRC Co

PRC Co makes improvement on

background IP/tech or independently

innovates

PRC Co licenses/transfers foreground IP/tech

to US Co


� Structuring considerations

� Tax implications

� Compliance with US-PRC technology import/export regulations

� Ownership of improvements and other technical achievements

� Fair and reasonable royalty rates

� Effectiveness of IPR enforcement mechanisms

� Employee-inventor remuneration requirement

� State secrecy examination for foreign patent filings

� Trade secret protection

Cross-Border Licensing/Tech Transfer Issues


JV /Third-party Licensee Structure

Technology/IP


WFOE Structure

Technology/IP


Early Tax Advice Is Crucial!


PRC Technology Import & Export Regulations

� Regulations of the PRC on the Administration of Technology Import and Export (effective 1 January 2002)

– Technology transferred from outside China into China or vice versa by way of trade, investment, or cooperation

– Assignment and licensing of patent rights

– Assignment and licensing technical know-how

– Provision of technical services

– Catch-all: “transfer of technology by other means”

� Classification of technology?

� Requirements for technology import contracts?


Classification of Technology

Prohibited technologies

No import/export under any circumstances

Restricted technologies Approval by MOFCOM

Permitted technologies Registration with MOFCOM


Licensor Liability for Third-Party Infringement

� Where the assignee to a technology import contract is accused of infringement by a third party for using the technology supplied by the assignor in accordance with the contract, the assignee shall immediately notify the assignor; the assignor, upon receipt of such notification, shall assist the assignee in removing the impediment. Where the assignee to a technology import contract infringes upon another party's lawful rights and interests by using the technology supplied by the assignor in accordance with the contract, the assignor shall bear the liability therefore. (Technology I/E Regulations, Article 24)

� Where the assignee infringes the lawful rights and interests of another party by exploiting a patent or using technological secrets in accordance with the provisions of the contract, the assignor shall assume liability, except where the parties have agreed otherwise. (Contract Law, Article 353)

� Conflict between Technology Import Regulations and Contract Law?


Licensor Warranty of Technology Quality

� The assignor to a technology import contract shall ensure the technology it supplies is complete, accurate, effective and capable of achieving the agreed technical objective. (Technology I/E Regulations, Article 25)

� The assignor to a contract for the assignment of technology shall guarantee that it is the lawful owner of the technology which it provides, and guarantee that such technology is complete, accurate, effective, and capable of achieving the agreed objectives. (Contract Law, Article 349)


Licensor Restrictions on Improvements

� Contract invalid if restricting licensee's making or use of improvements

� Terms not equitable if:

– Grant back of improvement without compensation

– Non-reciprocal transfer of improvement

– Sole or joint ownership of improvement without compensation

(Technology I/E Regulations, Articles 27 & 29(3);

Contract Law, Article 354)


License Royalties – Freedom to Contract?

� Earlier MOFCOM policy of unofficial cap of 5% net sales

� MOFCOM policy repealed, but often applied in practice

� Higher royalty may be challenged by MOFCOM

� 5% cap vs. freedom to contract vs. "fair and reasonable"?

� Different treatment for restricted vs. unrestricted technology?


IP Enforcement in China Is Improving!

�The American Chamber of Commerce in Shanghai,

�2015 China Business Report

� Survey: In the last year, China's enforcement of IPR has …


IP Enforcement in China Can Be Effective!

�The American Chamber of Commerce in the PRC,

�2016 China Business Climate Survey Report

� Survey: Rate the effectiveness of China's enforcement of IPR laws and regulations


� Lack of IPR protection & enforcement is a "serious hindrance" (18%) or "some hindrance" (46%) to business in China

� 75% of respondents identify "better IPR protection & enforcement" as the top three drivers for improving innovation in China

� 54% of respondents identify "improved IPR protection" as the top three reforms important to business growth in China

Source: 2017 China Business Report, AmCham Shanghai

But Improvement Is Still Needed!


� Obtaining evidence: Parties generally are not compelled to produce information they don't want to produce, and evidence preservation by courts can be ineffective. This makes proving infringement and damages difficult for the plaintiff in many cases, though the situation is improving.

� Submitting foreign evidence: Chinese courts require foreign-sourced evidence to comply with certain formalities, including notarization by notary public, legalization by Chinese embassy/consulate, and translation to Chinese. The process is time consuming and expensive, and must be considered as part of litigation strategy.

� Explaining complex technical issues: Though many courts have IP tribunals for hearing IP cases, most judges have no technical background. Technical issues are addressed via judicial technical appraisals and/or party technical expert witnesses. It is crucial for counsel to be able to "teach" the technology.

IP Litigation Challenges


� Receiving reasonable damages: Nearly all patent damage awards are based on statutory damages (upper limit of RMB 1 million, or EURO 140,000). Actual awards are generally low and insufficient to compensate the plaintiff for actual loss, and don't act to deter infringement. Plaintiffs in China should base damages on lost profits or illegal profits as much as possible.

� Enforcing judgments: Many defendants fail to comply voluntarily with judgments against them, especially paying damages. Plaintiffs in China must be prepared to apply to court for enforcement of judgment.

� Facing local bias: While local bias/protectionism still exists in Chinese courts, the problem likely is overstated. In most cases, depending on the court and situation, the plaintiff will receive fair hearing under Chinese law. However, foreign plaintiffs must be aware of the possibility of bias and develop a litigation strategy accordingly.

IP Litigation Challenges


Employee-Inventor Remuneration

� Both the PRC Contract Law and PRC Patent Law stipulate that employers must reward employees who develop technology on the employer’s behalf, and upon exploitation of the technology, allocate a reasonable proportion from the proceeds derived from the use or transfer of the technology as remuneration.

– Article 76 of the Implementing Rules of the Patent Law expressly allows employers to reach agreement with employees regarding the form and amount of rewards and remuneration required under Article 16 of the PRC Patent Law, and Articles 77 and 78 provide default rules when there is no agreement.

– Default minimum rewards – RMB3,000 for invention patents, RMB1,000 for utility model & design patents

– Default minimum remuneration – 2% operating profit for invention & utility model patents; 0.2% operating profit for design patents; 10% royalties

– Recommendation: Companies should implement a reward and remuneration

system for inventions in a policy and/or by agreement to avoid the onerous default rules.


Secrecy examination requirement for inventions made in China

� Secrecy examination is required prior to an entity/individual's application for a patent overseas on any invention or utility model made in China. Failure to do so can result in refusal to grant the patent in China.

– Option 1: File first in China, together with request for secrecy examination –process can take up to 6 months (normally much less)

– Option 2: File international application with SIPO as receiving office – deemed to simultaneously request secrecy examination, notification of secrecy decision within 3 months

– Option 3: File request for secrecy examination in order to file first in foreign country – priority date might be delayed, but is good option if both PRC and US first-filing rules apply


Trade Secrets under PRC Anti-Unfair Competition Law

Technical information

Not known to the public

Confidentiality measuresEconomic value and

practical utility

Operational information


Protection of Trade Secrets

Company trade

secrets

Employees

Customers Suppliers


Protection of Trade Secrets

HR

Vet employees before/after they

join

Training on what can/cannot be

disclosed

Conduct exit interviews

Facilities

Control access to areas

Sign in, sign out, wear badges

Keep clean desk policies, shred

documents

Documents

Mark confidential and individually

watermark

Prohibit unapproved forwarding of

company documents

Sign NDAs, NCAs

IT

Use stand alone computers for highly

confidential data

Change passwords regularly, secure company emails

Control access to rooms


� William (Skip) Fisher has practiced IP law in the U.S., China and internationally for 20 years. His practice focuses on counselling, licensing, and enforcement/litigation in all areas of intellectual property, with a particular emphasis on patents, trade secrets and international IP and technology-related transactions.

� He works with clients to establish and implement strategies for procuring, protecting, commercializing and enforcing their IP rights and for minimizing risk to their IP assets in China, the U.S. and globally. He also counsels clients on U.S.,Chinese and international IP law, practice and strategy; represents them in challenging, high-stakes patent, trade secret and other IP litigation and enforcement actions; and assists them in negotiating and drafting IP licenses, collaboration and development contracts and other commercial agreements.

� Skip advises clients in a wide range of technologies and industries, including computer hardware and software, computer networks, mobile devices and applications, telecommunications, Internet and e-commerce, pharmaceutical, biotechnology, chemical, medical devices, mechanical and industrial products, aerospace, automotive, and manufacturing.

� Skip is the China Head of Patents within the Intellectual Property and Technology (IPT) team, based in DLA Piper's Shanghai office.

William FisherPartnerHead of PatentsO: +862138522198 E: [email protected]

www.dlapiper.com0

CHINA JOINT VENTURES: ANTITRUST & ANTIBRIBERYDLA Piper, Silicon Valley


*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

www.dlapiper.com1

� Risks: legal, reputational and Commercial � Watch the exits!

� "Risk based" diligence on (1) partners and (2) contributed entities, businesses, key personnel

� Extraterritoriality: consider compliance risks from third-country activities

– Antitrust/competition

– Antibribery/anticorruption (ABAC)

– Official corruption

– Commercial bribery

– Overseas bribery

– Sanctions and export controls

– Sectoral regulations, environmental, labor, etc.

� Document compliance diligence and findings

� TRAP: Insufficient control during transitional periods

� TRAP: divergent risk appetites and risk assessments

Compliance dimensions of China JV strategy

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� "Although the FCPA’s accounting requirements are directed at ‘issuers,’ an issuer’s books and records include those of its consolidated subsidiaries and affiliates. An issuer’s responsibility thus extends to ensuring that subsidiaries or affiliates under its control, including foreign subsidiaries and joint ventures, comply with the accounting provisions."

� "Companies may not be able to exercise the same level of control over a minority-owned subsidiary or affiliate as they do over a majority or wholly owned entity. Therefore, if a parent company owns 50% or less of a subsidiary or affiliate, the parent is only required to use good faith efforts to cause the minority-owned subsidiary or affiliate to devise and maintain a system of internal accounting controls consistent with the issuer’s own obligations under the FCPA."

� "In evaluating an issuer’s good faith efforts, all the circumstances—including “the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located”—are taken into account."

DOJ and SEC: FCPA guidance

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� Policies & procedures addressing key corruption risks:

– gifts

– hospitality, entertainment and expenses

– customer travel

– political contributions

– charitable donations and sponsorships

– facilitation payments

– solicitation and extortion

� Third party relationships: Managing risks from agents and

intermediaries

Elements of effective compliance programs(from US Settlement Agreements)

� High level commitment

� Internal controls

� Proper oversight a independence

� Training guidance

� Internal reporting and investigation

� Enforcement and discipline

� Mergers acquisitions

� Monitoring and testing

� Periodic risk-based review

� Industry risk

�Country risk

�Operational/business model risk

www.dlapiper.com4

� Reps and warranties

– Covered actors: JV, JV partner, subsidiaries, officers; employees, agents, and Shareholders

– Covered misconduct: elements vs offenses

– Nexus to JV

� Corporate governance

– Compliance programs: specifications and models, adoption and amendment

– Appointment and oversight of compliance, audit, legal functions and high-risk commercial functions

– Procedures: triggering events, escalation, investigation and remediation

� Remedies and compliance impasse?

Negotiating compliance provisions

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� Antimonopoly Law (AML) establishes a mandatory, suspensive merger review regime modelled on EU practice

� "Concentrations" must be reported in advance to Antimonopoly Bureau (AMB) of Ministry of Commerce (MOFCOM) for clearance on competition grounds under the AML if the transaction parties' global and China revenues satisfy notification thresholds

� Penalties for failure to file and gun jumping

China: mandatory merger notification system

Current

ThresholdsEither And

(1) All parties' combined global turnover > RMB 10 billion (US$1.61 billion, Y121.6 billion)

OR

At least two parties' China turnover > RMB 400 million (US$65 million)

(2) All parties combined China turnover > RMB 2.0 billion (US$323 million, Y24.3 billion)

www.dlapiper.com6

� Formation of "greenfield" JV or conversion of existing business to JV may qualify as a reportable "concentration" in many antitrust jurisdictions

– EU Model:

– Joint control where multiple parties hold rights (and vetoes) conferring "possibility of exercising decisive influence" over JV

– JV must perform "on a lasting basis all the functions of an autonomous economic entity" to be treated as "concentration"

– MOFCOM largely follows EU on joint control, but has not adopted full functionality test � pending amendments follow EU

� In many jurisdictions (including EU and China), revenues of the two parent groups can trigger notification even if the JV will only operate elsewhere

– Simple case/short form procedures may be available

� As Chinese companies "globalize," JVs with Chinese parties increasingly trigger notifications in China and other jurisdictions

Merger review of China JVs

www.dlapiper.com7

Process

� Pre-notification consultation

� Intake: is filing complete?

– "Preview:" clock does not start until filing deemed complete

� Phase 1 initial review (30 Days)

� Phase 2 full review (90 Days)

� Phase 3 extension (60 Days)

– Notification may be withdrawn and refiled to "restart clock" in controversial case

� Approve/block/remedies

Timing effects: PRC merger review process

� Of the 917 unconditional clearances from 2015-2017, 208 involved JVs

� "Simplified procedure" alleviated bottleneck, but low headcount and turnover makes China a gating item, even for uncontroversial transactions

� In 2016, MOFCOM cleared 82% of all cases and 98.6% of all fast-track cases within 30 days of initiation

1 August 2008 –10 October 2017

Result

Cleared 1881

Conditions 31

Blocked 2

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� AML sets low bar for remedies

� Low combined market shares can trigger remedies, especially in sensitive sectors

� Comfortable with behavioural remedies, "permanent hold separate" against international practice

� Industrial policy may taint decisions– National champions, controls on

price/supply, famous brands � Pretext, error or innovation? Sparse

decisions & controversial foreign precedents for remedies or theories

� Conditions: not just antitrust

� Implicit welfare standards:– Consumer welfare vs total welfare – Domestic welfare vs global welfare– Politically-weighted domestic total

welfare� JVs with China partners

– "Win-win" narratives– Benefits of domestic allies– Not all policy objections can be

neutralized– AML uniquely reaches offshore

transactions� Political risk assessments in multiple

jurisdictions

MOFCOM's substantive decision making

www.dlapiper.com9

� Nathan (Nate) Bush is a partner in DLA Piper's Litigation and Regulatory Department. He advises clients in internal investigations, government enforcement actions, regulatory proceedings, and commercial disputes in Asia.

� He was based in Beijing from 2004 through 2012, and has covered the region from Singapore since 2013. Nate was a pioneer of antitrust practice in China, and guides clients through anti-bribery and anticorruption (ABAC) risks in Asia's dynamic markets.

� Nate served as general counsel of the American Chamber of Commerce in China from 2009 to 2011, and now co-chairs the IP & Legal Committee of the American Chamber of Commerce in Singapore.

� Nate is graduate of Harvard Law School and the University of Virginia. He clerked for the Hon. Leonie M. Brinkema in the U.S. District Court for the Eastern District of Virginia.

Nathan BushPartner

O: +65 6512 6065E: [email protected]