2021: the year of the “bully”

Phillipe E. Snel

Since 2004, Philippe is permanently established in Shanghai and has assisted numerous foreign investors to establish, develop and operate their businesses in China. Philippe mainly advises in the fields of corporate law, compliance and technology transfer.

From Huawei and Tik-Tok, to Xiaomi, to the delisting of Chinese telecom giants in recent years, it is clear that that doing business abroad is becoming increasingly difficult for Chinese companies. In an attempt to counter the effects of such sanctions or restrictions which are specifically targeting Chinese businesses, the PRC Ministry of Commerce (MOFCOM) has issued on January 9 2021, the “Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures” (“Blocking Rules”).

To Whom do the Blocking Rules Apply?

As provided by Article 2, the Blocking Rules apply to citizens, legal persons, and other organizations in China. This clearly includes Foreign-invested Enterprises (“FIEs”) as these are legal entities registered under PRC law in China.

As a consequence it must be expected that the Blocking Rules may bring along new compliance challenges to companies with subsidiaries in China as well as in other parts of the world. Indeed it is likely that such companies would be subject to competing compliance obligations between those applicable under the foreign laws and the obligations imposed by the Blocking Rules under PRC law. It remains unclear at this point whether Chinese-invested overseas companies, will also fall under the scope of the law. We expect that more details and further clarification will be forthcoming.

Obligation to Report

According to Article 5, if a Chinese entity faces the sort of foreign restriction or prohibition considered by the law, it shall report such facts to MOFCOM within 30 days. The confidentiality of such report shall be guaranteed upon the reporting party’s request.

Target of the Blocking Rules 

Most importantly, the Blocking Rule ostensibly provide legal justification for ignoring or rejecting foreign laws or sanctions which are perceived as causing unjustified restrictions or prohibitions against Chinese companies or businesses ability to engage in normal trade activities with entities from other countries.

How to define “unjustified”?

Whether the foreign laws or sanctions are deemed justified or unjustified will be decided by MOFCOM based on international law, international principles, potential impact on sovereignty, national security, development, etc. In other words, the Blocking Rules set out a broad and undefined standard for decision-making on these issues. Obviously, this could create uncertainty for parties facing sanctions.

Prohibition Orders and Exemptions

Once foreign laws or sanctions are deemed “unjustified”, MOFCOM will announce a blanket order prohibiting the recognition, enforcement, and nobeyance of such foreign law. Chinese entities may however apply to MOFCOM for exemption from the prohibition order. The decision on that application shall be made within 30 days unless the situation is urgent.

This mechanism seems designed to give some “leeway” to MNCs who may encounter a dilemma between abiding by sanctions from foreign authorities and prohibition orders from MOFCOM.

Judicial Support

The Blocking Rules also organize judicial relief to deal with unauthorized application of unjustified foreign laws and sanctions. Where a citizen or entity in China suffers damages due to a counter-party’s compliance with foreign laws or other measures which have been deemed unjustified by MOFCPOM, it may undertake legal proceedings and claim for compensation from the complying counterparty, unless an exemption has been granted.

Conclusion

Obviously with these new Blocking Rule the Chinese government intends to send a signal to other governments that it will not let its businesses and companies be “bullied” by foreign regulations across the world, without reaction. We’ll have to see how this new mechanism will be applied in the months to come but it is clear that the Blocking Rule could eventually force foreign-invested companies in China to make some difficult choices in the near future. If that happens, the year of the bull could quickly become the year of the bully!