How China Blocking Rules Affect Multinationals

原创余昕刚蒋蕙匡等中伦视界 2023-11-28

By：Scott YU, Frank JIANG,

John JIANG, Haozhe XU

On January 9, 2021, the Ministry of Commerce of the People's Republic of China (“MOFCOM”) published the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”) with immediate effect. Being the No.1 Order published by MOFCOM in 2021 and following the introduction of the mechanism of the Unreliable Entity List (UEL) in September 2020,[1] the Blocking Rules reflect China’s latest effort to safeguard the interests of Chinese entities in global economic activities and as a countermeasure to the escalating U.S. long-arm jurisdictional sanctions.

To manage compliance risk under the Blocking Rules, we recommend that multinational companies proactively evaluate risk exposures and formulate contingency plan, establish a firewall or fine-tune the existing arrangements between the foreign parent company and Chinese affiliates if necessary, and carefully draft and (re-)negotiate sanction-related clause in relevant transaction documents.

The following Q&As highlight the implications of the Blocking Rules for multinational companies:

1. What are the basis and background for promulgating the Blocking Rules?

The Blocking Rules are formulated pursuant to the PRC National Security Law and other relevant laws. According to MOFCOM, the Blocking Rules’ primary purpose is to protect the legitimate rights and interests of Chinese citizens and enterprises in the context of unjustified extra-territorial application of foreign legislation and other measures that may violate the principles of international law, hinder international trade and cross-border capital flow, and undermine the normal international economic order.[2]

The Blocking Rules have also drawn legislative and enforcement experience from other jurisdictions, including EU’s Blocking Statute, which is designed to protect EU operators from the extra-territorial application of third country laws, in particular response to U.S. sanction measures against Cuba, Iran and Libya.[3]

2. What situation may be caught? Are PRC affiliates of foreign companies subject to these rules?

Unlike the EU Blocking Statute, China’s Blocking Rules have not listed specific sanction measures from a third party country/region, but generally provide that they are applicable “where the extra-territorial application of foreign legislation and other measures, in violation of international law and the basic principles of international relations, unjustifiably prohibits or restricts the citizens, legal persons or other organizations of China from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations” (“Unjustified Extra-territorial Application Event”).

One may interpret that not only foreign laws but also administrative measures (for example, U.S. secondary sanctions) will be assessed when determining whether such extra-territorial application is justified, and it appears that Chinese affiliates of multinational companies will also be covered in evaluating potential impact. This broad language gives Chinese authorities more discretion and flexibility in practice depending on the specific case circumstances.

3. Who is responsible for implementing the Blocking Rules?

Similar to the UEL mechanism, the Blocking Rules has established a working mechanism composed of relevant central departments, which is led by MOFCOM, coordinated with National Development and Reform Commission (NDRC), with participation of other relevant departments of the State Council for specific matters.

4. What factors will be considered in evaluating unjustified extra-territorial application?

The following factors will be considered comprehensively:

(1) whether international law or the basic principles of international relations are violated;

(2) potential impact on China’s national sovereignty, security and development interests;

(3) potential impact on the legitimate rights and interests of the citizens, legal persons or other organizations of China;

(4) other factors that shall be taken into account.

5. How do the Blocking Rules operate?

The Blocking Rules primarily operate as follows:

(1) Reporting: a Chinese entity shall report within thirty (30) days where it encounters an Unjustified Extra-territorial Application Event.

(2) Evaluation: the working mechanism will take into account the factors listed above on comprehensive basis in evaluating whether there exists an Unjustified Extra-territorial Application Event.

(3) Prohibition order: where its evaluation confirms that there exists an Unjustified Extra-territorial Application Event, the working mechanism shall issue a prohibition order stipulating that the relevant foreign legislation and other measures are not accepted, executed, or observed.

(4) Judicial remedy: a Chinese entity may seek damages before a competent Chinese court for losses suffered from an Unjustified Extra-territorial Application Event.

(5) Sanction: a Chinese entity’s failure to report an event or to comply with the prohibition order may subject it to sanction in light of the specific case circumstances.

6. Whether and how can a prohibition order be stayed?

Depending on the specific circumstances, the working mechanism may decide to suspend or withdraw a prohibition order.

Also, a Chinese entity (including a PRC affiliate of a foreign company) may apply to MOFCOM in writing for exemption from compliance with a prohibition order stating the reasons and scope of exemption. MOFCOM shall decide whether to approve such application within thirty (30) days upon acceptance, or even shorter period in case of emergency.

7. How can an affected Chinese entity seek judicial remedies?

The Blocking Rules provide that a Chinese entity may seek judicial remedies in connection with an Unjustified Extra-territorial Application Event in the following scenarios:

(1) where an entity complies with the foreign legislation and other measures which fall within of the scope a prohibition order, and accordingly infringes upon the legitimate rights and interests of a Chinese entity, such Chinese entity may seek damages before a competent Chinese court, except where such entity at issue has secured an exemption from the said prohibition order;

(2) where a foreign judgment or ruling made in accordance with the foreign legislation which fall within the scope of the prohibition order causes losses to a Chinese entity, such Chinese entity may seek damages before a competent Chinese court against an entity who is a beneficiary of the said foreign judgment or ruling.

In both scenarios, a Chinese entity may apply to the Chinese court for enforcement.

8. Is there any targeted entity to be imminently subject to a prohibition order?

According to MOFCOM, no specific country or transaction has been targeted so far for application of the Blocking Rules, and that the working mechanism will closely monitor any Unjustified Extra-territorial Application Event, which may be reported by an affected Chinese entity.

As noted above, we anticipate that the Blocking Rules will serve as an important tool for China in its overall legislative framework, in addition to the UEL and other measures, to protect Chinese entities, whether individuals or companies, from the unjustified extra-territorial application of foreign legislations and other measures amid the complex and fast-changing geopolitical climate.

9. How can multinational companies manage compliance risk under the Blocking Rules?

The Blocking Rules could create a dilemma for many multinational companies, who will need to comply with the applicable foreign sanction involving or implying a Chinese entity while weighing the exposure to Chinese sanction under the Blocking Rules. Below are some compliance recommendations for consideration:

(1) Proactively evaluate risk exposures and formulate contingency plan, including:

whether an authority in foreign jurisdiction (e.g. U.S.) may impose, strengthen, relax or remove certain sanctions involving or implying your company’s business;
whether such foreign sanction may be deemed as an Unjustified Extra-territorial Application Event (which will trigger a reporting obligation for the relevant Chinese entity within 30 days and potentially be subject to a prohibition order);
if an Unjustified Extra-territorial Application Event may occur and a prohibition order is looming, the prospect and process for applying for exemption under the Blocking Rules;
exposure to associated private lawsuits in China as a result of an Unjustified Extra-territorial Application Event and possible damages.

(2) For businesses such as those in banking, energy or high-tech sector with heightened exposure to Unjustified Extra-territorial Application Events, it may be necessary to establish a firewall or fine-tune the existing arrangements between the foreign parent company and Chinese affiliates.

(3) Carefully draft and (re-)negotiate sanction-related clause in relevant transaction documents.

We will closely follow the implementation of the Blocking Rules and welcome discussion associated with the Rules.

[Note]

[1] For more detail about the UEL, see “What You Should Know About China’s New Unreliable Entity List Provisions” at https://www.lexology.com/library/detail.aspx?g=1afe008f-d98b-4a2b-9c07-0f60ab858cea .

[2] See MOFCOM’s press Q&A at http://www.mofcom.gov.cn/article/news/202101/20210103029779.shtml.

[3] See, e.g. “Blocking statute - Protecting EU operators, reinforcing European strategic autonomy” at https://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/blocking-statute_en.

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About the Author

Scott YU

Beijing Office

Equity Partner

Practice Areas：Antitrust/Competition, Capital Markets/Securities, Mergers & Acquisitions

Frank JIANG

Beijing Office

Equity Partner

Practice Areas：Antitrust/Competition, Mergers & Acquisitions, Litigation & Arbitration, Healthcare & Life Science

John JIANG

Beijing Office