Legal concerns in the acquisition of AVSP

By Tao Shan and He Wei, Hylands Law Firm
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An enterprise should obtain an Audio-Visual Service Permit (AVSP) before offering internet-based audio-visual programme services, pursuant to the Administrative Provisions Regarding Internet Audio-Visual Programme Services (decree No. 56) issued by the State Administration of Radio, Film and Television and the Ministry of Information Industry.

Service Permit
Tao Shan
Hylands Law Firm
Partner

Decree No. 56 requires an applicant for an AVSP to be an exclusively state-owned or state-controlled enterprise. The authority has not granted any new AVSP for a long time, restricted by overall planning and aggregate control pertaining to internet-based audio-visual programme services. In this context, a domestic private enterprise (acquirer) desiring to offer internet-based audio-visual programme services will usually consider acquiring the equity in an enterprise holding an AVSP.

An enterprise applying for an AVSP did not have to satisfy the above-mentioned requirements for state-owned capital before decree No. 56 took effect, so the target of such an acquisition is usually the equity in an enterprise holding an AVSP before the validity of the decree. This article will analyze the major legal issues involved in such acquisitions.

Whether an AVSP still satisfies the approval condition after equity acquisition

After the equity acquisition of an AVSP holder, the acquirer must complete the approval procedure regarding the shareholder change, pursuant to article 12 of decree No. 56.

Service Permit
He Wei
Associate
Hylands Law Firm

Although the decree doesn’t stipulate the deadline for the application of the approval, if an AVSP holder still wants to offer internet-based audio-visual programme services after the three-year term of the AVSP expires, it must complete the renewal procedure. At that time, the issue of shareholder change will still be subject to regulatory review.

An enterprise holding an AVSP established according to the law before the validity of decree No. 56 can continue to offer the service provided it has no offence and/or non-compliance records, as has been clarified by the authority.

However, current laws and regulations don’t stipulate whether the subsequent shareholder change of such an enterprise will be bound by the conditions set out by decree No. 56 (for example, the applicant shall be an enterprise with state-owned capital).

If the enterprise fails to satisfy the state-owned capital requirement after a shareholder change, the authority will lack the legal basis to approve such a change. In practice, the authority reviews the issue on a case-by-case basis, checks new shareholders for foreign capital, and checks new shareholders and their related parties as to non-compliant offering of internet-based audio-visual programme services, and doesn’t rule out applying any other standard.

Although in some cases enterprises have passed the approval, it remains uncertain whether the AVSP of such an enterprise will pass subsequent approval, due to the lack of legal basis.

Risk relating to using AVSP after acquisition

If the acquirer has set up and operated a website, it will usually hope to directly use the AVSP of the acquired enterprise for its original website. Considering the equity acquisition will not change the operator of the original website and the holder of the AVSP, the acquirer will be exposed to the risk of borrowing or sharing such a permit and be suspected of offering internet-based audio-visual services without approval. It risks a warning, an order for remediation and a penalty pursuant to article 24 of decree No. 56.

Other risks

To avoid borrowing or sharing the AVSP, the acquirer will usually continue to offer original programme services directly with the website launched by the AVSP holder.

In this case, the current business items approved under the AVSP will usually not fully match with the services that the acquirer desires to provide. In practice, they may usually deviate in some of the following aspects:

(1) Network and device. To offer the services through the website, the “transmission network” item of the AVSP should include “the internet”, and the “receiving device” item should include a “computer”. To offer the services through mobile phones and any other mobile devices, the “transmission network” item in the AVSP should contain “the mobile internet” and the “receiving device” item should include “mobile phones and other handheld devices”.

(2) Business types. The internet audio-visual programme services are divided into 17 sub-categories under four categories, and an AVSP holder shall conduct business activities to the extent of business types that are approved; otherwise it will face the risk of engaging in relevant services without approval. For example, if the business type indicated on the AVSP is to collect and broadcast film, teleplay and animation-related audio-visual programmes under category 2.5, while the acquirer also actually edits and arranges such programmes, and provides the public with programme search and watching services, it should obtain the service qualification for converging internet audio-visual programmes under category 3.1.

(3) Broadcast logo and name. An AVSP holder should mark the approved broadcast logo and name on the interface of the website and client software it runs, that is, main interface logo, screen opening logo, video broadcast interface logo and video corner logo of the client software, etc. The acquirer usually prefers to use its own logo and name in order to maintain its current brand, and in this case, the acquirer should apply to change the “broadcast name” item on the AVSP.

To resolve the above-mentioned differences in business items, the acquirer should apply for corresponding change approval based on actual business activities. Current laws and regulations lack explicit provisions regarding approval conditions, so the result of the approval procedure will be uncertain.

In conclusion, if an acquirer wants to offer internet-based audio-visual services by acquiring the equity in an existing enterprise holding an AVSP, it will face the risk that the permit cannot pass the approval in future, and should carefully consider before deciding this transaction.

If the acquirer does decide to acquire, the authors suggest that the acquirer selects an AVSP holder that has the same or similar business scope of internet-based audio-visual programme services, and arranges remedies for the failure to obtain a subsequent approval of the AVSP in the transaction document.

Tao Shan is a partner and He Wei is an associate at Hylands Law Firm

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