What kinds of opportunities and challenges do enterprises face in China’s current regulatory and market environments? China Business Law Journal interviewed corporate counsel and senior executives from different industries to get some observations
Media beyond imagining
Deng Qingxu, Senior Vice President, SINA.com
The many changes that have recently arisen in the new media sector are beyond anything previously imagined by anyone, and development has not followed any rhyme or reason, making it impossible to borrow from past rules to understand it; the only rule that can possibly be drawn upon is the legal regime.
For internet companies, the most marked change is the appreciable increase in infringement and rights protection cases in the past few years. Our perception of the law has also continuously strengthened. For example, in the past, when using an internet font, one would use whichever one was convenient; but now everyone is aware that each font is copyrighted, this concept having taken root deep in each basic-level employee.
My personal experience is that the importance that China attaches to intellectual property has rapidly increased in the past two years. This improvement is comprehensive, with commercial entities, lawyers and judges all in agreement, namely, whenever an intellectual property infringement case occurs, the judgment always favours the intellectual property rights holder.
Know your markets
Hope Hang, General Counsel, JuneYao Group
The economic situation that enterprises face is extremely varied. Regardless of whether it is within one industry or between industries, they harbour manifold operating philosophies and value points. When looked at from the perspectives of economic formation, industry features, project operational methods, etc., Chinese capital markets are similarly flexible and variable.
As corporate counsel, if much of the work covers such industries as capital markets, etc. – the regulatory requirements in respect of which are relatively stringent – then it is necessary to have an in-depth understanding of the historical evolution of the entire industry, the features of the industry at the current stage, and the profit model of the company for which the counsel works, while keeping a close eye on legal matters.
As a corporate counsel’s ultimate duty is to provide a recommendation to shareholders and decision makers, multiple factors must be taken into account before presenting such a recommendation.
Legal risks spring from business activities. On the one hand, the objective of a business activity determines the extent, breadth and type of legal risk that could arise; but on the other hand, legal and regulatory requirements will influence the judgment as to whether the specific business act complies with procedures and rules.
Specifically, with respect to legal compliance work, it is necessary to first look at the whole, seeing whether the business activity complies with economic laws, industrial orientation and universal commercial value.
If a business activity runs counter to the above-mentioned general orientation, there is no need to doubt that it poses a problem, even if the specific article of a law or regulation that is being violated cannot be found. Once the condition that the general orientation is correct is satisfied, it is still necessary to return to the specific law, statute and regulatory level, to scrutinize whether the entire transaction structure and procedure needs to be corrected or rectified.
Chen Yingying, Legal Director and Securities, Affairs Representative, Meten International Education Group
One of the difficulties that in-house counsel of educational enterprises face in their work is an excessive changeability in policies. How to rapidly meet the regulatory requirements of the regulators and seek a suitable operating model during these transition periods for various policies is a major challenge. Compliance rectification is extremely costly in energy and time, requiring efforts to secure the assistance of other departments of the company.
Second is how to flexibly combine the enterprise’s business and strategic requirements to do the work. For example, in the course of negotiations on an acquisition, we have to design the transaction structure, review the contracts, and understand and control the risks.
In some instances, these may stand in opposition to business requirements, or even hamper the rapid realization of the business. However, considered from the strategic requirements of the enterprise, in-house counsel have to act with determination and focus, and cannot do things simply by holding the ruler of risk control.
In recent years, educational enterprises have become the darlings of capital, as they have rushed to list on domestic and foreign capital markets. However, the road to an A-share IPO for educational enterprises remains rocky, with the great majority of A-share educational enterprises achieving their listings through the back door.
Accordingly, in contrast to A shares, domestic educational enterprises show a preference for listing abroad. Where do the difficulties in an A-share IPO lie? There are three major factors:
(1) The industry. The China Securities Regulatory Commission (CSRC) has an internal list of strategic industries that are supported, a list that excludes the tutoring, education and training industry. Accordingly, the education industry is not one that has drawn the special favour of the regulators.
(2) Significant policy uncertainty. Until the issuance of the Law on Promoting Private Education in September 2017, the Education Law expressly specified that, “the establishment of schools and other educational institutions with the objective of a making a profit is not permitted”, effectively choking off the road to capital securitization for education companies. With the issuance of the Law on Promoting Private Education, enterprises are permitted to register either as for-profit or non-profit institutions, but in the actual process, as the educational bureaus in many regions lack implementing rules on how to change a registration to a for-profit training institution, the process for educational institutions to convert into for-profit institutions presents difficulty upon difficulty. Furthermore, until the conversion into a for-profit training institution, the original private non-profit enterprise cannot be included on the consolidated financial statements.
Furthermore, the relatively significant regulatory policy uncertainty can affect an issuer’s conditions as a going concern. For example, the opinions on reforming pre-school education issued not too long ago prohibit all private kindergartens from listing individually or as part of a bundle of assets. For an educational enterprise that runs private kindergartens, this is a material obstacle that affects its operation as a going concern.
(3) Stringent compliance requirements. Education and training fall into a relatively special service industry, with the establishment conditions, education recipients, educational content and even the sites subject to relatively stringent regulation. To operate lawfully, the securing of a school permit and business licence – in the case of for-profit training institutions – is required. The instructors that are engaged are required to have a teaching certificate or other teaching qualifications. To engage a foreign instructor, qualifications to engage foreigners are required, and the procedures for a residence permit and work visa need to be carried out for such foreign instructors. A site is required to satisfy area, fire safety, number of floors and other such requirements. A title certificate is required for property, and an internet education company is required to secure an ICP certificate, online culture operation permit, online transmission permit, etc. In essence, very few educational enterprises can fully comply with the above-mentioned series of compliance requirements, and the rectification costs are prohibitive.
Work of art
Eric Xu, Senior Managing Director, CLADE
We are relatively new and have been in business in China for a year. We have five people, but we are trying to expand our business scope, including membership and a new fund that focuses on financial and non-financial products in China.
Right now, we believe that the art trading market is still developing, and there is more need for us to understand the new regulations and comply with the local rules, as we don’t want to do anything against the local law.
If you look back on this market a few years ago, there were a couple of art-related funds either being closed or having some problems. One of the reasons for this is that a lot of fund managers either didn’t follow the rules, or did something illegal. However, we still believe that the art trading business in a couple of years will be booming.
Jia Hongyi, Head of Legal Department, Beijing Kuaishou Technology
The main opportunities in the short video/video/live broadcasting industry are: (1) recognition of copyright in short video content; (2) the acceptance of such business as short video, live broadcasting, etc., by an increasing number of people, with a continuously increasing number of enterprises entering this industry; and (3) the short video and live broadcasting businesses beginning to integrate with an increasing number of industries, and the increasing number of scenarios and opportunities for their use with the coming of the 5G era.
The main challenges are: (1) the increasing intensity of regulation, with enterprise operations facing an increasing number of regulatory and compliance requirements; (2) the gradual move from competition in an incremental market to competition in a market with existing stock, with the concomitant increasingly fierce competition among the entities in the same industry; and (3) the increasing rights awareness – e.g., copyright awareness – of users, placing a heavier compliance obligation on enterprises.
From the perspective of the legal affairs team, I and the team grasp opportunities mainly from the three levels of strategy, tactics and personnel. Speaking from the strategic level, we have to embrace change and firmly keep our mission in mind. Regardless of how the external environment changes, in-house counsel must duly perform their core work, guard the bottom line, enhance efficiency, accumulate rights and actively protect rights.
Speaking from the tactical level, our approach is mainly two-dimensional. The first dimension is commercial, with us requiring team members to continuously learn and stay on top of the industry, have an in-depth understanding of business rules, and comprehend the commercial appeal behind the business model.
The second dimension is the legal dimension, requiring team members to understand the regulatory motivation of the regulators, the understanding of the law of the legislative authorities and judicial authorities, and what their core red lines in laws and regulations are, and what the law enforcement criteria of the law enforcement authorities are.
The combination of these two dimensions helps the business departments in seeking the best solutions falling between commercial rationale and legal compliance.
From the personnel level, we have, on three dimensions, consistently required of team members, in accordance with strict standards: (1) Business skills, i.e., professional skills and commercial skills. The former covers understanding of the law while the latter covers communication skills as well as an understanding of the business model and the company. On this dimension, we require in-house counsel to be able to present the most correct recommendations and solutions to the company; (2) Drive. On this dimension, we have two requirements: uncovering problems and resolving problems. One has to be able to actively uncover problems and have the means to push resolution of the problems; and (3) Execution: our requirement is the ability to execute immediately, and to see the execution of the work to the very end.
The opinions expressed by the interviewees are their own and not those of their companies. To watch the interview videos, please visit our TV section.