Kangda Law Firm

Since its implementation on 1 July 1994, the Company Law has played a crucial role in China’s reform and opening up, effectively achieving the legislative goal of encouraging investment. To date, more than 40 million companies have been established, and nearly 10,000 public companies are listed on the Shanghai, Shenzhen and Beijing stock exchanges, as well as on the National Equities Exchange and Quotations. Many companies with strong advantages in technology, management and scale have entered the Fortune 500, and numerous companies have stood out in niche sectors through domestic and international mergers and acquisitions. These achievements are significant for a country like China, which has a relatively weak market and industrial base. China’s market economy experiment, conducted under such weak conditions for just 30 years, reveals a stark contrast to the nearly 500 years of market economic development in Western countries. Currently, there are phenomena of disordered development and rampant growth, with many companies still at a low level of organisation, scale and modernisation, and issues with corporate executives abusing legal rights are common. Legislators need to acknowledge and address these problems, providing legislative guidance to market participants. Here are some signals that the revised Company Law is sending to the market economy: Encouraging competitive and well-governed companies. The recent economic downturn tests companies’ core competitiveness and corporate governance. From the perspective of the Company Law, companies that fail first typically lack core competitiveness; over-expand, leading to excessive legal risks; or have ineffective or seriously flawed governance functions. These flaws include poor decision-making by the shareholders’ meeting/board of directors at critical times, improper execution of decisions by the management team, lack of error correction mechanisms, shareholder disputes causing deadlock, or major legal violations. The sustained stock price and market value growth of Midea Group in the past five years, contrasted with the collapse of Evergrande Group, aptly illustrates that “good corporate governance is essential for a company’s success”. Encouraging positive relationships between companies, shareholders and DSOs. The revision reinforces the obligations and responsibilities of shareholders, particularly controlling shareholders and actual controllers. Specific changes include: article 23 introduces “the horizontal corporate personality denial system” in addition to the existing “vertical corporate personality denial system”; article 47 clarifies that shareholders of all companies are obliged to pay their subscribed capital in full within five years; article 54 raises the threshold for accelerated capital contributions from company insolvent to company unable to pay due debts; article 89 allows other shareholders to demand the company repurchase their shares if the controlling shareholder of a limited liability company severely abuses rights and harms the company or shareholders; article 180 introduces the “shadow director/officer” system; article 192 imposes joint liability on controlling shareholders directing directors, supervisors and officers (DSOs) to act against the company’s or shareholders’ interests; article 57 expands shareholders’ right to information to include accounting vouchers and wholly owned subsidiaries; and article 189 introduces the “dual derivative suits” system for shareholders. The revision also sets higher standards for the performance of DSOs, enforcing their duties of loyalty and diligence, and liabilities for failing to meet these duties. For instance: article 51 stipulates the duty to inspect and supervise shareholders’ capital contributions; article 53 imposes joint liability for shareholders’ withdrawal of capital contributions; article 191 specifies liability for damages caused to third parties due to intentional or gross negligence; and article 232 designates directors as liquidators. In the current external environment, achieving corporate success requires mutual selection between shareholders and professional managers. Trustworthy, responsible and accountable shareholders will choose directors and officers with strong professional knowledge, skills and work ethic, and vice versa. Encouraging investors to be well prepared before starting a new business. In a mature market economy, entrepreneurship requires thorough preparation. Besides having ideas, funds and talent, entrepreneurs need to understand the Company Law, the behavioural norms and requirements for establishing and operating a company, and the legal consequences if the company fails to establish. Clarifying practical confusions in the Company Law. The revision also addresses practical confusions in the current Company Law, such as whether unlisted joint-stock companies can restrict share transfers, whether they must establish a board of directors, and whether shareholding restrictions apply to DSOs of unlisted joint-stock companies. Although the revision does not use the classification standards of private company (company with restricted share transfer) and public company, it adopts similar system designs for non-listed joint-stock companies as those for limited liability companies, such as allowing share transfer restrictions and not requiring a board of directors. This alleviates practical concerns and marks a significant step towards a more reasonable company classification standard. To better achieve the legislative goal of encouraging investment under the Company Law, the author has two recommendations: (1) other laws, such as the Labour Law, Tax Law and supporting administrative regulations should be harmonised with the Company Law to create a favourable business environment; and (2) swiftly enact a Personal Bankruptcy Law. Currently, many individual shareholders in China provide guarantees for company actions (such as loans). The introduction of a Personal Bankruptcy Law would offer protection to these shareholders. Zhang Li Senior Partner Kangda Law Firm Tel: +86 10 5086 7577 Email: [email protected]

The separation of ownership and control creates agency problems that underpin the need for robust corporate governance in listed companies. As research evolves, governance frameworks increasingly address balancing interests between majority and minority shareholders, as well as between shareholders and external creditors. Unlike private small and medi   um-sized enterprises, which often rely on principle-based regulations and shareholder agreements, publicly traded firms face stricter, more detailed governance requirements – a necessity driven by their public nature and inherent information asymmetries. China’s corporate governance framework for listed companies operates across four tiers. Statutory laws such as the Company Law and Securities Law form the foundation, followed by regulatory rules issued by bodies like the China Securities Regulatory Commission (CSRC). Stock exchange guidelines and listing rules comprise the third layer, while company-specific governance policies tailored to individual firms’ needs complete the four-tier structure. To ensure effective implementation of the new Company Law passed in 2023, the CSRC issued Order No. 227 and Announcements 5, 6 and 7 at the end of March 2025, amending or repealing a total of 88 regulations and normative documents. By the end of April 2025, the Shanghai, Shenzhen and Beijing stock exchanges had also released revisions to their listing rules. Following the introduction of these new corporate governance regulations, the key areas requiring revision in listed companies’ governance systems are outlined below. Abolishing supervisory board and transferring its statutory powers to the audit committee of the board of directors. The newly issued Guidelines for the Articles of Association of Listed Companies (new guidelines) introduce a dedicated section on board committees, requiring listed companies to establish an audit committee in their articles to exercise the former supervisory board’s statutory functions. All provisions relating to supervisors and/or the supervisory board have been removed. Since its introduction in the 1993 Company Law, the supervisory board has been a fixture of Chinese corporate governance for more than three decades. Its removal under the new regulations marks a significant shift. In addition to the statutory powers transferred under article 78 of the new Company Law, the audit committee will also be responsible for issuing opinions or explanations in cases such as non-standard audit opinions, announcements of impairment provisions, and retrospective accounting adjustments. For non-listed public companies, the abolition of the supervisory board is not mandatory and it may still be retained as an internal supervisory body. Revising rules governing shareholders and shareholders’ meetings. The new guidelines amend the powers of the shareholders’ meeting, removing the mandatory requirement for shareholders’ approval of business policies, investment plans, annual budgets and final account. This change is set to enhance decision-making efficiency, flexibility and convenience for listed companies. The new guidelines also lower the shareholding threshold for proposing ad hoc motions from 3% to 1% and explicitly prohibit companies from raising this threshold. These measures further strengthen the protection of minority investors, encourage their participation in shareholders’ meetings, and broaden their influence and decision-making power. Enhancing shareholders’ obligations and directors’ responsibilities. A dedicated section in the new guidelines now sets out the duties of controlling shareholders and actual controllers, with a particular emphasis on prohibiting the abuse of control by these parties. The new guidelines also introduce provisions holding directors liable for misconduct in the performance of their duties, as well as new rules on the management of directors’ departure. It is now clear that directors’ liabilities incurred during their tenure are not discharged or terminated on departure. Updating independent director rules. The new guidelines introduce a dedicated section on independent directors, requiring listed companies to clearly define the role, independence, qualifications, core responsibilities and special powers of independent directors in their articles. The guidelines also enhance the mechanism for meetings of independent directors. Following these reforms, independent directors will exercise their supervisory functions and rights collectively through dedicated meetings. Notably, certain requirements for independent directors to issue opinions on occasions such as acquisitions, equity incentive schemes and employee stock ownership plans have been removed. Lifting ban on capital reserves offset. The new guidelines remove the absolute restriction, established by the 2005 Company Law, on using capital reserves to cover company losses. Under the revised rules, capital reserves may now be used to offset losses, but only after any discretionary and statutory reserves have been exhausted. Companies should exercise caution when applying capital reserves in this way, as doing so may trigger tax obligations. It is essential to comply with the requirements of local tax authorities to mitigate potential tax risks. A compliant governance framework forms the foundation for regulated business operations, while the robust regulations are essential for the healthy development of any company. The newly issued governance regulations for listed companies primarily involve revisions to key documents such as the articles of association, rules of procedure for shareholders’ meetings and boards of directors, and internal audit systems. Listed companies are required to complete these adjustments within specified timeframes and are advised to promptly begin updating their internal governance systems in line with the new requirements. Lu Tongtong Senior Partner Kangda Law Firm Tel: +86 136 9324 1334 E-mail: [email protected] Zhang Qiwei Senior Partner Kangda Law Firm Tel: +86 186 1837 9116 E-mail: [email protected]

With large contractors dominating the market, SME owners are confronted by higher hurdles in construction disputes, making contract management and legal strategy crucial China’s construction industry has evolved amid economic reform from a relatively underdeveloped sector into a modern industrial system characterised by a well-structured framework and professional management. From the 1980s to around 2005, the industry was still in its early stages of development, with contractors generally lacking strength. It was common for owners to delay project payments and compress construction periods. Although the Construction Law (1997), the Tendering and Bidding Law (1999), and the Regulations on the Quality Management of Construction Projects (2000) were successively implemented, the market environment did not fundamentally improve in the initial stages of enforcement. By the end of 2003, the total amount of project payments in arrears to construction units nationwide had exceeded RMB360 billion (USD23.7 billion), involving 124,000 projects, with more than RMB170 billion owed for completed projects. Contractor specialisation Since 2005, with vigorous promotion and deepening of policies to resolve payment arrears, along with continuous improvement and strict enforcement of the qualification management system, the construction industry entered a new phase of accelerated integration and professionalism. In 2010, general contracting and specialised contracting construction enterprises with qualifications achieved nationwide profits of RMB342.2 billion. Large construction enterprises – especially central state-owned enterprises and leading provincial state-owned enterprises – rapidly expanded by leveraging qualification upgrades, management improvements and capital operations, leading to increased market concentration. In recent years, large construction groups have come to dominate the market with their strong financial resources, core technologies, efficient management and brand advantages. At the same time, the status of project owners has become significantly polarised; in major projects, the government and large central or provincial state-owned enterprises still maintain a strong position as owners. However, the situation is markedly different for private owners. In high-end commercial and residential projects in core cities, private owners often find themselves at a distinct disadvantage when facing experienced large general contractors. Case analysis A series of major construction project disputes in Beijing’s core area handled by the author’s team exemplify the current contradictions and dilemmas between owners and dominant contractors. In this case, the owner, a private enterprise, signed a general contracting agreement with a well-known domestic specialised contractor. However, shortly after the project began, the contractor committed serious breaches and delays before seeking to amend key contractual terms. When the owner made reasonable claims for contract termination and compensation, the contractor not only refused to return the construction site but also attempted to use site handover as a bargaining chip, demanding that the owner abandon claims and litigation. Even substantial counterclaims were filed against the owner. As the project was in Beijing’s core area, failure to promptly regain control of the site would have led to indefinite suspension and direct economic losses exceeding RMB100 million annually. To help the owner regain site control as quickly as possible, the author’s team promptly filed a case in court on behalf of the owner. Under litigation pressure, the contractor was compelled to return the site before conclusion of the first instance hearing, allowing the project to proceed. During the substantive trial, the contractor filed substantial counterclaims, but the court ultimately ruled in favour of the owner’s main claims, dismissing all the contractor’s counterclaims. Notably, in the past 25 years, this contractor has been involved in 1,183 civil litigation cases nationwide, and this was the only case in which all counterclaims made by this contractor were dismissed, representing a dismissal rate of just 0.08%. This data fully illustrates the difficulty owners face in defending their rights. Specific response strategies Early intervention. At the initial contract signing stage, owners often focus on project payments and construction progress, while neglecting seemingly less important clauses such as payment settlement methods, site recovery and liability for breach of contract. In fact, these clauses often play a critical role in the event of a dispute. Engaging external legal counsel early in the contract drafting stage to scrutinise details can help owners secure greater initiative. Mid-term monitoring. Many owners neglect comprehensive supervision of contract performance during project implementation. However, construction projects are lengthy, complex and subject to frequent changes. It is therefore essential for lawyers to be involved throughout the construction phase, to promptly identify potential breaches by contractors such as schedule changes or site control issues, and to collect and preserve favourable evidence. Crisis response. A professional legal team should swiftly formulate a systematic crisis response strategy within the legal framework. Lawyers should also tailor litigation strategies to the owner’s industry regulatory environment and the specific operational mechanisms of the construction project, ensuring that all legal measures consistently serve and align with the owner’s commercial objectives. Key takeaway In the past 50 years, China’s construction market has gradually shifted from extensive development to a high degree of specialisation. However, as the above-mentioned case analysis demonstrates, with the right strategy and well-timed actions, lawyers can help disadvantaged owners regain the initiative, even in seemingly unwinnable confrontations. In a market environment where contractors have risen to dominance through specialisation, owners increasingly require lawyers with deep industry knowledge, insight and litigation skills to safeguard their interests and effectively resolve the legal challenges they face. Lu Jinxi Senior Partner Kangda Law Firm Tel: +86 186 1810 6591 Email: [email protected]

In an increasingly complex international environment, Chinese enterprises are facing ever greater challenges in carrying out trade activities abroad. Intellectual property (IP), as a key area of concern for all countries, has become an essential matter with which enterprises going abroad must deal. This article analyses a cross-border IP dispute case handled by the author to discuss the litigation idea and strategy to help Chinese enterprises defend their IP rights in the global market, effectively prevent the abuse of litigation rights to infringe on their lawful interests, adapt to the international climate and economic situation, and enhance their competitiveness. Case briefing On 27 May 2022, Portus Singapore, a smart-home and remote monitoring technology company, and its US subsidiary, Portus, filed a patent infringement lawsuit in the US District Court for the Eastern District of Texas against Uniden America, a US-based marketer of wireless consumer electronics. Under section 271 of the US patent law, title 35 of the US Code, Portus alleged that the wired and wireless cameras sold by Uniden America infringed its US patents No. 8,914,526 and No. 9,961,097 for intelligent remote control and monitoring technology for homes. Portus sought cessation of infringement and attorneys’ fees from Uniden America, as well as punitive damages up to three times the amount found, under section 284 of the US Code. The manufacturer of the products at issue is Ansjer Electronics, located in Zhuhai, China, which specialises in the R&D, manufacturing and marketing of security and monitoring products. Based on the agreement between Uniden America and Ansjer Electronics, if the products are involved in IP infringement, Ansjer Electronics must be held jointly and severally liable for all damages. Therefore, once the products at issue constitute infringement, Ansjer Electronics will face significant damages, which will also seriously affect its products already sold in the US and bring great risks to its export business, worth tens of millions of US dollars per year. Upon receipt of Uniden America’s notice, Ansjer Electronics immediately appointed the author’s team from Kangda Law Firm to fully represent it in the case. After examining the patent technology and litigation claims in the complaint, the team, jointly with the R&D, technology development, marketing and finance departments of Ansjer Electronics, analysed the function-way result or tripartite test established in Graver Tank v Linde Air Products (1950), a classic US Supreme Court case in assessing patent infringement, as well as the elements constituting equivalence infringement, and found that the technology of the products concerned was clearly different from the patent technology that Portus claimed had been infringed. The team then fully explained the fundamental differences between the two technologies in terms of function, means and effect, and provided a strong analysis and illustration that the products at issue did not constitute an infringement. Based on the above-mentioned analysis, the author’s team requested of Uniden America that it make an affirmative defence of non-infringement. In the end, Portus, the plaintiff, withdrew the case, and the court closed the case on 13 April 2023 with a ruling of dismissal with prejudice, which strongly safeguarded the legitimate rights and interests of Ansjer Electronics. The status quo When it comes to overseas IP disputes, Chinese enterprises still have many problems to solve. On one hand, when such disputes arise, very few Chinese enterprises actively respond to them, with most choosing not to do so. As a result, they often end up paying significant damages or high royalties for patents and trademarks, or even withdrawing from that country’s market. On the other hand, the IP arrangements of Chinese enterprises are deficient. When expanding into overseas markets, many of them do not make global IP strategy deployments or undertake systematic long-term plans for IP. When facing frequent IP lawsuits and disputes, they often pay large amounts of money to settle the cases. Advice and insights In this case, Ansjer Electronics actively responded to the lawsuit, not only to protect its legitimate rights and interests, but also to remove obstacles for its products to enter the US market, and to strive for more market opportunities, offering a valuable example to Chinese enterprises to defend their rights in similar situations. The author advises Chinese enterprises to make good arrangements for their IP in advance, according to their actual position, when expanding into overseas markets to establish external rights protection mechanisms to avoid infringement of products and to refine their marketing channels. At the same time, they should conduct in-depth research on the IP risks of the industry and other competitors, draw on the experience of professional organisations, familiarise themselves with IP laws and policy rules of the target country in advance, and properly arrange for dispute response mechanisms. For an enterprise, engaging in overseas trade is like taking a voyage, one mixed with opportunities and challenges. Only by constantly adapting to the wind and adjusting the sails can it manage to travel smoothly forward and ultimately arrive at its destination. Zhou Zhengping Senior Partner Kangda Law Firm Tel: +86 139 7518 1755 E-mail:[email protected]

Amid an unprecedented digital wave engulfing all industries, the financial sector is increasingly relying on the use of data to drive innovation and market expansion. Consequently, data compliance issues are becoming increasingly prominent, especially for data-intensive enterprises, and constructing a scientific and effective data compliance plan is crucial. This article explores key elements and strategies for financial data compliance by examining a real-world case, and aims to provide valuable references for businesses. Case study A leading domestic medical device data service provider integrates extensive industry data resources including existing market data, tender data and third-party data, and utilises big data and artificial intelligence technologies to generate high-quality alternative data for the financial sector. This data significantly enhances the accuracy of credit evaluations and loan efficiency, and reduces financial service costs for medical device companies, fostering innovation and development in financial services. However, the enterprise faces multiple challenges including the legality of data sources (whether it involves public or personal data), data asset ownership, data usage authorisation and its authorisation chains, the legal application of web scraping technologies, data security protection, and cross-border data transmission. These are critical areas of focus for data compliance and integration processes. Data compliance measures The enterprise has established a comprehensive data asset compliance mechanism covering data sourcing, collection, processing, operation, management and protection. This framework is built on the identification and cataloguing of data assets, aligning with a compliance system for data asset registration. The specific measures include: Adhering to policies and regulations. Understand the privacy regulations and data protection laws of the countries and regions involved in the business. Regularly review and update compliance policies to ensure alignment with the latest regulations. Establishing compliance plans. Address issues of data ownership, authorisation and authorisation chains to clear hurdles for compliance and lay the foundation for data compliance. Building a data asset system. The enterprise has developed a data asset system centred around the Data Asset Confirmation Work Guidelines, utilising data primarily sourced from public and third-party entities. Sort existing data resource environment information, file systems and databases to create a data asset inventory system. Develop compliance management systems for different data collection methods and data types, focusing on the Data Classification and Grading Management System and the Web Scraping Compliance System (WSCS). WSCS strictly limits the scope and methods of technology use, adhering to the principle of no operation or collection without authorisation. Data involving others’ intellectual property, trade secrets or non-public personal information should not be collected without consent. When purchasing data from other providers, establish a data acquisition commitment system requiring providers to ensure all data subjects have legally authorised the data and no rights are infringed. Clarify the responsibilities and collaboration among departments. The data production department assists the data management department in ensuring data resources meet the expected value inflow and reliable measurement conditions before assessing the cost of data assets. Once data assets are confirmed, the finance department is responsible for archival management, utilising registration cards for record keeping. The data governance department, serving as the data compliance management department, is tasked with supervising and evaluating the management of data resources and implementing data quality governance. Protecting data security. Use advanced encryption technologies to protect data during storage and transmission, preventing data breaches and unauthorised access. Implement strict access control and permission management strategies to ensure only authorised personnel can access sensitive data. Establish regular data backup mechanisms and periodically test backup data recoverability to prevent data loss. Conducting regular risk assessments. Identify potential internal and external risks, such as data breaches and system failures. Develop and implement corresponding risk response strategies such as emergency response plans. Compliance training. Help employees understand and follow compliance policies and regulations, enhancing data security awareness and reducing the risk of data breaches. Regular internal audits. Check the implementation of compliance and risk management measures. Monitor systems and networks in real time to promptly detect and respond to any abnormal activities or potential threats. Partnering with data security-conscious partners. Clearly define data protection and compliance requirements in contracts, ensuring partners adhere to the same standards. Efficiently and securely applying data while ensuring compliance is a pressing issue for data-intensive enterprises facing complex legal environments and evolving technological challenges. Data compliance is a critical component of corporate legal risk management and enterprises must develop a comprehensive data compliance management system that addresses the above-mentioned aspects. Zhong Yu Senior Partner Kangda Law Firm E-mail: [email protected] Liang Shuyi Associate Kangda Law Firm E-mail: [email protected]

Value adjustment mechanism (VAM) agreements are extensively used in private equity and venture capital (PE/VC) transactions, as well as in mergers and acquisitions (M&A) of listed companies. Although there is a relatively consistent standard for assessing the validity of VAM agreements in dispute resolution, the legal nature and exercise period of share repurchase rights under these agreements continue to be contentious issues. Some scholars argue that share repurchase rights result from the autonomy of the parties involved and should be considered as creditors’ rights, thus subject to the statute of limitations. Others believe that they can be exercised unilaterally by one party and should be classified as rights of formation, subject to a cut-off period. The author leans towards the latter view. The share repurchase rights in a VAM agreement is legally classified as a right of formation. This is because a right of formation allows the holder to unilaterally alter an existing civil legal relationship. In a VAM agreement, share repurchase clauses typically allow investors to demand that the financing party repurchase all or part of the equity held by the investor, or provide compensation, if the financing party fails to meet agreed targets. Essentially, these clauses grant investors the right to unilaterally establish an equity transfer relationship under specific conditions. When the underlying conditions are met and the right is still valid, a timely and lawful repurchase notice from the rights holder creates an equity transfer contract at the pre-agreed price, leaving the repurchase obligor without the option to refuse. Therefore, the above-mentioned repurchase right is a right of formation agreed on by the parties involved. Rights of formation are subject to cut-off periods, not statutes of limitation. A right of formation allows the holder to unilaterally create, alter or extinguish a civil legal relationship. In contrast, a statute of limitations refers to the legal system where a rights holder loses the ability to request court protection of their civil rights if they do not exercise their rights within a prescribed period. Therefore, rights of formation are governed by cut-off periods, not statutes of limitation. According to article 199 of the Civil Code: “Unless otherwise provided by law, the duration of rights such as the right of rescission or termination, as stipulated by law or agreed upon by the parties, shall be calculated from the date the rights holder knows or should have known the right has arisen. These rights are not subject to the provisions on the suspension, interruption or extension of the statute of limitations. Upon the expiration of the duration, rights such as the right of rescission or termination shall be extinguished.” In the civil judgment of CTSHK RV Leisure Tourism Development v Hao Gang (2021) of the Beijing High People’s Court, it was held that “the right of share repurchase is a right of formation, and its exercise should be constrained by a cut-off period. It must be exercised within a reasonable time and in a reasonable manner, not arbitrarily or at any time.” Similarly, in the civil judgment of Lyu Huaming v Cai Bing (2020) of the Shanghai High People’s Court, it was stated that “the repurchase right, like the right of rescission and termination, is a right of formation. Once the exercise period expires, the right is extinguished and is not subject to the statute of limitations.” In the Selected Q&A (series 9) session released by the Supreme People’s Court on 29 August 2024, the court addressed the nature of share repurchase rights in VAM agreements and the determination of their exercise periods. The response stated: “If the parties have agreed on a period within which the investor can request a repurchase, such as within three months from the date it is confirmed that the company will not go public, this agreement should be respected to honour the parties’ autonomy. “If the investor requests a repurchase after this three-month period, it can be deemed as a waiver of the repurchase right or a choice to continue holding the equity, and the court will not support the repurchase request. If the investor requests a repurchase within this three-month period, the statute of limitations should be calculated from the day following the request. “If the parties have not agreed on a period for the investor to request a repurchase, the right should be exercised within a reasonable period. To ensure business stability, a reasonable period should generally be considered as not exceeding six months during judicial proceedings.” The response contains two key points: First, the share repurchase right is subject to a cut-off period. If an agreement specifies this period, it should be respected. If not, the period should not exceed six months. If the rights holder does not exercise the repurchase right within the agreed period or the six-month period (if not agreed), the right is extinguished, and it is deemed that the holder has waived the repurchase right and continues to hold the company’s equity. This indicates that the Supreme People’s Court supports the view that the share repurchase right in investment agreements is a right of formation subject to a cut-off period. Second, if the rights holder exercises the repurchase right within the cut-off period, the share repurchase right, as a right of formation, transforms into a creditor’s right on the holder’s choice to exercise it. The statute of limitations for this creditor’s right starts from the day following the repurchase request and is subject to the general provisions of the statute of limitations. It is crucial for the rights holder to issue the repurchase notice in a timely, legal and effective manner to achieve the legal effect of exercising the right. First, the notice must be issued within the agreed period or within six months to be considered timely. Second, the method of issuing the notice must be legal and effective. For instance, the repurchase notice should be sent directly to the repurchase obligor at the address specified in the investment agreement. If the notice is only sent to an employee of the target company, and there is no proof that the employee forwarded it to the repurchase obligor, the legal effect of exercising the right is not achieved. Rui Gang Partner Kangda Law Firm Tel: +86 186 1208 3296 Email: [email protected]

With the implementation of the Fourteenth Five-Year National Intellectual Property Protection and Utilisation Plan, China’s invention patent authorisations have ranked first worldwide for four consecutive years, reflecting the country’s significant achievements in patent protection. However, data from the Supreme People’s Court shows that the proportion of patent infringement cases involving complex technological features has risen markedly in courts nationwide in recent years, with many cases failing due to insufficient evidence. Clearly, in the context of rapid technological development, patent enforcement faces severe challenges, particularly for patents with complex technical features that are highly specialised and numerous, making evidence gathering and use extremely difficult. Business challenges Take, for example, a well-known Taiwanese smart cleaning robot technology company. Its window-cleaning robot, backed by unique patented technology, has held a market-leading position. However, in recent years, the market has seen an influx of similar products priced far below the genuine article, significantly impacting the company’s market share. In this context, the company has commissioned the author to handle its intellectual property enforcement matters in mainland China. The enforcement process faces several challenges. First, establishing infringement is difficult, as infringers use subtle technical adjustments and decentralised supply chains to avoid direct infringement. Second, collecting evidence is challenging due to the dispersed and covert nature of the infringers’ production and sales channels, making tracing and verification resource-intensive. Third, proving the amount of damages during litigation is problematic, as it is difficult to establish the infringer’s profit from the infringement, which may lead courts to apply statutory compensation and award low damages. Finally, technical assessment is complex because the patented technology comprises numerous intricate features, requiring considerable specialised expertise to determine infringement. These challenges risk trapping companies in a vicious cycle of high enforcement costs and low infringement penalties, underscoring the urgent need for a systematic approach to intellectual property enforcement. Evidence breakthrough strategy Commission professional resources for evidence collection. When rights holders face difficulties collecting evidence on their own, they may enlist the assistance of professional institutions such as investigative companies or legal teams. Lawyers possess the necessary legal knowledge and litigation experience to grasp legal issues, understand the evidence requirements, precisely analyse infringement conduct, and determine the focus and direction of evidence collection. Preserve evidence through notarial agencies. Acting as a consumer, the author purchased the product in question from either the infringer’s online flagship store or an offline distributor. A notary recorded the entire purchase process and product details, thereby creating a complete evidence chain that ensures the evidence is both legally compliant and authentic. Report and collect evidence through administrative channels. On identifying the source factory, the author initially gathered evidence and then submitted a request to the local Market Supervision Administration for action. With administrative intervention, authorities inspected the factory, seized products and equipment, collected infringement evidence, and took measures to halt and penalise the infringement. Adopt specific measures to tackle online infringement. The author sent a lawyer’s letter to the e-commerce platform, urging immediate action to stop the infringement, such as delisting the products and providing seller details. An application was also made to the court for access to sales records – including sales volume and revenue – to establish the extent of the infringement. Utilise professional evaluation agencies. When products involve complex technical features and preliminary comparisons make it difficult to confirm infringement, or when there is a dispute over infringing activities, the author engages professional evaluation agencies to analyse and compare the patented technology with the infringing product. These agencies then issue an authoritative report to further clarify the infringement facts. Priority rights protection path Online infringement is addressed first. In cases of online infringement, the author issued lawyer’s letters to platforms and merchants, demanding the removal of infringing links. This approach quickly curtails infringement at low cost and is the preferred method for rights protection. A complaint is then filed with the Market Supervision Administration. After obtaining evidence of infringement from a particular factory, the author submitted a processing request along with preliminary evidence to the local Market Supervision Administration. On investigation and verification, the administration organised mediation and imposed penalties on the infringing party, effectively curbing further infringement and securing substantial compensation for the rights holder. Moreover, once the mediation agreement is judicially confirmed and becomes enforceable, the rights holder may apply to the court for compulsory enforcement if the infringer fails to comply. Litigation is also used for rights protection. Although litigation is characterised by more complex procedures, longer duration and higher costs, it provides enterprises with stronger legal protection and ensures that their legitimate rights are fully maintained. In the window-cleaning robot patent infringement case, the author employed the above-mentioned evidence collection and rights protection measures not only to safeguard the patent holder’s rights and secure high compensation, but also to regulate market order and encourage technological innovation. In the era of intelligent manufacturing, protecting complex technical patents now transcends traditional legal services, requiring lawyers with technical acumen, legal expertise and business insight to build a comprehensive service system that creates a solid moat for enterprises in the intellectual property battle. Lv Yinping Senior Partner Kangda Law Firm Tel: +86 136 9323 0666 E-mail: [email protected]

In recent years, there has been a growing trend in the application of agreed compensation in intellectual property (IP) infringement cases. However, the existing regulations are somewhat vague, leading to numerous controversies in practice. To clarify these issues, this analysis will delve into the legal concepts and attributes of agreed compensation for infringement. Legal concepts Agreed compensation for IP infringement refers to the compensation responsibility assumed by the infringing party for future IP infringement actions as stipulated in civil contracts signed by both parties before the infringement, settlement agreements reached through prior infringement procedures, civil mediation agreements confirmed by courts or arbitration institutions, and commitments made by the infringing party. Following the occurrence of future infringement actions, the rights holder can file a lawsuit in court and demand compensation based on the previously agreed terms. Currently, the basis for calculating compensation includes: losses suffered by the rights holder due to infringement; profits gained by the infringing party from the infringement or illegal gains; multiples of licensing fees; and statutory compensation. In practice, agreed compensation has become another independent method of determining compensation. Legal attributes Agreed compensation is a simplified method agreed upon by both parties in advance to calculate and determine the losses suffered by the rights holder or the profits gained by the infringing party in the event of future infringement, which is an independent method where parties agree on future infringement compensation based on their autonomy of will. Agreed compensation is generally included in settlement agreements, civil mediation agreements, commitment letters, and civil contracts. Regarding whether agreed compensation involves co-opetition between infringement and breach liability, the author believes that the first three of those four belong to special civil contracts with conditions attached, corresponding to liability for infringement only. However, civil contracts, being basic transaction contracts, contain pre-agreed compensation obligations and may involve co-opetition between breach and infringement liability, requiring the assertion of one. In cases where infringement is established and there are no grounds for invalidation, modification or revocation of the agreement, priority should be given to agreed compensation, aligning better with the practical challenges of determining compensation for IP infringement. Agreed v punitive compensation Agreed compensation and punitive compensation are both related and distinct. The conditions for their application are similar: punitive compensation requires both intentional infringement and serious infringement, while the same conditions apply to the application of agreed compensation. Both types of compensation carry punitive elements. Directly agreed compensation amounts serve a dual purpose of compensation and punishment, akin to “statutory compensation” by agreement between the parties, thus already carrying punitive elements, making punitive compensation inapplicable; however, the calculation method of agreed compensation can be applied to punitive compensation. The base for calculating punitive compensation should be a compensation amount determined fairly accurately without considering punitive elements. If the rights holder and infringing party have agreed on the compensation calculation base in advance, it serves as the basis for punitive compensation. Agreed compensation When there is no illegal basis for the agreed compensation clause, and respect is given to the parties’ private autonomy, and the agreed amount is reasonable, courts tend to fully support the agreed compensation amount based on the prior agreement. When a court judgment is based on statutory compensation, but the awarded amount matches the agreed compensation, it indirectly recognises the agreed compensation. In cases where the application of prior agreed compensation clauses is not supported, and the awarded compensation is generally lower than the prior agreed amount, agreed compensation is not widely recognised. Some courts have started incorporating agreed compensation clauses into mediation work, one approach being to include such clauses in commitment letters issued by infringers. The author suggests that agreed compensation clauses should be carefully considered and should clearly specify: Agreed compensation clauses need to be specific and precise, detailing compensation amounts for specific acts of infringement, IP rights, or breaches of agreement. Failure to specify may lead to broad interpretation by the courts; The direct amount or calculation method should vary depending on the case. For smaller-scale infringers, it may be advantageous to directly agree to a higher compensation amount considering punitive elements, but the compensation amount should be carefully considered, taking into account the value of the involved IP, production and operation conditions, industry status and court rulings; For cases involving prolonged or large-scale infringement, a calculation method for agreed compensation is more suitable than specifying a fixed compensation amount, and such calculation methods can be combined with punitive compensation. Pei Yinzhou Senior Partner Kangda Law Firm Tel: +86 138 0108 7811 E-mail:[email protected]

In recent years, as products registered during the rapid development of China’s private equity fund markets have reached their exit periods, the inclusion of guaranteed redemption clauses such as capital preservation and guaranteed returns commitments in fund contracts has become an important factor for cautious investors making investment decisions. As a result, fund managers and third parties have employed various internal and external credibility enhancement measures, including providing capital preservation and guaranteed returns commitments. However, disputes often arise when fund managers or third parties fail to fulfil these commitments. This article aims to provide a brief analysis of this issue. Legal validity Guaranteed redemption commitments made by fund managers are invalid. Articles 2 and 19 of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions explicitly prohibit fund managers from making capital preservation and guaranteed returns commitments. When faced with redemption difficulties, financial institutions are not allowed to make up for the loss with self-owned capital in any manner, and the recognition criteria and corresponding consequences of guaranteed redemption are clearly defined. Article 15 of the Interim Measures for the Supervision and Administration of Private Investment Funds specifically prohibits private fund managers and sales institutions from promising investors that the investment principal will not incur losses or guaranteeing the minimum return. The Supreme People’s Court, in the Minutes of the National Courts’ Civil and Commercial Trial Work Conference, clearly outlines the judicial practice of invalidating redemption clauses and supports beneficiaries in seeking compensation from trustees commensurate with their faults. It also states that regardless of the form, whether it’s through drawer agreements or other means of stipulating capital preservation or guaranteed return clauses, they should be deemed invalid. Therefore, regardless of the nature of the redemption commitment made by the fund manager, it will be considered invalid. Guaranteed redemption commitments made by investment advisers are invalid. Article 103 of the Securities Investment Fund Law of the People’s Republic of China explicitly prohibits fund investment advisory institutions from making any form of commitment or guarantee regarding investment returns. Therefore, any guaranteed returns commitment made by an investment adviser is invalid. Different views exist on the validity determination of capital preservation and guaranteed returns commitments made by third parties. Regarding redemption commitments made by related parties of the fund manager, external credibility enhancement measures are typically implemented through commitments such as guaranteed principal and returns commitments, shortfall makeup agreements, redemption clauses, repurchase obligations, fixed income, joint guarantees, and similar commitments. There is no clear provision in relevant laws and regulations, leading to different views in judicial practice. Some precedents consider the fund manager’s shareholders and other related parties as independent entities, and agreements signed with investors in their names represent their true intentions, without violating mandatory legal provisions, and should be deemed valid. However, other precedents believe that although the related parties are not fund managers themselves, they are associated with the fund manager’s interests, and investors are aware that the party making the capital preservation and guaranteed returns commitment is related to the fund manager. The intention of all parties to the agreement is to obtain capital preservation and guaranteed returns from the fund investment. Therefore, such commitments still violate relevant regulations and should be deemed invalid. For third parties other than the fund manager and its related parties who make capital preservation and guaranteed returns commitments, judicial practice distinguishes and determines whether a guarantee contract relationship, joint assumption of debt, a unilateral promise or another legal relationship was established based on specific facts. Precedents often consider commitments to be valid when they represent the true intentions of the parties involved, do not violate mandatory legal and regulatory provisions, and will likely find that a creditor-debtor relationship between the parties reflected in the corresponding commitment is a borrowing and lending relationship, allowing the claimed annualised returns and penalties for breach of contract to be subject to the upper limit of private lending interest rates according to the commitment. Agreements stipulating the return of principal after the determination of losses are generally considered valid. Judicial practice often determines that compensating investors for their losses after the fund term expires or after losses have occurred does not fall under the scope of expected capital preservation and guaranteed return commitments but represents the true intentions of the parties involved and is not prohibited by law. Therefore, the parties should fulfil their contractual obligations according to the agreement. Different views exist on whether the invalidity of guaranteed redemption clauses leads to the overall invalidity of the fund contract. In general, the judiciary can determine that clauses that solely guarantee capital preservation and guaranteed returns are invalid based on article 92 of the court minutes, which states that “contracts containing clauses guaranteeing fixed returns on capital, principal, or redemption as agreed between trustees such as trust companies, commercial banks, and other financial institutions and beneficiaries should be deemed invalid”. However, some argue that since guaranteed redemption clauses are important factors for investors when making investment decisions, invalidating these clauses would render the purpose of the fund contract unachievable, and therefore the entire fund contract should be deemed invalid. In conclusion, although judicial practices may vary slightly depending on the circumstances, the overall focus remains on protecting investor rights and maintaining the order of financial market transactions through lawful judgments. Private fund managers should prioritise compliance with financial regulatory provisions, conducting fund operations in a legal and compliant manner, to avoid penalties or being held responsible for the invalidity of capital preservation and guaranteed return clauses. As for investors, it is important to make rational investments with a clear understanding of the high risks associated with financial products and not easily trust various promises of capital preservation and guaranteed returns, and to maintain relevant written documentation to safeguard their legal rights. Yang Jiamei Associate Kangda Law Firm Tel: +86 155 2961 1206 E-mail: [email protected]