September 2008

CHINA’S SOVEREIGN WEALTH FUND: EUROPE’S CAUTIOUS WELCOME

The recent emergence of a Chinese sovereign wealth fund with initial capital of $200 billion poses a raft of exciting but delicate economic and security questions for European policy makers.

In the US, the Chinese fund has become highly, and anxiously, politicized. In the European Union, many senior officials have welcomed sovereign wealth funds in general as a potential new investment source. However, they have also adopted a somewhat cautionary stance, counseling that investment strategies underlying these sovereign wealth funds may be driven by political rather than pure business determinants.

For our readers, we have prepared a brief overview of Europe’s approach to sovereign wealth funds and the practical realities in the context of China’s sovereign wealth fund. Please read it here.

MICROSOFT MAY FACE
CHINA’S FIRST ANTITRUST PROBE


Although the Anti-Monopoly Law (AML) in China only came into effect in August, a complaint has already been filed against Microsoft. This appears to be the first complaint under the AML against a multinational operating in China. At this writing, it remains unclear whether Chinese authorities will actually launch an investigation into the allegations against Microsoft.

A letter of complaint by a local Chinese law firm alleges anti-competitive conduct by Microsoft, citing provisions under the AML relating to abuse of dominant market position. It seeks a fine against Microsoft of
US$1 billion.

Microsoft has fought long and difficult litigation against competition authorities in Europe and the US on similar claims, but it is too early to tell if this complaint is a harbinger of similar problems in China.

We have prepared a brief overview of the claim against Microsoft.
Please read it here.

CHINA’S NEW TELECOM AND TECH REGULATOR:
NEW NAME, NEW FACES, NEW APPROACH

Portending a new approach to regulation of the telecommunications sector, China has folded its Ministry of Information Industry (MII) into a new, larger governmental body—the Ministry of Industry and Information Technology (MIIT).

The creation of a new ministry and a new leadership will inevitably lead to changes to telecommunications and technology regulation in China. For a brief look at the changes, please click here.

VENTURE CAPITAL AND PRIVATE EQUITY INVESTMENT IN CHINA: COMING OF AGE

by Mark Williams, Annie Chen and Shannon Mo

The venture capital (VC) and private equity (PE) markets have been coming of age in China for the last decade, and this becomes especially clear from the investment activity that has taken place in China this year alone. In just the second quarter of 2008, US-based venture capitalists invested US$583 million in China through 47 deals, nearly doubling US investments from the first quarter. 1

China is progressively developing the legal and business landscape to encourage foreign VC and PE investors. For our readers, we have prepared a snapshot of the industry. Please read it here.

1 Market Watch report based on MoneyTree ™ Report from PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA).

TROUBLE AHEAD FOR USB MANUFACTURERS?


The Netac Flash Memory Suit

In the first-ever case of a Chinese IT company pursuing a patent complaint overseas, Netac, a Shenzhen-based manufacturer of USB flash memory devices, has reached an out-of-court settlement in the United States with the alleged patent violator, PNY Technologies, a New Jersey company.

We have prepared a summary of the issues, which may be found here.

LIGHT AT THE END OF THE TUNNEL FOR HONG KONG LITIGATION?


THE HONG KONG AND PRC RECIPROCAL ENFORCEMENT ARRANGEMENT

China and Hong Kong have now implemented a new law that allows them to recognize the judgments of each other’s courts in resolving many commercial disputes.

The Mainland Judgments (Reciprocal Enforcement) Bill (the Ordinance) came into effect in August this year. The Ordinance implements the ”Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial matters by the Courts of the Mainland and the Hong Kong SAR pursuant to the Choice of Court Agreements between Parties Concerned” (the Arrangement) entered into between the Hong Kong Special Administrative Region and the People’s Republic of China (the Mainland) in 2006.

For our readers, we have prepared a brief summary of the Arrangement and the Ordinance (as well as a convenient overview of its key provisions). Please read them here.

CERTIFYING HIGH AND NEW TECH ENTERPRISES UNDER CHINA’S NEW INCOME TAX LAW

China’s new PRC Enterprise Income Tax Law (EIT Law) became effective January 1, 2008, adopting a standard income tax rate of 25 percent. The new rate has been reduced from the prior 33 percent. However, the effective income tax rate for Foreign Investment Enterprises (FIEs) may actually increase as a result of the EIT Law. When taking into account various tax incentives previously available to FIEs, the effective income tax rate applicable to FIEs was previously only 15 percent, according to official statistics.

Nonetheless, there are still some tax incentives available under the new EIT Law. The most significant tax incentives applicable to FIEs are those associated with the certified status of High and New Technology Enterprises (HNTE).

For our readers, we have prepared an overview of the tax benefits that FIEs may receive by qualifying as HNTEs, as well as the steps companies need to take to obtain HNTE status.

Please read it here.

DLA PIPER’S CHINA PRACTICE IN THE NEWS

# 1 BY VOLUME

Mergermarket’s mid-year survey ranked DLA Piper #1 (by volume) for M&A deals in Greater China and the UK, and No. 2 in the world by volume of major M&A transactions.

COMING SOON

PRC Tax Seminar in Hong Kong

Closing Down Your Business in the People’s Republic of China - What Are the Corporate, Employment and Tax-related Obligations?

On Tuesday, November 25, DLA Piper will present an in-house seminar in its Hong Kong offices for companies that are considering the strategic business decision to cease some of their operations in the PRC.

Closing down a business in the PRC requires careful attention to corporate, employment and tax issues. This seminar will address the practical legal considerations, supported by actual case studies. Among the scenarios to be discussed: closing down a manufacturing operation or a representative office, converting a direct operation to an outsourcing model, terminating a work force and transferring operations.

For more information, please contact Yuming Lu.


DEALS

DLA Piper represented two China-based investors in the Series D round of venture capital financing of HaloSource, Inc., a Washington-based technology company focused on water treatment and anti-microbial fabric treatment. DLA Piper clients Origo Sino-India Plc and Origo Resource Partners Ltd, private equity funds focused primarily on China and India, invested US$10 million in HaloSource. The Origo funds are both listed on the AIM market in London and are managed by a combined team of Western and Chinese investment professionals, primarily through Origo’s headquarters in Beijing. The transaction was led by Matt Adler and Megan Muir (both Seattle). DLA Piper’s relationship with Origo began in China, where Rocky Lee and Steve Liu (both Beijing) have represented Origo in other venture financings.


QUOTES

Securities Law360 quotes Carl Hittinger discussing China’s long-anticipated new antimonopoly law. In “Uncertainty Swirls Around China’s New Antitrust,” Mr. Hittinger commented that three different government bodies have been tasked with administering different aspects of the new law, which may “lead to confusion and inconsistencies in the implementation of the law, which I think the officials are aware of.” China has yet to determine how the new law will be implemented and enforced. In an article in China Trends earlier this year, Hittinger and co-author John Huh warned that multinational corporations operating in China may be the first targets. He told Securities Law 360: “It’s no doubt a new antitrust frontier in China… and certain corporations are going to be guinea pigs in this process.”


WANT MORE CHINA TRENDS?

Would you like to know more? Business law in China is evolving rapidly. To help your company benefit from China’s remarkable growth, we explore exciting new legal developments and provide essential information in every issue of China Trends. To find back issues of China Trends, please click here.

Questions about doing business in China? We have prepared a brochure that provides the basics about business in China. Click here to go to the PDF.

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