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This post was originally published to Seyfarth’s Trading Secrets blog.

The UK government has announced that it will bring in legislation to restrict the post-employment non-compete restraints to three months. This is a significant proposal as currently non-compete restrictions in the UK are generally capable of being enforced for a period up to 12 months (if they are “no more restrictive than is reasonably necessary to protect the employer’s legitimate business interests’’). Whilst this means a 12 month period will usually only be appropriate for very senior employees, in practice non-competes are commonly expressed to apply for six or nine months post-termination.

The announcement comes following a government consultation, in which they had proposed either requiring payment for the duration of a non-compete in order for it to be valid (as is the case in many European countries), or limiting the use of non-competes. The expectation was that either no changes would be made, or would there be a requirement for extra payment. This new cap on the length of non-competes was not expected.

The government announcement came as part of a series of regulatory reform proposals intended to reduce regulation for businesses post-Brexit. It is brief, but references some further details on the new statutory three month limit, including that:

  • Employers will still be able to restrict activities during (paid) garden leave or notice periods, during which employees are still employed and on payroll – the three month limit will only apply to post-termination non-competes;
  • Confidentiality provisions and other types of post-employment restrictive covenants, such as non-solicit and non-dealing restraints, will not be affected by the new statutory limit;
  • The reforms will not be extended to cover non-competes in other types of contracts, such as shareholders’ and partnership agreements – however, in practice these are often part of an employment relationship, so this might not be such a simple distinction to make.

There are a number of important details missing and questions left unanswered in the announcement. Significantly, it is currently unclear how the new statutory limit will apply to existing non-competes that exceed three months – will they now be unenforceable, amended down to apply for three months only or judged under the rules applicable at the time the contract was signed? Given recommended UK practice in offer letters is to offset garden leave against non-competes, this could leave employers with no post-termination protections where an employee has a three-month notice period, as is often the case for senior employees. What about restraints for which an employees has received a significant payment or benefit, for example in an LTIP or RSU agreement? And when will the new legislation be introduced, if at all? The announcement says this will be “when parliamentary time allows” which might well not be before the next election, with no guarantees as to whether a new government would take this forward.

In the meantime, there is significant uncertainly as to what employers should be doing – both in terms of whether they need to amend existing employees’ covenants, and also offers to new hires. For now, we recommend that companies continue to include non-competes where they feel other restrictions do not give enough protection, but include these within a fuller set of protections. These could include non-dealing and non-interference restraints, non-solicits, longer notice periods which could be used to enforce garden leave and tailored confidentiality restrictions. And we already see a trend towards building retention arrangements, such as RSUs, which may offer a potentially safer ‘home’ for a non-compete restriction for senior employees.

Please contact any of the London employment team for any questions on your UK, or International, business protection strategy.

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Seyfarth Shaw Hong Kong Office
Suite 3701 & 3708-3710, 37/F
Edinburgh Tower, The Landmark
15 Queen’s Road Central
Central, Hong Kong

Wednesday, May 17, 2023
9:00am to 10:00am, with registration open and breakfast served from 8:30am

Language: English

Who should attend: HR Directors, Employment Counsel, General Counsel and business owners with responsibility for workforces in Hong Kong and Mainland China

Cost: There is no cost to attend this event, but registration is required.

REGISTER HERE

About the Program

Join us Wednesday, 17 May, for an in-person breakfast seminar at Seyfarth’s office on cross-border investigations in Hong Kong and Mainland China, involving discrimination and harassment complaints.

Conducting a successful workplace investigation is not an easy task, especially where discrimination and harassment allegations are involved and there are cross-border issues. It is important to handle it with the utmost care and be aware of the dos and don’ts of conducting investigations in both jurisdictions.

Employers can be apprehensive when handling discrimination and harassment complaints – there can be uncertainty as to how to react to the issues, or fear that an employee may become litigious if the company is perceived to be mishandling the complaint. Sometimes, cultural nuances also affect the approach to an investigation. Being aware of the anti-discrimination and harassment laws in each jurisdiction and how to apply them to an investigation can help ease this apprehension.

During this seminar, Seyfarth’s Hong Kong and Shanghai employment lawyers shall provide their insight into conducting investigations of discrimination and harassment complaints brought in Hong Kong and Mainland China, including key considerations and common pitfalls employers should be mindful of. We will also provide an analysis of the law on discrimination and harassment from a Hong Kong and Mainland China perspective, cover recent relevant case law/precedent and take you through a case study to bring the legal issues to life. Time will be allocated at the end of the seminar for Q&A.

We have applied for CPD accreditation from the Law Society for this seminar and are awaiting confirmation.

Speakers:
Kathryn Weaver, Partner
Leon Mao, Counsel
Joni Wong, Senior Associate
Ellie Cheung, Associate

If you have any questions, please contact Judie Tong at jtong@seyfarth.com and reference this event.

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Seyfarth Hong Kong Office
Suite 3701 & 3708-3710, 37F
Edinburgh Tower, The Landmark
15 Queen’s Road Central
Central, Hong Kong

Seyfarth Shanghai Office
15th Floor, Tower 2
Jing An Kerry Centre
1539 Nanjing Road West
Shanghai, China 200040

IN-PERSON Options

May 10, 2023
2:45 p.m. to 3:00 p.m. (GMT+8) Registration
3:00 p.m. to 4:00 p.m. (GMT+8) Program

WEBINAR Option

May 10, 2023
3:00 p.m. to 4:00 p.m. (GMT+8)

Cost

There is no cost to attend this event, but registration is required.

REGISTER HERE

About the Program

On Wednesday, May 10, from 3:00 – 4:00 pm (GMT+8), Seyfarth and JP Morgan will co-present “Escrow Services Introduction and Case Study – Risk Management Tool in M&A Transactions During Turbulent Times.”

Cross-border transactions are facing increasing risks and challenges during turbulent times. With breadth and depth of knowledge in areas ranging from M&A, litigation, and capital markets, this session aims to help attendees:

  • Develop knowledge of various escrow transaction structures that are catered for different transaction needs;
  • Gain a better understanding about preferential benefits on escrow services, such as an easy distribution and security assurance of the assets that are held in escrow; and
  • Understand the global market trend for using escrow arrangements, supported by interesting case studies.

This event will be jointly hosted in Seyfarth’s Shanghai and Hong Kong offices, with the speakers joining from our Shanghai office. Guests may also attend the event remotely; we will circulate the WebEx link shortly before the event.

If you are interested in attending the event, please use the link above for registration. We welcome all of you to attend and look forward to receiving your response by May 5, 2023.

Speakers

Stefano Beghi, Partner, Seyfarth Shaw LLP
Natalie Huang, Escrow Services, Corporate & Investment Bank, J.P. Morgan

If you have any questions, please contact Alice Li at alli@seyfarth.com and reference this event.

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There is a little-known provision of the Lanham Act (the US Trademark Act) that packs a potentially big punch.  15 USC § 1051(e) provides that if a non-U.S. entity registers for a trademark in the United States without designating a United States resident for service of “notices or process in proceedings affecting the mark” (a “Domestic Representative”), or if the Domestic Representative cannot be found, then service, including of court pleadings commencing and related to a lawsuit, can be accomplished on the non-U.S. entity by serving the Director of the United States Patent and Trademark Office (USPTO). The practical effect of this provision is that certain non-U.S. entities who apply for trademarks in the United States could find themselves a party to U.S. litigation if the non-U.S. entity is never directly served with court papers.

Recent Decisions Apply Section 1051(e) to Court Proceedings

Two recent cases suggest that Section 1051(e) may not be little-known much longer.  In San Antonio Winery, Inc. v. Jiaxing Micarose Trade Co., Ltd.,[1] the plaintiff sued a foreign trademark applicant and served the court papers on the USPTO Director, after which the USPTO sent the papers to the foreign applicant.  After the foreign applicant failed to appear in court, the plaintiff sought a default judgment.  The district court rejected that application, holding that Section 1051(e) only applies in USPTO administrative proceedings, not court cases.[2]  On appeal, the Ninth Circuit vacated the district court’s decision. It found that the plain meaning of “proceeding” includes court cases because court cases can “affect” a trademark.  This includes, among other things, determining whether someone has the right to register a mark, canceling a registered mark or restoring canceled registrations.[3]  The Ninth Circuit also relied on Section 1051(e)’s references to service of notices or “process,” which it held applied to service of process in a court case.[4]

The Ninth Circuit also held that Section 1051(e) does not conflict with the Hague Service Convention, which provides procedures for service on non-U.S. defendants in countries that are signatories to the Convention.[5]  The appeals court reasoned that the Convention applies only if “the method of service at issue ‘require[s] the transmittal of documents abroad.’”[6]  Because Section 1051(e) involves domestic service on the USPTO Director, it “falls outside the scope of the Convention.”[7]  Following the Ninth Circuit’s decision, the district court entered the default judgment sought by the plaintiff.[8]

Soon after the Ninth Circuit’s decision, a federal court in New York followed the same approach.  In Equibal, Inc. v. 365 Sun LLC,[9] two Brazilian entities that had applied for U.S. trademarks had listed U.S. attorneys as their counsel in their applications.  But the attorneys were no longer in contact with the Brazilian entities or authorized to accept service on the entities’ behalf.[10]  Neither entity had designated a Domestic Representative. Under those circumstances, the New York court found that Section 1051(e) applies in court proceedings, and concluded that service via the USPTO Director was proper.

The New York court held that service on the USPTO Director satisfied Federal Rule of Civil Procedure 4(f), which provides that individuals or entities outside the United States can be served: (1) by means set forth in an international agreement, such as the Hague Convention or the Inter-American Convention; (2) if there is no applicable international agreement, by means calculated to give reasonable notice; or (3) by means not prohibited by an international agreement that a U.S. court may order.[11]  The New York court found that the third option was satisfied.  Like the Ninth Circuit, the New York court concluded that neither the Hague Convention nor the Inter-American Convention (to which Brazil is a signatory) bars service on the USPTO Director.  The New York court found that service on the USPTO Director also satisfied due process because the Brazilian entities were “explicitly warn[ed]” by Section 1051(e) that if they availed themselves of U.S. trademark protection, they could be served via the USPTO Director if they failed to designate a Domestic Representative or their Representative could not be found.[12]  The court concluded by finding that service on the USPTO Director was warranted in the case before it in light of the difficulty of service through other means.[13]

Points for Plaintiffs

Section 1051(e) is a potentially useful tool for Lanham Act plaintiffs seeking to sue non-U.S. entities in connection with marks those entities apply to register in the United States.  If accepted in the particular judicial Circuit, service through Section 1051(e) could allow plaintiffs to avoid procedures like those set forth in the Hague Convention, which can often be cumbersome and expensive.  The statute, as interpreted by the Ninth Circuit and New York court, may also permit service via Federal Rule of Civil Procedure 4(f) on entities in countries that are not signatories to the Hague Convention, such as Algeria, Ghana, Kenya, Laos, Lebanon, Nigeria, Uganda, and Yemen.

It is worth noting, however, that the New York court was inclined to permit service in part because the plaintiff had made efforts to serve the Brazilian entities directly, and then sought leave to serve the USPTO Director when those efforts failed.  Plaintiffs who rely solely on serving the USPTO Director, but do not attempt to serve via other means, may find courts to be less receptive to the application of Section 1051(e).

In addition, Lanham Act plaintiffs should remain aware that, simply because service of process could be made through the USPTO Director, that in and of itself does not subject the foreign trademark applicant to personal jurisdiction in a federal district court.  The cases interpreting Section 1051(e) were based on the defendants’ United States use of allegedly infringing marks that they had also applied to register.

Points for Non-U.S. Entities

Non-U.S. entities should consider designating a Domestic Representative when they apply to register a trademark in the United States.  This should be a fairly easy thing to do, as all foreign-domiciled trademark applicants, registrants, and parties to proceedings must be represented by a U.S. attorney,[14] and attorneys may, and quite often are, appointed as foreign entities’ Domestic Representatives.  This said, designees may retire, pass away, or have a change in contact information.  Non-U.S. entities should find a trusted agent they can designate as Domestic Representative and share that agent’s details with their trademark attorneys.  That way, they ensure domestic representation for the long-term and can keep tabs on that agent so that they can update their Domestic Representative if the need arises.  Non-U.S. entities may want to consider using a corporate agent as a Domestic Representative to ensure continuity and predictability, with the caveat that the non-U.S. entity needs to ensure that the corporate agent has up-to-date contact information for the non-U.S. entity.

Non-U.S. entities should also take care to make sure that the USPTO has the most up-to-date contact information for the non-U.S. entity, in the event that service does go through the USPTO director.  In the Ninth Circuit case, the USPTO mailed the court documents to the non-U.S. entity at the address the entity had included in its trademark application.  If that address is out of date, the non-U.S. entity may never receive the court papers even if the USPTO sends them promptly.

Conclusion

Section 1051(e) is an important provision of the Lanham Act that, as recently interpreted by the Second and Ninth Circuit Courts of Appeal, can have a potentially significant impact on both non-U.S. entities registering trademarks in the United States and Lanham Act plaintiffs seeking to sue those entities.  Trademark registrants and litigants should pay close attention to both the statute and decisions interpreting that statute.

[1] 53 F.4th 1136 (9th Cir. 2022). 

[2] Id. at 1139-40. 

[3] Id. at 1141. 

[4] Id.

[5] Id. at 1143. 

[6] Id. 

[7] Id. at 1143-44. 

[8] Case No. 20-cv-9663-GW, ECF No. 57 (C.D. Cal. Nov. 28, 2022).

[9] 2023 U.S. Dist. LEXIS 62759 (S.D.N.Y. Apr. 10, 2023).

[10] Id. at *18-19. 

[11] Fed. R. Civ. P. 4(f). 

[12] 2023 U.S. Dist. LEXIS 62759, at *22. 

[13] Id. at *22-24.

[14] 37 C.F.R. § 2.11(a).

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Yesterday, the Supreme Court issued its decision in Turkiye Halk Bankasi A.S., aka Halkbank v. United States.[1] This groundbreaking case represents the first known attempt by the United States (or likely any state in modern history) to indict and criminally-prosecute the agency or instrumentality of a foreign state. The Supreme Court held that the Foreign Sovereign Immunities Act (“FSIA”) does not apply to, or provide immunity from, criminal prosecutions of foreign states and their agencies and instrumentalities. Noting Samantar’s[2] conclusion that immunity not addressed by the FSIA is controlled by the common law, the Court remanded to the Second Circuit to consider how that body of law addresses state immunity from criminal prosecutions. Certainly, in the short term, this case will generate much interest around criminal prosecutions of foreign states—potentially by domestic state courts, and perhaps certain organizations with immunities running parallel with those granted under the FSIA,[3] topics we will analyze further in the coming weeks.

The case involves the United States’ prosecution of Halkbank, a Turkish bank that is indirectly owned by the Republic of Turkey. The United States indicted Halbank, alleging that it engaged in “a multi-year conspiracy to evade economic sanctions imposed by the United States on Iran.”[4] The United States further alleged that Halkbank lied to the U.S. Treasury Department in order to cover up its conduct.

Halkbank moved to dismiss the indictment, arguing that it was immune from prosecution as an agency or instrumentality of the Republic of Turkey, a foreign sovereign under the FSIA.  A New York federal district court denied Halbank’s motion, based in part on its view that the FSIA does not grant immunity from criminal proceedings. The Second Circuit assumed for purposes of Halkbank’s appeal that the FSIA does, in fact, apply in criminal proceedings, but held that Halbank’s alleged misconduct fell into the FSIA’s “commercial activity” exception to jurisdictional immunity.  Halbank then sought Supreme Court review.[5]

Writing for the 7-2 majority, Justice Brett Kavanaugh first rejected Halkbank’s argument that the district court lacked subject matter jurisdiction under 28 U.S.C. § 3231, which according to its plain language provides federal district courts with jurisdiction over all criminal proceedings involving violations of federal law. Halkbank referred to the lack of any known prosecutions of foreign states and with that backdrop argued that Section 3231 does not specifically refer to suits against foreign states and their agencies or instrumentalities, and when it was passed, prosecution of foreign states was never contemplated.  Thus, those foreign entities are not included in Section 3231’s scope. Looking to the words Congress chose, the majority quickly rejected that argument, holding that Section 3231 applies to “all” federal criminal proceedings, regardless of who the defendant is. 

Further, the majority rejected Halkbank’s argument regarding the statutory predecessor of Section 3231, the Judiciary Act of 1789, read with the oft-cited 1812 Supreme Court decision, Schooner Exchange v. McFaddon,[6] holding that “Schooner Exchange did not address statutory subject matter jurisdiction,” but applied “a rule of substantive lawgoverning the exercise of the jurisdiction of the courts” that did not act as “an exception to a general statutory grant of subject matter jurisdiction.”[7]

The Court then turned to Halkbank’s FSIA arguments. The majority noted that the Supreme Court has frequently held that the FSIA applies in civil actions as part of the “carefully calibrated scheme,” covering only civil actions, and had never applied the FSIA to a criminal case. Examining the statutory text and reading it in context, the majority noted that the FSIA specifically refers to the federal courts’ subject matter jurisdiction over “any nonjury civil action against a foreign state.”[8] The FSIA’s sole venue provision similarly refers to venue in a “civil action.” The FSIA’s service provisions deal with service of a “summons and complaint,” as well as answers and responsive pleadings and default judgments—all of which apply only in civil cases—while other provisions address civil litigation features like counterclaims and punitive damages.[9] The majority further observed that the FSIA referred to “litigants,” rather than prosecutors, and to immunity “from suit,” rather than criminal investigations and proceedings. By contrast, the majority noted, the FSIA does not contain any references to criminal proceedings.

The majority further noted that the FSIA appears in Title 28 of the United States Code, which deals largely with civil procedure, and not in Title 18, which deals with crimes and criminal procedure. The majority found additional support for its conclusion in a prior case in which the Court held that the FSIA does not apply to suits against individual officials, reinforcing the conclusion that the FSIA does not extend to certain “discrete context[s],” such as criminal proceedings.[10]

Halkbank pointed to a provision of the FSIA, Section 1604, which states that “[s]ubject to existing international agreements,” a “foreign state shall be immune from the jurisdiction of the courts of the United States and of the States” unless an exception to immunity applies.[11]  The majority held that this provision could not be read in isolation, but rather in the context of the entire statutory framework. Reading Section 1604 together with 28 U.S.C. § 1330, which provides district courts with jurisdiction over “any nonjury civil action against a foreign state,” the majority held that “the natural inference is that § 1604 operates exclusively in civil cases.”[12] 

Halkbank acknowledged that the FSIA’s jurisdictional immunities only apply in civil cases.  That only reinforced the majority’s conclusion that the FSIA did not apply to criminal proceedings, since it would be odd for most FSIA provisions to apply only in civil cases, but one, Section 1604, to apply in both civil and criminal cases.  According to the majority, “[t]he better and more natural reading” is that all of the FSIA provisions “operate in tandem within a single universe of civil matters.”[13] 

The majority noted Halkbank’s concern that if the FSIA does not apply, state prosecutors might bring criminal proceedings against foreign sovereigns and their agencies or instrumentalities. But the majority stated that it “must interpret the FSIA as written,” while noting that “it is not evident that the premise of Halkbank’s consequentialist argument is correct.”[14] In that regard, the Court noted (without suggesting outcomes) the lack of history of domestic-state attempts to prosecute foreign states in state courts, the possibility of a suggestion of immunity filed in such actions by the Executive Branch, possible application of foreign-affairs preemption, and ultimately potential Supreme Court review of immunity from such prosecutions.

Even though it held the FSIA did not apply, the majority found that the Second Circuit did not fully address the application of common law immunity and remanded for further proceedings on that issue.[15]

Justices Neil Gorsuch and Samuel Alito concurred in part and dissented in part. They agreed with the majority that Section 3231 provided the district court with subject matter jurisdiction but took the position that the FSIA applies to criminal proceedings. The dissenting justices argued that Section 1604 of the FSIA “sets forth the FSIA’s general immunity rule” and refers broadly to “the jurisdiction of the Courts of the United States and the States” over foreign states and their agencies or instrumentalities unless an exception to jurisdictional immunity applies.[16] 

The dissenting justices further argued that the fact that certain FSIA provisions refer to civil actions reinforces their conclusion because if Congress had intended to limit Section 1604 to civil actions, it would have added express language about civil actions similar to that in the other provisions.[17] They also noted that not all of the exceptions to jurisdictional immunity are limited to civil cases, noting that the commercial activity exception refers to “any case . . . in which the action is based upon a commercial activity . . . .”[18]  The dissenting justices then concluded that context cannot illuminate the meaning of Section 1604 because that provision is not ambiguous. Finally, they disagreed with the majority’s decision to remand for an analysis of common law immunity, arguing that such an analysis would present the lower court and the litigants “with an unenviable task” involving “[m]any thorny questions,” in contrast to the “simple rules” and “straightforward conclusion” provided by the FSIA.[19]

Justices Gorsuch and Alito nevertheless concurred in the result because they agreed with the Second Circuit that the “commercial activity” exception to jurisdictional immunity applied to Halkbank’s alleged activities.

Conclusion

Although it will take some time before the full ramifications of this decision are known, the Court’s decision in Halkbank has the potential to impact criminal prosecutions of foreign states, and foreign policy in a variety of ways. Among other things, the ruling may affect how courts apply canons of statutory construction to the FSIA, or how federal and state courts address the availability of common law sovereign immunity.  We will analyze those potential impacts and others in the coming weeks.

[1] Case No. 21-1450, Decision available at https://www.supremecourt.gov/opinions/22pdf/21-1450_5468.pdf. 

[2] Samantar v. Yousuf, 560 U. S. 305 (2010).

[3] Aspects of this immunity will be addressed by the organizations charter, the international agreement on which the organization was formed, or perhaps immunity addressed in headquarters agreements.  Again, more analysis on this topic will follow.

[4] Decisionat 1.

[5] Id. at 1-2. 

[6] 7 Cranch 116 (1812).

[7] Decision at 3-5.

[8] Id. at 7. 

[9] Id. at 7-8. 

[10] Id. at 9.

[11] 28 U.S.C. § 1604.

[12] Decision at 10-11.

[13] Id. at 11. 

[14] Id. at 13-14.

[15] Id. at 14-15.

[16] Dissent at 2-3.

[17] Id. at 4.

[18] Id.

[19] Id. at 5-7.

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Under China’s data protection regulatory framework, data processors are required to pass a security assessment conducted by the cybersecurity regulator before transferring certain categories or volumes of data out of China. This January, six months after the Cyberspace Administration of China (“CAC”) released the Measures on Security Assessment of Outbound Data Transfers (“Measures”), the Beijing counterpart of CAC reported the first two cases where the data processors passed the security assessments led by CAC, which sheds some light on the uncertainty and complexity of the security assessment.

Uncertainty of Reviewing Process and End of Grace Period

As disclosed by Beijing CAC, as of February 22, 2023, Beijing CAC has assisted more than 310 entities with their potential applications for the security assessment of outbound data transfers, and has received 48 formal applications from organizations in industries such as technology, e-commerce, healthcare, finance, automotive, and civil aviation, including multinational companies. Among many applications, CAC granted two organizations with the approval for transferring data out of China, namely the Beijing Friendship Hospital of the Capital Medical University and Air China.

Pursuant to the Measures, an application for the security assessment should first be submitted to the local CAC for review. Once approved at the local level, the application will be escalated to CAC for final approval.  Though the total processing time should be no longer than 57 working days as provided in the Measures, the Measures allow CAC to extend the reviewing period if necessary. Therefore, the total processing time is much longer. Given the 6-month grace period for data processors ended in March 2023, multinational companies with the necessity of transferring data out of China should prepare for the security assessment application to be compliant.

For Multinational Companies: Challenging Yet Attainable

Given the details of the two cases approved by the CAC are not yet disclosed to the public, there isn’t guidance regarding how the security assessment is being processed now.

However, as disclosed by Beijing CAC, the applications from some multinational companies are currently under CAC’s review after being approved at the Beijing level. Additionally, Beijing CAC has completed the review process for six other companies; their applications will be provided to CAC for further review. While we will continue to keep an eye on CAC’s review process, we expect to see the first case of a multinational company getting through the review process soon.

Practically, more entities are likely to be subject to security assessment than as required by the Measures. For multinational companies with the needs to transfer data out of China, they should be aware that the CAC-led security assessment is time consuming and challenging under stringent regulations. They also should be prepared for the data security compliance requirements, such as conducting self-assessments, or seeking professional advice on alternative choices to a security assessment.

Seyfarth’s China team proactively advises foreign clients in connection with their data protection, cross-border data transfers, and other data related compliance matters. 

To find out more about Seyfarth’s PRC Practice and how they can help your business, please feel free to reach out to the authors, Wan Li, Leon Mao, and Cece Zhang.

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Introduction

On 17 February 2023, the China Securities Regulatory Commission (“CSRC“) announced the “Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises” (《境内企业境外发行证券和上市管理试行办法》) (the “Trial Measures“) with five supporting guidelines (the “Guidelines“). The effective date of the Trial Measures and the Guidelines are 31 March 2023. With such implementation, the following old rules and regulations will be repealed accordingly:

(i) (Notice on the Implementation of the Mandatory Provisions of Articles of Association of Companies to be Listed Overseas (《关于执行到境外上市公司章程必备条款的通知》)

(ii) The Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (《国务院关于股份有限公司境外募集股份及上市的特别规定》)

(iii) Circular of the State Council on Further Strengthening the Administration of Share Issuance and Listing Abroad (《国务院关于进一步加强在境外发行股票和上市管理的通知》)

We highlight some of the major changes made by the Trial Measures, which will affect the PRC companies seeking listing overseas (including Hong Kong).

What are domestic enterprises?

According to Article 2 of the Trial Measures, domestic enterprises for overseas listing (whether by way of direct overseas listings or indirect overseas listings) are subject to the requirements under the Trial Measures. By relying on the “substance over form” principle, not only are the companies incorporated in the PRC (H-share companies) subject to the new rules, but overseas incorporated companies with principal operations[1] in the PRC, such as red-chip companies, are also subject to the new rules.

Filing requirements

To replace the CSRC approval system, under the Trial Measures both H-share companies and “red-chip” companies seeking to list overseas (including Hong Kong) need to do the requisite filings (including a filing report, a PRC legal opinion, etc.) with CSRC within three days after submission of its listing application (Article 16 of the Trial Measures). Then CSRC will review the documents and will complete the filing procedures and publish the filing results on the CSRC website within 20 working days (Article 19 of the Trial Measures). The content of the filed documents shall be truthful, accurate, and complete (Articles 12 and 20 of the Trial Measures). Otherwise, substantial penalties and fines can be imposed (Chapter V – Legal Liabilities of the Trial Measures). Therefore, CSRC still retains its general vetting power for processing the filings. 

Transitional period

According to the Notice for the Administration of Filing of Overseas Issuance and Listing of Securities by Domestic Enterprises 《关于境内企业境外发行上市备案管理安排的通知》, domestic enterprises that have been listed overseas (including Hong Kong) by or before the implementation of the Trial Measures on 31 March 2023 will not be required for the requisite filings with the CSRC. A 6-month transitional period will be granted to the PRC companies that have obtained the approval of overseas regulators or exchanges (such as passed the hearing of The Stock Exchange of Hong Kong Limited (“HKSE”)) but have not yet completed their listing. If they can complete their listing within the transitional period, they will not be required for the requisite filing with the CSRC, too.

The emphasis on national security and quality of the domestic enterprises seeking listing overseas

The Trial Measures lists the circumstances where a domestic enterprise is prohibited from offering and listing securities overseas in Article 8. For instance:

(a) National security: If the issuance and listing of securities overseas may endanger national security, it is prohibited from listing overseas. Further, certain types of PRC companies (such as internet companies) are required to go through national security review or obtain clearance from relevant authorities if necessary before making any filings with the CSRC.

(b)  Criminal offences: if a domestic enterprise, its controlling shareholders, or its de facto controller has committed a criminal offence such as corruption, bribery, embezzlement, misappropriation of property, or has undermined the order of the socialist market economy within the last three years, it is prohibited from listing overseas.

(c) Subject of investigation: if a domestic enterprise is under investigation in connection with major violation of laws and regulations, it is prohibited from listing overseas.

VIE structure

The VIE structure is permissible under the new regime so long as it is not in violation of the relevant laws and regulations in the PRC. VIE-structured companies also need to undergo the filing procedures, and they must specify the reasons and arrangements for the adoption of such structure in their filed documents[2]. Since the VIE structure often attracts a lot of attention and concerns from HKSE and the PRC authorities, it is advisable to seek legal advice about the feasibility in advance. 

Further guidance from HKSE expected

In light of the implementation of the Trial Measures, HKSE will make necessary amendments to remove the old requirements in connection with the PRC issuers and update the documentary requirements to reflect the new filing procedures under the Trial Measures. HKSE published its consultation paper on such proposed amendments to the Listing Rules in February 2023, and it is expected that more guidance will be issued by HKSE after the consultation has been completed.

PRC domestic enterprises which are seeking listing in Hong Kong should consult our team regarding the compliance with the relevant rules and regulations under the new regime.

Link to the Trial Measures (Chinese version)

Link to the consultation paper

[1] Article 15 of the Trial Measures sets out the circumstances under which a domestic enterprise is deemed as listing overseas indirectly.

[2] For the detailed requirements about the filing documentation, please refer to “Guideline No. 2 for listing overseas: Guidance on the content and format of the filing materials”《境外发行上市类第2号：备案材料内容和格式指引》

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As we’ve previously written, complications arise for foreign sovereigns (States) and private companies when they structure commercial transactions. States prefer to hold as much of their immunities as is possible, while private companies prefer the State waive all immunities. This is particularly true with respect to execution on a judgment for breach of the agreement underlying the transaction. The latter is complicated because enforcement or execution immunities (garnishments or execution on assets to satisfy a judgement) are more narrow than jurisdictional immunities (haling the State into Court to obtain a judgment).

Many foreign missions reside in New York. And a recent New York state court decision highlights the complications arising from leases of real property made by a State and a private company. Although it does not address execution immunity, it highlights the issues that arise when arranging lease terms, preparing and serving civil actions, lease terms that in the court’s view operated as implied waivers of immunity, commercial activity exceptions to jurisdictional immunity, and contractual arrangements for service implied from the notice provisions of the lease. The case provides a reminder that foreign sovereign immunity issues can come up in many contexts, including otherwise “routine” disputes.

101-115 West 116th Street Corp. v. Consulate General of the Republic of Senegal, Index No. 154994/2020 (N.Y. Cty. Sup. Ct.) involved a dispute between a landlord and the Consulate General of the Republic of Senegal. The landlord and the Consulate entered into a lease for the second floor of a building on 116th Street in Manhattan. The landlord argued the Consulate held-over in the premises for several months after the lease ended, and asserted the Consulate  failed to pay rent for those months pursuant to the terms of the agreement (which included a rent calculation for any hold-over period). The landlord eventually sued in New York state court for breach. The Consulate did not remove the case to federal court, and argued that it was immune from the Court’s jurisdiction under both the Foreign Sovereign Immunities Act (FSIA) and the Vienna Convention on diplomatic immunity. On summary judgment, the New York state court ruled in favor of the landlord, rejecting the Consulate’s various immunity defenses.[1] 

The court began by noting the well-known rule that the FSIA “provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country,” and that courts can exercise jurisdiction only if exceptions to immunity set forth in the FSIA are present.[2]   

The court first addressed the Consulate’s threshold argument that the Consulate cannot be sued because it “is not a cognizable legal entity.” The Consulate argued that the landlord should have sued the Permanent Mission of the Republic of Senegal.[3] The court responded by noting case law that consulates general can be sued.[4] The court also did not accept the Consulate’s argument that the Vienna Convention on diplomatic immunity applied because the Convention applies only to individuals, not to the Consulate itself.[5]

Turning to the heart of the dispute – the lease — the court found that the Consulate had waived its immunity for two, independent reasons. First, the court found that the Consulate had impliedly waived its immunity in its lease with the landlord, which stated that the lease would be construed under New York law and that actions or proceedings arising out of the lease would be litigated only in federal or state courts located in New York City. The court held that “[t]his language illustrates defendant’s intent, by implication, to subject any dispute arising out of the Lease to adjudication in accordance with New York law in courts within the United States.”[6]  The FSIA withdraws immunity under certain exceptions. This aligns with the theory of restrictive sovereign immunity, which, put briefly, derives from the difference between acts taken by a State in its sovereign capacity versus acts taken in the commercial market similar to a private actor. The court found that the Consulate was not immune because entering into a lease for property is a “commercial activity” and thus it concluded it fell under the commercial activity exception to the FSIA.[7] 

The court also determined that a third FSIA exception relating to “immovable property” did not apply because the dispute related to unpaid rent, rather than to the property itself, but that was irrelevant because the other two exceptions applied.[8] 

Finally, the court addressed the FSIA’s specific requirements for service of process on a sovereign entity. The FSIA prescribes the requirements for service on a State in terms different from the rules applicable to private parties. Among these provisions, the FSIA permits service by “any special arrangement for service between the plaintiff and the foreign state or political subdivision.” The Court construed the lease’s general notice provision – which covered routine notices about the lease – to be a “special arrangement”[9] that covered service of process, even though the provision did not mention service.

This New York state court decision provides a potentially useful summary of issues that can arise between foreign sovereigns and private contracting parties, as well as summarizing principles both parties should keep in mind when entering into contracts.

[1] Index No. 154994/2020, NYSCEF Doc. No. 37.

[2] Id. at 6 (internal quotation marks omitted). 

[3] Id.

[4] Id. at 8-9.

[5] Id. at 9.

[6] Id. at 11-12.

[7] Id. at 12. 

[8] Id.

[9] Id. at 13-16. 

2023 Commercial Litigation Outlook RPT M4

Seyfarth’s Commercial Litigation practice group is pleased to provide the third annual installment the Commercial Litigation Outlook, where our nationally-recognized team provides insights about litigation issues and trends to expect in 2023.

The continuing global tumult and increasing chances for a recession will weigh heavily on the litigation outlook for 2023. We expect an uneven year where some litigation booms, some busts. As was true last year, the trick to navigating the upcoming challenges will require clients and their counsel to be adaptive, creative, and proactive.

Trends covered in this edition include: Antitrust, Bankruptcy, Consumer Class Actions, Consumer Financial Services Litigation, eDiscovery & Innovation, ESG, Franchise & Distribution, Health Care Litigation, Insurance, International Dispute Resolution, Privacy, Real Estate Litigation, Securities Litigation, Trade Secrets, Computer Fraud & Non-Competes and the Trial Outlook.

Click here to download the 2023 Commercial Litigation Outlook.

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On 16 November 2022, EU Regulation 2022/2065, better known as the Digital Services Act (“DSA”), came into force. The DSA is a key development in the use of online services in the European Union (“EU”), with an impact on online services as significant as the one which the General Data Protection Regulation (“GDPR”) had upon the collection, use, transfer, and storage of data originating in the EU on 25 May 2018.

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The DSA sets out rules and obligations for digital services providers that act as intermediaries in their role of connecting consumers with goods, services, and content.  

Continue Reading The EU Digital Services Act