A recent ruling rendered by Beijing Higher People’s Court of China, on granting the enforcement of the arbitral awards, has attracted much attention and discussion of the competition law circle. Specifically, this remarkable judicial decision suggests that Chinese courts will not consider the fact of ongoing merger review procedure when determining whether to grant the enforcement of arbitral awards. Also, a very special fact involved in this case is, the key role, Simcere Pharmaceutical Group Limited (“Simcere”), filed a voluntary concentration notification in spite that the filing threshold is not reached, instead of under the mandatory filing obligation. Details of this case together with the views of the parties and the courts on the antitrust aspect, are worthy of further ponderation.
Key Fact of the Case
To simply put, a Hong Kong company, Burich Limited (“Burich”), has dishonestly committed to sell 65% equities it holds in Beijing Tobishi Pharmaceutical Co.,Ltd (“Tobishi”), simultaneously to two purchasers in 2016 and 2017 respectively, Jiangxi Puyuan Health Industry Co., Ltd.(“Puyuan”) and Simcere. As Burich failed to fulfill its contractual obligation to deliver the equities, Simcere filed an arbitration application to Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center, “SHIAC”), which supported the arbitration claims of Sincere on ordering Burich to deliver the concerned shares. Afterwards, Simcere applied to Beijing First Intermediate People's Court to enforce the award, and during the proceeding Puyuan raised the objection as the third party. Beijng First Intermediate People’s Court rejected Puyuan’s objection and adjudicated to enforce the arbitral award. Puyuan then appealed to Beijing Higher People’s Court, which maintained the first instance ruling in the end.
The Parties’ Views on Antitrust Factor
When objecting the enforcement of arbitral award, there is one key ground that Puyuan put forward is related to the Anti-Monopoly Law of China. Puyuan asserted, enforcing the arbitral award, is virtually helping Simecre circumvent China’s merger control regulation. This is because when the merger filing obligation is triggered, the equity transfer should not be implemented before obtaining SAMR’s antitrust approval. However, Simcere did not submit the antitrust filing to and obtain the approval from SAMR yet, when Simcere applied the arbitral award enforcement to the court and even when the court implemented the enforcement. As a matter of fact, SAMR officially put on Simcere’s filing on record on November 23, 2022. Puyuan alleged that granting the enforcement will violate the mandatory provision of the Anti-Monopoly Law, to the effect of violating public interests. Consequently, Puyuan maintained that the court should reject the enforcement application of Simcere.
In response to Puyuan’s allegations, Simcere stressed that the equity acquisition of Tobishi by Simcere does not reach the filing threshold; as such, Simcere does not have the filing obligation but filed with SAMR only on a voluntary basis. In such a circumstance, the enforcement of arbitral award will not violate public interests. In addition, Simcere emphasized that the suspected antitrust violation does not in any way fall into the scope of rejecting enforcement of arbitral award in the judicial review pursuant to relevant laws.
The Court’s Stance
Beijng First Intermediate People’s Court in the first instance decided to reject Puyuan’s objection and supported Simcere’s enforcement application. The first instance court elaborated, where the third party applies to not enforce the arbitral award, it should meet three procedural conditions and four substantive conditions simultaneously. The procedural conditions include: (1) there exists evidence proving the arbitration is malicious or fake with infringement of the third party’s interests; (2) the enforcement has not been completed yet; and (3) the objection should be raised within 30 days after being or should be aware that the court adopts enforcement measures. The substantive conditions contain: (1) the third party is the subject of concerned rights or interests; (2) the rights or interests claimed by the third party are legitimate and genuine; (3) there is a fictitious legal relationship between the arbitration parties and the facts of the case are fabricated; and (4) there are partial or total errors in the main text of the arbitration award or the arbitration mediation agreement in handling the civil rights and obligations of the parties, which damages the legitimate interests of the third party. Considering the grounds that Puyuan relied on in its objection, the antitrust ground included, do not make the above-mentioned conditions be met, the first instance court declined Puyuan’s objection.
In the appeal procedure, interestingly, Puyuan applied to stay the proceeding until SAMR renders its merger review decision. Beijing Higher People’s court rejected Puyuan’s application again, on the reason that the merger review procedure and civil enforcement proceeding do not restrict each other, thereby there is no need to stay the instance proceeding. The appellate court in the end maintained the first instance ruling by recognizing the reasons illustrated in the first instance adjudication. Notably, the appellate court further pointed, the arbitration award involved in the case only has legal effect between its parties and cannot be legally binding on third parties. The fulfillment or enforcement of the obligations determined by the award does not affect the substantive rights enjoyed by the third party. It is the legal duty of the enforcement court to implement the content of the effective award through the enforcement procedure, but the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained. The rejection of the third party’s application for not enforcing the arbitration award in this case does not prevent them from filing a lawsuit against the relevant civil subject in accordance with the law.
Key Takeaways and Comments
Obviously, the ongoing SAMR merger review will not stop the enforcement of the arbitral awards. However, where gun-jumping is found by SAMR, SAMR theoretically has the discretion to still slap the violating party with penalties, because there is no exemption clause for the enforcement of arbitral awards. Assuming the extreme situation occurs, namely if SAMR finds competition concerns in its review, SAMR may also order the party to give back the shares it acquired through the enforcement of awards for restitution on top of the monetary fine. As the appellate court stressed in this case, the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained.
Of course, the favorable fact in the instant case is, assuming Simcere’s allegation is tenable, the filing was made on a voluntary basis because the equity acquisition does not reach the filing threshold. In this scenario, Simcere in principle will not receive a fine. Nonetheless, the disadvantages fact is Simcere is not an insignificant market play, but rather enjoys the dominant market position in certain active pharmaceutical ingredients (API) market. Particularly, Simcere has been fined by SAMR in 2021 due to engaged in abusing the dominant market position to refuse to supply.
Consequently, before applying for the enforcement of arbitral awards, companies are highly recommended to make a thorough and cautious assessment on the merger filing obligation in China, especially for those having a high market share in some markets, and then to decide whether to apply the enforcement and the appropriate application timing.