China: Highlights On The Draft HGR Regulations Implementing Rules

China began legislating the protection of human genetic resources in 1998, at which time the Ministry of Science and Technology (MOST) and the Ministry of Health jointly formulated the Interim Measures for Administration of Human Genetic Resources; however, there had been no corresponding implementing rules to implement it in practice. That was until 2015, when the Ministry of Science and Technology issued the Service Guide for Administrative Licensing Items for the Collection, Collection, Trading, Export, and Exit of Human Genetic Resources. This guidance caused the gradual application of the Interim Measures for the Administration of Human Genetic Resources, which had been dormant for many years. In 2019, the State Council promulgated the current Regulations on the Administration of Human Genetic Resources (the HGR Regulations), which replaced the Interim Measures for the Administration of Human Genetic Resources. In 2020, the Standing Committee of the National People's Congress adopted the Biosecurity Law of the PRC, which officially came into force in 2021 and serves as the fundamental law in the field of biosecurity. So far, China's regulatory framework for the protection of human genetic resources has been established, but more implementing measures are needed to refine these laws and regulations.

On March 22, 2022, the MOST issued for public comments the Rules for Implementation of the Regulations on Administration of Human Genetic Resources (Draft for Comments) (the Draft Rules). The Draft Rules contains certain highlights, such as the administrative system, subject qualifications (especially the recognition of foreign entities), international cooperation in intellectual property sharing, security reviews, and administrative enforcement procedures. This article aims to preliminarily interpret the Draft and analyze its potential impact.

Administration system

Article 3 of the Draft Rules [Central management system]: The MOST is responsible for the administration of human genetic resources approval, supervision, and sanction nationwide. Relevant institutions may be entrusted by the MOST to undertake specific support work in licensing acceptance, professional support, supervision and management, etc.

Article 4 of the Draft Rules [Local management system]: The science and technology departments (commissions and bureaus) of provinces, autonomous regions and municipalities directly under the Central Government, and the Science and Technology Bureau of Xinjiang Production and Construction Corps are responsible for the administration of human genetic resources in their respective administrative region:

• Routine management and supervision of human genetic resources;
• Accepting the entrustment of the MOST to organize the investigation of human genetic resources in the corresponding region;
• Investigation and sanction of violations in the scope of authority, and to organize and carry out the investigation of violations in the region as entrusted by the MOST;
• Accepting the entrustment of the MOST for implement matters related to human genetic resources.

The Draft Rules specify that the MOST is, once again, responsible for the national human genetic resources approval, supervision, sanction and other administration work, but further proposes that relevant institutions can be entrusted by the MOST to undertake part of the specific work of licensing and supervision. The administration of supervision and enforcement authorities at provincial level have been further refined. Notably, the MOST has not yet delegated the approval authority for human genetic resources to the provincial level.

Recognition of foreign entities

Article 12 of the Draft Rules [Foreign Entity]: "Foreign entity" refers to an institution established by overseas organization(s) or an institution which is actually controlled by overseas organization(s) or individual(s).

The above-mentioned "actually controlled" includes the following status:

• An overseas organization or an individual directly holds or indirectly holds more than 50% of the shares, equity, voting rights, property shares or other similar rights and interests of the institution;
• Although the shares, equities, voting rights, property shares or other similar rights and interests of the institutions directly held or indirectly held by an overseas organization or an individual do not reach 50%, the voting rights, other rights and interests of the decision-making bodies they owned are sufficient to have a significant impact on the resolution, decision-making and internal management of the institution;
• The agreement or other arrangement by the overseas organization(s) or individual(s) is sufficient to have a significant impact on the decision-making, operation and management and other major matters of the institution;
• Other status identified by the MOST.

Pursuant to the HGR Regulations, any foreign entity [foreign organizations and institutions that are established or actually controlled by foreign organization(s) or individual(s)] is prohibited from collecting or preserving China's human genetic resources within China. If the foreign entity does need China's human genetic resources to conduct scientific research, it would be required to cooperate with Chinese entities (such as Chinese scientific research institutions, colleges and universities, medical institutions, enterprises) so as to conduct scientific research. Besides this, the above international cooperation would require approval by the MOST Human Genetic Resources Office.

As to the definition of foreign entities, there was a gap between the regulation and legal practice when China began to supervise and regulate related human genetic resources activities. The Interim Measures for Administration of Human Genetic Resources (1998) once used the terms "foreign cooperative entity" and "foreign (overseas) entity", but did not explain or distinguish them. However, in our experience, the MOST has always regarded entities with any foreign capital as foreign entities, not merely entities registered outside China. Although Article 21 of the current HGR Regulations, expressly defines a "foreign entity" as a "foreign organizations and institutions that are established or actually controlled by foreign organizations or individuals", the definition of "actual control" remains unclear.

The definition of "actual control" has been controversial in practice, especially with use of the VIE structure. Some companies believe that the domestic companies in their VIE structure are not recognized as foreign entities as they do not hold any foreign capital in terms of equity, while some companies clearly disclose that domestic companies under their VIE structure still have risks to be recognized as foreign entities by the MOST in their prospectuses. Based on our experience, the MOST has already identified domestic companies in VIE structures as foreign entities in their approval practices. This regulatory practice is further clarified and confirmed in Article 12 of the Draft Rules which clearly includes the application of the VIE structure, that is, "agreements or other arrangements by an overseas organization(s) or individual(s) is sufficient to have a significant impact on the decision-making, operation and management and other major matters of the institution."

In contrast to the above-mentioned explicit incorporation of the VIE structure into supervision, another striking breakthrough in the Draft Rules is that the definition of foreign entities may be loosened. The Draft Rules clearly emphasize the concept of "50%" ratio for the first time, and stipulate that "actual control" includes "(1) an overseas organization or an individual directly holds or indirectly holds more than 50% of the shares, equity, voting rights, property shares or other similar rights and interests of the institution" or "(2) although the shares, equities, voting rights, property shares or other similar rights and interests of the institutions directly held or indirectly held by an overseas organization or an individual do not reach 50%, the voting rights, other rights and interests of decision-making bodies they owned are sufficient to have a significant impact on the resolution, decision-making and internal management of the institution". If the Draft Rules are finalized in this form, entities with less than 50% foreign shares which have no significant impact on their decision-making and internal management, may no longer be recognized as foreign entities. This would be advantageous for companies with only limited foreign ownership.

Additionally, interpreted literally, if an institution is established by an overseas organization or individual, it would be recognized as a foreign institution regardless of its shareholding ratio. In this way, there is a certain lack of logic in the disparity between the two types of enterprises in which foreign organizations and individuals hold minority ownership through establishment and through share transfer. The MOST should further clarify this issue.

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