CAFC Has Doubts on Whether Chinese Co. Owned by Labor Union Employees Free of Gov't Control

Judges at the U.S. Court of Appeals for the Federal Circuit during Jan. 12 oral arguments expressed skepticism over claims from antidumping respondent Zhejiang Machinery Import & Export Corp. (ZMC) in its bid to rebut the presumption of government control and win a separate rate in an antidumping duty review. Judges Sharon Prost, Jimmy Reyna and Todd Hughes questioned whether ZMC's ownership structure could ever be truly free of government control, calling it "implausible." At another point in the arguments, DOJ attorney Kelly Krystyniak said that given the combination of China's corporate laws and ZMC's ownership, it may be impossible to rebut the presumption of government control and that ZMC has no inherent right to be able to rebut it (Zhejiang Machinery Import & Export v. United States, Fed. Cir. # 21-2257).

The case concerns an administrative review of the antidumping duty order on tapered roller bearings and parts thereof, finished or unfinished, from China. In the review, ZMC requested a separate rate, seeking to get a rate other than the China-wide 92.84% dumping margin. However, the agency said that the exporter failed to rebut the presumption of government control. ZMC filed suit at the Court of International Trade.

The trade court, after looking at the evidence relating to ZMC's ownership structure, upheld Commerce's position (see 2106230033). ZMC is ultimately operated, through multiple layers of ownership, by the Zhejiang Provincial State-owned Assets Supervision and Administration Commission -- a state-run entity -- and a labor union for ZMC parent company Zhejiang Sunny I/E Corp. Commerce found that Sunny's government-run employee stock ownership committee (ESOC) runs the labor group. The court said Sunny's trade union was a subsidiary of the only legally allowed trade union in China, making it controlled by the government.

During oral arguments, Adams Lee, counsel for ZMC, clarified that under Chinese law, ESOCs do not have the right to stand as shareholders, so that the actual majority shareholders are employees who are part of the government-run union and not the ESOC, or the union, itself. The judges had a hard time believing that this distinction would let ZMC off the hook of government control. Lee claimed that while the ESOC is nominally listed as the majority shareholder, the employee ownership group does not actually control the shares, giving that power to the union employees.

"I don't see how that matters," Hughes declared, adding that "even if they're controlled by this other group of people, some of whom may not be union members, [the ESOC is] still the majority shareholder." Lee said that this makes the ESOC the majority shareholder in name only.

"I am baffled by how this 'in name only' argument makes any sense when as a matter of corporate law, they are the shareholder," Hughes said. "If China wants this ESOC committee to be the majority shareholder, then they need to change their corporate law to allow an employee ownership group to be the majority shareholder." Hughes followed this up by asking for evidence of any time the employees who actually held the shares voted against the interests of the union, to which Lee was not able to profer any evidence.

Hughes said that the exporter is asking the court to look beyond the legal corporate structure since the shareholders have the potential for independent voting even though there's no record of independent voting. While not denying this premise, ZMC's counsel did, however, say that practically, the union was completely uninvolved with the governance of the exporter. To this, Prost asked whether this makes any difference, declaring that the question is not who practically is in control, but who owns the company on paper.

Krystyniak, meanwhile, argued that it may be impossible for the exporter to rebut the presumption of government control. "Given this corporate structure where the [ESOC] is legally not allowed to be a majority shareholder under corporate law, it may be the case that it's not impossible to rebut it, but there's no inherent right for this company to rebut the presumption of government control." However, Hughes suggested that for cases where an exporter is controlled by a Chinese union, the company would have to show that the union is independent of the Chinese government.