Fiduciary Duties and Liabilities of Corporate Directors and Officers under Chinese Company Law

For subsidiaries of U.S. companies in the People's Republic of China (PRC), the fiduciary duties and liabilities of corporate directors and officers arise not only under the extraterritorial effect of U.S. law, but are also addressed substantially by Chinese law. This advisory focuses on the fiduciary duties and liabilities, under PRC law, of directors and officers of companies operating in China. We will address three key areas and offer additional information as follows:

• Definition of corporate directors and officers
• Statutory duties of corporate directors and officers
• Legal liability
• Observations

A legal framework governing the duties and liabilities of corporate directors and officers is a relatively new concept in China, found chiefly in the PRC Company Law (the “Company Law”). Many concepts in the Company Law are similar to those under U.S. corporate governance laws. Other laws¹ supplement the Company Law and may, in some cases, supersede the Company Law if the provisions in those other laws are stricter or more specific.

China is a civil-law country. The lack of a case-law precedent system and a transparent enforcement mechanism makes determining the duties and liabilities of corporate directors and officers both unpredictable and imprecise. This condition underscores the need for directors and officers to act cautiously.

Like many other countries, China has a dual-liability system that applies to corporate directors and officers as well as to companies. Directors and officers may be held individually liable for certain wrongful corporate acts under the system.

For substantive duties and liabilities, Chinese law treats corporate directors and officers equally, regardless of whether they are Chinese or foreign citizens, or whether they reside inside or outside China. The PRC Civil Procedure Law and Administration Procedure Law have special provisions for civil and administrative litigation procedures involving foreign citizens.

Definition of corporate directors and officers

Under PRC law, corporate directors include the chairperson and members of the board of a company. Corporate officers include the managers, deputy managers, persons in charge of the finance department, secretary to the board for public companies, and other persons identified as corporate officers in the articles of association of a company.

Statutory duties of corporate directors and officers

The Company Law provides two basic duties for corporate directors and officers: the duty of loyalty and the duty of care (i.e., duty of diligence).²

Duty of loyalty – The Company Law does not expressly define the duty of loyalty. Rather, it prohibits corporate directors and officers from: (i) acts related to bribery, misappropriation of company assets or funds; or (ii) abuse of position and powers; and (iii) breaches of confidentiality.³ Additionally, the Company Law includes a catch-all clause providing that “any other act which violates [a director's or officer's] fiduciary duties toward the company” is prohibited.

Duty of care – The Company Law also does not specifically define duty of care, but rather implies such a duty by providing that corporate directors and officers are statutorily subject to strict liability regarding compliance with the law as well as the articles of association and shareholder resolutions of a company.

Legal liability

A breach of duty by a corporate director or officer may give rise to civil, administrative and/or criminal liability in China. Normally, the individual director or officer who breaches their duty is the person subject to such liabilities. If the act is based on a board resolution, not only the director or officer who carries out the act, but also the directors who participated in the meeting may be held liable.

Civil liability – Civil liability in China is identical to tort liability under U.S. law. Normally, four elements must be present: (i) the existence of a duty; (ii) a breach of that duty; (iii) a loss suffered by the company, its shareholders or investors; and (iv) a causal relation between the breach of duty and the loss. Subject to procedures provided under PRC law, the company, the board of supervisors, the supervisor or a shareholder(s) may initiate a lawsuit against the directors or officers to hold them responsible for such losses.

Administrative liability – Administrative liability arises when a corporate director or officer violates any law or regulation that imposes specific administrative penalties for such violation. The government bodies that impose administrative liability include authorities in charge of company registration, labor protection, customs, taxation, environmental protection, fire prevention, and overall employee and public safety. Administrative penalties include warnings, fines, confiscation of illegal income or property, and administrative detention.

Criminal liability – In China, as in the U.S. and many other countries, certain serious wrongful acts in the management of a company may result in criminal liability. Corporate directors and officers may be held criminally liable for their own acts as well as crimes committed by the company if they are “the managers who are directly in charge” and/or the “persons who are directly responsible.”

Criminal liability usually results when a matter is “upgraded” from civil or administrative liability. The standards for upgrading the matter, however, are not always clear. Very often, PRC law employs terms and phrases such as “large,” “very large,” “serious” or “extremely serious” to upgrade a civil or administrative liability to criminal liability. This leaves law enforcement authorities significant discretion in assessing whether to bring criminal charges against—and whether to convict—an individual.

Observations

The “Business Judgment Rule” – Common under U.S. law, the Business Judgment Rule has not been specifically adopted under PRC law. However, it has been espoused in judicial practice.⁴

“Managers who are directly in charge” – If the job description, internal allocation of duties and responsibilities, and other internal corporate documents are not helpful in determining a person to be liable for corporate wrongdoing, the Chinese government may assign liability.

Power of attorney – A legal representative of a company, often one of its directors or officers, may appoint another person to act as their agent in corporate matters. For example, legal representatives commonly authorize another person to sign contracts on their behalf.

Civil and administrative investigations – In the investigation stage for determining civil or administrative liability, corporate directors and officers may be visited by government officials or they may be requested to visit the offices of government officials. The directors or officers may be questioned, asked to sign a written summary of the interview, and requested to submit a written statement or evidence.

FOOTNOTES

1 E.g., the PRC General Principles of Civil Law, the PRC Criminal Law, and laws concerning FIE's, accounting, customs, taxation, securities and listed companies

2 See Article 148 of the Company Law

3 See Articles 21, 116, 148, and 149 of the Company Law

4 See Judgment No. 322 (2002) issued by the Huizhou Intermediate People's Court