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China – Briefing For Directors: General Duties.

27 May, 2014

 

 

It is the personal responsibility of every director to comply with the general duties of a director. Failure to do so may result in serious consequences. In this Practice Note written by Yi Yi Wu, Partner at Minter Ellison in Shanghai, and Sarah Yu, Senior Associate, we provide an overview of these duties.

 

The duties of a director are provided for in the Company Law of the People’s Republic of China (PRC Company Law), other relevant PRC laws as well as the relevant articles of association of a company. 


The General Duties


PRC Company Law sets out the qualifications and duties of directors in Chapter VI. A summary of these duties is as follows:

 

  • directors are required to comply with the law, administrative regulations and the articles of association and owe duties of fidelity and due diligence to the company (PRC Company Law, article 148) 
  • directors may not take any bribe or other illegal gain by taking advantage of their position or misappropriate company assets for personal use (PRC Company Law, article 148) and
  • more particularly, under PRC Company Law, article 149, directors may not:
    • misappropriate company funds
    • divert company funds into an account held in their own name or in the name of any other individual
    • loan company funds or provide any guaranty to any other person by using company property in violation of the articles of association without first obtaining consent from the shareholders or the board of directors
    • become a party to any contract or business dealings with the company in violation of the articles of association without first obtaining consent from the shareholders
    • seek business opportunities for themselves or for any other person by taking advantage of their position, or operate on their own behalf or on behalf of any other person any business similar in nature to that of the company, without first obtaining consent from the shareholders
    • personally accept any commission on any transaction to which the company is a party
    • unlawfully disclose confidential company information or
    • act in any way that is inconsistent with their duty of fidelity to the company
 

Any income received by a director in violation of PRC Company Law, article 149 shall be treated as the property of the company.


Duties Of Directors of Listed Companies


In addition, directors of listed companies are under the following obligations, pursuant to the Corporate Governance Rules of a Listed Company:

 

  • perform their duties faithfully, honestly and diligently according to the greatest benefit of the company and all shareholders
  • ensure that they have sufficient time and effort to perform their duties
  • attend meetings of the board of directors in a serious and responsible manner and express explicit opinions on the matters discussed; those truly unable to attend may entrust another director in writing to vote on their his or her behalf, and the entrusting director shall independently bear legal liability
  • abide by the provisions of the relevant laws, regulations and articles of association of the company and strictly comply with the commitments that they make openly
  • actively participate in relevant training so as to know the rights, obligations and responsibilities of being a director, familiarise themselves with relevant laws and regulations, and master the relevant knowledge that a director should have
  • express opposition to resolutions of the board of directors that violate the provisions of the laws, regulations and articles of association of the company
 

Other types of duties are specified in various PRC laws, including but not limited to:

 

  • disclosing statutorily required information
  • reporting on major matters
  • prohibition on insider trading
  • restrictions on transferring held equity of the company
  • sitting in on the shareholders’ meetings to answer questions
 

Compliance 


The general duties must always be complied with unless they conflict with certain circumstances permitted by law. It is important to note that any provision in a company’s articles of association, a contract or otherwise that purports to exempt directors from compliance with the general duties is void.


A company may, through its articles of association, go further than the general duties by placing more onerous obligations on its directors. However, the articles of association may not dilute the general duties.


Although compliance is the personal responsibility of each director, there are practical steps that the company can take to help its directors. It should ensure that the general duties are embedded in the corporate culture and the directors’ approach to decision-making. These should include:

 

  • briefing all current directors fully and at regular intervals on the statutory general duties
  • giving new directors training on the general duties as part of their induction 
  • assessing the impact of the general duties on the Company’s strategy and operations on a regular basis
  • reviewing company policies in areas such as compliance and corporate responsibility in light of the general duties
  • referring to the general duties in the directors’ terms of appointment and/or labour contract and in board committee terms of reference (if any)
 

Breach Of Duty


If any director violates any law, administrative regulation or the articles of the company in the course of performing his or her duties, he or she shall be liable to compensate the company for any loss caused (PRC Company Law, article 150).


Furthermore, directors are responsible for the resolutions of the board of directors. Where such resolutions violate any law, administrative regulation, the articles or any shareholder resolution and causes serious loss to the company, the directors who participated in adopting the resolution shall compensate the company. However, where a director is proven to have raised an objection to the relevant resolution and his or her objection is recorded in the minutes, the director may be exempted from liability. Accordingly, it is very important to keep detailed minutes of all directors’ meetings (PRC Company Law, article 113). 


Under the PRC Civil Law, a company can claim damages on the basis of tort for any breach by an officer of his or her legal duty towards the company. Liability will arise if the company can prove that:

 

  • the officer had a duty imposed by law
  • he or she has breached that duty whether by negligence or through wilful default
  • the company has suffered a loss and
  • the loss was caused by the breach
 

Depending on the nature of the breach, criminal liability may also be incurred, which could result in imprisonment. 

 

This article was supplied by Lexis Practical Guidance. 

 

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