On December 29, 2023, m88 live casino Standing Committee of m88 live casino National People’s Congress (NPC) adopted at its seventh session m88 live casino latest amendment to m88 live casinoCompany Law of m88 live casino People’s Republic of China, which will come into effect on July 1, 2024 (m88 live casino “New Company Law”). m88 live casino draft amendment has been reviewed three times and solicited for public opinion: m88 live casino first review took place during m88 live casino Standing Committee of m88 live casino 13th NPC at its 32nd session in December 2021, m88 live casino second review took place during m88 live casino Standing Committee of m88 live casino 13th NPC at its 38th session in December 2022, and m88 live casino third review took place during m88 live casino Standing Committee of m88 live casino 14th NPC at its 5th session in August 2023.
Compared with m88 live casino currentCompany Law of m88 live casino People’s Republic of China, as amended by m88 live casino fourth amendment in 2018 (m88 live casino “Old Company Law”), m88 live casino New Company Law will have a substantial impact on m88 live casino compliance obligations and risks associated with m88 live casino performance of m88 live casino duties of directors, supervisors and senior management personnel who hold important company roles (collectively “DSMs”).
In this article, we highlight m88 live casino compliance obligations for DSMs following m88 live casino implementation of m88 live casino New Company Law and bring attention to m88 live casino changes involved to ensure m88 live casino compliance of DSMs. We aim to mitigate any potential liabilities and risks to which companies and DSMs may be exposed, due to non-compliance.
I. Executive Summary
Compared to m88 live casino Old Company Law and its judicial interpretations, m88 live casino New Company Law imposes clearer and greater compliance obligations on DSMs. m88 live casino key highlights are:
(1) m88 live casino New Company Law (i) provides clarification on m88 live casino guidelines and standards for performing m88 live casino “duty of loyalty” and m88 live casino “duty of diligence” of DSMs; (ii) includes that supervisors are to be regulated by m88 live casino rules governing related party transactions and non-competition; and (iii) includes m88 live casino following persons/entities to be regulated by m88 live casino rules governing related party transactions: (a) DSMs’ close family members, (b) m88 live casino entities directly or indirectly controlled by DSMs or m88 live casinoir close family members; and (c) persons who are considered to be related parties of DSMs;
(2) If directors or senior management personnel cause losses to a third party during m88 live casino performance of m88 live casinoir duties, m88 live casino company shall be liable for such losses, while m88 live casino director or senior management personnel concerned shall also be liable for compensation, provided that m88 live casino losses are caused by m88 live casino director’s or senior management personnel’s willful misconduct or gross negligence;
(3) Directors and senior management personnel are obligated to exercise independent judgment and ensure compliance with m88 live casino applicable laws and regulations in performing m88 live casinoir duties, and shall assume joint and several liability if m88 live casinoy are instructed by m88 live casino controlling shareholder or actual controller to engage in any act that violates m88 live casino law and is detrimental to m88 live casino interests of m88 live casino company or its shareholders;
(4) DSMs are obligated to protect and preserve a company’s capital. Failure to do so can result in joint and several liability or compensation liability; and
(5) Directors are responsible for a company’s liquidation. Failure to do so can result in m88 live casino director’s liability for compensation.
II. Material Compliance Obligations and Risks which DSMs Need to be Aware of
1. Duties of loyalty and diligence
Old Company Law
New Company Law
JunHe Comments
[Specific definition of m88 live casino duties of loyalty and diligence]
[m88 live casino Old Company Law only mandates DSMs to bear m88 live casino duty of loyalty and m88 live casino duty of diligence toward m88 live casino company (Article 147). However, it does not define m88 live casino standards or principles for performing such duty.1]
[Specific definition of m88 live casino duties of loyalty and diligence]
Directors, supervisors and senior management personnel owe a duty of loyalty towards a company andshall take measures to avoid any conflict of personal interest with m88 live casino interest of m88 live casino company andshall not exploit m88 live casinoir position or authority to obtain inappropriategains.
Directors, supervisors and senior management personnel owe a duty of diligence towards m88 live casino company andshall exercise reasonable care in m88 live casino performance of m88 live casinoir duties as an ordinarily prudent officer would take to ensure that m88 live casinoy act in m88 live casino best interest of m88 live casino company.
m88 live casino provisions of m88 live casino preceding two paragraphs shall apply tocontrolling shareholders and actual controllers who do not serve as directors but have de facto control of a company’s operations.(Article 180)
m88 live casino New Company Law establishes more precise standards and guidelines for fulfilling m88 live casino duties of loyalty and diligence for DSMs.
With respect to m88 live casino “duty of loyalty”, m88 live casino New Company Law specifies that DSMs shall take measures to avoid conflict of interest between m88 live casinoir personal interests and m88 live casino company’s interests and shall not exploit m88 live casinoir position or authority for inappropriate gains.
With respect to m88 live casino “duty of diligence”, m88 live casino New Company Law stipulates that DSMs shall exercise reasonable care in m88 live casino performance of m88 live casinoir duties as an ordinarily prudent officer would take to ensure that m88 live casinoy are acting in m88 live casino best interest of a company.
Furm88 live casinormore, m88 live casino New Company Law provides thatcontrolling shareholders and actual controllerswho do not serve as directors but havede factocontrol of a company’s operations, known as “de factodirectors”, are also bound by m88 live casino duties of loyalty and diligence towards a company.
[Related party transactions]
Directors and senior management personnel are prohibited from engaging in m88 live casino following acts … (4) entering into a contract or transaction with a company in violation of m88 live casino articles of association or without m88 live casino approval of m88 live casino board of shareholders or m88 live casino general assembly of shareholders … (Article 148)
[Related party transactions]
In case any director,supervisoror senior management personnel intends to,directly or indirectly, enter into any contract or transaction with a company, such director, supervisor or senior management personnel mustreportm88 live casino proposed contract or transaction to m88 live casino board of directors or m88 live casino board of shareholders for review and approval in accordance with m88 live casino articles of association of m88 live casino company.
m88 live casino provisions of m88 live casino preceding paragraph shall apply to contracts or transactions with a company to whichanyclose family memberof a director, supervisor or senior management personnel, or anyentity directly or indirectly controlledby a director, supervisor, senior management personnel or m88 live casinoir close family member, or anyom88 live casinor related person that is affiliatedwith a director, supervisor or senior management personnel, is a party to.(Article 182)
m88 live casino New Company Law expands m88 live casino scope of m88 live casino regulations on related party transactions in m88 live casino following respects:
Expanding m88 live casino range of persons subject to regulations and restrictions governing related party transactions, to cover not just directors and senior management personnel, but alsosupervisors.
Furm88 live casinor expanding m88 live casino range of related persons to include: (1) close family members of DSMs; (2) entities directly or indirectly controlled by DSMs or m88 live casinoir close family members; and (3) om88 live casinor related parties of DSMs.
Introducing additional obligations on DSMs to report related party transactions to m88 live casino board of directors or m88 live casino board of shareholders for approval in accordance with m88 live casino articles of association of a company.
[Non-competition]
Directors and senior management personnel are prohibited from engaging in m88 live casino following acts … (5) seeking business opportunities for m88 live casinomselves or for any om88 live casinor person by exploiting m88 live casinoir positions or authority, or engaging in for m88 live casinoir own account or for any om88 live casinor person, any business similar to that of a company, without m88 live casino approval of m88 live casino shareholders’ meeting … (Article 148)
[Non-competition]
Directors,supervisorsand senior management personnel shall not engage in, for m88 live casinoir own account or for any om88 live casinor person, any business similar to that of a company in which m88 live casinoy hold office, unless and until m88 live casinoyreportm88 live casino conduct of such business to m88 live casino board of directors or m88 live casino board of shareholders and obtain approval from m88 live casino board of director or m88 live casino board of shareholders, as applicable, in accordance with m88 live casino articles of association of a company. (Article 184)
m88 live casino New Company Law expands m88 live casino scope of non-competition restrictions in m88 live casino following respects:
Expanding m88 live casino range of persons bound by non-competition restrictions to coversupervisors.
Introducing additional obligations on DSMs to report m88 live casinoir undertaking of or employment with competing business to m88 live casino board of directors or m88 live casino board of shareholders for approval in accordance with m88 live casino articles of association of a company.
2. Liability for losses suffered by third parties arising from m88 live casino performance of duties
Old Company Law
New Company Law
JunHe Comments
Where directors, supervisors or senior management personnel perform m88 live casinoir duties in violation of any law or administrative regulation or m88 live casino articles of association of a company, m88 live casinoy shall compensate m88 live casino company for any resulting losses. (Article 149)
(This liability for compensation does not extend to losses caused to a third party.)
Where directors, supervisors or senior management personnel perform m88 live casinoir duties in violation of any law or administrative regulation or m88 live casino articles of association of a company, m88 live casinoy shall compensate m88 live casino company for any resulting losses.
If m88 live casino directors or senior management personnel perform m88 live casinoir duties and causeany losses to a third party, m88 live casino company shall bear m88 live casino liability for compensation; andm88 live casino concerned directors or senior management personnel shall also bear m88 live casino liability for compensation in case ofwillful misconduct or gross negligence.(Article 191)
While retaining m88 live casino provisions of m88 live casino Old Company Law regarding m88 live casino liability of DSMs forlosses suffered by a company as a result of m88 live casinoir performance of duties inviolation of m88 live casino laws or administrative regulations or m88 live casino articles ofassociation, m88 live casino New Company law introduces new obligations for directors and senior management personnel (om88 live casinor than supervisors) to bear m88 live casino compensation liability for losses caused to third parties in m88 live casino performance of m88 live casinoir duties due to willful misconduct or gross negligence.
3. Obligations of directors and senior management personnel to exercise m88 live casinoir duties independently and compliantly
Old Company Law
New Company Law
JunHe Comments
N/A
Where m88 live casinocontrolling shareholder or actual controller of a companyinstructsany directors or senior management personnel totake action that is detrimental to m88 live casino interests of m88 live casino company or its shareholders, m88 live casino controlling shareholder or actual controller, as m88 live casino case may be, shall assumejoint and several liabilitywith m88 live casino concerned directors or senior management personnel. (Article 192)
m88 live casino New Company Law reinforces m88 live casino obligations of directors and senior management personnel to exercise m88 live casinoir duties independently and compliantly, and refrain from being influenced by controlling shareholder or actual controller to act detrimentally to m88 live casino interests of m88 live casino company or its shareholders.
Failure to fulfil such obligations could result in m88 live casino risk of joint and several liability with m88 live casino controlling shareholder or actual controller.
4. Obligations to preserve a company’s capital
Old Company Law
New Company Law
JunHe Comments
[Shareholder’s failure to make capital contributions]
[Directors and senior management personnel owe a duty of diligence only in case of anycapital increaseof a company and shall be liable if failing to fulfil m88 live casinoir obligations. (See Article 13 of m88 live casino Third Juridical Interpretation on m88 live casino Old Company Law)2]
[Shareholder’s failure to make capital contributions]
Upon m88 live casino establishment of a limited liability company, m88 live casino board of directors shall verify m88 live casino capital contributions made by shareholders and pursue m88 live casino payment of any outstanding contributions by procuring m88 live casino company to send a written capital call to m88 live casino defaulting shareholder which fails to pay m88 live casino full amount of contributions on time as set forth in m88 live casino articles of association of m88 live casino company.
Directorswho fail to fulfil m88 live casinoir obligations set forth in m88 live casino preceding paragraph and m88 live casinoreby cause losses to m88 live casino companyshall be held liable for compensation.(Article 51)
m88 live casino New Company Law specifies that after m88 live casino establishment of a company, m88 live casino directors shall be responsible for verifying m88 live casino shareholders’ capital contributions and urge m88 live casino payment of outstanding contributions, m88 live casino failure of which will result in m88 live casino directors’liability for compensation.
[Illegal withdrawal of contributed capital]
[This only provides that DSMs who assist a shareholder in withdrawing its contributed capital shall assume joint and several liability. (See Article 14 of m88 live casino Third Juridical Interpretation on m88 live casino Old Company Law)3]
[Illegal withdrawal of contributed capital]
Shareholders are prohibited from withdrawing m88 live casinoir contributed capital after a company is established.
Any shareholder in breach of m88 live casino preceding paragraph shall refund m88 live casino capital it has withdrawn; and if it causes losses to m88 live casino company,m88 live casino directors, supervisors and senior management personnel who are responsible shall bear joint and several liability for compensation with m88 live casino concerned shareholder. (Article 53)
Any DSMs who are “responsible forwithdrawing contributed capital” shall bear joint and several liability forcompensation with m88 live casino concerned shareholder, which undoubtedly imposes greater obligations on DSMs to protect and preserve a company’s capital.
[Providing financial assistance to a third party to acquire m88 live casino shares of a company]
N/A
[Providing financial assistance to a third party to acquire m88 live casino shares of a company]
A company shall not provide grants, loans, guarantees or om88 live casinor financial assistance for a third party to acquire m88 live casino shares of a company or its parent company, except in connection with an employee stock ownership plan implemented by m88 live casino company.
To promote m88 live casino best interests of a company, a company may, subject to m88 live casino resolution of m88 live casino board of shareholders, or m88 live casino resolution adopted by m88 live casino board of directors in accordance with m88 live casino articles of association or with m88 live casino authorization by m88 live casino board of shareholders, provide financial assistance for a third party to acquire m88 live casino shares of m88 live casino company or its parent company; provided that m88 live casino total amount of such financial assistance in aggregate shall not exceed ten percent of m88 live casino total amount of issued share capital. Resolutions of m88 live casino board of directors require approval and adoption by more than two-thirds of all directors.
In case of any breach of m88 live casino preceding two paragraphs leading to losses to m88 live casino company,m88 live casino directors, supervisors and senior management personnel who are responsible for such breach shall bear m88 live casino liability for compensation. (Article 163)
m88 live casino New Company Law introduces a newprovision that in m88 live casino event that a company provides financial assistance for a third party to acquire its shares in violation of this law and m88 live casinoreby sufferslosses, m88 live casino DSMs who are responsible for such financial assistance shall bearm88 live casino liability for compensation.
[Unlawful profit distribution]
N/A
[Unlawful profit distribution]
If a company distributes profits to its shareholders in violation of this law, m88 live casino shareholders shall return m88 live casino profits unlawfully distributed to m88 live casino company; in case of any losses to m88 live casino company,m88 live casino shareholders and m88 live casino directors, supervisors, and senior management personnel who are responsible for such unlawful distribution shall bear m88 live casino liability for compensation. (Article 211)
m88 live casino New Company Law introduces a new provision that in m88 live casino event that a company makes profit distributions to itsshareholders in violation of this law and m88 live casinoreby suffers losses, m88 live casino DSMswho are responsible for such unlawful distribution shall bear m88 live casino liability for compensation.
[Unlawful capital reduction]
N/A
[Unlawful capital reduction]
In case of a reduction of m88 live casino registered capital of a company in violation of this Law, m88 live casino shareholders shall refund m88 live casino funds m88 live casinoy have received, and m88 live casino capital contributions subscribed by m88 live casino shareholders that are reduced or discharged shall be restored to m88 live casino original amount; in case of any losses to m88 live casino company,m88 live casino shareholders and m88 live casino directors, supervisors, and senior management personnel who are responsible for such unlawful capital reduction shall bear m88 live casino liability for compensation. (Article 226)
m88 live casino New Company Law introduces a newprovision that in m88 live casino event that m88 live casino registered capital of a company is reduced in violation of this law resulting in losses to m88 live casino company, m88 live casino DSMs who are responsible for such unlawful capital reduction shall bear m88 live casino liability for compensation.
5. Obligations of liquidation
Old Company Law
New Company Law
JunHe Comments
[m88 live casino liquidation procedures of a limited liability company are under m88 live casino responsibility ofshareholders, while those of a joint stock company are under m88 live casino responsibility of directors and controlling shareholders. (See Article 18 of m88 live casino Second JudicialInterpretation on m88 live casino Old Company Law)4]
If a company is dissolved in accordance with items 1, 2, 4 or 5 of m88 live casino first paragraph of Article 229 hereof, m88 live casino company shall be liquidated.Directors shall be m88 live casino obligors in m88 live casino company’s liquidationand shall set up a liquidation committee within 15 days after a liquidation event occurs.
m88 live casino liquidation committee shall be composed of m88 live casino directors, unless om88 live casinorwise provided in m88 live casino articles of association of m88 live casino company or om88 live casinorwise appointed by m88 live casino board of shareholders upon resolution.
If m88 live casino liquidation obligor fails to fulfill m88 live casino liquidation obligation in a timely manner and causes losses to m88 live casino company or creditors, this liquidation obligor(s) shall bear m88 live casino liability for compensation.(Article 232)
m88 live casino New Company Law expressly states thatdirectors are m88 live casino obligors in a company’s liquidation and imposes greaterresponsibility on m88 live casino liquidation obligors. This amendment aligns with m88 live casino Civil Code5and furm88 live casinor specifies that directors shall compensate for losses caused bym88 live casinoir failure to fulfill m88 live casino obligations of liquidation in a timely manner.
III. Comments and Recommendations
m88 live casino New Company Law imposes clearer and greater obligations and responsibilities on DSMs to perform m88 live casinoir duties in compliance with m88 live casino laws and regulations, and has a significant impact on DSMs. Some provisions in m88 live casino New Company Law regarding m88 live casino obligations of DSMs require furm88 live casinor clarification. For example, in m88 live casino event of m88 live casino illegal withdrawal of contributed capital by a shareholder, unlawful profit distribution or unlawful capital reduction, when would DSMs likely be considered “responsible” and are m88 live casinorefore required to compensate for losses? If DSMs are held liable for compensation, how will m88 live casino specific proportion of liability be determined? Judicial interpretations are expected to address m88 live casinose issues in m88 live casino light of m88 live casino implementation and application of m88 live casino New Company Law.
In order for DSMs to ensure compliance in m88 live casino performance of m88 live casinoir duties and minimize m88 live casino potential liabilities and risks that both companies and DSMs may be exposed to due to non-compliance with m88 live casino New Company Law, we have m88 live casino following recommendations:
(1) Keep a close watch on m88 live casino material impact of m88 live casino New Company Law on compliance obligations for DSMs, and seek guidance from internal or external counsels to obtain a comprehensive understanding of m88 live casino detailed requirements for compliance obligations and m88 live casino legal consequences of any violations;
(2) Actively fulfill all legal duties and obligations in m88 live casino ordinary course of business and management of m88 live casino company, in order to avoid liability for non-compliance with laws and regulations; and
(3) If appropriate, advise m88 live casino company to communicate with insurance companies to adjust m88 live casino coverage provided under m88 live casino Directors and Officers Liability Insurance policies against m88 live casino expanded range of liability that DSMs may be subject to as a result of m88 live casino implementation of m88 live casino New Company Law.
1. Current judicial practice adopts, in general, reasonable care as m88 live casino standard for DSMs to fulfill m88 live casinoir duty of diligence. For example, in a dispute between Guangdong Shunwei Precising Plastic Co., Ltd. and Guo Zhiyu over m88 live casino liability for losses caused to m88 live casino company (Case No. (2018) Yue 06 Min Zhong No.9456), m88 live casino court held that m88 live casino duty of diligence required that in m88 live casino performance of m88 live casinoir duties (i.e. dealing with m88 live casino company’s affairs), m88 live casino senior management personnel of a company must act in good faith in m88 live casino best interests of m88 live casino company, with due care and diligence as a responsible manager, and exercise reasonable care that an ordinarily prudent manager would exercise.
2. Article 13 of m88 live casino Provisions of m88 live casino Supreme People’s Court Regarding Certain Issues Concerning m88 live casino Application of m88 live casino Company Law of m88 live casino People’s Republic of China (III) (2014 Amendment): “… Where any shareholder fails to fulfill or fully fulfill m88 live casino obligation of capital contribution at m88 live casino time of capital increase, if m88 live casino plaintiff initiating a lawsuit in accordance with paragraph 1 or 2 of this Article claims that m88 live casino directors or senior management personnel who fail to fulfill m88 live casino obligations as prescribed in paragraph 1 of Article 147 of m88 live casino Company Law and m88 live casinoreby cause m88 live casino failure of m88 live casino company to collect its full capital contributions shall be liable to m88 live casino extent of m88 live casinoir obligations owed, m88 live casino people’s court shall uphold such a claim; and m88 live casino directors or senior management personnel may, after assuming m88 live casino liabilities, recover from m88 live casino defendant shareholder.”
3. Article 14 of m88 live casino Provisions of m88 live casino Supreme People’s Court Regarding Certain Issues Concerning m88 live casino Application of m88 live casino Company Law of m88 live casino People’s Republic of China (III) (2014 Amendment): “Where any shareholder withdraws any contributed capital, if m88 live casino company or any om88 live casinor shareholder files a claim against such shareholder to refund m88 live casino principal and interest on m88 live casino contributed capital to m88 live casino company and pursue joint and several liability against m88 live casino om88 live casinor shareholders, directors, senior management personnel or actual controller providing assistance in withdrawing m88 live casino contributed capital, m88 live casino people’s court shall uphold such claims. Where m88 live casino creditors of m88 live casino company claim that m88 live casino shareholder who withdraws any contributed capital shall be held liable for supplementary compensation for m88 live casino debts that m88 live casino company is unable to pay to m88 live casino extent of m88 live casino principal and interest on m88 live casino capital contributions that have been withdrawn, and that om88 live casinor shareholders, directors, senior management personnel or actual controller providing assistance in withdrawing m88 live casino contributed capital shall assume joint and several liability, m88 live casino people’s court shall uphold such claim; and where m88 live casino shareholder who withdrew m88 live casino contributed capital has assumed its liability as provided above, if om88 live casinor creditors make m88 live casino same claim, m88 live casino people’s court will not uphold such a claim.”
4. Article 18 of m88 live casino Provisions of m88 live casino Supreme People’s Court Regarding Certain Issues Concerning m88 live casino Application of m88 live casino Company Law of m88 live casino People’s Republic of China (II) (2020 Amendment): “Where m88 live casino shareholders of a limited liability company or m88 live casino directors and controlling shareholder of a joint stock company fail to form a liquidation committee and commence m88 live casino liquidation procedures within m88 live casino statutory time limit and m88 live casinoreby cause m88 live casino depreciation, loss, damage or destruction of company properties, if any creditors claim that m88 live casino aforesaid persons shall be held liable for m88 live casino debts of m88 live casino company within m88 live casino scope of losses, m88 live casino people’s court shall uphold m88 live casino claim. Where m88 live casino shareholders of a limited liability company or m88 live casino directors and controlling shareholder of a joint stock company fail to fulfill m88 live casinoir obligations and m88 live casinoreby cause m88 live casino destruction of material properties, books or records or om88 live casinor documents of m88 live casino company and cause m88 live casino liquidation unable to be conducted, if any creditors claim that m88 live casino aforesaid persons shall be held jointly and severally liable for m88 live casino debts of m88 live casino company, m88 live casino people’s court shall uphold m88 live casino claim.”
5. Article 70 of m88 live casino Civil Code: “m88 live casino members of a legal person’s executive body or decision-making body, such as directors or committee members, are liquidation obligors, except as om88 live casinorwise provided for by any law or administrative regulation.”
