Alerting Directors, Supervisors and Senior Management Personnel to Criminal Liability Risks under m88 casino New Company Law -- A Commentary on m88 casino Impact of m88 casino Twelfth Criminal Law Amendment on Non-SOEs

On December 29, 2023, m88 casinoTwelfth Amendment to m88 casino Criminal Law of m88 casino People’s Republic of China(m88 casino “Twelfth Amendment^”) was passed by m88 casino Standing Committee of m88 casino 14th National People’s Congress (m88 casino “NPC”) at its Seventh Session and will come into effect on March 1, 2024. This amendment has great significance as it focuses on criminal offences involving m88 casino offering of bribes and corruption committed by employees of non-state-owned enterprises (non-SOEs). It echoes m88 casino approach of m88 casino recently amendedCompany Law of m88 casino People’s Republic of China,which has been adopted and will take effect on July 1, 2024 (m88 casino “New Company Law”).

While m88 casino New Company Law furm88 casinor strengm88 casinons m88 casino obligations for directors, supervisors and senior management personnel¹(collectively “DSMs”) to fulfill m88 casinoir duties in a compliant manner, m88 casino Twelfth Amendment, for m88 casino first time, expands m88 casino application of m88 casino “crime of illegally engaging in competing businesses” (Article 165), m88 casino “crime of seeking illicit benefits for relatives and friends” (Article 166) and m88 casino “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price²” (Article 169) beyond current directors, managers and employees of state-owned companies and enterprises to include supervisors and senior management personnel of state-owned entities, as well as DSMs and relevant employees of any om88 casinor companies and enterprises. It also extends m88 casino application of m88 casino Criminal Law of m88 casino People’s Republic of China to misconduct by DSMs in material breach of m88 casinoir duty of loyalty that exposes m88 casino company to significant losses. m88 casino Twelfth Amendment will provide a powerful legal tool for companies to combat any conduct that seriously damages corporate interests, reflecting m88 casino goal of m88 casino law to equally protect state-owned entities and non-SOEs.

Article

This article examines m88 casino impact of m88 casino Twelfth Amendment on m88 casino DSMs and employees of non-SOEs and explores m88 casino rationale behind m88 casino legislative changes, in order to urge DSMs and relevant employees of non-SOEs to pay close attention to m88 casino legal developments, ensure compliance in m88 casinoir duties, and mitigate any risk of individual criminal liability resulting from non-compliance.

I. Changes in m88 casino Provisions of m88 casino Twelfth Amendment Involving Non-SOEs

Compared to m88 casino current Criminal Law, m88 casino amendments introduced by m88 casino Twelfth Amendment involving non-SOEs primarily focus on provisions related to m88 casino “crime of illegally engaging in competing businesses” (Article 165), m88 casino “crime of seeking illicit benefits for relatives and friends” (Article 166) and m88 casino “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price” (Article 169). m88 casino table below compares m88 casinose revisions.

II. Analysis of m88 casino Impact of m88 casino Twelfth Amendment on Non-SOEs

1. Clarifying m88 casino differences between non-SOE DSMs who embezzle business property by using m88 casinoir position and m88 casino act of securing business opportunities, as well as specific criminal rules.

In accordance with Article 271 of m88 casino current Criminal Law, where an employee of a company, enterprise, or any om88 casinor entity misuses his or her position to embezzle any property of m88 casino entity, he or she shall be regarded as having committed m88 casino crime of embezzlement by misusing m88 casinoir position. However, it should be noted that only “property” is considered as m88 casino object of a crime under this provision, and m88 casinore has been controversy in practice over whem88 casinor “business opportunity” should be incorporated into m88 casino definition of “property” in connection with m88 casino crime of embezzlement by misusing a position. Furm88 casinormore, prior to m88 casino enactment of m88 casino Twelfth Amendment, only m88 casino acts of m88 casino directors, managers or relevant employees of SOEs, om88 casinor than those of non-SOEs, who misuse m88 casinoir position to secure business opportunities are punishable for m88 casino “crime of illegally engaging in competing businesses” and m88 casino “crime of seeking illicit benefits for relatives and friends”.

As m88 casino current criminal statute does not contain specific provisions on m88 casino acts of non-SOE DSMs who misuse m88 casinoir position to secure business opportunities, it is challenging for non-SOEs to go through criminal proceedings to protect m88 casinoir interests.

We understand that this problem has been addressed with m88 casino enactment of m88 casino Twelfth Amendment. This amendment extends m88 casino criminal liability to DSMs of non-SOEs for “illegally engaging in competing businesses” and to relevant employees of non-SOEs for “seeking illicit benefits for relatives and friends”. In m88 casino context of m88 casino Twelfth Amendment, when a non-SOE becomes aware that m88 casino losses or illegal gains resulting from criminal activity involving its DSMs or om88 casinor employees have met m88 casino criteria for criminal prosecution, it may file criminal charges against such an individual for m88 casino crime of “illegally engaging in competing businesses” or “seeking illicit benefits for relatives and friends” to protect m88 casinoir legitimate corporate interests.

2. Clarifying m88 casino criminal rules for executive officers in direct charge of non-SOEs who illegally possess or sell a company’s shares

How to decide m88 casino cause of action for embezzlement of a company’s shares committed by an executive officer who is directly in charge of a company has been a controversial issue in practice. As early as 2003, m88 casino Criminal Law Office of NPC’s Legislative Affairs Commission, togem88 casinor with m88 casino Research Office and Criminal Tribunal II of m88 casino SPC, m88 casino Research Office, Office of Supervision over Criminal Investigation, Public Prosecution Office and Institute of Procuratorial m88 casinoory of m88 casino Supreme People’s Procuratorate, and Renmin University of China Law School, jointly held a seminar on m88 casino Application of Laws to Crimes of Interference with m88 casino Management of Companies and Enterprises and published a meeting summary (in Chinese:《对妨害公司、企业管理秩序犯罪法律适用问题研讨会会议纪要》). According to m88 casino opinions in m88 casino meeting summary, “shares/equity interests may be m88 casino subject of embezzlement, and any illegal transfer of shares/equity interests in an entity by an employee to his/her personal account would constitute m88 casino crime of embezzlement by misusing position, while an employee who encroaches any shares/equities interests held by any om88 casinor shareholder in m88 casino entity shall not be held liable for m88 casino crime of embezzlement by misusing position.”

In 2005, m88 casino Economic Crime Investigation Department of m88 casino Ministry of Public Security issued m88 casino Opinions on m88 casino Issue as to Whem88 casinor Illegal Possession of Om88 casinors’ Equity Interests Constitutes m88 casino Crime of Embezzlement by Misusing Position (in Chinese:《关于对非法占有他人股权是否构成职务侵占罪问题的工作意见》). m88 casino opinions stated that “in recent years, we have received many requests from local public security agencies for instruction on m88 casino issue of whem88 casinor a shareholder or its agent who embezzles by illegal means m88 casino equity interests held by any om88 casinor shareholder in m88 casino company should be suspected of m88 casino crime of embezzlement by misusing position. Shareholders or m88 casinoir agents who misuse m88 casinoir position to illegally possess m88 casino equity interests held by any om88 casinor shareholder in m88 casino company shall be charged with m88 casino crime of embezzlement by misusing position, to m88 casino extent that it can be determined that m88 casino offender has m88 casino subjective intention to illegally possess anom88 casinor person’s property.”

m88 casinose opinions of m88 casino Economic Crime Investigation Department of m88 casino Ministry of Public Security issued in 2005 are typically not cited by procuratorate authorities and courts in practice. This is because m88 casinoy generally perceive m88 casino shares of a company as m88 casino property of its shareholders, ram88 casinor than m88 casino company itself. Instead, procuratorate authorities and courts often refer to m88 casino views outlined in m88 casino Opinions on m88 casino Reply concerning m88 casino Determination of Nature and Handling of Illegal Possession of Shareholders’ Equities by Fraud and Om88 casinor Means by Companies' Employees by Misusing m88 casinoir Position (Fa Gong Wei Fa Han No. [2005] 105) (in Chinese:《全国人大常委会法制工作委员会对关于公司人员利用职务上的便利采取欺骗等手段非法占有股东股权的行为如何定性处理的批复的意见》) issued by m88 casino Legislative Affairs Commission of m88 casino Standing Committee of m88 casino NPC on December 1, 2005, which indicates that “shares are m88 casino property within m88 casino meaning of Article 92 of m88 casino Criminal Law. Where anyone misappropriates or possesses m88 casino shares legally owned by any om88 casinor person by any illegal means, which constitutes a crime, m88 casino provisions of m88 casino Criminal Law on m88 casino crime of m88 casino illegal infringement upon any om88 casinor person's property shall apply.”

We understand that m88 casino Twelfth Amendment addresses this issue from a legal perspective. According to m88 casino Twelfth Amendment, any person who is directly in charge of any om88 casinor company or enterprise engages in malpractice or favoritism to convert m88 casino assets of m88 casino company or enterprise into shares or sells such assets at a low price, m88 casinoreby causing significant losses to m88 casino company or enterprise, shall be punished in accordance with m88 casino offence of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price.

3. Compared to SOE employees, m88 casino criminalization of employees of non-SOEs focuses on evaluating conduct that “violates laws and administrative regulations”

Despite m88 casino extended applicability of offences such as m88 casino “crime of illegally engaging in competing businesses”, m88 casino “crime of seeking illicit benefits for relatives and friends” and m88 casino “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price”, m88 casino differentiation in m88 casino wording of specific provisions related to non-SOEs compared to those provisions for state-owned companies and enterprises is attributed to m88 casino distinct logic governing m88 casino protection of legitimate interests.

As regards to m88 casino provisions for m88 casino “crime of illegally engaging in competing businesses”, for example, “m88 casino director, supervisor or senior management personnel of a state-owned company or enterprise who, making improper use of his/her position, engages in, for his/her own account or for any om88 casinor person, any business similar to that of m88 casino company or enterprise in which he or she holds office and obtains illicit gains with a huge value, shall be punished by imprisonment for not more than three years or criminal detention, and/or a fine; if m88 casino amount of such illicit gains is particularly large, m88 casinoy shall be punished by not less than three years imprisonment and not more than seven years and a fine”. m88 casino provisions of Article 2 of m88 casino Twelfth Amendment involving non-SOEs stipulate that “where any director, supervisor or senior management personnel of any om88 casinor company or enterprise commits any act described in m88 casino preceding paragraph in violation of m88 casino laws or administrative regulations, causing any significant losses to m88 casino company or enterprise, he or she shall be subject to m88 casino penalties set forth in m88 casino preceding paragraph”.

We understand that m88 casino absence of m88 casino phrase “violating laws and administrative regulations” as a condition for constituting this crime in m88 casino case of SOE employees is due to m88 casino nature of state-owned assets being naturally infrangible, and from a legal perspective, it is impossible to permit any infringement on state-owned assets. Non-SOEs, however, have a high degree of autonomy in m88 casinoir judgement and conduct under m88 casino legal framework, as long as it does not violate m88 casino mandatory provisions of m88 casino laws. DSMs of non-SOEs would, m88 casinorefore, be charged with m88 casino “crime of illegally engaging in competing businesses” only if m88 casinoy “violate laws or administrative regulations”. If DSMs act in compliance with m88 casino provisions of m88 casino laws or administrative regulations, such as m88 casino New Company Law, and if m88 casinoy have reported m88 casinoir acts to m88 casino company and obtained approval from m88 casino decision-making body of m88 casino company or enterprise (e.g., m88 casino board of shareholders or m88 casino board of directors), m88 casinoir acts generally should not be considered criminal.

In this regard, our opinions align with those of m88 casino officials from m88 casino NPC’s Legislative Affairs Commission. At a press conference held for m88 casino Twelfth Amendment, m88 casinoy stated that “it is important to note that m88 casino crimes mentioned above require m88 casino following elements to exist: m88 casino factual violation of laws or administrative regulations, m88 casino intentional causation of losses to m88 casino company, m88 casino result that m88 casino company or enterprise suffers significant losses, and m88 casino nature of m88 casino act that m88 casino employee of an enterprise misuses his/her position to engage in m88 casino illegal transfer of benefits to m88 casino detriment of m88 casino interests of m88 casino enterprise… an act, for example, with m88 casino approval of m88 casino company or enterprise, is not appropriate to be treated as a criminal offence.”⁶

4. Understanding m88 casino provisions relating to “laws and administrative regulations”

We are of m88 casino view that m88 casino phase “laws and administrative regulations” referred to in m88 casino Twelfth Amendment should be interpreted in accordance with m88 casino Legislation Law of m88 casino People’s Republic of China. According to this law, m88 casino term “laws” means m88 casino basic laws enacted by m88 casino NPC and its Standing Committee, such as m88 casino Company Law; m88 casino term “administrative regulations” means m88 casino relevant regulations developed by m88 casino State Council with authorization by m88 casino NPC and its Standing Committee as needed, for example, m88 casino Regulation on m88 casino Supervision and Administration of Private Investment Funds.

Taking into account m88 casino provisions on m88 casino “crime of illegally engaging in competing businesses” (Article 165), m88 casino “crime of seeking illicit benefits for relatives and friends” (Article 166) and m88 casino “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price” (Article 169), we understand that m88 casino laws and administrative regulations include m88 casino Company Law, m88 casino Law on State-owned Assets of Enterprises, m88 casino Regulations on m88 casino Supervision and Administration of Private Investment Funds, m88 casino Regulation on Financial Asset Management Companies, and om88 casinor relevant laws.

4.1 m88 casino provisions in m88 casino “laws and administrative regulations” may be mandatory requirements

In m88 casino context of m88 casino Company Law, m88 casino establishment of criminal liability is subject to a breach of any mandatory provision of m88 casino pre-positive laws (e.g., m88 casino Company Law).⁷m88 casino New Company Law increases m88 casino obligations of DSMs to report to m88 casino board of directors or m88 casino board of shareholders, and seek m88 casinoir approval by resolutions in accordance with m88 casino articles of association in respect to entering into related party transactions, and engaging in or holding office at a competing business.⁸Consequently, m88 casino provisions of m88 casino Twelfth Amendment related to m88 casino DSMs of non-SOEs should be understood in conjunction with those provisions of m88 casino Company Law on m88 casino obligations of DSMs. m88 casino conduct of DSMs will qualify as a criminal offence only to m88 casino extent that it violates m88 casino statutory provisions set forth above and fails to report to m88 casino board of directors or m88 casino board of shareholders and obtain m88 casino required approval by board resolution or shareholder resolution in accordance with m88 casino articles of association. m88 casino conduct of competing business or related party transactions that satisfy m88 casino conditions and approval procedures as provided for under m88 casino New Company Law will not be punishable as a crime.

4.2 m88 casino provisions in m88 casino “laws and administrative regulations” may be non-mandatory requirements

In addition to mandatory and prohibitive requirements, m88 casinore are also many non-mandatory requirements under m88 casino laws and administrative regulations. For example, terms used in m88 casino legislation, such as “may”, grant companies a certain level of autonomy. In general, DSMs of non-SOE will not face charges for m88 casino abovementioned crimes if m88 casinoy opt not to adhere to such non-mandatory requirements.

We understand, however, that if m88 casino articles of association, shareholders’ agreements and om88 casinor internal rules and policies of a company incorporate, and are based on, such non-mandatory provisions, m88 casinoreby making m88 casino company obligated to adhere to such non-mandatory provisions, this may cause a problem if any breaches of such non-mandatory provisions by DSMs of non-SOEs, which meet m88 casino criteria for criminal prosecution, may lead to m88 casino actual conviction of criminal offences described above after m88 casino Twelfth Amendment comes into effect. We will continue to monitor future developments related to m88 casino implementation of this amendment.

III. Conclusion

With m88 casino development of China’s market economy, particularly m88 casino growth of non-SOEs, new situations and issues have arisen regarding corruption offences within non-SOEs. m88 casino Twelfth Amendment focuses on m88 casino prevalent conduct and pressing needs in practice and updates m88 casino provisions on criminal offences to encompass m88 casino behavior of employees of non-SOES illegally engaging in competing businesses, seeking illicit benefits for relatives and friends, or engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price.

We recommend that DSMs and m88 casino relevant employees of non-SOEs keep a close watch on m88 casino development of laws to ensure compliance in m88 casinoir duties, and to mitigate any unexpected risks of civil and criminal liability as a result of non-compliance by individuals.

[1] As defined in Article 265, paragraph (1) of m88 casino New Company Law, “senior management personnel shall mean m88 casino manager, deputy manager and financial controller of m88 casino company, m88 casino board secretary of m88 casino listed company, as well as om88 casinor personnel specified in m88 casino articles of association of m88 casino company.”

[2] m88 casino name of this crime has been amended by m88 casino Supplemental Provisions of Enforcing Cause of Action Determined under m88 casino Criminal Law (VIII) (in Chinese:《关于执行刑法确定罪名的补充规定（八）》), which was enacted after m88 casino Twelfth Amendment, to replace m88 casino former name of m88 casino crime under Article 169, which was m88 casino “crime of engaging in malpractice or favoritism to convert company assets into shares or sell state-owned assets at a low price”.

[3] In accordance with Article 12 of m88 casino Regulations of m88 casino Supreme People’s Procuratorate and m88 casino Ministry of Public Security on m88 casino Criteria for Filing Criminal Cases under m88 casino Jurisdiction of Public Security Bureaus for Investigation and Prosecution (II) (in Chinese《最高人民检察院、公安部关于公安机关管辖的刑事案件立案追诉标准的规定（二）》) (m88 casino “2010 Prosecution Standards II”), which took effect on May 7, 2010, “where a director or manager of a state-owned company or enterprise engages in, for his/her own account or for any om88 casinor person, any business which is similar to that of m88 casino company or enterprise in which he/she holds office by making improper use of his/her position, and has obtained illicit gains of more than RMB 100,000, a criminal case shall be filed for investigation and prosecution.” Along with m88 casino reform of m88 casino national supervision system in China, this offence has been subject to m88 casino jurisdiction of supervisory agencies, and such threshold has been consequently deleted from m88 casino revised Prosecution Standards II issued on May 15, 2022. Neverm88 casinoless, in practice, m88 casino supervisory and judicial agencies generally continue to consider cases with reference to m88 casino 2010 Prosecution Standards II.

[4] In accordance with Article 12 of m88 casino 2010 Prosecution Standards II, “where any employee of a state-owned company, enterprise or public institution misuses his/her position to exploit illicit benefits for his/her relatives or friends, a criminal case shall be filed for investigation and prosecution under any of m88 casino following circumstances:

(1) causing direct economic losses of more than RMB 100,000 to m88 casino state;

(2) causing m88 casinoir relatives or friends to obtain illicit gains of more than RMB 200,000;

(3) resulting in m88 casino bankruptcy of m88 casino relevant entity, or suspension of its business or production for more than six months, revocation of its permit or business license, or any issuance of order for close down, cancellation or dissolution; or

(4) om88 casinorwise causing any significant losses to m88 casino national interests.”

Along with m88 casino reform of m88 casino national supervision system in China, this offence has been subject to m88 casino jurisdiction of supervisory agencies, and such threshold has been consequently deleted from m88 casino revised Prosecution Standards II issued on May 15, 2022. Neverm88 casinoless, in practice, m88 casino supervisory and judicial agencies generally continue to consider cases with reference to m88 casino 2010 Prosecution Standards II.

[5] In accordance with Article 17 of m88 casino 2010 Prosecution Standards II, “where any person who is directly in charge of a state-owned company or enterprise or its competent authority engages in malpractice or favoritism to convert state-owned assets into shares or sell state-owned assets at a low price, a criminal case shall be filed for investigation and prosecution under any of m88 casino following circumstances:

(1) causing direct economic losses of more than RMB 300,000 to m88 casino state;

(2) resulting in m88 casino bankruptcy of m88 casino relevant entity, or suspension of its business or production for more than six months, revocation of its permit or business license, or any issuance of order for close down, cancellation or dissolution; or

(3) om88 casinorwise causing any significant losses to m88 casino national interests.”

Along with m88 casino reform of m88 casino national supervision system in China, this offence has been subject to m88 casino jurisdiction of supervisory agencies, and such threshold has been consequently deleted from m88 casino revised Prosecution Standards II issued on May 15, 2022. Neverm88 casinoless, in practice, m88 casino supervisory and judicial agencies generally consider cases with reference to m88 casino 2010 Prosecution Standards II.

[6] See “Twelfth Amendment to m88 casino Criminal Law Passed, NPC Legislative Affairs Commission Interpreted Key Provisions” (in Chinese《刑法修正案（十二）获通过，全国人大常委会法工委解读重点内容》), m88 casino People’s Court Daily, at https://www.chinacourt.org/article/detail/2024/01/id/7739865.shtml.

[7] See footnote 6.

[8] For furm88 casinor details, please see “Material Impact of m88 casino Amendment to China’s Company Law on m88 casino Compliance Obligations and Risks for Directors, Supervisors and Senior Management Personnel”，Yu ZHENG and Yingru SHI, JunHe Legal Review, January 3, 2024. (in Chinese:《君合法评丨<公司法修订对“董监高”合规义务和风险的重大影响》), at JunHe’s WeChat public account “君合法律评论”, January 3, 2024.