Conflict M88 login Interest Causing Criminal Liability

As discussed in our previous article 'Alerting Directors, Supervisors and Senior Management Personnel', M88 login Criminal Law AmendmentNo. 12('Twelfth Amendment', which came into effect on March 1, 2024), expands the application M88 login the “crime M88 login illegally engaging in competing businesses” (i.e., Article 165 M88 loginM88 login PRC Criminal Law) to includenot onlydirectors, supervisors and senior management personnel ('DSMs') M88 login state-owned entities ('SOEs'),butDSMs M88 login other types M88 login companies, including private entities, i.e., non-SOEs.

Recently, we observed Shanghai v. Zheng (2025) (M88 login 'Zheng Case') which was M88 loginfirst criminal trial held in Shanghai under M88 login amended Article165.The judge presiding in the Jiading District Court, Shanghai City found the former general manager (i.e., Zheng) M88 login a private lighting company (the 'Lighting Company') guilty M88 login a conflict M88 login interest ('COI'). He had established his own company in competition with M88 login Lighting Company and had unlawfully seized M88 login Lighting Company’s clients and business opportunities.

It was discovered that:

- ln August 2023, Zheng had established his own company with M88 loginfices located in the Zhejiang Province M88 login China and other Southeast Asian countries. His company engaged in the same business as the Lighting Company for which he worked and it was in direct competition with the Lighting Company.

- Taking advantage M88 login his position as general manager and with full access to the Lighting Company's client lists, product quotations, and supply chain information, Zheng began to transfer the Lighting Company's overseas orders to his own company.

- For the parts and components that his own company was unable to produce, Zheng placed orders with the Lighting Company as an OEM (i.e., original equipment manufacturer), and took advantage M88 login the Lighting Company’s business resources.

- From March to November 2024, Zheng completed sales totaling more than RMB 37 million (appr. USD 5.18 million) through his own company, causing a loss M88 login approx. RMB 2 million (appr. USD 0.28 million) to the Lighting Company.

During the trial, Zheng argued that he hadn't established his own company to unlawfully infringe upon the Lighting Company’s business opportunities. According to Zheng, he was “trying to rescue the Lighting Company’s business, because M88 login the ‘localized manufacturing trend’ in the international market M88 login the lighting industry, and the Lighting Company did not have the ability to invest and operate overseas".

Zheng’s defense was not accepted by the court. It was discovered that his COI conduct was carried out without a resolution passed by the Board M88 login Directors or the Board M88 login Shareholders M88 login the Lighting Company. This violated the non-competing provisions under the Lighting Company's articles M88 login association, and violated the fiduciary duty he owed to the Lighting Company under thePRC Company Law.

The court rendered a guilty verdict against Zheng. Prior to the guilty verdict, the court considered that Zheng’s family members had already assisted him in fully compensating the Lighting Company for its losses (i.e., a prM88 loginit loss M88 login appr. RMB 2 million). The court imposed on Zheng an imprisonment M88 login 10 months with a criminal fine (punitive) M88 login RMB 300,000 (appr. USD 42,020).

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We believe that the Zheng Case is a wake-up call for all DSMs in non-SOE companies in China and emphasizes the seriousness M88 login a company's non-competition obligations and its duty M88 login loyalty and diligence. Taking advantage M88 login job-related conveniences for personal gain may directly lead to criminal penalties under the amendedCriminal Law.

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