By Chen Yun, R&P China Lawyers
Directors and managers do not always make wise decisions, and
being prepared, knowing the circumstances in which they may be held
personally liable to the company for their decisions, and
protecting against such occurrences, are all essential to securing
a long business life for the company in China. An American company
recently learned this lesson the hard way. After hiring a Chinese
general manager for its Shanghai subsidiary without outlining the
limits on her authority, the GM proceeded to inappropriately use
company funds for her own benefit and that of a third-party.
Without the evidence that is provided by clear delineation of
authority within the company's Articles of Association, the
employee's labor contract, or through Board of Directors'
resolutions, the company found it unnecessarily difficult to
terminate her position for cause, and pursue her for criminal and
civil liabilities.
In light of the frequent disputes that arise in this area,
companies operating in the People's Republic of China should
have the best practices in place to reduce such risk. Clearly
regulating the bounds of authority and conduct of directors and
(management) employees, and establishing procedural controls such
as requiring directors to report any payments or benefits they
receive in exchange for benefits, are steps that every business
should consider to reduce its exposure in China and abroad.
Obligations and Liabilities of Directors and Managers in
China
Directors and senior managers of a Chinese-registered company,
including subsidiaries of foreign companies, may be held civilly
liable under the Company Law of the People's Republic of
China. The PRC Company Law requires directors and senior
managers to adhere to the duties of loyalty and duty of care. The
duty of care provides that corporate directors and managers comply
both with the law as well as the Articles of Association and
shareholder resolutions of a company. Certain circumstances where
directors and senior managers may bear personal liability to the
company under the PRC Company Law include:
- Violating a law, an administrative regulation or the
company's Articles of Association in the execution of company
duties, thereby causing losses to the company, he or she will be
liable for compensation;
- Misappropriating the company's funds;
- Taking business opportunities for themselves without
shareholders' approval; and
- Abusing his or her position to take improper benefits for him
(her) self or for other parties.
Carefully considering the desired limits of directorial and
managerial authority will prepare the company not only for
situations where these persons violate the PRC Company Law as
described above, but also where they take actions that exceed their
desired scope of authority. Firstly, the Articles of Association of
the company should include detailed procedural guidance in
connection with how directors and managers may exercise their
powers. This often entails resisting pressure from local
governments to use their preferred "standard" form of
articles, which has limited use. A normal compromise is to adopt
the basic style and sequence of that form, while adding more
detailed provisions on the limits of authority of directors, senior
managers and the legal representative, and on other points that are
important to the shareholders. This may include certain obligation,
such as to fully disclose to the Board of Directors and the
shareholders meeting any transactions or arrangements that involve
his or her personal interests.
Additionally, binding directors' and manager's authority
to limitations from board resolutions provides a flexible method to
limit their actions beyond the restrictions of PRC Company Law
provisions. Priority is to have documentation in place to determine
where the limits lie; absent such documentation, the company will
be unable to file a claim against a director or manager for acting
in excess of his or her authority, and will be unable to terminate
his or her positions at the company for cause on the basis of such
acts.
Managing the authority of directors and managers is also important
in the context of criminal liabilities. The offering of monetary
gifts to officials is prohibited under Chinese law. In commercial
practice, directors and managers should therefore be required to
promptly report to the Board of Directors or at the
shareholders' meeting in the event they receive any payments or
treatment in exchange for (expected) benefits. This is especially
important because not only can the employee be held liable; the
company and its legal representative could be held jointly liable
where the employee has engaged in criminal activity on behalf of
the company. Therefore, regulating the boundaries of authority and
activities of directors and employees in the Articles of
Association and in other documents, and establishing clear internal
rules and policies for employee conduct, will not only clarify the
limits to an individual, but it will also allow the company to
limit its exposure to third parties and in government
investigations.
Conclusions & Suggestions
Risks can be reduced at all times by clearly allocating particular
powers and responsibilities of company directors and managers. Such
allocations of authority will not only reduce the risks borne
individually and by the company, but will also benefit the company
by preventing important matters from 'falling between the
cracks' and by enabling the legal representative to be more
focused and less defensive. Having clearly-established the
boundaries also serve as sound evidence in the case a legal dispute
should arise, and procedural controls and reporting requirements
will help ensure compliance and limit the liability of the company
should a director or manager be accused of accepting special
treatment or monetary gifts in exchange for benefits.>
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
