Directors’ and Executives’ Liabilities under PRC Company Law (4/4)
The Article 180 of new PRC Company Law is a general article that explicitly defines a Chinese-style fiduciary duties of directors, supervisors, and senior management personnel (hereinafter referred to as "directors and officers"):
(a) Chinese-style duty of loyalty: Directors and senior management personnel must act in the best interest of the company and avoid using their positions for personal gain or to benefit others improperly. The burden of proof for violations of this duty lies with the company.
(b) Duty of Diligence: Directors and officers must fulfill their obligations with reasonable care and in the best interest of the company. While the law does not specify particular situations, it emphasizes the standard of reasonable management.
(c) Shadow Directors: Individuals who are not formally appointed as directors but exercise de facto control over the company's affairs are also subject to these provisions.
A. Judicial Precedents: The Definition and Application of Fiduciary and Duty of Care
(2020) Supreme Court Civil Appeal No. 640
Case Summary: The court examined whether Gao Bo's actions in the case violated either the duty of loyalty or the duty of care.
Court's View: The duty of loyalty prohibits directors from exploiting their positions for personal gain, and no such behavior was found in this case (Burden of proof on the company). The duty of care requires directors to exercise reasonable care, though specific standards are not legally defined.
Key Rulings: Gao Bo's actions fell within the scope of his duties as defined by the company's articles of association, and there was no evidence of negligence or harm to the company's interests. The court dismissed the Company's appeal due to insufficient evidence.
(2019) Supreme Court Civil Retrial No. 331
Case Summary: Li Huazhen, while serving as the legal representative and executive director of Tanghua Company, transferred 7,056,068 yuan from the company's account to his wife's account. Tanghua Company sued, alleging that this act damaged its interests.
Court's View: Li Huazhen failed to provide sufficient legal justification for the transfer and acted without authorization from the company's shareholders' meeting or board of directors. His actions infringed upon the company's property rights.
Key Rulings: The court upheld the original verdict, ruling that Li Huazhen must compensate the company for its losses.
These cases demonstrate that courts consider both procedural and substantive aspects when determining whether directors' actions constitute a conflict of interest or breach of duty. The extent to which directors' actions align with corporate governance procedures and internal regulations is a critical factor.
B. The Development of Directors and Officers Liability Insurance and Market Response
The expansion of directors' responsibilities under the new Company Law has led to corresponding adjustments in the coverage of Directors and Officers (D&O) liability insurance policies:
Expansion of Insurance Coverage:
Scope of Actions: Coverage includes acts or omissions, errors, breaches of duty, violations of trust, failures to fulfill fiduciary or duty of care obligations, false statements, misleading statements, and improper hiring practices.
Application Period: Insurance coverage applies to actions or omissions occurring during the policy term.
Key Considerations:
Insurance Policy Continuity: Just like other insurance policies, if the policy is not renewed or replaced in a timely manner, the insurance company may deny claims for wrongful acts that occurred during the policy term but were not reported before the policy lapsed.
Coverage Limits: Insurance limits can generally be tailored to meet the needs of the company.
C. Future Trends and Challenges
As the Company Law continues to evolve, the insurance market is expected to develop more specialized Directors and Officers (D&O) insurance products with broader coverage to address the expanding scope of directors' responsibilities. Insurers are encouraged to design more flexible policies to better meet the needs of small and medium-sized enterprises. At the same time, these businesses face unique challenges, particularly in managing policy renewal and replacement, as any lapse or delay could leave them exposed to uncovered losses.
Conclusion
Under the new Company Law, the boundaries of directors' fiduciary duties have become more clearly defined. Courts now consider both procedural compliance and substantive harm when determining liability. While the expansion of D&O insurance coverage provides greater protection, challenges remain, particularly regarding policy renewal and continuity. As the legal environment continues to improve, insurance products are expected to become more comprehensive. Companies must focus on improving corporate governance and risk management to align with the heightened standards of fiduciary and duty of care obligations.
