Responsibilities and liabilities of the Board Directors in Foreign invested companies in China


By: Alex Wu, Donia Joevion Fuller-Barrett     On: 2016-09-01

Introduction

 

The board of directors (‘the board’) is a key organ of any company. The members of the board are accountable to the shareholders, but hold wide powers which include, but are not limited to the formulation of the company’s business and investments plans and strategies, formulation of the annual budget and final accounts as well as formulation of plans for making up losses. By virtue of its power to establish the company’s internal management organization and make decisions relating to the employment or dismissal of the general manager of the company and his remuneration, and to decide on the employment or dismissal of the deputy manager(s) and person(s) in charge of financial affairs of the company according to the recommendations of the manager and on their remuneration, the board plays a critical role in securing company compliance with various rules and regulations required under the Company Law. In some circumstances, the Chairman of the Board may wield significant powers as the Company Law permits only the chairman of the board, executive director or general manager to act as the company’s legal representative. Therefore, by holding posts concurrently, a singular individual may have significant influence in a company. 

Risks and Liabilities Associated with the Roles of the Board of Directors 

Given the foregoing which shows the importance of the board of directors, it is not surprising that under Chinese Company Law, directors like other key company officials are imbued with a duty to abide by laws, administrative regulations and the articles of association of the company and also have a fiduciary obligation and a duty of diligence to the company. To that end, directors ought not to take advantage of their positions and powers to collect or accept bribes or other illegal income, and may not encroach upon the property of the company.

  1. misappropriating the funds of the company;
  2. depositing the funds of the company in an account opened in his personal name or in the name of another individual;
  3. lending the funds of the company to other persons or use the property of the company to provide security for other persons without the consent of the board of shareholders, general meeting or the board of directors or in any other way which violates the articles of association of the company;
  4. entering into a contract or transaction with the company in violation of the articles of association of the company or without the consent of the board of shareholders or general meeting;
  5. taking advantage of the convenience of his position to seek for himself or other persons commercial opportunities that belong to the company or to operate by himself or for another person the same type of business as that of his company without the consent of the board of shareholders or general meeting;
  6. accepting as his own the commissions of a transaction between another person and the company;
  7. Disclosing the secrets of the company without authorization; or
  8. Doing any other act which would amount to a violation of his fiduciary obligation to the company.

A director could incur civil liability in respect of any income obtained through the pursuit of any of these activities and must pay these sums over to the company as this “income” is deemed to belong to the company. Additionally, a director may have to indemnify a company in respect of losses it suffers consequent upon the actions of the director.

A further consideration under the issue of liability is that depending on the action of an individual director or board, criminal liability may come into play. For instance, Article 271 of the Criminal Law stipulates in very broad language that where a “person of a company” takes over the unit’s property by taking advantage of his office, he may be liable to a term of imprisonment or detention. Furthermore, if such a person takes advantage of his office to misappropriate his units’ funds for his/her own use or for lending to others, depending on the amounts, he/she could be subject to a term of imprisonment for up to ten years. In more extreme cases which pose a threat or cause harm to the public such as food safety matters or major production safety accidents capital punishment may be the stipulated penalty, therefore director liability ought not to be taken lightly.

Minimizing the Risks Associated with Director Liability 

The starting point in the reduction of the risks attendant to the role of the board is ensuring that the Articles of Association are explicit on what causes the director to be liable to the company and in what circumstances he will be indemnified against third parties. Moreover, it should be explicit that whenever a director acts to comply with the law or the articles, he has a complete defense against any action brought against him by any individual including but not limited to shareholders. 

Persons considering whether or not they wish to take up the mantle of serving as a director in a company, may also enquire about the status of liability insurance. However, the bottom line is that, a solid and tested risk management system may be required to reduce the potential for civil, administrative or criminal liability of each director. In this regard, Asia Base Law and Projects has been successful in assisting companies with their Corporate Compliance Guard. This system frequently checks whether the rules of the Company Law and other relevant laws and regulations are being followed, with the recommendation of expedient remedying where breaches are found. In this regard, the person(s) who fill the role of general manager and deputy managers, where applicable are obviously critical. Article 3 of this five part series of articles has delved deeper into this post. However, at this juncture, suffice it to say that in light of the board’s intimate role in the appointment of this person or group of persons a part of the risk management infrastructure may very well involve the appropriate appointments to this post coupled with the establishment of a compliance system as well as audits. This way the risk of non-compliance with authorities can be reduced and transparency increased.