Introduction

Companies are pivotal entities in the modern market economy, and accordingly, the Company Law serves as a foundational legal framework for the socialist market economic system. On December 29, 2023, the much-anticipated Revised Company Law of the People’s Republic of China (2023 Revision) (hereinafter referred to as the “New Company Law”) was officially promulgated and came into effect on July 1, 2024.

This revision introduces significant changes concerning the fiduciary duties and responsibilities of directors, supervisors, and senior management (collectively referred to as “Directors, Supervisors, and Senior Management” or “DSMs”). This article aims to elucidate the relevant provisions of the New Company Law, offering insights and recommendations to stakeholders.

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I. Detailed Provisions on Fiduciary Duties of DSMs

1. Clarification of Loyalty and Diligence Duties

• Relevant Provisions:

o 2018 Company Law, Article 147: Directors, supervisors, and senior management must comply with laws, administrative regulations, and the company’s articles of association, bearing fiduciary and diligence duties towards the company.

o 2023 New Company Law:

 Article 179: Directors, supervisors, and senior management must adhere to laws, administrative regulations, and the company’s articles of association.

 Article 180: 

 Fiduciary Duty: DSMs must take measures to avoid conflicts between their personal interests and those of the company and must not exploit their positions to obtain improper benefits.

 Diligence Duty: DSMs must exercise reasonable care in their managerial roles to act in the best interests of the company.

 Applicability: These provisions also apply to controlling shareholders or actual controllers who are not company directors but effectively manage company affairs.

Interpretation:

While the current Company Law broadly outlines the fiduciary and diligence duties of DSMs, it lacks specific definitions. Article 180 of the New Company Law addresses this gap by clearly defining loyalty and diligence duties, thereby delineating the boundaries of DSMs' fiduciary obligations and enhancing legal clarity.

2. Enhanced Restrictions on Related-Party Transactions and Competing Interests

• Relevant Provisions:

o 2018 Company Law, Article 148: DSMs are prohibited from engaging in certain activities, including:

 Entering into contracts or transactions with the company without the approval of the shareholders’ or board meetings.

 Utilizing their positions to secure business opportunities for themselves or others, or managing competing businesses without proper consent.

o 2023 New Company Law:

 Article 182: DSMs must report any direct or indirect contracts or transactions with the company to the board or shareholders’ meeting and obtain approval in accordance with the company’s articles of association.

 Article 184: DSMs who fail to report and obtain the necessary approvals are prohibited from managing or operating competing businesses.

 Article 185: In decisions regarding related-party transactions, associated directors must abstain from voting, and their votes will not be counted towards the total. If fewer than three non-associated directors attend the board meeting, the matter must be submitted to the shareholders’ meeting.

Interpretation:

The New Company Law significantly strengthens the restrictions on related-party transactions and competing interests involving DSMs. Previously, only directors and senior management were regulated, excluding supervisors, which created inconsistencies in governance. The revised law uniformly extends these regulations to supervisors and broadens the scope to include indirect transactions and relationships, effectively addressing loopholes related to concealed affiliations (“undercover transactions”). Additionally, the introduction of mandatory reporting and director recusal requirements marks a noteworthy improvement, enhancing transparency and mitigating conflicts of interest in corporate governance.

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II. Enhanced Responsibilities and Increased Risks for DSMs

1. Expanded Liability for Damages Caused by DSMs

• Relevant Provisions:

o 2018 Company Law, Article 149: DSMs must compensate the company for losses caused by violations of laws, administrative regulations, or the company’s articles of association during the execution of their duties.

o 2023 New Company Law:

 Article 188: Continues the obligation for DSMs to compensate the company for losses caused by legal or regulatory violations in their official duties.

 Article 191: 

 The company is liable to compensate third parties for damages caused by DSMs in the execution of their duties.

 DSMs who act with intent or gross negligence must personally compensate for such damages.

Interpretation:

The New Company Law maintains the existing provisions holding DSMs accountable for damages to the company due to legal or regulatory breaches. Additionally, it introduces personal liability for DSMs who, through intent or gross negligence, cause harm to third parties, thereby heightening personal accountability and encouraging more diligent conduct.

2. Clarification of Liability for "Shadow Directors"

• Relevant Provisions:

o 2023 New Company Law, Article 192: Controlling shareholders or actual controllers who instruct DSMs to act against the company’s or shareholders’ interests shall share joint and several liability with those DSMs.

Interpretation:

The concept of "shadow directors" refers to controlling shareholders or actual controllers who effectively direct DSMs without holding formal titles. Article 192 explicitly holds both the instructing parties and the DSMs jointly liable for actions that harm the company or its shareholders, thereby eliminating avenues for evading responsibility through indirect control and reinforcing the independence and accountability of the board.

3. Strengthening the Duty to Maintain Capital Integrity

• (1) Shareholders’ Failure to Fully Contribute Capital or Withdraw Capital:

o Relevant Provisions:

 Article 51:

After the establishment of a limited liability company, the board must verify shareholders’ capital contributions. If shareholders fail to make timely and full contributions as stipulated in the articles of association, the board must issue a written demand for payment. 

 Directors failing to fulfill this obligation and causing losses to the company must compensate for those losses.

 Article 53:

Shareholders are prohibited from withdrawing capital after the company's establishment. 

 Violations require shareholders to return withdrawn capital and compensate for any resulting losses, with responsible DSMs jointly liable.

Interpretation:

The New Company Law assigns the board the responsibility to monitor and enforce shareholders’ capital contributions, introducing a formal demand process for overdue contributions. Additionally, it prohibits capital withdrawal post-establishment, holding both shareholders and responsible DSMs liable for any losses incurred due to non-compliance, thereby reinforcing capital integrity.

• (2) Financial Assistance for Third-Party Share Purchases:

o Relevant Provisions:

 Article 163:

Companies are prohibited from providing financial assistance (e.g., gifts, loans, guarantees) for third parties to acquire company or parent company shares, except for employee stock ownership plans. 

 Financial assistance must be approved by a shareholders’ meeting or a board resolution, not exceeding 10% of the issued share capital, and requires a two-thirds majority of the board.

 Violations resulting in losses require responsible DSMs to compensate.

Interpretation:

This provision targets improper financial assistance in share acquisitions, particularly in equity investment and financing sectors. DSMs must ensure that any financial support for share purchases is within legal limits and properly approved, safeguarding the company’s financial health and preventing undue financial exposure.

• (3) Illegal Profit Distribution and Capital Reduction:

o Relevant Provisions:

 Article 211:

Companies unlawfully distributing profits to shareholders must have those profits returned. If such actions cause losses, shareholders and responsible DSMs must jointly compensate.

 Article 226:

Companies illegally reducing registered capital must have funds returned and restore any reduced capital. Responsible DSMs must jointly compensate for resulting losses.

Interpretation:

These provisions address unlawful financial maneuvers such as improper profit distributions and capital reductions, holding both shareholders and DSMs accountable for restoring funds and compensating for any losses, thereby ensuring financial propriety and stability.

4. Clarification of Directors’ Obligations in Company Liquidation

• Relevant Provisions:

o Civil Code, Article 70(2):

Members of a corporation’s executive or decision-making bodies are responsible for liquidation. Specific laws or regulations take precedence.

o 2023 New Company Law, Article 232:

Upon dissolution under specified conditions, a liquidation must commence. Directors are responsible for forming a liquidation team within fifteen days of dissolution.

 The liquidation team is typically composed of directors unless the articles of association or a shareholders’ meeting resolution dictates otherwise.

 Directors failing to timely perform liquidation duties and causing losses must compensate.

Interpretation:

Aligning with the Civil Code, the New Company Law mandates that directors assume responsibility for liquidation procedures, ensuring timely and lawful liquidation processes to protect the company and creditors. Failure to adhere to these duties results in personal liability, thereby reinforcing the fiduciary responsibilities of directors during dissolution.

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III. Recommendations and Countermeasures

Given the enhanced independence, authority, and fiduciary obligations imposed on DSMs by the New Company Law, alongside the increased legal liabilities and operational risks, the following recommendations are proposed:

1. Active Engagement and Capital Integrity Maintenance

DSMs should proactively engage in understanding the company’s operations and financial status. Responsibilities include:

• Verifying and monitoring shareholders’ capital contributions.

• Promptly issuing written demands for overdue contributions.

• Refusing unauthorized profit distributions and capital reductions.

• Addressing shareholder capital withdrawals with due diligence and preserving evidence of compliance.

2. Customisation of Articles of Association

When establishing a company, shareholders should prioritize the bespoke drafting of the articles of association to:

• Clearly define related-party transactions and the scope of senior management.

• Establish detailed procedures for reporting and approving related-party transactions, ensuring DSMs adhere to compliance protocols.

3. Vigilance in Financial Assistance Matters

In contexts such as equity investment and financing:

• DSMs must scrutinize financial assistance activities to ensure alignment with company interests and regulatory limits.

• Avoid or decline commitments that could impose undue financial obligations on the company, such as problematic share buyback or guarantee agreements.

4. Procurement of Directors’ Liability Insurance

Companies should consider:

• Securing liability insurance for directors to mitigate personal risk exposure.

• Enhancing the management team’s capacity to manage and mitigate potential liabilities effectively.

5. Timely Initiation of Liquidation Procedures

In the event of company dissolution:

• DSMs must swiftly establish a liquidation team to commence the process within the stipulated fifteen-day period.

• Act diligently and responsibly during liquidation, preserving evidence and seeking legal intervention when faced with obstruction or non-compliance.

6. Enhancement of Directors’ Resignation Mechanisms

To prevent the issue of “left-behind directors”:

• Articles of association should refine rules governing the election of directors upon term expiration and outline detailed resignation procedures.

• Prospective resigning directors should monitor board composition and timing to ensure a smooth transition, avoiding scenarios where directors remain legally bound despite their intention to resign.

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Conclusion

The New Company Law significantly refines the fiduciary duties and responsibilities of DSMs, enhancing corporate governance standards and transparency. By clearly delineating the obligations and liabilities of directors, supervisors, and senior management, the revised law not only mitigates legal risks but also fosters the healthy development of companies. Enterprises are encouraged to proactively adapt to the new legal requirements by strengthening internal governance structures and elevating the compliance and responsibility awareness of their management teams to navigate the increasingly complex legal and market landscapes effectively.