CHINA Law and Practice Contributed by: Chen Ma, Michelle Gon, Xinjie Li and John Fitzpatrick, Han Kun Law Offices
3.4 Appointment and Removal of Directors/ Officers Directors are typically appointed or removed by the shareholders’ meeting through an ordinary resolution. The process for appointing senior officers, such as the general manager, chief financial officer and board secretary, falls under the authority of the board of directors. Appointments are generally based on pro - fessional qualifications and a “fit and proper” assess - ment to ensure the individuals have the integrity and capability to lead. Specific legal conditions restrict who may serve as a director or officer. Individuals are prohibited from holding such positions for a specified period if they have a criminal record related to economic crimes or have been judicially or administratively determined to bear personal responsibility for the bankruptcy of a company due to mismanagement. Directors can be removed by a shareholder resolution before the expi - ration of their term, although the company may be liable for compensation if the removal is deemed to be without “just cause”, as defined in the company’s articles of association. 3.5 Independence of Directors Independence is a cornerstone of governance for public companies in China. Independent directors must maintain both actual and perceived independ - ence from the company, its major shareholders and its actual controllers. They are prohibited from hold - ing significant shares in the company or having any material business relationships that could impair their objective judgement. To manage potential conflicts of interest, directors are required to disclose any personal interests in con - tracts or transactions involving the company. In such cases, interested directors must recuse themselves from voting on the relevant board resolution. Further - more, independent directors are specifically tasked with reviewing and issuing public opinions on mat - ters where the interests of controlling shareholders might conflict with those of the company or minority investors.
3.6 Legal Duties of Directors/Officers Directors and officers in China owe two primary fidu - ciary duties to the company: (i) the duty of loyalty, and (ii) the duty of care. The duty of loyalty requires the avoidance of self-dealing, refraining from compet - ing with the company, and protecting the company’s assets and confidential information. A company’s directors and officers must prioritise the company’s interests above their own or those of any third party. The duty of care requires directors and officers to act with the diligence and skill that a reasonably pru - dent person would exercise in a similar position. This includes staying informed about the company’s busi - ness, attending board meetings, and making decisions based on adequate information. The 2024 Company Law has further clarified these duties, emphasising that directors may be held personally liable for losses caused to the company if they fail to perform these obligations with the required standard of care. 3.7 Responsibility/Accountability of Directors Directors primarily owe their fiduciary duties to the company as a legal entity. Their responsibility is to ensure the company’s sustainable growth and long- term value. While directors are appointed by the com - pany’s shareholders, their legal obligation is to act in the best interests of the company itself, which some - times requires balancing the competing demands of various stakeholders. In addition to shareholders, directors are increasingly expected to take into account the interests of other stakeholders, such as employees, creditors and the broader community. For instance, in situations of financial distress, directors have an increased duty to protect the interests of creditors. The modern govern - ance trend in China also encourages boards to con - sider environmental and social impacts (ESG) as part of their broader responsibility to ensure the company remains a responsible corporate citizen. 3.8 Breach of Directors’ Duties Breaches of fiduciary duties can be enforced through several mechanisms. The company itself, acting through the board or a shareholder meeting, can sue a director for damages. If the company fails to act, shareholders holding a certain threshold of shares
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