CHINA Law and Practice Contributed by: Chen Ma, Michelle Gon, Xinjie Li and John Fitzpatrick, Han Kun Law Offices
may initiate “derivative lawsuits” in their own name on behalf of the company to hold the director account - able. The consequences of a breach can be severe, rang - ing from the disgorgement of personal profits gained through the breach to the payment of significant mon - etary damages to the company. In cases involving fraud or serious misconduct, directors may also face administrative penalties from regulators such as the CSRC or even criminal prosecution. These enforce - ment mechanisms are designed to deter misconduct and ensure that those in positions of trust act with integrity. 3.9 Other Claims/Enforcement Against Directors/Officers Beyond breach of fiduciary duties, directors and offic - ers can be held liable for violations of securities laws, environmental regulations or labour laws. For exam - ple, in cases of fraudulent financial reporting or market manipulation, regulators can impose heavy fines and issue “market entry bans”, prohibiting individuals from serving as directors of any public company for several years or even for life. A director’s liability can sometimes be limited through indemnification agreements or directors and officers (D&O) liability insurance, which is becoming more common in China. However, such protections gen - erally do not cover acts of intentional misconduct, gross negligence or criminal behaviour. The ability to limit liability is subject to the articles of association and must not contravene mandatory provisions of law aimed at protecting the public and the company’s creditors. 3.10 Payments to Directors/Officers The remuneration of directors must be approved by the shareholders’ meeting, while the compensation of senior officers is determined by the board of direc - tors. This separation of powers is intended to prevent management from unilaterally setting their own pay. Companies must ensure that compensation structures are reasonable and do not encourage excessive risk- taking that could jeopardise the company’s stability.
Publicly traded companies are subject to strict dis - closure requirements regarding executive compensa - tion. They must disclose the total remuneration paid to directors and senior officers in their annual reports, often including a breakdown of salaries, bonuses and other benefits. Failure to comply with these approval and disclosure requirements can lead to the invalida - tion of the payment resolutions and potential regula - tory sanctions against the company and the respon - sible individuals. The relationship between a company and its share - holders is defined by the principle of limited liability, where shareholders are generally not personally liable for the company’s debts beyond their capital contri - butions. This relationship is primarily governed by the PRC Company Law and the company’s articles of association, which function as a binding contract between the shareholders and the legal entity. Share - holders hold fundamental rights, such as: • the right to receive dividends; • the right to participate in major decision-making; and • the right to share in the distribution of remaining assets upon liquidation. 4. Shareholders 4.1 Companies and Shareholders In China, there is no single, consolidated public regis - try that displays every individual shareholder of every private company to the general public. However, basic shareholder information for LLCs is recorded with the SAMR and is accessible via the National Enterprise Credit Information Publicity System. For publicly traded companies, information regarding major share - holders and the top ten shareholders is disclosed in periodic reports, while the full shareholder register is maintained by the China Securities Depository and Clearing Corporation (CSDC) and is generally not
available for public inspection. 4.2 Role of Shareholders
Shareholders participate in management primarily by exercising their voting rights at shareholders’ meetings to decide on the company’s strategic direction and
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