CHINA Trends and Developments Contributed by: Chen Ma, Michelle Gon, Xinjie Li and John Fitzpatrick, Han Kun Law Offices
liability regimes and outlines how to construct evi - dentiary chains via granular board minutes. • Capital maintenance and creditor protection – Anchors the new personal liability baselines for D&Os regarding capital calls, unlawful dividends and capital withdrawals, establishing the manda - tory use of ex-ante solvency testing to defeat third- party creditor leapfrog claims. Rise of the audit committee The single - tier governance model : benefits and potential risk exposure The revised Company Law introduces a more flexible single-tier governance model, permitting both LLCs (Article 69, paragraph 1) and JSCs (Article 121, para - graph 1) to dispense with a traditional board of super - visors and instead establish an audit committee under the board of directors. This offers MNCs a significant opportunity to streamline their corporate structures and bypass the traditional employee representative proportion requirements (Articles 71 and 130), achiev - ing a smooth transition from passive external over - sight to active internal governance. However, this single-tier model, which integrates supervisory and decision-making functions, also intro - duces a significant potential risk. Given that Article 136 of the revised law only mandates the establishment of an independent director system for listed JSCs, LLC subsidiaries commonly utilised by MNCs have no stat - utory requirement to ensure the independence of their audit committees. Consequently, these committees are likely to be staffed by internal senior executives, creating an inherent conflict of interest. Should any internal control deficiencies be revealed during a regu - latory look-through examination, these members face a heightened risk of liability for negligent oversight, as the integrated functional structure makes it difficult to demonstrate objective and rigorous supervision. Substantive record - keeping as risk mitigation To mitigate risk, substantive record-keeping by the audit committee regarding financial compliance and related-party transactions naturally serves as the basis for any legal defence. The importance of good record-keeping is compounded by provisions of the revised Company Law. For example, it is anticipated that courts will no longer treat the audit committee’s
signatures as a mere procedural formality. Instead, the courts will deeply scrutinise whether an audit com - mittee has established internal control systems and reporting lines that are independent of daily executive management. Redefining fiduciary duties Harmonisation of the duties of loyalty and diligence across organisational forms The 2026 legal environment has transformed the tradi - tional, abstract concept of “fiduciary duties” into con - crete adjudicative criteria for pursuing personal liabil - ity in civil and administrative litigation. Compared to the relatively broad provisions of Articles 147 and 148 of the previous Company Law (2018 Revision), Articles 179 and 180 of the revised Company Law establish more operable fiduciary duty standards for D&Os of both LLCs and JSCs: the duty of loyalty ( zhongshi yiwu ) and the duty of diligence ( qingmian yiwu ). The statutory “duty of diligence”, which serves as the PRC law equivalent to the common law “duty of care”, is explicitly defined in Article 180, paragraph 2 of the revised Company Law as requiring D&Os to exercise the reasonable care expected of a manager acting in the best interests of the company. When facing direc - tor liability lawsuits, courts will utilise these refined, updated statutory definitions to determine whether the management of either type of company has ful - filled its compliance oversight obligations. Risk exposure for D & O joint liability with controlling shareholders ; anticipated failure of the “ passive execution ” defence Under the statutory logic of the revised Company Law, legal experts predict that the deeply ingrained commercial practice within many MNC subsidiaries – where local management treats the execution of global group policies or explicit directives from over - seas headquarters as an absolute, self-evident inter- nal justification – will face an unprecedented challenge in upcoming judicial enforcement cycles. While Article 180 (paragraph 3) and Article 192 of the revised law progressively establish statutory joint and several liability for controlling shareholders and actual controllers who issue wrongful instructions,
161 CHAMBERS.COM
Powered by FlippingBook