CHINA Law and Practice Contributed by: Kevin Wang, Global Law Office
business dealings with the above-mentioned enterprises, or persons who work in com - panies having significant business dealings with the above-mentioned enterprises, their controlling shareholders or their actual control persons shall not serve as independent direc - tors. • Persons holding the position of independ - ent director shall have more than five years of working experience in law, economics or another field, and having no records of major breaching of promises or other illegal records. In addition, there are limitations for some people with a conflict of interest to be an independent director. For example, within three years after resigning or retiring (leaving), leading officials in middle management of the company shall not be appointed as independent directors or inde - pendent supervisors of publicly traded compa - nies to avoid potential conflicts. 4.6 Legal Duties of Directors/Officers The principal legal duties of directors and offic - ers of a company are the fiduciary duties – ie, the duty of loyalty and the duty of diligence. The new revision to Company Law clarifies, for the first time, the connotations of the duty of loyalty and the duty of diligence. The Duty of Loyalty The duty of loyalty requires directors and offic - ers to take measures to avoid conflicts between their own interests and the company’s interests, and not to take advantage of their powers to pursue improper interests, with the following important restrictions: • directors and officers and their close relatives, and enterprises directly or indirectly con - trolled by them, and persons who have other affiliated relationships with them, shall not
enter into contracts or engage in transactions with the company they are serving without the consent of shareholder or board meetings; • without the consent of shareholder or board meetings, directors and officers shall not seek business opportunities that would have belonged to the company for themselves or others by taking advantage of their position; and • without the consent of shareholder or board meetings, directors and officers shall not engage in business that is similar to the com - pany’s, for themselves or others. Any income arising from the breach of duties of loyalty shall belong to the company. The Principle of Business Judgement The new revision to Company Law adds a spe - cific interpretation of the duty of diligence, which indicates that the directors and officers shall act as reasonable business persons do. The prin - ciple of business judgement also leaves room for Chinese courts to determine what will be the reasonable level of business judgement for Chi - nese company directors. 4.7 Responsibility/Accountability of Directors Directors are required to take into account the overall interests of the company and the inter - ests of all shareholders when discharging their duties. In publicly traded companies, the direc - tors are required to pay special attention to the interests of the minority shareholders, as well as other interested parties, such as creditors, employees, clients, suppliers and communities. Director Accountability Exemption In a joint stock company, the directors shall be responsible for the board resolutions. If a resolu - tion violates laws, administrative regulations, the
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