Legal guide for company directors and CEOs in China

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

ESG refers to environmental, social and governance-related matters. They are commonly regarded as criteria for a company’s operations in relation to the environment, employees, customers, corporate governance, etc. Under PRC law, there is currently no specific statutory directors’ duty on or in relation to matters that could be categorized as an ESG consideration. Such duties are, currently, also not stipulated or recommended in any nationwide applicable legal framework. In particular, China does not have a unified Corporate Governance Code to regulate ESG-related duties. 

However, from a civil and corporate law perspective, the PRC Company Law provides for some relevant provisions. In this regard, as of the date of drafting of this legal guide, still the PRC Company Law as last having been amended with effect of 26 October 2018 (the "2018 Company Law") was in effect. On 29 December 2023, the Standing Committee of the National People's Congress of the People's Republic of China adopted and promulgated a substantive revision of the 2018 PRC Company Law (the "2024 Company Law"), which will enter into effect on 1 July 2024. The 2024 Company law constitutes a major update and introduces multiple changes compared to the 2018 PRC Company Law. The 2024 Company Law, inter alia, provides for changes regarding capital contributions, corporate governance as well as responsibilities of shareholders and key personnel of companies. 

Articles 147 of the 2018 PRC Company Law and Articles 179 and 180 of the 2024 Company Law stipulate that directors, supervisors and senior management personnel shall comply with laws, administrative regulations and the Articles of Associations of the company, and bear a duty of loyalty and diligence towards the company. Thus, it is possible that the Articles of Association, a code of conduct or other internal rules of a company stipulate specific duties of directors and management personnel on ESG-related matters. For management personnel, such duties are additionally possible to be stipulated in their labour contracts or be stipulated in their annual target for evaluating their performance. Therefore, in order to identify any ESG-related duties of directors and management personnel, the above-mentioned legal documents should be reviewed in the individual case. 

As a basic principle under PRC law, a director or manager of a PRC limited liability company is personally liable towards a third party for his or her personal actions, but normally not for his or her operational activities. However, Article 191 of the 2024 Company newly provides that, while for losses caused to others by a director or senior officer during the performance of their duties, the company shall be liable for compensation, if there is intent or gross negligence on the part of the director or senior officer, the person shall also be liable for compensation. Notwithstanding that, it is rather unlikely that third parties will directly raise civil claims against a director or manager for the acts (e.g. breach of contract) of the company. Under normal circumstances, even if a director, supervisor or manager is internally considered to be responsible for a breach of contract by the company, he or she will not assume external civil liability towards a third party. 

From an administrative and criminal law perspective, there are numerous stipulations according to which the “responsible person”, “person directly in charge”, “person directly responsible” or “major person in charge” can be liable. Due to the immense administrative legislation of the PRC, an exhaustive summary of the potential administrative liability is practically unobtainable. Below are some examples: 

Under Article 63 of the PRC Environmental Protection Law, where a company commits any of the violations stated below, besides imposing a penalty, the competent departments of environmental protection shall transfer the case to the public security organ which shall impose an (administrative) detention of no less than 10 days, and up to 15 days, on the persons directly in charge and other persons directly responsible. If the circumstances are relatively minor, a detention for no less than 5 days, and up to 10 days, shall be imposed: 

• construction projects without an environmental impact assessment in accordance with the law have been ordered to be suspended, but the company of such projects has refused to do so;
• the company that discharged pollutants in violation of the law and without a pollutant discharge license has been ordered to suspend discharging pollutants, but it has refused to do so;
• the company has discharged pollutants illegally using measures to avoid supervision;
• the company that produced and used forbidden pesticide has been ordered to rectify, but it has refused to do so. 

According to Article 338 in conjunction with Article 346 of the PRC Criminal Law, where a company discharges, dumps or disposes of radioactive waste, waste containing infectious disease pathogens, toxic substances or other harmful substances, and thus seriously pollutes the environment in violation of the provisions of the State, detention or imprisonment of up to 7 years (or above 7 years in especially severe cases) shall be imposed on the persons directly in charge and other persons directly responsible, besides a penalty which shall be imposed on the company. 

However, there is no statutory definition for the terms “person directly in charge” and “person directly responsible” under PRC law. In a commercial context, the responsible person of a company often refers to the Legal Representative and/or the General Manager. Also, persons to whom a relevant task has been assigned may be regarded as a “person directly in charge” or a “person directly responsible”, if, for instance, they are recorded as “person in charge” for environmental issues or work safety at the competent authorities. 

According to Article 17 of the 2018 PRC Company Law and Article 16 of the 2024 Company Law, a company shall protect the legitimate rights and interests of its employees, enter into employment contracts with its employees in accordance with the law, purchase social insurance for employees and strengthen labor protection so as to ensure work safety. A company shall, through various means, enhance the professional education and in-service training of its employees so as to improve their quality as employees. According to Article 21 of the PRC Work Safety Law, the major person in charge of a production or operation company shall have the following duties with regard to work safety efforts of the company: 

• establishing, improving and implementing a responsibility system for the work safety of all employees of the entity, and strengthening the development of standards for work safety;
• organizing the formulation and implementation of work safety-related rules and systems and operating procedures of the entity;
• organizing the formulation and implementation of work safety education and training plans of the entity;
• ensuring the effective execution of input with regard to work safety of the entity;
• organizing the establishment and implementation of the dual prevention mechanism of level-to-level safety risk management and control and hidden danger identification and management, supervising, urging and inspecting work safety efforts of the entity, and eliminating the potential for work safety accidents in a timely manner;
• organizing the formulation and execution of emergency rescue plans for work safety accidents of the entity;
• reporting work safety accidents truthfully and in a timely manner. 

The PRC Work Safety Law requires that a production or operation company shall specify the responsible persons for the respective posts, but it does not define the term “major person in charge”. The “major person in charge”, as defined in the Interpretation of the PRC Work Safety Law (jointly released by the Legislative Affairs Commission of the Standing Committee of the National People’s Congress and the Ministry of Emergency Management) and the Reply from the Ministry of Emergency Management, must be the main decision-maker in the production and operation activities of the production and operation unit; enjoy the final decision on the production and operation activities of the unit, including production safety matters; and lead the overall production and operation activities. For example, if the major production and operation matters of the production and operation unit should be decided by the Board of Directors, then the Chairman of the Board of Directors will likely be regarded as the major person in charge. However, a director who is not the Chairman but has given an affirmative vote for a Board resolution on a work safety related matter may possibly also be regarded as the major person in charge in regard to the resolved matter and bear the relevant liability under the PRC Work Safety Law. 

As to ESG considerations on gender pay inequality, Article 48 of the PRC Constitutional Law stipulates that women in the PRC shall enjoy equal rights with men in all spheres of life: political, economic, cultural, social and familial. However, there is no specific regulation on any obligation of directors in this regard.

According to the PRC Law on Protection of Rights and Interests of Women which was amended and came into effect on 1 January 2023, the employer in China shall take specific measures to prevent gender discrimination in the workplace, i.e. gender equality in recruitment, promotion, training and termination, gender pay equality, collective agreements on gender equality, etc. Specifically, the employer shall take action on prevention of sexual harassment at the workplace. If the employer fails to duly handle the complaints of the female employees, makes retaliation against the complaining employees, or fails to take actions preventing sexual harassment at the workplace causing serious consequences but refuses to make rectification, the competent authority may impose punishment on the major person in charge or the person directly responsible.

Article 19 of the 2024 Company Law provides that in conducting their business activities, companies shall abide by laws and regulations, observe social ethics and business ethics, act in good faith, and be subject to government and public oversight. In addition to that, Article 20 of the 2024 Company Law stipulates that companies in conducting their business activities must fully take into account the interests of their employees, consumers, and other stakeholders, as well as social and public interests, such as ecological and environmental protection, and undertake social responsibility. It further states that the State encourages companies to engage in social welfare activities and to publish reports on social responsibility. 

Although the 2024 Company Law still does not provide for specific provisions regarding directors’ duties, Articles 19 and 20 of the 2024 PRC Company Law clearly show that ESG related considerations came more into the focus of the Chinese legislator. It may be expected that regulations or other more detailed guidance will be implemented in the near future which may then also contain specific duties on directors and the senior management with regard to ESG considerations.

There are reporting and/or disclosure obligations in relation to ESG for listed companies. The China Securities Regulatory Commission (CSRC) expressly requires listed companies to disclose environmental information and information related to fulfilling social responsibilities such as poverty alleviation, as outlined in the Code of Corporate Governance for Listed Companies (2018). According to Article 86 of the Code of Corporate Governance for Listed Companies (2018), a listed company shall actively implement the concept of green development, integrate ecological environmental protection requirements into its development strategy and corporate governance process, take the initiative to participate in the construction of ecological civilization, and play a demonstration role in pollution prevention and regulation, resource conservation, and ecological protection. Further, the Standards for the Contents and Formats of Information Disclosure by Companies Making Public Offering of Securities No. 2: Contents and Formats of Annual Reports, updated in 2021, feature a distinct section outlining criteria for disclosures related to "environmental and social responsibility". In the Guidelines for Investor Relations Management implemented in May 2022, the CSRC further specifies that communication between listed companies and investors should include ESG information. These regulatory frameworks have established mandates for the disclosure of ESG information by listed companies. Based on this, securities offerings and trading places, including stock exchanges and the National Association of Financial Market Institutional Investors, have promulgated comprehensive regulations concerning ESG-related information disclosure. 

It is noteworthy that on 8 February 2024, the Shanghai, Shenzhen and Beijing Stock Exchanges separately issued the Guidelines for Continuous Supervision of Listed Companies - Sustainability Report (Draft for Comments), which systematically regulates the disclosure of ESG reports by listed companies. For certain listed companies, it requires that the Board of Directors must prepare a "Sustainability Report" annually regarding ESG related issues. 

For Directors of listed companies, it is their duty to ensure that the information and content disclosed publicly by the company is free from any false statements or material omissions. According to Articles 82 and 85 of the PRC Securities Law, the directors, supervisors and senior officers of an issuer shall guarantee that the issuer discloses information in a timely and fair manner, and the authenticity, accuracy and completeness of the information so disclosed shall be guaranteed. Where an information disclosure obligor fails to disclose information as required, or any published securities issuance document, periodical or ad hoc report or any other information disclosed, contains any false record, misleading statement or major omission, causing losses to investors in the course of securities trading, the information disclosure obligor shall be liable for compensation. The controlling shareholder, actual controller, director, supervisor, senior officer or any other person directly liable of the issuer, as well as the sponsor, underwriting securities company or the person directly liable thereof, shall be jointly and severally liable for compensation together with the issuer, unless they are able to prove that they are not at fault.

Most foreign-invested enterprises are established as limited liability companies under PRC law. The advantage is that shareholders are generally liable only for their contribution to the registered capital of the company. 

The highest authority of a limited liability company is the Shareholders’ Meeting. As a rule, these companies also have a Board of Directors, which must consist of at least three members (the 2018 PRC Company Law contains an upper limit of 13 directors, while such upper limit has been abolished in the 2024 PRC Company Law). However, limited liability companies with a relatively small number of shareholders, or which are relatively small in scale, may have one single Executive Director instead of a Board of Directors. 

Directors are appointed by the shareholders.

Under the 2018 Company Law, all limited liability companies including joint ventures must have a Supervisory Board consisting of at least three members. At least one third of the members of the Supervisory Board must be employee representatives. To avoid this, companies which operate on a small scale, or which have a small number of shareholders, can choose to have only one or two supervisors instead of a Supervisory Board. 

According to the 2024 Company Law, in principle, limited liability companies shall still have a Supervisory Board comprising at least three persons (including at least one employee representative). Limited liability companies with a smaller number of shareholders or of a smaller scale can opt to have one Supervisor instead. However, it is not possible anymore to have two Supervisors. Further, under the 2024 Company Law, it is possible not to have a Supervisory Board or a Supervisor at all, if (i) a newly introduced Audit Committee composed by members of the Board of Directors is established which exercises the functions of the Supervisor(s); and (ii) for limited liability companies with a smaller number of shareholders or of a smaller scale, all shareholders unanimously agree not to have Supervisor(s) at all. 

Supervisors are appointed by the shareholders. Directors, including the Executive Director, and managers may not simultaneously serve as supervisor of the same company. 

Another important change introduced by the 2024 Company Law is that, unless a Supervisory Board is set up and includes at least one third employee representatives, limited liability companies with at least 300 employees must have employee representative(s)in the Board of Directors. The employee representative(s) shall be elected by the company's employees through the employee representative congress, employee congress, or other forms of democratic elections. As of the date of drafting this legal guide, still no implementing rules, interpretations or other guidance had been issued on the 2024 Company Law and the issue of employee representatives for limited liability companies with at least 300 employees. According to our understanding when drafting this legal guide, under the 2024 Company Law, limited liability companies with at least 300 employees must mandatorily have employee representative(s) either in the Supervisory Board or in the Board of Directors, and it is not possible to prevent this anymore as under the 2018 Company Law. 

These categories do not exist for limited liability companies under PRC law.

There are few legal restrictions on who can become a director. In general, any natural person with full civil capacity may become a director. In particular, a director is not required to be resident in China and there is no nationality requirement. 

However, according to the 2024 PRC Company Law (the 2018 PRC Company contains very similar stipulations), none of the following individuals shall be eligible for appointment as a director, supervisor, or senior officer of a company: 

• Any individual without civil capacity or with limited civil capacity;
• Any individual who has been subjected to criminal punishment for corruption, bribery, embezzlement or misappropriation of property, or disruption of the economic order of the socialist market, or who has ever been deprived of political rights due to a criminal conviction, and five years have not elapsed since the term of punishment was completed, or in the case of a suspended sentence, two years have not elapsed since the probation period was completed;
• Any former director, factory director, or company manager of a company or enterprise which has been declared bankrupt and liquidated, and where the individual was personally responsible for the bankruptcy of the company or enterprise, and three years have not elapsed since the bankruptcy and liquidation were completed;
• Any former legal representative of a company or enterprise which has had its business license revoked or been ordered to shut down due to any violation of the law, and where the individual was personally responsible for the situation, and three years have not elapsed since the date of revocation of business license or shutdown order; and
• Any individual identified as a subject of enforcement for breach of trust by a People’s Court for failure to repay a significant amount of overdue debts.

The election or appointment of any director, supervisor, or senior officer in violation of the above is invalid, and any existing director, supervisor, or senior officer who falls under the circumstances described above during their term of office shall be removed by the company from the corresponding position. 

Further, a supervisor cannot act as a director or manager of the same company at the same time.

The members of the Board of Directors are appointed by the Shareholders’ Meeting or the sole shareholder. The term of office of the directors is stipulated in the Articles of Association of the company, but each term of office may not exceed three years. 

A director can be reappointed upon expiry of his or her term of office and hold consecutive terms. If no timely reappointment is carried out after the expiry of the term of office of a director, or if the number of the members of the Board of Directors is less than the quorum due to the resignation of some directors from the Board of Directors prior to the expiry of their term of office, the original directors shall continue to perform their functions as directors according to the law before the newly appointed directors assume their roles.

The appointment of directors must be filed with the competent Market Supervision Administration for recordal in order to be effective towards third parties. 

A director is subject to removal by the Shareholders’ Meeting or the sole shareholder which appointed him/her at any time. A director may also resign from his/her office at any time by giving notice to the company, unless the Articles of Association of the company stipulate otherwise. 

The removal of directors must be filed with the competent Market Supervision Administration for recordal in order to be effective towards third parties. 

The 2024 Company Law newly introduces that if a director is dismissed without good cause before the end of his/her term, the director may claim compensation from the limited liability company. As of the date of drafting this legal guide, no further interpretation or guidance has been available on the practical impact of such stipulation.

Under PRC law, a company only has one legal representative, and the legal representative is the only person with statutory representation rights. The legal representative must be registered with the company registration authority, i.e. the competent Market Supervision Administration. Persons other than the legal representative may only represent the company on the basis of a power of attorney issued by the legal representative. 

Under the 2018 PRC Company Law, only the Chairman of the Board of Directors, the Executive Director (if there is no Board of Directors) or the General Manager may be registered as the legal representative. 

Under the 2024 PRC Company Law, any member of the Board of Directors or company manager can serve as legal representative. 

A specific PRC characteristic to note is that the company seal has the same validity as the signature of the legal representative. I.e., contracts and documents affixed with the company seal are, generally, valid and legally binding, even if they have not been signed.

According to the 2018 PRC Company Law, a Board of Directors must have between three and 13 members. The 2024 PRC Company Law abolished such upper limit of 13 members and states that a Board of Directors must have at least three members. 

Under both the 2018 PRC Company Law and the 2024 PRC Company Law, there is no minimum number of board meetings for limited liability companies. Normally, a limited liability company has at least one board meeting every year. Meetings of the Board of Directors are convened and presided over by the Chairman of the Board of Directors. 

The discussion methods and voting procedures of the Board of Directors of limited liability companies are flexible and are subject to the stipulations of the Articles of Association. The 2024 PRC Company Law newly provides in this regard that a meeting of the board of directors shall only be held with the presence of a majority of the directors and any resolution of the Board of Directors shall be adopted by a majority of all the directors. Each director has one vote.

It is not mandatory for a company and not very common to sign a service contract or employment contract with its board members for their services. Also, it is not mandatory for a company and not very common to pay any remuneration to board members.

Both the 2018 PRC Company Law and the 2024 PRC Company Law set out restrictions on a director’s activities so as to prevent situations of conflict of interest. The Articles of Association may stipulate additional limitations. According to the 2024 PRC Company Law, directors, supervisors, and senior officers, whether directly or indirectly, entering into a contract or engaging in a transaction with the company, shall report matters related to the contract execution or transaction to the Board of Directors or the Shareholders' Meeting and obtain approval in accordance with the company's Articles of Association through resolutions of the Board of Directors or the Shareholders' Meeting.

The 2024 Company Law further expands these restrictions on related-party transactions, which now apply to concluding contracts or conducting transactions with the company by (i) its directors, supervisors and senior managers; (ii) close relatives of the persons under item (i); (iii) enterprises directly or indirectly controlled by the persons under items (i) and (ii); and (iv) persons having other related-party relationships with persons under item (i).

Further, according to the 2024 PRC Company Law, directors, supervisors and senior officers shall not use their positions to seek any business opportunity available to the company for themselves or others, except in any of the following circumstances: (i) where the activity is reported to the Board of Directors or the Shareholders' Meeting and approved in accordance with the company's Articles of Association through resolutions of the Board of Directors or the Shareholders' Meeting; or (ii) where the company cannot exploit the business opportunity by itself according to any laws, administrative regulations, or the company's Articles of Association.

Under the 2024 Company Law, directors, supervisors, and senior officers shall not operate businesses, either self-owned or owned by others, similar to those of the company they serve, without reporting to the Board of Directors or the Shareholders' Meeting and obtaining approval in accordance with the company's Articles of Association through resolutions of the Board of Directors or the Shareholders' Meeting.

Under both the 2018 Company and the 2024 Company Law, directors, supervisors, and senior officers shall abide by laws, administrative regulations, and the company’s Articles of Association. 

Further, under both the 2018 Company and the 2024 Company Law, Directors owe obligations of fidelity and diligence to the company. The 2024 PRC Company Law provides more details in this regard: As to the duty of loyalty, Directors, Supervisors and senior managers as well as, newly introduced, controlling shareholders and the actual controllers, shall take measures to avoid conflicts of interest between their personal interests and the interests of the company, and they shall not use their authority to seek improper benefits. As to the duty of diligence, they shall, in the performance of their duties, exercise the usual and reasonable care that a manager should have for the maximum benefit of the company. 

Under both the 2018 Company and the 2024 Company Law, Directors shall not infringe the interests of the company by taking advantage of their relationship with the company. According to the 2024 PRC Company Law, e.g. directors may not use their functions and powers for embezzling company property or misappropriating company funds; diverting company funds into an account held in their own name or in the name of any other individual; using their authority to engage in bribery or accept other illegal income; personally accepting commissions on transactions to which the company is a party; disclosing confidential company information without authorization; or other conduct that violates the duty of loyalty to the company. 

Towards the company.

PRC law does not provide for specific stipulations in this regard. As set out above, the members of the Board of    Directors owe obligations of fidelity and diligence to the company and shall act in the best interests of the company. According to Article 125 of the PRC Enterprise Bankruptcy Law, the directors, supervisors or officers of a bankrupt enterprise that have violated the duties of loyalty and diligence and led to the bankruptcy of the enterprise shall bear relevant civil liability. Further, persons involved in circumstances as set out in the preceding sentence shall not act as a director, supervisor or officer of any enterprise for three years from the date of conclusion of bankruptcy proceedings.

It is further noteworthy that, unlike in other jurisdictions, under PRC law, even if a company is insolvent, there is no obligation of the legal representative, the members of the Board of Directors or the General Manager to apply for insolvency proceedings.

It is suggested that, as soon as the directors are aware that a company is in financial difficulty, they seek external advice.

If directors of a company breach the law, administrative regulations or the Articles of Association of the company in the performance of their functions and cause losses to the company, they are liable to compensate the company. With regard to third parties, the company as a legal person bears civil liability for the operational activities of its personnel including directors. Therefore, in respect of civil liability, a board member of a company is normally personally liable towards a third party only for his personal actions but not for his/her corporate actions. However, the 2024 PRC Company Law newly provides that for losses caused to others by a director or senior officer during the performance of their duties, the company shall be liable for compensation, but if there is intent or gross negligence on the part of the director or senior officer, the person shall also be liable for compensation. 

It is further noteworthy that the 2024 PRC Company Law newly provides for the following potential liabilities of directors:

• The Board of Directors shall verify the status of the shareholders' capital contributions. If an incompliance is found, a written payment demand shall be issued by the company to the relevant shareholder. Directors who fail to fulfill the above obligation in a timely manner, resulting in losses to the company, shall be liable for compensation. 
• In case of an unlawful profit distribution, if losses are caused to the company, shareholders as well as any directors, supervisors and senior officers responsible for the violation, shall be liable for compensation.
• In case of an unlawful capital decrease, if losses are caused to the company, shareholders as well as any directors, supervisors and senior officers responsible for the violation, shall be liable for compensation. 

In addition to the civil liabilities mentioned above, the directors of a company may also be subject to administrative and criminal liabilities. Administrative liability of board members can occur by being the “responsible person”, “directly responsible person” or “main person in charge”, as set out above. Criminal liability of board members can occur, e.g., through providing false financial and accounting reports  and, thereby, causing damages to the shareholders or the public; concealing property in the process of liquidation and, thereby, impairing the interests of creditors; tax evasion of more than 10% of the tax payable and more than RMB 10,000; forging VAT invoices; misappropriation of corporate funds; misuse of credit; insurance fraud; smuggling of certain goods; money laundering; fraudulent use or violation of intellectual property rights; disclosure of confidential information and corruption. In all of the above cases, a director’s criminal liability requires the criminal act to have been committed within the area of responsibility of the relevant  person and the relevant person to have been at fault and to have acted at least with gross negligence.

In practice, the liability risks for directors can be mitigated through the following measures:

• Companies should stipulate a clear allocation of the responsibilities of their directors and management personnel and strict compliance with PRC law in the Articles of Association, management by-laws, code of conduct, employees' labor contracts, etc. They should obtain all necessary permits for their operation and introduce and document sufficient standards and control measures in relation to ESG.
• An indemnification clause can be included in the Articles of Association. It can, e.g., be stipulated that if directors, in performing their duties on behalf of the company, incur liability towards third parties, they shall be indemnified by the company except for intentional misconduct or gross negligence or serious dereliction of their duties.
• Companies may further consider taking out a Director and Officer Liability Insurance in order to protect directors from liabilities incurred when they perform their duties on behalf of the company. In this regard, the 2024 Company Law now expressly provides that a company may purchase Director and Officer Liability Insurances. In such case and if such insurance is renewed, the Board of Directors shall report the insured amount, coverage, premium rate, etc. to the Shareholder's Meeting of the company.