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.
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