China Company Directors and China Criminal Liability

Prison. It's everywhere you don't want to be.

I was recently asked by a reporter about China director liability and I responded per the below. Because my answer should be of interest to anyone who is a director of a Chinese company or contemplating becoming one, I thought we should run it on here (modified a bit) as well.

Directors of major Chinese companies are lining up to go to prison these days. So director liability is a big issue in China.

That said, the concept of director liability in China is different than in the U.S. or the EU. In China, the directors are assumed to be directly involved in the day to day business operations of the company. It is very rare in China to have directors who do no more than attend an occasional board meeting and merely review high level documents and policy decisions. For this reason, the directors who are going to jail are going to jail not because they “should have known” about the crimes committed by the company, but because they managed, promoted and supervised those crimes. Thus, the “prudent man” standard is not an issue; the issue is “criminal intent”.

Note also that the directors being prosecuted by the state for committing crimes are not being sued by their shareholders for not properly conducting their management duties. Rather, they are being criminally prosecuted for crimes committed by the company. But, in effect, they are being prosecuted and convicted because they committed crimes like embezzlement, tax evasion, and insider trading. There are also cases in the product safety area where a director knows the company’s product is not safe but instructs company employees to make the sale anyway.

If you want examples, just Google PetroChina, Citic Securities, Gome, China railroad or “melamine in milk scandal.” Those are all cases where directors and senior management were prosecuted and convicted for major crimes. The list is virtually endless, but those are the first that come to mind.

Who wants the position now?

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