First batch of typical cases of foreign investment equity protection: regulating senior management behavior and providing relief for damages
The People’s Courts provide relief to foreign-invested enterprises that have suffered damages by regulating the behavior of senior executives of these enterprises in accordance with the law. On the fifth anniversary of the implementation of the Foreign Investment Law, the Supreme People’s Court released the first batch of five typical cases of protecting foreign investment rights and interests in accordance with the law.
The Supreme Court stated that in recent years, China has maintained a rapid growth in newly established foreign-invested enterprises, with an optimized structure of introduced foreign investment, accelerated implementation of various foreign investment projects, and significant achievements in the construction of free trade experimental zones and海南自由贸易港.
Pengpai News noted that the Foreign Investment Law of the People’s Republic of China (hereinafter referred to as the Foreign Investment Law), which has been in force since January 1, 2020, has made unified regulations on the access, promotion, protection, and management of foreign investment, establishing the basic framework of China’s new foreign investment legal system.
The five aforementioned cases involve various types of disputes common to foreign-invested enterprises, such as disputes over liability for damage to company interests, disputes over shareholders’ right to know, disputes over company dissolution, disputes over the return of company licenses and certificates, and disputes over liability for damage caused by related-party transactions within the company. The legal controversies also have certain universality and strong representativeness.
In one case involving a dispute over responsibility for damage to the interests of Lan’s Trading Co., Ltd., the court accurately determined the self-transaction behavior of senior executives and promptly safeguarded the legitimate rights and interests of foreign-funded enterprises. The Chinese Company Law stipulates that directors, supervisors, and senior managers have duties of loyalty and diligence to the company. Without being approved by the board of directors or shareholders’ meeting as stipulated in the articles of association, they are not allowed to enter into contracts or conduct transactions with the company. The income obtained by directors, supervisors, and senior managers in violation of these provisions should belong to the company. Foreign-invested enterprises, as one of the market subjects stipulated in the Company Law, should also be subject to these regulations on the behavior of their senior management personnel.
According to court records, in September 2013, a French company Lan’s Company jointly established Shanghai Lan’s Trading Co., Ltd. (hereinafter referred to as Shanghai Lan’s Company) with other French and Belgian investors. Jiang served as the general manager of Shanghai Lan’s Company and was fully responsible for the company’s daily management. In September 2017, Shanghai Lan’s Company signed a decoration engineering contract with澜某公司, entrusting澜某公司 with interior decoration of its office. Subsequently,嘉某公司 took over the project and began construction instead of澜某公司. Shanghai Lan’s Company paid 嘉某company a decoration fee of 1,508,323.50 yuan. Jiang’s spouse, Zhong, holds 99% of the shares in 嘉某公司 but Jiang did not report this information to Shanghai Lan’s Company. Shanghai Lan’s Company believed that Jiang took advantage of his position to transfer higher decoration costs to 嘉某company and Zhong through signing a contract with 嘉某company without reporting to the shareholders’ meeting. Therefore, Shanghai Lan’s Company claimed for compensation.
According to Article 148 (1) (4) of the Company Law of the People’s Republic of China (2018 Amendment), directors and senior managers are not allowed to enter into contracts or conduct transactions with the company unless otherwise stipulated in the articles of association or approved by the shareholders’ meeting. The Shanghai Second Intermediate People’s Court held that in this case, as a senior manager of Shanghai Lan’s Company, without obtaining approval from the shareholders’ meeting to conduct transactions with 嘉某company, Jiang intentionally concealed his close relationship with 嘉某company and conducted transactions on behalf of Shanghai Lan’s Company. This violated Article 148 (1) (4) of the Company Law and it was determined that Jiang and 嘉某company should return the transaction income exceeding market fair value by 342,861.5 yuan to Shanghai Lan’s Company. After the first-instance judgment was made, neither party appealed.
“Foreign investors often rely on corporate executives to manage their investment-established enterprises when investing in China. The provisions on executives’ duties of diligence and loyalty in the Company Law are important legal basis for protecting foreign investors’ rights and interests,” said the Supreme Court when explaining the typical significance of this case. Companies invested by foreigners in China belong to one of China’s market subjects and are equally protected by Chinese company law.” The interpretation of self-dealing under Article 148 (1) (4) of the Company Law (2018 Amendment) in this case expands its scope from senior executives themselves to their close
