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1 the Doctrine That Dared Not Speak Its Name – Anglo-American Fiduciary Duties in China's Company Law and Case Law Intimat

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1 the Doctrine That Dared Not Speak Its Name – Anglo-American Fiduciary Duties in China's Company Law and Case Law Intimat The Doctrine That Dared Not Speak Its Name – Anglo-American Fiduciary Duties in China’s Company Law and Case Law Intimations of Convergence By Nicholas Calcina Howson1 Submitted to the Author’s Workshop for: Professors Hideki Kanda, Kon Sik Kim, and Curtis J. Milhaupt, Eds., A Decade After Crisis: Transforming Corporate Governance in East Asia (2007) September 30-October 1, 2006 Tokyo, Japan Draft Date: September 1, 2006 On October 27, 2005, the Standing Committee of the legislature of the People’s Republic of China adopted an amended corporate law statute, changing China’s 1994 Company Law almost beyond recognition. The new 2005 Company Law represents a radical shift in the understanding and implementation of China’s “modern enterprise system” inaugurated in the mid 1990s and corporate governance generally, and a potentially serious challenge for China’s developing judicial institutions. Among a large number of very important changes, one of the most intriguing is the inclusion of new Article 148, which for the first time in China’s corporate law directly addresses directors’ and officers’ fiduciary duties and in a distinctly Anglo-American way (just as other articles in the new Law provide structures for private enforcement of these new duties). The adoption of these norms better known from alien legal and judicial systems provides a unique prism through which to discuss – at the “micro” level – corporate governance and governance reform across national boundaries, and between separate legal systems and legal orders at different stages of development. This paper examines the formal adoption of corporate fiduciary duties in Chinese law, but also reviews a number of pre- 2005 Chinese judicial opinions which purport to apply corporate fiduciary duties standards. This review both informs how fiduciary duties principles might be applied in China going forward, and allows us to speculate on the engine for, and reality of, “convergence” over this narrow but critically important mechanism of corporate governance. 1 Assistant Professor of Law, University of Michigan School of Law. This paper and its Appendices have been prepared for the Author’s Workshop for Hideki Kanda, Kon Sik Kim and Curtis J. Milhaupt, Eds., A DECADE AFTER CRISIS: TRANSFORMING CORPORATE GOVERNANCE IN EAST ASIA (forthcoming 2007), held in Tokyo, Japan, September 30 – October 1, 2006, and should not be used, referred to, or cited in whole or in part without the prior written permission of the author. Comments are most welcome at: Nicholas C. Howson, Michigan Law School, 625 S. State Street, Ann Arbor, MI, 48109-1215, USA, e-mail: [email protected]. 1 I. Introduction – Corporate Fiduciary Duties Come to China On October 27, 2005, the Standing Committee of the legislature of the People’s Republic of China (“PRC” or “China”) adopted an amended corporate law statute, changing China’s 1994 Company Law2 almost beyond recognition. The new 2005 Company Law3 represents a radical shift in the PRC’s understanding and implementation of the “modern enterprise system” for China and corporate governance generally, and a serious challenge for China’s relatively untested and politically weak judicial institutions. Among a large number of very important changes in the new Chinese Company Law of 2005,4 perhaps the most intriguing is the inclusion of a new Article 148,5 which 2 Zhonghua Renmin Gongheguo Gongsifa (The Company Law of the People’s Republic of China), passed by the 5th Session of the Standing Committee of the 8th National Peoples Congress on December 29, 1993, collected in Guojia Guoyou Zichan Guanliju Qiyesi (National State-owned Assets Bureau Enterprise Department), Ed., GUFENZHI FAGUI ZHIDU WENJIAN HUIBIAN (SHARE SYSTEM – COLLECTION OF LAWS AND REGULATIONS, SYSTEM, DOCUMENTS) (1994) (hereinafter, “Share System Collection”) at p. 21 (with the very minor December 25, 1999 amendments, hereinafter, the “1994 Company Law”). 3 Zhonghua Renmin Gongheguo Gongsifa (The Company Law of the People’s Republic of China), passed by the 18th Session of the Standing Committee of the 10th National Peoples Congress on October 27, 2005 (hereinafter “2005 Company Law”), collected in Guowuyuan Fazhibangongshi (Legislative Affairs Office of the State Council), Ed., GONGSI FALU GUIZHANG SIFA JIESHI QUANSHU (COMPENDIUM OF COMPANY LAW, REGULATION AND JUDICIAL EXPLANATIONS) (2006) (hereinafter, “Company Law Compendium” or “CLC”) at p. 1-1. Unless otherwise noted, all references to company law, regulation, forms and normative documents are from this authoritative State Council Company Law Compendium of 2006, and all English language renderings of the same material are by the author. 4 The changes between the 1994 Company Law and the 2005 Company Law may be summed up as follows: The 1994 law was in many ways an orthodox business regulation type statute, with unique aspects tied closely to China’s transitional economy. Thus, while it expressed very significant attention to state ownership and state participation in the corporate form, it was also replete with mandatory rules governing both external actions of the corporate entity and internal (shareholder, director and officer) governance, with very little role given to courts or any kind of authority applying standards ex post. The new 2005 statute has been washed clean of all provisions relating to state (or Communist Party) involvement, and is characterized by a host of enabling rules (permitting corporate participants to contract into a wide variety of arrangements) and a very significant role for the Chinese People’s Courts to apply judicial standards (like the fiduciary duties that are the subject of this article) ex post. 5 New Article 148 may be contrasted with old Articles 123 and 57-63 of the 1994 Company Law. For companies limited by shares (as opposed to limited liability companies) old Article 123 reads: “The directors and the managers should abide by the company’s articles of association, loyally perform their tasks and protect the interests of the company; they may not use their position or functions and powers in the company to seek personal gain.” 1994 Company Law, supra note __ , Article 123(1). Article 123(2) of the 1994 Company Law then, by cross reference, made Articles 57–63 of the 1994 Company Law (for limited liability companies) applicable; that cross-reference folded in the provisions of Article 59, different only from Article 123(1) in that Article 59 includes supervisory board members in the ambit of the stipulated duty. Thus, the most important clauses in the 1994 Company Law related to corporate fiduciary duties were: Articles 59 (directors, supervisory board members, and officers conformity with law, regulation and articles of association, and prohibition against self-dealing), 61 (self-dealing and related party contracts, and disgorgement of profits to company) and 63 (compensation for damages resulting from violation of law, etc.). All of the material touched on in Articles 57-63 and 123 is now addressed in new Chapter VI of the 2005 Company Law. 2 for the first time6 in China’s corporate law directly addresses directors and officers’ fiduciary duties, and in a distinctly Anglo-American way: Article 148. Directors, supervisory board members and high level management personnel should abide by laws, administrative regulations and the company articles of association, and have a duty of loyalty (zhongshi yiwu) and duty of care (qinmian yiwu) to the Company.7 As in the 1994 Company Law, the 2005 Company Law sets forth a number of direct prohibitions constituting breach of loyalty obligations,8 but omits any mention of a specific standard for the duty of care prong,9 or any instruction to regulators or judges 10 that might be employed as a “business judgment rule” for duty of care inquiries. 6 There may be some residual debate among certain Chinese scholars as to whether the 2005 Company Law Article 148 is substantively new, or just a reformulation of what everyone “hoped” or “assumed” was already in, or could be read into, the 1994 Company Law. The author agrees with the views of Professors Zhang Xudong (“China’s original [1994] Company Law had some basic stipulations regarding the duties of directors, supervisory board members and senior management personnel, and only a relatively generalized rule on duty of loyalty; but it did not clearly stipulate duty of care (or the duty [of care] of a good manager”) and Luo Peixin (“The duty of care requires directors and managers to perform with the same diligence as a prudent person, under similar circumstances, with respect to the management of his own affairs. In China, Article 118 of the [1994] Company Law provided that directors should be liable for damages, if their performance constituted breach of law or the articles of incorporation. However, such duties emphasizing non-violation were not consistent with duty of care, because duty of care emphasizes due diligence and intelligence applied in the service of the corporation”). See Zhang Xudong, Ed., SHANGSHI GONGSI DONGSHI ZEREN YU CHUFA (RESPONSIBILITIES AND SANCTIONS FOR DIRECTORS OF LISTED COMPANIES) (2004) (hereinafter, “Zhang Xudong 2004”) 82, and Luo Pexin, “Judicial Plights in The Context of the New Company Law of China,” working paper delivered at “The Development of Law in Asia: Convergence versus Divergence,” Third Asian Law Institute (ASLI) Conference, May 25-6, 2006, Shanghai, PRC, p. 56. See also Appendix II. 7 2005 Company Law, supra note __, Article 148(1) (emphasis added). The duties apply to both
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