CEO Liability under Chinese Law

Last week I had a consultation regarding a company acquisition. My client intends to acquire shares of a Chinese corporation. At the same time, my client wants to take a management position in the target company. In this context, the question arose whether this would also give rise to special liability risks. Today’s article is intended to examine exactly these risks.

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First of all, it should be noted that liability risks under Chinese Law are involved; after all, this is a management position in a Chinese corporation on Chinese territory.

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Turning directly to liability: In accordance with Chinese corporate law, corporate liability must also be based on the corporate structures of this law. Generally speaking, the liabilities of members of the board of directors and senior executives are not as strict in China as they are in many western legal systems. Nevertheless, liability is provided for members of the board of directors and the supervisory board and senior executives if they have violated laws or provisions of the articles of Association and thereby caused damage to the company. In the examination of a possible breach of duty, additionally to Article 49 of PRC Company Law, the wording of the articles of association is then relevant. In addition, the legal eepresentative is liable if the company does not complete its annual audit by SAIC in a timely manner. Directors and officers are also liable if they fail to fulfill their duty of care and loyalty to the company. In addition, they are liable under the company law if they take advantage of their position to receive bribes or other pecuniary benefits (Articles 148 – 150 of PRC Company Law).

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In exceptional cases, company officers are also liable to criminal prosecution, in particular in the case of creditor fraud, operational accidents for which they are responsible, serious environmental damage and acceptance of benefits (in particular: Articles 30, 31 PRC Criminal Law).

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A liability issue also arises from the new Corporate Social Credit System (CSCS). In particular, if the company fails to meet its accounting and fiscal obligations, company officers may receive a negative filing. In some cases, this has already resulted in these individuals then no longer being able to purchase airline tickets or high-speed train tickets, or being subject to travel restrictions.

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