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The newly amended Company Law of PRC, effective July 1, 2024, introduces major reforms to corporate governance, shifting from "shareholders' meeting centrism" to "board of directors centrism." The law strengthens the duties and responsibilities of directors, supervisors, and senior management, emphasizing loyalty and diligence. The amendments aim to enhance accountability for controlling shareholders, de facto controllers, and company officials, enforcing fiduciary obligations and providing creditors with more remedies.

The Kangmei Pharmaceuticals case illustrates the risks and compliance strategies under the new law. The Guangzhou Intermediate People's Court found Kangmei Pharmaceuticals guilty of securities misrepresentation, resulting in significant financial losses for over 52,000 investors. The court held the company's actual controllers, directors, supervisors, and senior management jointly and severally liable based on their involvement and degree of fault. Key personnel, including the actual controllers and directors, were held 100% liable, while others with lesser involvement faced reduced liability. This case underscores the importance of compliance and diligence in corporate governance under the new Company Law.

Responsibilities and Risks of Directors and Supervisors

The Kangmei Pharmaceuticals case highlights the significant risks and liabilities directors and supervisors face, underscoring the need for caution in their duties. The new Company Law emphasizes their legal and compliance obligations, detailing accountability for violations.

Obligations and Liability:

1. Compliance with Articles of Association: Directors and supervisors must adhere to the company’s articles of association. Breaches resulting in company losses will hold them liable for damages.

2. Verification of Capital Contributions: The board must verify shareholder contributions. Failure to do so, leading to company losses, results in liability for responsible directors.

3. Capital Evasion: Directors and supervisors are jointly liable if shareholders abscond with capital contributions, causing company losses.

4. Board Resolutions: Directors must ensure board resolutions comply with laws and company articles. Non-compliance causing serious losses makes them liable for compensation.

5. Conflict of Interest: Directors with conflicts must report in writing and refrain from voting on related resolutions to avoid liability.

These provisions enforce stricter compliance and accountability, reducing risks and enhancing corporate governance.

Under the Companies Act 2018 and the New Company Law, individuals are disqualified from serving as directors, supervisors, or senior management if they:

1. Are incapable of or restricted in civil behavior.

2. Have been sentenced to imprisonment for embezzlement, bribery, or similar crimes, with the execution period not exceeding five years, or deprived of political rights for such crimes.

3. Were responsible for a company’s bankruptcy and liquidation within the past three years.

4. Were legal representatives of a company whose business license was revoked due to legal violations within the past three years.

5. Have unsettled debts.

Appointments violating these rules are invalid, and individuals must be dismissed if such conditions arise during their term.

Compliance Strategies for Directors and Supervisors

(I) Strict Adherence to Company’s Articles of Association

Directors and supervisors must follow the Company’s Articles of Association, including attending relevant meetings, keeping accurate minutes, and ensuring all resolutions comply with laws and company regulations. This minimizes the risk of non-compliance.

(II) Principles for Connected Transactions

1. Improved Rules in the New Company Law: The new Company Law enhances regulations on connected transactions, focusing on transparency and fairness. Directors, supervisors, and senior management must report and obtain approval for transactions with the company, including those involving their relatives or associated entities.

2. Core Conditions for Valid Transactions: Connected transactions must involve adequate disclosure, legal procedures, and fair consideration to ensure legality, maintain corporate governance integrity, and protect company interests.

(III) Directors' Liability Insurance

The New Company Law encourages companies to take out liability insurance for directors, covering risks arising from their duties. This insurance typically covers civil liabilities from negligent acts but excludes intentional acts and criminal liabilities. Effective use of such insurance can transfer risk and protect directors from personal financial loss.