News

In a market environment full of opportunities and challenges, entrepreneurs, as the helmsmen of commercial vessels, have a profound impact on the direction and destiny of enterprises. However, legal risks are like reefs under the surface of the sea, lurking in many decision-making processes such as major investments, equity structure design, daily contract signing and even labor management. Failure to foresee the legal consequences of a decision can lead to economic loss and goodwill, or trigger severe administrative penalties or even criminal liability, plunging individuals and enterprises into an irreparable abyss. The purpose of this paper is to analyze the core legal risks faced by entrepreneurs in business decision-making, reveal the root causes, and systematically build a prospective and operable legal risk prevention system to provide theoretical guidance and practical support for entrepreneurs to make sound decisions in a complex business environment.

I. Core Legal Risks in Entrepreneurial Decision-Making

The legal risks in entrepreneurial decision-making are diversified, hidden and highly hazardous, and can be mainly categorized into the following categories:

(a) Civil and Commercial Legal Risks: Fundamental Risks of Business Operation

1. contract risk: latent in the contract life cycle. Contract subject qualification defects (such as the contracting party without authorization or beyond the authority), the core terms of the design defects (such as the imbalance of rights and obligations, liability for breach of contract is unclear, the dispute resolution mechanism is not conducive), the performance of the process of improper monitoring (such as failure to claim rights in a timely manner, the lack of evidence retained) and major situational changes to cope with the error, may trigger liquidated damages, the contract is revoked or invalid and other legal consequences. The risks in supply chain contracts and major investment and financing agreements are particularly fatal.

2. Corporate Governance and Equity Risks: Concentrate on the level of enterprise organization structure and power operation. Inadequate design of shareholding structure (e.g. over-concentration leading to deadlock, over-dispersion leading to control struggle), violation of laws and articles of association in convening procedure or voting method of shareholders' meeting/board of directors, infringement of shareholders' rights (right to know, right to dividends, etc.), failure to fulfill the compliant procedure of connected transactions, defective effectiveness of corporate resolutions (revocable or invalid) may induce shareholders' lawsuits, paralysis of corporate governance, and even shake the foundation of the enterprise. Intellectual Property Risks

3. Intellectual Property Risk: This is reflected in the creation, utilization and protection of intellectual property. Unintentional or intentional infringement of other people's patents, trademarks, copyrights, trade secrets; their own core intellectual property rights are not in time to confirm the right (apply for registration) or improper protection strategy (confidentiality measures are not enough); cooperation and development, licensing and transfer agreements, there are significant omissions in the terms of the agreement, which can lead to infringement lawsuits, the loss of market share, core competitiveness is damaged.

4. Unfair competition risk: from the market competition behavior. The implementation of commercial confusion (counterfeit logo), false publicity, commercial defamation, infringement of trade secrets, improper prize sales, commercial bribery and other acts expressly prohibited by the Anti-Unfair Competition Law, will face high civil damages, administrative penalties and serious depreciation of goodwill.

5. Tort Liability Risks: arising from the infringement of personal or property rights and interests of others by business practices. Product quality defects causing consumer damage, environmental pollution caused by business activities, network platforms failing to fulfill their reasonable management obligations resulting in damage to the rights and interests of users, and third-party damage caused by employee behavior, etc., all of which may lead to large-scale infringement lawsuits and large amounts of compensation.

(ii) Administrative and Legal Risks: Compliance Pressure under Regulatory Red Lines

1. Market access and continuous operation compliance risk: it involves the violation of regulatory requirements in the establishment, change, deregistration and daily operation of enterprises. Typical examples include operating without a license, operating in excess of the scope of business, false registration, failure to register changes in accordance with the law, and false or concealed information in annual reports.

2. Industry-specific regulatory risks: Specific industries face strong regulation. Violation of prudent business rules in the financial industry, data security risks (violation of the Network Security Law, the Data Security Law, and the Personal Information Protection Law), advertising and publicity violations (false advertisements, absolute terms), price violations (price fraud, collusion to increase prices), tax violations (tax evasion and fraudulent invoicing), production safety accidents, and environmental violations (unapproved construction, over-standard emissions), etc., will incur the administrative authorities' Warning, fines, confiscation of illegal income, suspension of production and business, revocation of licenses and other severe penalties.

3. Anti-monopoly risk: mainly for enterprises with dominant market position. The implementation of monopoly agreements (horizontal/vertical), abuse of dominant market position (unfairly high prices, refusal to deal, tying, etc.), illegal implementation of operator concentration (should be declared but not declared, declared but not approved and then implemented), facing the regulator of a huge fine (can be as high as 10% of annual sales), ordered to stop the illegal behavior, split the business and other penalties, the enterprise's reputation and market position caused by a devastating blow.

(iii) Criminal law risk: the ultimate cost of poor decision-making

1. Unit crime risk: enterprises for their own interests, the collective research decision or by the person in charge of the decision to implement the harmful social behavior. Common crimes include: production and sale of shoddy products, smuggling crimes, crimes against the management order of the company's enterprises (such as misrepresentation of registered capital, false capital contribution evasion), undermine the financial management order (such as illegal absorption of public deposits, capital fraud), financial fraud (such as loan fraud, bill fraud), crimes against the administration of taxation (such as tax evasion, false VAT invoices), crimes against intellectual property rights (such as counterfeit registered trademarks). (e.g. counterfeiting of registered trademarks, infringement of commercial secrets), illegal business operation, bribery (unit bribery) and so on. Upon conviction, the enterprise will be sentenced to a fine, and the directly responsible supervisors and other directly responsible persons will face penalties.

2. Risks of crimes related to the entrepreneur's personal duties: The entrepreneur may commit personal crimes in the course of performing his duties, such as the crime of passive bribery of non-State staff, the crime of misappropriation of duties, the crime of misappropriation of funds, the crime of breach of trust to the detriment of the interests of a listed company, the crime of illegally operating a business of the same kind, and so on. Such crimes directly lead to the entrepreneurs being imprisoned and disqualified from business.

3. Risks of tax-related crimes: Tax evasion (huge amount and high proportion of taxable amount), false VAT invoices/invoices used to fraudulently obtain export tax refunds and tax deductions, etc., are the high incidence areas of criminal risks for entrepreneurs.

The Root Cause of Legal Risk: A Multidimensional Perspective

The formation of legal risk in entrepreneurs' decision-making is not caused by a single factor, but is the result of the intertwining of multiple causative factors:

(a) Subjective cognitive bias: weak legal awareness and blind spot of risk identification

“Emphasis on business is light on the law” mindset: some entrepreneurs are overly concerned about the business opportunities and profit pursuit, and regard the law as a constraint rather than a safeguard, and lack of initiative to seek legal assessment when making decisions. Some entrepreneurs are overly concerned with business opportunities and profit chasing, and regard the law as a constraint rather than a guarantee, and lack the consciousness to actively seek legal assessment when making decisions.

(ii) Lack of legal knowledge and misjudgment: Insufficient mastery of the current legal system, regulatory policy updates, biased understanding of specific industry rules, and wrong judgment of the legal nature of the behavior (e.g., crime and non-crime, this crime and that crime).

(C) Driven by fluke: underestimating the cost of violating the law, overestimating the possibility of circumventing the regulation, and taking risks in order to pursue short-term interests or solve the operational difficulties.

(D) Complex objective decision-making environment: information asymmetry and external pressure.

(e) Incomplete and asymmetric information: It is difficult to obtain comprehensive and accurate legal, market and counterparty information for decision-making, especially in complex transactions or emerging areas.

(vi) Pressure from the business environment: Intense market competition, difficulties in raising capital, and pressure from performance reviews may force entrepreneurs to adopt aggressive or even marginalized strategies.

(vii) Rapidly evolving regulatory environment: Frequent adjustments to laws, regulations, and policy standards (especially in the areas of data, fintech, and ESG), and increasing compliance requirements make it difficult for entrepreneurs to follow and adapt in a timely manner.

(viii) Lack of internal governance mechanisms: imbalance of power and uncontrolled processes.

(ix) High concentration of power and lack of checks and balances: under the “one-word” decision-making model, personal will overrides the system, and there is a lack of effective internal oversight, constraints and error correction mechanisms.

(J) Compliance and internal control system: Although there is a system text but not effectively embedded in the business process, the lack of independent and authoritative compliance department, internal audit is a mere formality, the key risk points out of control.

(XI) Decision-making process is not standardized: major decision-making without the necessary procedures (such as professional argumentation, legal review, collective discussion), based on experience or personal preferences.

(XII) legal function marginalization: the legal department failed to participate in depth in the core decision-making, reduced to “firefighters” or contract review machine, failed to play the role of early warning and prevention of risks beforehand.

Third, to build a systematic legal risk prevention system: from awareness to action

Legal risk prevention requires entrepreneurs, business organizations and external professional forces to work together to build a systematic line of defense throughout the entire process of decision-making:

(a) Entrepreneurs to enhance their legal literacy: the concept of the first

Set up the “compliance creates value” core concept: a deep understanding of compliance is the cornerstone of sustainable development of enterprises, and internalize the legal risk prevention as an important part of corporate strategy. Establish the core concept of “compliance creates value”: deeply understand that compliance is the cornerstone of sustainable development of enterprises, and internalize legal risk prevention as an important part of enterprise strategy.

Continuous learning and updating of legal knowledge: Pay attention to legislative developments, judicial precedents and regulatory priorities, and participate in high-quality legal training to enhance one's legal knowledge.

Cultivate prudent decision-making habits: Maintain a high degree of alertness to major, complex and innovative decisions, and take the initiative to ask, "Is it permitted by law? “What are the legal consequences?”. (ii) Improve the corporate governance structure and the management of the company.

(ii) Improve the corporate governance structure and internal control mechanism: build the foundation of the system

Optimize the allocation of power and checks and balances: Improve the articles of incorporation, and clarify the boundaries of the powers and responsibilities of the shareholders' meeting, the board of directors (or the executive directors), and the managerial layer. Explore the establishment of independent directors and minority shareholder protection mechanisms in enterprises with concentrated shareholdings; strengthen the strategic decision-making and supervisory functions of the board of directors in enterprises with dispersed shareholdings.

(C) Build a “strong compliance” internal control system:

(1) Sound system: A refined management system and operating procedures covering all business areas (contracts, labor, intellectual property, data, antitrust, anti-corruption, etc.).

2. Effective implementation: Ensure that the system is implemented on the ground, and that the process is solidified and managed through information technology. Establish rigid control procedures for key risk points (e.g., contract approval, large-value payment, and related transactions).

3. Independent and authoritative compliance department: Establish a chief compliance officer (CCO) and an independent compliance department directly responsible to the board of directors or top management, and give them full investigative, reporting and veto power (on major compliance risks).

4. Regular monitoring and auditing: The internal audit department regularly conducts independent assessments and audits of the effectiveness of compliance and internal controls, with the results reaching the highest level of governance.

5. Standardized decision-making process: Define process specifications for all types of decisions (especially major investment and financing, M&A and reorganization, connected transactions, and high-risk businesses), and make it mandatory to embed the legal review process. Implement a legal due diligence and risk assessment system before major decisions are made.

6. Strengthen the legal professional support: leverage external brains.

7. Enhance the status and capability of internal legal affairs: Ensure that the head of legal affairs enters the core management, and the legal team is deeply involved in major strategic decisions and commercial negotiations. Continuously invest in the professional capacity building of the legal team.

8. Utilizing the wisdom of external lawyers: Establishing long-term strategic cooperative relationships with law firms that are experienced in specific areas (e.g., capital markets, mergers and acquisitions, intellectual property rights, antitrust, and criminal compliance). In the event of major, complex and innovative transactions or when facing high-level risks (e.g., criminal risks, major regulatory investigations), it is necessary to seek the professional advice of top external lawyers. Establish a mechanism for the selection, management and evaluation of external lawyers.

9. Establish risk warning and emergency response mechanism: dynamic defense.

10. Regularized risk scanning and assessment: Regularly (e.g., quarterly/half-yearly) or before the introduction of major policies and regulations, business model adjustment, or entering a new market, systematically sort out and identify potential legal risk points, and assess the level and impact of risk.

11. Establish early warning indicator system: Set up key risk warning indicators (e.g. contract default rate, number of lawsuits/arbitration, amount of regulatory inquiries, employee reports, etc.) for real-time monitoring.

12. Formulate detailed contingency plans: For possible major legal crises (e.g., major lawsuits, administrative penalties, criminal investigations, negative media reports), formulate in advance detailed response processes, division of labor, information reporting paths, public relations strategies.

13. Rapid response to crisis: Once the crisis breaks out, the plan will be activated quickly, and under the guidance of professional lawyers, the company will unify the presentation, communicate effectively, respond according to law, and maximize the control of losses and negative impacts.

Fourth, the conclusion

legal risk is hanging over the entrepreneur's head of the sword of Damocles, its prevention is by no means a momentary success, but a long-term project that requires strategic vision, continuous investment and systematic construction. The only way for entrepreneurs to realize the effective identification, assessment, control and resolution of legal risks in business decision-making is to establish the values of respecting the law and compliance from the depth of their consciousness, as well as to build a modern corporate governance structure with clear powers and responsibilities, effective checks and balances, standardized processes and a strong compliance and internal control system, and to fully integrate the internal and external legal professional wisdom. In today's improving business environment under the rule of law, the ability to prevent legal risks has become a key dimension in measuring entrepreneurial wisdom and core competitiveness of enterprises. By internalizing the awareness of legal risks in the heart, externalizing it in the line, and building a strong “legal moat”, entrepreneurs can lead their enterprises to move steadily in the turbulent business sea and realize the grand vision of everlasting success.