Viewpoint... Research on the rules of "shadow directors" and "de facto directors" in the new Company Law.
Published:
2024-06-18
Due to the lack of corresponding constraints on "shadow directors" and "de facto directors" in the current Company Law, the new Company Law has improved this by drawing on and introducing it, and further strengthened the code of conduct of actual controllers and controlling shareholders.
Foreword
With the continuous development and change of the current business environment, the corresponding governance structure of the company has become more and more complex.
In this context, as the core force of corporate governance, the responsibilities of directors and the corresponding code of conduct are particularly important. At this time, the controlling shareholder and the actual controller give instructions behind the scenes, thus indirectly exercising the corresponding powers of the directors, which is likely to harm the interests of the company and shareholders. Due to the lack of corresponding constraints on "shadow directors" and "de facto directors" in the current Company Law, the new Company Law has improved this by drawing on and introducing it, and further strengthened the code of conduct of actual controllers and controlling shareholders.
Overview of 1. "shadow director" and "de facto director" rules
Modern companies are characterized by entrusted management, and directors, as entrusted managers, constitute the essential core of corporate governance. The distribution of corporate equity in China is highly concentrated, the controlling shareholder and the actual controller often have strong control in corporate governance, and the abuse of rights to harm the interests of the company, shareholders and creditors is very common. Controlling shareholders or actual controllers often manipulate the board of directors and directors in various ways, thus reducing the board of directors or directors to a puppet at the level of corporate governance. In this regard, in the process of revising the Company Law in 2023, various opinions suggested strengthening the legal liability of controlling shareholders and actual controllers in order to be consistent with de facto control.
The third paragraph of Article 180 of the new "Company Law" is called the "de facto director rule". It is a new clause, that is, although the controlling shareholder and actual controller do not serve as a director of the company, they perform company affairs and exercise directors and directors. When the powers of the board of directors, they shall assume the obligations and responsibilities of directors. Article 192 is called the "Shadow Director Rule", that is, if the controlling shareholder or actual controller instructs a director or senior manager to engage in an act that harms the interests of the company or shareholders, he shall be jointly and severally liable with the director or senior manager. This is consistent with the provisions of the Civil Code on joint infringement. The controller and the controlled person form a whole, and they should bear joint and several liability for joint infringement of the infringed.
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The normative gist of 2. "shadow directors"
According to the provisions of Article 192 of the new "Company Law", the following relevant factors should be comprehensively considered regarding the normative essence of "shadow directors": First, in terms of the main elements. The regulatory subjects of this article shall be the controlling shareholder and the actual controller, which are the subjects who have actual control over the company through equity and other rights media. Second, there needs to be indicative behavior. The element of conduct stipulated in this article is that the controlling shareholder and the actual controller "instruct" the directors and senior managers to engage in acts that harm the interests of the company or shareholders. Third, directors and senior managers engage in acts that harm the interests of the company or shareholders on the basis of instructions. From the object of its damage, on the one hand, it includes the interests of the company, on the other hand, it also includes the interests of shareholders. At this time, it is necessary for the behind-the-scenes instructors to bear joint and several liabilities to the company or shareholders together with the directors and senior managers. Fourth, there is a causal relationship between the aforementioned behavior and the damage result. The determination of relevant liability is premised on the occurrence of damage and the existence of a relationship, and although there is an act based on instructions to engage in harm to the interests of the company or shareholders, it does not result in the occurrence of damage, and of course there is no legal liability. If there is no causal link between the aforementioned acts and the result of the damage, there is no legal liability.
"Shadow directors" usually stay behind the scenes and instruct or manipulate the front directors in order to achieve their purpose of controlling the company. The liability of a "shadow director" under this article is based on the indication that the subject has the status of a controlling shareholder or actual controller, which is different from English law. According to section 251 of the UK Companies Act 2006, a "shadow director" is a person who is accustomed to acting on the direction or direction of a company director, but this standard remains to be clarified by jurisprudence. In jurisprudence, the English courts have a more specific definition of what constitutes a "shadow director. In the case of Re Hlydrodam(Corby)Ltd, the court defined the constitutive requirements of "shadow director" as:(1) shadow director manipulates formal director or de facto director behind the scenes, and does not directly participate in the decision-making and execution of the company's business;(2) shadow director has the influence of controlling and controlling the decision-making of the company's business, which is sufficient to make the board of directors comply with its instructions;(3) such dominant and controlling power must achieve continuous influence, make the board accustomed to obey the instructions of shadow directors;(4) It is not necessary to control all the actions of the company. However, in the Secretary of State for Tradeand Industry v. Deverell case in 2000, the aforementioned components showed development and change. The judge in the case held that if it can be proved that all or part of the directors have placed themselves in a subordinate position or waived their independent judgment, the dominator and controller can naturally constitute a "shadow director" and does not presuppose the complete loss of independence of the board of directors. In other words, based on the Deverell case, the establishment of "shadow directors" no longer requires absolute obedience between the board of directors and the controller, nor is it necessary to manipulate behind the scenes, or to openly control the directors of the company in front of the curtain. It can be seen that the composition of "shadow directors" in English law is not the same as that in China.
The Normative Essence of 3. "Factual Directors"
For controlling shareholders and actual controllers, the 2023 Company Law adopts the regulation of substantive directors. The rules on "de facto directors" in Article 180, paragraph 3, of the new Company Law and the rules on "shadow directors" in Article 192 form the normative system of substantive directors and senior executives in China's Company Law, the "de facto director" regulates the actual execution of the affairs of the director by the controlling shareholder and the actual controller who do not serve as a formal director, while the core of the regulation of the "shadow director" lies in the controlling shareholder and the actual controller, through their influence in the company, behind-the-scenes instructions to directors and senior managers, and the two jointly construct a complete norm of obligations and responsibilities of the controlling shareholder and the actual controller. The composition of "de facto directors" should take into account the following two aspects:
First, there is no formal director status. The third paragraph of Article 180 of the new Company Law applies to controlling shareholders and actual controllers who do not serve as directors, and aims to solve the problem of their manipulation and control of the company. The Companies Act 2023 was amended to remove the provision that the actual controller "is not a shareholder of the company. According to the definition of Article 265 of this Law, a controlling shareholder is a shareholder whose capital contribution accounts for more than 50% of the total capital of a limited liability company or whose shares account for more than 50% of the total share capital of a joint stock limited company; although the capital contribution or the proportion of shares held is less than 50%, but the voting rights enjoyed by the capital contribution or the shares held are sufficient to have a significant impact on the resolution of the shareholders' meeting. The actual controller is the person who can actually control the company's behavior through investment relationship, agreement or other arrangement. If the controlling shareholder or de facto controller is a director of the company, he or she is naturally subject to the obligations of the preceding two paragraphs; if the controlling shareholder or de facto controller who is not a director of the company actually performs the affairs of the company, the provisions of this paragraph that the director has a duty of loyalty and diligence to the company shall apply.
Second, the act of the director was in fact carried out. The key to the determination is the determination of "actual execution of corporate affairs. The controlling shareholder and the actual controller should reach the level of de facto becoming a child of the company, I .e. performing or performing duties or acts that only the directors of the company can perform. In our company law, the board of directors is the statutory way for directors to exercise their powers, and directors are not able to determine the company's representation. Therefore, the controlling shareholder and the actual controller who actually participate in or exercise the statutory authority of the board of directors should be included in the subject category of the duty of loyalty and diligence as "de facto directors. The circumstances in which the controlling shareholder or de facto controller constitutes a "de facto director" usually include the existence of defects in the election of directors, participation in meetings and resolutions of the board of directors as a director, signing as a director, and exercising the powers of the board of directors as an executive director.
4. epilogue
In practice, the determination of "de facto director" and "shadow director" and the definition of their legal liability often require the court to make a comprehensive judgment according to the specific circumstances. For the company and its shareholders, understanding and mastering the relevant rules of "de facto directors" and "shadow directors" will help to better protect their own rights and interests and prevent losses caused by improper behavior. At the same time, for regulators, strengthening the supervision of "de facto directors" and "shadow directors" will help maintain market order, protect the interests of investors, and promote the healthy development of companies.
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