On The Duty Of Duty Of Directors In China

As the administrators and executors of a corporation, the corporate directors have the duty of care, the duty of loyalty and the other legal duties, wherein the duty of loyalty is one of the important duties. The duty of loyalty requires that a director favor the corporation’s interest over her own whenever those interests conflict. The interests’ conflicts are common seen in three situations:(1) self‐transaction between a director and the corporation,(2) a director personally takes an opportunity that belongs to the corporation and(3) a director engaged in competition with the corporation. The first situation refers to the transaction between the director and the corporation or the affiliated companies. The second situation means the director take the opportunities which are the opportunities and business information she knows from the process of managing corporate affairs and executing her duties. An opportunity properly belongs to the corporation should be disclosed by the director to the corporation and directly related to corporate operation. Also the corporation has a legitimate interest or expectancy in this particular opportunity. The third situation means the director take competing behaviors with the corporation in favor of her personal interest. Under these three situations, the directors may unfairly favor her personal interest, thus the corporation’s interest would be harmed. If a director conducts self‐transaction, or takes the corporation’s opportunity, or competes with the corporation without meet the legal requirements and the legal procurers, she is in breach of the duty of loyalty. Countries of both civil law and common law systems all have made different restrictive rules on this issue.This study focuses on how a director perform her duty of care when confronts the situations that involve a conflict between her personal interests and those of the corporation. Besides the introduction and conclusion parts, this study will be divided into five parts.The first part introduces the rationale under the duty of loyalty. It begins with the definition of the duty of loyalty, then analyses the reasons for having the duty of loyalty, and ends with briefly introducing the situations whenever the interests between the director and the cooperation conflict and the performances of the duty of loyalty under these situations.The second part discusses the relationship between self‐transaction situation and the performance of duty of loyalty. In the beginning of this part, the study explains the definition and the characteristics of self‐transaction between the director and the corporation. Then the issue regard to how to perform the duty of loyalty when the director confront the situation of self‐transactions is discussed. In this part, this study finally illustrates the problems exist in the present Corporation Law of our country and proposes solutions. For example, regulating how to handle self‐transaction in the bylaws is not effective in operating, it would be a better solution if the corporation regulates this situation in the regulations which are frequently used by the directors. And it costs a lot to get the approval form the board or the general meeting of shareholders. The costs can be reduced by using the method of getting the approval form a certain percentage of the uninterested directors first. What’s more, there is no explicit rule referring to the disclosure duty of the director in the present Corporation Law, thus these rules should be made. And the scope of the subjects related to self‐transaction should be expanded. The director’s relatives, friends and affiliated companies also should be added into the subjects.The third part is about the relationship between the corporation opportunity situation and the performance of the duty of care. The definition and the criterion of corporation opportunity will introduced firstly, and how to perform the duty of care under this situation will be discussed by analyzes two cases.The relationship between the competition situation and the duty of care will be addressed in the fourth part. The definition and the different opinions related to the competition between the director and the corporation will be introduced firstly. And how to perform the duty of loyalty under this situation will be discussed after that. The problems exist in our country’s Corporation Law and the suggestions will be the last issue of this part. Besides the problems mentioned in the second part, there are some other problems such as no explicit rules relate to whether there is the duty of loyalty for the director after her leave.The fifth part concentrates on the legal liability of breaching the duty of loyalty. This study first analyses the different legal consequences of this kind of breaching behaviors, it may lead to the consequences such as invalidity, revocation and ratification. There are shortcomings in the rules of our country’s Corporation Law. The rules should specify the corresponding relations between these behaviors and consequences. Then this study points out the only subject who has the right to make the director hold responsibility of breaching duty of care is the corporation. The last issue in this part is what the liabilities are when the director breach the duty of care. These are the return and the compensation of damages. Additional, this study also analyses the shortcomings in our country’s Corporation Law regarding to the corporate right of returning and the term of this right, this study makes the suggestion that the rules related to this should be more explicit.