Alerting Directors, Supervisors and Senior Management Personnel to Criminal Liability Risks under the New Company Law -- A Commentary on the Impact of the Twelfth Criminal Law Amendment on Non-SOEs

On December 29, 2023, the Twelfth Amendment to the Criminal Law of the People’s Republic of China (the “Twelfth Amendment^”) was passed by the Standing Committee of the 14th National People’s Congress (the “NPC”) at its Seventh Session and will come into effect on March 1, 2024. This amendment has great significance as it focuses on criminal offences involving the offering of bribes and corruption committed by employees of non-state-owned enterprises (non-SOEs). It echoes the approach of the recently amended Company Law of the People’s Republic of China, which has been adopted and will take effect on July 1, 2024 (the “New Company Law”).

While the New Company Law further strengthens the obligations for directors, supervisors and senior management personnel¹ (collectively “DSMs”) to fulfill their duties in a compliant manner, the Twelfth Amendment, for the first time, expands the application of the “crime of illegally engaging in competing businesses” (Article 165), the “crime of seeking illicit benefits for relatives and friends” (Article 166) and the “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price²” (Article 169) beyond current directors, managers and employees of state-owned companies and enterprises to include supervisors and senior management personnel of state-owned entities, as well as DSMs and relevant employees of any other companies and enterprises. It also extends the application of the Criminal Law of the People’s Republic of China to misconduct by DSMs in material breach of their duty of loyalty that exposes the company to significant losses. The Twelfth Amendment will provide a powerful legal tool for companies to combat any conduct that seriously damages corporate interests, reflecting the goal of the law to equally protect state-owned entities and non-SOEs.

In a guiding case released by the Supreme People’s Court of China (the “SPC”) in the 2018 Reference to Criminal Trial (《刑事审判参考》) (Guiding Case No. 1234, the Case of an Abuse of Power by the Shenmu Sub-branch of the Industrial and Commercial Bank of China, a Certain Tong and Certain Other Employees of the State-owned Company: the Determination of the Illegal Disposal of Business Property by the Employees of State-controlled or Owned Companies), there are two different understandings of the concept of “state-owned companies and enterprises” in juridical decisions pertaining to the offences. The first advocates for a broad interpretation of the term “state-owned companies and enterprises”, encompassing wholly state-owned companies and enterprises as well as those companies and enterprises controlled or partially owned by the State. Conversely, the second advocates for a narrower interpretation, limiting the term to wholly state-owned companies and enterprises only. In the Guiding Case No. 1234, the SPC favored the narrow interpretation, holding that the term “state-owned companies and enterprises” only refers to wholly state-owned companies and enterprises. Consequently, we understand that the term “any other company and enterprise” mentioned in the respective paragraphs (2) of Articles 165, 166 and 169 of the Criminal Law of the People’s Republic of China (the “Criminal Law”), as revised by the Twelfth Amendment, should include those companies and enterprises controlled or partially owned by the State. Although we expect subsequent judicial interpretations to give further clarification on the definition of “any other company and enterprise” outlined in the above provisions, it is evident that this definition encompasses non-SOEs, i.e., those companies or enterprises without any state-owned shareholding.

This article examines the impact of the Twelfth Amendment on the DSMs and employees of non-SOEs and explores the rationale behind the legislative changes, in order to urge DSMs and relevant employees of non-SOEs to pay close attention to the legal developments, ensure compliance in their duties, and mitigate any risk of individual criminal liability resulting from non-compliance.

I. Changes in the Provisions of the Twelfth Amendment Involving Non-SOEs

Compared to the current Criminal Law, the amendments introduced by the Twelfth Amendment involving non-SOEs primarily focus on provisions related to the “crime of illegally engaging in competing businesses” (Article 165), the “crime of seeking illicit benefits for relatives and friends” (Article 166) and the “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price” (Article 169). The table below compares these revisions.

II. Analysis of the Impact of the Twelfth Amendment on Non-SOEs

1. Clarifying the differences between non-SOE DSMs who embezzle business property by using their position and the act of securing business opportunities, as well as specific criminal rules.

In accordance with Article 271 of the current Criminal Law, where an employee of a company, enterprise, or any other entity misuses his or her position to embezzle any property of the entity, he or she shall be regarded as having committed the crime of embezzlement by misusing their position. However, it should be noted that only “property” is considered as the object of a crime under this provision, and there has been controversy in practice over whether “business opportunity” should be incorporated into the definition of “property” in connection with the crime of embezzlement by misusing a position. Furthermore, prior to the enactment of the Twelfth Amendment, only the acts of the directors, managers or relevant employees of SOEs, other than those of non-SOEs, who misuse their position to secure business opportunities are punishable for the “crime of illegally engaging in competing businesses” and the “crime of seeking illicit benefits for relatives and friends”.

As the current criminal statute does not contain specific provisions on the acts of non-SOE DSMs who misuse their position to secure business opportunities, it is challenging for non-SOEs to go through criminal proceedings to protect their interests.

We understand that this problem has been addressed with the enactment of the Twelfth Amendment. This amendment extends the criminal liability to DSMs of non-SOEs for “illegally engaging in competing businesses” and to relevant employees of non-SOEs for “seeking illicit benefits for relatives and friends”. In the context of the Twelfth Amendment, when a non-SOE becomes aware that the losses or illegal gains resulting from criminal activity involving its DSMs or other employees have met the criteria for criminal prosecution, it may file criminal charges against such an individual for the crime of “illegally engaging in competing businesses” or “seeking illicit benefits for relatives and friends” to protect their legitimate corporate interests.

2. Clarifying the criminal rules for executive officers in direct charge of non-SOEs who illegally possess or sell a company’s shares

How to decide the cause of action for embezzlement of a company’s shares committed by an executive officer who is directly in charge of a company has been a controversial issue in practice. As early as 2003, the Criminal Law Office of NPC’s Legislative Affairs Commission, together with the Research Office and Criminal Tribunal II of the SPC, the Research Office, Office of Supervision over Criminal Investigation, Public Prosecution Office and Institute of Procuratorial Theory of the Supreme People’s Procuratorate, and Renmin University of China Law School, jointly held a seminar on the Application of Laws to Crimes of Interference with the Management of Companies and Enterprises and published a meeting summary (in Chinese:《对妨害公司、企业管理秩序犯罪法律适用问题研讨会会议纪要》). According to the opinions in the meeting summary, “shares/equity interests may be the subject of embezzlement, and any illegal transfer of shares/equity interests in an entity by an employee to his/her personal account would constitute the crime of embezzlement by misusing position, while an employee who encroaches any shares/equities interests held by any other shareholder in the entity shall not be held liable for the crime of embezzlement by misusing position.”

In 2005, the Economic Crime Investigation Department of the Ministry of Public Security issued the Opinions on the Issue as to Whether Illegal Possession of Others’ Equity Interests Constitutes the Crime of Embezzlement by Misusing Position (in Chinese:《关于对非法占有他人股权是否构成职务侵占罪问题的工作意见》). The opinions stated that “in recent years, we have received many requests from local public security agencies for instruction on the issue of whether a shareholder or its agent who embezzles by illegal means the equity interests held by any other shareholder in the company should be suspected of the crime of embezzlement by misusing position. Shareholders or their agents who misuse their position to illegally possess the equity interests held by any other shareholder in the company shall be charged with the crime of embezzlement by misusing position, to the extent that it can be determined that the offender has the subjective intention to illegally possess another person’s property.”

These opinions of the Economic Crime Investigation Department of the Ministry of Public Security issued in 2005 are typically not cited by procuratorate authorities and courts in practice. This is because they generally perceive the shares of a company as the property of its shareholders, rather than the company itself. Instead, procuratorate authorities and courts often refer to the views outlined in the Opinions on the Reply concerning the Determination of Nature and Handling of Illegal Possession of Shareholders’ Equities by Fraud and Other Means by Companies' Employees by Misusing Their Position (Fa Gong Wei Fa Han No. [2005] 105) (in Chinese:《全国人大常委会法制工作委员会对关于公司人员利用职务上的便利采取欺骗等手段非法占有股东股权的行为如何定性处理的批复的意见》) issued by the Legislative Affairs Commission of the Standing Committee of the NPC on December 1, 2005, which indicates that “shares are the property within the meaning of Article 92 of the Criminal Law. Where anyone misappropriates or possesses the shares legally owned by any other person by any illegal means, which constitutes a crime, the provisions of the Criminal Law on the crime of the illegal infringement upon any other person's property shall apply.”

We understand that the Twelfth Amendment addresses this issue from a legal perspective. According to the Twelfth Amendment, any person who is directly in charge of any other company or enterprise engages in malpractice or favoritism to convert the assets of the company or enterprise into shares or sells such assets at a low price, thereby causing significant losses to the company or enterprise, shall be punished in accordance with the offence of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price.

3. Compared to SOE employees, the criminalization of employees of non-SOEs focuses on evaluating conduct that “violates laws and administrative regulations”

Despite the extended applicability of offences such as the “crime of illegally engaging in competing businesses”, the “crime of seeking illicit benefits for relatives and friends” and the “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price”, the differentiation in the wording of specific provisions related to non-SOEs compared to those provisions for state-owned companies and enterprises is attributed to the distinct logic governing the protection of legitimate interests.

As regards to the provisions for the “crime of illegally engaging in competing businesses”, for example, “the director, supervisor or senior management personnel of a state-owned company or enterprise who, making improper use of his/her position, engages in, for his/her own account or for any other person, any business similar to that of the company or enterprise in which he or she holds office and obtains illicit gains with a huge value, shall be punished by imprisonment for not more than three years or criminal detention, and/or a fine; if the amount of such illicit gains is particularly large, they shall be punished by not less than three years imprisonment and not more than seven years and a fine”. The provisions of Article 2 of the Twelfth Amendment involving non-SOEs stipulate that “where any director, supervisor or senior management personnel of any other company or enterprise commits any act described in the preceding paragraph in violation of the laws or administrative regulations, causing any significant losses to the company or enterprise, he or she shall be subject to the penalties set forth in the preceding paragraph”.

We understand that the absence of the phrase “violating laws and administrative regulations” as a condition for constituting this crime in the case of SOE employees is due to the nature of state-owned assets being naturally infrangible, and from a legal perspective, it is impossible to permit any infringement on state-owned assets. Non-SOEs, however, have a high degree of autonomy in their judgement and conduct under the legal framework, as long as it does not violate the mandatory provisions of the laws. DSMs of non-SOEs would, therefore, be charged with the “crime of illegally engaging in competing businesses” only if they “violate laws or administrative regulations”. If DSMs act in compliance with the provisions of the laws or administrative regulations, such as the New Company Law, and if they have reported their acts to the company and obtained approval from the decision-making body of the company or enterprise (e.g., the board of shareholders or the board of directors), their acts generally should not be considered criminal.

In this regard, our opinions align with those of the officials from the NPC’s Legislative Affairs Commission. At a press conference held for the Twelfth Amendment, they stated that “it is important to note that the crimes mentioned above require the following elements to exist: the factual violation of laws or administrative regulations, the intentional causation of losses to the company, the result that the company or enterprise suffers significant losses, and the nature of the act that the employee of an enterprise misuses his/her position to engage in the illegal transfer of benefits to the detriment of the interests of the enterprise… an act, for example, with the approval of the company or enterprise, is not appropriate to be treated as a criminal offence.”⁶

4. Understanding the provisions relating to “laws and administrative regulations”

We are of the view that the phase “laws and administrative regulations” referred to in the Twelfth Amendment should be interpreted in accordance with the Legislation Law of the People’s Republic of China. According to this law, the term “laws” means the basic laws enacted by the NPC and its Standing Committee, such as the Company Law; the term “administrative regulations” means the relevant regulations developed by the State Council with authorization by the NPC and its Standing Committee as needed, for example, the Regulation on the Supervision and Administration of Private Investment Funds.

Taking into account the provisions on the “crime of illegally engaging in competing businesses” (Article 165), the “crime of seeking illicit benefits for relatives and friends” (Article 166) and the “crime of engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price” (Article 169), we understand that the laws and administrative regulations include the Company Law, the Law on State-owned Assets of Enterprises, the Regulations on the Supervision and Administration of Private Investment Funds, the Regulation on Financial Asset Management Companies, and other relevant laws.

4.1 The provisions in the “laws and administrative regulations” may be mandatory requirements

In the context of the Company Law, the establishment of criminal liability is subject to a breach of any mandatory provision of the pre-positive laws (e.g., the Company Law).⁷The New Company Law increases the obligations of DSMs to report to the board of directors or the board of shareholders, and seek their approval by resolutions in accordance with the articles of association in respect to entering into related party transactions, and engaging in or holding office at a competing business.⁸ Consequently, the provisions of the Twelfth Amendment related to the DSMs of non-SOEs should be understood in conjunction with those provisions of the Company Law on the obligations of DSMs. The conduct of DSMs will qualify as a criminal offence only to the extent that it violates the statutory provisions set forth above and fails to report to the board of directors or the board of shareholders and obtain the required approval by board resolution or shareholder resolution in accordance with the articles of association. The conduct of competing business or related party transactions that satisfy the conditions and approval procedures as provided for under the New Company Law will not be punishable as a crime.

4.2 The provisions in the “laws and administrative regulations” may be non-mandatory requirements

In addition to mandatory and prohibitive requirements, there are also many non-mandatory requirements under the laws and administrative regulations. For example, terms used in the legislation, such as “may”, grant companies a certain level of autonomy. In general, DSMs of non-SOE will not face charges for the abovementioned crimes if they opt not to adhere to such non-mandatory requirements.

We understand, however, that if the articles of association, shareholders’ agreements and other internal rules and policies of a company incorporate, and are based on, such non-mandatory provisions, thereby making the company obligated to adhere to such non-mandatory provisions, this may cause a problem if any breaches of such non-mandatory provisions by DSMs of non-SOEs, which meet the criteria for criminal prosecution, may lead to the actual conviction of criminal offences described above after the Twelfth Amendment comes into effect. We will continue to monitor future developments related to the implementation of this amendment.

III. Conclusion

With the development of China’s market economy, particularly the growth of non-SOEs, new situations and issues have arisen regarding corruption offences within non-SOEs. The Twelfth Amendment focuses on the prevalent conduct and pressing needs in practice and updates the provisions on criminal offences to encompass the behavior of employees of non-SOES illegally engaging in competing businesses, seeking illicit benefits for relatives and friends, or engaging in malpractice or favoritism to convert company assets into shares or sell company assets at a low price.

We recommend that DSMs and the relevant employees of non-SOEs keep a close watch on the development of laws to ensure compliance in their duties, and to mitigate any unexpected risks of civil and criminal liability as a result of non-compliance by individuals.

[1] As defined in Article 265, paragraph (1) of the New Company Law, “senior management personnel shall mean the manager, deputy manager and financial controller of the company, the board secretary of the listed company, as well as other personnel specified in the articles of association of the company.”

[2] The name of this crime has been amended by  the Supplemental Provisions of Enforcing Cause of Action Determined under the Criminal Law (VIII)  (in Chinese:《关于执行刑法确定罪名的补充规定（八）》), which was enacted after the Twelfth Amendment, to replace the former name of the crime under Article 169, which was the  “crime of engaging in malpractice or favoritism to convert company assets into shares or sell state-owned assets at a low price”.

[3] In accordance with Article 12 of the Regulations of the Supreme People’s Procuratorate and the Ministry of Public Security on the Criteria for Filing Criminal Cases under the Jurisdiction of Public Security Bureaus for Investigation and Prosecution (II) (in Chinese《最高人民检察院、公安部关于公安机关管辖的刑事案件立案追诉标准的规定（二）》) (the “2010 Prosecution Standards II”), which took effect on May 7, 2010, “where a director or manager of a state-owned company or enterprise engages in, for his/her own account or for any other person, any business which is similar to that of the company or enterprise in which he/she holds office by making improper use of his/her position, and has obtained illicit gains of more than RMB 100,000, a criminal case shall be filed for investigation and prosecution.” Along with the reform of the national supervision system in China, this offence has been subject to the jurisdiction of supervisory agencies, and such threshold has been consequently deleted from the revised Prosecution Standards II issued on May 15, 2022. Nevertheless, in practice, the supervisory and judicial agencies generally continue to consider cases with reference to the 2010 Prosecution Standards II.

[4] In accordance with Article 12 of the 2010 Prosecution Standards II, “where any employee of a state-owned company, enterprise or public institution misuses his/her position to exploit illicit benefits for his/her relatives or friends, a criminal case shall be filed for investigation and prosecution under any of the following circumstances:

(1) causing direct economic losses of more than RMB 100,000 to the state;

(2) causing their relatives or friends to obtain illicit gains of more than RMB 200,000;

(3) resulting in the bankruptcy of the relevant entity, or suspension of its business or production for more than six months, revocation of its permit or business license, or any issuance of order for close down, cancellation or dissolution; or

(4) otherwise causing any significant losses to the national interests.”

Along with the reform of the national supervision system in China, this offence has been subject to the jurisdiction of supervisory agencies, and such threshold has been consequently deleted from the revised Prosecution Standards II issued on May 15, 2022. Nevertheless, in practice, the supervisory and judicial agencies generally continue to consider cases with reference to the 2010 Prosecution Standards II.

[5] In accordance with Article 17 of the 2010 Prosecution Standards II, “where any person who is directly in charge of a state-owned company or enterprise or its competent authority engages in malpractice or favoritism to convert state-owned assets into shares or sell state-owned assets at a low price, a criminal case shall be filed for investigation and prosecution under any of the following circumstances:

(1) causing direct economic losses of more than RMB 300,000 to the state;

(2) resulting in the bankruptcy of the relevant entity, or suspension of its business or production for more than six months, revocation of its permit or business license, or any issuance of order for close down, cancellation or dissolution; or

(3) otherwise causing any significant losses to the national interests.”

Along with the reform of the national supervision system in China, this offence has been subject to the jurisdiction of supervisory agencies, and such threshold has been consequently deleted from the revised Prosecution Standards II issued on May 15, 2022. Nevertheless, in practice, the supervisory and judicial agencies generally consider cases with reference to the 2010 Prosecution Standards II.

[6] See “Twelfth Amendment to the Criminal Law Passed, NPC Legislative Affairs Commission Interpreted Key Provisions” (in Chinese《刑法修正案（十二）获通过，全国人大常委会法工委解读重点内容》), the People’s Court Daily, at https://www.chinacourt.org/article/detail/2024/01/id/7739865.shtml.

[7] See footnote 6.

[8] For further details, please see “Material Impact of the Amendment to China’s Company Law on the Compliance Obligations and Risks for Directors, Supervisors and Senior Management Personnel”，Yu ZHENG and Yingru SHI, JunHe Legal Review, January 3, 2024. (in Chinese:《君合法评丨<公司法>修订对“董监高”合规义务和风险的重大影响》), at JunHe’s WeChat public account “君合法律评论”, January 3, 2024.