Conflict of Interest Causing Criminal Liability

As discussed in our previous article 'Risks Brought by Criminal Law Amendment No. 12 for Non-SOEs', the Criminal Law Amendment No. 12  ('Twelfth Amendment', which came into effect on March 1, 2024), expands the application of the “crime of illegally engaging in competing businesses” (i.e., Article 165 of the PRC Criminal Law) to include not only directors, supervisors and senior management personnel ('DSMs') of state-owned entities ('SOEs'), but DSMs of other types of companies, including private entities, i.e., non-SOEs.

Recently, we observed Shanghai v. Zheng (2025) (the 'Zheng Case') which was the first criminal trial held in Shanghai under the amended Article 165. The judge presiding in the Jiading District Court, Shanghai City found the former general manager (i.e., Zheng) of a private lighting company (the 'Lighting Company') guilty of a conflict of interest ('COI').  He had established his own company in competition with the Lighting Company and had unlawfully seized the Lighting Company’s clients and business opportunities.

It was discovered that:

- ln August 2023, Zheng had established his own company with offices located in the Zhejiang Province of China and other Southeast Asian countries. His company  engaged in the same business as the Lighting Company for which he worked and it was in direct competition with the Lighting Company.

- Taking advantage of his position as general manager and with full access to the Lighting Company's client lists, product quotations, and supply chain information, Zheng  began to transfer the Lighting Company's overseas orders to his own company.

- For the parts and components that his own company was unable to produce, Zheng placed orders with the Lighting Company as an OEM (i.e., original equipment manufacturer), and took advantage of the Lighting Company’s business resources.

- From March to November 2024, Zheng completed sales totaling more than RMB 37 million (appr. USD 5.18 million) through his own company, causing a loss of approx. RMB 2 million (appr. USD 0.28 million) to the Lighting Company.

During the trial, Zheng argued that he hadn't established his own company to unlawfully infringe upon the Lighting Company’s business opportunities. According to Zheng, he was “trying to rescue the Lighting Company’s business, because of the ‘localized manufacturing trend’ in the international market of the lighting industry, and the Lighting Company did not have the ability to invest and operate overseas".

Zheng’s defense was not accepted by the court. It was discovered that his COI conduct was carried out without a resolution passed by the Board of Directors or the Board of Shareholders of the Lighting Company. This violated the non-competing provisions under the Lighting Company's articles of association, and violated the fiduciary duty he owed to the Lighting Company under the PRC Company Law.

The court rendered a guilty verdict against Zheng. Prior to the guilty verdict, the court considered that Zheng’s family members had already assisted him in fully compensating the Lighting Company for its losses (i.e., a profit loss of appr. RMB 2 million). The court imposed on Zheng an imprisonment of 10 months with a criminal fine (punitive) of RMB 300,000 (appr. USD 42,020).

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We believe that the Zheng Case is a wake-up call for all DSMs in non-SOE companies in China and emphasizes the seriousness of a company's non-competition obligations and its duty of loyalty and diligence. Taking advantage of job-related conveniences for personal gain may directly lead to criminal penalties under the amended Criminal Law.

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