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Citation: 47 Va. J. Int'l L. 897 2006-2007

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Fiduciary Duty Without Equity: "Fiduciary Duties" of Directors Under the Revised Company Law of the PRC
REBECCA LEE*

I. II.

III.

IV.

Introdu ction ............................................................................... 898 The Concept of "Fiduciary Duties" of Directors Under the C ompany L aw ............................................................................ 900 A. The Old Company Law (1993) ........................................ 900 B. The Revised Company Law (2005) ................................. 901 Fiduciary Loyalty of Directors Under the Revised Company L aw ............................................................................................ 90 2 A. Directors' "Obligation of Loyalty" ................................. 903 B. Manifestations of Directors' "Obligation of Loyalty" .... 905 C. Remedies for Breach of Directors' "Obligation of L oyalty". ............................................. 908 D. Fiduciary Duty Without Equity? ................... .. .. . . . . . . . . . . .. . . 909 E. Equity's Contribution to the Fiduciary Doctrine ............. 911 Beyond Equity: Fortifying Fiduciary Duties of Directors in C h in a .......................................................................................... 9 13 A. Statutory Prohibition of Self-Dealing .............................. 913 B. Fortifying Fiduciary Duties of Directors in China ........... 915

* Faculty of Law, University of Hong Kong. This Article benefits from the funding support provided by the Small Project Funding scheme of the University of Hong Kong. I am particularly grateful to Lusina Ho for her comments and suggestions on an earlier draft of this Article. All errors remain mine.

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V.

Judicial Reference to Overseas Practice ............... 915 a. Where the Statute Is Ambiguous ............... 916 b. Where There Is a Legislative Vacuum ....... 918 2. Statutory Embodiment of Equity's Techniques .... 920 3. Domestic Inspirations from Existing Rules and R egulations ........................................................... 922 4. Sum m ary ............................................................... 924 C o nclu sion ................................................................................. 9 25

1.

I.

INTRODUCTION

It has been more than a decade since the Company Law of the People's Republic of China (PRC) was first promulgated in 1993.1 When the law was first enacted, its purpose was to enhance corporatization reforms of the debt-ridden state-owned enterprises (SOEs) in China, whose poor performance was partly due to strong administrative influence of the government. 2 Together with other economic reforms, the planned economy of China was rapidly transformed into a more marketoriented one. But this also meant that the old Company Law-enacted to facilitate restructuring of SOEs-had become outdated. At the same time, the Asian Financial Crisis in 1997 precipitated corporate law reforms in many Asian jurisdictions. Although China was able to survive the crisis relatively unscathed, it also saw the need to improve its corporate law regime in order to create a more favorable legal infrastructure for its investors. The Company Law was thus revised in 1999 and again in 2004. Unfortunately, alongside the economic growth in China, an increase
1. Zhonghua Renmin Gongheguo Gongsifa [ Company Law (PRC)] (adopted at the 5th Session of the Standing Committee of the 8th National People's Congress, Dec. 29, 1993, promulgated on Dec. 29, 1993, amended in 1999, 2004, and 2005 respectively) [hereinafter Company Law]. 2. In the past, the prevailing concept of public ownership often allowed the state to exercise de facto ownership rights over SOEs without the attendant management risks. This led to problems of corruption and inefficiency. The corporatization reforms therefore transferred some state assets to private ownership. See generally Jia Heting, On Corporatization of Enterprises and Corporate
Governance, in POLICY OPTIONS FOR REFORM OF CHINESE STATE-OWNED ENTERPRISES: PROCEEDINGS OF A SYMPOSIUM IN BEIJING, JUNE 1995 (Harry G. Broadman ed., 1996); EDWARD S. STEINFELD, FORGING REFORM IN CHINA: THE FATE OF STATE-OWNED INDUSTRY (1998).

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in corporate misconduct roiled the corporate sector. Tension between corporate governance and market development soared as there were regular reports of corporate scandals and business scams. 3 An overhaul of the Company Law was thus long overdue. The time finally came when China's accession to the World Trade Organization provided the impetus for speeding up the country's company law reforms. Against this background, China undertook extensive revisions to its Company Law, focusing on corporate governance and protection of minority shareholders. The revised Company Law was promulgated in October 2005 and became effective on January 1, 2006. 4 An overview of the major features of the revised Law has already been offered by some commentators. 5 This Article examines in detail one of the major aspects of the amendments to the Company Law, namely the directors' duties. After a brief introduction to the background of the Company Law in this Part, Part II begins with a brief description of the directors' duties under the old Company Law, highlighting the main features under the old regime. There follows in Part III a discussion of the introduction of a new concept of fiduciary loyalty of directors under the revised Law. Whereas the fiduciary doctrine has its roots in English equity, the Chinese civilian legal tradition knows no duality of law and equity. Without the concomitant incorporation of the English equity jurisprudence, the revised Chinese Company Law has not fully embraced the fiduciary doctrine. This Article therefore evaluates the feasibility of transplanting an equitable concept to a civil law jurisdiction, and the pitfalls that may be encountered. Part IV illustrates these diffi3. Problems included misappropriation of corporate assets, mis-investment, over-borrowing, falsification of accounts, lack of disclosure of interests, etc. A number of infamous examples even involved listed companies, such as Guangdong International Trust and Investment Corporation (GITIC), which defaulted on RMB 14.4 billion in debts in 1998, and Euro-Asia Agricultural (Holdings) Company Limited, which falsified its company accounts in 2003. Both were listed on the Stock Exchange of Hong Kong before the fraud was uncovered. See, e.g., Implementing Corporate Governancefor PRC Companies-Post GITIC, MONDAQ BUSINESS BRIEFING (June 14, 2004); Zheng Caixiong, Former GITIC Chief Imprisoned, CHINA DAILY (June 30, 2004); Tycoon Given 18 Years in Jail,CHINA DAILY (July 15, 2003). 4. The Company Law was revised for the third time at the 18th Session of the 10th National People's Congress of the PRC, Oct. 27, 2005, promulgated by Presidential Order of the PRC (No. 42 of 2005) on Oct. 27, 2005, came into force on Jan. 1, 2006, and is translated in 19 CHINA L. & PRAC. 21 (Dec. 2005). 5. See, e.g., Baoshu Wang & Hui Huang, China's Revised Company Law and Securities Law: An Overview and Assessment, 19 AUSTL. J. CORP. L. 229 (2005); Jean-Marc Deschandol & Charles Desmeules, One HesitantStep Forward: New Company Law Brings Mixed Feelings, 19 CHINA L. & PRAC. 13 (Dec. 2005).

900

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culties with reference to the proscription against self-dealing of directors under the Company Law. As will be seen, there is a lack of detailed specifics for Chinese judges to apply the statute effectively to deal with the cases at hand. Nonetheless, a fiduciary doctrine which displays equity's techniques, while also remaining compatible with the Chinese civilian legal tradition, is not impossible. A number of suggestions are made to refine the fiduciary concepts introduced under the revised Law. Part V concludes by suggesting that, in the final analysis, a more proactive legislative and judicial approach is needed to tackle ambiguities under existing law.

II.

THE CONCEPT OF "FIDUCIARY DUTIES" OF DIRECTORS UNDER THE COMPANY LAW

A.

The Old Company Law (1993)

Under the old Company Law, there was no separate and independent chapter on directors' duties and remedies for breach thereof. Provisions on directors' duties were scattered throughout the statute. Directors were only required to "perform their duties faithfully" (zhongshi liixing zhiwu, , ,]4 , *R) under articles 59(1) and 123.6 This appeared to suggest that directors had to act honestly and in good faith in the performance of their roles. A few examples of a director's duties could be found in articles 59 to 62 of the Company Law, 7 including prohibitions from accepting bribes, 8 misappropriating company funds, 9 engaging in business ac6. Company Law art. 59(1) (1993) ("Directors.. .shall.. faithfully perform their duties and maintain the interests of the company and shall not take advantage of their position, functions and powers in the company to seek personal gains."). Where article 59(1) applies to limited liability companies (youxian zeren gongsi, ), article 123 (1993) contains a similar provision that applies to joint stock companies (gufen gongsi, R]6L451). See Company Law ch. 3 (1993). Article 128 (1993) also requires supervisors to "faithfully perform [their] duties." See id. 7. These apply to limited liability companies, as they are contained in Chapter 2 of the Company Law (1993) which applies to limited liability companies. See Company Law ch. 2 (1993). By virtue of article 123 (1993) of the Company Law, they also apply to joint stock companies. See id. Most of these duties apply to directors, supervisors, and managers of the company alike, but for the purpose of this Article, only the directors' duties are discussed. See Company Law articles 58, 59, 62, 63, and 128 (1993), which apply to supervisors of the company. 8. Company Law art. 59(2) (1993) ("Directors.. shall not, by taking advantage of their functions and powers, accept bribes or other unlawful incomes, nor may they misappropriate the property of the company."). 9. Company Law art. 60(1) (1993) ("Directors.. shall not misappropriate company funds....").

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tivities that compete with the company's,1 engaging in transactions with 12 the company," or divulging the company's confidential information. Although articles 59(1) and 123 ("perform duties faithfully") could fairly be criticized for being too general to be invoked on their own to impeach a director's action and hence devoid of any practical significance, 13 the imposition of various directors' duties at least raised the discussion of whether it could be regarded as a step towards recognition of a concept of fiduciary duty such as that at common law. 14 B. The Revised Company Law (2005)

The much-awaited revised Company Law came into force on January 1, 2006. It has been hailed as a significant milestone in the reform of the Chinese economy. Of the 229 provisions under the old Company Law, 46 provisions have been deleted and 137 amended, and 41 provisions have been added. 15 Substantial changes were made to revolutionize various aspects of the Company Law. For example, the incorporation of companies is now simplified by reducing the minimum registered capital requirements' 6 and permitting the establishment of one-person (or single-shareholder) companies; 17 protection of minority shareholders is
10. Company Law art. 61(1) (1993) ("Directors.. shall not operate their own in, or operate for others, the same category of business as the company they are serving or, engage in activities which damage the interests of the company.... [Tihe incomes derived therefrom shall belong to the company."). 11. Company Law art. 61(2) (1993) ("Directors.. shall not enter into contracts or conduct transactions with the company except as provided for in the articles of association or approved by the shareholders' meeting."). 12. Company Law art. 62 (1993) ("Directors.. .shall not disclose any company secrets except as provided for by the law or approved by the shareholders [sic] meeting."). 13. Cases relating to directors' duties were litigated under the specific provisions of articles 59 through 62, rather than the general duty to "perform [their] duties faithfully" under articles 59(1) and 123. See, for example, the cases extracted in GONGSIFA YUANLI, ANLI YU YUNYONG [COMPANY LAW: PRINCIPLES, CASES AND APPLICATION] ch. 6 (Jianzhong Shi ed., 2006), which were litigated under the specific provisions of articles 59 to 62. 14. See, e.g., Michael I. Nikkel, "Chinese Characteristics"in CorporateClothing: Questions of FiduciaryDuty in China's Company Law, 80 MINN. L. REV. 503 (1995); IAN TOKLEY & TINA RAvN, COMPANY AND SECURITIES LAW IN CHINA paras. 6.24-6.25 (1998). 15. Wang & Huang, supra note 5, at 231-32. For mainland literature commenting on the directors' duties under the revised Company Law, see XUDONG ZHAO, XN GONGSIFA ZHIDU SHEJI [THE INSTITUTIONAL DESIGN OF THE REVISED COMPANY LAW] ch. 13 (2006); GONGSIFA YUANLI, ANLI YU YUNYONG, supranote 13, at 328-34. 16. The minimum registered capital is now RMB 30,000 for limited liability companies and RMB 5 million for joint stock companies. See Company Law arts. 26, 81 (2005). 17. See Company Law art. 58 (2005).

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strengthened by granting them cumulative voting rights, 18 statutory rights to access the company's information, 19 rights to convene shareholders' meetings, 20 and even rights to bring derivative lawsuits. 21 On the corporate governance front, the revised Company Law sought to enhance corporate governance standards 22 through introduction and reinforcement of fiduciary concepts.

III.

FIDUCIARY LOYALTY OF DIRECTORS UNDER THE REVISED COMPANY LAW

Whereas articles 59(1) and 123 of the old Company Law require a director to "perform their duties faithfully," article 148(1) of the revised Company Law, for the first time, imposes on directors a separate and independent "obligation of loyalty" (zhongshi yiwu, uP..,-,9.*).23 An understanding of the nature or theoretical basis of this obligation has its practical significance. For example, although the applicability of the revised Company Law is generally limited to domestically invested companies in China, it is also relevant to foreign-invested enterprises (FIEs) where the law governing foreign investment is silent. 24 Since current
18. Company Law art. 106 (2005). Cumulative voting gives minority shareholders better representation by allowing a shareholder to cast his total voting rights for one candidate when electing directors. 19. Company Law art. 34 (2005). 20. Company Law art. 102(2) (2005). This right can be exercised on holding 10% or above of voting rights. Id. 2 1. Any shareholder holding more than 1% of the shares of the company for more than 180 consecutive days may bring legal proceedings in their own name on behalf of the company against directors who fail to comply with the laws and regulations or the company's articles in the course of performing their duties, thereby causing loss to the company. Company Law art. 152 (2005); cf Company Law art. 111 (1993) (providing for a shareholder's right to sue only if the resolutions of a shareholders' or board of directors' meeting have violated the law, violated administrative decrees or encroached upon the legitimate rights of shareholders). 22. See generally Craig Anderson & Bingna Guo, Corporate Governance Under the Revised Company Law (Part 1): FiduciaryDuties and Minority Shareholder Protection, 20 CHINA L. & PRAC. 17 (Apr. 2006); Craig Anderson & Bingna Guo, CorporateGovernance Under the Revised Company Law (Part2): Shareholder Lawsuits and Enforcement, 20 CHINA L. & PRAC. 15 (May 2006). 23. Company Law art. 148(1) ("Directors... shall bear an obligation of loyalty (zhongshi yiwu, Z5,SL*) and diligence toward the company."). The revised Company Law also introduces an obligation of "diligence," or care, (qinmian yiwu, 08S *) by directors. At common law, the duty of care is a positive duty to render the due diligence that a reasonable person of his knowledge and experience would do under similar circumstances. This aspect of a director's duties will not be addressed in this Article. 24. Company Law art. 218 (2005).

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laws regulating FIEs contain no relevant provisions on directors' duty of loyalty, provisions in the Company Law relating thereto will presumably be applicable to FIEs and hence will have much wider impact than many other provisions of the Company Law. In addition, the revised Company Law has spawned amendments to other laws and regulations to further enhance corporate governance. For example, in March 2006, the China Securities Regulatory Commission (CSRC) revised its Guidelines for the Articles of Association of Listed Companies 25 in which article 97 similarly introduces an obligation of loyalty (zhongshi yiwu, -, .SL.-) of directors of PRC-listed companies. The same obligation can also be found in article 8 of the Measures for the Administration of the Takeover of Listed Companies promulgated by the CSRC in July 2006.26 The prevalence of the duty of loyalty in Chinese law necessitates a closer examination of the nature of this obligation. Contrary to the provisions in the old Company Law, which merely provide a descriptive understanding of directors' duties, it is submitted that the revised Law introduces a concept of fiduciary loyalty of directors by virtue of the new article 148, and indeed, fiduciary duties of directors manifest themselves in a number of provisions in the revised Law. That the revised Law introduces fiduciary concepts can be illustrated by: (a) the incorporation of a defining obligation of the fiduciary doctrine; (b) the inclusion of various specific directors' duties under the rubric of this defining obligation; and (c) the introduction of remedies conventionally available to fiduciary breaches. Each will be elaborated in detail. A. Directors' "Obligationof Loyalty"

After the amendments, the revised Company Law dedicates an entire chapter (Chapter 6) to the Qualifications and Obligations of Directors, Supervisors and Senior Management of a Company.27 Not only does this signify the importance of directors' duties under the revised Law, the new chapter also defines the content of a director's duties more clearly, thereby promoting the accountability of directors. The most significant
25. [Shangshi gongsi zhangcheng zhiyin (2006 xiuding), .. F JRA.. MM l (2006 FiT)] (promulgated by the CSRC Mar. 16, 2006, effective Mar. 16, 2006). 26. [Shangshi gongsi shougou guanli banfa, 1"l$ 6.5L&R ,V,'--] (promulgated by the CSRC Jul. 31, 2006, effective Sept. 1, 2006). 27. Unlike the old Company Law, the new Law does not discuss the duties of directors of limited liability companies and joint-stock companies separately, in order to avoid repetition.

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provision in this chapter appears to be article 148, which improves upon the old articles 59(1) and 123 and states expressly, for the first time, that a director owes an "obligation of loyalty." As remarked by Lord Justice Millett in the English Court of Appeal case of Bristol & West Building Society v. Mothew,28 the obligation of loyalty is the distinguishing obligation of a fiduciary: The principal is entitled to the single-minded loyalty of his fiduciary. The core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trusts; he must not place himself in a position where his duty and his interests may conflict; he may not act for his own benefit or the benefit of a third person without the consent of his principal.... They are the 29 fiduciary. a of characteristics defining Similarly, in the High Court of Australia, it has been held that: [W]hat the law exacts in a fiduciary relationship is loyalty, often of an uncompromising kind, but not more than that.3 According to the Circular Concerning the Explanation of the Company Law Reform Bill of the PRC,31 the revised Company Law imposes an obligation of loyalty (together with an obligation of fidelity) on directors so that directors' statutory duties could be further clarified. Unfortunately, the Chinese Company Law fails to stipulate the nature of this obligation of loyalty. 32 A possible hurdle to justifying directors' duty of loyalty as fiduciary in nature is that under civil law jurisdictions, including China, directors' duties are more often analyzed on the basis that
28. [1998] Ch 1 (C.A.) (U.K.). 29. Id. at 18; see also Arklow Investments Ltd. v. Maclean, [1999] UKPC 51, [2000] 1 W.L.R. 594, 598 (P.C.) (approving this holding); Peter Birks, The Content of Fiduciary Obligation, 16 TRUST L. INT'L 34 (2002) (describing the obligation of loyalty as the obligation of disinterestedness). 30. Breen v. Williams (1996) 186 C.L.R. 71, 93 (Aus.) (Dawson, J. and Toohey, J.) (quoting P.D. Finn, The FiduciaryPrinciple,in EQUITY, FIDUCIARIES AND TRUSTS 28 (T.G. Youdan ed., 1989)); see also Int'l Corona Res. Ltd. v. LAC Minerals Ltd., [1989] 61 D.L.R. (4th) 14 (Can.) at para. 42 ("[F]iduciary law... [is] concerned with the exaction of a duty of loyalty....") (La Forest,

J.).
31. Guanyu Zhonghua Renmin Gongheguo Gongsifa (xiuding caoan) de shuomin, 5 TcJ 0 ),AI M . W (4iTV*) niARA), delivered at the 14th Session of the 10th National People's Congress of the PRC, Feb. 25, 2005. 32. For example, articles 23 and 192 of the Taiwan Company Law provide that directors owe a duty of loyalty, and that the relationship between the company and its directors is one of agency (weiren, Off), unless otherwise stipulated. See also WENYU WANG, GONGSIFA LUN [ON COMPANY LAW] 25-27, 527 (2004).

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they are agents of their company. 33 The concept of "fiduciary" duties, which is a common feature of a trust institution, is still relatively new to China, having introduced a Trust Law only in 2001. It is submitted that although agency theory is more prevalent, this theory alone has proved insufficient in promoting directorial accountability, for interests of directors and shareholders do not always coincide.35 Indeed, the risk that directors may be swayed from the performance of their primary duties owed to the company 36 may partly explain why the Chinese Company Law has also put in place a set of negative duties to prevent directors from having any conflict of interests or making any secret profits. Moreover, an agency theory of directors is not irreconcilable with its fiduciary nature. For example, in China, it has been recognized that a director's agency relationship with the company is based upon the "trust" (xinren, MlJf) between the parties, and that the director as an agent is to act "in the best interests" (zuigao liyi, ji~lI]f) of the company.37 Properly understood, directors are agents standing in a fiduciary relationship with the company. By recognizing that company directors are also fiduciaries of the company, the law only acknowledges that directorial discretion is to be regulated to prevent abuses. B. Manifestations of Directors' "Obligation of Loyalty" Besides having assigned an "obligation of loyalty" to directors, the
33. See, e.g., XINJIU GONGSIFA BIJIAO FENXI [A COMPARATIVE ANALYSIS OF THE OLD AND NEW COMPANY LAW] 256 (Xudong Zhao ed., 2005); GONGSIFA YUANLI, ANLI YU YUNYONG, supra note 13, at 326; XUDONG ZHAO, supra note 15, at 158-60. 34. Fiduciary duties are imposed on the trustee as a result of the division of ownerships between the trustee holding legal title and the beneficiary reserving equitable title. Under article 25 of the Trust Law of the PRC, a trustee shall handle trust affairs in the beneficiary's best interest and shall fulfill the duties of honesty, trust, prudence, and effectiveness. For a thorough examination of the first Trust Law of the PRC, see LUSINA Ho, TRUST LAW INCHINA (2003). 35. This understanding has its own difficulties. Strictly speaking, an individual director is not an agent of his company because the authority of directors to bind the company as agents depends on their acting collectively as a board, rather than an individual director. 36. See generally Matthew Conaglen, The Nature and Function of Fiduciary Loyalty, L.Q.R. 2005, 121 (JUL), 452-80, 471-72. 37. ZuixIN GONGSIFA TIAOWEN SHIYI [ANNOTATED ARTICLES OF THE LATEST COMPANY LAW] 369 (Ping Jiang & Guoguang Li eds., 2006); see also ANBIAO XU, ZHONGIUA RENMIN GONGHEGUO GONGSIFA SHIYI [ANNOTATED ARTICLES OF THE COMPANY LAW OF THE PEOPLE'S REPUBLIC OF CHINA] 200 (2005). Similarly, the Restatement of Agency understands agency as a fiduciary relation owing a duty of loyalty to the principal: "Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency." RESTATEMENT (SECOND) OF AGENCY 387 (1958).

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revised Company Law also outlines the content of this obligation by listing a number of specific proscriptions in articles 148(2) and 149, such as prohibitions against acceptance of bribes, 38 misappropriation of company funds, 39 exploitation of business opportunities that belong to the the comcompany, 4 transactions with the company, 4 1 competition with 42 and disclosure of confidential information. 43 business, pany's This detailed inclusion of specific prohibitions of directors stands in sharp contrast with statutory regulations of directors' duties in other civil law jurisdictions. Generally speaking, company laws in civil law jurisdictions do not set out in detail the rights and obligations of company directors; the civil law which is considered to be the foundation of the company law governs where the latter is silent. For example, the Company Law of Taiwan merely requires directors to faithfully execute the business of the company (zhongshi zhixing yewu, , Al '*) and abide by the company's articles of association and shareholders' resolutions. 45 In Germany, although the law governing stock companies was taken out of the German Commercial Code and separately codified under the German Stock Corporation Act (Aktiengesetz/AktG), the Act merely stipulates that under the dual board system, the management
38. Company Law art. 148(2) (2005) ("Directors.. .may not use their functions and powers to accept bribes or other illegal income, nor may they seize property of the company."). 39. Company Law art. 149(l) (2005) ("A director.. .may not: (1) misappropriate company funds."). 40. Company Law art. 149(5) (2005) ("A director.. .may not: (5) without the consent of the shareholders' meeting or shareholders' general meeting, utilize the advantages of his or her position to obtain for himself or herself or others commercial opportunities rightly belonging to the company...."). This is a new concept akin to the Anglo-American "corporate opportunities doctrine." See, e.g., Broz v. Cellular Info. Sys. Inc., 673 A.2d 148 (Del. 1996); Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939); Bhullar v. Bhullar, [2003] EWCA (Civ) 424, [2003] BCC 711 (C.A.) (U.K.). 41. Company Law art. 149(4) (2005) ("A director ... may not: (4) conclude a contract or carry out transactions with the company in breach of the company's articles of association or without the consent of the shareholders' meeting or shareholders' general meeting."). 42. Company Law art. 149(5) (2005) ("A director.. .may not (5) without the consent of the shareholders' meeting or shareholders' general meeting.. .for himself or herself or for the benefit of another, engage in business identical to the business of the company in which he or she serves."). Thus, contrary to Company Law art. 61 (1993), which imposes an absolute noncompetition restraint, the revised Company Law now relaxes the prohibition provided that consent is obtained from shareholders. 43. Company Law art. 149(7) (2005) ("A director.. may not (7) disclose company secrets without authorization.").
44. See MINAN ZHANG, GONGSIFA DE XIANDAIHUA [THE MODERNIZATION OF COMPANY

LAW] 422 (2006). 45. Company Law of Taiwan arts 23, 193 (2001).

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board (Vorstand) has a duty to manage the company and the supervisory board (Aufsichtsrat)must supervise the conduct of the business, and that members of the boards are held to a standard of care exercised by a "diligent and prudent business executive" (sorgfalt eines ordentlichen 4 6 Although article 209 of the und gewissenhaften Geschifisleiters). Company Law of Taiwan and section 88 of the German Stock Corporation Act also impose some specific prohibitions on directors (such as non-competition restraints and regulations on self-dealing), it appears that none of these company statutes goes so far as to set out the detailed content of a director's obligation of loyalty like the current revised Chinese Company Law does. Moreover, apart from the specific sub-rules of a director's duties of loyalty, the revised Company Law also adds a catch-all provision (article 149(8)) to cover all other acts that are inconsistent with the obligation of loyalty.47 This reinforces the view that the circumstances set out in articles 148(2) and 149 are only examples where the "obligation of loyalty" in article 148 may be breached, but are neither exhaustive nor exclusive. The introduction of a catch-all provision, coupled with a separate and independent duty of loyalty, suggests that even though a case is not covered by a specific rule under an exclusive judicial approach to construction,4 8 it is still open to courts to adopt a more flexible approach and go beyond the strictures of the specified proscriptions in deciding whether a director has acted in breach of his "obligation of loyalty." This underscores the obligation of loyalty as the director's fundamental

duty.
46. See Aktiengesetz [AktG, Stock Corporation Act], Sept. 6, 1965, BGB1. I at 1809, 93(1) (F.R.G.), translatedin H. SCHNEIDER & M. HEIDENHAIN, THE GERMAN STOCK CORPORATION ACT (2001); Andreas Kaiser, Introduction to the German Stock CorporationLaw, http://www. kaiser-law.comldownload/2005/kaisergerman-stock-corporation.pdf (last visited Aug. 1, 2007). See also 4.3 and 5.5 of the German Corporate Governance Code, which prohibit the management and supervision of German listed companies from placing themselves in positions of conflicts of interest, http://www.corporate-govemance-code.de/eng/kodex/index.html (last visited Aug. 1, 2007). Note that 161 of the German Stock Corporation Act requires the management and supervisory boards of German listed companies to declare once a year whether and to what extent the company conforms to the recommendations set out in the German Corporate Governance Code. 47. Company Law art. 149(8) (2005) ("A director.. may not (8) commit another act that breaches his or her obligation of loyalty to the company...."). 48. This is to be contrasted with an inclusive approach to construing legislation of the common law courts. See Xian Chu Zhang, PracticalDemands to Update the Company Law, 28 HONG KONG L.J. 248, 255 (1998).

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C.

Remedies for Breach of Directors' "Obligationof Loyalty"

In terms of remedies for breach of directors' duties, under the old Company Law, directors were liable to pay compensation only if their breach resulted in damage or harm to the company. 49 This was obviously inadequate, as there may often be circumstances where the director breached his duty of loyalty without causing any loss-and may even have caused a gain-to the company. In the locus classicus of English 5 the company could fiduciary law, Regal (Hastings)Ltd. v. Gulliver, not afford to take up additional shares necessary for a cinema transaction to proceed. The House of Lords held that the company directors who took the shares up personally and subsequently sold them at a profit were liable to account for their profit to the company, despite the absence of any loss to the latter. As Lord Russell remarked: The rule of equity which insists on those, who by use of a fiduciary position make a profit being liable to account for that profit, in no way depends.. .upon such questions or considerations as.. .whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit 5 1 made. been circumstances, stated the in having, In this connection, not only does the revised Law introduce fiduciary duties of directors, it also makes available fiduciary remedies such as disgorgement of unauthorized profits. A new provision (article 149) in the revised Company Law provides that "[a]ny income obtained by a director... in violation of [article 149] shall belong to the company." This appears to require directors to account for any profits they receive while acting in breach of the "obligation of loyalty" listed in article 149.52 To sum up, while it is not clear whether the intent of articles 148 and 149 of the revised Company Law is to import Anglo-American fiduciary
49. Company Law art. 63 (1993) ("Where a director.. violates the law, administrative decrees, or the company's articles of association in performing his (her) official corporate duties resulting in harm of the company, [he] is liable for compensation for the damage."). The revised Company Law also contains a similar provision: Company Law art. 150 (2005) ("If a director.. violates laws, administrative regulations or the company's articles of association in the course of performing his or her company duties, thereby causing the company to incur a loss, he or she shall be liable for damages."). 50. [1967] 2 A.C. 134 (H.L.) (U.K.). 51. Id. at 144-45. 52. This addition is to be welcomed, although there remains a glaring need to clarify the circumstances in which it can be invoked.

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concepts to China, it is at least arguable that those express stipulations could produce such effect. The introduction of an overarching "obligation of loyalty" in article 148(1) encompasses a concept of fiduciary loyalty of directors. This is a potent concept. Not only does it lay the theoretical basis for the whole panoply of proscriptions on directors in the Company Law, it also allows those proscriptions to be more widely interpreted with reference to this fundamental duty of loyalty. Consequently, it also has the effect of reorienting the directors' duties regime from one which focuses on specific proscriptions of directors to one which emphasizes a general (fiduciary) duty of loyalty. D. FiduciaryDuty Without Equity?

However, legal or institutional impediments exist in understanding the "fiduciary duty" concept under the revised Company Law as equivalent to the Anglo-American common law fiduciary doctrine. First of all, there is no effective institutional framework to support the fiduciary system in China. Not only is there a lack of judicial expertise in enforcing fiduciary concepts, there also appears to be insufficient institutional shareholders to prevent directors from abusing their powers through shareholder activism. Most companies are still controlled by government agencies or SOEs. These entities, as controlling shareholders, may not have sufficient incentives to monitor the directors of the company. More significantly, Chinese civil law does not recognize a legal classification directly equivalent to the law-equity divide in common law jurisdictions. On the contrary, civil law starts and ends with the civil codes. 53 Legislation of the Chinese style, including the current revised Company Law, tends to be general, rigid and certain. Judges in China are not trained to interpret legislation, and there is also a lack of a body of case law for Chinese judges to determine the content of fiduciary duty or display analysis in interpreting the statutes. Even if they were to do so, Chinese judges tend to adopt a more restrictive approach. Unlike common law jurisdictions where courts have power to give binding statutory interpretations and judges play a more active role in making and developing the law, the doctrine of supremacy of the legislature prevails in China. Consequently, unless expressly proscribed, Chinese
53. See Peter Joseph Loughlin, The Domestication of the Trust: Bridging the Gap Between Common Law and Civil Law, http://www.jurisconsultsgroup.com/trusts.htm#_ednref95 (last visited July 19, 2007).

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courts are more inclined to construe an alleged breach as not falling within the statute. This rigidity does not sit well with the historical foundations of the fiduciary doctrine. The concept of fiduciary duty originates from the equity regime in the English legal system. Historically, the equity regime was developed to ameliorate harshness of the common law and inadequacies of its legal remedies, but it gradually developed into a Court of Chancery in England. The institution of a "trust" is the greatest invention of equity.5 4 A trustee undertakes to act in the interest of the beneficiary in the management of the trust assets. However, as the trustee is delegated discretion which can be exercised to (adversely) affect the position of the beneficiary, 55 the law has imposed certain duties on the trustee to control his exercise of discretion. The relationship between the trustee and the beneficiary is said to be fiduciary in nature. Fiduciaries are persons who have agreed to act in the interest of another.56 As the concept of a "fiduciary" originates from the equitable institution of a "trust," the fiduciary doctrine is also illustrative of equity's jurisdiction. For example, the fiduciary doctrine is also underpinned by notions of fairness and conscience, 57 which are reflective of the fundamental tenets 5 8 tool. blunt "equity's as characterized been has and of equity, Likewise, in the context of a company, in consequence of the separa54. See F.W. MAITLAND, EQUITY: A COURSE OF LECTURES 23 (1936). 55. See Hodgkinson v. Simms, [1994] 117 D.L.R. (4th) 161 at para. 32 (Can.) (La Forest, J.); Ernest J. Weinrib, The Fiduciary Obligation, 25 U. TORONTO L.J. 1, 4 (1975). For example, the trustee may have exclusive access to information that is not generally available. It may also be very costly, if not impossible, to scrutinize the trustee's exercise of discretion. Apart from controlling discretion, Professor Weinrib also justifies the imposition of fiduciary obligations on the policy of protecting the integrity of commercial organizations. 56. See Bristol & W. Bldg. Soc'y v. Mothew, [1998] Ch. 1 (C.A.), at 18 (U.K.) ("A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.") (Millett, L.J.); P.D. FINN, FIDUCIARY OBLIGATIONS 201 (1977) ("[A fiduciary is] someone who undertakes to act for or on behalf of another in some particular matter or matters."). In a similar vein, the United States' RESTATEMENT (SECOND) OF TORTS 874 cmt. a (1977) also states that "[a] fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." See also Austin W. Scott, The FiduciaryPrinciple,37 CAL. L. REv. 539, 540 (1949) (defining a fiduciary as "a person who undertakes to act in the interest of another person."). 57. Since the equity jurisdiction is concerned with justice in individual cases, Professor Rotman considers the "fiduciary" concept to be one of the means by which the law transmits its ethical resolve to the spectrum of human interaction. LEONARD I. ROTMAN, FIDUCIARY LAW 2 (2005). 58. Int'l Corona Res. Ltd. v. LAC Minerals Ltd., supra note 30, at 124, 127 (Sopinka, J.).

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tion of ownership and management, company directors are conferred much power and discretion to control the company. This makes it expedient for them to exercise their management power to divert corporate assets to themselves, and hence explains the export of trustee-like fiduciary obligations to directors.5 9 Therefore, duties of loyalty which the law requires of directors are based on fiduciary principles originated from English courts of equity and developed by analogy with duties of trustees. Under Anglo-American law, a director has a fundamental duty to act in what he in good faith considers to be the best interests of his company. This duty has been described as a "duty of loyalty" and a "fiduciary principle" in English law. 6 1 This core duty has emanated into two major rules: namely, that the fiduciary has a duty not to place himself in a position where his interests would or may conflict with his duties owed to the principal (the "no-conflict" rule), and that he has a duty not to make a profit from his position (the "no-profit" rule).62 E. Equity's Contributionto the FiduciaryDoctrine

A fiduciary concept without equity is one which is not informed by equitable principles. This is doctrinally unsound because there is a legislative vacuum not filled by the equity jurisprudence. Practically, equity ameliorates the rigidity of common law by introducing specificity and flexibility. In transplanting legal concepts emanating from the English tradition to a civil law jurisdiction, wholesale adoption appears to be the norm. Can the fiduciary doctrine prove to be an exception? In other words, is the concept of fiduciary loyalty of directors workable in China without a corresponding incorporation of the equity jurisprudence? The answer to this question depends on what equity techniques the fiduciary concept has utilized and whether these techniques can sensibly be substi59. Note, however, that company directors are not trustees: Company assets are not vested in the directors, but in the company itself. Directors only owe trustee-like obligations.
60. PAUL L. DAVIES, GOWER & DAVIES' PRINCIPLES OF MODERN COMPANY LAW 387 (7th

ed. 2003). 61. Item Software (U.K.) Ltd. v. Fassihi, [2004] EWCA (Civ) 1244, [2005] 2 B.C.L.C. 91 (C.A.) at paras. 41, 44 (U.K.) (Arden, L.J.); cited in Shepherds Inv. Ltd. v. Walters, [2006] EWHC 836 (Ch.) at para. 85 (U.K.) (Etherton, J.). 62. See Chan v. Zacharia (1983-84) 154 C.L.R. 178, 198-89 (Aus.) (Deane, J.); Bray v. Ford, [1896] A.C. 44 (H.L.) at 51 (U.K.); Ultraframe (U.K.) Ltd. v. Fielding [2005] EWHC 1638 (Ch.) at paras. 1307 & 1318 (U.K.); see also P.D. Finn, Fiduciary Law and the Modern Commercial
World, in COMMERCIAL ASPECTS OF TRUSTS AND FIDUCIARY OBLIGATIONS 9 (Ewan McKen-

drick ed., 1992).

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tuted in the Chinese context. It is submitted that equity's techniques relate to the substantive and procedural flexibility they offer to the fiduciary doctrine. In the first place, equity is attentive to the detailed circumstances of every individual case. 63 The genesis of equity tells us that it was neither constrained by the nature of relief sought by the plaintiff nor the type of remedies that were available to redress the wrongs. If found appropriate, equity would create new remedies that were unavailable in the common law courts. Therefore, the most important technique of equity owes to its protean character. As observed by Lord Upjohn in Boardman v. Phipps, "[r]ules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case. 64 Thus, the fiduciary concept, being a creature of equity, shares this protean quality. Because of its equitable roots, the fiduciary concept is necessarily a fluid one. At the same time, the doctrine's inherent flexibility has also been infused with coherence, certainty and predictability by over centuries of equity jurisprudence. Next, equity achieves this substantive flexibility by permitting a higher degree of procedural flexibility. For example, techniques such as reversal of burden of proof are widely employed in equity to help the claimants to establish their claims. For example, in establishing undue influence in equity, where the claimant has established certain prerequisites, the burden 65 of proof would be reversed to disprove any exercise of undue influence. To recapitulate, describing directors as owing an obligation of loyalty necessitates an investigation into the nature of this obligation. However, the recognition of the obligation's fiduciary nature is inadequate if the concept of fiduciary loyalty is embodied without the application of equitable principles. A fiduciary concept without equity encompasses only some bright-line rules not supported by equity's techniques-techniques that are important if the introduction of fiduciary loyalty under the revised Company Law is not to be condescended into a broad concept de63. Professor Rotman expressed that equitable principles are "designed to contextualize judicial decision-making and thereby mitigate the harshness and rigor of law." ROTMAN, supra note 57, at 161. 64. [1967] 2 A.C. 46 (H.L.) at 123 (U.K.). 65. Bank of Scotland v. Etridge (No.2), [2002] A.C. 773 (H.L.) at para. 14 (U.K.) (Lord Nicholls).

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void of practical significance. The pitfalls of introducing "fiduciary duty without equity" will be further addressed in the next section with reference to a specific proscription against self-dealing under the Company Law.

IV.

BEYOND EQUITY: FORTIFYING FIDUCIARY DUTIES OF DIRECTORS


IN CHINA

A.

Statutory Prohibitionof Self-Dealing

Directors are to act in the best interest of their company. Unfortunately, their personal interest may not always align with that of the company. Given human frailties, the Company Law has established a system of fiduciary duties to control the directors so that they would not be swayed to prefer their own interest, of which one is the rule against selfdealing. The rule against self-dealing is based on the wider principle that a fiduciary must not put himself in a position where there is a real or sensible possibility of conflict between his interest and duty. 66 Although the rule was developed in the context of trustees attempting to purchase trust property themselves, its application has been extended beyond trustees to circumstances where the fiduciary is on both sides of a transaction. 67 There is also statutory regulation of self-dealing of directors in China. Article 61(2)68 of the old Company Law provides that: Unless otherwise provided in the articles of association or otherwise agreed by the shareholders' committee, a director or the general manager may not execute any contract or engage in any transaction with the company. Likewise, article 149(4) of the revised Company Law contains a similar provision:
66. See JOHN MOWBRAY ET AL., LEWiN ON TRUSTS para. 20-60 (17th ed. 2000); see also SNELL'S EQUITY para. 7-38 (John McGhee ed., 31st ed. 2005); Matthew Conaglen, A ReAppraisal of the Fiduciary Self-Dealing and Fair-Dealing Rules, 65 CAMBRIDGE L.J. 366, 368 (2006). 67. SNELL'S EQUITY, supra note 66, at paras. 7-39. 68. The rule in article 61(2) has been understood as the rule against self-dealing in Chinese law. See, for example, GONGSIFA SHENPAN SHIWU YU DIANXING ANLI PINGXI [COMPANY LAW: TRIAL AND TYPICAL CASE ANALYSIS] (Court No. 4 of Beijing First Intermediate People's Court ed., 2006), which adopted the phrase "ziwo jiaoyi" (self-dealing, MR Z) to describe the proscription under art. 61(2).

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A director.. .may not.. .conclude a contract or carry out transactions with the company in breach of the company's articles of association or without the consent of the shareholders' meeting or shareholders' general meeting.... Although the Chinese Company Law appears to have codified selfdealing of directors, its application is still far from satisfactory. This can be illustrated by a recent Chinese case. The facts of the case 69 were straightforward. On September 23, 2003, the plaintiff Contractor (the Contractor) entered into a renovation contract with the defendant Company (the Company), of which Mr. Jia was a director, to undertake renovation works for the Company. Payment was to be made in stages according to the progress of the work. The Contractor undertook the renovations and the Company paid the first two installments of the sum, but refused to satisfy the remainder sum of RMB 7,700. The Contractor sued for breach of contract. The case was heard before the Beijing First Intermediate People's Court. At trial, the Company defended the Contractor's claim on the ground that since the wife of Mr. Jia was one of the shareholders of the Contractor, 70 the renovation contract entered into between the Contractor and the Company ought to have been declared void for violation of article 61(2) of the Company Law (1993) which prohibited a director from executing any contract or engaging in any transaction with the company, unless otherwise approved. 71 Although the trial court acknowledged that Mr. Jia had an "indirect interest" in the Contractor, it was of the view that the Company Law did not prohibit the director from engaging in transactions with the Contractor in such circumstances. Article 61(2) only prohibited a director from dealing with the company himself-the
69. The facts of this case are extracted from GONGSIFA SHENPAN SHIWU YU DIANXING ANLI PINGXI, id., at 380-90.

70. Under Company Law art. 45 (1993) (and the corresponding Company Law art. 13 (2005)), the legal representative of a company shall be assumed by the chairman of the board of directors, acting director or manager. Since Mrs. Jia was also, until the date when the renovation contract was entered into, the legal representative of the Contractor, it appears that she was also a director of the Contractor. But whether Mrs. Jia was a director of the Contractor was not discussed in the extract of the case. See id. 71. The Company also defended on the (second) ground that there was a conspiracy between Mr. Jia and his wife to defraud the Company: The Contractor delayed the completion of the renovation work, and that work was of poor workmanship. But this argument was quickly dismissed as the trial court found no evidence of conspiracy. Rather, the Contractor had tendered evidence showing satisfactory completion of the work as approved by the Company. Further, the Company had not counterclaimed for any delay in the completion of the work. See id. at 383-86.

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renovation contract in this case was not signed by Mr. Jia with the Company; it was a contract between the Contractor and the Company. Consequently, the present case did not fall within the requirements of article 61(2) and that provision was found to be inapplicable. This conclusion was upheld by the appellate court. B. Fortifying FiduciaryDuties of Directors in China

It is submitted that both the trial and appellate courts in Mr. Jia's case were too restrictive in interpreting article 61(2) of the old Company Law and only came to its conclusion on a perfunctory analysis of the facts. Since 61(2) is now superseded by article 149(4) which is substantially the same as the old provision, the wording of article 149(4) will be used for the purpose of showing how careful refinements should be made to the fiduciary doctrine in general (and to the rule against self-dealing in particular) before it is translated into a domestic institution that embodies equity's techniques as well as is compatible to the Chinese civilian legal tradition. 1. JudicialReference to Overseas Practice

Although the Chinese statutory provisions on fiduciary duties tend to be general and rigid and there is no corresponding transplantation of the equity jurisprudence to China in introducing the fiduciary doctrine, Chinese courts can nonetheless refer to the body of Anglo-American cases to see how equitable principles have supplemented the fiduciary doctrine. In Japan, the transplantation of a US-modeled principle of loyalty of directors to its (old) Commercial Code 72 only met with varied success: civil law judges were not very comfortable in working with vague, open-ended standards, and consequently, the statutory principle was rarely invoked. 73 The Japanese experience shows that the practical sig72. Article 254-3 of the (old) Japanese Commercial Code stipulates that directors owe to the company a duty to perform their functions faithfully, in compliance with laws, the company's articles of association, and shareholders' resolutions. Japan undertook substantial company law reforms which culminated in the enactment of the Company Code in June 2005. Article 254-3 of the Commercial Code has become obsolete and has been replaced by article 355 of the (new) Japanese Company Code. 73. Hideki Kanda & Curtis J. Milhaupt, Re-examining Legal Transplants: The Director'sFiduciary Duty in Japanese CorporateLaw, 51 AM. J. COMP. L. 887 (2003). The authors observed that article 254-3 of the (old) Commercial Code had been dormant for almost forty years after it was transplanted. Id. at 888.

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nificance of the statutory obligation depends on how prepared the legislature and judiciary are to create a favorable legal infrastructure for the invocation of the fiduciary loyalty principle. It is therefore essential to look abroad first to see how the doctrine has been understood, interpreted and developed. a. Where the Statute Is Ambiguous

To begin with, where the statutory provisions lack detailed guidelines, courts can draw inspiration from similar cases abroad. For example, in the case of fiduciary self-dealing, the House of Lords had established in Aberdeen Railway Co. v. Blaikie Bros.74 as long ago as 1854 that a director could not enter into a contract with his company. 75 There, the director, Mr. Blaikie, entered into a contract on behalf of his company for the supply of certain iron chairs. 76 Although the contract was partly performed, the House of Lords held that it was voidable in equity because of Mr. Blaikie's breach of fiduciary duty in acting in a situation where there was a conflict between his duty to negotiate the best contract terms for his company and his own personal interest by virtue of his partnership in the supplier. Lord Cranworth L.C. held that: [I]t is a rule of universal application, that no one, having [fiduciary] duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom 77 he is bound to protect. In Mr. Jia's case, although there was an insufficient finding of facts as to whether the renovation contract was negotiated by Mr. Jia on behalf of the Company, the concept of fiduciary loyalty would suggest that, just as Mr. Blaikie's self-dealing rendered his contract voidable, Mr. Jia's action, though not violating the strict letters of the rule, might have also brought into conflict his duty to get the best (lowest) contract price for the company considering his personal interest which went in the opposite direction. By incorporating a concept of fiduciary loyalty of directors into the statute, the revised Company Law arguably paves the way for a wider interpretation of the specific rules of corporate conduct set
74. 75. 76. 77. [1854] 1 Macq. 461, 149 R.R. 32 (H.L.) (U.K.). Id. Id. Id. at471,39.

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out in article 149 (including the rule against self-dealing): Even if the facts do not fall within a specific sub-rule, the general principle of fidu78 ciary loyalty might still apply. More specifically, although article 149(4) governs, on the face of it, the situation where a director transacts directly with his company, it is unclear whether its scope is so limited. Should the rule apply to impeach a transaction by the company with a third party in which the director is interested (for example, where the director is a major shareholder or a partner of the counterparty)? Does the rule extend beyond directors to other persons, such as wives of directors? In Mr. Jia's case, even though the Court did acknowledge Mr. Jia's "interest" in his wife's company, it did not go on to explain what "interest" entails,7 9 whether "interest" was invoked by virtue of any directorship on his part in his wife's company, or whether such interest would have any impact on the application of the rule against self-dealing. Even assuming that Mr. Jia the director had no direct or indirect financial interest in the Contractor, the state of affairs might still call for caution. A recent English case which bears some resemblance to the Chinese case at hand is worth noting. In Newgate Stud Company v. Penfold, Mr. Penfold was a director and manager of the plaintiff companies, Newgate, which ran horse racing and bloodstock businesses, and which were ultimately controlled by Prince Fahd. 80 The plaintiff companies brought proceedings against Mr. Penfold on the ground of self-dealing in relation to the sale of certain broodmares to partnerships established between Mr. Penfold and his wife. The court held that Mr. Penfold was subject to the rule against self-dealing as a director of the plaintiff companies. 81 In the course of its judgment, the court clarified the scope of the rule against self-dealing. There is no strict application of the rule in a husband-wife situation: if the sales had been made directly to Mr. Penfold's wife as principal and
78. See SNELL'S EQUITY, supra note 66, at para. 7-36. 79. The Court mentioned that Mr. Jia was a director of the Contractor, but did not further indicate whether he had any shareholding interest in that company. See GONGSIFA SHENPAN SHIWU YU DIANXING ANLi PtNGXI, supra note 68, at 381. 80. [2004] EWHC 2993, [2004] All E.R. (D) 372 (Ch.) (U.K.). 81. With respect to the proposed purchase of the first horse, Mr. Penfold had not disclosed his interest in the transaction to Prince Fahd and had therefore not obtained his consent to that transaction. Id. at para. 255. With respect to the second horse, consent was not given after full disclosure of all material facts. Id. at para. 256. Hence, the court held that Mr. Penfold breached the selfdealing rule and the plaintiffs were entitled to an account of profits with respect to these two horses. Id. at para. 257.

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not as nominee for him, they would not have been automatically voidable by reason of the self-dealing rule, but the onus would have been on Mr. Penfold to demonstrate that they represented fair dealing. Indeed, as observed by Justice Richards, in any husband and wife relationship: [T]here exists the potential for the exercise of fiduciary duties to be influenced by personal considerations. If a director causes his company to enter into a transaction with a close relation, or a spouse or other partner, there is a significant risk that the director 82 party. other the favor to desire a by compromised be will By analogy, although article 149(4) of the revised Company Law is silent on the scope of the fiduciary duty rule, reference to the equity jurisprudence abroad suggests that in Mr. Jia's case, the Court could, at the very least, have conducted a fuller inquiry into whether there was a significant risk that Mr. Jia might have compromised his company's interests by entering into a transaction with a company in which his wife held an interest. While it is almost impossible to introduce centuries of case law jurisprudence by the stroke of a legislative pen, the case provides a vivid illustration of the value of making reference to overseas practice in the course of developing China's own understanding of fiduciary loyalty. b. Where There Is a Legislative Vacuum

Apart from clarifying ambiguities in the existing statutory provisions, Chinese judges can indeed go further and look at the Anglo-American jurisprudence where there does not appear to be any statutory provision governing the situation at hand. Two examples are relevant here. The first deals with the duty of directors upon resignation. In common law jurisdictions, a director's fiduciary duty is owed to the company at the commencement of his directorship, but such duty may not cease immediately upon resignation. For example, English courts have already accepted that a director's fiduciary duty may survive (albeit in a limited scope) termination of his directorship. In Industrial Development Consultants Ltd. v. Cooley, the director who resigned on pretence of ill health to pursue a business opportunity was held to remain liable for 83 profits arising from the opportunity that arose during his directorship.
82. Id. at para. 240. 83. [1972] 1 W.L.R. 443 (U.K.); see also Ultraframe (UK) Ltd. v. Fielding, supra note 62, at

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This is justified on the policy that a director is not allowed to evade his fiduciary loyalty by resignation. 4 In contrast, the revised Company Law is silent on the duration of fiduciary obligations imposed on directors. Nonetheless, given that it is now more apparent that the revised Company Law contains a concept of fiduciary loyalty, the absence of any specific provisions on restraining directors' actions post-resignation in the statute should not prevent Chinese courts from utilizing this principle to fill the legislative vacuum.85 The second example relates to standard of liability for breach of fiduciary duty. Although the revised Company Law now contains a general duty of loyalty as well as specific proscriptions on directors in articles 148 and 149, it does not indicate how courts are to identify whether a director's conduct falls short of those requirements. In contrast, American courts generally adopt the "business judgment rule" in reviewing a director's decision, e.g. whether a director has entered into a self-dealing transaction. This rule creates a presumption in favor of directors that they acted on an informed basis, in good faith and in the honest belief that the action was in the best interest of the company. Under this rule, courts would defer to the director's business judgment unless the presumption is rebutted. 86 This allows for risky, but responsible, entrepreneurial activities. Likewise, English courts generally adopt common sense principles to decide whether the directors "exercise their discretion bona fide in what they consider-not what a court may consider-is in

para. 1309 ("Resignation will not preclude a director from being in breach of the 'no-profit rule' if, after his resignation, he uses for his own benefit property of the company or information which he has acquired while a director.") (Lewinson, J.); Canadian Aero Servs. Ltd. v. O'Malley, [1974] 40 D.L.R. (3d) 371, 382 (Can.) ("[A director] is also precluded from [usurping or diverting a maturing business opportunity] even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company....") (Laskin, J.). 84. See also Pearlie Koh, Once a Director, Always a Fiduciary, 62 CAMBRIDGE L.J. 403 (2003). 85. Note that according to art. 118 of the Daojingwai shangshi gongsi zhangcheng bibei tiaokuan [Mandatory Provisions for the Articles of Associations of Companies to be Listed Overseas] (promulgated by the Securities Office of the State Council and the State Commission for Restructuring the Economic System Sept. 29, 1994, effective Sept. 29, 1994), translated in 9 CHINA L. & PRAC. 19 (May 1995) [hereinafter Mandatory Provisions], a director's duty of loyalty does not necessarily cease upon termination of his directorship. 86. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Although the business judgment rule is mostly invoked to assess whether a corporate director has exercised his duty of care, it appears that it is also adopted as a standard of liability for breach of fiduciary loyalty cases.

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the interests of the company,' 87 although there is also recent suggestion that a more objective approach may be employed. 88 At the moment, the revised Company Law does not stipulate a standard of liability for breach of directors' duties. Fiduciary loyalty is an open-ended standard of behavior which requires directors to be altruistic by focusing on the company's, rather than their own, interests. Since there may be cultural differences in practicing altruistic behaviors, 89 it is possible for China to formulate a standard of behavior that suits its own economy and culture. This takes time, however. In the meantime, it is advisable that a more robust approach along the recent English lines should be adopted. Given the lack of judicial expertise, it may be more difficult for Chinese judges to interpret the American business judgment rule. Moreover, a more robust and objective approach could help clamp down on corporate misconduct in China more effectively. All in all, the concept of fiduciary loyalty of directors is a concept which has to be constantly refined by courts in discerning its precise meaning. Judges in China should play a more active role in considering the extensive body of case law on90fiduciary duty in Anglo-American jurisprudence in developing its law. 2. Statutory Embodiment of Equity's Techniques

The provisions pertaining to fiduciary duties of directors in China are often skeletal and lack operating standards. Without the support of equitable principles and cases from the equity jurisprudence, it may be difficult for the courts to enforce the provisions. Thus, apart from judges making reference to overseas practice when deciding cases, it may also be preferable for Chinese lawmakers to perfect the fiduciary rules by in87. Re Smith & Fawcett Ltd., [1942] Ch 304 (C.A.) at 306 (U.K.) (Lord Greene M.R.); see also DAVIES, supra note 60, at 387-88. 88. For example, in Item Software (UK) Ltd. v. Fassihi, supra note 61, at para. 44, Arden, L.J. adopted an objective interpretation of the facts to hold that a director is under a fiduciary duty of loyalty to disclose his wrongdoings. 89. Lynn A. Stout, On the Export of U.S.-Style Corporate Fiduciary Duties to Other Cultures:
Can a Transplant Take?, in GLOBAL MARKETS, DOMESTIC INSTITUTIONS: CORPORATE LAW AND

GOVERNANCE INA NEW ERA OF CROSS-BORDER DEALS 46 (Curtis J. Milhaupt ed., 2003). 90. Some commentators describe this as allocating "residual lawmaking powers" to courts. See Katharina Pistor & Chenggang Xu, Fiduciary Duty in Transitional Civil Law Jurisdictions: Lessons from the Incomplete Law Theory, in GLOBAL MARKETS, DOMESTIC INSTITUTIONS: CORPORATE LAW AND GOVERNANCE IN A NEW ERA OF CROSS-BORDER DEALS, supra note 89, at

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troducing more detailed legislation that incorporates the necessary techniques of equity. As discussed above, equity promotes substantive flexibility by giving fine attention to details rather than applying a particular rule rigidly to a case. In the context of self-dealing, this flexibility is manifested in its attention to the fine details of the circumstances in which the rule is to be invoked. For example, a director may be exonerated where consent to the transaction is obtained, and equity has spelled out detailed guidelines on the nature of consent that is required. In this regard, article 149(4) does not impose strict prohibition on a director's transactions with the company either. According to this provision, there are two ways by which a director who enters into a transaction with the company can absolve himself from liability: (i) that such transactions are permissible under the company's articles of association; or (ii) that consent (tongyi, R 01) of the shareholders is obtained. As to (ii), unfortunately it is only expressed in general terms. While this may be compatible with the highly generalized nature of statutory codes, it may not be very helpful in the absence of more specific statutory guidance or equitable principles on whether any formal procedural requirements are to be satisfied. Does it matter in which way such "consent of the shareholders" is obtained? More specifically, can it be obtained either antecedently or subsequently? Must the consent be "informed"? In Mr. Jia's case, the Court did not consider that Mr. Jia's action fell within the strict letters of the rule. Hence, it was not necessary for the Court to consider whether the shareholders' consent was obtained. 91 However, even if article 149(4) were to be applied, there might still be other difficulties. This is because the provision fails to stipulate that the consent must be obtained after formal disclosure of the conflict in advance. On the contrary, the English equitable rule against self-dealing of trustees renders such a transaction voidable ex debito justitiae however fair it is, 92 unless it falls within a limited number of exceptions, notably where the trustee has obtained the fully informed consent of all his beneficiaries.93 English courts have thus extended the application of the rule to prevent a company's director from dealing with the company without
91. It appears that the Court in Mr. Jia's case did not make any reference to the requirements of the articles of association of the Company. 92. Tito v. Waddell (No. 2), [1977] Ch. 106, 241 (Ch.) (U.K.). Note also that Megarry V.C.'s remarks on self-dealing were predicated on the existence of a fiduciary duty. Id. at 230. 93. See Re Thompson's Settlement, [1986] Ch. 99, 115 (Ch.) (U.K.).

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the fully informed consent of the shareholders. For instance, section 317 of the UK Companies Act (1985) imposes a positive requirement on a company director to declare his interest, whether directly or indirectly, in any proposed contract with the company. 94 When the UK government published a new Company Law Reform Bill in November 2005 to codify directors' duties, it also included draft clauses prohibiting selfdealing of directors, detailing the circumstances in which declaration of interest is or is not required for transactions between the company and its directors. 95 These rules offer useful reference for incorporating equity's techniques into the Chinese statute. Besides substantive flexibility, equity also offers more flexible procedures in establishing claims. Since the principle underlying self-dealing is that a director should not be permitted to place himself in a position of conflict of interest, equity has reversed the burden of proof where circumstances are suspicious; that is, the burden is placed on the director to show that the transaction was fair and in the interest of the company before he could be exempted from a strict application of the rule. This was also stressed by Justice Richards in Newgate v. Penfold: [T]he fiduciary [has] the burden of showing, in a case where the fiduciary does not have a personal interest in the transaction but where on the facts there exists a real risk of conflict between duty and personal loyalties, that the transaction was demonstrably in the best interests of the company or others to whom he owes his 96 duties. Absent incorporation of equity jurisprudence, it is submitted that this procedural flexibility of equity can also be embodied by clarifying the burden of proof for self-dealing transactions under the revised Company Law. 3. Domestic Inspirationsfrom Existing Rules and Regulations Last but not least, it may be tempting to suggest that a wholesale
94. See also Hong Kong Companies Ordinance (Cap. 32 of the Laws of Hong Kong) 162 ("(1) Any director of a company who is in any way, directly or indirectly, interested in a contract or proposed contract with the company shall, if his interest in such contract or proposed contract is material, declare the nature of his interest at the earliest meeting of the directors at which it is practicable for him so to do...."). 95. See Draft Clauses B8-B20 of the UK Company Law Reform Bill (Nov. 2005), http://www.dti.gov.uk/files/file2541 l.pdf (last visited Aug. 1, 2007). 96. See Newgate v. Penfold, supra note 80, at para. 242.

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transplantation of Anglo-American legal rules is the only way to introduce foreign legal concepts to a different jurisdiction. This is not necessarly so, at least in the context of introducing a fiduciary concept to the Chinese civilian legal tradition. Indeed, some of the equity's techniques detailed above have already been embodied by some domestic rules and regulations. One should therefore also look for domestic inspirations in perfecting the fiduciary concepts in China. In the case of the rule against self-dealing, the following domestic models provide an example of how the legislation can closely replicate the fiduciary rules in common law jurisdictions. First, as mentioned above, it appears that the scope of the rule against self-dealing in article 149(4) covers director and directors only. However, a number of domestic rules and regulations have already indicated that the scope of the rule need not be so restricted. For example, article 120 of the Mandatory Provisions for the Articles of Associations of Companies to be Listed Overseas promulgated by the CSRC extends the prohibition to transactions with "connected persons" (xiangguanren,M ,).97 Similarly, article 21 of the revised Company Law prohibits a director from using his affiliated relationship (guanlianguanxi, *$f*,) to harm the interests of his company, although what amounts to affiliates is not defined in the statute. 98 Although it is arguable that this approach is still too broadbrushed (as there may indeed be circumstances where spouses and, a fortiori, other family members are not nominees for each other), it at least shows that the rule can be clarified and extended from a domestic perspective without reference to overseas legal or equitable principles. In a similar vein, there are also domestic rules and regulations detailing the nature of approval required for the self-dealing rule. For example, article 116(5) of the Mandatory Provisions for the Articles of Associations of Companies to be Listed Overseas prohibits a director's transactions with the company unless approval of shareholders' general meeting is obtained in circumstances where the approval is obtained on
97. Mandatory Provisions, supra note 85. "Connected persons" are defined in article 117 to include persons such as the director's spouse and children. In fact, it has also been suggested by some commentators that reference to "directors" in article 149(4) of the revised Company Law should include the director's associates, including the director's spouse and children, parents or brothers and sisters of the spouse; children, grandchildren, brothers and sisters, and parents of the director, as well as the spouse of the each of the above-mentioned persons. GONGSIFA SHENPAN SHIWU Yu DIANXING ANLI PINGXI, supra note 68, at 387. 98. "A company's.. .director... may not use his or her affiliated relationship to harm the interests of the company." See Company Law art. 21 (2005).

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an informed (zhiqing, )IMR-)basis. 99 The interested director is also required to disclose the nature and extent (xingzhi he chengdu, 1tNlif) of his interest at a board meeting.100 He is also not to be counted in the quorum for the purposes of the board meeting in which this transaction is discussed, nor is his vote to be counted.' 0' The requirement of an informed consent is thus not a foreign concept. Thus, the CSRC has already attempted to elaborate a number of domestic rules and regulations to improve the corporate legal framework by introducing more familiar common law rules and doctrines. Unfortunately, the more stringent requirements are lacking from the Company Law, and can only be found in the least authoritative source of legislation which is applicable to some companies only. It is disappointing that the revised Company Law fails to draw insights from these domestic rules when it is possible for China to introduce a fiduciary concept that works remarkably similar to its common law counterpart without sacrificing its civilian legal tradition. By drawing upon these domestic inspirations, the statute may actually provide a prime example of how the fiduciary doctrine may be introduced and refined without disregarding civil principles. Further, such refinement of the fiduciary rules in the Company Law can also contribute to the internal consistency of the domestic legislation. This would help secure the most principled judicial responses while causing the least disturbance to China's delicate legal structure. 4. Summary

The recent Chinese case on self-dealing discussed above suggests that there appears to be reluctance on the part of Chinese courts to develop criteria to delineate actions that violate the specific rules of the Company Law. By making reference to Anglo-American fiduciary concepts, this article is not suggesting that Chinese courts will arrive at the same conclusions as common law judges in the UK or US. In fact, it is likely that given the different market conditions and corporate culture in
99. Note that in the Guanyu yinfa "Shangshi gongsi zhangcheng zhiyin (2006 xiuding)" de tongzhi, [)=fEP -Tr.!WIJMM] (2006 *WiT))) MAO, Circular on Issues Concerning the Guidelines for the Articles of Association of Listed Companies (revised 2006)] (published by the CSRC on Mar. 16, 2006), http://www.csrc.gov.cn/, overseas listed companies are still required to comply with the Mandatory Provisions. 100. Mandatory Provisions, supranote 85, art. 120 (1994). 101. Id.

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China, judges in China will respond differently. Rather, as the analysis of article 149(4) illustrates, whereas fiduciary duty without equity may seem doctrinally unsound, the legal impediments to the reception of an equitable fiduciary doctrine are not insurmountable. It. is possible to avoid the pitfalls of introducing a mere broad, hollow fiduciary concept by making judicial reference to overseas practice, domesticating equity's certain techniques or even examining some of the current domestic rules more carefully. Such refinements to the operation of the fiduciary concept will make its reception more palatable. They will also in turn encourage a broader understanding of the circumstances that may compromise a director's ability to uphold high standards of corporate governance. Besides, as shown above, the current legal or institutional impediments to introduction of a fiduciary concept do not preclude the possibility of introducing a fiduciary concept by statute. Indeed, in an attempt to modernize its company law framework, the UK government has also suggested codification of directors' duties. As the UK Company Law Reform Bill attempted to amalgamate of the current case law and statutory provisions on directors' duties, it has much to offer to China in drafting her own statutory provisions on directors' fiduciary duties.
V. CONCLUSION

It is beyond doubt that the recent extensive amendments to the Company Law will soon prove to be a landmark, if not a watershed, in the history of China's corporate governance reforms. The reinforcement of directors' duties, accompanied by the availability of more extensive civil remedies such as disgorgement of the defaulting director's profits, as well as the introduction of a concept of fiduciary loyalty of directors, are to be commended. Yet it is difficult to completely codify an equitable fiduciary doctrine and thus there is a risk that the principle of fiduciary loyalty as embodied in the revised Company Law exemplifies only a generic description for the specific rules set out therein. However, it does not follow that the introduction of the concept of fiduciary loyalty of directors in China without the concomitant incorporation of the English equity regime is fatal. The differences between common law and civil law jurisdictions might, at first blush, suggest that the fiduciary doctrine is incompatible with the civilian legal tradition. However, these differences are not insurmountable and equity's contribution to the fiduciary doctrine can be instilled, for example, by making refer-