fiduciary duty without equity fiduciary duties of directors under the revised company law of the...

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

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Fiduciary Duty Without Equity: "FiduciaryDuties" of Directors Under the Revised

Company Law of the PRC

REBECCA LEE*

I. Introdu ction ............................................................................... 898II. The Concept of "Fiduciary Duties" of Directors Under the

C om pany L aw ............................................................................ 900A. The Old Company Law (1993) ........................................ 900B. The Revised Company Law (2005) ................................. 901

III. Fiduciary Loyalty of Directors Under the Revised CompanyL aw ............................................................................................ 9 0 2A. Directors' "Obligation of Loyalty" ................................. 903B. Manifestations of Directors' "Obligation of Loyalty" .... 905C. Remedies for Breach of Directors' "Obligation of

L oyalty". .......................................................................... 908D. Fiduciary Duty Without Equity? ................... .. .. . . . . . . . . . . .. . . 909E. Equity's Contribution to the Fiduciary Doctrine ............. 911

IV. Beyond Equity: Fortifying Fiduciary Duties of Directors inC h in a .......................................................................................... 9 13A. Statutory Prohibition of Self-Dealing .............................. 913B. 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 particularlygrateful to Lusina Ho for her comments and suggestions on an earlier draft of this Article. All er-rors remain mine.

VIRGINIA JOURNAL OF INTERNATIONAL LAW

1. Judicial Reference to Overseas Practice ............... 915a. Where the Statute Is Ambiguous ............... 916b. Where There Is a Legislative Vacuum ....... 918

2. Statutory Embodiment of Equity's Techniques .... 9203. Domestic Inspirations from Existing Rules and

R egulations ........................................................... 9224. Sum m ary ............................................................... 924

V . C o nclu sion ................................................................................. 9 2 5

I. INTRODUCTION

It has been more than a decade since the Company Law of the Peo-ple's Republic of China (PRC) was first promulgated in 1993.1 Whenthe law was first enacted, its purpose was to enhance corporatization re-forms of the debt-ridden state-owned enterprises (SOEs) in China,whose poor performance was partly due to strong administrative influ-ence of the government. 2 Together with other economic reforms, theplanned economy of China was rapidly transformed into a more market-oriented one. But this also meant that the old Company Law-enacted tofacilitate restructuring of SOEs-had become outdated. At the sametime, the Asian Financial Crisis in 1997 precipitated corporate law re-forms in many Asian jurisdictions. Although China was able to survivethe crisis relatively unscathed, it also saw the need to improve its corpo-rate law regime in order to create a more favorable legal infrastructurefor its investors. The Company Law was thus revised in 1999 and againin 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 defacto ownership rights over SOEs without the attendant management risks. This led to problems ofcorruption and inefficiency. The corporatization reforms therefore transferred some state assets toprivate ownership. See generally Jia Heting, On Corporatization of Enterprises and CorporateGovernance, 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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2007] FIDUCIARY DUTIES UNDER THE COMPANY LAW OF THE PRC 899

in corporate misconduct roiled the corporate sector. Tension betweencorporate governance and market development soared as there wereregular reports of corporate scandals and business scams.3 An overhaulof the Company Law was thus long overdue. The time finally camewhen China's accession to the World Trade Organization provided theimpetus for speeding up the country's company law reforms. Againstthis background, China undertook extensive revisions to its CompanyLaw, focusing on corporate governance and protection of minorityshareholders. The revised Company Law was promulgated in October2005 and became effective on January 1, 2006.4

An overview of the major features of the revised Law has alreadybeen offered by some commentators.5 This Article examines in detailone of the major aspects of the amendments to the Company Law,namely the directors' duties. After a brief introduction to the backgroundof the Company Law in this Part, Part II begins with a brief descriptionof the directors' duties under the old Company Law, highlighting themain features under the old regime. There follows in Part III a discus-sion of the introduction of a new concept of fiduciary loyalty of directorsunder the revised Law. Whereas the fiduciary doctrine has its roots inEnglish equity, the Chinese civilian legal tradition knows no duality oflaw and equity. Without the concomitant incorporation of the Englishequity jurisprudence, the revised Chinese Company Law has not fullyembraced the fiduciary doctrine. This Article therefore evaluates the fea-sibility of transplanting an equitable concept to a civil law jurisdiction,and the pitfalls that may be encountered. Part IV illustrates these diffi-

3. Problems included misappropriation of corporate assets, mis-investment, over-borrowing,falsification of accounts, lack of disclosure of interests, etc. A number of infamous examples eveninvolved 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 onthe Stock Exchange of Hong Kong before the fraud was uncovered. See, e.g., Implementing Cor-porate Governance for PRC Companies-Post GITIC, MONDAQ BUSINESS BRIEFING (June 14,2004); Zheng Caixiong, Former GITIC Chief Imprisoned, CHINA DAILY (June 30, 2004); TycoonGiven 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 NationalPeople'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 Hesitant Step Forward: New Company Law Brings Mixed Feelings, 19CHINA L. & PRAC. 13 (Dec. 2005).


culties with reference to the proscription against self-dealing of directorsunder the Company Law. As will be seen, there is a lack of detailed spe-cifics for Chinese judges to apply the statute effectively to deal with thecases at hand. Nonetheless, a fiduciary doctrine which displays equity'stechniques, while also remaining compatible with the Chinese civilianlegal tradition, is not impossible. A number of suggestions are made torefine the fiduciary concepts introduced under the revised Law. Part Vconcludes by suggesting that, in the final analysis, a more proactive leg-islative and judicial approach is needed to tackle ambiguities under ex-isting 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 independentchapter on directors' duties and remedies for breach thereof. Provisionson directors' duties were scattered throughout the statute. Directors wereonly required to "perform their duties faithfully" (zhongshi liixing zhiwu,

, , ]4 , *R ) under articles 59(1) and 123.6 This appeared to suggestthat directors had to act honestly and in good faith in the performance oftheir roles. A few examples of a director's duties could be found in arti-cles 59 to 62 of the Company Law,7 including prohibitions from accept-ing bribes, 8 misappropriating company funds,9 engaging in business ac-

6. Company Law art. 59(1) (1993) ("Directors.. .shall.. faithfully perform their duties andmaintain the interests of the company and shall not take advantage of their position, functions andpowers in the company to seek personal gains."). Where article 59(1) applies to limited liabilitycompanies (youxian zeren gongsi, ), article 123 (1993) contains a similar provisionthat 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 Com-pany Law (1993) which applies to limited liability companies. See Company Law ch. 2 (1993). Byvirtue 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 forthe 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 func-tions and powers, accept bribes or other unlawful incomes, nor may they misappropriate the prop-erty of the company.").

9. Company Law art. 60(1) (1993) ("Directors.. shall not misappropriate company funds....").

900 [Vol. 47:4


tivities that compete with the company's,1° engaging in transactions withthe company," or divulging the company's confidential information. 12

Although articles 59(1) and 123 ("perform duties faithfully") couldfairly be criticized for being too general to be invoked on their own toimpeach a director's action and hence devoid of any practical signifi-cance, 13 the imposition of various directors' duties at least raised the dis-cussion of whether it could be regarded as a step towards recognition ofa 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 January1, 2006. It has been hailed as a significant milestone in the reform of theChinese economy. Of the 229 provisions under the old Company Law,46 provisions have been deleted and 137 amended, and 41 provisionshave been added. 15 Substantial changes were made to revolutionize vari-ous aspects of the Company Law. For example, the incorporation ofcompanies is now simplified by reducing the minimum registered capitalrequirements' 6 and permitting the establishment of one-person (or sin-gle-shareholder) companies; 17 protection of minority shareholders is

10. Company Law art. 61(1) (1993) ("Directors.. shall not operate their own in, or operate forothers, the same category of business as the company they are serving or, engage in activitieswhich damage the interests of the company.... [Tihe incomes derived therefrom shall belong tothe company.").

11. Company Law art. 61(2) (1993) ("Directors.. shall not enter into contracts or conducttransactions with the company except as provided for in the articles of association or approved bythe shareholders' meeting.").

12. Company Law art. 62 (1993) ("Directors.. .shall not disclose any company secrets exceptas 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 59through 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), whichwere litigated under the specific provisions of articles 59 to 62.

14. See, e.g., Michael I. Nikkel, "Chinese Characteristics" in Corporate Clothing: Questionsof Fiduciary Duty in China's Company Law, 80 MINN. L. REV. 503 (1995); IAN TOKLEY & TINARAvN, 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 di-rectors' duties under the revised Company Law, see XUDONG ZHAO, XN GONGSIFA ZHIDU SHEJI[THE INSTITUTIONAL DESIGN OF THE REVISED COMPANY LAW] ch. 13 (2006); GONGSIFAYUANLI, ANLI YU YUNYONG, supra note 13, at 328-34.

16. The minimum registered capital is now RMB 30,000 for limited liability companies andRMB 5 million for joint stock companies. See Company Law arts. 26, 81 (2005).

17. See Company Law art. 58 (2005).


strengthened by granting them cumulative voting rights, 18 statutoryrights to access the company's information, 19 rights to convene share-holders' meetings, 20 and even rights to bring derivative lawsuits. 21 Onthe corporate governance front, the revised Company Law sought to en-hance corporate governance standards 22 through introduction and rein-forcement of fiduciary concepts.

III. FIDUCIARY LOYALTY OF DIRECTORS UNDER THE REVISEDCOMPANY LAW

Whereas articles 59(1) and 123 of the old Company Law require a di-rector to "perform their duties faithfully," article 148(1) of the revisedCompany Law, for the first time, imposes on directors a separate and in-dependent "obligation of loyalty" (zhongshi yiwu, uP..,-,9.*).23 An un-derstanding of the nature or theoretical basis of this obligation has itspractical significance. For example, although the applicability of the re-vised Company Law is generally limited to domestically invested com-panies 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 rep-resentation by allowing a shareholder to cast his total voting rights for one candidate when elect-ing 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 againstdirectors who fail to comply with the laws and regulations or the company's articles in the courseof performing their duties, thereby causing loss to the company. Company Law art. 152 (2005); cfCompany Law art. 111 (1993) (providing for a shareholder's right to sue only if the resolutions ofa shareholders' or board of directors' meeting have violated the law, violated administrative de-crees or encroached upon the legitimate rights of shareholders).

22. See generally Craig Anderson & Bingna Guo, Corporate Governance Under the RevisedCompany Law (Part 1): Fiduciary Duties and Minority Shareholder Protection, 20 CHINA L. &PRAC. 17 (Apr. 2006); Craig Anderson & Bingna Guo, Corporate Governance Under the RevisedCompany Law (Part 2): Shareholder Lawsuits and Enforcement, 20 CHINA L. & PRAC. 15 (May2006).

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 anobligation of "diligence," or care, (qinmian yiwu, 08S *) by directors. At common law, theduty of care is a positive duty to render the due diligence that a reasonable person of his knowl-edge and experience would do under similar circumstances. This aspect of a director's duties willnot be addressed in this Article.

24. Company Law art. 218 (2005).

[Vol. 47:4


laws regulating FIEs contain no relevant provisions on directors' duty ofloyalty, provisions in the Company Law relating thereto will presumablybe applicable to FIEs and hence will have much wider impact than manyother provisions of the Company Law. In addition, the revised CompanyLaw has spawned amendments to other laws and regulations to furtherenhance corporate governance. For example, in March 2006, the ChinaSecurities Regulatory Commission (CSRC) revised its Guidelines forthe Articles of Association of Listed Companies 25 in which article 97similarly introduces an obligation of loyalty (zhongshi yiwu, -, .SL.-)of directors of PRC-listed companies. The same obligation can also befound in article 8 of the Measures for the Administration of the Take-over of Listed Companies promulgated by the CSRC in July 2006.26 Theprevalence of the duty of loyalty in Chinese law necessitates a closer ex-amination of the nature of this obligation.

Contrary to the provisions in the old Company Law, which merelyprovide a descriptive understanding of directors' duties, it is submittedthat the revised Law introduces a concept of fiduciary loyalty of direc-tors by virtue of the new article 148, and indeed, fiduciary duties of di-rectors manifest themselves in a number of provisions in the revisedLaw. That the revised Law introduces fiduciary concepts can be illus-trated by: (a) the incorporation of a defining obligation of the fiduciarydoctrine; (b) the inclusion of various specific directors' duties under therubric of this defining obligation; and (c) the introduction of remediesconventionally available to fiduciary breaches. Each will be elaboratedin detail.

A. Directors' "Obligation of Loyalty"

After the amendments, the revised Company Law dedicates an entirechapter (Chapter 6) to the Qualifications and Obligations of Directors,Supervisors and Senior Management of a Company.27 Not only does thissignify the importance of directors' duties under the revised Law, thenew 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 theCSRC Jul. 31, 2006, effective Sept. 1, 2006).

27. Unlike the old Company Law, the new Law does not discuss the duties of directors of lim-ited liability companies and joint-stock companies separately, in order to avoid repetition.


provision in this chapter appears to be article 148, which improves uponthe old articles 59(1) and 123 and states expressly, for the first time, thata director owes an "obligation of loyalty." As remarked by Lord JusticeMillett in the English Court of Appeal case of Bristol & West BuildingSociety v. Mothew,28 the obligation of loyalty is the distinguishing obli-gation of a fiduciary:

The principal is entitled to the single-minded loyalty of his fidu-ciary. The core liability has several facets. A fiduciary must act ingood faith; he must not make a profit out of his trusts; he mustnot place himself in a position where his duty and his interestsmay conflict; he may not act for his own benefit or the benefit ofa third person without the consent of his principal.... They are thedefining characteristics of a fiduciary. 29

Similarly, in the High Court of Australia, it has been held that:

[W]hat the law exacts in a fiduciary relationship is loyalty, oftenof an uncompromising kind, but not more than that.3 °

According to the Circular Concerning the Explanation of the Com-pany Law Reform Bill of the PRC,31 the revised Company Law imposesan obligation of loyalty (together with an obligation of fidelity) on direc-tors so that directors' statutory duties could be further clarified. Unfor-tunately, the Chinese Company Law fails to stipulate the nature of thisobligation of loyalty. 32 A possible hurdle to justifying directors' duty ofloyalty as fiduciary in nature is that under civil law jurisdictions, includ-ing 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 Obliga-tion, 16 TRUST L. INT'L 34 (2002) (describing the obligation of loyalty as the obligation of disin-terestedness).

30. Breen v. Williams (1996) 186 C.L.R. 71, 93 (Aus.) (Dawson, J. and Toohey, J.) (quotingP.D. Finn, The Fiduciary Principle, 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.) atpara. 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 Na-tional People's Congress of the PRC, Feb. 25, 2005.

32. For example, articles 23 and 192 of the Taiwan Company Law provide that directors owea 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 [ONCOMPANY LAW] 25-27, 527 (2004).

[Vol. 47:4


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 toChina, having introduced a Trust Law only in 2001. It is submitted thatalthough agency theory is more prevalent, this theory alone has provedinsufficient in promoting directorial accountability, for interests of direc-tors and shareholders do not always coincide.35 Indeed, the risk that di-rectors may be swayed from the performance of their primary dutiesowed to the company36 may partly explain why the Chinese CompanyLaw has also put in place a set of negative duties to prevent directorsfrom having any conflict of interests or making any secret profits. More-over, an agency theory of directors is not irreconcilable with its fiduciarynature. For example, in China, it has been recognized that a director'sagency relationship with the company is based upon the "trust" (xinren,MlJf) between the parties, and that the director as an agent is to act "inthe best interests" (zuigao liyi, ji~ lI]f) of the company.37 Properlyunderstood, directors are agents standing in a fiduciary relationship withthe company. By recognizing that company directors are also fiduciariesof the company, the law only acknowledges that directorial discretion isto 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 ANDNEW 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 be-tween the trustee holding legal title and the beneficiary reserving equitable title. Under article 25of the Trust Law of the PRC, a trustee shall handle trust affairs in the beneficiary's best interestand shall fulfill the duties of honesty, trust, prudence, and effectiveness. For a thorough examina-tion of the first Trust Law of the PRC, see LUSINA Ho, TRUST LAW IN CHINA (2003).

35. This understanding has its own difficulties. Strictly speaking, an individual director is notan agent of his company because the authority of directors to bind the company as agents dependson 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 COMPANYLAW] 369 (Ping Jiang & Guoguang Li eds., 2006); see also ANBIAO XU, ZHONGIUA RENMINGONGHEGUO GONGSIFA SHIYI [ANNOTATED ARTICLES OF THE COMPANY LAW OF THE PEOPLE'SREPUBLIC OF CHINA] 200 (2005). Similarly, the Restatement of Agency understands agency as afiduciary relation owing a duty of loyalty to the principal: "Unless otherwise agreed, an agent issubject to a duty to his principal to act solely for the benefit of the principal in all matters con-nected with his agency." RESTATEMENT (SECOND) OF AGENCY § 387 (1958).

906 VIRGINIA JOURNAL OF INTERNATIONAL LAW [Vol. 47:4

revised Company Law also outlines the content of this obligation by list-ing a number of specific proscriptions in articles 148(2) and 149, such asprohibitions against acceptance of bribes, 38 misappropriation of com-pany funds, 39 exploitation of business opportunities that belong to thecompany, 4° transactions with the company, 41 competition with the com-pany's business, 42 and disclosure of confidential information. 43

This detailed inclusion of specific prohibitions of directors stands insharp contrast with statutory regulations of directors' duties in othercivil law jurisdictions. Generally speaking, company laws in civil lawjurisdictions do not set out in detail the rights and obligations of com-pany directors; the civil law which is considered to be the foundation ofthe company law governs where the latter is silent. For example, theCompany Law of Taiwan merely requires directors to faithfully executethe 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 companieswas taken out of the German Commercial Code and separately codifiedunder the German Stock Corporation Act (Aktiengesetz/AktG), the Actmerely stipulates that under the dual board system, the management

38. Company Law art. 148(2) (2005) ("Directors.. .may not use their functions and powers toaccept 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 companyfunds.").

40. Company Law art. 149(5) (2005) ("A director.. .may not: (5) without the consent of theshareholders' meeting or shareholders' general meeting, utilize the advantages of his or her posi-tion to obtain for himself or herself or others commercial opportunities rightly belonging to thecompany...."). This is a new concept akin to the Anglo-American "corporate opportunities doc-trine." See, e.g., Broz v. Cellular Info. Sys. Inc., 673 A.2d 148 (Del. 1996); Guth v. Loft, Inc., 5A.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 carryout transactions with the company in breach of the company's articles of association or withoutthe 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 theshareholders' meeting or shareholders' general meeting.. .for himself or herself or for the benefitof another, engage in business identical to the business of the company in which he or sheserves."). Thus, contrary to Company Law art. 61 (1993), which imposes an absolute non-competition restraint, the revised Company Law now relaxes the prohibition provided that consentis obtained from shareholders.

43. Company Law art. 149(7) (2005) ("A director.. may not (7) disclose company secretswithout authorization.").

44. See MINAN ZHANG, GONGSIFA DE XIANDAIHUA [THE MODERNIZATION OF COMPANYLAW] 422 (2006).

45. Company Law of Taiwan arts 23, 193 (2001).


board (Vorstand) has a duty to manage the company and the supervisoryboard (Aufsichtsrat) must supervise the conduct of the business, and thatmembers of the boards are held to a standard of care exercised by a"diligent and prudent business executive" (sorgfalt eines ordentlichenund gewissenhaften Geschifisleiters).46 Although article 209 of theCompany Law of Taiwan and section 88 of the German Stock Corpora-tion Act also impose some specific prohibitions on directors (such asnon-competition restraints and regulations on self-dealing), it appearsthat none of these company statutes goes so far as to set out the detailedcontent of a director's obligation of loyalty like the current revised Chi-nese Company Law does.

Moreover, apart from the specific sub-rules of a director's duties ofloyalty, the revised Company Law also adds a catch-all provision (arti-cle 149(8)) to cover all other acts that are inconsistent with the obliga-tion of loyalty.47 This reinforces the view that the circumstances set outin articles 148(2) and 149 are only examples where the "obligation ofloyalty" in article 148 may be breached, but are neither exhaustive norexclusive. The introduction of a catch-all provision, coupled with a sepa-rate and independent duty of loyalty, suggests that even though a case isnot covered by a specific rule under an exclusive judicial approach toconstruction,48 it is still open to courts to adopt a more flexible approachand go beyond the strictures of the specified proscriptions in decidingwhether a director has acted in breach of his "obligation of loyalty."This underscores the obligation of loyalty as the director's fundamentalduty.

46. See Aktiengesetz [AktG, Stock Corporation Act], Sept. 6, 1965, BGB1. I at 1809, § 93(1)(F.R.G.), translated in H. SCHNEIDER & M. HEIDENHAIN, THE GERMAN STOCK CORPORATIONACT (2001); Andreas Kaiser, Introduction to the German Stock Corporation Law, 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 manage-ment and supervision of German listed companies from placing themselves in positions of con-flicts of interest, http://www.corporate-govemance-code.de/eng/kodex/index.html (last visitedAug. 1, 2007). Note that § 161 of the German Stock Corporation Act requires the managementand supervisory boards of German listed companies to declare once a year whether and to whatextent the company conforms to the recommendations set out in the German Corporate Govern-ance Code.

47. Company Law art. 149(8) (2005) ("A director.. may not (8) commit another act thatbreaches his or her obligation of loyalty to the company....").

48. This is to be contrasted with an inclusive approach to construing legislation of the com-mon law courts. See Xian Chu Zhang, Practical Demands to Update the Company Law, 28 HONGKONG L.J. 248, 255 (1998).


C. Remedies for Breach of Directors' "Obligation of Loyalty"

In terms of remedies for breach of directors' duties, under the oldCompany Law, directors were liable to pay compensation only if theirbreach resulted in damage or harm to the company.49 This was obviouslyinadequate, as there may often be circumstances where the directorbreached his duty of loyalty without causing any loss-and may evenhave caused a gain-to the company. In the locus classicus of Englishfiduciary law, Regal (Hastings) Ltd. v. Gulliver,5 ° the company couldnot afford to take up additional shares necessary for a cinema transactionto proceed. The House of Lords held that the company directors whotook the shares up personally and subsequently sold them at a profitwere liable to account for their profit to the company, despite the ab-sence of any loss to the latter. As Lord Russell remarked:

The rule of equity which insists on those, who by use of a fiduci-ary position make a profit being liable to account for that profit,in no way depends.. .upon such questions or considerationsas.. .whether the plaintiff has in fact been damaged or benefitedby his action. The liability arises from the mere fact of a profithaving, in the stated circumstances, been made. 51

In this connection, not only does the revised Law introduce fiduciaryduties of directors, it also makes available fiduciary remedies such asdisgorgement of unauthorized profits. A new provision (article 149) inthe revised Company Law provides that "[a]ny income obtained by a di-rector... in violation of [article 149] shall belong to the company." Thisappears to require directors to account for any profits they receive whileacting 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 and149 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 resultingin harm of the company, [he] is liable for compensation for the damage."). The revised CompanyLaw also contains a similar provision: Company Law art. 150 (2005) ("If a director.. violateslaws, administrative regulations or the company's articles of association in the course of perform-ing his or her company duties, thereby causing the company to incur a loss, he or she shall be li-able 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 cir-

cumstances in which it can be invoked.

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concepts to China, it is at least arguable that those express stipulationscould produce such effect. The introduction of an overarching "obliga-tion of loyalty" in article 148(1) encompasses a concept of fiduciaryloyalty of directors. This is a potent concept. Not only does it lay thetheoretical basis for the whole panoply of proscriptions on directors inthe Company Law, it also allows those proscriptions to be more widelyinterpreted with reference to this fundamental duty of loyalty. Conse-quently, it also has the effect of reorienting the directors' duties regimefrom one which focuses on specific proscriptions of directors to onewhich emphasizes a general (fiduciary) duty of loyalty.

D. Fiduciary Duty Without Equity?

However, legal or institutional impediments exist in understandingthe "fiduciary duty" concept under the revised Company Law as equiva-lent to the Anglo-American common law fiduciary doctrine. First of all,there is no effective institutional framework to support the fiduciary sys-tem in China. Not only is there a lack of judicial expertise in enforcingfiduciary concepts, there also appears to be insufficient institutionalshareholders to prevent directors from abusing their powers throughshareholder activism. Most companies are still controlled by governmentagencies or SOEs. These entities, as controlling shareholders, may nothave sufficient incentives to monitor the directors of the company.

More significantly, Chinese civil law does not recognize a legal clas-sification directly equivalent to the law-equity divide in common law ju-risdictions. On the contrary, civil law starts and ends with the civilcodes. 53 Legislation of the Chinese style, including the current revisedCompany Law, tends to be general, rigid and certain. Judges in Chinaare not trained to interpret legislation, and there is also a lack of a bodyof case law for Chinese judges to determine the content of fiduciary dutyor display analysis in interpreting the statutes. Even if they were to doso, Chinese judges tend to adopt a more restrictive approach. Unlikecommon law jurisdictions where courts have power to give bindingstatutory interpretations and judges play a more active role in makingand developing the law, the doctrine of supremacy of the legislature pre-vails in China. Consequently, unless expressly proscribed, Chinese

53. See Peter Joseph Loughlin, The Domestication of the Trust: Bridging the Gap BetweenCommon Law and Civil Law, http://www.jurisconsultsgroup.com/trusts.htm#_ednref95 (last vis-ited July 19, 2007).


courts are more inclined to construe an alleged breach as not fallingwithin the statute.

This rigidity does not sit well with the historical foundations of the fi-duciary doctrine. The concept of fiduciary duty originates from the eq-uity regime in the English legal system. Historically, the equity regimewas developed to ameliorate harshness of the common law and inade-quacies of its legal remedies, but it gradually developed into a Court ofChancery in England. The institution of a "trust" is the greatest inven-tion of equity.5 4 A trustee undertakes to act in the interest of the benefi-ciary in the management of the trust assets. However, as the trustee isdelegated discretion which can be exercised to (adversely) affect the po-sition of the beneficiary, 55 the law has imposed certain duties on thetrustee to control his exercise of discretion. The relationship between thetrustee and the beneficiary is said to be fiduciary in nature. Fiduciariesare persons who have agreed to act in the interest of another.56 As theconcept 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 offairness and conscience,57 which are reflective of the fundamental tenetsof equity, and has been characterized as "equity's blunt tool. 58

Likewise, in the context of a company, in consequence of the separa-

54. 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, thetrustee may have exclusive access to information that is not generally available. It may also bevery costly, if not impossible, to scrutinize the trustee's exercise of discretion. Apart from control-ling discretion, Professor Weinrib also justifies the imposition of fiduciary obligations on the pol-icy 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 fiduciaryis someone who has undertaken to act for or on behalf of another in a particular matter in circum-stances 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 onbehalf 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 ex-ists between two persons when one of them is under a duty to act for or to give advice for thebenefit of another upon matters within the scope of the relation." See also Austin W. Scott, TheFiduciary Principle, 37 CAL. L. REv. 539, 540 (1949) (defining a fiduciary as "a person who un-dertakes to act in the interest of another person.").

57. Since the equity jurisdiction is concerned with justice in individual cases, Professor Rot-man considers the "fiduciary" concept to be one of the means by which the law transmits its ethi-cal 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 conferredmuch power and discretion to control the company. This makes it expe-dient for them to exercise their management power to divert corporateassets to themselves, and hence explains the export of trustee-like fidu-ciary obligations to directors.5 9 Therefore, duties of loyalty which thelaw requires of directors are based on fiduciary principles originatedfrom English courts of equity and developed by analogy with duties oftrustees. Under Anglo-American law, a director has a fundamental dutyto act in what he in good faith considers to be the best interests of hiscompany. This duty has been described as a "duty of loyalty" and a"fiduciary principle" in English law. 61 This core duty has emanated intotwo major rules: namely, that the fiduciary has a duty not to place him-self in a position where his interests would or may conflict with his du-ties owed to the principal (the "no-conflict" rule), and that he has a dutynot to make a profit from his position (the "no-profit" rule).62

E. Equity's Contribution to the Fiduciary Doctrine

A fiduciary concept without equity is one which is not informed byequitable principles. This is doctrinally unsound because there is a legis-lative vacuum not filled by the equity jurisprudence. Practically, equityameliorates the rigidity of common law by introducing specificity andflexibility. In transplanting legal concepts emanating from the Englishtradition to a civil law jurisdiction, wholesale adoption appears to be thenorm. Can the fiduciary doctrine prove to be an exception? In otherwords, is the concept of fiduciary loyalty of directors workable in Chinawithout a corresponding incorporation of the equity jurisprudence? Theanswer to this question depends on what equity techniques the fiduciaryconcept has utilized and whether these techniques can sensibly be substi-

59. Note, however, that company directors are not trustees: Company assets are not vested inthe directors, but in the company itself. Directors only owe trustee-like obligations.

60. PAUL L. DAVIES, GOWER & DAVIES' PRINCIPLES OF MODERN COMPANY LAW 387 (7thed. 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] EWHC836 (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 CommercialWorld, in COMMERCIAL ASPECTS OF TRUSTS AND FIDUCIARY OBLIGATIONS 9 (Ewan McKen-

drick ed., 1992).


tuted in the Chinese context. It is submitted that equity's techniques re-late to the substantive and procedural flexibility they offer to the fiduci-ary doctrine.

In the first place, equity is attentive to the detailed circumstances ofevery individual case. 63 The genesis of equity tells us that it was neitherconstrained by the nature of relief sought by the plaintiff nor the type ofremedies that were available to redress the wrongs. If found appropriate,equity would create new remedies that were unavailable in the commonlaw courts. Therefore, the most important technique of equity owes to itsprotean character. As observed by Lord Upjohn in Boardman v. Phipps,"[r]ules of equity have to be applied to such a great diversity of circum-stances that they can be stated only in the most general terms and ap-plied with particular attention to the exact circumstances of each case. 64

Thus, the fiduciary concept, being a creature of equity, shares thisprotean quality. Because of its equitable roots, the fiduciary concept isnecessarily a fluid one. At the same time, the doctrine's inherent flexi-bility has also been infused with coherence, certainty and predictabilityby over centuries of equity jurisprudence.

Next, equity achieves this substantive flexibility by permitting ahigher degree of procedural flexibility. For example, techniques such asreversal of burden of proof are widely employed in equity to help theclaimants to establish their claims. For example, in establishing undueinfluence in equity, where the claimant has established certain prerequi-sites, the burden of proof would be reversed to disprove any exercise ofundue influence.

65

To recapitulate, describing directors as owing an obligation of loyaltynecessitates an investigation into the nature of this obligation. However,the recognition of the obligation's fiduciary nature is inadequate if theconcept of fiduciary loyalty is embodied without the application of equi-table principles. A fiduciary concept without equity encompasses onlysome bright-line rules not supported by equity's techniques-techniquesthat are important if the introduction of fiduciary loyalty under the re-vised Company Law is not to be condescended into a broad concept de-

63. Professor Rotman expressed that equitable principles are "designed to contextualize judi-cial decision-making and thereby mitigate the harshness and rigor of law." ROTMAN, supra note57, 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 dutywithout equity" will be further addressed in the next section with refer-ence to a specific proscription against self-dealing under the CompanyLaw.

IV. BEYOND EQUITY: FORTIFYING FIDUCIARY DUTIES OF DIRECTORS

IN CHINA

A. Statutory Prohibition of Self-Dealing

Directors are to act in the best interest of their company. Unfortu-nately, their personal interest may not always align with that of the com-pany. Given human frailties, the Company Law has established a systemof fiduciary duties to control the directors so that they would not beswayed to prefer their own interest, of which one is the rule against self-dealing. The rule against self-dealing is based on the wider principle thata fiduciary must not put himself in a position where there is a real orsensible possibility of conflict between his interest and duty.66 Althoughthe rule was developed in the context of trustees attempting to purchasetrust property themselves, its application has been extended beyond trus-tees to circumstances where the fiduciary is on both sides of a transac-tion.67 There is also statutory regulation of self-dealing of directors inChina. Article 61(2)68 of the old Company Law provides that:

Unless otherwise provided in the articles of association or other-wise agreed by the shareholders' committee, a director or thegeneral manager may not execute any contract or engage in anytransaction with the company.

Likewise, article 149(4) of the revised Company Law contains a similarprovision:

66. See JOHN MOWBRAY ET AL., LEWiN ON TRUSTS para. 20-60 (17th ed. 2000); see alsoSNELL'S EQUITY para. 7-38 (John McGhee ed., 31st ed. 2005); Matthew Conaglen, A Re-Appraisal 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 Courted., 2006), which adopted the phrase "ziwo jiaoyi" (self-dealing, M R Z) to describe the pro-scription under art. 61(2).


A director.. .may not.. .conclude a contract or carry out transac-tions with the company in breach of the company's articles of as-sociation or without the consent of the shareholders' meeting orshareholders' general meeting....

Although the Chinese Company Law appears to have codified self-dealing of directors, its application is still far from satisfactory. This canbe illustrated by a recent Chinese case. The facts of the case 69 werestraightforward. On September 23, 2003, the plaintiff Contractor (theContractor) entered into a renovation contract with the defendant Com-pany (the Company), of which Mr. Jia was a director, to undertake reno-vation works for the Company. Payment was to be made in stages ac-cording to the progress of the work. The Contractor undertook therenovations and the Company paid the first two installments of the sum,but refused to satisfy the remainder sum of RMB 7,700. The Contractorsued for breach of contract. The case was heard before the Beijing FirstIntermediate People's Court.

At trial, the Company defended the Contractor's claim on the groundthat since the wife of Mr. Jia was one of the shareholders of the Contrac-tor,70 the renovation contract entered into between the Contractor andthe Company ought to have been declared void for violation of article61(2) of the Company Law (1993) which prohibited a director from exe-cuting any contract or engaging in any transaction with the company,unless otherwise approved. 71 Although the trial court acknowledged thatMr. Jia had an "indirect interest" in the Contractor, it was of the viewthat the Company Law did not prohibit the director from engaging intransactions 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 contractwas entered into, the legal representative of the Contractor, it appears that she was also a directorof the Contractor. But whether Mrs. Jia was a director of the Contractor was not discussed in theextract of the case. See id.

71. The Company also defended on the (second) ground that there was a conspiracy betweenMr. Jia and his wife to defraud the Company: The Contractor delayed the completion of the reno-vation work, and that work was of poor workmanship. But this argument was quickly dismissed asthe trial court found no evidence of conspiracy. Rather, the Contractor had tendered evidenceshowing satisfactory completion of the work as approved by the Company. Further, the Companyhad 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 Com-pany; it was a contract between the Contractor and the Company. Con-sequently, the present case did not fall within the requirements of article61(2) and that provision was found to be inapplicable. This conclusionwas upheld by the appellate court.

B. Fortifying Fiduciary Duties of Directors in China

It is submitted that both the trial and appellate courts in Mr. Jia's casewere too restrictive in interpreting article 61(2) of the old Company Lawand only came to its conclusion on a perfunctory analysis of the facts.Since 61(2) is now superseded by article 149(4) which is substantiallythe same as the old provision, the wording of article 149(4) will be usedfor the purpose of showing how careful refinements should be made tothe fiduciary doctrine in general (and to the rule against self-dealing inparticular) before it is translated into a domestic institution that embod-ies equity's techniques as well as is compatible to the Chinese civilianlegal tradition.

1. Judicial Reference to Overseas Practice

Although the Chinese statutory provisions on fiduciary duties tend tobe general and rigid and there is no corresponding transplantation of theequity jurisprudence to China in introducing the fiduciary doctrine, Chi-nese courts can nonetheless refer to the body of Anglo-American casesto see how equitable principles have supplemented the fiduciary doc-trine. In Japan, the transplantation of a US-modeled principle of loyaltyof directors to its (old) Commercial Code72 only met with varied suc-cess: civil law judges were not very comfortable in working with vague,open-ended standards, and consequently, the statutory principle wasrarely invoked. 73 The Japanese experience shows that the practical sig-

72. Article 254-3 of the (old) Japanese Commercial Code stipulates that directors owe to thecompany a duty to perform their functions faithfully, in compliance with laws, the company's ar-ticles of association, and shareholders' resolutions. Japan undertook substantial company law re-forms which culminated in the enactment of the Company Code in June 2005. Article 254-3 of theCommercial Code has become obsolete and has been replaced by article 355 of the (new) Japa-nese Company Code.

73. Hideki Kanda & Curtis J. Milhaupt, Re-examining Legal Transplants: The Director's Fi-duciary Duty in Japanese Corporate Law, 51 AM. J. COMP. L. 887 (2003). The authors observedthat article 254-3 of the (old) Commercial Code had been dormant for almost forty years after itwas transplanted. Id. at 888.


nificance of the statutory obligation depends on how prepared the legis-lature and judiciary are to create a favorable legal infrastructure for theinvocation of the fiduciary loyalty principle. It is therefore essential tolook abroad first to see how the doctrine has been understood, inter-preted 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, inthe case of fiduciary self-dealing, the House of Lords had established inAberdeen Railway Co. v. Blaikie Bros.74 as long ago as 1854 that a di-rector could not enter into a contract with his company. 75 There, the di-rector, Mr. Blaikie, entered into a contract on behalf of his company forthe supply of certain iron chairs. 76 Although the contract was partly per-formed, the House of Lords held that it was voidable in equity becauseof Mr. Blaikie's breach of fiduciary duty in acting in a situation wherethere was a conflict between his duty to negotiate the best contract termsfor his company and his own personal interest by virtue of his partner-ship in the supplier. Lord Cranworth L.C. held that:

[I]t is a rule of universal application, that no one, having [fiduci-ary] duties to discharge, shall be allowed to enter into engage-ments in which he has, or can have, a personal interest conflictingor which possibly may conflict, with the interests of those whomhe is bound to protect.77

In Mr. Jia's case, although there was an insufficient finding of facts asto whether the renovation contract was negotiated by Mr. Jia on behalfof the Company, the concept of fiduciary loyalty would suggest that, justas Mr. Blaikie's self-dealing rendered his contract voidable, Mr. Jia'saction, though not violating the strict letters of the rule, might have alsobrought into conflict his duty to get the best (lowest) contract price forthe company considering his personal interest which went in the oppo-site direction. By incorporating a concept of fiduciary loyalty of direc-tors into the statute, the revised Company Law arguably paves the wayfor a wider interpretation of the specific rules of corporate conduct set

74. [1854] 1 Macq. 461, 149 R.R. 32 (H.L.) (U.K.).75. Id.76. Id.77. Id. at471,39.

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out in article 149 (including the rule against self-dealing): Even if thefacts do not fall within a specific sub-rule, the general principle of fidu-ciary loyalty might still apply.78

More specifically, although article 149(4) governs, on the face of it,the situation where a director transacts directly with his company, it isunclear whether its scope is so limited. Should the rule apply to impeacha transaction by the company with a third party in which the director isinterested (for example, where the director is a major shareholder or apartner of the counterparty)? Does the rule extend beyond directors toother persons, such as wives of directors? In Mr. Jia's case, even thoughthe Court did acknowledge Mr. Jia's "interest" in his wife's company, itdid not go on to explain what "interest" entails,7 9 whether "interest" wasinvoked 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 therule against self-dealing. Even assuming that Mr. Jia the director had nodirect or indirect financial interest in the Contractor, the state of affairsmight still call for caution. A recent English case which bears some re-semblance to the Chinese case at hand is worth noting.

In Newgate Stud Company v. Penfold, Mr. Penfold was a director andmanager of the plaintiff companies, Newgate, which ran horse racingand bloodstock businesses, and which were ultimately controlled byPrince Fahd.80 The plaintiff companies brought proceedings against Mr.Penfold on the ground of self-dealing in relation to the sale of certainbroodmares to partnerships established between Mr. Penfold and hiswife. The court held that Mr. Penfold was subject to the rule againstself-dealing as a director of the plaintiff companies. 81 In the course of itsjudgment, the court clarified the scope of the rule against self-dealing.There is no strict application of the rule in a husband-wife situation: ifthe 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 indi-

cate whether he had any shareholding interest in that company. See GONGSIFA SHENPAN SHIWUYU 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 trans-action. Id. at para. 255. With respect to the second horse, consent was not given after full disclo-sure of all material facts. Id. at para. 256. Hence, the court held that Mr. Penfold breached the self-dealing rule and the plaintiffs were entitled to an account of profits with respect to these twohorses. Id. at para. 257.


not as nominee for him, they would not have been automatically void-able by reason of the self-dealing rule, but the onus would have been onMr. Penfold to demonstrate that they represented fair dealing. Indeed, asobserved by Justice Richards, in any husband and wife relationship:

[T]here exists the potential for the exercise of fiduciary duties tobe influenced by personal considerations. If a director causes hiscompany to enter into a transaction with a close relation, or aspouse or other partner, there is a significant risk that the directorwill be compromised by a desire to favor the other party.82

By analogy, although article 149(4) of the revised Company Law is si-lent on the scope of the fiduciary duty rule, reference to the equity juris-prudence abroad suggests that in Mr. Jia's case, the Court could, at thevery least, have conducted a fuller inquiry into whether there was a sig-nificant risk that Mr. Jia might have compromised his company's inter-ests by entering into a transaction with a company in which his wife heldan interest. While it is almost impossible to introduce centuries of caselaw jurisprudence by the stroke of a legislative pen, the case provides avivid illustration of the value of making reference to overseas practice inthe course of developing China's own understanding of fiduciary loy-alty.

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-Americanjurisprudence where there does not appear to be any statutory provisiongoverning the situation at hand. Two examples are relevant here.

The first deals with the duty of directors upon resignation. In commonlaw jurisdictions, a director's fiduciary duty is owed to the company atthe commencement of his directorship, but such duty may not ceaseimmediately upon resignation. For example, English courts have alreadyaccepted that a director's fiduciary duty may survive (albeit in a limitedscope) termination of his directorship. In Industrial Development Con-sultants Ltd. v. Cooley, the director who resigned on pretence of illhealth to pursue a business opportunity was held to remain liable forprofits arising from the opportunity that arose during his directorship. 83

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 hisfiduciary loyalty by resignation. 4 In contrast, the revised Company Lawis silent on the duration of fiduciary obligations imposed on directors.Nonetheless, given that it is now more apparent that the revised Com-pany Law contains a concept of fiduciary loyalty, the absence of anyspecific provisions on restraining directors' actions post-resignation inthe statute should not prevent Chinese courts from utilizing this princi-ple to fill the legislative vacuum.85

The second example relates to standard of liability for breach of fidu-ciary duty. Although the revised Company Law now contains a generalduty of loyalty as well as specific proscriptions on directors in articles148 and 149, it does not indicate how courts are to identify whether a di-rector's conduct falls short of those requirements. In contrast, Americancourts generally adopt the "business judgment rule" in reviewing a di-rector's decision, e.g. whether a director has entered into a self-dealingtransaction. This rule creates a presumption in favor of directors thatthey acted on an informed basis, in good faith and in the honest beliefthat the action was in the best interest of the company. Under this rule,courts would defer to the director's business judgment unless the pre-sumption is rebutted. 86 This allows for risky, but responsible, entrepre-neurial activities. Likewise, English courts generally adopt commonsense principles to decide whether the directors "exercise their discretionbona 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 whichhe 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 ma-turing business opportunity] even after his resignation where the resignation may fairly be said tohave been prompted or influenced by a wish to acquire for himself the opportunity sought by thecompany....") (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 tiao-kuan [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 Restruc-turing 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 notnecessarily cease upon termination of his directorship.

86. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Although the business judgment rule ismostly invoked to assess whether a corporate director has exercised his duty of care, it appearsthat it is also adopted as a standard of liability for breach of fiduciary loyalty cases.


the interests of the company,' 87 although there is also recent suggestionthat a more objective approach may be employed.88

At the moment, the revised Company Law does not stipulate a stan-dard of liability for breach of directors' duties. Fiduciary loyalty is anopen-ended standard of behavior which requires directors to be altruisticby focusing on the company's, rather than their own, interests. Sincethere may be cultural differences in practicing altruistic behaviors, 89 it ispossible for China to formulate a standard of behavior that suits its owneconomy and culture. This takes time, however. In the meantime, it isadvisable that a more robust approach along the recent English linesshould be adopted. Given the lack of judicial expertise, it may be moredifficult for Chinese judges to interpret the American business judgmentrule. Moreover, a more robust and objective approach could help clampdown on corporate misconduct in China more effectively.

All in all, the concept of fiduciary loyalty of directors is a conceptwhich has to be constantly refined by courts in discerning its precisemeaning. Judges in China should play a more active role in consideringthe extensive body of case law on fiduciary duty in Anglo-American ju-risprudence in developing its law.90

2. Statutory Embodiment of Equity's Techniques

The provisions pertaining to fiduciary duties of directors in China areoften skeletal and lack operating standards. Without the support of equi-table principles and cases from the equity jurisprudence, it may be diffi-cult for the courts to enforce the provisions. Thus, apart from judgesmaking reference to overseas practice when deciding cases, it may alsobe preferable for Chinese lawmakers to perfect the fiduciary rules by in-

87. Re Smith & Fawcett Ltd., [1942] Ch 304 (C.A.) at 306 (U.K.) (Lord Greene M.R.); seealso 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 ofloyalty 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 ANDGOVERNANCE IN A 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 tech-niques of equity.

As discussed above, equity promotes substantive flexibility by givingfine attention to details rather than applying a particular rule rigidly to acase. In the context of self-dealing, this flexibility is manifested in its at-tention to the fine details of the circumstances in which the rule is to beinvoked. For example, a director may be exonerated where consent tothe transaction is obtained, and equity has spelled out detailed guidelineson the nature of consent that is required.

In this regard, article 149(4) does not impose strict prohibition on adirector's transactions with the company either. According to this provi-sion, there are two ways by which a director who enters into a transac-tion with the company can absolve himself from liability: (i) that suchtransactions 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 maybe compatible with the highly generalized nature of statutory codes, itmay not be very helpful in the absence of more specific statutory guid-ance or equitable principles on whether any formal procedural require-ments are to be satisfied. Does it matter in which way such "consent ofthe shareholders" is obtained? More specifically, can it be obtained ei-ther antecedently or subsequently? Must the consent be "informed"?

In Mr. Jia's case, the Court did not consider that Mr. Jia's action fellwithin the strict letters of the rule. Hence, it was not necessary for theCourt to consider whether the shareholders' consent was obtained.91

However, even if article 149(4) were to be applied, there might still beother difficulties. This is because the provision fails to stipulate that theconsent must be obtained after formal disclosure of the conflict in ad-vance. On the contrary, the English equitable rule against self-dealing oftrustees renders such a transaction voidable ex debito justitiae howeverfair it is,92 unless it falls within a limited number of exceptions, notablywhere the trustee has obtained the fully informed consent of all his bene-ficiaries.93 English courts have thus extended the application of the ruleto 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 requirementsof 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.'sremarks 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.).


the fully informed consent of the shareholders. For instance, section 317of the UK Companies Act (1985) imposes a positive requirement on acompany director to declare his interest, whether directly or indirectly,in any proposed contract with the company. 94 When the UK governmentpublished a new Company Law Reform Bill in November 2005 to cod-ify directors' duties, it also included draft clauses prohibiting self-dealing of directors, detailing the circumstances in which declaration ofinterest is or is not required for transactions between the company andits directors.95 These rules offer useful reference for incorporating eq-uity's techniques into the Chinese statute.

Besides substantive flexibility, equity also offers more flexible proce-dures in establishing claims. Since the principle underlying self-dealingis that a director should not be permitted to place himself in a position ofconflict of interest, equity has reversed the burden of proof where cir-cumstances are suspicious; that is, the burden is placed on the director toshow that the transaction was fair and in the interest of the company be-fore he could be exempted from a strict application of the rule. This wasalso stressed by Justice Richards in Newgate v. Penfold:

[T]he fiduciary [has] the burden of showing, in a case where thefiduciary does not have a personal interest in the transaction butwhere on the facts there exists a real risk of conflict between dutyand personal loyalties, that the transaction was demonstrably inthe best interests of the company or others to whom he owes hisduties.

96

Absent incorporation of equity jurisprudence, it is submitted that thisprocedural flexibility of equity can also be embodied by clarifying theburden of proof for self-dealing transactions under the revised CompanyLaw.

3. Domestic Inspirations from 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 contractor proposed contract with the company shall, if his interest in such contract or proposed contract ismaterial, declare the nature of his interest at the earliest meeting of the directors at which it ispracticable 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 intro-duce foreign legal concepts to a different jurisdiction. This is not neces-sarly so, at least in the context of introducing a fiduciary concept to theChinese civilian legal tradition. Indeed, some of the equity's techniquesdetailed above have already been embodied by some domestic rules andregulations. One should therefore also look for domestic inspirations inperfecting the fiduciary concepts in China.

In the case of the rule against self-dealing, the following domesticmodels provide an example of how the legislation can closely replicatethe fiduciary rules in common law jurisdictions. First, as mentionedabove, it appears that the scope of the rule against self-dealing in article149(4) covers director and directors only. However, a number of domes-tic rules and regulations have already indicated that the scope of the ruleneed not be so restricted. For example, article 120 of the MandatoryProvisions for the Articles of Associations of Companies to be ListedOverseas promulgated by the CSRC extends the prohibition to transac-tions with "connected persons" (xiangguanren, M ,).97 Similarly, ar-ticle 21 of the revised Company Law prohibits a director from using hisaffiliated relationship (guanlian guanxi, *$f*,) to harm the interestsof his company, although what amounts to affiliates is not defined in thestatute. 98 Although it is arguable that this approach is still too broad-brushed (as there may indeed be circumstances where spouses and, afortiori, other family members are not nominees for each other), it atleast shows that the rule can be clarified and extended from a domesticperspective without reference to overseas legal or equitable principles.

In a similar vein, there are also domestic rules and regulations detail-ing the nature of approval required for the self-dealing rule. For exam-ple, article 116(5) of the Mandatory Provisions for the Articles of Asso-ciations of Companies to be Listed Overseas prohibits a director'stransactions with the company unless approval of shareholders' generalmeeting is obtained in circumstances where the approval is obtained on

97. Mandatory Provisions, supra note 85. "Connected persons" are defined in article 117 toinclude persons such as the director's spouse and children. In fact, it has also been suggested bysome commentators that reference to "directors" in article 149(4) of the revised Company Lawshould include the director's associates, including the director's spouse and children, parents orbrothers and sisters of the spouse; children, grandchildren, brothers and sisters, and parents of thedirector, as well as the spouse of the each of the above-mentioned persons. GONGSIFA SHENPANSHIWU 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 inter-ests of the company." See Company Law art. 21 (2005).


an informed (zhiqing, )IMR-) basis.99 The interested director is also re-quired to disclose the nature and extent (xingzhi he chengdu,1tNlif) of his interest at a board meeting.100 He is also not to becounted in the quorum for the purposes of the board meeting in whichthis transaction is discussed, nor is his vote to be counted.' 0' The re-quirement of an informed consent is thus not a foreign concept.

Thus, the CSRC has already attempted to elaborate a number of do-mestic rules and regulations to improve the corporate legal frameworkby introducing more familiar common law rules and doctrines. Unfortu-nately, the more stringent requirements are lacking from the CompanyLaw, and can only be found in the least authoritative source of legisla-tion which is applicable to some companies only. It is disappointing thatthe revised Company Law fails to draw insights from these domesticrules when it is possible for China to introduce a fiduciary concept thatworks remarkably similar to its common law counterpart without sacri-ficing its civilian legal tradition. By drawing upon these domestic inspi-rations, the statute may actually provide a prime example of how the fi-duciary doctrine may be introduced and refined without disregardingcivil principles. Further, such refinement of the fiduciary rules in theCompany Law can also contribute to the internal consistency of the do-mestic legislation. This would help secure the most principled judicialresponses while causing the least disturbance to China's delicate legalstructure.

4. Summary

The recent Chinese case on self-dealing discussed above suggests thatthere appears to be reluctance on the part of Chinese courts to developcriteria to delineate actions that violate the specific rules of the Com-pany Law. By making reference to Anglo-American fiduciary concepts,this article is not suggesting that Chinese courts will arrive at the sameconclusions as common law judges in the UK or US. In fact, it is likelythat given the different market conditions and corporate culture in

99. Note that in the Guanyu yinfa "Shangshi gongsi zhangcheng zhiyin (2006 xiuding)" detongzhi, [)=fEP -Tr.!WIJMM] (2006 *WiT))) MAO, Circular on Issues Concern-ing the Guidelines for the Articles of Association of Listed Companies (revised 2006)] (publishedby the CSRC on Mar. 16, 2006), http://www.csrc.gov.cn/, overseas listed companies are still re-quired to comply with the Mandatory Provisions.

100. Mandatory Provisions, supra note 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 impedi-ments to the reception of an equitable fiduciary doctrine are not insur-mountable. It. is possible to avoid the pitfalls of introducing a merebroad, hollow fiduciary concept by making judicial reference to overseaspractice, domesticating equity's certain techniques or even examiningsome of the current domestic rules more carefully. Such refinements tothe operation of the fiduciary concept will make its reception more pal-atable. They will also in turn encourage a broader understanding of thecircumstances that may compromise a director's ability to uphold highstandards of corporate governance.

Besides, as shown above, the current legal or institutional impedi-ments to introduction of a fiduciary concept do not preclude the possibil-ity of introducing a fiduciary concept by statute. Indeed, in an attempt tomodernize its company law framework, the UK government has alsosuggested codification of directors' duties. As the UK Company LawReform Bill attempted to amalgamate of the current case law and statu-tory provisions on directors' duties, it has much to offer to China indrafting her own statutory provisions on directors' fiduciary duties.

V. CONCLUSION

It is beyond doubt that the recent extensive amendments to the Com-pany Law will soon prove to be a landmark, if not a watershed, in thehistory of China's corporate governance reforms. The reinforcement ofdirectors' duties, accompanied by the availability of more extensive civilremedies such as disgorgement of the defaulting director's profits, aswell as the introduction of a concept of fiduciary loyalty of directors, areto be commended. Yet it is difficult to completely codify an equitablefiduciary doctrine and thus there is a risk that the principle of fiduciaryloyalty as embodied in the revised Company Law exemplifies only a ge-neric description for the specific rules set out therein.

However, it does not follow that the introduction of the concept of fi-duciary loyalty of directors in China without the concomitant incorpora-tion of the English equity regime is fatal. The differences between com-mon law and civil law jurisdictions might, at first blush, suggest that thefiduciary doctrine is incompatible with the civilian legal tradition. How-ever, these differences are not insurmountable and equity's contributionto the fiduciary doctrine can be instilled, for example, by making refer-

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