Introduction
This unit studies the liability of the company’s “key minority”: directors, supervisors, senior managers, controlling shareholders, actual controllers, and the people who exercise or direct corporate power without always appearing in the formal governance chart. The revised Company Law makes this unit more important than before because it gives China a clearer statutory architecture for loyalty, diligence, conflicted transactions, controller liability, third-party claims, liquidation responsibility, and director liability insurance.
The starting point is fiduciary responsibility. Directors, supervisors, and senior managers manage or monitor property that belongs to the company, not to themselves. Loyalty requires them to avoid conflicts, unauthorized profits, misappropriation, undisclosed related-party transactions, diversion of corporate opportunities, and competing business. Diligence requires them to act for the company’s best interests with the reasonable care expected of managers in their position. The revised Company Law states both duties expressly in Article 180 and then operationalizes them through Articles 181 to 193.
The second major development is the expansion of duty subjects. Article 180(3) reaches controlling shareholders and actual controllers who do not formally serve as directors but actually execute company affairs. Article 192 reaches controlling shareholders and actual controllers who instruct directors or senior managers to harm the company or shareholders. These provisions create a statutory pathway for de facto director and shadow director analysis in Chinese law.
The third theme is remedy. A breach may trigger disgorgement to the company, damages to the company, direct shareholder claims, derivative litigation, double derivative litigation, third-party liability for intentional or grossly negligent harm, capital-maintenance liability, liquidation liability, securities false-statement liability, administrative sanctions, market bans, and in serious cases criminal transfer. Students should resist treating all cases as generic “fiduciary duty” disputes. Each remedy has its own claimant, defendant, fault standard, causation requirement, procedure, and measure of loss.
The fourth theme is defense and risk control. The business judgment rule, properly understood, is not a license to be careless. It protects informed, disinterested, good-faith business decisions from hindsight review. It does not protect self-dealing, false disclosure, ignored red flags, fake capital arrangements, fund occupation, or sham public commitments. Companies should therefore teach their boards to build decision records, conflict protocols, internal reporting channels, capital-call records, disclosure controls, and directors’ liability insurance arrangements that actually match the statutory risks.
The unit’s logic is “duty, breach, defendant, claimant, remedy, defense.” That sequence helps students move from broad moral language to litigation-ready analysis.
Key Legal Issues
- The meaning of loyalty and diligence under Company Law Article 180.
- The difference between a bad business outcome and a breach of duty.
- Conflicted transactions, corporate opportunities, competing business, fund occupation, bribery, secret commissions, and disclosure of company secrets.
- De facto director liability for controlling shareholders and actual controllers who actually execute company affairs.
- Shadow director liability when controllers instruct directors or senior managers to harm the company or shareholders.
- Capital-maintenance duties: capital-call review, withdrawal of capital contributions, unlawful financial assistance, illegal reduction of capital, unlawful distributions, and liquidation.
- The relation between company-interest harm, shareholder direct harm, and creditor-facing harm.
- Representative actions and double derivative actions after Article 189.
- Directors’ and senior managers’ direct liability to third parties under Article 191.
- Listed-company overlays: false statements, public commitments, independent directors, disclosure controls, share trading, short-swing disgorgement, share reductions, and market bans.
- State-invested companies and dual loyalty, especially when public-asset supervision intersects with ordinary company-law duties.
- Risk defenses: informed process, conflict abstention, approval procedure, fairness evidence, business judgment, reliance on professionals, D&O insurance, and compliance records.
Hypotheticals
- A director owns 40 percent of a supplier and arranges for the company to buy through that supplier without reporting the connection.
- A senior officer hears about a project through the company and moves the opportunity into a newly formed affiliate.
- A supervisor discovers fund occupation but does not convene a meeting, demand correction, or sue.
- Directors know that subscribed capital is overdue, but do not verify or call the contribution before the company becomes unable to pay debts.
- A controlling shareholder instructs the board to approve an affiliate transfer that benefits the controller but weakens the company.
- A legal representative signs a transaction that helps a controller move assets out of the company.
- A listed-company executive promises a large share purchase without funding, repeats optimistic statements to investors, and never performs.
- Independent directors approve financial reports despite obvious warning signs from auditors and internal finance staff.
- Directors delay liquidation after dissolution and creditors lose the chance to recover company assets.
Duty Architecture
| Layer | Main Question | Core Sources |
|---|---|---|
| Qualifications | Who may serve as director, supervisor, or senior manager? | Company Law art. 178; listed-company rules |
| Baseline duties | What do loyalty and diligence require? | Company Law arts. 179-180 |
| Loyalty rules | What conflicts and profits are prohibited or require approval? | Company Law arts. 181-186 |
| Enforcement by company or shareholders | Who sues and in whose interest? | Company Law arts. 188-190 |
| Controller extension | When do controllers become duty bearers or joint tortfeasors? | Company Law arts. 22, 180(3), 192 |
| Third-party liability | When do directors or senior managers owe liability outside the company? | Company Law art. 191; draft interpretation art. 59 |
| Capital and distress | What duties protect the capital pool and creditors? | Company Law arts. 51, 53, 163, 226, 232, 238 |
| Securities law | What special duties apply in public markets? | Securities Law arts. 84-85; information disclosure rules; false-statement interpretation |
| Defensive tools | What evidence supports faithful and diligent performance? | Business judgment doctrine, D&O insurance, internal controls, meeting records |
Legislation
Start with the revised Company Law. Article 178 sets the negative qualification list, including restrictions after criminal punishment, bankruptcy responsibility, serious unpaid debts resulting in dishonesty-list status, and other disqualifying circumstances. Article 179 adds the general duty to comply with law, administrative regulations, and the articles.
Article 180 is the anchor. It defines loyalty as the duty to avoid conflicts between personal interests and company interests and not to use office for improper gain. It defines diligence as acting for the company’s best interests with the reasonable care normally expected of a manager. It also applies those duties to controlling shareholders and actual controllers who do not serve as directors but actually execute company affairs.
Articles 181 to 186 make loyalty operational. Article 181 prohibits misappropriation of company property or funds, personal-account storage of company funds, bribery or illegal income through office, secret commissions, unauthorized disclosure of company secrets, and other loyalty breaches. Article 182 requires reporting and approval for direct or indirect transactions with the company and extends the rule to close relatives, controlled enterprises, and other related persons. Article 183 governs corporate opportunities, allowing use only after proper report and approval or where the company legally or practically cannot use the opportunity. Article 184 regulates competing business. Article 185 requires interested directors to abstain, and sends the matter to shareholders if too few disinterested directors remain. Article 186 gives the company disgorgement of income obtained through breaches of Articles 181 to 184.
Articles 187 to 193 provide enforcement and risk allocation. Article 188 is the basic damages rule for harm to the company. Article 189 supplies representative litigation and extends it to wrongs involving wholly owned subsidiaries. Article 190 allows shareholder direct suits where directors or senior managers harm shareholder interests. Article 191 creates direct third-party liability for directors and senior managers who intentionally or with gross negligence cause harm while performing duties. Article 192 imposes joint liability on controlling shareholders and actual controllers who direct directors or senior managers to harm the company or shareholders. Article 193 gives statutory recognition to directors’ liability insurance and requires board reporting to shareholders on coverage, amount, and premium rate.
Do not confine the unit to Articles 178 to 193. Article 22 prohibits controlling shareholders, actual controllers, directors, supervisors, and senior managers from using related relationships to harm company interests. Article 51 requires the board to verify capital contributions and call overdue contributions, with damages liability for responsible directors if failure causes company loss. Article 53 makes responsible directors, supervisors, and senior managers jointly liable with a shareholder where capital withdrawal causes company loss. Article 163 matters for financial assistance for acquisition of company shares. Article 226 addresses illegal capital reduction. Articles 232 and 238 place liquidation and liquidation-team duties on directors and liquidation members.
The judicial materials sharpen the statutory rules. Interpretation III remains important for defective contribution, capital withdrawal, and director-side participation in capital misconduct. Interpretation V remains important because a controller, director, supervisor, or senior manager cannot escape related-party liability merely by pointing to internal approval if the transaction caused company loss. The Jiu Min Minutes supply over-control and personality-denial analysis when controllers use a company or group as a debt-avoidance tool.
The SPC draft Company Law interpretation released on 30 September 2025 is not binding, but it is useful for current teaching. It would refine direct shareholder suits, company suits brought through organs, representative suits, double derivative suits, third-party liability of legal representatives who serve as directors or managers, and liquidation. It also proposes rules for related transactions and capital withdrawal that would make procedure, fault, causation, and loss central to duty litigation.
For listed companies, add the Securities Law and CSRC instruments. Securities Law Article 84 covers civil liability for failure to perform public commitments. Article 85 imposes civil liability for false statements and places heavy responsibility on directors, supervisors, senior managers, controlling shareholders, and actual controllers unless they can prove lack of fault. The 2025 Measures for Information Disclosure by Listed Companies, CSRC Order No. 226, take effect on 1 July 2025 and are the current disclosure baseline. The revised Code of Corporate Governance for Listed Companies, CSRC Announcement [2025] No. 18, takes effect on 1 January 2026 and updates director, senior-manager, controller, incentive, related-party, disclosure, and internal-control rules. The Independent Director Measures, CSRC Order No. 220, took effect on 4 September 2023 and should be read after Kangmei and alongside the 2023 State Council reform opinion.
Cases
Use the Chinese duty cases by wrong rather than by article number. The Shanghai Fluid Equipment case is the cleanest corporate-opportunity example. The Shenzhen competing-business case tests the line between private entrepreneurship and disloyal competition. Shangu Turbine shows why an undisclosed affiliate layer in procurement can be treated as company-interest harm. Zhengzhou Siwei and Shaanxi Real Estate focus attention on supervisors, finance-role knowledge, and the practical content of monitoring duties.
Simante is central for capital-call responsibility. After the 2025 retrial report, it should be taught carefully: Article 51 matters, but director liability for failure to call unpaid capital still requires fault, causation, and proportionate responsibility. It is not automatic full liability for all unpaid shareholder contributions.
Modern Avenue and the short-swing disgorgement case show how company-law and securities-law remedies can recover improper benefits. Modern Avenue uses derivative enforcement against controlling-shareholder fund occupation. The short-swing case shows statutory disgorgement of trading gains and the enforcement value of procedural standing.
Kangmei is the landmark special representative securities litigation. It shows how false-statement liability can expose issuers, directors, supervisors, senior managers, independent directors, controllers, and intermediaries to large-scale investor compensation. It also triggered the modern independent-director reform debate.
Jinlitai is the key public-commitment case. A director and a subsidiary manager publicly committed to a large share purchase, failed to perform, and were held liable to investors where the court treated the conduct as seriously misleading. The teaching point is that public commitments are not soft investor-relations language. When they enter the disclosure system and influence investor expectations, non-performance plus misleading follow-up may create securities tort liability.
Zeda Yisheng, Saiwei, Zijing Storage, and Guangdao Digital should be taught as a cluster. They show special representative litigation, support litigation, advance compensation, fraudulent issuance, false disclosure, intermediary incentives, and administrative enforcement working together. The 2025 CSRC enforcement review adds the controller layer: CSRC reported 32 major “key minority” abuse or tunneling cases over RMB 100 million, including Dongxu and Guangdao examples, heavy fines, market bans, and referrals for criminal accountability.
The legal-representative cases belong here because formal title often hides the real decision-maker. Baota, Xinjiang removal, nominee legal representative, puppet legal representative, and wage-arrears cases force students to ask whether liability follows registration, actual conduct, delegated authority, or control.
The comparative cases give students sharper doctrine. Caremark, Van Gorkom, and Disney separate oversight, process, good faith, and business judgment. Regal, Guth, Bhullar, and Kumagai-Zenecon test strict corporate-opportunity accountability. Sinclair, Weinberger, and MFW explain controller transactions, intrinsic or entire fairness review, and procedural cleansing. Vita Health and ECRC Land add common-law Asian examples of contextual duty analysis and conflict handling.
Comparative Materials
The United States supplies the strongest judge-made fiduciary-duty vocabulary. Delaware law distinguishes the duty of care, duty of loyalty, good faith, oversight duties, corporate opportunities, and controller transactions. The business judgment rule protects disinterested, informed, good-faith decisions; entire fairness review applies where conflicted controllers or fiduciaries stand on both sides of a transaction unless appropriate cleansing conditions are met.
The United Kingdom codifies directors’ general duties in the Companies Act 2006, including the duty to promote the success of the company, avoid conflicts, declare interests, and exercise reasonable care, skill, and diligence. UK law is also useful for shadow director analysis because it has long treated persons whose directions directors are accustomed to follow as legally significant actors.
Germany is the leading comparator for stakeholder-oriented and group-company governance. Its two-tier board structure and Konzernrecht help students see a different route to controlling-shareholder discipline: rather than only imposing ex post fiduciary or veil-piercing liability, German law contains organization-specific rules for corporate groups, control agreements, compensation, and creditor protection.
Japan is useful as a contrast to the U.S. direct-regulation model. Japanese company governance has often relied more heavily on board structure, disclosure, and institutional monitoring than on a broad direct fiduciary-duty claim against controlling shareholders. That contrast helps explain why China’s revised Company Law made a deliberate choice to put controlling shareholders and actual controllers directly inside the statutory responsibility system.
Singapore and Hong Kong are close common-law comparators in Asia. Singapore cases such as Vita Health and ECRC Land offer practical, role-sensitive duty analysis. Hong Kong materials are helpful for bilingual statutory comparison, remedies, and the relationship between common-law duties and statutory corporate governance.
The G20/OECD Principles remain the global benchmark. They frame board responsibilities through strategic guidance, management monitoring, accountability, risk management, disclosure, related-party review, nomination and remuneration, and sustainability. They are not binding Chinese law, but they help students evaluate whether a domestic rule addresses the same governance problem as other systems.
Readings
Use Shi, Zhao Lei, Wang Xiangchun, Lin Yiying, Deng, Wang Zhenzhen, and Cai Lifeng to map the revised Chinese duty system: fiduciary architecture, interest-conflict transactions, company-interest harm, diligence standards, supervisor responsibility, representative actions, and controller responsibility. Zhu Ciyun and Zhao Xudong remain essential for the controlling-shareholder problem behind Articles 22, 89(3), 180(3), and 192.
Use Howson, Xiong, Xu, Lin Lin, Wang Jiangyu, Howson-Clarke, Huang, Liu Junhai, Zhang, and the Anatomy of Corporate Law to test how far common-law fiduciary labels travel into Chinese law. This is especially useful because Chinese statutes use loyalty and diligence language, but the litigation ecology, judicial style, ownership structure, and securities-regulatory context are not the same as Delaware or English law.
Use Hines, state-asset materials, and the liquidation-duty readings to explore dual loyalty, distress, creditor-facing responsibility, and public-asset accountability. Use Clarke, Cai, the Independent Director Measures, and Kangmei to teach independent directors as a real accountability problem rather than as a purely formal transplant.
For current regulatory practice, use the CSRC 2025 enforcement review with Kangmei, Jinlitai, Zijing Storage, Guangdao Digital, and Modern Avenue. The pattern is important: private compensation, support litigation, advance compensation, administrative punishment, market bans, and criminal referrals increasingly operate together.
Core Statutory Index
| Topic | Core Source |
|---|---|
| Negative qualifications | Company Law art. 178 |
| Compliance with law and articles | Company Law art. 179 |
| Loyalty and diligence; de facto controller execution | Company Law art. 180 |
| Specific loyalty prohibitions | Company Law art. 181 |
| Related-party transactions | Company Law art. 182 |
| Corporate opportunities | Company Law art. 183 |
| Competing business | Company Law art. 184 |
| Interested-director abstention | Company Law art. 185 |
| Disgorgement to company | Company Law art. 186 |
| Duty to answer shareholder questions | Company Law art. 187 |
| Damages to company | Company Law art. 188 |
| Representative and double derivative suits | Company Law art. 189 |
| Shareholder direct suits | Company Law art. 190 |
| Third-party liability of directors and senior managers | Company Law art. 191 |
| Shadow director/controller joint liability | Company Law art. 192 |
| Directors’ liability insurance | Company Law art. 193 |
| Related-relationship abuse | Company Law art. 22 |
| Board duty to verify and call capital contributions | Company Law art. 51 |
| Capital withdrawal liability | Company Law art. 53 |
| Illegal capital reduction | Company Law art. 226 |
| Directors as liquidation obligors | Company Law art. 232 |
| Liquidation-team loyalty and diligence | Company Law art. 238 |
| Public commitment liability | Securities Law art. 84 |
| False-statement liability | Securities Law art. 85 |
| Information disclosure duties | CSRC Order No. 226 |
| Listed-company governance code | CSRC Announcement [2025] No. 18 |
| Independent director system | CSRC Order No. 220 |
| Draft direct, derivative, third-party, and liquidation rules | SPC draft Company Law interpretation arts. 53-59, 66-69 |
Teaching Notes
Teach the unit by actor and remedy. First identify whether the defendant is a formal director, supervisor, senior manager, controlling shareholder, actual controller, legal representative, independent director, issuer, intermediary, or third-party participant. Then identify whether the claim belongs to the company, a shareholder, a creditor, an investor, or a regulator.
Emphasize dates. The revised Company Law has been in force since 1 July 2024. CSRC Order No. 226 on information disclosure takes effect on 1 July 2025. CSRC Announcement [2025] No. 18 on listed-company governance takes effect on 1 January 2026. The SPC Company Law interpretation remains a 30 September 2025 draft, so it should be taught as likely judicial direction, not binding law.
Be careful with the business judgment rule. It protects courts from second-guessing clean business decisions. It does not excuse conflicts, hidden related-party benefits, false disclosure, failure to respond to known red flags, or deliberate controller tunneling.
Use Kangmei and Jinlitai together. Kangmei teaches mass investor compensation and independent-director risk after false disclosure. Jinlitai teaches that a public commitment by a director or senior manager can become a securities-law liability event when it seriously misleads investors.
End the class with documentation. A director’s best defense is often a record: conflict disclosure, abstention, independent review, expert reliance, risk discussion, voting record, follow-up supervision, and timely correction. The absence of that record is not always liability, but it makes the duty story much harder to tell.