Controlling Shareholders and Actual Controllers in China
On December 29, 2023, the National People’s Congress of the People’s Republic of China made significant strides in corporate governance reform with the approval of the sixth amendment to the Company Law. This comprehensive revision, scheduled to take effect on July 1, 2024, introduces key changes designed to regulate the influence of controlling shareholders and actual controllers in Chinese companies, addressing a significant aspect of corporate governance.
A noteworthy advancement in the revised law is the expanded application of the "piercing the corporate veil" doctrine. Traditionally focused on vertical piercing, where shareholders could be held accountable for company liabilities, the law now extends to horizontal piercing. This new dimension targets shareholders who manipulate the legal personalities and limited liabilities of one or more companies to evade debts, to the detriment of creditors. In such cases, all implicated companies will bear joint and several liabilities. Furthermore, in a single-shareholder company scenario, the obligation is on the shareholder to demonstrate the separation of personal and company assets, failing which they face joint liabilities for the company's debts.
The amendment also introduces the concept of ‘de facto’ and ‘shadow’ directors, presenting liabilities for controlling shareholders and actual controllers. Under the 2023 Company Law, de facto directors who may not hold official positions as directors, including controlling shareholders and actual controllers, but engage in the management of the company now have the same fiduciary duties of loyalty and diligence as company directors, supervisors, and senior managers. Additionally, shadow directors, which are controlling shareholders and actual controllers who direct company directors or senior managers to undertake actions detrimental to the company or its shareholders, incur joint and several liability along with the directed individuals for any damages and losses of the company.
These reforms signify a move towards enhanced transparency, accountability, and fairness in the corporate governance of Chinese companies. The amendment aims to regulate the influence of controlling shareholders and actual controllers, intending to safeguard the interests of companies, shareholders, and creditors, thereby contributing to a more stable and balanced business environment.