Corporate Governance under the New Company Law (Part 2): Shareholder Lawsuits and Enforcement

By Craig Anderson and Bingna Guo, O'Melveny & Myers LLP

The new PRC Company Law (New Company Law)(中华人民共和国公司法), which became effective on January 1 2006, reconstructs the legal relationships between the investors and management of Chinese companies.¹ Minority shareholders in particular have been granted a range of new protections, the most significant of which are the explicit fiduciary duties of loyalty and diligence conferred upon company managers in China. Likewise, controlling shareholders, who generally enjoyed immunity from civil action, may now be held liable for their abuse of power. The protection offered by these new provisions is reinforced by the civil enforcement framework constructed by the New Company Law, which marks a bold departure from the previous Chinese corporate governance regime.

Underdeveloped corporate governance laws and weak enforcement of corporate governance matters have caused investments in Chinese companies to remain unattractive for many investors. The risk that management or controlling shareholders will divert company property or interests to themselves undermines the investment value of many otherwise promising companies. The New Company Law and related legal and institutional developments represent an attempt to steer Chinese business practices toward a more transparent system guided by legal rules. However, the impact of the new corporate governance rules will ultimately depend on the state's approach to enforcement.