Risk boundaries of dual controllers under Company Law

In corporate governance, power often extends beyond the votes cast at the boardroom table. In practice, certain individuals, although holding no formal position within the company, exert significant influence through their status as shareholders, financial strength or personal connections. These “dual controllers” are controlling shareholders or actual controllers.

The 2023 revision of the Company Law further refines the system of liability rules in response to the phenomenon of dual controllers acting as de facto directors without holding the title. The boundaries of liability for these controllers involve balancing the interests between the company and its shareholders and also concern creditor protection and the stability of the corporate legal system. This article, drawing on judicial precedents, aims to clarify the structure of liability for dual controllers and shadow directors under various circumstances.

Liability for compensation to the company due to improper related-party transactions. According to article 22 of the Company Law, controlling shareholders, actual controllers, directors, supervisors and senior management who, by exploiting related‑party relationships, harm the company’s interests must compensate the company for resulting losses.

In judicial practice, the allocation of liability operates as follows: if the law or the articles of association set clear procedural requirements for the related‑party transaction in question, and those requirements have been followed, the party claiming damages must prove that the transaction caused substantive harm to the company’s interests. Where the prescribed procedures were not observed, or where neither the law nor the articles set out clear requirements, the burden shifts: the party to the transaction must demonstrate that the outcome was substantively fair. Failing this, they will be held liable for damages arising from the unfair transaction. See Jing 02 Min Zhong No. 6373 (2024).

Liability for compensation due to abuse of control. According to article 21 of the Company Law, shareholders who abuse their rights and cause losses to the company or other shareholders shall bear liability for compensation. Common forms of abuse include the misuse of voting rights, the right to information, and the right to submit proposals.

However, as business performance may be affected by factors such as market conditions and strategic decisions, judicial practice imposes a high evidentiary standard for proving shareholder abuse. It must be shown the conduct seriously harmed the interests of the company or other shareholders. See Yun 01 Min Zhong No. 1707 (2025).

Joint and several liability for abusing the company’s independent legal status. According to article 23 of the Company Law, where shareholders abuse the company’s independent legal status and seriously harm the interests of the company’s creditors, they shall bear joint and several liability to the company’s creditors.

The prevailing judicial view holds that, although de facto controllers are not shareholders, the doctrine of piercing the corporate veil should be applied by analogy to them on the basis of the principles of fairness and good faith. See Guizhou Everbright Energy Development v Liu Zhenjin (2020).

Joint and several liability for assisting shareholders in the illegal withdrawal of capital contributions. According to article 14 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law (III), other shareholders, directors, senior executives or de facto controllers who assist in the illegal withdrawal of capital contributions shall bear joint and several liability with the shareholder who withdraws capital, and shall be liable for supplementary compensation for the portion of company debts that cannot be repaid. See Hu 02 Min Zhong No. 7070 (2021).

Fiduciary and diligence duties of de facto directors. De facto directors refer to individuals who, although not formally appointed as company directors, actually manage company affairs and exercise the powers of a director. Article 180 of the Company Law stipulates that de facto directors owe duties of loyalty and diligence. If they violate the obligations and responsibilities of directors as set out in the Company Law or the articles of association, they shall be liable for damages to the company, shareholders or third parties.

The most common grounds for director liability are related-party transactions, intra-industry competition, and shareholder capital contribution obligations. For example, in Jing 02 Min Zhong No. 6373 (2024), a de facto director was ordered to compensate the company for losses arising from an improper related-party transaction.

Shadow directors and controlled directors, supervisors and senior executives bear joint and several liability. A “shadow director” is an individual who, although not formally appointed as a director and not directly exercising the powers of a director, nonetheless exercises such powers by directing the appointed directors and thereby functions as a dual controller. According to article 192 of the Company Law, a dual controller is not subject to the duties of loyalty and diligence, but is jointly and severally liable for any harm to the company or its shareholders resulting from instructions given to directors or senior executives.

In judicial practice, the scope of liability under the doctrine of piercing the corporate veil for one-person companies may be expanded to include shareholders or actual controllers of such companies, based on the joint and several liability rules applicable to shadow directors.

For example, in Jing 0115 Min Chu No. 24093 (2024), company C was a one‑person company. Company B, as its sole shareholder, was held jointly and severally liable for company C’s debts because it failed to establish that its assets were independent of company C’s. Zhao, who indirectly owned 90% of company C and was its actual controller, exercised control and dominion over company C’s assets. When company C was unable to satisfy its creditors, the court, applying article 192 of the Company Law, ultimately held both Zhao and the sole shareholder jointly and severally liable.

In summary, although dual controllers, de facto directors and shadow directors may not appear in a company’s formal organisational structure, they exert considerable influence over governance, shareholder interests and creditor rights. Once they exceed the limits of their authority, they risk internal liability and may even be treated by analogy to the doctrine of piercing the corporate veil, facing direct external debt exposure.

Dual controllers must follow the Company Law and the company’s articles, act transparently, and avoid replacing board resolutions with private instructions, expressing influence only through legitimate channels.

Liu Jing is a partner at Han Kun Law Offices. She can be contacted by phone at +86 10 8525 4692 and by email at jing.liu@hankunlaw.com

Gao Xiya is an associate at Han Kun Law Offices. She can be contacted by phone at +86 10 8560 6462 and by email at xiya.gao@hankunlaw.com