Application of Company Law in labour disputes involving executives

By Qi Bin, Wilson Dong, Xin Bai Law Firm

Chinese laws, as is known, “extend the same treatment” to all factions of labour, without exception to senior managers (executives) and general employees. However, in recent years, there have been increases in labour disputes involving executives, making the application of laws a matter of concern.

齐斌 QI BIN 信栢律师事务所合伙人 Partner Xin Bai Law Firm
Xin Bai Law Firm

In our opinion, under the framework of existing Chinese laws, labour disputes over executives can be subject to Company Law and its supporting stipulations in some specific issues (mostly related to procedural matters, such as the confirmation of dismissal formalities and remuneration), but they must still be subject to Labour Law, Labour Contract Law and supporting stipulations in other matters, such as whether economic compensation or indemnity stemming from the dissolution or termination of labour contracts has to be paid.

A case of labour dispute we handled goes as follows: The headquarters of a foreign luxuries enterprise discovered that the general manager and deputy general manager of Chinese branch were involved in malpractices and other behaviour that was seriously damaging company interests. At the request of the headquarters, the said branch removed the pair from their duties concurrently through the resolution of its board of directors. Soon, the company sent a dismissal notice to the two executives because their malpractices and gross neglect of duties saw it suffer significant losses. Subsequently, the deputy GM (Manager C) applied for arbitration, and claimed that the company’s dissolution of the labour contract violated laws and required it to pay more than RMB20 (US$2.9 million) as “special awards” as agreed in the labour contract.

The key problems of this case were closely related to the Company Law and Labour (Contract) Law. One, the removal of executives from office should have been initially executed before the dissolution of labour contracts with the executives. Two, according to Company Law, executives are obliged to stay loyal and diligent to their employer; according to Article 39 of the Labour Contract Law, where staff are involved in gross neglect of duty, malpractice and other behaviour that cause significant damages, the employer can dissolve labour contracts. Three, in case of non-liquet (unclear) labour contracts of executives, comprehensive consideration must be given in combination with the stipulations of the Company Law, Articles of Association and business practice.

One, in general the duties shall be first removed, as specified in the Company Law, prior to the dissolution of labour contracts of executives. As specified in article 46 of the Company Law, a board of directors is entitled to appoint and dismiss a deputy (general) manager of a company, as well as decide on remuneration and other matters. In this case, the headquarters decisively removed the two executives from their duties through the resolution of the board of directors after it was verified that they violated laws and regulations. Their removal cleared barriers for the dissolution of labour contracts; more importantly, from the perspective of company governance. The removal of “errant executives” can avoid disputes resulting from work, the handover, return of seals and archives, plus documents and other things, at the time of the dissolution of labour contracts, and further affect company operations.

董传羽 WILSON DONG 信栢律师事务所律师 Associate Xin Bai Law Firm
Xin Bai Law Firm

Two, the stipulations on loyal and diligent obligations of executives in the Company Law are helpful to the dissolution of labour contracts of “errant executives” to some extent. As specified in articles 147 and 148 of the Company Law, executives are obliged to stay loyal and diligent to their employer, shall neither accept bribes or other illegal income nor embezzle properties through their powers. In case of any behaviour prohibited by laws, the illegal income shall belong to the company.

In this instance, the reason the employer firstly removed Manager C from office, and then dismissed him (her) was that he (she) established an entity with the GM to compete with the company where they worked, and improperly took advantage of its employees, customer resources and marketing channels, which almost emptied the entire firm. As such, the two executives seriously violated the stipulations on honest and diligent obligations as executives under the Company Law and brought about significant damages to the employer. Therefore, the company was entitled to dismiss them, based on the Labour Contract Law, and not pay any economic compensation.

Finally, as the board of directors is entitled to determine the remuneration of executives, in case of non-liquet stipulations of executives in the labour contracts, their remuneration shall be comprehensively judged in combination with the stipulations of the Company Law, Articles of Association and business practices and others. In this case, it was “agreed” in the labour contract that Manager C submitted as evidence that if executives were dismissed, the company needed to pay more than RMB10 million, or 25% business turnover, as special awards (based on the higher of the two). However, no one on the board of directors of the company and the headquarters knew of the labour contract or ever made any resolution for the above “special awards”.

Besides, the Chinese branch was always under the control of Manager C and the former GM from the preparatory stage. As such, the two executives also naturally managed the use of an official seal. So, the authenticity of the labour contract became key to the case. At the time of arbitration the defence was that the company never performed any meaningful connection or communication for the so-called “special awards”, and was more unlikely to reach an agreement on this. As specified in Articles of Association, the GM was only entitled to sign the contract for the amount of RMB1 million at most, and the contract with the higher amount had to be approved and signed by the board of directors. However, there was an agreement on a matter exceeding RMB10 million in the labour contract that Manager C provided, and the board of directors knew nothing about it.

Arbitrators adopted our defence opinions, and considered that Manager C did not prove that the “special awards” clauses specified in the contract had the approval of the board of directors, and the awards “directly pointed to the operating income of the company”, “ignored the profit situation of the company in the previous year”, “had extremely high proportion and initial amount”, and “violated the common sense”. Therefore, the request of Manager C was not supported.

Qi Bin is a director and partner, and Wilson Dong is an associate, at Xin Bai Law Firm


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