Business opportunities are paramount to a company, but from time to time directors or senior management take advantage of their positions to seek opportunities that rightfully belong to their company, causing it to suffer losses.
In this regard, article 148 of the Company Law provides that no director or senior management member of a company may commit any of the following acts: “without consent of the shareholder’s meeting or shareholder’s general meeting, seeking business opportunities belonging to the company for himself or any other persons by taking advantages of his powers, or operating similar businesses to those of the company”. However, because this provision does not define the business opportunities that belong to a company, judgments can be inconsistent between different trials.
When determining whether an opportunity should be attributed to the company, some courts consider various factors such as business relevance, certainty of the opportunity, willingness of both parties, and the company’s financial resources. Other courts focus on individual factors, such as the certainty of the opportunity. Based on past trials, the following four factors would appear to be the most important when judging whether a business opportunity belongs to the company:
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Relevance to the company’s business, and that the company’s pursuit of such opportunity does not violate laws and regulations. It should be noted that we should not judge the relevance of business opportunities with the company’s business solely based on the business scope of the industrial and commercial registration. Rather, we should consider the company’s industry, business field, business policies and plans, development strategies, actual business activities, and other factors. Even if a certain business opportunity exceeds the company’s business scope, if it is compatible with the company’s business policy and plans, and the business activity does not violate any relevant laws or regulations, the opportunity can still be determined as relevant to the company’s business.
The business opportunity should be clear and specific, with evidence that the company has attempted to seek it. The so-called clear and specific business opportunity refers to the possibility of achieving a certain transaction goal, and the company taking a series of actions to make the business opportunity manifest. In the process of setting out the case, we should focus on whether there is a clear transaction opportunity, whether there is a specific counterparty to the transaction, and whether the transaction negotiation process is close to the conclusion of a contract. The so-called company’s willingness to seek business opportunities mainly refers to the company’s potential expected benefits for the business opportunity, in other words, the company reasonably expects to obtain the opportunity in accordance with its business policy and plans, the company hopes to obtain corresponding economic benefits through this opportunity, or this opportunity plays an indispensable role in promoting the company’s development, and the company has not rejected or abandoned the opportunity.
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The willingness of the counterparty. Whether the counterparty of the transaction expressly expresses its intention to conduct transactions with the company is another important factor in determining whether the business opportunity should go to the company. When the company’s directors and senior management negotiate with the counterparty to a certain extent, if the counterparty clearly expresses its willingness to transact with the company or sends a draft agreement, the business opportunity rightfully belongs to the company.
If the counterparty of the transaction expresses its unwillingness to deal with the company not due to any improper behaviour of the company’s directors or senior management, we should remain cautious in determining whether the business opportunity can be recognised as still belonging to the company.
Whether the directors and senior management become aware of the business opportunity in the process of performing their duties, and whether they have used the company’s human and material resources to obtain it. If the directors and senior management learn of a business opportunity due to personal relationships without using any company resources, and the company has no reasonable expectations for the benefits, the business opportunity should not be deemed to belong to the company.
Whether transaction opportunities obtained by directors and senior management before taking office or after leaving office can be recognised as business opportunities of the company, it is a much more complicated scenario involving myriad factors to be taken into consideration.
In certain cases, some courts use the company’s financial resources as one of the criteria in determining the company’s business opportunities. However, indebted operations and high debt ratios are part and parcel of ordinary corporate status, and financial pressure of a company should not give grounds to deprive it of any business opportunities. Other courts make the judgment based on whether the company has internal resolutions on obtaining business opportunities, which is even less reliable. Business opportunities come in various shapes and sizes, and not all of them require resolutions of the shareholder’s meeting, shareholder’s general meeting or the board of directors in accordance with the provisions of the company’s articles of association. Even if resolutions are needed, it should be examined whether the transaction has progressed to the stage of company resolution. Hence, courts should not take company resolutions as a prerequisite in determining the company’s business opportunities.
In summary, courts have not reached a consensus on how to determine the boundary of a company’s business opportunities, nor has the academic community. With the continuous development of China’s market economy, companies have become the most important component of the market. Theft of business opportunities is damaging both to the company and the overall market, which is why it is imperative to establish a firm standard for demining the affiliation of business opportunities.
Ji Chaoyi is a partner and Suo Shiyu is an associate at East & Concord Partners
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