Impact of Criminal Law amendment on top brass of private enterprises

Employees of private enterprises such as senior executives may become the subject of crimes for certain charges under the Draft Amendment (XII) to the Criminal Law, released on 26 July 2023.

The National People’s Congress explained that this amendment – adding offences related to employees’ intentional breach of duty of loyalty to harming the interests of private enterprises – will further strengthen equal protection, provide legal means for private enterprises to effectively prevent and punish internal corruption, and positively respond to concerns of entrepreneurs.

Amendment details

Specific amendments are in articles 165, 166 and 169 of the Criminal Law.

The original article 165 provides that: “Directors and managers of state-owned enterprises who, in order to gain illegal benefits, make use of their job opportunities to conduct for themselves or others business similar to that conducted by companies or enterprises to which they attach, shall, in cases involving a large amount, be punished with imprisonment or criminal detention for less than three years, with a fine or a separately imposed fine for cases involving extraordinarily large amounts, with imprisonment of over three years but less than seven years, and with fine.”

The draft introduces a new paragraph following this: “Directors and managers of other companies or enterprises who commit any conduct set forth in the preceding paragraph shall be punished accordingly.”

Article 166 provides that: “Work personnel in state-owned companies, enterprises, or institutions who use their job opportunities to commit the following acts that seriously hurt state interests shall be punished with imprisonment or criminal detention of less than three years, with a fine or a separately imposed fine; for cases causing extraordinary huge losses to state interests, with imprisonment of over three years and less than seven years, and with fine: (1) offering profitable business conducted by their own unit to their relatives and friends for operation; (2) buying merchandise from units operated and managed by their relatives and friends at a price apparently higher than market price or selling merchandise to units operated and managed by their relatives and friends at a price apparently lower than market price; or (3) buying sub-standard merchandise from units operated and managed by their relatives and friends.”

In the draft, a new paragraph is added: “Work personnel in other companies or enterprises who commit any act set forth in the preceding paragraph that seriously hurt interests of companies or enterprises shall be punished accordingly.”

Article 169 provides that: “People directly in charge of state-owned companies or enterprises or higher competent departments who cause great damage to national interests by practising favouritism and converting state-owned assets into low-value stocks or selling them at a low price shall be sentenced to not more than three years in prison or criminal detention. They shall be sentenced to not less than three years and not more than seven years in prison if they cause especially serious damage to national interests.”

The draft also includes a new paragraph: “People directly in charge of other companies or enterprises who commit any act set forth in the preceding paragraph that seriously hurt interests of companies or enterprises shall be punished accordingly.”

As such, the draft seeks to extend existing offences applicable to personnel in “state-owned companies or enterprises” to those in the private sector.

Basis for amendments

According to article 147 of the Company Law, directors, supervisors and senior managers shall bear the obligations of fidelity and diligence to the enterprise. Article 148 also enumerates the prohibited acts of directors and senior managers that breach the obligations of fidelity.

Considering that the manifestations of such breaches are complex, hidden and variable, the last paragraph of article 184 of the Company Law provides a miscellaneous provision stating that all breaches of fidelity obligations are prohibited.

These three crimes aiming at serious breach of employee duty of loyalty are set out in the section of the Criminal Law entitled “Offences against company and enterprise management order”. So far, the subject matter of these crimes is limited to personnel of state-owned enterprises.

But the Company Law applies equally to companies of various ownerships – including state-owned enterprises and private entities – so the duty of loyalty owed by directors, supervisors and senior managers of private entities is basically the same as that of the top brass of state-owned enterprises.

If the law only imposes criminal liability on employees of state-owned enterprises – but not on employees of private enterprises – for serious breach of the duty of loyalty, it obviously violates the principle that the law protects the assets of all ownerships equally. It could also be suspected of neglecting the protection of rights and interests of private entrepreneurs and shareholders.

Besides, many private firms have also become public companies with shares publicly issued and listed, involving the rights and interests of many investors, so the social harm caused by their employees breaching the duty of loyalty is equally serious.

Therefore, employees of private enterprises who intentionally harm the interests of private enterprises and cause significant losses should also be held criminally liable.

Potential impact

If the draft is adopted, the subjects that illegally operate a similar business may be directors or managers of private enterprises.

In current judicial practice, “managers” in the Criminal Law include general managers and deputy general managers of companies.

In future, the author believes that chairpersons, vice-chairpersons, executive directors, directors, general managers and deputy general managers in the private sector may all become the subject of such a crime.

Subjects who illegally seek gains for family or friends, or practise graft by translating shares at a low price or selling corporate assets, can be any employees who take advantage of their office, not limited to directors or senior managers.

Private enterprises as well as their directors and senior managers should take this amendment of the Criminal Law prudently, seriously strengthen their awareness of legal risks and improve their corporate governance.

Xie Yang is a senior partner at Zhilin Law Firm