Personal legal risk of SOE senior executives

By Lin Zeda and Gong Lin, Young-Ben Law Firm

Depending on how a state-owned enterprise (SOE) is organized, the titles of senior executives of an SOE can manifest as president/vice president, chairman/vice chairman of the board, director, general manager/deputy general manager, manager/deputy manager, factory director/deputy factory director, financial controller, department head, etc.

Senior Partner
Young-Ben Law Firm

Criminal legal risks

(1) Embezzlement and bribery. From published cases it can be seen that crimes by senior executives of SOEs mainly involve embezzlement and bribery, accounting for 80-90% of all crimes they commit. In comparison, the crimes of the senior executives of private enterprises mainly involve undermining the market economic order. The areas in which embezzlement or bribery frequently occur include asset or fund management, undertaking of work, construction, trade, day-to-day operations, land development and requisitioning, etc.

(2) Crimes particular to SOEs. The Criminal Law sets out crimes that are particular to SOEs. The subjects perpetrating such crimes are specific, i.e., the working personnel of an SOE company or enterprise and the specific crimes include: illegally operating a similar business; illegally seeking gains for family or friends; dereliction and being deceived in the execution and/or performance of a contract; dereliction of duty by an employee of a state-owned enterprise or institution; practising graft by translating shares at a low price or selling state-owned assets, etc.

(3) Criminal legal risks under the dual penalty system. Pursuant to the Criminal Law, “dual penalty system” means that when an entity commits a criminal offence the entity is assessed a fine, and the person in charge directly responsible, and other directly responsible persons, are assessed criminal penalties. About 70 crimes set out in the Criminal Law are subject to the dual penalty system.

(4) New criminal risks. From time to time the Criminal Law makes certain new harmful acts subject to criminal punishment, but, as SOE senior executives may not necessarily keep abreast of new laws in real time, they may perpetrate a crime without realizing it. Taking the crime of infringing the personal information of a citizen as an example, the illegal procurement, sale or offering of 50 or more items of sensitive personal information constitutes a criminal offence.

Senior Partner
Young-Ben Law Firm

Administrative legal risks

Administrative penalties typically are subject to the dual penalty system, meaning that not only is the entity that broke the law subject to penalties, but the person in charge is directly responsible, and the other directly responsible persons are assessed such penalties as fines, etc.

In such stringently regulated sectors as securities and finance, if an SOE violates a law, administrative statute or relevant regulation, and the circumstances are serious, the regulator may assess such administrative penalties against the relevant responsible persons as banning them from the market, confiscating their illegal income, imposing fines, etc.

Furthermore, if an SOE violates another law or regulation, such as the Environmental Protection Law, Cybersecurity Law, etc., the relevant regulator may impose fines on the relevant individuals.

Civil legal risks

(1) Restriction of high-end consumption. When an SOE, as a judgment debtor, fails to perform an effective judgment or ruling, or is declared a judgment debtor in breach of trust, the People’s Court will take measures to restrict high-end consumption by the SOE’s legal representative, main person in charge, directly responsible persons who directly affect the performance of the debt obligation, and actual controller.

After the imposition of such measures, the relevant individuals will be subject to restrictions when they take a means of transport, seek accommodation, purchase immovable property, purchase a motor vehicle, travel on holiday, or their children attend an expensive private school, etc.

(2) Restriction on going abroad. When an SOE is involved in an unresolved civil case, the People’s Court may decide to place restrictions on its legal representative leaving the country.

(3) Civil damages. Where a director, supervisor or senior executive violates a law, a regulation, or the articles of association, causing the SOE to incur a loss, he or she shall be liable for damages. For example, pursuant to a company’s articles of association, the decision on the company providing security for a third party is to be made by the shareholders’ meeting of the board of directors, but if the author of the act (usually meaning the legal representative) provides security for a third party in breach of the articles of association, causing the company to incur a loss, he or she will be liable for damages and, based on the fault principle, will bear personal liability towards the opposite party.

Internal Accountability

(1) Banning. Pursuant to the Law on the State-Owned Assets of Enterprises, if a director, supervisor or senior executive of an SOE violates the law, causing a material loss of state-owned assets, and is dismissed from his or her position, he or she may not serve as a director, supervisor or senior executive of an SOE for five years from the date of his or her dismissal.

If his or her violation causes a particularly large loss of state-owned assets, or he or she is assessed criminal penalties for embezzlement, bribery, appropriation of property, diversion of property or undermining the socialist market economic order, he or she will be banned from serving as a director, supervisor or senior executive of an SOE for life.

(2) Damages and recovery of income. If a director, supervisor or senior executive of an SOE commits either of the following acts, causing a loss of state-owned assets, he or she will be liable for damages in accordance with the law: He or she deals with his or her enterprise in contravention of the Law on the State-Owned Assets of Enterprises; or, in deciding a material matter of the enterprise, he or she violates the decision-making procedure specified in laws, regulations and the enterprise’s articles of association.

Any income derived by an SOE director, supervisor or senior executive in connection with the acts specified above will be recovered or vested in the state-invested enterprise according to the law.

(3) Liability for non-compliant operation or investment. The scope of pursuit of liability for non-compliant operation or investment covers group management and control, purchase and sales management, project contracting and construction, transfer of property rights, listed company equity and assets, fixed asset investment, investment and acquisition, change in organizational form, fund management, and risk management.

Liabilities for operation or investment can be divided into direct liability, supervisor liability and leader liability. Depending on the extent of the asset loss and nature of the issue, the responsible persons will be dealt with by such means as payment deduction, banning, disciplinary sanctions, or transfer of case to the judicial authority.

Lin Zeda is a senior partner at Young-Ben Law Firm. He can be contacted on +86 21 6148 4898 or by email at

Gong Lin is a senior partner at Young-Ben Law Firm. She can be contacted on +86 21 6148 4909 or by email at