China’s new Company Law, which will come into effect on July 1, 2024, creates the following systems for the dismissal and resignation of directors: first, the shareholders’ meeting may resolve to dismiss a director, but if a director is dismissed before the expiration of his or her term of office without a justifiable reason, the company shall bear the liability for compensation; second, a director may resign from his or her office by giving written notice to the company, and the resignation shall take effect on the date of the receipt of the notice by the company; however, the original director shall continue to perform his or her duties until a new director assumes his or her office.
The above provision regarding directors does not clearly specify whether the dismissal or resignation of directors is subject to the provisions of Labor Law and Labor Contract Law, leading to disputes in practice regarding the application of the Labor Law and the Company Law.
Currently, there are three viewpoints: first, that there is only a principal-agent relationship between the directors and the company, excluding a labor relationship; second, that there is a labor relationship between directors and the company; and third, that both exist simultaneously.
In the case of (2020) Zui Gao Fa Min Zai No. 50, the Supreme Court held the third viewpoint: from the perspective of the Company Law, the company, and the director form the principal-agent relationship, but under specific conditions, they may also simultaneously constitute a labor contract relationship under the Labor Law.
Therefore, from the legal practice perspective, we tend to find that a labor relationship can be formed between the company and the director. However, the court will still make a substantive examination and accordingly will determine whether the relationship constitutes a labor relationship, including whether the relationship between the company, the director constitutes a managerial and managed relationship (the “subordinate characteristics” stipulated in Article 1 of the Circular on the Establishment of Labor Relationship (Lao She Bu Fa [2005] No. 12), and whether there is a consensus, etc.
The new Company Law does not clarify what compensation norms are applied that a director requests compensation from the company. In the case of (2018) Hu 02 Min Zhong No. 1653, the Shanghai No. 2 Intermediate People’s Court upheld the director’s claim for economic compensation. According to Article 3 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (V), after a director has been dismissed from his/her position, the court shall, based on the provisions of the laws, administrative regulations, the articles of association of the company, or the agreement of the contract, and taking into account the reasons for the dismissal, the remaining term of office, and the remuneration of the director, determine whether or not to make compensation as well as the reasonable amount of compensation. The case of (2020) Zui Gao Fa Min Zai No. 50, based on the consideration of balancing the interests of both parties, discretionarily set a certain amount of compensation, and the court’s reasoning also referred to those provisions.
Therefore, regarding compensation standards, while there are guiding principles, there remains discretion to some extent in practice. Moreover, after the implementation of the new Company Law, the validity of previous judicial interpretations of the Company Law awaits further refinement through new judicial interpretations or judicial practices by the Supreme Court.
In the case where there is a labor relationship between directors and the company, there is a risk for the company of being required to compensate for the termination of the labor relationship when directors are dismissed or resign, and there is even a possibility of reinstating the employment relationship. Directors may also face risks of loss. From the fairness perspective, the following practices can be referred to in practice.
1. If the two parties constitute a labor relationship, a labor contract may be signed to clarify the rights and obligations of both parties (including remuneration, confidentiality, non-competition restrictions, etc.), to reduce the risk of unnecessary losses due to ambiguity;
2. Both parties may fully negotiate and agree that in the case of dismissal or resignation of a director, both parties agree that the Company shall pay a certain amount of compensation to terminate the labor contract so that to a certain extent, the burden arising from the labor contract will be controlled within an acceptable range as far as the Company is concerned; and as far as the director is concerned, his/her loss can be reduced to a certain extent;
3. Agreeing on the position and remuneration to be adjusted. The parties may, as appropriate, agree in the labor contract that in the event of dismissal or resignation of a director, alternative positions and remuneration may be adjusted for the director to reduce future disputes.
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