Director's Roles and Duties in China

Introduction

A director holds one of the most important positions in a company. This person oversees how the business runs day to day, so the law sets out clear requirements for who can take the role and clear duties they must follow once appointed.

This guide covers what a director does, who can and cannot serve as one, the duties directors owe the company, and how the role starts and ends.

What Is a Director?

A director is a person responsible for managing and supervising a company's affairs.

Roles of a Director

A director in a Chinese company is expected to:

• Act in the company's best interest
• Appoint or remove the general manager
• Call shareholder meetings and present reports to them
• Set the pay for company officers
• Make sure the company meets its goals
• Prepare plans on matters such as raising or lowering registered capital, the annual financial budget, profit distribution, and the company's dissolution or liquidation

Who Can Be a Director

To qualify as a director, a person must:

• Be at least 18 years old
• Be a natural person
• Be a Chinese citizen or a foreign national

Who Cannot Be a Director

A person is barred from serving as director if any of the following apply:

• They have limited or no capacity for civil acts
• They were convicted of corruption, bribery, or misusing property within the past five years
• They have had their political rights taken away within the past five years
• They previously served as a director, factory manager, or president of a company that was shut down due to mismanagement, or they were responsible for that company's liquidation
• They were the legal representative of a company whose business license was revoked for breaking the law, within the past three years
• They carry a large amount of unpaid debt
• They are under criminal investigation or prosecution and the case has not been resolved
• They are barred from the market by the China Securities Regulatory Commission (CSRC)

Duties of a Director

Directors of Chinese companies must follow two core duties: the duty of loyalty and the duty of care.

Duty of loyalty

Directors must manage the company in good faith and stay loyal to its interests. This means carrying out their duties honestly, protecting the company's interests, and never using their position for personal gain. They must also follow the law, relevant regulations, and the company's articles of association.

Duty of care

Directors must use their powers and carry out their duties with the same level of care a reasonable person would apply in the same position.

Director Liability

A director breaches their duties by:

• Taking a commission meant for the company as their own
• Putting company funds into their own personal account or someone else's account
• Leaking company secrets
• Embezzling company funds
• Signing contracts or deals with the company that break the articles of association, or that lack approval from the board of directors or general meeting
• Lending company funds to others, or using company property as security for others, without approval from the board of directors, shareholders, or general meeting, or in a way that breaks the articles of association
• Using their position to take a business opportunity for themselves or someone else that rightfully belongs to the company, without board or shareholder approval

Term of Office

A director's term of office is set in the company's articles of association, but it cannot run longer than three years at a time.

A director can serve back-to-back terms if re-elected before the current term ends.

How Directors Are Appointed

Directors are chosen by the general meeting through a vote.

Within seven days, the company must receive a written notice explaining why the candidate is being proposed, along with a written notice from the candidate accepting the nomination.

How Directors Are Removed

A director can be removed for missing two board meetings in a row without sending a substitute to attend in their place.

In that case, the board of directors puts the removal forward at the general meeting.

A director can also be removed before their term ends through an ordinary resolution, as long as the general meeting is called in line with the law, relevant regulations, and the articles of association.

Resignation

A director can resign before their term ends by sending written notice to the board of directors. The board must respond within two days.

If a resignation would drop the board below the legally required minimum number of members, the director must stay in the role until a replacement is found, as required by law, relevant regulations, and the articles of association.

The remaining board members must then arrange an extraordinary shareholders' meeting as soon as possible to appoint a new director.

Conclusion

Directors in China must follow their roles and duties closely. Breaking them can lead to criminal or civil penalties.

Reach out to Signum if you would like your company's directors to have a clear, working understanding of the role.