Author: Lawyer Zhu Meicong, December 28, 2016

1、 The Meaning of Company Directors and the Theoretical Basis for Their Obligations

The definition of a company director is that a director is the decision-maker elected by the company's shareholders and the manager of the company's business. The Oxford Dictionary of Law defines directors as decision-makers elected by the shareholders of a company and managers in charge of the company's business. The definition of the Black Law Dictionary is: a person appointed or elected and authorized by law to manage and operate the affairs of a company. Article 741 (1) of the 1985 Companies Act in the UK defines a company director as any person in the position of a director, regardless of their title, such as a managing director, chief executive, or a member of the board of directors or managers. The newly revised 2006 Company Law provides the same definition of company directors in Article 250 as the 1985 Company Law. The new company law did not provide further detailed provisions for the very simple definition of directors in the revision process, mainly to ensure that the legal provisions related to company directors are applicable to all individuals who actually hold management power in the company, especially those who can make decisions in the company. According to the definition of British company law, directors should specifically include the following personnel:

(1) An executive director appointed by authorization from the company;

(2) Non executive directors appointed by the company's authorization;

(3) A de facto director (referring to a person who, although not authorized by the company through any means, actually holds the position of a director and performs the functions of a director).

The theoretical basis for the emergence of director obligations The legislative design of the director obligation system should first clarify the nature of the relationship between directors and the company, which is the theoretical basis for the emergence of director obligations. Directors have a dual legal status in Anglo American company law, which is established by Anglo American case law. As early as the mid-19th century, American jurist Kane pointed out, "What is the legal status of a company's directors who offer shares to the public? They are just agents of the company. The company itself cannot carry out activities by itself... it can only carry out activities through directors. Therefore, as long as the agent is responsible, the director should bear responsibility." Judge Romeli pointed out: A director is a person appointed to manage the affairs of a company for the benefit of its shareholders. It is a fiduciary obligation, and once this obligation is fulfilled, the director must fully and comprehensively fulfill it... "Therefore, in Anglo American company law, a director is both the agent and trustee of the company, The dual legal status of a director is still widely recognized and respected in modern Anglo American case law and statutory law regarding companies, as it is the trustee of the company's finances and the agent representing the company in trading activities for the benefit of the company.

2、 The Latest Reform of the Obligation System of Directors in British Companies

The latest reform process of the company director obligation system As one of the important contents of company law, the company director obligation system has been constantly revised and improved in a timely manner with the development of British company law for a long time. However, due to traditional reasons, the provisions on director obligations in the UK are scattered in case law, and many provisions are not clear enough. This is not conducive to directors understanding and fulfilling their obligations, nor is it convenient for companies to supervise directors to fulfill their obligations. Therefore, the obligation system of company directors has also undergone corresponding reforms in the latest major revision of the UK Company Law. In March 1998, the Department of Trade and Industry (DTI) of the United Kingdom issued an advisory opinion titled 'Modern Company Law for a Competitive Economy', initiating a comprehensive reform of company law. This company law reform is known as the most comprehensive and in-depth reform of British company law in over 150 years. In the following three years, under the name of the Department of Trade and Industry (DTI) in the UK, many review reports were released, examining the hot and difficult issues of company law reform in different topics. As a response to the review report, the British government released the "Modernizing Company Law" and "Company Law Reform White Paper" in July 2002 and 2005 respectively, proposing government opinions on comprehensive reform of the company system to meet the needs of modern enterprises, and publicly consulting opinions to the society. After thorough public consultation, the Company Law Reform Bill 2005 was submitted to Congress for review. After eight years of intense debate, the company law was finally approved by the Royal Assent on November 8, 2006, completing the final legislative process. The new company law is known as the "Companies Act 2006". The main aspects of this company law reform include: establishing a more flexible and easy to interpret legal system for small companies; Strengthen the positive role of shareholders in corporate governance; Reducing the operating costs of the company, among which incorporating the obligations and responsibilities of the company's directors into the statutory provisions is a major measure of this company law reform.

A major measure of the reform of the Company Law in 2006 was to codify the relevant provisions on director obligations. The original regulations on the obligations of company directors were scattered in case law and equity law accumulated over 150 years, which were very complex and not conducive to the knowledge and understanding of company directors (especially those of small companies). The new company law almost restates all director obligations, such as directors not allowing their personal interests to conflict with the interests of the company, and not using their powers to accept third-party interests. Article 154 of the New Company Law clearly states that the obligations of directors under the law are based on case law rules and equity principles, and should be interpreted in accordance with existing case law and equity. In addition, Article 162 of the law further stipulates that the legal consequences of violating obligations under the law should be consistent with the legal liability established in case law and equity. At the same time, the bill introduces the concept of "enlighted shareholder value", requiring directors to establish their responsibilities on the basis of "enlighted shareholder value", that is, directors should aim to maximize shareholder interests. Because only in this way can we maximize the company's competitiveness and thereby increase the wealth and welfare of the entire society. However, if the company's directors only focus on short-term financial goals and neglect the establishment of long-term relationships, the aforementioned goals cannot be achieved. To this end, the bill requires directors to properly handle all aspects of interest relationships, including the company and employees, consumers, suppliers, and the community, when making decisions. Because only in this way can we ultimately achieve the maximization of the interests of all shareholders.

3、 Main Obligations of Directors under the UK Companies Act 2006

The Company Law of the United Kingdom, approved by the Queen on November 8, 2006, sets out the obligations of directors in written form, including the long-standing fiduciary duty and the duty of care and skill required by common law. The Company Law sets out seven main obligations of company directors in Articles 170 to 181.

1. Obligation to fulfill responsibilities within the scope of authorization

This obligation is stipulated in Article 171 of the 2006 Company Law, according to which directors shall perform their duties within the scope of their delegated powers, and the performance of their duties shall be in accordance with appropriate purposes. As for what is the appropriate purpose, it must be determined through analysis in specific situations. This obligation requires directors to comply with the company's charter, which means making decisions in accordance with the company's charter; Alternatively, a decision can be made based on the resolution of the company's shareholders, which must represent the company's wishes, such as an informal voting resolution that all shareholders do agree to, or a situation where the shareholder's resolution represents the company's decision in accordance with the law.

2. The obligation to promote the company towards "success"

This obligation is stipulated in Article 172 of the Company Law, which is a new principle developed from the fundamental principle of good governance, requiring directors to make decisions based on the best interests of the company. The new company law stipulates that directors must fulfill their duties with the most likely goal of promoting the success of the company. Although the subject of this obligation should be the board of directors as a whole, when fulfilling this obligation, directors need to consider various situations not fully listed in Article 172, including considering the interests of company employees; Relationship with suppliers; Relationship with customers; And the impact of the director's decision on the company's community and surrounding environment, while also considering maintaining a high standard of commercial reputation for the company; The fairness of interests among shareholders within the company. This obligation also clearly stipulates that directors should consider the company's social responsibility more in the process of making decisions.

As for what constitutes "success of a company", it is not defined in the company law. DIT's guidance notes suggest that success should be linked to the long-term sustainable development of commercial companies. This obligation also requires directors to consider and balance various factors before making a decision in the event of a conflict of interests. At the same time, the regulation also believes that in order to clarify the execution status of the director's obligation, the process of making a resolution by the director should be recorded in the minutes of the meeting, which is very important for indicating whether the director has fully fulfilled the obligation during the resolution process,

3. Obligation to make independent decisions

Article 173 of the New Company Law stipulates a proactive obligation of directors to make decisions independently. The specific meaning of this obligation includes two parts: firstly, a director must make a decision first, and secondly, when making a decision, they should be independent. On the surface, this regulation will affect the so-called directors who do not actively fulfill their responsibilities in management and are accustomed to letting others make decisions, but a little analysis shows that this obligation will truly affect the rights of shadow directors. Because if each director makes independent decisions, there will no longer be too much room for the exercise of shadow director power. This obligation was subject to significant controversy during the revision process, but during the debate and controversy, the government's opinion was very clear that it should be stipulated in the Company Law.

4. Directors should have the obligation of reasonable prudence, skill, and diligence in performing their duties

This obligation is stipulated in Article 174 of the Company Law, which requires directors to exercise reasonable prudence, skills, and diligence in the performance of their duties. The meaning is that a company director must possess (1) general knowledge, skills, and experience that people can reasonably expect and perform the same duties as a person. (2) The general knowledge, skills, and experience possessed by the director.

5. Obligation to avoid conflicts between the personal interests of directors and the interests of the company

This obligation is stipulated in Article 175 of the Company Law, which specifically includes (1) a director of a company must avoid situations where his personal or potential interests (including direct or indirect interests) conflict or may conflict with the interests of the company. The conflicting interests should include any property, information, and opportunities of the company (regardless of whether the company can truly benefit from these properties, information, and opportunities). Conflicts of interest do not include conflicts of interest that only arise during company transactions and the execution of affairs.

The obligation of a director to have a conflict of interest can be waived in two situations: if a director cannot reasonably determine based on the situation that there will be a conflict of interest, or if a director with a conflict of interest has already authorized others to perform the relevant work. Authorizing responsibilities to others should meet certain conditions: that is, if there is no provision in the company charter in a private company that such authorization is invalid, similar matters are recommended or authorized by the company's directors; If it is a public company, there must be provisions in its articles of association that allow the authorization of the company's directors. The company's directors have authorized and made suggestions in accordance with the provisions of the articles of association. This obligation stipulates that there shall be no conflict of interest and includes situations of conflict of obligations.

6. Obligation not to use the director's identity to collect benefits from third parties

This obligation is stipulated in Article 176 of the Company Law, which specifically requires that a director of a company shall not accept any benefits from any third party due to his status as a director or the fact that he is performing his duties as a director. Third party refers to any company or group of companies, or any individual acting on behalf of the company or group of companies, other than the company in which the director serves. Benefits include both monetary and non monetary benefits. However, if accepting this interest cannot be considered as conflicting with the company's interests, it will not constitute a breach of the obligation.

7. Obligation to disclose interests in transactions and arrangements proposed by the company

This obligation is stipulated in Article 177 of the Company Law. Require company directors to have a direct or indirect personal interest in the proposed transaction or work arrangement of the company. He must disclose his personal interests to other directors of the company. The disclosure of personal interests shall be made at the board of directors or through legal notices or other means. If the disclosure is deemed inaccurate or incomplete, the directors will be required to make further disclosures. Any disclosure should be made before the company enters into transactions and work arrangements.

But the disclosure obligation does not apply: 1. The company's directors do not realize that they have a personal interest in the transaction and work arrangements, or that the directors are not aware of the proposed transaction and work arrangements; 2. The directors of the company cannot reasonably conclude that the proposed transactions and arrangements will conflict with their personal interests; 3. The other directors of the company are already aware of the existence of the conflict of interest, or should be aware of the existence of the conflict of interest, or the matter has been discussed at a board meeting or by a committee authorized by the board of directors in accordance with the provisions of the company's articles of association.

4、 The Advantages of the UK Company Director Obligation System and Its Enlightenment for Improving China's Director Obligation System

The superiority of the director obligation system in the UK Company Law, especially the director obligation system stipulated in the 2006 Company Law, fully reflects the trend of increasingly clear and strengthened director obligations in the UK Company Law, and reflects the spirit of "promoting shareholder rights and calling for the return of shareholder rights" advocated in the revision process of the UK Company Law. In the white paper on the revision of the Company Law, it is referred to as "enhancing shareholder participation and a long-term investment culture." During the revision process of the Company Law, the revision group also explicitly stated that the basic goal of directors is to achieve the success of the company for the benefit of its members. The design and reform of the board of directors system fully meet the needs of modern company development and improving the investment environment in the UK. In the context of economic globalization and competition, business and investment are increasingly dependent on global conditions to determine where investors are protected, and capital flows. The UK company law places such emphasis on strengthening the obligations of company directors, which in fact enhances the protection of shareholder rights. The goal is also to "maintain the UK's position as the most attractive place for investors (shareholders) in the world in establishing and operating enterprises".

The inspiration for improving the director's obligation system in China. With the rapid development of China's economy, the size of companies is increasing, and more and more companies are implementing the separation of ownership and management rights. Companies are operated by the agent chosen by shareholders - the director. Shareholders are the owners of the company, and directors are the agents of shareholders. In theory, agents should work for the interests of the principal, but directors are also reasonable "economic agents" who consider their own interests and may make decisions or actions that are contrary to the interests of the company or shareholders. In recent years, the situation of insider control among the operators of limited liability companies in China has been very serious. The power of the operators has expanded, and there is a lack of effective supervision. There have also been many scandals of large companies (especially listed companies) where the board of directors manipulated the company to infringe on the interests of the company and shareholders, greatly dampening the enthusiasm of investors and fundamentally affecting economic development. Although there are relevant provisions on the obligations of company directors in China's current company law, these provisions are not systematic and comprehensive enough, and lack operability in procedures. Therefore, we should conduct in-depth research and draw on the legislative experience of director obligations in the UK. In future relevant legislation, we should consciously apply some advanced concepts from the UK company law reform to specific work, in order to promote the improvement of legislative quality. At the same time, in formulating specific systems for the obligations of company directors, it is necessary to make the relevant systems practical and in-depth, and avoid rules becoming mere formality and difficult to implement, thereby affecting the authority and credibility of the law.