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On Several Issues of Directors’ Duty of Loyalty

Author: ZhangXu
Tutor: FuZuo
School: Jilin University
Course: Civil and Commercial Law
Keywords: Director Duty of Loyalty Self-dealing Prohibition of Business Strife Corporate Opportunity
CLC: D922.291.91
Type: Master's thesis
Year: 2010
Downloads: 229
Quote: 1
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Abstract


The duty of loyalty for the board directors exists in the legal relationship between the directors and the company which roots in the special status position of the directors. The directors have a diversified status position who can not only be the trustee and agent of the company, but also the company’s agencies, employees or partners. The relationship between directors and the company can be analyzed from internal and external dimensions. Based on the special status position of the directors as the company’s delegate, trustee and the organ, extensive legal rights are entitled to the directors with corresponding obligations at the same time. The loyal duty of the directors saw the long process from case law to the statute. Throughout the world, the provisions of the directors’duty of loyalty of the Company Law include many types, among which the obligation to avoid self-dealing, non-competition obligations and obligations that shall not usurp the corporate opportunity are the three most common types.An important aspect of directors’duty of loyalty is to avoid self-dealing provisions. Self-dealing refers to director sand officers deal with the companies in which they are working for their own interests. Self-dealing transactions include direct and indirect conflict of interest, conflict of interest transactions. U.S. Law on the self-dealing saw an attitude from prohibition at the early stage to statute and case law later on. There are four types of regulations for the self-dealing in practices which cover completely fairness, the disclosure of directors and the ratification of self-dealing rules. In case of self-dealing, the law allows stakeholders to impose remedies in direct action and derivative litigation.The prohibition of business strife of directors is the directors or others can not carry out competitive business activities with the company for their own interests or others’. That is, they can not do it for themselves or others as belonging to the company’s business within the enterprise or for damage to company interests. As a director, an important duty of loyalty, national company law had stipulated the non-competition. States on the scope of trade and industry of the competition is not exactly identical. In the scope of the directors of trade, Germany has the most stringent provisions. Non-competition obligation of director includes business scope and geographic scope. Non-competition obligation is limited to a director during his employment. The directors do not belong to non-competition after quitting the company.“Corporate Opportunity”is the company’s business opportunities. As the company’s manager, directors should use the asset for the benefit of all company property including business opportunities. The theory of development of opportunities in the common law, the case law played a crucial role which gradually formed a set of perfect judgment standard based on series of principles established by cases, and. To identify the business opportunities of the directors engaged in to be the one of the company, the directors and the companies are two factors that should be considered. Director shall not be unreasonable usurpation of corporate opportunity, but it does not mean that the directors can not reasonably make use of those which have been rejected by the company or companies do not have access to business opportunities.The equity in our company is too focused, controlling shareholders influence the directors through the use of interference management company director, damages the company and other shareholders. In this regard, China should introduce the UK Company Law of the“shadow director”to limit the provisions of registered shareholders, and controlling shareholders, to control the behavior of the daily management of the company. PRC Company Law dose not mention the legal relationship between the directors and the companies. Therefore, we should supplement and perfect the Company Law on the relationship between directors and the company and provide a clear relationship between director and corporation. According to PRC Company Law Article 49, the main duty of loyalty of directors and senior managers, compared to Anglo-American Company Law stipulates that the main scope is slightly narrower. In view of this, interested directors should be appropriate to expand the scope of the subject for the protection of interests of the company to maintain the rights of shareholders. Whether to assume duty of loyalty after the directors quit has been in dispute. China has no specific laws and regulations, departmental rules and regulations of the Duty of directors expired.PRC Company Law on the disgorgement provisions are too general, however, we can study the specific provisions in the Taiwan or Japan. PRC Company Law Article 152 of the derivative action, the derivative action as a breach of fiduciary responsibility to implement an effective mechanism with significant improvement. But the provisions of the shareholders to the board of supervisors or supervisors approach are worth considering the request. PRC Company Law Article 149 only provides for the directors from the company for breach of duty of loyalty, but does not require the directors who breach the obligation removed, suggested the Company Law to supplement Article 149 provides that“cause serious damage to the company or a very bad influence on the shareholders may be removed”It is a clear national company law trends to prevent directors who abuse the right to damage the company, to strengthen its responsibility. The relevant provisions of PRC Company Law does not meet this trend The provisions of the directors duty of loyalty is not very systematic and complete, and it is lack of operational and appropriate flexibility. In view of this, our legislators need to learn from the successful experience of foreign legislation to improve the relevant legislation on the directors’duty of loyalty.

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CLC: > Political, legal > Legal > Chinese law > Economic Law > Corporate law, company law
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