How to deal with the failures to fulfill duty of diligence?

Source: Beijing DOCVIT Law Firm  Time: 2021-10-25 20:09:27  Author: The dispute resolution team

Both party A and party B are shareholders of company a, with a accounting for 30% of the shares and B for a state-owned enterprise holding company, accounting for 50% of the shares. Mr. Li is a director appointed by company B to company a, and also the head of financial department of company A. At the beginning of 2021, party A learned that there was still 1 million yuan of capital contribution of company B due but not paid in, and Mr. Li never called on company B according to his duty when he clearly learned that company B did not fulfill his obligation of capital contribution. In addition, Li used his authority to change the management authority of company A's office system, adjust the relevant processes and procedures of the company's internal management, and put pressure on the employees without reason, resulting in the failure of company A's normal operation for three consecutive months. In view of Li's behavior, how should company a and shareholders a protect the rights and interests of the company and themselves?

According to the Company Law, directors, supervisors and senior executives should be cautious and reasonable in the process of business operation, strive for the best interests of the company as far as he can, and bear the responsibility of compensation if he violates the duty of diligence due to personal negligence or other reasons and causes losses to the company. As a director and senior manager of company a, Li's above-mentioned behavior has violated his duty of diligence and caused loss of interest to the company, so he should bear the responsibility of compensation for the loss. A, as a shareholder of company a, may file a written request to the supervisor of company a to file a lawsuit against Mr. Li for damaging the interests of the company. If Li's behavior damages the interests of a shareholder, a can directly bring a lawsuit against Li to the people's court.

The right relief way of violating the duty of diligence

In the practice of corporate governance, directors, supervisors and senior executives, as the management, are often negligent or negligent in dealing with foreign companies in the name of the company, which leads to economic losses of the company. How the company and its shareholders pursue responsibility for such cases is always the first problem to reduce losses. According to the existing laws and regulations, the current remedies for directors, supervisors and senior executives' breach of duty of diligence are summarized as follows:

■ Preparation for pre-litigation actions such as inquiry by shareholders' meeting, communication of lawyer letter and so on

The meeting shall be held to inquire the directors and supervisors who are not present, collect relevant information, make minutes of the meeting, and sign and confirm by relevant personnel; The lawyer can also communicate with the other party in advance through letter of lawyer to make preparations for the follow-up proceedings.

■ Seeking relief through litigation

Qualified shareholders may request directors or supervisors to file a lawsuit in the people's court in writing; If the interests of shareholders are damaged, the shareholders may bring a lawsuit directly to the people's court.

The difficulties and challenges in the practice of rights relief

In order to protect the legitimate rights and interests, how to determine that the behavior of directors, supervisors and senior executives is a violation of the duty of diligence and how to determine the loss caused by the violation of the duty of diligence has become the bottleneck that can not be broken through in such cases. The difficulties of the above bottlenecks in practice are as follows:

■ The legal provisions are general and lack of detailed implementation rules

There are only two principles about the duty of diligence in the Company Law. The Company Law does not clearly stipulate the specific forms and constituent elements of the duty of diligence. In fact, Article 149 of the limited provisions includes the legal consequences of violating the duty of loyalty and the duty of diligence, which leads to the situation that the two obligations are not distinguished in judicial practice.

■ In practice, various forms of examination are superficial.

The law does not require the directors, supervisors and senior executives' own knowledge, experience or skills to any extent, and the business decisions and judgments made by the director, supervisor and senior executives do not involve prudent and reasonable duty of care. Therefore, when the director, supervisor and senior executives do not obviously violate the relevant provisions or the articles of association, it is difficult for the court to judge how to measure his duty of diligence, The court only made formal review on the duty of diligence of the directors, supervisors and senior executives, but seldom made substantive review, which also led to the failure of most companies in such cases.

In view of the above difficulties, how to judge in practice, combined with a few similar cases in which the company won, is summarized as follows:

• The criteria for judging whether directors, supervisors and senior executives have fulfilled their duty of diligence are as follows:

① Is it done in good faith?

② When dealing with the company's affairs, do you pay attention to those who are in a similar situation and in a similar position with general prudence when dealing with their own affairs?

③ Is there any reason to believe that it is in the best interests of the company to perform its duties?

• The criteria for determining the losses of the company caused by the directors, supervisors and senior executives failing to fulfill their duty of diligence:

① Does the company have objective losses? Only when directors, supervisors and senior executives fail to fulfill their duty of diligence and cause losses to the company, can they form the premise of bearing the liability for compensation to the company;

② Do the directors, supervisors and senior executives fail to fulfill his duty of diligence?

③ Is there a direct causal relationship between the breach of duty of diligence by directors, supervisors and senior executives and the loss of the company?

The duty of diligence is an important mechanism to restrict the behavior of directors, supervisors and senior executives and protect the interests of shareholders under the modern corporate governance system. In order to accurately judge whether directors, supervisors and senior executives fulfill their duty of diligence and protect the legitimate interests of the company and shareholders from being infringed, the company and shareholders should make good use of the internal system to restrict the behavior of directors, supervisors and senior executives with detailed provisions on the duty of diligence in order to prevent the occurrence of problems. 

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