Lin and Lin, ‘Directors’ Duty of Care in China: Empirical and Comparative Perspective’

The adoption of director’s duty of care in the 2005 revision of the PRC Company Law made significant progress in holding directors accountable for their wrongdoings. However, certain defects still exist, most importantly the lack of a specific standard for the duty of care in the legislation. Therefore, this article adopts an empirical and comparative approach in reviewing Chinese duty of care cases in comparison with major jurisdictions such as the United Kingdom and the United States. The 86 sample cases hand-collected from the ten-year period from 2011 to 2020 reveal that the number of duty of care litigation in China is still far lower than other types of company disputes, despite an increasing trend. This article finds a divergence in judicial practice concerning at least two different standards of the duty of care, with an array of non-uniform factors considered in the judgments. Accordingly, this article adopts a selective approach concerning best practices in major jurisdictions globally and proposes several solutions specifically catered to China’s legal and commercial context, including the unified adoption of the objective reasonable person standard, the suggestion that a wholesale transplant of the business judgment rule is undesirable while some of its elements could be borrowed for reference, the shifting of evidentiary burden to the defendants and the promotion of director’s liability insurance. By incorporating these changes, China’s company law stands to benefit from striking an appropriate balance between director’s authority to manage the companies and shareholder’s right to hold them accountable.

Lin, Shaowei and Lin, Lin, Directors’ Duty of Care in China: Empirical and Comparative Perspective (July 2021). NUS Law Working Paper No 2021/015, EW Barker Centre for Law and Business Working Paper 21/04, Tsinghua China Law Review, forthcoming 2021.

First posted 2021-07-24 18:00:47

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