Business opportunities are vital to a company’s survival and growth. The first time that China’s legislation prohibited the misappropriation of business opportunities was in the Company Law (2005 Revision), with article 149 declaring that directors and senior executives shall not, without the consent of a shareholders’ meeting or general meeting, abuse their positions to seek business opportunities belonging to the company for themselves or others.

The new Company Law, enacted this July, further refines these rules, detailing the applicable subjects and exceptions in article 183. However, the legislative framework still lacks clear standards for identifying business opportunities, leaving judicial practice to establish varying criteria based on individual cases.

Substantive efforts

A company’s business opportunities often stem from its substantive efforts, typically in the form of human and financial resources devoted to secure such prospects, or long-term inputs in the past operation. This distinction is exemplified in Lin Cheng’en v Li Jiangshan et al, a dispute over misappropriation of company interests reported in the Supreme People’s Court Gazette (2014, Issue 11).

The court ruled that contested land use rights were not a business opportunity for the target company, as any qualified real estate firm could have bid for them. Business opportunities are also often region-specific. If a company operates in a particular region, its directors, supervisors and officers (DSOs) engaging in business activities in other regions may not be deemed as misappropriating the company’s business opportunities.

In Jin Aiqi v Su Jing et al, a dispute over shareholders’ contributions, the court ruled that the defendant had not exploited the target company’s business opportunities or harmed its interests through their own company, on the grounds that the target company had no business activities in the region where the defendant’s company was located. It had only developed local footbridge projects.

Additionally, some courts have held that when a company abandons a business opportunity – or a third party is unwilling to collaborate with the company – it would be an extreme interpretation of the duty of loyalty to prohibit DSOs from taking the forsaken opportunity. This could lead to wasting potential societal resources. In such cases, DSOs should not be deemed to have harmed the company’s interests.

Abuse of power

The Company Law identifies DSOs’ abuse of power as a requisite for their misappropriation of business opportunities. Therefore, business opportunities should be those obtained by DSOs in the course of performing their duties, and closely related to the company’s operations.

In practice, if DSOs manage to provide evidence that the business opportunity in question has been acquired sheerly out of personal efforts – without direct or indirect utilisation of company resources (including their powers of office, the company’s reputation and business information), which proves highly probable and meets the standard of proof – it can be determined that such business opportunity is not exclusive to the company.

Sometimes DSOs are just figureheads for business registration, with no engagement in the company’s actual operations. In such cases, it is difficult to establish that they have taken advantage of their positions to obtain business opportunities.

Good faith

Article 183 of the new Company Law provides an exception to the prohibition on misappropriating business opportunities by requiring “reporting to the board of directors or the shareholders’ meeting and obtaining a resolution pursuant to the company’s articles of association”.

This means that if DSOs act in good faith by promptly disclosing the opportunity and obtaining approval as required by the articles of association, their pursuit of the business opportunity will not be considered detrimental to the company’s interests.

Notably, DSOs’ good faith lies in the timeliness, completeness and effectiveness of the disclosure. Companies are to specify in their articles of association whether such disclosures are to be resolved by the board of directors or the shareholders’ meeting.

Furthermore, if the board of directors or the shareholders’ meeting fails to make a timely decision following the disclosure in good faith, it may potentially harm the interests of DSOs and impede business activities.

Such special circumstances should be addressed by judicial practice on a case-by-case basis. Where feasible, the company’s articles of association should specify a reasonable timeframe for the board or the shareholders’ meeting to reach a resolution.

Anti-abuse mechanisms

In light of the new Company Law, companies are advised to set up effective mechanisms to mitigate the risk of business opportunities being abused and safeguard the company’s interests and sustainable development.

These mechanisms can include:

Well-defined regulations. Establish clear articles of association and regulations that explicitly prohibit the misappropriation of business opportunities and outline the consequences of violations.

Segregation of duties and proper authorisation. Articulate well the ladder of responsibilities and authorities to avoid excessive concentration of power. Adopt a multi-level approval process for major decisions to ensure transparency and fairness in the evaluation and decision making regarding business opportunities.

Information disclosure and reporting. DSOs should be required to promptly disclose information related to business opportunities, as well as the positions held and investments made by themselves and affiliated parties.

Training. Conduct regular training sessions to enhance DSOs’ ethical and legal awareness, ensuring they understand the legal consequences of abusing business opportunities.

Regular evaluation and improvement. Periodically assess the supervision mechanisms, adjusting and improving them as appropriate to ensure their effectiveness.