Business opportunities are paramount to a company, but from sometimes directors or senior management of a company take advantage of their positions to seek business opportunities rightfully belonging to the company, causing the company to suffer losses.

Article 148 of the Company Law provides that: no director or senior management member of a company may commit any of the following acts: … (5) without consent of the shareholder’s meeting or shareholder’s general meeting, seeking business opportunities belonging to the company for himself or any other persons by taking advantages of his powers, or operating similar businesses to those of the company.

However, because the law does not define the meaning of business opportunities that belong to a company, the scale of judgement may be inconsistent in different cases. When determining whether an opportunity should be attributed to the company, some courts consider various factors including business relevance, certainty of the opportunity, willingness of both parties and the company’s financial ability, while other courts may focus on a single factor. We have successfully handled many disputes in this kind. Based on our practical experience, we believe the following four points are the most important ones to be considered when to ascertain business opportunities of a company.

First, relevance to the company’s business, and that the company’s pursuit of such opportunity does not violate relevant laws and regulations.

We should not judge the relevance of business opportunities solely based on the business scope on the registration files. Rather, we should comprehensively consider the industry, business field, business policies and plans, development strategies, actual business activities, and other factors. Even if a certain business opportunity exceeds the company’s registered business scope, if it is compatible with the company’s business policy and plans, and the business activity does not violate any relevant laws or regulations, the business opportunity can still be determined as relevant to the company’s business.

Second, the business opportunity should be clear and specific, with evidence that the company has attempted to seek it.

The so-called clear and specific business opportunity refers to the possibility of achieving a certain transaction goal, and the company taking a series of actions to make the business opportunity manifest. In the process of argumentation, we should focus on whether there is a clear transaction opportunity, whether there is a specific counterparty to the transaction, and whether the transaction negotiation process is close to the conclusion of a contract. The so-called company’s willingness to seek business opportunities mainly refers to the company’s potential expected benefits for the business opportunity, in other words, the company reasonably expects to obtain the opportunity in accordance with its business policy and plans, the company hopes to obtain corresponding economic benefits through this opportunity, or this opportunity plays an indispensable role in promoting the company’s development, and the company has not rejected or abandoned the opportunity.

Third, the willingness of the counterparty.

Whether the counterparty of the transaction expressly expresses its intention to conduct transactions with the company is another important factor in determining whether the business opportunity should be deemed as belonging to the company. When the company’s directors and senior management negotiate with the counterparty to a certain extent, if the counterparty clearly expresses its willingness to transact with the company or sends a draft agreement, the business opportunity rightfully belongs to the company. If the counterparty of the transaction expresses its unwillingness to deal with the company not due to any improper behavior of the company’s directors or senior management, we should remain cautious in determining whether the business opportunity can be recognized as still belonging to the company.

Fourth, whether the directors and senior management become aware of the business opportunity in the process of performing their duties, and whether they have used the company’s human and material resources to obtain it.

If the directors and senior management learn of a business opportunity due to personal relationships without using any company resources, and the company has no reasonable expectations for the benefits, the business opportunity should not be deemed to belong to the company. Whether transaction opportunities obtained by directors and senior management before taking office or after leaving office can be recognized as business opportunities of the company, it is a much more complicated scenario involving many factors to be taken into consideration.

We noticed that in certain cases, some courts use the company’s financial resources as one of the criteria in determining the company’s business opportunities. We find this is inappropriate. Indebted operation and high debt ratio may be normal status in certain industries. Financial pressure of a company should not be the ground to deprive it of business opportunities. Some other courts make the judgment based on whether the company has made internal resolutions on business opportunities. We think this is also inappropriate. Business opportunities come in various financial sizes, and not all of them require resolutions of the shareholder’s meeting or shareholder’s general meeting or the board of directors. Even if resolutions are needed, it should be examined whether the transaction has progressed to the stage of requiring corporate resolution. The court should not take corporate resolution as a prerequisite in determining the existence of company’s business opportunities.

Judicial courts have not reached a consensus on how to ascertain the boundary of company’s business opportunities, neither has the academic community. With the continuous development of China’s market economy, companies have become the most important component of the market. Theft of business opportunities by directors or senior management is damaging both to the company and the business environment, which is why it is imperative to establish practical standard for ascertaining the business opportunities.

Mr. Chaoyi Ji
the managing partner and head of the Dispute Resolution team at East & Concord Partners