East & Concord Partners

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

Judicial assistance and judicial review of foreign-related arbitration in China have made a breakthrough, creating a more diversified and friendly arbitration environment for domestic and foreign enterprises to conduct arbitration in Chinese mainland. China International Commercial Court The China International Commercial Court (CICC) is established by the Supreme People's Court of China (SPC) to adjudicate international commercial cases. CICC's objective is to try international commercial cases fairly and timely in accordance with the law, protect the lawful rights and interests of the Chinese and foreign parties equally, and create a stable, fair, transparent, and convenient rule of law international business environment. The First International Commercial Court is situated in Shenzhen, Guangdong Province, and the Second International Commercial Court in Xi'an, Shaanxi Province. The Fourth Civil Division of SPC is responsible for coordinating and guiding the two international commercial courts. CICC is a permanent adjudication organ established by SPC. Cases tried by CICC shall be heard by a collegial panel consisting of three or more judges. CICC practices the "First Instance being Final". The judgments and rulings made by CICC are final. According to the current system of jurisdiction by level on judicial review of arbitration, judicial assistance and judicial review of foreign-related arbitration shall be adjudicated by the intermediate people's court, and at the same time the "three-level reporting system" shall be implemented. One of the highlights of CICC is that they can directly provide judicial assistance to and conduct judicial review of specific types of foreign-related arbitration, breaking through the current system of jurisdiction by level on judicial assistance and judicial review of arbitration. Specifically, the parties of specific types of arbitration cases are allowed to directly apply to CICC for preservation measures in arbitration, for setting aside or enforcement of international commercial arbitration awards. According to Article 11 and Article 14 of Provisions on Certain Issues Concerning the Establishment of International Commercial Court and Article 34 and Article 35 of Rules of Procedure of the International Commercial Court of the Supreme People's Court (Pilot), the parties of arbitration case of the amount in dispute more than RMB 300 million (US$ [] million) or of other significant influences, if the arbitration is managed by or the arbitral award is made by the arbitration institutions that have been incorporated into the "One-Stop" Diversified Settlement Mechanism for International Commercial Disputes, can directly apply to CICC for judicial assistance to and conduct judicial review of the arbitration, i. e. apply to CICC for preservation measures in arbitration, for setting aside or enforcement of the arbitral award. So far, the arbitration institutions incorporated into the "One-Stop" Diversified Settlement Mechanism for International Commercial Disputes include China International Economic and Trade Arbitration Commission, Shanghai International Economic and Trade Arbitration Commission, Shenzhen International Court of Arbitration, Beijing Arbitration Commission, China Maritime Arbitration Commission, Guangzhou Arbitration Commission, Shanghai Arbitration Commission, Xiamen Arbitration Commission, Hainan International Court of Arbitration (Hainan Arbitration Commission), Hong Kong International Arbitration Centre. While maintaining the stability of the current judicial assistance and judicial review system of foreign-related arbitration, CICC has paved a special approach which is expected to provide efficiency and convenience to the parties. Breakthrough of International Arbitration Institutions in China International arbitration institutions from overseas have experienced an "ice-breaking journey" in managing arbitration cases in Chinese mainland. Article 16 of the Arbitration Law takes the "selected arbitration commission" as one of the essential elements of a valid arbitration agreement, while an arbitration institution established overseas is not an "arbitration commission" in the legislative context of the Arbitration Law, which leads to the risk of invalidation of the arbitration clause that arbitration by an overseas arbitration institution while the place of arbitration is in China. In the Longlide Case, the arbitration agreement stipulates that the dispute shall be submitted to ICC Court of Arbitration for arbitration in Shanghai, China. The Supreme People’s Court issued a reply, arguing that the arbitration agreement has selected a specific arbitration institution, which meets the requirements of Article 16 of the Arbitration Law on valid arbitration agreements and should be determined valid. However, in the Shenhua Coal Case, the Supreme People’s Court held an opinion in its reply that the "arbitration commissions" in Article 20 of the Arbitration Law only refers to arbitration institutions established in China according to the P.R.C law, excluding overseas arbitration institutions. The two replies in the same period seem to have made diametrically opposite determinations, making it easy to cause misunderstanding. In fact, many detours are because Chinese legal practice pays too much attention to "arbitration institution" instead of "seat of arbitration" and takes "location of arbitration institution" as the standard for judging the nationality of an arbitral award. The breakthrough of this problem is reflected in two recent milestone cases. In the Daesung Case, the arbitration clause stipulates that the dispute shall be submitted to Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai. Regarding the dispute over the validity of the arbitration agreement, Shanghai First Intermediate People's Court decided: "the arbitration agreement concerned has the intention of requesting arbitration, stipulates arbitration matters, and selects a specific arbitration institution - SIAC, and therefore should be recognized as valid." Shanghai First Intermediate People's Court further confirmed the opinions of the Supreme People’s Court in the reply of the Longlide Case, reflecting the stable judicial policy. In the Brantwood Case, the arbitration agreement stipulates that the dispute shall be submitted to the ICC Arbitration Commission for arbitration at the project location (Guangzhou, China) according to international practice. After making the arbitral award, Brantwood applied to Guangzhou Intermediate People's Court for recognition and enforcement of the arbitral award. Guangzhou Intermediate People's Court made a civil ruling: "the arbitral award concerned is an arbitral award made by an overseas arbitration institution in Chinese mainland and can be deemed as a foreign-related arbitral award in China. If the Respondent failed to perform the arbitral award, Brantwood may apply to the Intermediate People's Court of the place where the Respondent is domiciled or where its property is located for enforcement with reference to Article 273 of the Civil Procedure Law.” This is the first time that Chinese courts have made clear the nature of awards made within the territory of China by overseas arbitration institutions, which is of far-reaching significance. In this case, Guangzhou Intermediate People's Court did not evade the problem of the nationality of the arbitral award, did not follow the old "standard of location of arbitration institution", but, following the international rules, determined the nationality of the arbitral award according to the standard of the seat of arbitration and pointed out the enforcement basis under Chinese laws. At present, the agreement for submitting disputes to an overseas arbitration institution for arbitration managed in Chinese mainland has been recognized by Chinese laws. However, whether the parties can and how to apply for judicial assistance and judicial review remains to be answered by legislation or trial practice. The root of the problems is still the standard for determining the nationality of arbitral awards. We expect that when the Arbitration Law and the Civil Procedure Law are revised, the seat of arbitration will be clearly taken as the standard for determining the nationality of arbitral awards, thus facilitating the arbitration activities managed by overseas arbitration institutions to be fully compatible with and supported by China's arbitration procedure laws. Mr. Chaoyi Ji the managing partner and head of the Dispute Resolution team at East & Concord Partners