The ‘De Facto Director’ System Under China's New Company Law: Criteria for Determination and Assumption of Responsibility

Abstract

One of the significant achievements of the revision of the Company Law of the People's Republic of China (2023 Revision) is the further refinement of the fiduciary duties of directors, supervisors, and senior management, which are reflected in the ‘de facto director’ provision. This refinement was made by combining beneficial explorations in China's judicial practice with mature experiences from foreign laws. This revision also provides concrete responses to numerous issues of concern to the legal community, further solidifying the duty and liability framework for directors, supervisors, and senior management centered on the duties of loyalty and diligence. However, Article 180(3) of the new Company Law does not provide detailed guidance on how to determine ‘actual management of company affairs.’ As a result, the specific criteria for identifying a ‘de facto director’ remain unclear in both legal norms and legal application, necessitating further clarification of its constituent elements. This paper will analyze relevant cases based on the ‘de facto director’ provision introduced after this amendment, comprehensively analyze the court's approach to determining ‘de facto directors’ in practice from multiple perspectives, and then summarize reasonable criteria for determining ‘de facto directors’ by combining normative and theoretical perspectives. This study also focuses on the issue of liability for breach of the duty of loyalty and diligence by de facto directors in China. From a comparative law perspective, it explores the implications and lessons from foreign legislative examples for China, aiming to assist de facto directors in assuming liability in accordance with the law, further refine the theoretical framework of de facto director liability, and contribute to judicial practice.