The folks over at the European Chinese Law Research Hub
(with thanks to Marianne von Blomberg, Editor ECLR Hub, Research
Associate, Chair for Chinese Legal Culture, University of Cologne) have
posted three papers, one each by Fang Ma (University of Portsmouth); Hannak Klöber (Universoty of Cologne) and Larry Catá Backer (Pennsylvania State University).
As legislators in China seek to improve the corporate governance environment, Fang Ma took a closer look at a second draft of the Company Law amendment and its implications especially concerning directors’ duties and the protection of shareholders’ interests.
Social credit is mostly about corporate regulation - however, personal social credit files are also being created and pose a major challenge to personal information protection. Hannah Klöber investigated the current legal framework with regard to how well it can ensure the accuracy of personal social credit information.
Finally, Chinese state-owned companies go global and spark concerns outside of China as they present an "anomaly in the operation of the well-ordered construction of a self-referencing and closed system of liberal democratic internationalism." Larry Catá Backer sheds some much needed light on these institutions.
The three work nicely together. Fa suggests the path toward effective global convergence of corporate law, but with national characteristics. Klöber suggests convergence around the challenges of personal data integrity in a regulatory universe in which the autonomous person is increasingly reduced to an aggregate et of data. Backer suggests the challenges for aligning risk valuation against norms where those norms are themselves valued by reference to distinct systems the valuation of which carries with it national characteristics. All center on Chinese developments, but all have consequences that leak into the spaces once the sole domain of liberal democratic internationalism.
I am cross posting the essays below. The original ECLRH post may be accessed HERE: Fang Ma; Hannah Klöber; and Larry Catá Backer. And as a plug for the marvelous work at the European Chinese Law Research Hub: if you have observations, analyses or pieces of research that are not publishable as a paper but should get out there, or want to spread event information, calls for papers or job openings, or have a paper forthcoming- do not hesitate to contact Marianne von Bloomberg.
What does the Proposed Amendment to the Chinese Company Law Hold?
A new paper by Fang Ma
Chinese company law is going through significant reforms. The current law, first passed by the National People’s Congress in 2005 and last amended in 2018, has played an important role in establishing a modern enterprise system and promoting the development of a socialist market economy in China. As stated in the explanatory notes for the first draft amendment to the Company Law, the current law provides the fundamental and theoretical legal framework for companies; however, it lacks detailed rules, in particular, in the areas of directors’ liabilities and the protection of shareholders and creditors. This article maps the proposed amendments and draws parallels to Company Law in the United Kingdom.
To mend these shortcomings, two amendments have been proposed: The first draft amendment was published on 24 December 2021 by the Standing Committee of the 13th National People’s Congress for soliciting comments from the public. Based on the feedback and rounds of consultation, the amendment was revised and the resulting second draft amendment was issued on 27 December 2022. The probably final round of deliberation is expected in August 2023. This is the third major reform of the 2005 Chinese Company Law following the amendments in 2013 and 2018. As laid out in the explanatory notes that accompany the draft amendment, the main purposes of this Company Law reform are to “deepen state-owned enterprise reform, improve business operation environment, improve the protection of property rights and optimize fundamental systems for the capital market”.
The stated aim manifests in the following concrete changes:
- The Chinese party-state is given stronger controls over its state-owned enterprises, as decisions made in previous years by the Central Committee of the CPC are woven into the Company Law.
- Some clarity on the duty of diligence (勤勉义务) and the duty of loyalty (忠实义务): While the 2005 Company Law stipulates that directors, supervisors and senior managers all owe a duty of diligence and a duty of loyalty to their companies, and lists some activities they must not engage in, specific rules for the application of these requirements are lacking. The proposed amendment (draft article 180) defines the duty of diligence similarly to the duty to exercise reasonable care, skill and diligence as stipulated in the United Kingdom’s 2006 Company Act.
- Detailed rules on self-dealing: The draft amendment suggests detailed notification and approval procedures for when supervisors, directors and senior managers enter into a contract or transaction with the company (draft article 183).
- Expansion of the corporate opportunity doctrine: Under the current Company Law, the duty to refrain from taking advantage of one’s position to acquire a business opportunity that belongs to the company applies to directors and senior managers only. The draft amendments not only extend this duty to supervisors, but also lay out exceptions such as when the business opportunity was rejected by the board of directors or the shareholder meeting (draft article 184).
- Clarification of the joint liability of directors, senior managers and controlling shareholders with the company (draft articles 190 and 191): Directors and senior managers will be jointly liable with the company if they have, either deliberately or due to gross negligence, caused losses to other people when they are performing their duties.
- Giving teeth to corporate social responsibility duties: The Company Law requires businesses to not only abide by laws and regulations, but also “observe social morals and business ethics, act in integrity and good faith, accept the supervision of the government and the public, and bear social responsibility” (Article 5). Critiques have pointed out that this provision is a paper tiger as it is broad and comes without remedies. While the draft amendment does specify who the stakeholders are (employees, consumers, and the environment), concrete measures for the enforcement of this rule are not proposed (draft article 20).
- Finally, the proposed amendment introduces the double derivative action (draft article 188). Derivative actions are suits brough by shareholders in the name of the company against a third party, normally a director of the company. The institution of the double derivative action, as laid down in the draft Article 188, allows a shareholder in a parent company to sue the directors, supervisors and senior managers of its wholly-owned subsidiary.
This paper explores the rationale for the current law reform and analyses the proposed changes in relation to directors’ duties and the protection of shareholders’ interests. It also assesses the relevant law in the 2006 Companies Act of the United Kingdom in order to draw comparative lessons for future company law reforms in China. The proposed amendments have not solved all of the problems in relation to the current law on directors’ duties and shareholders’ derivative actions; nevertheless, they undoubtedly reflect Chinese legislators’ effort to improve the corporate legal framework and enhance corporate governance in China. If these proposals are adopted in the final legislation, they will bring significant improvement to company law and corporate governance in China; ultimately, they will make Chinese companies more competitive and attractive to both home and foreign investors.
The paper Chinese Company Law Draft Amendments: Strengthening Directors’ Duties and Improving Shareholders’ Protection was published in the International Company and Commercial Law Review.
Dr Fang Ma is a Senior Lecturer in Law at the University of Portsmouth in the UK. Her research interests include Company law and Corporate Governance in China and in the UK. She can be contacted at fang.ma[at]port.ac.uk.
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Rules for Ensuring the Accuracy of Social Credit Data
A new paper by Hannah Klöber
Born from an intention to establish a financial credit (investigation) system, the Social Credit System (SCS) is a mega-project to improve governance capabilities and legal compliance. However, the modern publicly run SCS resembles rather an interconnected set of initiatives under the umbrella term of creating “trust” than being a comprehensive system to monitor and rank all citizens. Currently, the basic components at the national level that are being created are the information infrastructure and the joint enforcement mechanism. Both components rest on the sharing among agencies and the general disclosure of compliance information on subjects, to on the one hand punish and educate, but also to facilitate assessing any entity’s “trustworthiness”. They constitute an emerging state-led data processing mechanisms which may strongly impact the lives of individuals, companies, social organizations and other actors throughout China, with the centrepiece being the information it holds about its subjects. Acknowledging the wide-reaching consequences that the contents of social credit information about a subject may have, this article (draft) asks: What legal framework do SCS builders create to guarantee the accuracy of personal social credit information?
Why is Personal Data Accuracy Important?
One area where social credit information is currently bringing about consequences for subjects is the joint enforcement mechanism – or “joint disciplining for trust-breaking”. The joint enforcement mechanism is mostly set up by State Council policy documents, promoting desired behaviours and discouraging unwanted ones through so-called blacklists and redlists. Listing might lead to punishment or benefits by unrelated actors (as redlists confer benefits, they are much less problematic and thus not discussed in detail). It has to be noted that the mechanism’s main focus rests on companies but there is a corporate overlap, as leading personnel can get blacklisted due to their company’s wrongdoings. So far, there is no real central management to these lists. For the purpose of analysing the legal aspects of joint enforcement, four stages must be differentiated: preparatory acts before blacklisting, the blacklisting decision, the publication of the blacklist and the ensuing disciplinary action. They can be based on the same facts and norms but may be executed by different actors and be linked together.
To achieve its goal of promoting trust and steering behaviour, the SCS needs large amounts of accurate data. Simultaneously, data inaccuracy in this behemoth of a reputational shaming machine could potentially harm a large number of people: Because open government data is intended to be reused, it is very hard to control once publicised. For example, if an entity is entered on one of the many blacklists for trust-breaking, she may find her name on display in public spaces as well as online platforms, screenshots of which may be further shared across social media. The inaccuracy discussed here encompasses only factual errors, thus instances where data is not correct, complete, or timely, resulting from inattentiveness during handling. Legal errors on the other hand concern the application of law (for example excessiveness of punishment) and are outside the scope of this study.
What Legislation is There?
The looseness of the concept of social credit and the plurality of actors involved make the regulatory situation quite complex. There is no national social credit law (although a draft for soliciting comments from the public has been published in November 2022), but a host of special sectoral and provincial regulations dealing with different social credit initiatives create a jumbled regulatory landscape. Apart from this, in the context of personal data accuracy national legislation such as the 2021 Personal Information Protection Law (PIPL) and the Regulation on Open Government Information (ROGI, revised in 2019) apply. Administrative legislation on procedural issues should be applicable, but the placement of joint enforcement measures under administrative law is still disputed.
What Does it Offer?
Basic Definitions
Generally, social credit is defined as the status of information subjects complying with legally prescribed obligations or performing contractual obligations in their social and economic activities (see e.g., Shanghai Municipal Social Credit Regulations art 2(1), Tianjin Municipal Social Credit Regulations art 2(2)), while social credit information is defined as (objective) data and materials that can be used to identify, analyse and judge the status of information subjects’ compliance with the law and contract performance (see e.g. Shanghai Municipal Social Credit Regulations art 2(2), Henan Provincial Social Credit Regulations art 3 (3)). What this means in detail remains unclear, though. Two types of social credit information exist: public credit information and non-public (or market) credit information, depending on the generating entity (state or private actor).
Accuracy Obligations for Data Processors
PIPL and ROGI provide some guidance on how to handle and publish government information, but data quality requirements are not sufficient for the complex processes of the SCS. The examined provincial documents either set up principles for the processing of public social credit data or impose data-quality responsibilities on information providers. The latter can also be found in sectoral regulation, but only in a third of the covered documents.
Notification Requirements
Because of the multi-actor structure of joint enforcement, credit subjects face the problem of recognizing the possibility of rights relief and identifying the right addressee for enforcing their rights. One important way to counteract this situation is notification requirements. The PIPL introduced a general notification obligation in 2021, covering among other things the processor’s name and contact information, and the methods and procedures for individuals to exercise their rights. But proper notification requirements are generally rare among special legislation documents. To best protect credit subjects, notification should occur at all four possible stages of joint enforcement. In the preparatory stage and after the listing decision they are however only seldom found. A few provincial documents provide for the notification of listing, but only for the so-called seriously untrustworthy lists, which cause stricter restrictions than normal blacklists. Some measures consider the publication of blacklists as a form of public notification. Notification of punishment is generally not covered by blacklist management documents, as the listing entity is usually not in charge of punishment. A quarter of the sectoral and most of the provincial documents do not set up any notification procedures.
Review Procedures Prior to Blacklisting
Among the analysed documents, procedures for prior review can be found only in those measures which also stipulate notification before inclusion. None of the norms provide for suspension, however. A clear classification of joint enforcement measures under administrative law would improve the situation, although there is no general administrative procedure law in China.
Access to One’s Personal Credit Information
General access rights are provided by both the PIPL and the ROGI. About half the provincial documents explicitly set up a right to inquire one’s own information. Other regulations appear to take accessibility for granted and only regulate the corresponding procedures for data providers.
Objection Procedures after Blacklisting
If personal information held by the government is found to be incorrect or incomplete, individuals have a general right to request correction under PIPL and ROGI. The content of specific objection procedures among the special legislation is uneven. Two models can be found in the analysed documents: objection to wrong information for a fixed time period after publication of the decision, or a general possibility of objection. In provincial documents, only the latter can be found, while some of the ministerial documents designate no objection possibilities at all. Generally, the stipulated handling time for objections in provincial documents is shorter than in the ministerial regulations, often calling for verification within a few days, rather than weeks. While the State Council calls for the suspension of enforcement during verification procedures, this is rare in implementing documents. On the contrary, some ministries and the SPC explicitly regulate that objection will not cause suspension or impact publication. A compromise, to mark objected information during verification procedures, is employed by almost two-thirds of the provincial documents. The deletion of non-verifiable data is not always required.
Dissemination of Corrected Data throughout the System(s)
The dissemination of corrected data is thinly regulated. Where it is mandated, it often merely requires that other providers of the information are informed. The information subject itself might only be informed of updates and corrections in its social credit information if the change is due to a successful objection the subject has initiated.
A Patchwork
The study finds that special legislation is inconsistent and that national legislation is often too vague to deal with the complicated and diverse processes of the SCS. Further legislation will be needed to standardise procedures. While it is often difficult for data subjects to exercise their rights against first-party collectors, when raised against third party-reusers of data, the problem multiplies. Special legislation by different national actors and local legislators is very diverse, and procedural requirements are often vague, fragmented or missing. Some regulations deviate from protection measures proposed in policy documents. The rules in the examined documents range from almost no regulation to some very promising models in the eastern, economically more developed provinces. The biggest issue remains a lack of solid ex ante control mechanisms, as most relief is only provided after the fact. This is problematic, as the spread of inaccurate data can cause unforeseen consequences, and reputational damage is difficult to repair.
The article The Regulation of Personal Data Accuracy in China’s Public Social Credit System was published in the Hong Kong Law Journal (2023, Vol. 53, No. 1). A free draft is available here.
Hannah Klöber is a Research Assistant at University of Cologne, where she is currently working on her PhD with the Chair for Chinese Legal Culture. Her dissertation deals with the Proportionality Principle in Chinese administrative law, examining it from a comparative perspective, exploring its application by and use for Chinese actors, thereby gaining deeper insight into its function, potential and limitations. She holds a BA and MA in Chinese Regional Studies, Law from Cologne University. She can be contacted at hkloeber[at]smail.uni-koeln.de
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Chinese State-Owned Companies and Investment in Latin America and Europe
A new paper draft by Larry Catá Backer
In the United States at least, there has been an increasing worry
about the state of US relations (economic and political) with Latin
American states. Increasingly that is measured by the extent of Chinese
development of its own political and economic relations with Latin
American and Caribbean states. Europeans, more than most, worry about
this shift in the sources of overseas investments from the perspective
of their now decades long objectives to embed human rights more directly
in economic activities and political life.
US military leaders
have also expressed fears about Beijing’s influence on Mexico’s
communications industry, where 80 percent of telecoms are provided by
Chinese companies, according to General Glen VanHerck, commander of both
the US Northern Command and the North American Aerospace Defense
Command. China is also extending its reach into the ‘Lithium Triangle’
which spans Argentina, Bolivia and Chile: The Chinese battery company
Catl recently struck a deal worth more than $1 billion to develop
Bolivia’s lithium reserves. Some analysts have speculated
this resource-grab constitutes a ‘lithium monopoly in the making’. The
benefits gained from these investments are coupled with the willingness
of Latin American countries to accept loans worth tens of billions of
dollars from China.
At the center of Chinese overseas investment
are their state-owned and controlled enterprises. The Chinese
state-owned enterprise (CSOE) presents an anomaly in the operation of
the well-ordered construction of a self-referencing and closed system of
liberal democratic internationalism, especially as that system touches
on business responsibilities under national and international human
rights and environmental law and markets driven norms. The anomaly is
sourced in the increasingly distinct and autonomous framework principles
within which it is possible to develop conduct-based systems respectful
of both human and environmental rights which are emerging in between
liberal democratic and Marxist-Leninist systems.
This essay considers
the forms and manifestations of these disjunctions where CSOEs are used
as vehicles for the projection of Chinese economic activity beyond its
borders. The essay first situates the CSOE within the political ideology
of its home state. These CSOEs are both creatures of the
political-economic system from which they are constituted and economic
actors seeking to maximize return for investment in a risk reducing
environment. CSOEs are instruments of state power and its
political-economic objectives, as well as value maximizing market
participants. They seek to avoid risk and maximize value-but their
calculation of risk and value are a function of the normative system
from which they are constituted. That, in turn, affects their engagement
with human rights and the sustainability impacts of their operations.
To better understand the CSOE especially as they operate in host states is especially necessary as global and national systems for compliance and accountability are refined, and as national security regimes increasingly constrain the extent and form of inbound public investment. To that end the essay focuses on the formal structures for CSOE supervision by state organs that operationalize the guiding ideology through which they are conceived and operated. This provides the basis for a deeper consideration of the way that the projection of CSOEs abroad is structured within a conceptual cage of policy objectives: specifically, emerging conceptions of socialist human rights, including environmental rights and obligations, and an operational framework in the form of the Chinese Belt & Road Initiative. It is only in the complex interplay of these layers of law, principle, regulation, and guidance described above, that one can begin to see the outline of the normative cage within which human rights can be understood and practiced by CSOEs.
Nonetheless, at its core, the study is about risk- its ideology and the way it is expressed through governance expectations and principles. One speaks here about legal risk (to align the discussion with the 1st Pillar of the UN Guiding Principles), but also of business risk (aligning the markets driven, private law structures of the UNGP 2nd Pillar). More importantly, the sort of risk that one encounters here, in comparing the liberal democratic and Marxist-Leninist models of human rights and sustainability, is intimately tied to the principle of “prevent-mitigate-remedy”, and its administrative-compliance overlay. In a sense, when one speaks to human rights and sustainability, and especially climate change, one is using the qualitative language of rights to speak to the quantitative probabilities of risk of harm, and more importantly risk of irremediable harm. The function of those principles, then, framed through the prevent-mitigate-remedy principle is to provide a formula for valuing those risks, and for placing them within a hierarchy of risk tolerance. Increasingly in liberal democratic regimes, risk tolerance for strategies that do not privilege prevention (and then mitigation and last remedy) are reduced, or in some cases, risk aversion is implicitly or explicitly the result of the application of the “principles” analysis. That is fair enough and represents the culmination of conversation about value choices. Nonetheless, Marxist-Leninist systems approach risk, and risk tolerance, in a different way. That difference is in part a function of differences in the conceptualization of both human rights and sustainability as a function of development and collective prosperity. But it is also in part a reflection, effectively, of what might be preferences for mitigation-remediation (or otherwise exit if the costs of prevention exceed the anticipated vale of an activity), at least indifference as between the strategies as a function of expected value. That poses some challenges for any project that seeks global consensus on what had once been the unchallenged valuations and framework of liberal democracy.
Larry Catá Backer is a W. Richard and Mary Eshelman Faculty Scholar and Professor of Law and International Affairs. He does research in Legal Fundaments, Political Economy and International Relations. Currently working on “Next Generation Law”–data driven governance; the emergence of new global trade regimes (Belt and Road Initiative and America First); and the emergence of new theories of Leninist state organization as they may apply to non-Leninist institutions.
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