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A Memo on Fiduciary Duty and Liability of Employee under Chinese Law

Memorandum
To:     Senior Partner
From:   Senior Associate Bo Zhu
Re:     Singer’s Fiduciary Duty and Liability under Chinese Law
Date:   September 21, 2011
Facts
On March 1953, John Singer was hired by General Automotive Manufacturing Company (”Automotive”) as general manager of its business and affairs. They signed an employment contract, where Singer agreed not to engage in other business or disclose business information to third party.
Singer was experienced at machine work and bolstering business credit. His high reputation attracted large volume of orders, among which were some orders that either Singer deemed as could not be done by Automotive for lack of suitable equipment or Automotive could not do at a competitive price. Without informing Automotive of this situation, Singer forwarded the orders to other competitors and retained secret profits.
Singer finally set up a business of his own, doing the same products with Automotive, while he was still Automotive’s employee and without informing Automotive of it.
The profits of his side line business accrued to $64,088.08 so far.
Issue Presented
1. Whether Singer was liable for breach of fiduciary duty owed to Automotive.
2. What liability Singer would bear if he breached fiduciary duty.
Brief Answer
1. Under Chinese law, Singer was liable for breach of fiduciary duty because he competed with Automotive and appropriated Automotive’s business opportunities.
2. Singer must account for the profits he obtained and render the profits to Automotive.
Discussion
1. Singer Owed Fiduciary Duty to Automotive
General Principles of Civil Law of the People’s Republic of China §2 Article 63 stipulates: “[c]itizens and legal persons may perform civil juristic acts through agents. An agent shall perform civil juristic acts in the principal's name within the scope of the power of agency. The principal shall bear civil liability for the agent's acts of agency.” [1] Based on this agent principle, Company Law of the People's Republic of China (“Company law”) §6 Article 148 further provides: “[d]irectors, supervisors and senior managers . . . owe duties of loyalty and diligence to the company.”[2] It follows that Chinese law requires a high-level employee act as an agent in good faith to advance the best interest for the employer.[3]
Here, Automotive hired Singer as its employee to act on its behalf, thus Singer was an agent of Automotive. Singer’s position was the general manager of Automotive, a senior manager defined in Company Law, and therefore, he had a fiduciary duty to act loyally and diligently for Automotive’s benefit.
2. Singer Violated Fiduciary Duty of Loyalty by Competing with Automotive
Company Law §6 Article 149 (5) sets forth that a director or senior manager shall not run the same or similar business with the employer for himself or for others without consent of the shareholders meeting. [4] Thus, it is a statutory obligation for employee to refrain from competing with an employer or acting on behalf of an adverse party.
In this case, Singer initially forwarded Automotive’s orders to its competitors. Furthermore, despite the non-competition clause in his employment contract, he finally set up a business of his own, doing the same business with Automotive, while he was still Automotive’s employee and kept Automotive and its shareholder ignorant. No matter his competition injured Automotive or not, his competitive behavior conformed to the elements included in the non-competition provision of law and therefore, Singer was liable for breach of fiduciary duty of loyalty.
3. Singer Violated Fiduciary Duty of Loyalty by Appropriating Automotive’s Business Opportunity
Company Law §6 Article 149 (5) also specifies that a director or senior manager shall not take advantage of his position to seek business opportunities belonging to the company for himself or for others without consent of the shareholders meeting. This provision requires a senior employee to excise reasonable care and diligence, and bear the duties to act with undivided loyalty, when dealing with the employer’s business opportunities.
Here, Singer received some orders he thought did not fit Automotive. He did not tell Automotive, when Automotive could decide to buy new equipment, recruit workers and expend business to meet the needs of market. Instead, singer exploited his position as Automotive’s general manager, secretly directing the Automotive’s orders, i.e. its business opportunities, to third parties. Moreover, when he eventually established his own business, Singer used Automotive’s orders for his own use. As a result, Singer breached his duty of loyalty by appropriating Automotive’s business opportunities.
4. Singer’s Liability
Company Law §6 Article 149 last sentence provides: “[t]he income of any director or senior manager from any act in violation of the preceding paragraph shall belong to the company.”  Article 150 requires: “[w]here any director, supervisor or senior manager violates laws, administrative regulations or the articles of association during the course of performing his duties, if any loss is caused to the company, he shall make compensation.” These provisions manifest a principle that an agent’s breach subjects the agent to principal’s loss caused by the agent. In light of this, Singer must disgorge all his income to Automotive, and indemnify losses Automotive suffered if any.
Conclusion
Singer was in competition with Automotive and he appropriated Automotive’s business opportunities for himself and for others without permission of Automotive’s shareholders meeting. Therefore, Singer violated Company law’s provisions and was liable for breach of fiduciary duty of loyalty. Singer must disgorge his side line business profits of $64,088.08 to Automotive and indemnify any loss Automotive suffered.
[1] See http://en.chinacourt.org/public/detail.php?id=2696.
[2] See http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=50878. Due to variation of translation, some version of Company law uses the word   “fidelity” instead of “loyalty”.
[3] Company Law does not require low-level employee to bear the fiduciary duty to employer.
[4] Please note that the permission should be from the shareholder meeting, not board of directors or the company itself.
 
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