Could Dismissal of a Director Without Cause Comply with or Violate Employment Law?

An Analysis of Article 3 of the Legal Interpretation V of the Company Law
作者:Lear Gong
2019-07-23 11:50:07

The Regulations of Several Issues Concerning Application of the Company Law of the People’s Republic of China (V) recently published by the Supreme People’s Court (“Legal Interpretation V”) took effect from 29 April 2019, which further clarifies procedural issues dealt with by the company law in the interests of shareholders including medium and small sized investors.

According to Article Three of Legal Interpretation V, if a person who was dismissed from their position as director before the tenure expires with a valid resolution of the shareholder board or meeting claims that such dismissal has no legal effect, the people’s court should not support the claim.

If a person who was dismissed from their position as director brings a severance pay action against the company, the people’s court should decide whether to award the severance pay and its reasonable amount according to relevant laws, administrative regulations, the company’s bylaws or the applicable contract, taking into account the reason for the dismissal, the rest of the tenure, compensation for the director and other factors.  

It seems awkward to include the above clause in Legal Interpretation V, which mainly deals with procedures for shareholders to protect their legal interests from being harmed by associated transactions and other activities done by the company. However, the company’s right to dismiss a director at any time does not agree with the above shareholder’s right. The logic of the clause is that shareholders are bound to dismiss a director who has damaged legal interests of the company or its shareholders.   

Does this clause conflict with the company’s right of conditional dismissal of its employees under the company law?

The relationship between a company and any of its directors is based on the delegation under the civil law, in which either party can terminate the delegation at any time. Either party should indemnify the other party against damages arising from the termination. There are many legal cases that had existed before Legal Interpretation V was taken into action, in which legal authorities agreed with the opinions.

Dismissal of a director who is performing an employment agreement with the company would not necessarily cause a termination of their employment relationship under employment law because employment relationship between an employer and any of its senior managers is bound by employment contract law.

It is known that a person may be appointed as director by the shareholder meeting according to company law without having a employment relationship with the company. In this circumstance, Legal Interpretation V surely applies without dispute, which means that if the director is dismissed, the only possible disputed issue between the director and the company is about severance pay. Someone believes that the severance clause negates the action against acquisition. It may be true to listed or unicorn companies. For limited companies or companies limited by shares that are not listed or acquired. A director who only works for the company and is only paid as director may be greatly affected by the company’s right of unconditional unilateral dismissal. If appointed as director, a person should think over how to make a director agreement through negotiation that can guarantee their rights when they are dismissed. The agreement that involves the applicable director should also be appropriate to other directors, the shareholder meeting and the articles of association of the company. A shareholder as a natural person is very likely to be director. It is interesting to think over interests of the company and other shareholders from the perspective of a shareholder and interests of directors from the perspective of a senior manager. Future legal cases may be helpful to further clarify this provision.      

It is more likely that a director is also a senior manager doing a particular job in the company, for example, general manager or finance, legal or HR director. Dismissal of a director does not mean terminating their employment relationship. A person dismissed from their post as director can still be a senior manager in the same company, though the person will no longer have the right to attend board meetings and exercise the director rights. 

What we aspire to achieve is much better than what we can actually achieve. In most cases, by the time that a resolution is made by a shareholder meeting to dismiss a director, a dispute has arisen between the director and the shareholder meeting. The shareholder meeting usually believes that the director fails to perform their duty of diligence or even acts in a way that damages interests of the company or its shareholders, while the director thinks that the shareholder meeting will use their power to deprive of their management rights when he/she finishes doing his work.  

In my opinion, the relationship between senior management and the company is much more complicated than a short-worded clause in a legal interpretation could clarify. It is more important to balance interests of shareholders represented by the parties involved and skilfully apply laws.

According to Legal Interpretation V, a company can dismiss any person from their post as director without any reason. However, if the company intends to dismiss a director from their concurrent post as senior manager, the company must give an appropriate reason according to employment law.

According to Legal Interpretation V, a dismissed director has no right to claim the invalidity of their dismissal from their post as director, but a dismissed senior manager can file an opposition to their dismissal from their post as senior management on the ground of no mutual agreement reached through consultation. 

Therefore, a company can bind job requirements for directors and senior management together in its bylaws so that it can dismiss a person from their posts as director and senior manager at the same time on the ground of incompetency and change their job to a non-managerial one, whether he/she is unable to meet job requirements for a director or a senior manager. As the employer is obligated to prove that an employee fails to meet job requirements, a company should give proof of the reason for dismissal of a director and senior manager.  

For me, steps should be take to fulfill the above obligation at least include the following.   

a.The job description for a director and senior manager should include job requirements for director and senior management and clearly state that a person who fails to meet job requirements for either of the posts as director or senior manager which are bound together will be seen as failing to meet job requirements for the other post as well. Only people who are able to work as director can be appointed as senior manager and vice versa.

b.Unless a director and senior manager acts in a way that clearly damages interests of the company, etc. when performing their duties, the company needs to provide evidence that he/she has done something wrong when performing their duties as senior manager, especially due to incompetence in leading or instructing their team.  

A company can surely separate job requirements for directors from those for senior management when making bylaws, allowing a person dismissed from their post as director to continue in their post as senior manager. In this case, the company treat a directors and a senior manager differently when paying compensation. When a director and senior manager is dismissed from their post as director, he/she will no longer be given compensation for a director. It is like a medicine that only relieves the symptoms but cannot cure the disease. It can dampen a senior manager’s expectation for income but cannot prevent a dismissed director from using their powers as a senior manager to interfere in the company’s business operations. A company may need to make more complicated handover procedures to avoid a stalemate over its business operations due to dismissal of a director.