1. Definition and determination of actual controller
(1) Definition of actual controller
| Companies Act 2018 | Companies Act 2023 |
| Article 216:The meanings of the following terms in this Law: (3) "Actual controller" refers to a person who is not a shareholder of the company, but is able to actually control the company's behavior through investment relations, agreements or other arrangements. | Article 265:The meanings of the following terms in this Law: (3) "Actual controller" refers to a person who is able to actually control the company's behavior through investment relationships, agreements or other arrangements. |
Although the Company Law has a clear definition of the actual controller, it has been criticized by the academic and practical circles for excluding shareholders from the actual controller. The newly revised Company Law (revised in 2023, hereinafter referred to the newly revised Company Law in 2023 without indicating the time of revision) shifts the key to the identification of the actual controller from the formal element of identity to the substantive element of control, which fills the loopholes in the law, solves the inconsistency of theoretical logic, and solves the problem that it is difficult to identify the actual controller with the status of a shareholder in practice.
(2) The relationship between the actual controller and the controlling shareholder
From the perspective of company law, the legislation divides the entities that have control over the company into two categories, namely the controlling shareholder and the actual controller. The definition of a controlling shareholder is set out in the table below:
| Companies Act 2018 | Companies Act 2023 |
| Article 216:The meanings of the following terms in this Law: (2) "Controlling shareholder" refers to a shareholder whose capital contribution accounts for more than 50 percent of the total capital of a limited liability company or whose shares account for more than 50 percent of the total share capital of a company limited by shares; | Article 265:The meanings of the following terms in this Law: (2) "Controlling shareholder" refers to a shareholder whose capital contribution accounts for more than 50 percent of the total capital of a limited liability company or whose shares account for more than 50 percent of the total share capital of a company limited by shares; |
The definition of a controlling shareholder follows the provisions of the 2018 Company Law and has not been substantially modified, except for the deletion of the term "general meeting of shareholders", which is based on the statement that the Company Law has abolished the general meeting of shareholders as a whole, rather than a modification of this definition. According to the Interpretation of the Company Law of the People's Republic of China, a controlling shareholder is a direct holding relationship, and the first paragraph of the definition is a description of the absolute controlling shareholder, and the second paragraph is a description of the relative controlling shareholder.
By comparing with the definition of actual controller, it can be seen that the controlling shareholder and the actual controller have different emphases, the controlling shareholder emphasizes a direct holding relationship, which can usually have the effect of actually controlling the company's behavior, while the actual controller focuses on the results of the actual control of the company's behavior, and its control over the company's behavior can take various forms, such as direct holding, indirect shareholding, entrustment and other ways. However, in practice, under the single shareholding structure, the controlling and holding company control are generally not separated, and the controlling shareholder is usually also the actual controller, and the relationship between the two is as follows:
(3) The form of expression of the actual controller
Through the provisions of Article 265 of the Company Law, it can be seen that the actual controller is usually determined to complete the actual control of the company through "investment relationships, agreements or other arrangements".
1. Investment relationship through indirect shareholding or equity holding. For example, in the cases (2020) Zui Gao Fa Zhi Min Zhong No. 1905 and (2021) Zui Gao Fa Min Shen No. 241, the Supreme People's Court held that Zhao was able to control the actual operation and management of the company involved in the case through indirect shareholding and Chen Mouxu through nominee shareholding, and should be recognized as the actual controller.
2. Through various types of agreements. For example, in the VIE structure, China Shipping Shell Company controls the domestic company by agreement, and also controls the voting rights through the voting rights entrustment agreement, and controls the sales and operation rights of the main business through the technology transfer agreement.
3. Through special relationships such as relatives. For example, in the cases (2021) Zui Gao Fa Min Shen No. 4969 and (2021) Zui Gao Fa Min Shen No. 4488, the Supreme People's Court found that Zhou Mouping and Liang Mourong took advantage of their special relationships with shareholders or relatives of the legal representative to actually control the operation and management of the company involved in the case, and should be determined to be the actual controllers.
4. Control the company's certificate seal through key positions. For example, by using the positions of legal representative, general manager, director and other positions of the company for a long time to control the company's official seal, license, financial account books, etc., the normal operation of the company has actually been controlled.
2. The Company Law increases the liability of the actual controller to serve as a de facto director of the company
| Companies Act 2018 | Companies Act 2023 |
| Article 147.1 Directors, supervisors and senior managers shall abide by laws, administrative regulations and the articles of association of the company, and shall have a duty of loyalty and diligence to the company. | Article 180 Directors, supervisors and senior officers Managers have a duty of loyalty to the company, and shall take measures to avoid conflicts between their own interests and the interests of the company, and shall not use their authority to seek improper benefits. Directors, supervisors and senior management have a duty of diligence to the company, and shall exercise reasonable care in the best interests of the company in the performance of their duties. Where the controlling shareholder or actual controller of a company does not serve as a director of the company but actually performs the company's affairs, the provisions of the preceding two paragraphs apply. |
The so-called "de facto director" refers to the controlling shareholder or actual controller who does not serve as a director of the company but actually performs the company's affairs. If it is found that the de facto director shall bear the same duty of loyalty and diligence as the director, and shall be liable for compensation if the breach of the duty of loyalty and diligence causes losses to the interests of the company or shareholders.
With regard to the determination of de facto directors, the core lies in the determination of "actual execution of corporate affairs": the execution of corporate affairs by the department should refer to the corporate affairs performed by the directors in accordance with their powers. Generally speaking, a controlling shareholder or actual controller who is not a director can only conduct "control acts" at the level of the shareholders' meeting, and even if the control infringes upon the interests of the company or other shareholders, in principle, it should be restrained by the relevant provisions of the Company Law such as articles 21, 22 and 23 on abuse of shareholders' rights, and it is not appropriate to directly determine that they are "de facto directors". However, only when the controlling shareholder or the actual controller has exceeded the scope of the exercise of the powers of the shareholders' meeting and directly exercises the powers of the directors or the board of directors, can it be determined that the controlling shareholder and the actual controller actually carry out the company's affairs, such as participating in the resolutions of the board of directors and entering into agreements in the name of the directors, for details, please refer to the enumeration of the powers and powers of the board of directors in Article 67 of the Company Law.
3. The Company Law increases the liability of the actual controller to serve as a shadow director and senior executive of the company
| Companies Act 2018 | Companies Act 2023 |
| Article 192 Where the controlling shareholder or actual controller of a company instructs a director or senior management to engage in an act that harms the interests of the company or its shareholders, it shall be jointly and severally liable with the director or senior manager. |
This article is a new provision of the so-called "shadow Dong Gao". Proceeding from the meaning of this article, the form of liability of the shadow Dong Gao and Dong Gao stipulated in it is tort liability. The Company Law does not impose the same duty of loyalty and diligence on Shadow Dong Gao as Dong Gao, but stipulates it in the form of tort liability, which means that the identity of Shadow Dong Gao does not need to be determined based on the continuity and habituality of the instructed acts, but only needs to be determined in the event of infringement damages.
In view of the fact that the form of liability is tort liability, which is similar to the form of instigation tort, the constitutive elements of the tort liability of the shadow Dong Gao can be summarized with reference to Article 1169 of the Civil Code:
1. The instructor has instructive behavior. Second, the directive has the meaning of "order", "instruct" and "order", which shows that the status of the directive should be higher than that of the instructee, or that the instructer has sufficient influence over the company to deprive the instructee of its own expression, and these characteristics are completely consistent with the characteristics of the controlling shareholder and the actual controller. Thirdly, there can be a variety of ways of instruction here, including explicit, implicit, or any other method that conforms to the habits of the instructing and the instructed person, and whether it constitutes an instructive act needs to be determined in light of the specific case. Finally, the instructional act is similar to the instigation act but there are certain differences, the instruction should have a higher coercive nature to a certain extent, and the instructed person has less room to express his own will, while the instigated person has more space for his own expression of his own intention in the instigation.
2. The instructed person has carried out acts that harm the interests of the company or shareholders under the instructions. First of all, the subject of the instructed person is limited to directors and senior executives, and supervisors are excluded. Second, the instructed person should have carried out the act of violating Dong Gao's duty of loyalty and diligence based on the instructions of the instructor, rather than on his own will. Finally, a breach of the duty of loyalty and diligence is detrimental to the interests of the company or its shareholders.
3. There is a causal relationship between the behavior of the instructed person and the damage to the interests of the company or shareholders. The instructed party is the subject of the actual infringement, the directing party is similar to the subject of instigating the infringing position, and the instructed person commits the tortious act under the instruction of the instructor, and the two have common intent, so as long as there is a causal relationship between the instructed's tortious act and the damage result, all the damage results can be attributed to the instructee and the instructor to be jointly borne.
4. The instructor and the instructed person have common intent. The directing party and the instructed person are similar to a form of joint tort liability in the form of instigation, so the directing party and the instructed person should have a common intention for the occurrence of the damage result, that is, the directing person deliberately instructs the instructed person to engage in acts that harm the interests of the company or shareholders, and the instructed person also knows that the acts of accepting the instructions will harm the interests of the company or shareholders.
The identification of "de facto directors" focuses more on the identification of identity, that is, if the controlling shareholder or actual controller is determined to be a "de facto director", all subsequent acts shall bear all the duties of loyalty and diligence of directors under the Company Law; Executives who harm the interests of the company or shareholders shall be jointly and severally liable with the directors and executives.
4. Determination of the liability of the actual controller for abusing the right of control to harm the interests of creditors
Article 23 of the Company Law is mainly applicable to the determination of liability of the actual controller of the company for abusing control to harm the interests of creditors, which is amended as follows:
| Companies Act 2018 | Companies Act 2023 |
| Paragraph 3 of Article 20 Where a shareholder of a company abuses the independent status of the company's legal person and the limited liability of shareholders to evade debts and seriously harm the interests of the company's creditors, he shall be jointly and severally liable for the company's debts. | Article 23 Where a shareholder of a company abuses the independent status of the company's legal person and the limited liability of the shareholders to evade debts and seriously damage the interests of the company's creditors, he shall be jointly and severally liable for the company's debts. Where a shareholder uses two or more companies under its control to carry out the acts specified in the preceding paragraph, each company shall be jointly and severally liable for the debts of either company. In a company with only one shareholder, if the shareholder cannot prove that the company's property is independent of the shareholder's own property, he shall be jointly and severally liable for the company's debts. |
The personality denial system has been applied for many years and is the main basis for pursuing the liability of corporate shareholders for abusing shareholder rights to harm the interests of creditors. The actual controller of a company can be divided into two categories: those who have the status of shareholders and those who do not, and for the actual controllers who have the status of shareholders, Article 23 of the Company Law can be directly applied to pursue liability. However, for the actual controller who does not have the status of a shareholder, if he wants to be held liable, because the Company Law does not directly stipulate it, it can only rely on the analogous application system of the law.
(1) Determination of the liability of the actual controller with the status of a shareholder when harming the interests of creditors
If the shareholders of a company abuse their limited liability and the status of a legal person to evade debts and damage the interests of creditors, the company has lost its legally independent personality at this time. If the actual controller who is a shareholder is himself a shareholder of the company, he uses his control over the company to evade debts and harm the interests of creditors. In terms of the application of law, this article is directly applied, and there is no legal obstacle to determining that it and its affiliates are jointly and severally liable for the company's debts.
Paragraph 1 of Article 23 of the Company Law provides for a vertical personality denial system, and paragraph 2 provides for a new horizontal personality denial system. The horizontal personality denial system has increased the scope of the crackdown on the actual controller's use of affiliated companies to transfer property to the detriment of creditors' interests, and plugged the loopholes. The law clarifies that shareholders or affiliated companies shall be jointly and severally liable for the company's debts.
(2) The determination of the liability of the actual controller who does not have the status of a shareholder when harming the interests of creditors
<中华人民共和国公司法>Articles 18, 19 and 20 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application (II) respectively stipulate that in the liquidation and dissolution proceedings of a company, if the creditor suffers losses due to the actual controller, the creditor has the right to claim that the actual controller bears the corresponding liability for the company's debts. This is the only direct provision that can be found that the actual controller is liable to creditors under the current system of corporate laws and regulations, and this article is the responsibility of the actual controller to creditors under specific circumstances, which is not universal, and cannot solve the situation that a large number of actual controllers abuse their control to evade debts and harm the interests of creditors in judicial practice.
It can be seen that in the vast majority of situations in judicial practice, if the actual controller of a non-shareholder uses his control to evade debts and harm the interests of creditors, the biggest obstacle faced by creditors who want to pursue their responsibilities is that there are no direct provisions of the law. Theories and judicial practice believe that there are three potential paths for creditors to choose, such as infringement lawsuits, subrogation lawsuits or revocation lawsuits, and the application of the legal person personality denial system by analogy. However, in light of the Supreme People's Court's cases, the current trend in judicial practice is to apply the legal person personality denial system by analogy.
In the (2019) Zui Gao Fa Min Zhong No. 30 case, the Supreme People's Court held that "Du Minhong and Du Mihong, as the actual controllers of Nengsheng Company, abused their control to evade debts, which seriously damaged the interests of Sinopec Jiangxi Branch." Therefore, it is not improper for the original judgment to apply the provisions of Article 20, Paragraph 3 of the Company Law of the People's Republic of China by analogy";
In the case (2020) Zui Gao Fa Min Zhong No. 185, the Supreme People's Court held that "the corporate personality denial system aims to correct the imbalance in the protection of the interests of creditors under the limited liability system under certain circumstances. Other entities that are not shareholders of the company but have an association or control relationship with the company harm the interests of the company's creditors through the operation or control of the company are homogeneous with the abuse of the company's personality by the shareholders of the company to harm the interests of creditors. In this regard, based on the principles of fairness and good faith, the provisions of paragraph 3 of Article 20 of the Company Law of the People's Republic of China should be applied by analogy to achieve substantive justice";
In the case (2020) Zui Gao Fa Min Shen No. 1106, the Supreme People's Court held that: "Although Wang Hongjun is not a shareholder of Weiqi Garden Company, he is the husband of Zhang Kun, a shareholder of Weiqi Garden Company, and as a representative of Weiqi Garden Company, he signed a Cooperation Agreement with Suzhou Kehuan Company, and exercised the power to approve the payment of Weiqi Garden Company. Under the circumstance that Weiqi Garden Company was unable to repay the loan in a timely manner, Wang Hongjun voluntarily issued a Letter of Guarantee to guarantee that it would be liable for the repayment of the debts of Weiqi Garden Company, and on this basis, the original trial court found that Wang Hongjun was the actual controller of Weiqi Garden Company and ruled that Wang Hongjun was jointly and severally liable for the debts of Weiqi Garden Company, and it was not improper to apply the law."
In the above-mentioned case, neither of the actual controllers is a shareholder of the company, but the Supreme People's Court's reasoning for the adjudication mainly holds that the legislative purpose of the personality denial system is to avoid malicious infringement of the interests of creditors under the circumstance of limited liability, and that the abuse of control by the actual controller and the abuse of the independent status of the legal person by the shareholders are both serious infringements on the interests of creditors in nature, so the legal person personality denial system should be applied by analogy. Although the mainland is not a case law country, the precedents of the Supreme People's Court usually have the guiding significance of similar cases, which has both a theoretical basis and high efficiency, and is also the most recognized method in the theoretical and practical circles.
V. Conclusion
The amendment to the Company Law has improved the definition of the actual controller of the company and the determination of liability, in particular, drawing on foreign laws, establishing the system of "shadow directors" and "de facto directors", and adding direct regulatory measures against the abuse of control by the actual controller. Combined with the application of the legal personality denial system by analogy, the actual controller's internal and external legal liabilities are strengthened through direct and indirect regulation, which strengthens the protection of the interests of the company and creditors, and also demonstrates the state's determination to further restrict the abuse of control by the actual controller at multiple levels and from multiple angles.
Nevertheless, the current revision of the Company Law has also partially supplemented it. In view of the differences in the legal systems and legal environments between mainland and foreign countries, different opinions may arise on the application of judicial practice in the future, which depends on the issuance of corresponding judicial interpretations to refine the provisions in the future. The Company Law does not determine the application of the system of denial of legal personality by analogy or judicial interpretation of the actual controller's abuse of control, resulting in great resistance to the application of the law in judicial practice in various places, which is not conducive to protecting the interests of creditors, the company and internal minority shareholders. (Hai Chinese)
About the Author
Qiu Maobo
Hiways Senior Partner (Limited Interest)
Mr. Qiu Maobo, director of Haihua Yongtai Corporate and Commercial Business Committee, has been practicing for 16 years, mainly engaged in corporate and commercial litigation and investment and mergers and acquisitions, and has served as the legal director of large group companies and listed companies for a long time, the company's director and chairman of the board of supervisors, etc., proficient in corporate law, corporate investment and financing related legal business, has rich experience in dealing with complex corporate and commercial disputes, and provides perennial legal counsel services for many well-known brands.
Li Kunpeng
Hiways Wing Tai lawyer
Li Kunpeng, a practicing lawyer at Hiways Yongtai Law Firm, holds a master's degree in law from East China University of Political Science and Law, and has patent agent qualifications, fund practice qualifications, and securities practice qualifications. His main practice areas are corporate commercial legal business, contract legal business, intellectual property business, labor dispute business and perennial legal counsel business, and he has rich practical experience in the fields of dispute resolution and compliance risk control. The service customers involve a number of large Internet technology companies, design consulting companies, agricultural products companies and construction companies.
Editor: Qin Zheng