News and developments
Analysis regarding the Development of D&O Liability Insurance System in China under 2023 PRC Company Law
constitutes a form of professional liability insurance which covers the civil liabilities incurred by directors, supervisors, and senior executives (hereinafter referred to as “Directors and Officers”) in defending against the claims brought by companies, shareholders or third parties. It serves as a crucial cornerstone of corporate governance for listed companies. Originating from the Common Law system, D&O Insurance provides coverage for directors and senior executives. Notably, within the civil law system and the Chinese corporate governance system, D&O Insurance coverage has expanded to encompass a company’s supervisors.
The enactment of the revised Securities Law (2019 revision) marked a significant milestone in China’s regulatory and restraint mechanism, continuously strengthening oversight and liability restraint mechanism on Directors and Officers. Consequently, there is a growing recognition among companies, both listed and non-listed, of the imperative nature of D&O Insurance as a safeguard against potential liabilities. Thus, the demand for D&O Insurance as a risk protection for Companies, including listed and non-listed ones, as well as Directors and Officers continues to intensify.
On December 29, 2023, the 7th Session of the Standing Committee of the 14th National People’s Congress voted to adopt the newly revised Company Law of the People’s Republic of China (hereinafter referred to as the “2023 PRC Company Law”), which came into effect on July 1, 2024. The 2023 PRC Company Law, for the first time, explicitly encourages companies to purchase D&O Insurance and requires the board of directors to report the relevant details regarding the D&O Policy purchased at the shareholders’ meeting.
The legislation pertaining to D&O Insurance represents a proactive response to market demands aimed at encouraging and promoting its adoption. It further underscores the importance of securing D&O Insurance for Chinese companies. In order to elevate the corporate governance standards, the 2023 PRC Company Law systematically clarifies the liabilities of Directors and Officers. From the application scope, coverage subjects and approval procedure, the 2023 PRC Company Law constantly expands and refines the liabilities of Directors and Officers while establishing the D&O Insurance system. Notable changes include the extension of the application scope to encompass non-listed companies, broadening coverage to include all directors rather than solely independent directors, and modifying the approval process from shareholder meeting approval to post-purchase reporting to shareholders. The evolving business environment has prompted the continuous enhancement of the D&O Insurance system.
Authors : Hao Zhan, Jia WAN, Guangrui Cheng
- The Legislation of D&O Insurance System
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- embezzling the property or misappropriating the funds of the company;
- depositing the funds of the company into an account opened in his/her own name or in the name of any other individual;
- giving bribes or accepting any other illegal proceeds by taking advantage of his/her power;
- taking commissions from the transactions between the company and any other person into his/her own pocket;
- unlawfully disclosing the confidential information of the company; or
- other acts in violation of the obligation of loyalty to the company.
- Illustration of Related Party Transactions
- Obligation of Listed Companies to Disclose Information of Shareholders and Actual Controllers
- Compensation Liability for Losses Caused by Directors and Officers to the Company
- Compensation Liability for Damages Caused by Directors and Officers to A Third Party
- Establishment of A Dual Derivative Action System
- Clarification of Duties and Obligations
- Increasing Underwriting Risk
- Insurance Policy Design
- Consideration of the Differences Between Listed Companies and Non-listed Companies
Authors : Hao Zhan, Jia WAN, Guangrui Cheng