Company Law and Limits of the Rule of Law in China

Abstract

This article discusses the extent to which rule of law principles have been embraced within the language, principles and practice of China’s Company Law. The paper discusses different understandings of the rule of law that are to be found in the wider literature. Whilst China has affirmed the principles of legality, the 1993 Company Law adopted a narrowly prescriptive approach; at the same time, the State took firm control of the degree to which the privileges of limited liability and incorporation will be available. As a result, the balance of power within the company has tended to favour the State rather than the company or its shareholders. In contrast to the broadly non-interventionist approach to the internal affairs of companies of the courts and the State in western countries, in China the State and the Party have played an important role in internal company decision making, such as through the appointment of the company Chairman and the role of the Party Secretary. Whilst acknowledging the limits of the rule of law in Western countries, the article goes on to discuss various challenges to the implementation of the rule of law in China’s business relations. The article discusses how China’s company laws have in practice been applied; particular attention is given to the handling of the case involving Australian businessman James Peng which was seen at the time by some as a litmus test for the operation of the rule of law in China. Peng had reorganised a former state owned company and generated substantial profits as a result of his efforts to use legal rules to his advantage. Later, Peng had a falling out with his Shenzhen business partners who launched a vendetta against him; he was abducted from his hotel in Macao and taken secretly to Shenzhen where he was incarcerated. The involvement of a 'princeling' or a relative of a senior Chinese political official in Peng’s business affairs complicated the matter. Although embezzlement charges against Peng had been thrown out by the local Shenzhen courts, due to a lack of evidence, the central government seemed powerless to prevent local cadres from continuing their vendetta so that the rule of law in this case was severely tested. The paper documents these issues and draws some broader conclusions about the limits of company law ideas in China.