System Construction And Judicial Application Of Directors' Resignation Compensation Syste

Directors Resignation Compensation refers to the compensation that a director may claim from his/her company when he/she is dismissed in advance without justification,including agreed and statutory severance pay.Directors Resignation Compensation has been widely adopted by many foreign legislations due to its institutional effects on reducing directors’ burden of performing their duties,encouraging directors to make bold decisions and avoiding impairment of directors’ independence.Compared with foreign laws and regulations on Directors Resignation Compensation,in China there is only a very general stipulation on this matter in Article3 of the Company Law Interpretation(V),and its application in practice is rather chaotic,thus the function of Directors Resignation Compensation has not been effectively brought into play.Based on the ambiguity of the basis of claim rights and the ambiguity of the judicial review standards in respect of directors’ compensation system in China,and based on the latest legislation direction of the Company Law(Draft),this article proposes that the applicable system of the provisions on compensation for departure of directors as specified in the Company Law(Draft)and the Interpretations(V)shall be clearly defined through the balancing of interests on the premise that the basis of claim rights for compensation for departure of directors is clearly defined,and that interpretation and improvement shall be made to the standards involved in the review of establishment conditions and fairness of amount.Part 1 The current situation and problems of Directors Resignation Compensation in China.The current situation of Directors Resignation Compensation in China is a serious shortage of system supply and a chaotic and disorderly judicial application.In summary,there are mainly three problems in the judicial application of Directors Resignation Compensation.Firstly,the basis for the right of claim is still unclear.Currently,the only relevant provision on Directors Resignation Compensation can be found in Article 3 of the Company Law Interpretation(V),which is not the basis for the right of claim,but shall refer to "the provisions of laws,administrative regulations,the articles of association of the company,or the provisions of the contract".However,most of the companies do not make a prior provision on severance pay,and the laws and administrative regulations do not set out specific provisions on severance pay.Due to the ambiguity of the basis for the right of claim,the courts often refer to the labor law in judicial practice.Some scholars believe that the right of claim for Directors Resignation Compensation shall be based on the claim right after the arbitrary termination of a mandate contract,and others believe that there is no basis for the right of claim for Directors Resignation Compensation except as agreed upon in the contract.To address this issue,the Company Law(Draft)directly stipulates that directors have the right to request severance pay.Although the basis of the right to request is clarified,the Company Law(Draft)still has the problem of concurrence of the right to request severance pay with the Civil Code and the Employment Contract Law.Secondly,the applicable system is chaotic and unclear.During the judicial application,judges often fail to carefully weigh the interests of all parties involved in the legal relationship of Directors Resignation Compensation and often fail to follow the principle of fairness,resulting in different judgments on the same cases.Meanwhile,the relationship between agreed and statutory severance pay is also unclear,and there are still no full discussions about what conditions can be agreed and what conditions can only apply to statutory requirements.Thirdly,the specific standards need to be clarified.The Company Law(Draft)specifies two factors: premature termination and whether there is no justifiable reason to consider the issue of "whether compensation shall be given";and the Interpretation(V)of the Company Law shall base on the "reasonable amount of compensation" on the remaining term of office and the remuneration of a director.There is not enough elucidation on the above four standards,and there are still great controversies on issues such as what constitutes a "just cause" and whether the standards for a reasonable compensation amount vary from company to company.Part Ⅱ: System Basis of Director Severance Compensation.Since there is no special claim basis available for directors’ severance compensation,in judicial practice,Article 46 of the Labor Contract Law or Article 933 of the Civil Code is usually applied as the basis for judgment.However,in terms of the former system,it is uncertain whether there exists employment relationship between the company and the director,and even if there exists employment relationship,the termination of employment relationship cannot be equated with the termination of director’s post.The Labor Contract Law is mostly a value reference and foundation for the compensation system for directors,i.e.when directors are in a weak position as employees,the Company’s Legal System may make preferential adjustments to directors by referring to the compensation system under Labor Laws.In terms of Article 933 of the Civil Code,the legal relationship to be regulated by it is more consistent with the situation faced by directors’ severance compensation.The two provisions both solve the problem of payments after the arbitrary termination of an appointed relationship,which is reasonable as the basis for directors’ right to claim severance compensation.However,there are differences between the severance compensation of directors determined by Article 66 of the Company Law(Draft)and the provisions of Article 933 of the Civil Code in terms of nature,conditions of establishment,compensable amount and other aspects.The severance compensation system of directors is still affected by labor laws,which is in favor of directors when compared with Article 933 of the Civil Code.In the future,the principle of "lex specialis prevail over the general law" shall be followed,and Article 66 of the Company Law(Draft)or similar provisions of company law shall prevail.Part Ⅲ: Measurement of Interests and System Allocation in Severance Compensation of Directors There are many interweaving interests involved in severance compensation of directors,including directors’ personal interests,shareholders’ personal interests,interests of the operation of the company’s system as well as social and public interests.After measuring the abovementioned interests,when directors’ personal interests are in conflict with shareholders’ personal interests,they shall be allowed to be resolved by means of transaction,but examination on fairness shall be conducted;when directors’ personal interests are in conflict with the operation of the company’s system or social and public interests,priority shall be given to measuring heterogeneous interests,in general,social and public interests and interests of the operation of the company’s system shall prevail.The basic conclusions of interest measurement are as follows: to guarantee directors’ independence in the operation of the company’s system,compensation shall not be allowed to exclude between directors and the company generally;to guarantee the social and public interests,compensation for just dismissal shall not be allowed to be agreed upon between directors and the company;to guarantee the personal interests of directors and shareholders,examination on fairness shall be conducted on the contents agreed upon.On this basis,the basic system of Directors Resignation Compensation system should be as follows: deciding whether to pay such compensation shall be based on the establishment condition set by Article 66 of the Company Law(Draft);the director and the company can only agree on the amount of compensation,but have no right to create or destroy it;the court can conduct a review on the substantive fairness of the agreement on the amount of compensation.Part Ⅳ: Judicial Judgment on the Elements of Directors Resignation Compensation.As determined by Article 66 of the Company Law(Draft),there are two elements of Directors Resignation Compensation: firstly,the reason for removal of the director is not justifiable;secondly,the director is removed before the expiration of his term of office by the company.On the meaning of "just cause" of the first requirement,there have been extensive and in-depth discussions in comparative law.The representative view is that a dismissal for breach of duty of loyalty is just,but a dismissal for breach of duty of diligence is not just.However,it is not entirely unreasonable to consider a classification of loyalty and/or diligence as a condition for termination of employment of directors.A removal of a director from office shall also be considered to be for just cause if the director failed to perform his or her duty of diligence and thereby caused the company to suffer material losses,which is likely to occur again.For the scope of "early termination" as specified in Element II,from both the perspective of legal interpretation and policy,it is necessary to recognize early change of office as a special circumstance of early termination in judicial practice;provided,however,that the directors who vote in favor of early change of office shall be deemed to have terminated office pursuant to mutual consent and shall not be entitled to compensation.Part Ⅴ Review of the Fairness of the Amount of Directors Resignation Compensation.In reviewing the fairness of director’s compensation agreement,the focus shall be on the procedural fairness and the substantial fairness.The former mainly refers to the legality of the decision-making procedures,including the control of decision-making bodies,the control of associated transactions and the performance of information disclosure;the latter mainly refers to the substantial fairness of the amount of compensation.The amount of compensation of directors generally only involves the balance of interests as between private parties.On the premise of the freedom of the parties,the intervention of judicial review shall be limited.In light of the regulatory paths of golden parachute and non-restrictive liability compensation in the US and the UK,the amount of compensation of directors,director remuneration and average remuneration in the industry shall be compared comprehensively,in light of the triggering conditions and coverage agreed in the clauses,and the degree of intervention shall be comprehensively considered.Meanwhile,even if the amount of compensation of directors is higher than the ordinary standard,resulting in prima facie unfairness,it is inappropriate to directly deny its validity.Instead,the fairness of the decision-making process shall be based on the rule of business judgment or the rule of substantial fairness,having regard to the good faith of the directors being compensated.