Compliance Update on Conflict of Interest, Bribery, and Trade Secrets

There are significant updates for companies operating in China regarding conflict of interest, bribery, and trade secrets. The PRC Standing Committee of the National People's Congress published the new Amendment (XII) to the PRC Criminal Law, effective since March 1, 2024. Moreover, on the same day, the new Company Law was published and will be effective starting July 1, 2024. These relevant updates concerning conflict of interest, bribery, and trade secrets are summarized as follows:

1. Conflict of Interest

One of the most prominent updates regarding conflict of interest is the new amendment to the Criminal Law. The typical crimes related to conflict of interest were illegally engaging in similar businesses and profiting for relatives and friends. These crimes previously applied only to PRC state-owned companies but have now been extended to all private companies, including foreign-invested enterprises (FIEs). For example, this means that if directors, supervisors, or senior executives (“Key Persons”) of a FIE engage in a business similar to that of their employer, it may lead to criminal punishment with a maximum of seven years’ imprisonment. The potential for criminal liability may provide stronger leverage for employers in addressing the respective staff, in addition to terminating their employment and requesting compensation for losses.

This update regarding conflict of interest is also reflected in the new Company Law. The law improves the regulatory system of loyalty and diligence duties of Key Persons toward the companies and the corresponding liabilities. In other words, Key Persons must avoid conflicts between personal interests and the company's interests. For instance, the new Company Law clearly stipulates that Key Persons may not engage in any business similar to the business of their employer, nor may they take advantage of their position to seek any business opportunity that belongs to the company. Exceptions can only be made with the approval of the board of directors or the shareholders’ meeting.

2. Bribery

Among the seven material amendments in Amendment (XII) to the PRC Criminal Law, four clauses are related to bribery. This demonstrates China's commitment to combatting corruption. The updates impose stricter penalties for both offering and accepting bribes. For example, the maximum sentence for the crime of taking bribes by entities has been increased from five years to ten years. These updates signal a zero-tolerance stance against corrupt practices.

3. Trade Secrets

The protection of trade secrets has always been very important but also a significant challenge for companies. Amendment (XI) to the Criminal Law has significantly lowered the threshold for the crime of infringing upon trade secrets. Firstly, the maximum sentence has been increased from seven years to ten years. Secondly, the criterion for criminalization has been changed from causing heavy losses to serious circumstances. On the one hand, not all infringements of trade secrets result in heavy losses. According to official prosecution guidelines, a loss can be considered heavy if it exceeds RMB 300,000. On the other hand, it is sometimes difficult in practice to obtain evidence to prove heavy losses. As a result, the pre-condition for the crime was too high in some cases, and companies could barely seek protection under the Criminal Law in the past. The update now chooses a broader term and focuses on serious circumstances, which includes serious losses as one scenario but also considers other individual circumstances of a case. This means that an infringement can be criminalized with or without the loss from now on.

The new responsibilities provide a stronger legal framework for employers to enforce compliance regulations in practice. To make full use of the new legal toolbox, we suggest that companies consider the following steps:

• Train their management staff to ensure they have a clear understanding of the new responsibilities in the criminal and company law.
• Update and revise the articles of association and the employee handbook to reflect the new legal changes in compliance.

Please do not hesitate to contact us if you are interested in our training services in the area of compliance or an update of the articles of association and the employee handbook reflecting the legal changes. WZR would be glad to support you.

Beijing, June 28, 2024