July 2025
Serials Research Part Six on the New Systems under the New Company Law: Analysis of Changes to Related-Party Transaction Rules for Non-Listed Companies (Mainland China)
The newly revised Company Law (effective on July 1, 2024) has implemented a systematic reform of the related-party transaction regime for non-listed companies. Through three major measures—expanding the scope of regulated parties, strengthening procedural constraints, and increasing legal liabilities—it effectively addresses past regulatory shortcomings and significantly enhances the constraints on related-party transactions detrimental to company interests.
I. Substantial Expansion of the Criteria for Identifying Related Parties
Adopting the principle of "substance over form," the new Company Law significantly broadens the scope of related parties. Pursuant to Article 182 of the new Company Law, in addition to the original directors and senior executives, the scope of related persons now includes supervisors, near relatives of directors, supervisors, and senior executives, enterprises directly or indirectly controlled by them, and other related parties with related-party relationships (hereinafter collectively referred to as "directors, supervisors, senior executives and their related parties"). Furthermore, Article 180 of the new Company Law introduces the concept of "de facto directors," clarifying that controlling shareholders and actual controllers must bear the same loyalty duties as directors even if they do not serve as director, as long as they actually execute company affairs. Their related parties will also be subject to the related-party transaction rules.
II. Comprehensive Establishment of Procedural Constraint Mechanisms
Regarding the procedures for related-party transactions, the new Company Law establishes a systematic decision-making framework. Article 182 sets forth a reporting obligation, requiring directors, supervisors, senior executives and their related parties to report to the board of directors or the shareholders' meeting. Simultaneously, related-party transactions must be reviewed and approved in accordance with the procedures stipulated in the company's articles of association. In designing the decision-making mechanism, Article 185 of the new Company Law stipulates the recusal system for related directors: Related directors shall not participate in the voting, and their voting rights shall not be calculated into the total voting rights. If the number of unrelated directors present at the meeting of the board of directors is less than 3, the matter shall be submitted to the shareholders' meeting for deliberation.
III. Significant Upgrade of the Liability System for Violations
At the liability level, the new Company Law constructs a multi-tiered disciplinary mechanism. Article 186 extends the scope of application of the right of recovery (disgorgement) from directors and senior executives to directors, supervisors, senior executives and their related parties. Incomes derived from non-compliant transactions shall belong to the company. More deterrent is the joint and several liability clause: If a controlling shareholder or actual controller instructs a director or senior executive to engage in a related-party transaction that damages the interests of the company or its shareholders, pursuant to Article 192 of the new Company Law, they shall bear joint and several liability with that director or senior executive.
Recommendations for Corporate Response Paths:
Facing the reforms under the new Company Law, non-listed companies can proceed with adjustments in the following aspects:
1. Prioritize amending the Articles of Association: Clearly define related parties and detail the recusal and voting procedures.
2. Establish a dynamic monitoring mechanism: Regularly update the list of related parties (covering dimensions such as near relatives and controlled enterprises) and implement pre-transaction compliance reviews.
3. Improve decision traceability management: Systematically retain records of related-party transaction reports and voting resolutions.
The new Company Law systematically improves the regulatory framework for related-party transactions in non-listed companies by expanding the scope of regulated parties, strengthening procedural constraints, and increasing legal liabilities. It is recommended that companies shift their approach to related-party transaction governance from passive compliance to proactive governance, building effective internal control mechanisms to genuinely safeguard the interests of the company and its shareholders.
I. Substantial Expansion of the Criteria for Identifying Related Parties
Adopting the principle of "substance over form," the new Company Law significantly broadens the scope of related parties. Pursuant to Article 182 of the new Company Law, in addition to the original directors and senior executives, the scope of related persons now includes supervisors, near relatives of directors, supervisors, and senior executives, enterprises directly or indirectly controlled by them, and other related parties with related-party relationships (hereinafter collectively referred to as "directors, supervisors, senior executives and their related parties"). Furthermore, Article 180 of the new Company Law introduces the concept of "de facto directors," clarifying that controlling shareholders and actual controllers must bear the same loyalty duties as directors even if they do not serve as director, as long as they actually execute company affairs. Their related parties will also be subject to the related-party transaction rules.
II. Comprehensive Establishment of Procedural Constraint Mechanisms
Regarding the procedures for related-party transactions, the new Company Law establishes a systematic decision-making framework. Article 182 sets forth a reporting obligation, requiring directors, supervisors, senior executives and their related parties to report to the board of directors or the shareholders' meeting. Simultaneously, related-party transactions must be reviewed and approved in accordance with the procedures stipulated in the company's articles of association. In designing the decision-making mechanism, Article 185 of the new Company Law stipulates the recusal system for related directors: Related directors shall not participate in the voting, and their voting rights shall not be calculated into the total voting rights. If the number of unrelated directors present at the meeting of the board of directors is less than 3, the matter shall be submitted to the shareholders' meeting for deliberation.
III. Significant Upgrade of the Liability System for Violations
At the liability level, the new Company Law constructs a multi-tiered disciplinary mechanism. Article 186 extends the scope of application of the right of recovery (disgorgement) from directors and senior executives to directors, supervisors, senior executives and their related parties. Incomes derived from non-compliant transactions shall belong to the company. More deterrent is the joint and several liability clause: If a controlling shareholder or actual controller instructs a director or senior executive to engage in a related-party transaction that damages the interests of the company or its shareholders, pursuant to Article 192 of the new Company Law, they shall bear joint and several liability with that director or senior executive.
Recommendations for Corporate Response Paths:
Facing the reforms under the new Company Law, non-listed companies can proceed with adjustments in the following aspects:
1. Prioritize amending the Articles of Association: Clearly define related parties and detail the recusal and voting procedures.
2. Establish a dynamic monitoring mechanism: Regularly update the list of related parties (covering dimensions such as near relatives and controlled enterprises) and implement pre-transaction compliance reviews.
3. Improve decision traceability management: Systematically retain records of related-party transaction reports and voting resolutions.
The new Company Law systematically improves the regulatory framework for related-party transactions in non-listed companies by expanding the scope of regulated parties, strengthening procedural constraints, and increasing legal liabilities. It is recommended that companies shift their approach to related-party transaction governance from passive compliance to proactive governance, building effective internal control mechanisms to genuinely safeguard the interests of the company and its shareholders.
Related Articles
Serials Research Part One on the New Systems under the New Company Law: The Protection System of Creditor's Rights and Interests Under the New Company Law (Mainland China) Serials Research Part Two on the New Systems under the New Company Law: How to Transit from "Registered and Subscribed Capital System" Under the New Company Law? (Mainland China) Serials Research Part Three on the New Systems under the New Company Law: Exploring the Direct Compensation Liability of Directors and Senior Executives to Third Parties Under Article 191 of the New Company Law (Mainland China) Serials Research Part Four on the New Systems under the New Company Law: Discussion on Shareholder Liability and Corporate Veil Piercing in One-Person Companies (Mainland China) Serials Research Part Five on the New Systems under the New Company Law: Evolution and Judicial Application of Shareholders' Capital Contribution Liability Rules after the Equity Transfer under the Old and New Company Law Systems (Mainland China)
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