Lau was the general manager of Company A. A terminated the labor contract with Lau on the grounds that the board of directors had made a resolution to dismiss him. Lau filed a labor arbitration. The labor arbitration committee, the court of first instance and the court of second instance all held that the dismissal is illegally.
Why Company A lost the lawsuit?
Paragraph 9, Article 46 of the “Company Law” stipulates that the board of directors has the right to decide on appointment or dismissal of the general manager and his remuneration, and decide on appointment or dismissal of deputy managers and finance controller based on the nomination by the general manager. Therefore, as long as the resolution of the board of directors of company A is procedural in line with the “Company Law” and its articles of association, Company A could remove Lau from the position of the general manager.
Regarding the reason of removal, according to the rules in judicial practice, “the appointment and dismissal of the general manager is the statutory authority of the board of directors of the company, as long as the resolution of the board of directors does not violate the provisions of the ‘Company Law’ and the company’s articles of association in terms of procedures, and the company’s articles of association in terms of the content. The court will not review and determine whether the reasons for dismissal are true, and the reasons will not affect the validity of the resolution of the board of directors.” (Quoted from the Guiding Case of the Supreme People’s Court (2010) Hu Er Zhong Min Si (Shang) Zhong Zi No. 436).
Wow, the court would not review the authenticity and rationality of the reasons for removal, then courts in the case in the beginning have made a mistake.
In fact, the courts in the case in the beginning were right. The root cause of Company A’s failure is that it did not understand the difference between the removal of a position and the dismissal of a labor contract. In other words, according to the “Company Law”, there is no risk for the board of directors to remove the general manager’s position. However, regarding the dismissal of a labor contract, companies shall check whether such dismissal complies with the relevant provisions of the “Labor Contract Law”, such as whether there is a negligent dismissal situation stipulated in Article 39, or a no-fault dismissal situation stipulated in Article 40. In addition, companies have to accomplish the procedure to notify the trade unions in accordance with the provisions of Article 43 of the “Labor Contract Law”. Therefore, Company A would not be supported by the courts when it only uses the resolution of the board of directors to dissolve the labor relationship with Lau.
In practice, there are some other issues shall be taken into consideration.
First, Article 216 of the “Company Law” stipulates that senior management personnel shall mean the general manager, deputy manager, financial controller, board secretary of a listed company and other personnel stipulated in the articles of association of the company. Then how to remove the position of those personnel which have not been mentioned in Paragraph 9 of Article 46 of the “Company Law”? According to item 7 of Article 49 of the “Company Law”, the general manager could decide on the appointment or dismissal of management staff other than those positions which are to be decided by the board of directors. If the company’s articles of association stipulate otherwise, the procedures shall be reviewed accordingly.
Second, some senior management personnel have not signed any labor contracts with the company, especially when individual shareholders are senior management personnel of several companies at the same time, under such circumstance, companies may presume such personnel could be fired in accordance with the “Company Law” and the company’s articles of association without any risks. However, if such personnel have not sign a labor contract with any of those companies, they may claim from the perspective of confirming the labor relationship, and normally the courts may support such claims (See typical case: (2020) Zui Gao Fa Min Zai No. 50).
Third, special issues related to foreign senior management personnel. Although the “Labor Contract Law” is also applicable to foreign employees, some local regulations on employment of foreigners have brought some changes to the handling of such circumstances. Taking Shanghai as an example, Article 16 of the “Several Opinions on Implementing the Regulations on the Administration of Employment of Foreigners in China” (Hu Lao Wai Fa  No. 25) stipulates that the duration, position, remuneration, insurance, working hours, conditions for termination and liability for breach for the employment relationship between an employer and its foreign employee as well as other rights and obligations shall be specified in an employment contract. In judicial practice in Shanghai, if a company and a foreign senior management person have made a special agreement on the termination of the employment relationship, such as performance indicators and etc., the court normally would support such agreement, that is, it is not necessary to meet Article 39 of the “Labor Contract Law” or relevant requirements of Article 40 (e.g. (2020) Hu 01 Min Zhong No. 847).