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Protecting Your Business from Competing Employee Ventures in China

By Robin Tabbers

As we navigate the evolving legal landscape in China, it is imperative to stay informed about recent legislative changes that may impact your business operations. The latest amendments to the PRC Criminal Law, effective March 1, 2024, introduce stringent provisions to address employee misconduct related to establishing competing businesses and engaging in transactions that disadvantage their employers.

Amendments to the PRC Criminal Law

The updated PRC Criminal Law includes critical changes aimed at preventing and penalising unethical employee behaviour:

  1. Article 165: This provision criminalises actions by a company’s director, supervisor, or senior manager who abuses their position to operate a competing business, particularly if such actions result in substantial losses to the company
  2. Article 166: This article addresses conflicts of interest, making it a criminal offence for employees to cause their employer to engage in transactions with entities managed by their relatives or friends at significantly above-market prices or to sell to such entities at below-market prices

Case Studies and Firm’s Experience

Our law firm is actively representing several European and North American clients in disputes involving former managers who established competing businesses while still employed by our clients' subsidiaries in China. Such conduct is both unethical and increasingly prevalent in the current Chinese business environment, where cultural and business practice differences can exacerbate these issues.

Strategic Approach to Employee Misconduct

When retained for these cases, our primary strategies include:

  1. Evidence Collection and Termination: The initial step involves confirming and gathering substantial evidence of the employee's violation. With sufficient proof, we proceed with termination without severance or economic compensation. Given the difficulty in obtaining evidence post-termination, our preferred approach is to pressure the employee to resign voluntarily
  2. Negotiation for Additional Remedies: Besides termination, our clients often seek additional remedies, such as compensation and legally binding commitments to prevent future competition. These objectives are pursued through strategic negotiations

Key Factors for Successful Negotiations

  1. Attitude: Our approach involves surprising the violating employees, thereby reducing their opportunity to prepare and increasing the pressure to reach an immediate settlement
  2. Evidence: Robust evidence is crucial in strengthening our negotiating position
  3. Leverage: The most significant leverage is the threat of reporting the misconduct to the local Public Security Bureau (PSB) for criminal enforcement, which includes the risk of imprisonment.

Impact of the Amended Law

The recent amendments to the PRC Criminal Law bolster our ability to pursue criminal charges against offending employees, thereby enhancing our negotiating position and the likelihood of favourable settlements. These legal enhancements also improve our chances of convincing the PSB to accept our cases, should filing become necessary.

Call to Action

If you suspect any employees of engaging in conduct that undermines your business or establishes competing ventures, it is crucial to take action wisely by instructing an investigating.

For more about how we can help foreign companies that are suspecting employees of going behind their back to hurt their business, please contact [email protected] or your usual contact at R&P.  We are here to help you make the best decision.

This was originally published on LinkedIn as an edition of Robin's China Business Navigator Newsletter. Subscribe here to get regular updates.