Scenario: the director of an FDI company signs a 10-year office lease with a company owned by his wife — at 40% above market rent. No proposal, no related-interest declaration ever reached the board. A minority shareholder spots the lessor’s name matching the director’s surname. Can this deal survive?
Two duties breached at once
The 2020 Law on Enterprises imposes two duty layers for related-party transactions (in force as of 19/10/2026): the disclosure layer — Article 164 obliges managers to declare their and their related persons’ interests to the company (on taking office and when changes occur); and the approval layer — Article 167 requires contracts with related persons to be approved: the board approves deals below 35% of total assets, the GMS decides at 35% or more, and interested persons may not vote.
Above, the director breached both: no declaration of his wife’s ownership (Article 164 breach), and signing a 10-year above-market lease without approval (Article 167 breach).
Four legal consequences
- The deal may be voided: contracts concluded in breach of mandatory related-party approval rules are grounds for court voidance. On voidance, parties return what they received (Article 131, 2015 Civil Code).
- Joint damages and disgorgement: Article 167(4): improperly concluded contracts causing company loss make the signer and related persons jointly liable for damages and disgorgement of gains to the company. A 40% rent gap over 10 years is a concrete damages number.
- Manager liability: in parallel, the director breached honesty and non-self-dealing duties under Article 165 — 1% shareholders may bring a derivative suit under Article 166.
- Criminal risk: with signs of intentional loss-causing self-dealing at large amounts, the case may turn criminal (abuse of trust to appropriate property — Article 175, Penal Code — depending on elements).
What shareholders should do on discovery
- Demand an immediate supervisory-board inspection (5% shareholders, Article 115(2)).
- Seek interim urgent measures: suspend contract performance to stop ongoing loss pending trial.
- Sue for voidance plus damages and disgorgement.
- Long-term: embed a related-party transaction regulation in internal governance — every deal above a threshold needs declaration and written authorized approval.
Frequently asked questions
A deal with the director’s wife’s company, undisclosed — consequences?
Breach of interest-declaration (Article 164) and approval (Article 167, 2020 Law on Enterprises) duties. The deal may be voided; signer and related persons face joint damages and disgorgement (Article 167(4)).
What threshold sends related-party deals to the GMS?
35% or more of total assets per the latest financial statements goes to the GMS; below 35% the board approves (Article 167).
May interested persons vote on approval?
No. Article 167 bars board members/shareholders with interests in the contract from voting on its approval.
How to prevent “secret” related-party deals?
Adopt internal rules: managers declare related interests periodically; every related-party deal above a threshold needs a proposal, independent valuation, and written authorized approval.
This article has been quality-reviewed by the FLAW AI Legal Council Content prepared by the AI Legal Council of FLAT Law Firm for general reference only; it has not been reviewed by a human lawyer for your specific situation.
