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Executive Penalties

China’s top prosecutor released a report on the private sector, arguing that there should be no arrest or charges against businesspeople whenever possible

By NewsChina Updated Sept.1

An equity dispute involving agribusiness Jiangsu Muyang Group, a feed processing machinery company based in Yangzhou, Jiangsu Province, that had dragged on for over a decade has finally come to an end.  

On June 1, Jiangsu High Court in Nanjing rejected an appeal from the group’s former president Fan Tianming and trade union head Chen Jiarong and affirmed the original judgment. This meant that an equity transference agreement signed in jail by Xu Ronghua, a former shareholder, was withdrawn and Xu was acquitted for the second time. 

During the two sessions, China’s main legislative meetings which this year took place in May due to the coronavirus pandemic, Zhang Jun, prosecutor-general of the Supreme People’s Procuratorate (SPP) delivered a report which underlined protections for private businesses and entrepreneurs. The report said that it is important to accord equal treatment to State-owned enterprises and private businesses, domestic and foreign capital, as well as large and small enterprises. 

The report stated that the SPP will implement 11 policies to serve private enterprises, release typical judicial cases for guidance and be more cautious about approving either the arrest of entrepreneurs or civil litigation to sue them. It encouraged judicial organs to allow 1,971 private enterprise leaders that are in detention to obtain a guarantor and pay bail while awaiting trial if those in custody do not need to be there for the type of case or alleged offense they are involved in.  

Chinese courts and public security organs have over the years been stringent in dealing with the private economy and businesspeople, and the legitimate rights of private businesses are not well protected. Private businesspeople’s crimes include illegal fundraising, bribery, embezzlement, accepting bribes and VAT invoice fraud. They are violations of law and not civil suits in China. Charges against businesspeople, however, are sometimes driven by political interests and corrupt officials. 

State-owned enterprises and leaders, which have closer relationships with the government, are usually given more leeway by the country’s judicial system. They can more easily access preferential policies and loans from the government. For example, private businesspeople sometimes have to raise funds from the public illegally in order to keep their enterprises alive. Sometimes they have to bribe their way to get loans or obtain an order or contract from the government. They have to face unequal treatment from courts. The SPP released the new regulations in a bid to create a better and fairer environment for the country’s private economy. 

Conflicts of Interest
The origins of Xu Ronghua’s case date back to 2002, when Jiangsu Muyang Group was restructured, with the equity shared by five managers, including Xu Ronghua and Fan Tianming. The trouble started when there were conflicts of interest over the running of the firm, which escalated. 

In 2008, Xu was detained on suspicion of trademark infringement. During this time, he signed an equity transfer agreement in order to clear himself of any criminal liability. The deal transferred 15.51 percent of shares to Chen Jiarong, head of the group’s trade union. Two days after signing, Xu was released from custody, after which he embarked on the lengthy legal process to reclaim his equity.  

In 2012, lawyer Chen Youxi, director of the Capital Equity Legal Group in Hangzhou, capital of Zhejiang Province, met Xu at a legal seminar and began providing legal advice. When Xu was detained for the second time in 2016, Chen and six lawyers at his firm started working on his case.  

In 2017, Jiangsu High Court reviewed Xu’s case with Chen representing him. The proceedings that had lasted several years have instilled in Chen a strong sense of injustice, in particular about how difficult it is to protect the property rights of private entrepreneurs. 

“Shoring up the confidence of private entrepreneurs hinges on providing practical policies and judicial cases instead of offering slogans,” Chen told NewsChina, adding that one judicial case is worth 100 documents - meaning that actual cases and case law are more significant for guidance than documents, directives and regulations released by the government.  

In the dispute involving Muyang Group, prosecutors eventually found that it was a false accusation. The majority shareholders in the group had previously agreed to use a specific trademark, but later Xu was accused of illegally using it. The frame-up aimed to restrict Xu’s power in the enterprise and force him to transfer his equity. Xu spent about a month in jail, although the case dragged on for more than a decade. While he was detained, he was afraid of being accused of criminal misconduct, so he signed away his equity to get out. 

According to Wang Songmiao, director of the general office of the SPP, the agency conducted two campaigns in 2019 to protect the rights of private entrepreneurs - looking into the necessity of detaining entrepreneurs and speeding up the criminal proceedings in which entrepreneurs are involved. As of the end of 2019, 2,687 criminal cases that dragged on for a long time were identified and 1,181 of those were settled. 

From July 2019 to March 2020, the SPP released specific regulations on the scope, procedure, measures and the applicable law to review the necessity of detaining entrepreneurs. It aimed to reduce the number of entrepreneurs under custody to the greatest extent. 

Jiangsu High Court in Nanjing, Jiangsu Province is in session for the share transfer dispute involving Chen Jiarong, Fan Tianming and Xu Ronghua, December 6, 2018

Yao Guojian, director of the Institute of Constitutional Law under China University of Political Science and Law, argued that many private business owners have been detained over the years and legal authorities have called for a lenient environment for entrepreneurs.  

Yao said that the arrests and civil litigation against entrepreneurs was necessary as part of the evolution of the country’s legal system. “It was an unavoidable phenomenon in the process of improving the rule of law alongside the continuous development of the private economy in China,” he told NewsChina. “It also reflected the changes in perception of the private sector.” 

Before China started its reform and opening-up policy in the late 1970s, there were virtually no laws covering the private economy. As the private economy grew, alongside its contribution to the national economy, China gradually changed its regulations.  

In 1988, when China revised the Constitutional Law for the first time, the legitimate rights of the private economy were recognized, which was regarded as a “supplement to the publicly owned economy.” In 1999, when the Constitutional Law was revised again, the private economy became “a crucial part of the Socialist market economy.” 

Even though obtaining a guarantor and awaiting trial out of custody is a basic right of entrepreneurs involved in a legal case, it is common that many entrepreneurs are detained for many years for no good reason. 

Over the years, entrepreneurs faced a higher risk of being targeted by the legal system in comparison with those working for SOEs. According to a report on crimes committed by entrepreneurs in 2017 by Beijing Normal University which was presented at a seminar in 2018, there were 2,481 crimes committed by entrepreneurs, of which 395 were committed by those working for SOEs, accounting for 15.9 percent, and 2,086 were committed by those in the private sector, accounting for 84.1 percent.  

The report found that illegal fundraising, embezzlement and bribery are the most common charges levied against entrepreneurs in private businesses. 

Lethal Blow
Many private enterprises are established by entrepreneurs with strong personal characteristics in terms of corporate management, so detaining them beyond the legally prescribed time limits is likely to deal a lethal blow to these enterprises. Even when they are acquitted and set free, their firms are often left bankrupt. 

Lawyer Chen Youxi has over the years experienced many cases in which entrepreneurs won the lawsuit, but by the time they had, their were no assets left to compensate them. He told our reporter that the leader of a high-profile enterprise in Nanjing, Jiangsu Province was in custody for three and a half years on suspicion of accounting fraud. After he was released, a debt chain of 70 billion yuan (US$10b) was due and two stocks fell by 50 percent before the enterprise was restructured. 

Another plight facing private enterprises is the inability to pay up after a civil judgment is made. In the case of Muyang Group, even though Xu Ronghua reclaimed his equity, the corporate assets have largely evaporated. Muyang Group now exists in name only - the factory, facilities, employees and trademarks have all been transferred to another company. 

“If the tangible and intangible assets, as well as the business relations of Muyang Group can’t be restored, the equity reclaimed by Xu Ronghua over the past 11 years will have little value,” said Chen Youxi. He added that if the assets and capital of Muyang Group could not be transferred back, the rights of Xu Ronghua and other shareholders are unable to be protected and winning the lawsuit is meaningless. 

“It would set a very bad example,” he said. “Many more entrepreneurs will feel disappointed.” 

“The SPP has proposed no arrests or charges whenever it is possible but there are to date no specific and detailed rules to implement it,” said Yao Guojian. He said that because China is so big, conditions are different and local judicial organs interpret the law in their own way.  

Yao said the SPP should issue standard judicial interpretations of the regulations and release some cases that have been ruled on for local jurisdictions to use as a reference. “Basically, there should be a unified standard for local governments to implement.” 

Yao added that infighting between shareholders and family members of an enterprise over corporate management and the division of profits is common, and sometimes criminal litigation is used to settle what are actually internal conflicts.  

“It is the obligation of judicial organs to take action if there is a crime committed with adequate evidence,” he said. “Otherwise, judicial organs should try not to intervene in the internal disputes of an enterprise.” 

In the opinion of lawyer Chen Youxi, it is of great significance if the SPP is instructing courts to avoid formal charges and encourage the use of probation for entrepreneurs to the greatest extent, but it should be pointed out that there are also many unjust judgments and wrongful convictions waiting to be redressed. 

“The Chinese economy will only be healthy after the legitimate rights of private entrepreneurs are properly protected,” he said.