Fortifying Your Walls: Enhanced Trade Secret Protection Under China’s New Company Law (2024)

China’s business landscape just got a significant security upgrade. The revised Company Law of the People’s Republic of China, effective July 1, 2024, places unprecedented emphasis on safeguarding corporate secrets. For international businesses partnering with or scrutinizing Chinese companies, understanding these enhanced protections isn’t just prudent—it’s critical for risk mitigation and informed decision-making.

Why Trade Secrets Matter More Than Ever

Trade secrets – confidential business information providing a competitive edge (e.g., formulas, processes, customer lists, algorithms) – are often a company’s most valuable, yet vulnerable, assets. Unlike patents or trademarks, their protection relies solely on the owner’s ability to keep them secret. Unauthorized disclosure can devastate market position and profitability. The new Company Law significantly raises the stakes for directors, supervisors, and senior management (collectively, “DSSMs”) in protecting these assets.

The New Company Law: Key Weapons for Trade Secret Defense

The 2024 revisions introduce robust obligations and consequences, primarily articulated in Articles 180 to 186:

1. Explicit Codification of Fiduciary Duties (Article 180 & 181):
   • Loyalty Obligation (忠实义务 – Zhōngshí Yìwù): DSSMs must actively “avoid conflicts of interest” and refrain from “using their positions to seek improper gains.” Crucially, they are now expressly forbidden from “disclosing company secrets without authorization” (Article 181(5)). This elevates confidentiality from a best practice to a core legal duty.
   • Diligence Obligation (勤勉义务 – Qínmiǎn Yìwù): DSSMs must exercise the “reasonable care of a prudent manager” acting in the company’s “best interests.” This includes implementing and overseeing effective measures to protect confidential information.
2. Strict Rules on Conflicts of Interest & Exploitation (Articles 182-184):
   • Related-Party Transactions (Article 182): DSSMs must disclose and obtain board/shareholder approval for transactions involving themselves, close relatives, or entities they control. This prevents covert leaks disguised as business deals.
   • Usurping Corporate Opportunities (Article 183): DSSMs generally cannot take business opportunities belonging to the company for themselves or others. Exceptions require full disclosure and board/shareholder approval. This prevents diverting confidential strategies or leads.
   • Competing Businesses (Article 184): Engaging in competing businesses without disclosure and approval is strictly prohibited. This mitigates the risk of DSSMs using sensitive knowledge gained in one role to benefit a competitor.
3. Consequences of Breach: Deterrence and Remedy (Articles 186-188):
   • Disgorgement of Profits (Article 186): Any income DSSMs gain from violating their duties (e.g., profits from selling secrets or exploiting usurped opportunities) belongs to the company.
   • Liability for Damages (Article 188): DSSMs who breach their duties (including confidentiality), causing loss to the company, are personally liable for compensation. This applies even if the breach wasn’t intentional, though intentional/major negligence likely increases exposure.
   • Shareholder Derivative Suits (Article 189): Shareholders meeting specific thresholds can initiate lawsuits on the company’s behalf against DSSMs who cause loss through breaches, providing an enforcement mechanism.
   • Potential Criminal Liability: While the Company Law itself outlines civil consequences, serious trade secret theft may also trigger criminal liability under China’s Law Against Unfair Competition and the Criminal Law.

What This Means for International Businesses: Due Diligence Imperative

The heightened focus on DSSM accountability directly impacts foreign entities engaging with Chinese firms:

1. Assessing Partner Integrity: A Chinese company with a history of DSSMs breaching duties (like confidentiality) poses a significant red flag. It indicates weak internal governance and a higher risk of your sensitive information being mishandled. Verifying the integrity and track record of key personnel is crucial. Our Executive Risk Reports delve into the legal and reputational histories of directors and executives, revealing past breaches or litigation.
2. Evaluating Internal Controls: Understanding whether a potential partner has robust systems to protect its own trade secrets is a strong indicator of how it will handle yours. Look for evidence of confidentiality policies, access controls, employee training, and contractual safeguards (NDAs). While harder to observe directly, clues can be found in corporate governance reports or through targeted inquiries during due diligence. Comprehensive Professional Enterprise Credit Reports often include governance assessments and major legal risk indicators.
3. Mitigating Joint Venture & M&A Risks: Joint ventures and acquisitions inherently involve sharing sensitive data. The new law underscores the need for:
   • Watertight NDAs: Ensure agreements explicitly cover the scope of confidential information and obligations under the new Company Law.
   • Thorough Vetting: Intensify due diligence on the target’s DSSMs, past confidentiality incidents, and internal compliance programs.
   • Post-Deal Integration Plans: Include clear protocols for managing and protecting merged confidential information assets.
4. Supply Chain Security: Ensure suppliers, especially those handling proprietary designs or processes, have demonstrable trade secret protection measures. Their DSSMs’ obligations under the new law are just as relevant to safeguarding your IP within their operations.

Proactive Steps for Chinese Companies (and Their Partners)

Chinese entities must urgently adapt:

1. Review and Update Internal Policies: Implement clear, written confidentiality policies defining trade secrets, handling procedures, access levels, and employee obligations. Integrate these with the new DSSM duties.
2. Strengthen Contractual Safeguards: Use robust employment contracts, NDAs, and non-compete clauses (within legal limits) that explicitly reference the new legal obligations.
3. Implement Technical & Physical Controls: Utilize data encryption, access logs, secure storage, and compartmentalization of sensitive information.
4. Regular Training: Mandate training for all employees, especially DSSMs, on the Company Law revisions, the importance of trade secrets, and the severe consequences of breaches.
5. Establish Monitoring & Enforcement: Create mechanisms to detect potential leaks and procedures for investigating and responding to suspected violations.

Conclusion: Building Trust Through Enhanced Security

China’s 2024 Company Law marks a decisive step towards stronger corporate governance and heightened protection for valuable business assets like trade secrets. By placing clear, stringent obligations on directors and executives and attaching serious consequences for breaches, the law aims to foster a more transparent and trustworthy business environment.

For international companies, this evolution presents both a challenge and an opportunity. The challenge lies in navigating the heightened need for rigorous due diligence on potential partners’ internal controls and leadership integrity. The opportunity is the potential for more secure and reliable partnerships built on stronger legal foundations. Understanding and leveraging the provisions of the new law, particularly concerning trade secret protection and DSSM accountability, is no longer optional—it’s fundamental to mitigating risk and ensuring successful engagement in the Chinese market. Partnering with experts who can provide deep insights into a company’s compliance posture and executive risk profile is an essential strategy. Explore our comprehensive suite of Company Verification and Due Diligence Services designed to give you the clarity and confidence needed in this new legal landscape.