As reported on August 8, 2014, the Shanghai Hongkou Arbitration Committee ruled that a company illegally terminated its general manager and ordered the company to reinstate him, even though the company's board of directors had removed him from the post of general manager in accordance with the Company Law.
The company’s board of directors decided to remove the general manager on May 13, 2014 and the proposal to remove the general manager from the board of directors was passed at a shareholders' meeting on June 12, 2014. The employee's employment was deemed by the company to have been terminated as a result.
According to the company, the grounds for termination of employment were dereliction of duty and serious violation of company rules. Specifically, the company introduced an audit report prepared by a professional accounting firm as the justification for the termination of the employee. The audit report cited material defects in the company’s internal control system and gave an adverse opinion on the system. The company claimed that the employee as general manager was solely responsible for establishing and implementing the internal control system and therefore was responsible for the defects in the system.
The arbitration decision found that: (1) a general manager cannot be held solely responsible for a corporate internal control system or the damages caused by its defects because the board of directors, chairman of the board, and other senior managers are also responsible persons for the internal control system; (2) the company had not provided sufficient evidence to prove that the employee acted negligently or improperly in performing his duties associated with the internal control system (in fact, the evidence supported the opposite conclusion because the board of directors had evaluated the employee’s performance and rated it as being "up to grade" as recently as January 2014); and (3) the company had not provided sufficient evidence to prove that the defects in the internal control system caused significant damage to the company. The arbitration decision therefore ruled that the termination was illegal and granted the employee reinstatement and payment of salary for the period from termination until reinstatement.
As a final point, the arbitration decision emphasized that while the removal of an employee from the position of general manager is completely discretionary and can be done in accordance with the Company Law and the company's articles of association, the removal will not and cannot automatically result in termination of employment. Termination of employment is restricted by the Employment Contract Law and only may occur if its requirements are met. It should be noted that this was only an arbitration ruling, and some courts in Shanghai may take the position that removal of a general manager by the board of directors may provide grounds for termination.