Criminal risk of professional embezzlement in M&A

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In a market-oriented economy, resources can be optimally allocated through mergers and acquisitions (M&A). An M&A is a complex process, harbouring large legal risks. How to avoid such legal risks is one of the most important matters in M&A activities. However, criminal risk is an area that draws relatively little attention in M&A legal services.

Liu Zhaojun-cutout
Liu Zhaojun
Partner
East & Concord Partners

An M&A involves the reallocation of different companies’ assets. As for companies with less sound financial systems, the company’s property can be easily confused with the property of the company’s shareholders or senior officers. If, at the M&A segment, the disentangling of the confused property is difficult, the problem of the company’s shareholders or senior officers possessing the company’s property may arise, which could easily trigger criminal risk. The entry point for the discussion in this article will be the identification of “taking advantage of one’s position” in the crime of professional embezzlement.

Pursuant to article 271 of the Criminal Law of China, the term “crime of professional embezzlement” means that any employee of a company, enterprise or any other unit who, taking advantage of his position, unlawfully takes possession of the money or property of one’s own unit, with the amount being relatively large. From this definition, it can be concluded that the crime of professional embezzlement has two major components: “taking advantage of one’s position”; and “unlawfully taking possession of the money or property of one’s own unit”. The former is the most controversial issue in the constitution of this crime and has become the core of the identification of the crime of professional embezzlement.

Traditional approach to the identification of “taking advantages of one’s position”. The traditional approach holds that the object of the crime of professional embezzlement is the property ownership of the company, enterprise or other entity and “taking advantage of one’s position” means being in charge of, or supervising, or handling, the entity’s property. Based on this approach, in the case of the crime of professional embezzlement, as long as the act falls under the category of “being in charge of, or supervising, or handling”, it can be affirmed that the same constitutes “taking advantage of one’s position”.

However, this approach is worth discussing. On one hand, “being in charge of, or supervising, or handling” are not strict legal concepts, and their connotations and denotations are not distributed. In judicial practice, based on the imperative of cracking down on crime, any act that “possesses” property of the entity can be interpreted as an occupational act of “being in charge of, or supervising, or handling”. Under such circumstances, the scope of fighting crimes could be inappropriately expanded.

On the other hand, “being in charge of, or supervising, or handling” is no more than three ways in which “taking advantage of one’s position” is manifested, and it obviously fails to cover all patterns of acts of “taking advantage of one’s position”. Under such circumstances, the scope of fighting crimes could be inappropriately narrowed.

Identification of the nature of “taking advantage of one’s position”. With respect to this, it is necessary to accurately understand the nature. Some scholars are convinced that taking advantage of a position of authority in which one controls or allocates the property of a company, enterprise or other entity is the essential feature of “taking advantage of one’s position”. This article is in agreement with this point of view.

Peng Fu-cutout
Peng Fu
Associate
East & Concord Partners

Theoretical and practice circles generally interpret the crime of professional embezzlement as a crime infringing one single object. In contrast, this article holds that such a crime violates complex objects, namely the property of the company, enterprise or other entity, as well as occupational probity. In a market economy, a company, enterprise or other entity is, legally, a socioeconomic organization with relatively independent “personality”, one that itself has independent interests.

If one categorizes the interests of a company, enterprise or other entity, its interests will at minimum include property interests and public authority interests. The authors agree with the definition of public authority interests as the right of a company, enterprise or other entity to require its employees to perform their duties in accordance with laws, regulations and internal rules and regulations. Professional embezzlement not only infringes the property interests of a company, enterprise or other entity, but also its public authority interests. In other words, determining whether the act infringes upon the public authority interests of the entity is the fundamental issue involved in determining whether “one has taken the advantage of one’s position”.

Means of identifying “taking advantage of one’s position”. Formally, whether the act constitutes “taking advantage of his or her position” should be determined from the perspective of cause and effect. More specifically, on one hand, identifying whether the act is in a position to control or allocate property is based on his or her handling of public affairs of the company, enterprise or other entity. In other words, the pre-condition and basis for determining whether he or she has “taken advantage of his or her position” must be an act based on a position of control or allocation of property, otherwise there is no need to make such determination.

On the other hand, determining whether the actor took advantage of his or her position – which involves control or allocation of the property of the company, enterprise or other entity to illegally possess its property – is a determination of the cause and effect relationship between taking advantage of a position that involves the control or allocation of the property of a company, enterprise or other entity and illegally possessing its property.

Once the first cause and effect relationship is established, the actor has the authority to manage the property of the company, enterprise or other entity, in which case he or she not only has the right to, and meets the conditions for, allocating such property, but also is under the obligation and duty to oversee such property. If the actor abuses such position of control or allocation, the second cause and effect relationship is realized, i.e., he or she has taken advantage of a position that involves control or allocation of the property of the company, enterprise or other entity, to illegally possess its property, and such act constitutes “taking advantage of his or her position”.

Liu Zhaojun is a partner and Peng Fu is an associate at East & Concord Partners in Wuhan

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