Macau Gaming Law series part 6: Directors’ liability – changing centuries of corporate law?

Welcome to the sixth in a series of articles on the Macau gaming law IAG is publishing throughout the month of March and in early April:

The concept of “limited liability” is a foundational characteristic, perhaps the foundational characteristic, of companies. Amongst the most basic principles taught in business school, the concept is so fundamental that it is acknowledged in the very names of companies. In Australia, England or Hong Kong we append “Limited” or “Ltd” to the end of company names. In the US, we have the LLC (“limited liability company”) and most Chinese companies have “有限公司” (yao han gong si, literally “limited company”) at the end of their names.

Early notions of limited liability date back to the grand sailing ship explorations of the Middle Ages, almost 1,000 years ago. Limited liability was the norm for most companies by the early 17th century and was enshrined in modern day legislation from the early 19th century – the time of the industrial revolution.

Without the concept of limited liability, it would be very difficult for entrepreneurs and investors to take risks. Investors need to know the limit of their risk when committing to investments, and that limit is the amount of fully paid-up capital of the companies through which investments are made. There are rare provisions under company law for the so-called “lifting of the corporate veil,” which makes directors personally liable, but typically this only happens when directors have been grossly negligent in their duties.

Despite all this, the new Macau gaming law contains several instances where limited liability seems to have been disposed of, and directors of the concessionaire companies have been made personally responsible for company liabilities.

The most extreme of these is to be found in Article 50(3), which reads, “Shareholders with an amount equal to or greater than 5% of the share capital of the concessionaires, directors and members of the management body are jointly and severally liable for all debts of the concessionaires, including in particular the chips in circulation.” In the case of Macau concessionaires, these could be staggeringly large amounts – as much as billions of dollars!

While Article 50 as a whole deals with the compulsory dissolution of existing concessionaires in the event they do not receive a new concession after the expiry of their existing one, Article 50(3) does not specify that the personal liability of directors only applies in that case. And even if it does, it is no less staggering!

Individuals can also be made liable for the debts of the concessionaire by Article 48E(4), which provides that “any person representing the [concessionaire] in any way” shall bear joint and several liability with the concessionaire for any administrative violation fine imposed by the Gaming Inspection and Coordination Bureau (DICJ), if that person has been determined to be “liable for the act of violation.” Article 48F(1) makes all shareholders who hold 5% of more of a concessionaire jointly and severally liable for administrative fines imposed on the concessionaire, even if the concessionaire has since been wound up! Under the new law, such fines can be up to MOP$5 million (US$625,000).

These provisions seem to conflict with Article 7(1), which provides that “The right to operate games of chance … can only be exercised by limited liability companies incorporated in the Macau SAR; Article 10(1) which reads, “Only limited liability companies incorporated in the Macau SAR … shall be admitted to the tender,” and Article 10(6) which reads, “reliable commercial businessmen that [have not registered a limited liability company in the Macau SAR] may be admitted to the tender, as long as they commit to incorporate a limited liability company in the Macau SAR …”

On the one hand the gaming law is quite insistent that concessionaires be limited liability companies registered under the Macau Commercial Code, and on the other it seems to be making directors and shareholders personally liable for all the debts of the concessionaires – potentially billions of dollars.

What sane individual would be part of this? Under these circumstances even a barely competent company director, never mind a sophisticated and skilful one, would simply refuse to be an INED (independent non-executive director), or any other form of company director for that matter.

Here’s another problem. With these rules in place, I suspect it will be well-nigh impossible for the concessionaires to procure Directors and Officers (D&O) Insurance, something most major companies do in the interests of financial prudency.

If these provisions remain in the final version of the Macau gaming law, we could see a spate of concessionaire board director resignations. And they will likely be replaced by people who do not really understand what they are getting themselves into.

The seventh article in this series will be published later this week.

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