How Chinese Investors Can Manage Directors’ Authority in UK Acquisitions 

For Chinese investors acquiring a majority stake in a UK business, understanding the framework of corporate governance is essential. A common area of cultural and legal friction arises from the significant inherent authority of UK company directors under the UK Companies Act 2006 (the Act).

In this blog we explain how directors’ authority operates under the Act, contrast this with the position under law of the People’s Republic of China (PRC Law) and set out practical governance strategies that can help Chinese investors maintain effective oversight and financial control following a UK acquisition.

How directors’ powers work under the Companies Act 2006

Under the Act, the board of directors is responsible for managing a company’s day-to-day business. Importantly, directors’ authority is inherent — it does not derive from shareholders. Directors also owe their duties to the company itself, not directly to shareholders.

A fundamental principle of the Act is the concept of “ostensible authority”.

What “ostensible authority” means in practice

“Ostensible authority” means that a third party dealing with a director is generally entitled to assume that the director has full power to bind the company, unless it can be shown that the third party acted in bad faith.

Section 40 of the Act provides that:

“In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution… A person dealing with a company is presumed to have acted in good faith unless the contrary is proved, and is not to be regarded as acting in bad faith merely because they know the act is beyond the directors’ powers under the constitution.”

In practice, the threshold for proving bad faith is high.

How UK corporate governance differs from PRC LAW

The position under PRC law is more nuanced. While the general principle is similar, mere knowledge of constitutional restrictions is usually not enough to establish bad faith.

However, Section 16 of the Company Law of the People’s Republic of China (Company Law)imposes specific statutory requirements, including:

1. a company may only invest in another business or provide guarantees if approved by its board or shareholders, as required by the articles;
2. if the articles impose caps on investments or guarantees, these must not be exceeded; and
3. if a guarantee is provided for a shareholder or beneficial owner, the decision must be approved by the shareholders’ meeting.

In practice, PRC courts have not applied these rules consistently. Some courts treat Section 16 as a clear statutory requirement, effectively assuming that third parties are deemed to know the limitations and must request proof of authorisation before contracting with the company.

This divergence in approach can create uncertainty for Chinese investors when considering how to structure post-completion governance in a UK target company.

Practical governance strategies to strengthen investor control

While risks cannot be eliminated entirely, a multi-layered governance framework can provide Chinese investors with greater oversight and comfort. Practical strategies include:

1. Articles of association

As the company’s constitutional document, the articles of association can include a comprehensive list of “reserved matters” requiring prior shareholder approval. These may cover:

• contracts above a financial threshold;
• borrowing beyond a specified limit;
• issuing new shares or altering share capital; and
• acquisitions or disposals of major assets.

2. Board composition

Investor representation on the board is a critical safeguard. The articles or shareholders’ agreement can require that key decisions — such as approving budgets or major contracts — need the affirmative vote of the investor-appointed director. In some cases, casting votes can be granted to investor directors.

3. Shareholders’ agreement

This binding contract between shareholders supplements the articles. It can include, among others:

• “bad leaver” provisions forcing directors (who may also be shareholders – a common practice in SMEs in the UK) who breach their duties or policies to sell their shares at a discount;
• additional reserved matters; and
• mechanisms to resolve disputes and enforce investor rights.

4. Corporate governance policy

An internal policy document can set out detailed operational rules, including:

• delegated authorities
• financial signing limits
• procedures for procurement, tenders, and capital expenditure.

Once approved by the board, it becomes binding on management.

5. Directors’ service agreements

As employment contracts, these agreements can reinforce directors’ duties, require compliance with company policies, and provide termination rights for misconduct or breaches of fiduciary duty.

6. Bank mandates

Controlling access to company bank accounts is often one of the most effective safeguards. Dual signatories (including at least one investor-appointed director) should be required for payments above an agreed threshold. However, some UK banks may require at least one UK-resident director on the mandate, so this should be confirmed with the bank beforehand.

Beyond legal controls: the importance of aligning expectations post-completion

Legal protections are critical, but experience shows that education and alignment are equally important. For overseas investors managing UK businesses, taking the time to:

• explain the UK legal framework to China-based leadership;
• maintain open communication with senior management; and
• work closely with experienced UK legal counsel;

can help manage expectations and ensure smooth and effective post-completion operation.

Conclusion

By combining legal structuring with practical safeguards, Chinese investors can create a governance framework that respects English law whilst providing meaningful oversight and financial protection.

A multi‑layered strategy, implemented early, ensures compliance as well providing the confidence, to manage a UK business effectively post-acquisition.

Investors considering a UK acquisition, or reviewing governance arrangements post‑completion, should ensure that authority, approval thresholds and enforcement mechanisms are aligned with commercial expectations.

Early advice on governance design can be particularly valuable, as many issues are difficult and costly to unwind after completion.

This content is provided for general informational purposes only and does not constitute legal advice. It is not intended to address the circumstances of any individual or entity, nor should it be relied upon as a substitute for specific advice from a qualified solicitor. The information reflects the legal position as at the date specified and may be subject to change. If you require advice on a specific matter, please contact us directly.