Executive Summary

In 2025, a major Korean display and semiconductor component supplier with a manufacturing subsidiary in Suzhou, Jiangsu Province, faced a complex Directors & Officers (D&O) liability claim following the termination of a Chinese national sales director. The former employee filed a wrongful termination lawsuit against the company and two individual Korean expatriate directors, alleging that his dismissal was retaliation for whistleblowing on pricing irregularities that may have implicated anti-bribery and anti-money-laundering (AML) concerns. This case study examines how the company’s Side A, B, C D&O insurance policy—placed with a leading international insurer through its China-licensed branch—responded to the claim, how defense counsel and Chinese labor law specialists were deployed, and how the matter was ultimately resolved through court-mediated mediation. The total cost of RMB 1.13 million (defense costs of RMB 680,000 plus a settlement of RMB 450,000) was covered by the policy less a RMB 100,000 deductible. The case offers critical lessons for foreign-invested enterprises (FIEs) operating in China on corporate governance, whistleblower protections, termination documentation, and the structuring of D&O coverage for cross-border exposures.

Company Background

The subject of this case study is a Seoul-headquartered multinational corporation that is among the world’s top five suppliers of display driver integrated circuits (DDICs) and semiconductor packaging substrates. The group reported consolidated annual revenue of approximately KRW 8 trillion (roughly USD 6 billion) in fiscal 2024, with its China operations generating approximately RMB 4 billion in revenue.

Its wholly foreign-owned enterprise (WFOE) in China is located in the Suzhou Industrial Park (SIP), one of the country’s most established manufacturing and technology hubs. The subsidiary, established in 2008, employs approximately 1,200 staff comprising Chinese national engineers, production workers, sales professionals, and administrative personnel, alongside a small cohort of Korean expatriate managers and directors. The Suzhou facility functions as both a manufacturing plant for display components sold to Chinese OEMs and a regional sales and technical support hub for greater China.

The subsidiary’s corporate governance structure includes a board of directors with three members: two Korean nationals seconded from headquarters and one Chinese national independent director. The day-to-day management is led by a Korean country manager (who also serves as legal representative) supported by Chinese national department heads covering sales, operations, finance, and human resources.

The Whistleblower and the Termination

The claimant, a Chinese national in his late forties, had served as the subsidiary’s Sales Director for the China domestic market for approximately eight years. He was responsible for a sales team of 25 people and managed relationships with several major Chinese display panel manufacturers. In early 2025, he raised concerns internally through the company’s compliance hotline about what he described as irregular pricing practices in several large contracts—specifically, allegations that certain volume-discount arrangements and rebate structures were being used in ways that could potentially contravene both the company’s internal anti-corruption policy and, in his view, China’s Anti-Unfair Competition Law.

Following an internal review that the company characterized as inconclusive regarding any impropriety, the Sales Director was placed on administrative leave and subsequently terminated for what the company cited as “poor performance and failure to meet sales targets.” The termination was carried out under Article 40 of the PRC Employment Contract Law, which permits dismissal for incompetence after training or adjustment of position. However, the employee disputed this characterization, arguing that his performance metrics had been met in three of the preceding four quarters and that the real motive for his dismissal was retaliation for his whistleblowing complaint.

The D&O Incident: Wrongful Termination Lawsuit

In March 2025, the former Sales Director initiated legal proceedings by filing a petition with the Suzhou Labor Personnel Dispute Arbitration Commission (the local labor arbitration tribunal). His claim named three respondents:

• The company (the WFOE): for wrongful termination in breach of the PRC Employment Contract Law;
• Director A (Korean, Country Manager/legal representative): for personal involvement in the termination decision and alleged retaliation;
• Director B (Korean, Head of Operations): for alleged participation in the decision to terminate and for purportedly making defamatory statements about the claimant’s performance during exit proceedings.

The employee sought reinstatement and back pay (equivalent to approximately 18 months’ salary plus benefits) or, alternatively, severance of RMB 1.2 million, plus RMB 300,000 in compensation for emotional distress and reputational harm. Critically, the employee’s legal representatives also signaled in correspondence that they intended to share documentation of the alleged pricing irregularities with the Suzhou Market Supervision Administration and, potentially, the Public Security Bureau’s Economic Crime Investigation Division, raising the specter of AML and anti-bribery cross-referencing by Chinese authorities.

Regulatory Dimensions: Beyond Employment Law

What elevated this case beyond a routine labor dispute was the regulatory cross-exposure. The whistleblower’s allegations touched on pricing practices that, if proven to involve kickbacks or improper inducements to procurement officers at customer firms, could attract scrutiny under China’s Anti-Unfair Competition Law, the Criminal Law (Article 163 on commercial bribery), and the broader anti-money laundering framework administered by the People’s Bank of China (PBOC).

For FIEs, this type of cross-referencing is a growing risk. Chinese enforcement authorities increasingly share intelligence across agencies. A labor arbitration filing that surfaces allegations of financial impropriety can trigger parallel inquiries from market regulators, tax authorities, and even customs. In this case, the company’s legal team prepared proactively for the possibility that the Suzhou labor tribunal might, under its procedural rules, refer evidence of suspected criminal conduct to the relevant prosecutorial authorities.

The company also faced potential reputational damage with its Chinese customers, many of whom are state-owned enterprises (SOEs) with zero-tolerance policies toward bribery and corruption among their suppliers.

The D&O Insurance Policy

The company had in place a comprehensive D&O liability insurance policy arranged through a leading international insurer with a licensed branch in Shanghai. The policy was placed on a non-admitted basis but underwritten through the insurer’s China branch, ensuring that coverage responded to Chinese-law claims and that premium payments and claims were handled within the regulatory framework of the China Insurance Regulatory Commission (now part of the National Financial Regulatory Administration, NFRA).

Policy Structure: Side A, B, and C Coverage

The D&O policy was structured as a standard three-tier coverage form:

• Side A (Directors & Officers Personal Liability): Provides coverage to individual directors and officers when the company is unable or unwilling to indemnify them. This was critical for Director A and Director B, both of whom were named as individual respondents. Under Chinese law, a company’s ability to indemnify directors for certain types of liability may be restricted, making Side A coverage essential for expatriate directors.
• Side B (Corporate Indemnification): Reimburses the company when it has indemnified its directors and officers for losses. In this case, the company initially bore the legal costs of defending the directors and then sought reimbursement under Side B.
• Side C (Entity Coverage): Provides direct coverage to the company itself for securities claims. While the primary claim in this matter was a labor/employment dispute rather than a securities claim, the Side C wording was broad enough to encompass certain regulatory investigation costs, providing an additional layer of protection.

The policy carried an aggregate limit of USD 10 million, a per-claim sub-limit of USD 5 million, and a self-insured retention (deductible) of RMB 100,000. Defense costs were covered within the limit of liability (i.e., they eroded the policy limit), which is standard for D&O placements in the Asia-Pacific market.

The Claims Process

Immediate Notification and Counsel Appointment

Within 48 hours of receiving the arbitration petition, the company’s general counsel (based in Seoul) notified the insurer’s Shanghai-based claims team through the broker. The notification included the petition, correspondence from the claimant’s lawyers, and a preliminary assessment of the allegations. The insurer acknowledged coverage subject to a full reservation of rights pending further investigation of the facts.

The company, with the insurer’s consent, appointed a leading international law firm’s Shanghai office as defense counsel. The firm had dedicated PRC employment law, investigations, and dispute resolution practices. Two additional specialists were seconded onto the matter:

• A Chinese labor law specialist from a top-tier domestic firm, to navigate the Suzhou labor arbitration procedures and advise on the substantive merits of the wrongful termination claim under PRC law.
• A regulatory investigations lawyer to prepare a defensive brief addressing the pricing-allegation dimensions and to proactively engage with the Suzhou Market Supervision Administration if required.

Coverage Analysis: Side B + Side A in Practice

The coverage analysis proceeded along two tracks. Under Side B (Corporate Indemnification), the insurer agreed to reimburse the company for legal costs incurred in defending the corporate entity and for indemnifying the two directors for their defense costs. Under Side A (Directors Personal Liability), a backstop was established: if a judgment or settlement imposed personal liability on either director that the company was legally unable to indemnify (for instance, under PRC company law restrictions on indemnifying directors for intentional misconduct), Side A would respond directly to the directors.

This dual-track structure proved important because the claimant’s allegations of retaliation arguably touched on conduct that, if proven, could be characterized as intentional or knowing misconduct. Under most D&O policies, intentional wrongful acts are excluded from Side A coverage. However, the insurer’s coverage counsel analyzed the facts and concluded that the allegations, even if proven, sounded in wrongful termination rather than intentional fraud or criminal conduct, meaning the policy’s “conduct exclusion” was not triggered absent a final adjudication of deliberate illegality.

Defense Costs Management and Insurer Consent

The D&O policy contained standard consent-to-settlement and consent-to-defense-costs clauses. The insurer required that all material steps—including the selection of expert witnesses, the filing of substantive pleadings, and any settlement discussions—be pre-approved. The claims team held bi-weekly conference calls with defense counsel and the company’s legal department to monitor costs and strategy.

Defense costs were managed through a combination of a discounted hourly rate arrangement negotiated between the insurer and the law firm, and a defense budget that was updated monthly. Total defense costs through the conclusion of the matter amounted to RMB 680,000, which fell within the budget projections and was fully reimbursed under the policy, subject to the deductible.

Settlement Negotiation Strategy

After the initial round of arbitration pleadings, it became evident to defense counsel that the labor arbitration tribunal was likely to find procedural deficiencies in the company’s termination process. Specifically, the company had failed to:

• Document a formal performance improvement plan (PIP) for the Sales Director before terminating for alleged incompetence;
• Provide evidence that the employee had been offered an alternative position or training as required under Article 40 of the PRC Employment Contract Law; and
• Maintain contemporaneous records of the whistleblowing complaint and the internal investigation.

Given these procedural gaps, the legal team recommended settlement. The insurer, after reviewing the risk assessment, consented to settlement negotiations. The strategy was to engage a court-appointed mediator through the Suzhou Industrial Park People’s Court’s mediation center, which offered a confidential forum less adversarial than the arbitration tribunal.

After three mediation sessions over a period of six weeks, the parties reached an agreement. The settlement terms included:

• A lump-sum payment of RMB 450,000 to the former employee;
• A mutual confidentiality agreement prohibiting both parties from disclosing the terms or the underlying allegations;
• The employee’s agreement to withdraw all claims and to refrain from sharing documents with regulatory authorities; and
• No admission of liability by the company or the individual directors.

Total Costs and Insurance Recovery

The policy responded as follows: defense costs of RMB 680,000 were reimbursed under Side B (corporate indemnification) as the company had initially paid these costs; the settlement of RMB 450,000 was apportioned between Side B and Side A, with the Side A component serving as a backstop for any portion of the settlement that could be attributed to the individual directors’ alleged personal liability. The RMB 100,000 deductible was applied as a single retention per claim, consistent with the policy terms. The entire claim was resolved within nine months of the initial notification, and the policy limit was not materially eroded beyond the settlement and defense costs.

Lessons Learned

1. Corporate Governance for FIEs in China

This case underscores the importance of ensuring that corporate governance practices at Chinese subsidiaries meet both home-country and host-country standards. The parent company in Seoul had robust whistleblower and compliance policies at the group level, but these were not fully implemented or documented at the Suzhou subsidiary level. The internal investigation of the pricing irregularity allegations was conducted informally, without a written report or clear chain of evidence, which weakened the company’s position when the employee alleged retaliation.

2. Whistleblower Policies Must Be Locally Effective

While the company had a group-wide whistleblower hotline operated from Seoul, Chinese national employees often face language and cultural barriers to using such channels. The subsidiary did not have a China-specific whistleblower policy that clearly outlined protections against retaliation in terms recognizable under PRC law. A best practice for FIEs is to maintain a dual-channel whistleblower mechanism—a global hotline supplemented by a local, Chinese-language channel administered by a third party and subject to PRC data privacy requirements under the Personal Information Protection Law (PIPL).

3. Documentation of Termination Procedures Is Non-Negotiable

The single most critical factor that weakened the company’s defense was the absence of proper documentation of the performance improvement process. Under PRC labor law, terminating a “non-performing” employee requires a rigorous paper trail: objective performance criteria, documented evidence of failure to meet those criteria, a formal PIP, evidence of training or position adjustment, and written records of the employee’s response. The company’s HR department, accustomed to Korean employment practices where at-will termination is more common for managerial staff, did not adhere to these PRC-specific requirements. This gap turned a defensible termination into a likely liability.

4. D&O Insurance Is Only as Good as the Claims Response

The company’s experience demonstrated that a well-structured D&O policy is indispensable, but its value depends on prompt notification, skilled defense counsel, and a cooperative relationship with the insurer’s claims team. The decision to notify the insurer within 48 hours ensured that coverage was confirmed early and that defense strategy was developed with the insurer’s input. Companies that delay notification risk coverage disputes or, worse, forfeiture of coverage under policy provisions requiring timely notice.

Key Takeaways for Foreign Companies with China Operations

1. Invest in China-specific employment law compliance. PRC labor law is procedurally rigorous and employee-friendly. Foreign companies must ensure that their HR teams in China are trained on the documentation requirements for terminations, performance management, and disciplinary actions. A well-documented process is the first line of defense against wrongful termination claims.
2. Implement a localized whistleblower policy. A group-level compliance hotline is insufficient. FIEs should establish a China-specific whistleblower channel that complies with PIPL, offers Chinese-language support, and clearly communicates non-retaliation protections under PRC law. The policy should designate a responsible officer within China who can independently investigate complaints.
3. Train expatriate directors on PRC personal liability risks. Many Korean and other foreign expatriate directors serving on China subsidiary boards are unaware that they can be named personally in PRC labor and regulatory proceedings. D&O insurance training sessions for directors should include specific China scenarios, including wrongful termination, regulatory investigations, and personal liability for workplace safety or environmental non-compliance.
4. Secure D&O coverage with a China-licensed insurer. A D&O policy issued by a China-licensed branch ensures that claims are adjudicated within the Chinese regulatory framework and that premium payments and claims payouts are compliant with NFRA requirements. Non-admitted policies may face regulatory obstacles in responding to Chinese claims, including currency controls and service-of-process issues.
5. Engage specialist Chinese labor counsel early. In this case, the early involvement of a PRC employment law specialist prevented the company from taking procedural positions in the arbitration that would have been difficult to reverse. Foreign companies should maintain a retainer relationship with a qualified PRC labor law firm, even when no active disputes exist.
6. Document everything. The strength of the company’s defense—and the insurer’s willingness to fund coverage—was directly correlated with the quality of the documentation available. From board resolutions to HR communications, contemporaneous records in both English and Chinese are the bedrock of a successful D&O claim response.

Conclusion

The case of the Korean electronics firm’s D&O claim in China illustrates the convergence of employment law, corporate governance, and insurance risk management that foreign-invested enterprises must navigate in today’s Chinese regulatory environment. A well-structured D&O insurance policy—placed with a China-licensed insurer and covering Side A, B, and C exposures—provided the financial backbone for the company to defend its directors and resolve the claim without catastrophic cost. However, the case also reveals that insurance alone is not a substitute for robust local governance. The procedural gaps in the termination process, the inadequate documentation of the whistleblower complaint, and the lack of a localized compliance infrastructure all contributed to the claim’s severity.

For foreign companies operating in China, the lessons are clear: invest in local employment law compliance, implement whistleblower policies that work within the PRC legal framework, ensure expatriate directors understand their personal exposure, and structure D&O coverage with a China-licensed insurer who understands the local claims environment. The RMB 1.13 million that this claim cost—RMB 1.03 million of which was recovered under the D&O policy—represents a relatively modest outcome given the potential exposure. Had the pricing irregularity allegations triggered a full-scale regulatory investigation, or had the case proceeded to an adverse arbitration award with punitive damages, the costs could have been multiples of what was ultimately incurred.

As China continues to strengthen its enforcement of labor, anti-bribery, and corporate governance laws, the importance of comprehensive D&O insurance tailored to the Chinese market will only grow. Foreign companies that treat D&O coverage as a standard global program line item—rather than a China-specific risk management tool—do so at their peril.

This case study is provided for informational purposes only and does not constitute legal or insurance advice. Company names and certain factual details have been anonymized or modified to protect confidentiality. CG360 recommends that foreign companies consult with qualified legal counsel and insurance brokers regarding their specific circumstances in China.