China’s corporate leadership style has changed in the past few years due to the country’s competitive market, rapid industrial and digital transition, enormous consumer base, large labor force, and advanced manufacturing infrastructure. However, the Company Law is strict when it comes to corporate governance.
China has shown an ability to adapt to practical and economic difficulties, as well as a strong desire to improve its business environment, economy, industry, and technological development.
According to the Company Law, the general meeting of all shareholders is the corporate organ with the highest authority at an LLC and applies to both domestic companies and FIEs (Foreign Invested Enterprises).
Before 2020, all Equity Joint Venture Enterprise (EJV) and Co-operative Joint Venture Enterprises (CJV) were required to make the board of directors the highest corporate organ with the highest authority.
Typically, a board would have between three and 13 directors. If representation at the board is made properly in accordance with the equity ratio of each shareholder, changing the structure is simply a procedure.
On the other hand, if the equity ratio is close, whether the minority shareholder has the veto right and whether the simple majority would win on all cases will become a big topic for the shareholders to discuss.
In an LLC, the highest authority is represented by the general meeting of all shareholders. It has the power to decide how the corporate governance shall be arranged and decided. The Company Law lists the statutory powers and duties of the general meetings of all shareholders as follows:
Decide on the business direction and investment plans of the company;
Elect and remove directors and supervisors who are not representatives of the employees and decide on the remuneration of directors and supervisors;
Review and approve reports of the board of directors;
Review and approve reports of the supervisors or the board of supervisors;
Review and approve the annual financial budget and financial accounting plan of the company;
Review and approve the profit distribution plan and loss recovery plan of the company;
Resolve on an increase or reduction of registered capital of the company;
Resolve on issue of corporate bonds;
Resolve on merger, division, dissolution, liquidation or change of company structure; and amend the articles of association (AoA) of the company.
The general meeting of all shareholders may discuss additional matters and powers, and decide to amend the AoA, which are the backbone of a company. It can also delegate certain powers to the board of directors through a provision of the AoA or special resolution.
The voting power of each shareholder is entitled in accordance with each shareholder's contributed equity ratio, unless otherwise provided in the AoA. For example, if a shareholder owns 33.2 per cent of the equity, it will be entitled to 33.2 per cent of the votes.
Quorum of the general meetings of all shareholders
The law does not specify a quorum of the general meetings of all shareholders and leaves it to the shareholders to decide in the AoA. For instance, if a general meeting is called and held to discuss the dividend issue or a capital decrease, legally, every shareholder's interest would be affected. It is best to have a proper procedure for calling and holding the meeting, as well as the quorum being at a reasonable level, to avoid a potential dispute with absent shareholders.
A valid resolution of the general meeting of all shareholders must be made in writing with sufficient supportive voting rights. The meeting or the voting itself is permitted by law to be done in offline or online form. If a resolution is passed and approved unanimously, the law allows not to hold a shareholders' meeting as long as every shareholder signs the resolution.
The board of directors or executive director
The Company Law states that a board of directors must have between 3 and 13 members. If it is a smaller LLC, it is permissible to have one executive director instead of a board of directors. The shareholders may, through the AoA, decide how to nominate, appoint, and remove a director of the board or the executive director.
If a board of directors is formed, the Company Law requires a chair of the board to be appointed, and one or more vice chairs of the board may be appointed if the AoA so provides. The Company Law does not clarify the method of selection of the chair and vice chair(s) and leaves it to the AoA.
If an LLC has two or more state-owned shareholders, it is required to have an employee representative appointed as a member of the directors of the board. Other LLCs that are not owned by two or more state enterprises are free to have or not an employee representative. If one is to be appointed, it must be elected by the employees through a democratic election.
Three years is the term for the directors, and they can be reappointed repeatedly without limitation of the terms.
The director must be an individual with full capacity of civil rights, and it cannot be an organization. There is no nationality or residency requirement. A director of an LLC in China could have any nationality and live anywhere outside or inside of China, unless the AoA impose any restriction.
According to the Company Law, any individual under the following circumstances shall not be appointed as a director:
A person with no civil capacity or limited civil capacity;
A person convicted for corruption, bribery, misappropriation of property or disruption of the order of socialist market economy and a five-year period has not lapsed since expiry of the execution period, or they have been stripped of political rights for being convicted of a crime and a five-year period has not lapsed since expiry of the execution period;
A person who acted as a director, factory manager or manager in a company that has been declared bankrupt or liquidated and were personally accountable for the bankruptcy or liquidation of the company, and a three-year period has not lapsed since the completion of bankruptcy or liquidation of such company;
A person who acted as a legal representative of a company that has had its business license revoked or been ordered to close down for breach of law and were personally accountable, and a three-year period has not lapsed since the revocation of the business license of such company; and
Is unable to repay a relatively large amount of personal debts.
Board of directors or executive director’s power and duties
Under the Company Law, the board of directors or executive director of an LLC has the following statutory powers and duties:
convene shareholders' meetings and report to the general meetings of all shareholders;
execute the resolutions passed by the general meetings of all shareholders;
decide on the company's operation and investment plans;
formulate the annual financial budget and financial accounting plan of the company;
formulate the profit distribution plan and loss recovery plan of the company;
formulate the plan for an increase or reduction of registered capital and issue of corporate bonds;
formulate the plan for merger, division, dissolution or change of company structure;
decide on the set-up of internal management organization of the company;
decide on appointment or dismissal of company managers and their remuneration and decide on appointment or dismissal of deputy managers and employees in charge of finance matters on the basis of the nomination by the managers; and
formulate the internal management regime of the company AoA.
Except in the above circumstances, the law permits that the meetings of all shareholders may, through the AoA or resolutions, add, reduce, expand, or limit the powers and duties of the board of directors.
Resolutions and Board meetings
Each director has one vote at each resolution regardless of the equity ratio of the shareholders it represents. The AoA of the LLC may stipulate the frequency of the board meeting, the procedure, the venue, the cost and burden, and the voting. Unless otherwise stipulated, a resolution would be approved by simple majority of the directors present at the board meeting, provided that the meeting is called and presided over properly, and the quorum is met in accordance with the provisions of the AoA.
The chair of the board does not have any extra vote or power to overrule any discussion. The chair has the power to call, preside over and record the board meeting but does not have veto rights or super vote power.
The Company Law requires an LLC to have a manager, who commercially is called the general manager. The general manager is responsible for execution of the board's resolutions and manages and oversees the business operations. The AoA decide how many managers will be appointed. Typically, there is one general manager and several deputy general managers.
The board of directors appoints and removes the managers, including the general manager. There are no restrictions on the nationality and residency of the manager.
'Legal representative' is a person who represents the company in any and all circumstances. The legal representative of an LLC has the authority to represent the company, and anything signed by the legal representative would be binding and effective.
The legal representative could be either the chair of the board or the general manager, whichever is provided by the AoA. Every Chinese LLC is required to have one legal representative registered at the corporate register for publicity.
The AoA may restrict the representation scope of the legal representative. If a legal representative acts out of the authorized scope, the company legally assumes the corresponding civil liability to bona fide third persons. Under such circumstances, the company may sue the legal representative for breach of the AoA.
Board of supervisors or supervisor
The Company Law requires that LLCs have a board of supervisors with at least three members and include employees' representatives. The ratio of employees' representatives therein shall not be less than one-third. Directors and senior management personnel may not take the role of supervisor.
An LLC with relatively fewer shareholders or of a smaller scale may appoint one to two supervisor(s) instead of establishing a board of supervisors where the supervisor(s) appointed is not required to be an employee representative.
The statutory duty and power of a board of supervisors or a supervisor includes inspection of the company finances, supervision of the performance of the directors and senior management, proposing to convene ad hoc shareholders' meetings and making proposals, and asking the director or senior management to correct or initiate a lawsuit against a director or senior management who violates their fiduciary duties.
Amendment of the governance regime for EJVs and CJVs
The governance regime for EJVs and CJVs in the form of an LLC incorporated under the Sino-Foreign Equity Joint Venture Enterprise Law and the Sino-Foreign Co-operative Joint Venture Enterprise Law is different from that stipulated under the Company Law.
Foreign invested EJVs and CJVs should revise the AoA, which may trigger a shift of power balance among the shareholders. It is important that foreign companies amend the AoA to be compliant with the Company Law.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.