The Company Law in China, which rules over all registered companies including foreign invested enterprises (FIEs), mandates a two-tier board system structure, consisting of a board of directors managing the company and a supervisory board overseeing the management.
Under the Company Law, the shareholders’ meeting is the highest decision-making body, and the board of directors must enforce resolutions approved at shareholders’ meetings.
Some of the responsibilities that the board of directors has, include:
to convene shareholders’ meetings and report to the board of shareholders;
to execute the resolutions passed by the board of shareholders;
to decide on the business plans and investment schemes of the company;
to formulate the annual financial budget and financial accounting plan of the company;
to formulate the profit distribution plan and loss recovery plan of the company;
to formulate the plan for the increase or reduction of registered capital and issuing corporate bonds;
to formulate the plan for a merger, division, dissolution or change of company structure;
to decide on the set-up of internal management organization of the company;
to decide on the appointment or dismissal of company managers and their remuneration, and decide on the appointment or dismissal of deputy managers and the finance controller of the company based on the nomination by the managers; and
to formulate the basic management system of the company.
Among the duties that the board of directors must carry out are:
to inspect the company finances;
to supervise the performance of duties by directors and senior management personnel and propose to remove a director or a member of the senior management who violates the provision of the laws and administrative regulations and the articles of association of the company or the resolutions of the board of shareholders;
to require a director or a member of the senior management who acts against the interests of the company to make corrections;
to propose to convene an ad hoc shareholders’ meeting, and convene and chair a shareholders’ meeting when the board of directors fails to convene and chair a shareholders’ meeting in accordance with the provisions of the Company Law;
to make proposals at shareholders’ meetings; and
to file a lawsuit against a director or a member of the senior management in accordance with the provisions of article 151 of the Company Law.
Though independent from each other, both the board of directors and the board of supervisors owe legal duties to the shareholders and the company. While the board of directors has the executive rights of the company, the board of supervisors has the right to inspect the finances and supervise the performance of duties by directors and senior management.
Any shareholder of a limited liability company (LLC) or a company limited by shares (CLS) who alone or jointly holds at least 1 per cent of the company's shares for at least 180 days in succession has the right to request the supervisory board (or supervisors) to start legal proceedings against a director or board member who violates fiduciary duties or the company’s articles of association.
If the supervisory board or the supervisors fail to start legal proceedings within 30 days of the date of the request or, in urgent circumstances, where failure to promptly start legal proceedings could cause irreparable harm to the company's interests, the shareholders have the right to directly start proceedings in a court in their own name.
The Guidelines on Governance of Listed Companies state that directors shall perform their duties loyally, diligently, and prudently.
Generally, in Chinese practice the duties of individual members of the board do not differ from each other irrespective of the difference in skill or experience. In most companies, directors have the same duties following the provisions of the Company Law and the articles of association.
If the board members also serve as officers in charge of a specific aspect of the management of the company, the duties of these board members in this sense will differ. However, for listed companies, the Guidelines on Governance of Listed Companies stipulate that the professional structure of the board of directors must be reasonable.
Members of the board of directors must have the necessary knowledge, skills, and quality for the performance of their duties. Furthermore, diversity in the members of the board of directors is encouraged.
Based on the company's needs, the board of directors must set up an audit committee and may establish specialized committees, such as nomination, remuneration and strategic committees, where all members are directors. The head of the audit committee must be an accounting professional.
According to the Company Law, the board of directors may delegate management responsibilities to managers on the following matters:
the management of the production and business operations of the company and organizing and implementing resolutions passed by the board of directors;
the organization and implementation the annual business plan and investment scheme of the company;
the draft of plans for setting up the internal management organization of the company;
the draft of the basic management system of the company;
the formulation of company rules and policies;
the recommendation, appointment or dismissal of management staff other than those positions that are to be decided by the board of directors; and other duties and rights granted by the board of directors.
In China, there is no legal concept of the non-executive director. The law requires that a listed company establish an independent director system and at least a third of board members must be independent directors, including at least one accounting professional.
The term ‘independent director of a listed company’ under Chinese law is defined as a director who does not hold any position in the company other than director and who has no relationship with the listed company engaging him or her or its principal shareholders that could hinder his or her making independent and objective judgements.
Listed companies should grant independent directors the following special functions and powers, in addition to the ones granted by the law:
to approve major related-party transactions (referring to transactions that the listed company intends to conclude with the related party and whose total value exceeds 3 million yuan or 5 per cent of the company’s net assets audited recently) before being submitted to the board of directors for discussion. Before the independent director makes his or her judgement, an intermediary agency can be employed to produce an independent financial advisory report, which will serve as the basis for his or her judgement;
to put forward the proposal to the board of directors relating to the appointment or removal of the accounting firm;
to propose to the board of directors the calling of an interim shareholders’ meeting;
to propose to call a meeting of the board of directors;
to appoint the external auditing or consulting organization independently; and
to solicit the proxies before the convening of the shareholders’ meeting.
Besides the above duties, the independent director shall provide an independent opinion on matters such as the nomination, appointment, or replacement of directors; the appointment or dismissal of senior managers; and remuneration for directors and senior managers; among other.
The Company Law states that an LLC must have a board of directors with between three and thirteen members. A small size LLC with fewer shareholders can have one executive director instead of a board of directors.
For an LLC established with investment from two or more state-owned enterprises or two or more other types of state-owned investors, the members of its board of directors must include employee representatives of the company.
A supervisory board of an LLC must have at least three members. LLCs with relatively fewer shareholders may appoint one or two supervisors instead of establishing a supervisory board.
The board of directors of a CLS must have five to 19 members, and a supervisory board must never have less than three members.
The composition of directors or supervisors is regulated in the articles of association. Shareholders decide at their meetings how to fill vacancies on the board or among newly created directors or supervisors.
At the incorporation of a company, the identities of each member of the board of directors and supervisors must be registered with the commercial registry and any changes regarding the board members must also be registered. The names of board members of a company can be found in the National Enterprise Credit Information Publicity System.
The Company Law does not require the separation of functions between a board’s chair and the chief executive or president. For LLCs, especially small ones, a person may perform the dual role of the board chair and CEO. For a CLS, to avoid conflict of interest, the separation of the board chair and CEO roles is a more reasonable approach.
There is no minimum number of meetings a LLC’s board of directors must hold each year, but its board of supervisors must convene at least one meeting per year. A CLS must have at least two meetings of its board of directors every year, and at least one meeting of its board of supervisors every six months.
There is no mandatory requirement for the evaluation of the board in LLCs or CLSs. Companies may implement their own evaluation system in the articles of association.
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