Unlike the position of shareholder and director, whose role and functions is more immediately known and comprehensible to laymen, that of supervisor are very often underestimated, misconceived, if at all overlooked. Very often, especially in foreign-invested companies, the position of supervisor is taken by a person (or persons) who is (are) not fully aware of the requirements and consequences of such a role.
As a matter of fact, such a position and role in PRC companies may turn out to be crucial in certain circumstances.
In this article we try to briefly describe the role, functions, duties and liabilities of PRC company supervisors, as set forth in the company law of the PRC (the “Company Law”). This short analysis focuses only on supervisors of private companies (leaving out the relevant provisions applying to PRC state-owned companies).
According to the Company Law, PRC companies are required to appoint a board of supervisors consisting of no less than 3 members. Only limited liability companies with a relatively small number of shareholders or which are relatively small in scale may appoint 1 to 2 supervisors instead of a board. Supervisors are appointed by the shareholders and their actions and role are independent from those of the directors.
If a board of supervisors is appointed, it must include representatives of the shareholders' representatives and representatives of the employees (elected by the employees) in the ratio prescribed by the law. In practice, most private limited liability companies do not appoint a board of supervisors, but very often only one supervisor.
Due to the specificity of their duties, supervisors cannot be selected amongst the directors or senior management personnel of the company.
The supervisors' main role is to protect the interest of the company and the shareholders. In exercising their role, the supervisors will above all be required to oversee the business of the company; for such purpose, supervisors have the right to check the financial affairs of the company and inspect the company's books. In general, whenever they find that the company is not running normally, supervisors are required to conduct an investigation.
Supervisors are also required to oversee the performance of the directors and other senior management personnel of the company; if a violation of the law, provisions of the articles of associations or resolution of the shareholders is committed, causing harm to the interests of the company, supervisors have the right to require corrections to be made, propose that directors or other senior personnel be removed from their position, and even file a lawsuit against them on behalf of the company where so requested by the shareholders. Directors and senior managers of a company are required to cooperate with the supervisors and provide them with any information and materials the supervisors may request.
Supervisors play a more active role when, under specific circumstances, they are required to supplement the functions of the directors. In particular, this may happen where directors fail to convene or preside over shareholders' meetings; in such event, supervisors are required to call, and preside over, the meetings. In other circumstances, supervisors may also propose to call interim shareholders' meetings and also put forward proposals at shareholders' meetings.
Supervisors are also required to attend shareholders' meetings when so required by the shareholders. Similarly, supervisors may attend the meetings of the board of directors as non-voting attendees, and may raise questions or suggestions about the meeting agenda discussed by the board of directors.
The foregoing describes the normal powers of the supervisors as provided for in the Company Law. The shareholders may agree to extend the powers of the supervisors by establishing different provisions in the articles of association of the company.
Supervisors play an important role within the company as they ensure that the activities of the company are actually carried out in the interests of the company and in accordance with the articles of association and the law. One of the reasons why this role and function are often not given all the attention they deserve within the organisation of foreign-invested companies in the PRC is that very often in these companies people who are entrusted with management positions are selected amongst persons well-known to, and in close contact with, the investor(s), thus rendering the supervision of their activities less immediately necessary.
This is particularly true for those foreign-invested companies that have a sole shareholder and that actually already exercises a strict form of control over the company's activities.
However, the situation changes drastically for those companies that are invested by more than one shareholder (and even more in case of foreign shareholders) and where the composition of the board of directors is likely to reflect the plurality of the shareholders and their interests.
In such cases, a supervision of the management's operations and activities acquires a greater importance and, consequently, choosing competent and qualified supervisors provides an additional protection.
Like the directors and senior managers of a company, supervisors are required to comply with the laws, administrative regulations, and relevant provisions of the articles of association of the company. They have a duty of loyalty and diligence towards the company. Whenever a violation is committed by a supervisor in the performance of his/her duties, the supervisor will be liable for compensation of any if any damage caused to the company.
Supervisors who are members of a board must hold meetings annually (every 6 months for companies limited by shares) and may convene interim meetings whenever necessary.
It is worth noting, also, that where a supervisor resigns during his/her term of appointment and causes the number of supervisors constituting the board of supervisors to fall below the required quorum, the resigning supervisor is required to continue performing his/her duties until a new supervisor takes office. In other words, a supervisor cannot walk away immediately as he/she wishes, but can only leave office when a replacement is appointed, thus ensuring a continuity in the position.
The role of a supervisor is not a passive role. It is, therefore, important to appoint supervisors who have a good knowledge of the company decision-making process and a good understanding of the financial operations of a company in order to be able to address the right questions within the organisation of the company to the right people and, if necessary, conduct effective investigations. Supervisors must be reliable individuals of proven integrity who are fully trusted by the shareholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.