Abstract
The struggle for corporate control is reflected not only in the balance of rights between minority shareholders and majority shareholders, but also in the weight given to the voice of each shareholder in corporate governance. Through the system of the powers and personnel of directors, supervisors, senior executives and legal representatives, shareholders can more conveniently participate in the daily operation and decision-making of the company, thus realizing effective control of the company. Compared to the Company Law (2018), the newly implemented Company Law, which entered into force on July 1, 2024 ("the New Company Law"), has streamlined the rules for the appointment and removal of directors, supervisors, senior executives, and legal representatives. This includes, inter alia, optimizing the rules for the appointment and removal of directors, providing a richer range of intervention options for supervisory bodies, enhancing the powers and functions of managers, and optimizing the appointment and removal of legal representatives. This article will summarize and analyze the highlights and key changes of the rules for the appointment and removal of directors, supervisors, senior executives, and legal representatives under the New Company Law.
I.Optimization of the Rules for the Appointment and Removal of Directors
i. Adjustment of the Number of Members of the Board of Directors
The New Company Law has adjusted the requirements for the number of members of the board of directors of limited liability companies and joint stock companies. In particular, the New Company Law adjusts the number of members of the board of directors of a limited liability company from the original "three to thirteen"1 to "more than three"2, removing the upper limit of the number of members of the board of directors of a limited liability company. In a similar vein, the New Company Law adjusts the requirement for the number of members of the board of directors of a joint stock company from the previous "five to nineteen"3 to the same number of members of the board of directors of a limited liability company, i.e., "more than three"4. This abolishes both the upper limit and reduces the lower limit of the number of members, thereby enabling both limited liability companies and joint stock companies to form their boards of directors according to their actual needs. The elimination of the upper limit on the number of board members will also help small and medium-sized shareholders to obtain board seats and participate in corporate governance.
ii. Clarification of the Removal of Directors without Cause
Prior to the implementation of the New Company Law, Article 3 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (V) ("Fifth Judicial Interpretation of the Company Law")5 regulated the removal of directors without cause by the shareholders' meeting. Article 3 stipulated that the directors were entitled to file a lawsuit seeking the determination of any relevant compensation issues arising out of or in connection with their removal.
The New Company Law codifies the mechanism of the shareholders' meeting removing directors without cause into law in Article 716, which stipulates that the shareholders' meeting may resolve to remove a director, and that the removal shall take effect on the date of the resolution. However, if a director is removed before the expiration of his / her term of office without a justifiable reason, he or she may request compensation from the company. This new provision clarifies the legal right of the shareholders' meeting to pass a resolution to remove a director, and the legal effect such a resolution. It should be noted that although the shareholders' meeting may remove a director without cause, the relevant resolution of the shareholders' meeting must be a valid one to avoid violating various legal provisions, administrative regulations, and the company's bylaws. It will also be important to avoid defects in the validity of the resolution passed at the shareholders' meeting.
At the same time, in order to make provision the loss to a director incurred by a removal without cause, if a director is removed without justifiable reasons before the expiration of his / her term of office, the removed director has the right to directly sue the company for damages in court on the basis of Article 71 of the New Company Law as set out above.
II.Provision of Diversified Options for Supervisory Bodies
The New Company Law has made further provision for supervisory bodies in corporate governance structures, providing diverse and flexible institutional options for corporate governance.
i. Full Introduction of the Board of Auditors System
For limited liability companies, Article 69 of the New Company Law7 provides that an audit committee composed of directors may be established to exercise the functions of the board of supervisors in accordance with the company's bylaws. This eliminates the requirement to have a separate board of supervisors or supervisors. It should be noted that Article 76 of the New Company Law8 stipulates that no director or senior manager may concurrently act as a supervisor, and that the audit committee exercising the functions of the board of supervisors is to supervise the directors and managers executing the affairs of the company. Thus, at least theoretically, the directors attending to the day to day operation of company affairs cannot be the members of a limited liability company's audit committee.
For joint stock limited companies, Article 121 of the New Company Law9 provides that an audit committee consisting of directors may be established by the board of directors to exercise the functions of the board of supervisors in accordance with the company's bylaw. Similarly, this obviates the requirement of having a separate board of supervisors or supervisors. In addition, the audit committee shall have more than three members, and a majority of the members must not hold any position other than directorship in the company. It should be noted that, in view of the supervisory function of the audit committee, the directors composing the audit committee should not have any relationship with the company that may affect their independent and objective judgments in any event.
For listed companies and joint stock limited companies, Article 137 of the New Company Law10, combined with Article 38 of the Code of Corporate Governance of Listed Companies (2018 Revision)11, and Article 12 of the Provisions of the State Council on Implementation the Registration Management System for Registered Capital under the Company Law of the People's Republic of China12, provides that the audit committee is one of the specialized committees that the board of directors of a listed company is required to establish.
For wholly state-owned companies, Article 176 of the New Company Law13 provides that it is not necessary to have a board of supervisors or supervisors where the company's board of directors has an audit committee composed of directors that exercises the functions of the board of supervisors specified in its bylaws. It bears note that pursuant to Article 4 of the Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises14, "wholly state-owned companies" refers in this context only to solely state-owned companies established by government departments, institutions, or public institutions, and does not include companies in which the total shares directly and indirectly held by any of the abovementioned entities is 100%.
ii. Allowing Companies Meeting Conditions to Not Have a Supervisory Body
The New Company Law allows limited liability companies that are small or have a small number of shareholders to have no supervisors with the unanimous consent of all shareholders15. This further reduces the cost of corporate governance. That said, the New Company Law still requires joint stock companies that are small or have a small number of shareholders to have at least one supervisor to exercise the functions of the board of supervisors if there is no board of supervisors or audit committee16 .
iii. Summary: Options for Various Types of Corporate Supervisory Bodies
Company Type |
Supervisory body options |
Limited Liability Companies |
§To choose one from four ØThe Board of Supervisors ØNo Board of Supervisors if the company size or the number of shareholders is small, and there is one supervisor ØEstablishment of an audit committee composed of directors of the board of directors in accordance with the company's bylaws ØIf the size of the company or the number of shareholders is small, there may be no supervisors if all shareholders unanimously consent |
Joint Stock Limited Companies |
§To choose one from three ØThe Board of Supervisors ØNo Board of Supervisors if the company size or the number of shareholders is small, and there is one supervisor ØEstablishment of an audit committee composed of directors of the board of directors in accordance with the provisions of the company's bylaws |
Supervisory Body of Wholly State-Owned Companies |
§To choose one from three ØThe Board of Supervisors ØSupervisors ØEstablishment of an audit committee of directors of the board of directors |
Supervisory Body of Listed Companies |
§To choose one from two ØEstablishment of a board of supervisors and an audit committee that does not replace the board of supervisors (primarily exercising audit functions)17 ØAn audit committee which also exercises the functions of the board of supervisors |
III.Full Liberalization of Manager Authority
Prior to the implementation of the New Company Law, China's Company Law, in addition to giving the board of directors and the company's bylaws the power to contour the scope of a manager's authority, also enumerated various powers of a manager.18 These included, inter alia, presiding over the company's production management, organizing the implementation of the resolutions of the board of directors, organizing the implementation of the company's annual business and investment plan, formulating plans for the establishment of the company's internal management departments, formulating the company's basic management system, formulating specific bylaws of the company, proposing the appointment or dismissal of vice manager(s) and the persons in charge of the finances of the company, and deciding on the appointment or dismissal of reporting managers, other than those who need to be appointed or dismissed by the board of directors, etc.
The New Company Law removes the enumeration of legitimate areas of authority on the part of the manager, and instead leaves the manager's authority entirely to the company's bylaws and the board of directors.19 This provides a guarantee that the company and its shareholders are free to divide and allocate labor within the company.
IV.Streamlining the Rules for the Appointment and Removal of Legal Representatives
i. Expansion of the Scope of Election of Legal Representatives
Prior to the implementation of the New Company Law, China's Company Law limited the choice of the company's legal representative to the chairman of the board of directors, the executive director, or the /a manager20. Article 10 of the New Company Law now stipulates that "the legal representative of a company shall be the director or manager who represents the company in attending to company affairs in accordance with the company's bylaws". In other words, save that the manager can serve as the company's legal representative, the ability to be the legal representative does not turn on one's status as a director in the company's corporate governance structure. Instead, more emphasis is placed on the actual functions performed by the person who is to serve as the legal representative in the company, i.e., to represent the company in attending to company affairs and actually engaging in company management. This provision expands the scope of parties eligible to serve as a company's legal representative to include any director, other than a manager, who may represent the company in attending to company affairs, which is more in line with the company's actual need for a legal representative.
ii. Addition of Rules on Resignation and Replacement of the Legal Representative
Article 10 of the New Company Law adds a new time requirement arising out of the resignation and replacement of the legal representative: "If a director serving as the legal representative or manager resigns, he shall be deemed to have resigned as the legal representative concurrently. If the legal representative resigns, the company shall determine a new legal representative within 30 days of the resignation of the legal representative."
The term "resignation" in the above provision should not only include the situation where the legal representative resigns, but should also be interpreted to include the situation where the company dismisses the legal representative. Meanwhile, in order to ensure, inter alia, the continued sound management of the company, maintain the continuity, ligitimacy and compliance of the company's business and management, and avoid as far as possible the influence on the interests of the company, shareholders, investors, creditors and other relevant subjects, Article 10 of the New Company Law21 requires that the company must determine a new legal representative within a limited 30-day period. If the company fails to determine the new legal representative within the time limit, the original legal representative may sue the company to compel compliance with the formalities for modifying its registration to remove the position of the legal representative. In practice, the court may support such applications for modification of the company's registration, while at the same time requiring that the company go through the relevant formalities to appoint a new legal representative and complete the corresponding registration of modification within a limited time.22
iii. Clarifying that any Registration of Modifications is to be Signed By the New Legal Representative
Prior to the implementation of the New Company Law, Article 27 of the Regulation of the People's Republic of China on the Administration of Company Registration (administrative regulations, 2016 revised edition, now expired) had explicitly required that a company applying for modification of its registration had to submit the written application for modification as signed by the company's legal representative. This meant in practice that although the modification of the legal representative was one of the reasons for the company's application for modification, such an application nonetheless required the original legal representative to sign the written application for modification. Subsequently, the Regulation of the People's Republic of China on the Administration of Registration of Market Entities (Administrative Regulations) replaced the Regulation of the People's Republic of China on the Administration of Company Registration and deleted Article 27 as set out above. However, this change did not alter the requirement in Article 25 of the Regulation of the People's Republic of China on the Administration of Registration of Market Entities that if a company's legal representative does not serve as the legal representative during his or her term of office, an application for modification registration must be filed with the registration authority.
One recent change, however, is that Article 33 of the Detailed Rules of the Implementing of the Regulation of the People's Republic of China on the Administration of the Registration of Market Entities23 (departmental rules), of a slightly lower level of authority than the aforementioned provisions, explicitly provides that the change of legal representative of a company shall be effected by the new legal representative signing the written application for modification registration.
Prior to the development of the law as set out above, some registration authorities required the written application for modification of legal representatives to be signed by both the original and the new legal representative of the company. However, there were a large number of cases in which the original legal representative was unwilling to sign the written application, thereby making it difficult to proceed with the formalities for modification.
In order to solve the above issues, the New Company Law provides at Article 3524 that if a company modifies its legal representative, the application for registration of modification shall be signed by the replacement legal representative. This effectively eliminates the practical difficulty set out above, and reflects the provision of Article 33 of the Detailed Rules of the Implementing of the Regulation of the People's Republic of China on the Administration of the Registration of Market Entities.
V.Conclusion
Under the New Company Law, the rules on the appointment and removal of directors, supervisors, senior executives and the legal representative are prominently featured. The effect of such rules includes, inter alia, that the company is given greater freedom regarding the appointment and removal of directors; that the abolition of the upper limit of the number of directors encourages small and medium-sized shareholders to nominate directors to actively participate in company management (albeit subject to the realities of their limited shareholding); that corporate governance structures are streamlined in that the board of supervisors / supervisors are no longer necessary organs of the company in certain situations, thereby reducing the cost of corporate governance; that the authority of the manager has been fully left to the company's bylaws and the board of directors to decide, underscoring the importance of the board of directors; and that the rules on the appointment and removal of the legal representative have been rationalized.
In conclusion, the amendments under the New Company Law further advance the development of corporate governance in China, provide greater legal space for companies to "customize" their corporate governance structure in a way that meets their own development needs, and provide for a wider array of choices in the struggle for control of the company.
Footnotes
1 Article 44 of Company Law 2018: The board of directors established by a limited liability company shall be composed of 3 up to 13 members unless it is otherwise provided by Article 51 of this Law.
If a limited liability company established by 2 or more state-owned enterprises or other state-owned investors, the board of directors shall include representatives of the employees of the companies. The board of directors of any other limited liability company may also include representatives of the employees of the company concerned. The employees' representatives who are to serve as board directors shall be democratically elected by the employees of the company through the general assembly of the representatives of employees, employees' assembly of the company or in any other way.
The board of directors shall have one chairman and may have one or more deputy chairmen. The appointment of the chairman and deputy chairman shall be specified in the bylaws.
2 Article 68 of the New Company Law: The board of directors of a limited liability company shall have three or more members, who may include a representative of the company's employees. The board of directors of a limited liability company which has 300 or more employees shall include representatives of the employees of the company, unless a board of supervisors has been established in accordance with the law and has representatives of the employees of the company. The representatives of the employees who serve as board directors shall be democratically elected through the assembly of the representatives of the employees, the assembly of employees, or other methods.
The board of directors shall have one chairman and may have deputy chairmen. The appointment of the chairman and deputy chairman shall be specified in the bylaws.
3 Article 108 of Company Law 2018: A joint stock limited company shall set up a board of directors, which shall be composed of 5-19 persons.
The board of directors may include representatives of the company's employees. The representatives of the employees who serve as board directors shall be democratically elected through the assembly of the representatives of the employees, the assembly of employees, or other methods.
The provisions in Article 45 of this Law on the term of office of the directors of a limited liability company shall apply to the director of a joint stock limited company.
The provisions in Article 46 of this Law on the functions of the board of directors of a limited liability company shall apply to the board of directors of a joint stock limited company.
4 Article 120 of the New Company Law: A joint stock limited company shall have a board of directors, unless otherwise specified in Article 128 of this Law.
The provisions of Article 67, paragraph 1 of Article 68, Article 70, and Article 71 of this Law shall apply to joint stock limited companies.
5 Article 3 of Fifth Judicial Interpretation of the Company Law: The people's court shall not support the claim of a director who has beenremoved by a valid resolution of the shareholders' meeting or the general meeting of shareholders before the expiration of the director's term of office that the removal is not legally effective. If, after a director has been removed from his or her post, he or she files a lawsuit in a dispute with the company over compensation, the people's court shall, in accordance with the provisions of laws, administrative regulations, the articles of association of the company, or the agreement of the contract, and taking into account the reasons for the removing from his or her post, the remaining term of office, the director's remuneration, etc., determine whether to compensate or not to compensate as well as the reasonable amount of compensation.
6 Article 71 of the New Company Law: The shareholders' meeting may resolve to remove a director, with effect on the date of resolution.
If a director is removed before expiration of his term of office without good reason, the director may request compensation from the company.
7 Article 69 of the New Company Law: A limited liability company may establish an audit committee composed of directors of the board of directors in accordance with the company's bylaw which exercises the functions of the board of supervisors specified in this Law, and is not required to have a board of supervisors or supervisors. Employee representatives who are members of the company's board of directors may serve as members of the audit committee.
8 Article 76of the New Company Law: A limited liability company shall have a board of supervisors, except as otherwise provided for in Articles 69 and 83 of this Law.
The board of supervisors shall consist of three or more members. The members of the board of supervisors shall include representatives of shareholders and an appropriate percentage of representatives of the company's employees. The percentage of the representatives of employees shall account for no less than 1/3 of all the supervisors, but the concrete percentage shall be specified in the bylaw. The representatives of employees who serve as members of the board of supervisors shall be democratically elected through the assembly of representatives of the company's employees, the shareholders' assembly or by other means.
The board of supervisors shall have one chairman, who shall be elected by a majority of all the supervisors. The chairman of the board of supervisors shall convene and preside over the meetings of the board of supervisors. If the chairman of supervisors is unable or fails to perform his duties, the supervisor elected by a majority of the supervisors shall convene and preside over the meetings of the board of supervisors.
No director or senior manager may concurrently act as a supervisor.
9 Article 121 of the New Company Law: A joint stock limited company may establish an audit committee composed of directors of the board of directors in accordance with the company's bylaw which exercises the functions of the board of supervisors specified in this Law, and is not required to have a board of supervisors or supervisors.
The audit committee shall have three or more members, and a majority of the members shall neither hold a position other than directorship in the company nor have any relationship with the company that may affect his independent and objective judgments. Employee representatives who are members of the company's board of directors may serve as members of the audit committee.
The audit committee shall adopt resolutions by a majority vote of its members.
Each audit committee member is entitled to one vote when voting on a resolution.
The methods of discussion and voting procedures of the audit committee shall be specified in the bylaws, unless otherwise provided by this Law.
The company may establish other committees of the board of directors in accordance with the company's bylaw.
10 Article 137 of the New Company Law: Where a listed company establishes an audit committee of the board of directors, the board of directors shall obtain the approval of more than half of all members of the audit committee before adopting resolutions on the following matters:
(1) Engaging and removing the accounting firm that undertakes the company's audit business;
(2) Appointing and removing the person in charge of finance;
(3) Disclosing financial and accounting reports;
(4) Other matters prescribed by the securities regulatory agency of the State Council.
11 Article 38 of the Code on Governance of Listed Companies (2018): The board of directors of a listed company shall set up an audit committee and may set up relevant specialized committees, such as strategy, nomination, remuneration and appraisal, as required. Specialized committees shall be responsible to the board of directors and perform their duties in accordance with the articles of association and the authorization of the board of directors, and the proposals of the specialized committees shall be submitted to the board of directors for consideration and decision. The members of the specialized committees shall all be composed of directors, of which the independent directors of the audit, nomination and remuneration and evaluation committee shall account for the majority and act as the convenor, and the convenor of the audit committee shall be an accounting professional.
12 Article 12 of the Provisions of the State Council on the Implementation of the Company Law of the People's Republic of China on the Registration and Management System of Registered Capital: Listed companies, in accordance with the Company Law and the State Council's regulations, shall stipulate in their articles of association that an audit committee shall be established in the board of directors and shall set forth the composition, powers and authority of the audit committee, among other matters.
13 Article 176 of the New Company Law: Article 176 Where the board of directors of a wholly state-owned company has an audit committee composed of directors that exercises the functions of the board of supervisors specified in this Law, the wholly state-owned company is not required to have a board of supervisors or a supervisor.
14 Article 4 of the Measures for the Supervision and Administration of Transactions in State-owned Assets of Enterprises: State-owned and state-controlled enterprises and enterprises under actual control of the State as referred to in these Measures include:
(1) Wholly state-owned enterprises (companies) funded by government departments, agencies and institutions, and wholly state-owned enterprises in which the combined direct or indirect shareholding of the above units and enterprises is 100%;
(2) Enterprises in which the units and enterprises listed in paragraph (1) of this Article, individually or jointly, together own more than 50 percent of the property (stock) rights and one of them is the largest shareholder;
(3) Sub-enterprises at all levels in which the enterprises listed in paragraphs (1) and (2) of this Article make external contributions and own more than 50 percent of the equity;
(4) Government departments, agencies, institutions, single state-owned and state-controlled enterprises that do not directly or indirectly hold more than 50 percent of the shares, but are the largest shareholders and are able to exercise actual dominance over them through shareholders' agreements, articles of association, board of director's resolutions, or other agreed arrangements.
15 Article 83 of the New Company Law: A limited liability company that is small or has a small number of shareholders is not required to establish a board of supervisors, and may either have one supervisor who exercises the functions of the board of supervisors specified in this Law or have no supervisor with the unanimous consent of all shareholders.
16 Article 133 of the New Company Law: A joint stock limited company that is small or has a small number of shareholders is not required to establish a board of supervisors, but shall have one supervisor who exercises the functions of the board of supervisors as provided for in this Law.
17 For listed companies, the provisions of the New Company Law themselves allow for a choice between two. Whether the audit committee will be fully implemented to replace the supervisory committee in subsequent practice still requires further observation of the opinions of the Securities and Futures Commission, the Stock Exchanges and other relevant departments.
18 Article 49 of Company Law 2018: A limited liability company may have a manager, who shall be hired or removed upon decision of the board of directors. The manager shall be responsible for the board of directors and shall exercise the following powers: (1)Taking charge of the management of the production and business operations of the company, organizing the implementation of the resolutions of the board of directors; (2)Organizing the execution of the company's annual business plans and investment plans; (3)Drafting plans on the establishment of the company's internal management departments; (4)Drafting the company's basic management system; (5)Formulating the company's specific rules and policies; (6)Proposing to hire or remove the company's vice manager(s) and the person in charge of finance; (7)Deciding on the hiring or removal of the persons-in-charge other than those who shall be decided by the board of directors; and (8)Other powers conferred by the board of directors. If the bylaw provides otherwise for the powers of managers, the bylaw shall be followed. The manager attends the meetings of the board of directors as a non-voting representative.
Article 113 of Company Law 2018: A joint stock limited company may have a manager whom may be hired or removed by the board of directors. The provisions of Article 49 of this Law on the powers of the manager of a limited liability company shall apply to the manager of a joint stock limited company.
19 Article 74 of the New Company Law: A limited liability company may have a manager, who shall be hired or removed upon decision of the board of directors.
The manager shall be responsible to the board of directors, and perform functions in accordance with the company's bylaw or under the authority of the board of directors. The manager attends the meetings of the board of directors as a non-voting representative.
20 Article 13 of Company Law 2018: The legal representative of a company shall, be assumed by the chairman of the board of directors, executive director or manager according to the company's bylaw and shall be registered according to law. If the legal representative of the company is changed, the company shall go through the formalities for modifying the registration.
21 Article 10 of the New Company Law: The legal representative of a company shall be the director or manager who represents the company in attending to company affairs in accordance with the company's bylaw.
If a director serving as the legal representative or manager resigns, he shall be deemed to have resigned as the legal representative concurrently.
If the legal representative resigns, the company shall determine a new legal representative within 30 days of resignation of the legal representative.
22 Reference to No. 23 Civil Judgment of Retrial by Shanghai Second Intermediate People's Court (2023).
23 Article 33 of Rules for the Implementation of the Regulations of the People's Republic of China on the Registration of Market Entities: An application for change registration of a market entity to change its legal representative, managing partner (including appointed representative), or person in charge shall be signed by the New legal representative, managing partner (including appointed representative), or person in charge.
24 Article 35 of the New Company Law: When a company applies for registration of modification, it shall submit to the company registration authority an application for registration of modification signed by the company's legal representative, a modification resolution or decision made in accordance with the law, and other documents.
If the modification of the company registration matter involves the amendment of the company's bylaws, the company's bylaws as amended shall be submitted.
If the company modifies its legal representative, the application for registration of modification shall be signed by the replacement legal representative.
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