Are Companies Required To Establish Employee Directors And Employee Supervisors?

The newly amended Company Law of the People's Republic of China (hereinafter the "New Company Law"), which came into effect on July 1, 2024, introduces several important adjustments to corporate governance structures. These adjustments primarily concern the organization and allocation of powers among the board of directors, management, and supervisory boards. In particular, it provides detailed provisions on employee participation in corporate governance, thereby imposing higher compliance requirements on companies. This article interprets these requirements using limited liability companies as an example; however, the requirements are applicable to joint stock companies as well.

The former Company Law provided that the supervisory board of a limited liability company shall include representatives of the shareholders and an appropriate proportion of employee representatives. The proportion of employee representatives shall not fall below one-third and shall be in line with the stipulation in the company's articles of association. However, for limited liability companies with relatively few shareholders or of small scale, the law permitted the appointment of one or two supervisors in lieu of establishing a supervisory board. In practice, most limited liability companies—especially single-shareholder companies— fall within the scope of "few shareholders". As a result, it is common for such companies not to establish a supervisory board and appoint only one or two supervisors. (Please note that the two supervisor model has been abolished under the New Company Law.) In this case, it is not required to include employee representatives in the supervisory board or any other governance or management body.

Under the New Company Law, limited liability companies with more than 300 employees are re quired to include employee representatives within either the supervisory board or the board of directors. If the shareholders' meeting (or the sole shareholder in a single-shareholder company) decides not to establish a supervisory board, employee representatives shall be included in the board of directors, who may also serve as members of the audit committee within the board of directors in order to fulfill compliance requirements.

For clarity, a brief overview of the compliance pathways in corporate governance structures, categorized by the number of employees, is provided below:

1. Companies with fewer than 300 employees:

1) Board of Directors: A company may choose either to appoint a single director or establish a board of directors (with at least three members). In either case, there is no mandatory requirement to include employee representatives. Nor is the establishment of an audit committee within the board of directors re quired.

2) Supervisory Board: A company may choose not to establish any supervisory body, or alter natively to appoint a sole supervisor or establish a supervisory board (with at least three members). If a supervisory board is established, employee representatives shall account for no less than one-third of its members.

1. Companies with more than 300 employees: The company shall select one of the following four governance models to satisfy the minimum compliance requirements regarding employee participation:

1) Establish a board of directors and a supervisory board that includes employee representatives. In this model, there is no requirement to include employee representatives in the board of directors, and no audit committee is required;

2) Appoint a single director and establish a supervisory board that includes employee representatives;

3) Appoint a single supervisor and establish a board of directors that includes employee representatives. In this model, no audit committee within the board of directors is required;

4) Not to establish any supervisory body and establish a board of directors that includes employee representatives, along with an audit committee within the board of directors. In this case, the employee representatives may also participate in the audit committee.

It is particularly noteworthy that the New Company Law explicitly requires that employee representatives in the board of directors or supervisory board be elected through democratic procedures, such as meeting of employees or meeting of employ ees' representatives. Appointment or designation by the shareholders is not permissible. Failure to include employee representatives in the boards or supervisory body in accordance with the law may result in corrective orders issued by the registration authorities or challenges to the validity of corporate resolutions and other legal risks, which may in turn affect the company's stable operations.

Therefore, companies with 300 or more employ ees are strongly advised to carefully assess and select an appropriate governance structure that is in line with the requirements of the New Company Law, taking into account both corporate and shareholder interests. If the current governance structure is not fully compliant with the law, companies should develop timely implementation plans, amend their articles of association, and carry out the required measures in accordance with the statutory procedures.

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.