Although Zhang, a stockbroker, has been a shareholder of various public listed companies in China for about 4 years, he was only invited to his first shareholders' meeting in December 2004. The "invitation" was a direct result of the Several Measures to Strengthen the Protection of the Rights of Public Shareholders (the "Measures") promulgated by the China Securities Regulatory Commission on 7 December 2004. The purpose of the Measures is to raise the standard of corporate governance for listed companies in China and to prevent further abuse of powers by controlling shareholders resulting in numerous cases of security fraud, insider dealing and market manipulation.
Chinese public listed companies have 2 types of shares: negotiable or non-negotiable. The former are tradable like listed shares in any other countries. The latter are mainly held by state owned enterprises and cannot be traded.
The Measures introduced the following new rules in an attempt to improve the rights of public shareholders:
1. Right to Vote on Major Issues
The Measures put strong emphasis on the voting rights of public shareholders. Firstly, with regard to certain major company issues, such as asset restructuring or substantial transactions, placements, issuing new shares or convertible bonds or listing major subsidiaries overseas, the relevant resolutions need to be passed by more than half of the public shareholders attending and voting at a general meeting. Secondly, listed companies need to provide public shareholders with online voting facilities. Thirdly, the board of directors, independent directors or qualified shareholders of a listed company are allowed to collect proxies from other shareholders to vote at general meetings. Finally, listed companies are encouraged to adopt a cumulative voting system in electing their directors and supervisors.
2. Functions of Independent Directors
The Measures set out for the first time the functions and duties of independent directors, including requiring all major connected transactions and the appointment and dismissal of auditors to be approved by at least 50% of the independent directors. The Measures also focus on the accessibility of company information by independent directors.
3. Improving Communication with Public Shareholders
In order to improve communication with public shareholders, all information disclosed by a listed company is required to be readable, comprehensive and easily accessible. Disclosure to selected shareholders or of partial information by a listed company is strictly forbidden. The Measures also encourage listed companies to establish more communication channels with public investors such as investors’ consultation hotlines, specific web site chat rooms for investors and regular interviews with investors.
4. Encouraging Profit Distribution
The Measures encourage profit distribution by listed companies. Dividend distribution policies should take into account what is a reasonable investment return for public shareholders. The Measures also state that if a listed company fails to distribute profits in cash in the preceding three years, it is not permitted to issue new shares or convertible bonds or place shares to its existing shareholders.
5. Strengthening Supervision of Listed Companies and their Senior Management
Controlling shareholders owe a fiduciary duty to their public shareholders. Senior management of a listed company is under a duty to maximize profits and benefits for its company and all shareholders. If the senior management is in breach of this duty, it will be recorded in the CSRC's credit file and consequently be published to the public "at a suitable time". In addition, if there is any material breach by the senior management, the Measures stipulate that the senior management is not allowed to "gain access to the market" and will be liable in law for any loss caused by his/her conduct.
Our China Practice group in Hong Kong and Shanghai has lawyers specializing in an extensive range of business issues in China. If you have any question regarding the above article or would like to have a copy of the Measures, please do not hesitate to contact us.
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.