Contributed By Global Law Office
There are three principal forms of corporate/business organisation in China:
Only companies have the status of legal persons, and shareholders shall bear liabilities for a company to the extent of their respective subscribed capital contribution/shares. However, a shareholder who abuses the independent legal person status of the company or the shareholder’s limited liabilities to evade debts, thereby prejudicing the interests of the creditors of the company, shall be jointly and severally liable for the debts of the company.
Companies are classified as limited liability companies and joint stock limited companies. Joint stock limited companies whose shares are listed and traded on a stock exchange are publicly traded companies. Currently, there are three stock exchanges in Mainland China:
The principal sources of corporate governance requirements for companies are the Company Law of the People’s Republic of China (the “Company Law”) and five judicial interpretations of the Company Law. In addition to the laws, judicial interpretations and regulations, the activities of a company and all participants (including shareholders, directors, supervisors and officers) are governed by the articles of association of the company.
Publicly Traded Companies
Provisions on the supervision and administration of publicly traded companies are numerous and complex. As publicly traded companies are a type of joint stock limited company, the provisions of Chapter 4 of the Company Law, regarding joint stock limited companies, also apply to them. The organisation and activities of publicly traded companies are also regulated by the Securities Law of the People’s Republic of China, the regulatory supervision rules of the China Securities Regulatory Commission (CSRC) and the relevant stock exchanges. The regulations relate to the issuing and trading of securities, corporate governance, disclosure, restructuring, delisting and other aspects. In short, publicly traded companies are subject to comprehensive and strict supervision because of their involvement of public interests.
On 17 February 2023, the CSRC issued a whole new set of rules for the comprehensive implementation of the stock issuance registration system, which took effect from the date of the announcement. With information disclosure at the core, the new rules replace the securities offering approval system and aim to simplify, standardise and clear the entire lifecycle of securities issuance and listing.
Corporate governance requirements for companies with publicly traded shares mainly include the following:
Corporate governance requirements for companies with publicly traded shares are mainly stipulated in the Code of Corporate Governance of Publicly Traded Companies. Some requirements are mandatory, while some are voluntary. However, certain provisions seem to be voluntary but in fact have become quasi-mandatory, because companies may be confronted with unnecessary complications if they have not strictly complied with them in the IPO procedure.
Environmental, social and governance (ESG) is by far the hottest topic in corporate governance. In one of its recent working plans, the State-Owned Assets Supervision and Administration Commission of the State Counsel expected all publicly traded companies controlled by central state-owned enterprises to issue an ESG special report by 2023. Other publicly traded companies and other state-owned enterprises voluntarily followed this trend. For more details on ESG considerations, please see 2.2 Environmental, Social and Governance (ESG) Considerations.
A second round of draft revisions to the Company Law was published for public opinion in early 2023, with the following highlights in corporate governance issues:
The current supervision regulations have not imposed compulsory requirements on publicly traded companies to disclose ESG reports but do encourage them to make voluntary disclosure. However, the disclosure of certain special ESG issues is mandatory.
Environmental Issues Reporting
With respect to reporting on environmental issues, a publicly traded company shall disclose, in its annual report, any administrative penalties on it due to environmental issues during the reporting period. A company or its major subsidiary that is a key pollutant discharging entity, as established by the environmental protection department, shall also disclose major environmental information, including:
Companies are encouraged to voluntarily disclose the measures that have been taken to reduce carbon emissions and the effect of such measures during the reporting period. Other commonly seen topics include energy saving, water saving, the use of recycled resources, pollutant supervision, the adoption of environmental management systems, etc.
SSE and SZSE each have more detailed disclosure requirements on environmental issues in addition to the above general requirements. The Ministry of Ecology and Environment also imposes more stringent disclosure requirements on publicly traded companies that have violated ecology and environment laws and regulations in the previous calendar year.
Social Issues Reporting
With respect to reporting on social issues, certain index companies listed on the SSE or the SZSE, companies listed both onshore and offshore, and listed financial companies shall disclose a corporate social responsibility report (“CSR Report”) at the same time as disclosing annual reports. Other publicly traded companies are encouraged to disclose a CSR Report.
The contents of a CSR Report shall include the construction and implementation of social responsibility systems concerning the protection of workers, environmental pollution, the quality of commodities, and relationships with relevant communities. In addition, publicly traded companies are encouraged to disclose the active fulfilment of their social responsibilities in consideration of their particular industrial characteristics, particularly the consolidation and expansion of achievements in poverty alleviation and rural revitalisation. Other commonly seen topics include employees’ welfare and equality, information and privacy protection, anti-bribery, supply chain management, participation in public welfare, etc.
Governance Issues Reporting
With respect to reporting on governance issues, please see 6.2 Disclosure of Corporate Governance Arrangements for specific disclosure requirements.
In China, the principal bodies involved in the governance and management of a company include the shareholder meeting, the board of directors, the board of supervisors and the manager. The shareholder meeting is the key organ of authority, responsible for making decisions on fundamental issues and electing the main members of the board of directors and the board of supervisors. The board of directors is the executive organ, and the manager is the auxiliary executive organ. The manager is appointed by the board of directors. The board of directors is responsible for making decisions on day-to-day operation and management, and the manager assists the board of directors in the execution of the company business. The board of supervisors is the supervisory organ, responsible for supervising the execution of business and the company’s financial status.
Decisions of the Board of Directors
The board of directors is responsible for making decisions on day-to-day operation and management, and shall decide on the following matters:
In addition to its decision-making power over operation, management and personnel matters, the board of directors shall also have the right to formulate plans in respect of the company’s dividends distribution, loss recovery, increase/decrease of registered capital, issuance of bonds, merger, division, dissolution, or change of the company form, provided that all such plans are subject to the review and approval of the shareholder meeting.
Decisions of the Shareholder Meeting
The shareholder meeting is responsible for making decisions on fundamental issues, including but not limited to:
The shareholder meeting shall also have the right to review and approve the plans formulated by the board of directors, such as plans for the company’s annual budget and final accounts, dividends distribution, loss recovery, etc. If a publicly traded company purchases or sells significant assets, or guarantees an amount exceeding 30% of the company’s total assets within one year, such actions must be authorised by resolutions of the shareholder meeting.
In addition, a publicly traded company shall state principles of authorisation by the shareholder meeting to the board of directors in its articles of association, and the contents of the authorisation shall be clear and detailed. The shareholder meeting shall not authorise the statutory functions or powers to the board of directors.
The shareholder meeting or the board of directors shall make decisions by convening meetings to review and vote on the relevant matters and form a resolution. However, a decision may be made without convening a shareholder meeting if shareholders unanimously agree in writing (all shareholders sign and seal on the resolution documents).
Normally, meetings of the board of directors shall be convened and presided over by the chair of the board. When the board of directors votes on a resolution, each director shall have one vote. For a limited liability company, the methods of deliberation and voting procedures of the board of directors shall be specified in the company’s articles of association, unless otherwise provided in the Company Law. The following applies for a joint stock limited company:
With respect to the shareholder meeting, please see 5.3 Shareholder Meetings regarding decision-making processes.
The board of directors in a limited liability company shall consist of three to 13 members, while a smaller limited liability company or a limited liability company with fewer shareholders may have an executive director, but without the board of directors. The board of directors in a joint stock limited company shall consist of five to 19 members. A publicly traded company shall have independent directors and board secretaries, and its board of directors shall establish an audit committee; it may also establish special committees on strategy, nomination, remuneration and assessment. The second round of draft revisions to the Company Law proposes to eliminate the maximum limit for the number of board members in both limited liability companies and joint stock limited companies, and to lower the minimum limit of members for joint stock limited companies.
The board of directors shall be presided over by a chair, and may have one or more vice-chairs. The chair shall be responsible for presiding over shareholder meetings, convening and presiding over meetings of the board of directors, and inspecting the implementation of resolutions of the board. A vice-chair assists the chair in its work. If the chair cannot or does not carry out its duties, such duties shall be carried out by the vice-chair; if the vice-chair cannot or does not carry out its duties, the duties shall be carried out by a director jointly elected by more than half of the directors.
Members of the board of directors in wholly state-owned companies shall include representatives of the employees, and the Company Law allows employees to take positions of members of the board of directors in other limited liability companies and joint stock limited companies, although this is not very common in practice.
A publicly traded company shall have independent directors and board secretaries. Independent directors shall be responsible for supervising the directors and officers, and shall report their work to the shareholder meeting annually. The board secretary shall be responsible for the preparation of shareholder meetings and meetings of the board of directors, custody of documents, management of shareholders’ materials, disclosure of information, investor relations and other matters. The second round of draft revisions to the Company Law proposes that a limited liability company and a joint stock company can set up an audit committee in the board of directors in accordance with the company’s articles of association, to exercise the functions and powers of the board of supervisors, in lieu of having a board of supervisors or supervisors.
Terms of office for directors on the board shall be specified by the articles of association of the company, provided that each term of office shall not exceed three years. Upon the expiration of their term of office, a director can serve another term if re-elected.
A person may not serve as a director of a company in any of the following circumstances:
In addition to those listed in 4.1 Board Structure and 4.2 Roles of Board Members, members of the board of directors shall have the knowledge, skills and qualities that are necessary for the performance of their duties. Furthermore, diversity among members of the board of directors is encouraged.
The directors who are not representatives of the employees shall be appointed and removed by the shareholder meeting. The representatives of the employees shall be democratically elected by the employees through the employees’ congress, through the employees’ meeting or in other ways. The method of appointing the chair and vice-chair of the board of directors in a limited liability company shall be stipulated in the articles of association of the company. In practice, the chair and vice-chair can be elected or recommended by the shareholder meeting or the board of directors. The chair and vice-chair of the board of directors in a joint stock limited company are elected by more than half of all the directors on the board of directors.
The manager shall be appointed and removed by the board of directors. The appointment and removal of the deputy manager and chief financial officer shall be recommended by the manager and decided by the board of directors. The appointment and removal of other officers shall be decided by the manager unless otherwise stipulated in the articles of association of the company.
The rules and requirements concerning the independence of directors are mainly applicable to publicly traded companies. According to the regulatory supervision rules, publicly traded companies shall establish rules for independent directors. At least a third of members of the board of directors in a publicly traded company shall be independent directors. Independent directors shall constitute a majority of the members of the audit committee, the nomination committee and the remuneration and assessment committee, and shall act as the convener therein.
Independent directors must have independence, which means they shall perform their duties and responsibilities independently, without interference from the major shareholders, the actual controller, or other entities or individuals that are interested parties of the publicly traded company. The General Office of the State Council issued its opinions on the reform of the independent director system of publicly traded companies in April 2023, to further strengthen the requirement for the independence of independent directors, pursuant to which the CSRC has issued detailed management measures to solicit public opinions.
Independent Director Requirements
Independent directors of publicly traded companies are required to meet the general requirements for directors as stipulated in the Company Law, as well as the specific qualifications for independent directors under regulatory supervision rules applicable for publicly traded companies. In principle, an individual may concurrently hold the position of independent director in no more than five publicly traded companies. The following persons may not hold the position of independent director:
A person holding the position of independent director shall:
The principal legal duties of directors and officers of a company are duties of loyalty and diligence to the company. The duty of loyalty requires directors and officers not to take advantage of their position to pursue illegitimate interests, with the following important restrictions:
The duty of diligence requires that directors and officers shall perform their duties with reasonable care in the best interests of the company, including:
The board of directors is responsible for the shareholder meeting, and the directors owe duties of loyalty and diligence to the company. Directors are required to take into account the overall interests of the company and the interests of all shareholders when discharging their duties. In publicly traded companies, the directors are required to pay special attention to the interests of the minority shareholders, as well as other interested parties, such as creditors, employees, clients, suppliers and communities.
If directors or officers breach their duties and thereby cause losses to the company, any income arising from the breach shall belong to the company, and the directors or officers shall be liable to compensate the company. In such a situation, the company may file a lawsuit with the people’s court. Shareholders holding equities of a limited liability company, or shareholders individually or collectively holding more than 1% of shares of a joint stock limited company for more than 180 consecutive days, may request the board of supervisors in writing to file a lawsuit with the people’s court. If the board of supervisors does not file a lawsuit, a shareholder satisfying the aforesaid conditions has the right to file a lawsuit with the people’s court in their own name directly, in the interests of the company. In an emergency, instead of requesting the board of supervisors to file suit, the shareholder may do so directly. If directors or officers breach their duties and thereby cause losses to shareholders, the directors or officers shall be responsible to compensate the shareholders, who may file a lawsuit with the people’s court.
Directors and officers of publicly traded companies may also be subject to administrative punishment from the CSRC due to false statements, breach of promises, insider trading and manipulation of the market, and shall be responsible to compensate the investors who have suffered losses as a result of such conduct.
There are other bases for claims or enforcement against directors or officers for breaches of corporate governance requirements; for example, directors shall be responsible for resolutions of the board of directors. If a resolution of the board of directors violates laws, administrative regulations, the articles of association of the company or resolutions of shareholder meetings, the shareholders may petition the people’s court to invalidate or revoke the resolutions. If the company suffers serious losses as a result thereof, the directors who participated in the adoption of such resolutions are responsible for compensation. However, the liability of a director or officer can be limited. If a director can prove that they expressed an objection to such resolutions in the vote, and their objection was recorded in the minutes of the meeting on that resolution, then such director can be exempted from liability.
According to the Company Law, remuneration, fees or benefits payable to directors are decided by the shareholder meeting. Payments to the manager are decided by the board of directors, and payments to the deputy manager and chief financial officer are decided by the board of directors upon proposals by the manager.
In a publicly traded company, when the board of directors or the remuneration and assessment committee is evaluating the performance of a director or is discussing their compensation, the director shall not participate in such evaluation or discussion. The remuneration distribution plan for officers shall be approved by the board of directors, explained at shareholder meetings and fully disclosed.
Publicly traded companies shall provide appropriate allowances to independent directors. The proposed standard of such allowances shall be formulated by the board of directors, then reviewed and approved by the shareholder meeting, and disclosed in the annual report of the company. In addition to the above-mentioned allowances, independent directors shall not accept additional, undisclosed benefits from the publicly traded company, its major shareholders or entities/individuals that are interested parties of the company.
According to the Company Law, a joint stock limited company shall regularly disclose to its shareholders the remuneration, fees or benefits payable to directors and officers. A publicly traded company shall disclose the appointments, changes of shareholding and annual remuneration of its directors and officers in its annual report, including but not limited to:
Shareholders mainly have the following rights with regard to the company.
The shareholders’ principal obligation to the company is to invest capital in accordance with their committed payment schedule provided in the articles of association of the company. The second round of draft revisions to the Company Law further proposes that a shareholder who fails to complete its capital contribution obligation within its committed payment period, and fails to cure such delay within the grace period specified by the company, may lose rights to the unpaid portion of its equity interests/shares.
In addition, the shareholders shall exercisetheir rights in accordance with laws, administrative regulations and the articles of association of the company, and shall not abuse their rights to damage the interests of the company or other shareholders. Moreover, the shareholders shall not abuse the independent legal person status of the company and limited liabilities of shareholders to damage the interests of the company’s creditors. The second round of draft revisions to the Company Law proposes a mechanism for the acceleration of contributions, according to which, in the event that the company is unable to pay off its due debts, upon the request of the company or creditors of the due debts, the shareholders’ obligations to capital contributions will be accelerated even if its corresponding committed payment period has not expired.
Ownership of companies is somewhat separated from management rights. The managers are responsible for the operation and management of the company while, as owners of the company, shareholders do not normally participate directly in the daily operation and management of the company. Their management in a company is indirect, which means they exercise their rights in a collective manner by participating in shareholder meetings and voting on proposals in accordance with the procedures provided by laws and the articles of association of the company. The shareholders may make decisions on fundamental issues and elect the main members of the board of directors by exercising their voting rights and thereby control the company.
The shareholder meetings of a limited liability company are divided into regular meetings and interim meetings. Regular meetings shall be convened in accordance with the articles of association of the company, while interim meetings shall be convened upon proposal by the shareholders representing more than a tenth of voting rights or more than a third of directors or (the board of) supervisors. Generally, shareholder meetings are convened by the board of directors and presided over by the chair of the board. If there is no special provision in the articles of association of the company, all the shareholders shall be notified 15 days before a shareholder meeting is held, and the shareholders shall exercise their voting rights at the meeting in proportion to their capital contribution. According to the Company Law, resolutions on the amendment of the articles of association, increases/decreases of registered capital, mergers, divisions, dissolutions or changes of the company form shall be approved by shareholders representing more than two thirds of voting rights.
Shareholder meetings of a joint stock limited company shall be held once a year. An interim shareholder meeting shall be held within two months under any of the following circumstances:
A meeting hall shall be set up for the shareholder meeting, and the meeting shall be held by way of combining an on-site meeting and network voting. All the shareholders shall be notified of the time, place and agenda of the shareholder meeting 20 days in advance of a regular meeting or 15 days in advance of an interim meeting. For a publicly traded company where a single shareholder and any persons acting in concert with them hold more than 30% of the shares, the cumulative voting system shall be adopted in the election of directors and supervisors at the shareholder meeting – ie, each share shall have the same number of voting rights as the number of directors or supervisors to be elected, and the voting rights held by shareholders may be exercised cumulatively.
Normal claims of shareholders against the company are asserted in situations where shareholders’ rights have been infringed. The common claims include:
In addition, investors of a publicly traded company who have suffered losses in securities trading due to the company’s false statement have the right to sue the company for compensation.
The base of a claim for shareholders against the directors is the directors’ breach of their duties of loyalty and diligence, which has led to damage to the interests of the shareholders or the company. The shareholder may claim damages against the directors in their own name for the company’s interests. Investors in a publicly traded company who have suffered losses in securities trading due to the company’s false statement, the directors’ breach of promises, insider trading or manipulation of the market have the right to sue the directors for compensation. Furthermore, the Supreme People’s Court issued regulations in 2022 stipulating that administrative penalties or criminal judgments will no longer be preconditions for the courts to accept such civil compensation cases filed by the investors.
According to the regulatory supervision rules, a shareholder or actual controller of a publicly traded company shall inform the board of directors and co-operate with the company in performing information disclosure obligations under any of the following circumstances:
Where the controlling shareholder or actual controller of a publicly traded company plays an important role in the occurrence or progress of a significant event that may have a great influence on the trading prices of the company’s securities and derivatives, the controlling shareholder or actual controller shall inform the company of the relevant situation in writing in a timely manner, and co-operate with the company in performing information disclosure obligations, including the cause, current status and possible impact of the disclosed event. In addition, any promise made by a publicly traded company’s controlling shareholder or actual controller shall be disclosed.
The CSRC also requires that, where any shareholder of the company applying for an IPO has a shareholding structure consisting of two or more layers and is a company or a limited partnership with no actual business activities, the ultimate beneficial owner of such shareholder should be disclosed, in the case that the buy-in price of such shareholder is apparently abnormal.
Publicly traded companies are subject to annual and interim financial reporting requirements. According to the regulatory supervision rules, an annual report shall record the key accounting data and financial indicators, and the full text of the financial statement and the audit report. An interim report shall record the key accounting data and financial indicators, and the financial statement. An annual report shall be prepared and disclosed within four months from the end of each fiscal year, and an interim report shall be prepared and disclosed within two months from the end of the first half of each fiscal year.
There are some requirements for publicly traded companies to disclose their corporate governance arrangements in the interim report and annual report.
In the interim report, a publicly traded company shall disclose its corporate governance arrangements, including:
In addition to the arrangements mentioned above, a publicly traded company shall also disclose the following in its annual report:
A company is required to register the following items with the companies registry:
An application for change of the above registered items shall be made within 30 days from the date of passing the relevant resolution or decision on such change or the date of occurrence of the statutory change. If a company fails to make such application for a change of registered items, the companies registry will order the company to rectify or impose a fine of no less than RMB10,000 but no more than RMB100,000 if the company refuses to rectify, or revoke the business licence if the circumstances are serious.
A company is required to file the following items with the companies registry:
An application for a change of the above filing items shall be made within 30 days from the date of passing the relevant resolution or decision on such change or the date of occurrence of the statutory change. If a company fails to make such application for a change of filing items, the companies registry will order the company to rectify or will impose a fine of no more than RMB50,000 if the company refuses to rectify.
If a joint stock limited company established by public offering issues shares to the public, it shall also submit the approval documents of the CSRC to the companies registry.
The following stakeholders may apply to the companies registry to inquire about the registered matters of the company by submitting corresponding documents:
A company shall prepare a financial statement upon the end of each fiscal year, which shall be audited by an accounting firm in accordance with laws. According to the articles of association of the company, the decision to hire or dismiss the accounting firm that undertakes the company’s auditing business shall be taken by the shareholder meeting or the board of directors. When the shareholder meeting or the board of directors votes on the dismissal of the accounting firm, said accounting firm shall be allowed to state its opinions. The board of directors of a publicly traded company shall establish an audit committee to supervise and evaluate the external auditing work, and to propose hiring or replacing the external auditing institution.
Large and Medium-Sized Companies
The key requirements for directors in connection with the management of risk and internal controls in large and medium-sized companies are set out below.
Publicly Traded Companies
Specific requirements for directors in connection with the management of risk and internal controls in publicly traded companies include the following.
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