According to the currently effective Company Law of the PRC (the “Company Law”), there are two types of companies that can be established:

• limited liability companies (LLCs); and
• companies limited by shares, also known as “joint-stock limited companies”.

Prior to 2020, companies with foreign investments were not regulated by the Company Law, but by three separated legislations. These stipulated the following three specialised types of companies foreign investors could use:

• the Law of Sino-Foreign Equity Joint Ventures, which stipulated that domestic investors in China can establish special joint ventures with foreign investors;
• the Law of Wholly Foreign-Owned Enterprises (WFOE), which stipulates that foreign investors can solely establish a WFOE in China; and
• the Law of Sino-Foreign Contractual Joint Ventures, which stipulated that domestic investors in China can establish special contractual joint ventures with foreign investors.

However, the National People’s Congress ‒ the supreme legislative body in China – promulgated the Foreign Investment Law in March 2019. When the Foreign Investment Law officially came into effect in January 2020, the above-mentioned three legislations were simultaneously abolished.

According to the Foreign Investment Law, foreign investors can now enjoy national treatment when establishing companies in China. This means that now only LLCs and companies limited by shares can be used by foreign investors – no matter whether the company is wholly foreign-owned or a joint venture with domestic investors. Nowadays, foreign investors generally use LLCs because of their clear legal responsibilities, flexible capital structure, relatively simple corporate governance as well as flexible equity transfer.

Under the currently effective Company Law and other relevant laws and regulations in China, a company may issue two classes of shares, ordinary shares and class shares.

• Ordinary shares are the most common class of shares, and ordinary shareholders generally follow the “one share, one vote” principle when exercising their voting rights.
• Class shareholders may specify in the articles of association certain preferential or inferior treatment for themselves, including (but not limited to):
1. priority and inferiority in the distribution of profits or surplus properties;
2. the number of votes per share, as class shareholders are not necessarily required to follow the “one share, one vote” principle; or
3. transfer restrictions on certain classes of shares.

General shareholders’ rights could be found in Article 4, Article 57, Article 144 and Article 210 of the Company Law. For more details, please refer to 2.8 Shareholder Approval, as well as5. Dividends, 6. Shareholders’ Rights as Regards Directors and Auditors, 7. Corporate Governance Arrangements, 8. Controlling Company, 9. Insolvency and 10. Shareholders’ Remedies.

The variation of shareholders’ rights may involve the classification, proportion, transfer, etc, of the shares. More specifically, such variation may require a resolution from a shareholders’ meeting or general meeting as a prerequisite to the aforementioned change. Articles of association may also be required to be amended and new capital-contribution certificates must be issued to shareholders. Proper registration procedures by the market regulation authority are also required.

According to the Company Law, there is no minimum share capital requirement for LLCs or companies limited by shares. However, in practice, minimum share capital requirements are imposed on companies in certain industries, such as financial companies and insurance companies.

According to the Company Law, LLCs and companies limited by shares are both subject to requirements on the minimum number of shareholders. However, only companies limited by shares are subject to some degree of requirement for their shareholders to be resident in China.

• An LLC should be jointly invested and established by no less than one but no more than 50 shareholders. There are no specified requirements for the LLC’s shareholders to have a domicile in China.
• A company limited by shares must be established by no less than one but no more than 200 shareholders. More than half of the original shareholders of a company limited by shares must be resident in China.

Shareholders’ agreements or joint venture agreements are often used in private companies, particularly in LLCs or private companies limited by shares. These agreements help to clarify the rights and responsibilities of the parties, reducing the potential for ambiguity to arise.

Private companies, owing to their diverse and flexible nature, need these agreements more than ever to regulate corporate governance and define the interests of all parties.

Typical provisions in shareholders’ agreements and joint venture agreements include:

• capital contribution – each shareholder’s proportion, contribution method and payment period, etc;
• corporate governance – authority and rules of procedure of the shareholders’ meeting (or annual general meeting (AGM)), as well as composition, appointment and meeting rules of the board of directors and board of supervisors;
• regulations on share transfer and investors’ exit mechanism;
• protection of shareholders’ rights and interests, such as anti-dilution rights, tag-along rights and the right to request buying-back;
• confidentiality and non-competition clauses;
• profit distribution and payment of dividends; and
• each party’s liability for breaching the agreement, such as compensation and liquidated damages.

Such agreements are usually confidential and are generally not required to be filed with the market regulation authority or made public, except for special requirements in certain regions or industries.

A company limited by shares is required by law to convene AGMs and should notify each shareholder at least 20 days in advance of the time and place of the meeting and the matters to be discussed. The period of notice must not be shortened. For LLCs, there is no compulsory requirement to convene AGMs, but shareholders can make such arrangements in the company’s articles of association.

Article 59 of the Company Law specifies the authorities exercised by the shareholders’ meeting or AGM. Matters usually discussed and approved by shareholders’ meetings mainly include:

• the annual financial report and the annual report of the board of directors and board of supervisors;
• election or replacement of directors and supervisors;
• a plan for the distribution of the company’s profits (dividends) and a plan for making up losses;
• appointment or renewal of auditors; and
• modification of the articles of association.

Aside from the annual shareholders’ meeting or AGM, the company can also convene extraordinary shareholders’ meetings or general meetings in certain special circumstances.

Notices given of shareholders’ meetings or general meetings other than AGMs is similar to the notice given of AGMs, which includes the time and place of the meeting, the matters to be discussed at the meeting, or an explanation of the reason for convening the meeting. For a company limited by shares, whether it is an annual shareholders’ meeting or an extraordinary shareholders’ meeting, the notice period is mandatory provision of the law and must not be shortened at will.

Article 114 of the Company Law stipulates that a shareholders’ meeting or AGM is convened by the board of directors and presided over by the chair of the board of directors. It goes on to stipulate that:

if the chair of the board of directors cannot or will not carry out their duties, the meeting shall be presided over by the vice-chair of the board of directors;

• if the vice-chair of the board of directors cannot or will not carry out their duties, the meeting shall be presided over by a director jointly nominated by more than half of the directors;
• if the board of directors cannot or will not carry out the duties of convening shareholders’ meeting, the board of supervisors should convene and hold a shareholders’ meeting in a timely manner; and
• if the board of supervisors does not convene and hold a shareholders’ meeting, the shareholders – who, individually or together, hold more than 10% of the shares for more than 90 consecutive days ‒ may convene and hold a shareholders’ meeting by themselves.

If shareholderswho ‒ individually or collectively ‒ hold more than 10% of the shares of the company propose to hold an extraordinary shareholders’ meeting, the board of directors and board of supervisors should decide whether to hold an extraordinary shareholders’ meeting within ten days of receipt of such proposal and reply to the shareholders in writing. Therefore, only when all the preceding persons or entities cannot carry out their duties to convene such shareholders’ meeting, can the shareholders all convene and hold a shareholders’ meeting by themselves.

Notices of the shareholders’ meeting or AGM should be issued to all shareholders. Shareholders are entitled to:

• inspect and copy the articles of association, register of shareholders, minutes of shareholders’ meetings, resolutions of the board of directors, resolutions of the board of supervisors, and financial and accounting reports; and
• raise suggestions or queries with regard to the operation and management of the company.

Article 24 of the Company Law stipulates that shareholders’ meetings and voting can be held by means of electronic communication, unless otherwise provided in the articles of association. Therefore, if the articles of association of the company do not impose any prohibition or restriction, shareholders’ meetings can be held virtually or remotely.

The Company Law does not impose mandatory requirements regarding the number of shareholders to attend shareholders’ meetings. It only sets forth requirement regarding the proportion of votes that can be cast when a shareholders’ meeting is making a resolution.

Each share held by shareholders attending shareholders’ meetings is entitled to one vote, except in the case of shareholders holding other classes of shares or where special arrangements were made in the articles of association and shareholders’ agreements.

Shareholders individually or collectively holding more than 1% of the company’s shares may submit a written bill (“interim bill”) to the board of directors for discussion at the shareholders’ meeting or AGM ten days before its convening. For more details regarding the interim bill, please refer to 2.10 Shareholders’ Rights Relating to the Business of a Meeting.

According to Article 116 of the Company Law, resolutions of shareholders’ meetings or AGMs can be divided into ordinary and special resolutions.

• An ordinary resolution must be adopted by a simple majority of the voting rights held by the shareholders attending the meeting.
• A special resolution on “amendment of the articles of association of the company, increase or reduction of registered capital, or merger, division, dissolution or change of corporate form of the company” must be adopted by two-thirds or more of the voting rights held by the shareholders attending the meeting.

Shareholders approving the company’s matters through votes during the company’s shareholders’ meetings. According to Article 59 and Article 116 of the Company Law, the shareholders’ meeting or AGM of a company shall exercise the following functions:

• electing and replacing directors and supervisors, as well as deciding on the remuneration matters of the directors and supervisors;
• reviewing and approving the reports of the board of directors;
• reviewing and approving the reports of the board of supervisors;
• reviewing and approving the company’s plan of profit distribution and loss compensation;
• deciding on the increase or decrease of the registered capital of the company;
• deciding on the issuance of company bonds;
• deciding on the merger, division, dissolution, liquidation or change of the company’s corporate form;
• amending the articles of association of the company; and
• other functions as provided in the articles of association.

General matters must be passed by affirmative votes representing more than half of the voting rights of the shareholders attending the shareholders’ meeting. However, as mentioned in 2.7 Types of Resolutions and Thresholds, resolutions on the amendment of the articles of association, increase or decrease of the registered capital, or the merger, division, dissolution or change of the company’s corporate form must be passed by affirmative votes representing more than two-thirds of the voting rights of the shareholders attending the shareholders’ meeting.

Shareholders of the company can make other arrangements in the articles of association for other matters to be decided or approved by the shareholders’ meeting and stipulate the percentage required for the decision or approval.

Voting requirements for shareholders in shareholders’ meetings or AGMs are stipulated in Article 24, Article 65, Article 117 and Article 118 of the Company Law, as follows.

• The convening and voting of the shareholders’ meeting or general meeting can be conducted by means of electronic communication, unless otherwise provided in the articles of association.
• Unless otherwise provided in the articles of association, shareholders shall exercise their voting rights in proportion to their respective capital contributions.
• The shareholders’ meeting can adopt, in accordance with the provisions of the articles of association or resolutions of the shareholders’ meeting or AGM, a cumulative voting system for the election of directors and supervisors. This means that when shareholders elect directors or supervisors at a shareholders’ meeting or AGM, each share shall have the number of voting rights equivalent to the number of candidates for director or supervisor, and the voting rights held by shareholders can be used collectively.
• When appointing a proxy to attend the shareholders’ meeting or AGM, a shareholder should specify the matters, authority and period of the proxy. The proxy must submit the power of attorney from the shareholder to the company and exercise their voting rights within the scope of authority authorised.
• Generally, voting by written ballot is preferred. Laws and regulations do not explicitly prohibit voting by show of hands, but it is subject to the provisions of the articles of association.

According to Article 115 of the Company Law, shareholders have the right to call for a shareholders’ meeting or AGM to discuss and vote on a specific issue.

As mentioned in 2.6 Quorum, Voting Requirements and Proposal of Resolutions, shareholders individually or collective holding more than 1% of the company’s shares may submit an interim bill to the board of directors for discussion at the shareholders’ meeting or AGM ten days before its convening.

The interim bill shall focus on a specific issue and specify the issue’s subject matter. Furthermore, the contents of such interim bill must comply with the provisions of laws, administrative regulations or the articles of association and be within the scope of the shareholders’ meeting’s duties.

However, where the company publicly issues shares, the notice must be made in the form of announcement. The shareholders’ meeting must not make resolutions on matters not included in the notice, meaning that shareholders of public companies have no right to require a specific issue to be considered through the submission of an interim bill.

Shareholders can challenge resolutions passed at a shareholders’ meeting or AGM according to Article 26 and Article 89 of the Company Law, as follows.

• Where the convening procedure or voting method of a shareholders’ meeting or AGM violates any law, administrative regulation or the articles of association, or any resolution made violates the articles of association, the shareholders may – within 60 days of the date on which the resolution is made – file a request to the court to revoke it. However, exceptions will be made where the defect is minor and does not have substantial impact on the resolution.
• Shareholders who have not been notified to attend the shareholders’ meeting or AGM may, within 60 days of the date on which they know or ought to know that a resolution has been made by the shareholders’ meeting, file a request to the court to revoke the resolution. Where the right of revocation is not exercised within one year of the date on which the resolution is made, the right of revocation shall lapse.
• A shareholder voting against the resolution passed by the shareholders’ meeting or AGM may request that the company purchases its shares at a reasonable price under the following circumstances:
1. the company has not distributed any profits or dividends to the shareholders for five consecutive years, even though the company has been profitable for such five consecutive years and meets the profit and dividends distribution requirements stipulated in the Company Law;
2. merger, division and transfer of primary properties of the company;
3. upon expiration of the company’s term of business operation as prescribed in the company’s articles of association, or upon the occurrence of any other cause for dissolution as prescribed in the articles of association, the shareholders’ meeting shall adopt a resolution to amend the articles of association so as to make the company continue its existence.

If the shareholders and the company fail to reach any share transfer and acquisition agreement within 60 days from the date on which the resolution is made at the shareholders’ meeting, the shareholders may institute legal proceedings in a court of law within 90 days from the date on which the resolution is made at the shareholders’ meeting.

According to the Company Law and other relevant legislations and regulations, institutional shareholders and other shareholder groups generally enjoy the same rights as the individual shareholders. No special rights or powers are granted to institutional shareholders and shareholder groups by laws and regulations.

Generally speaking, institutional shareholder and other shareholder groups can only influence and/or monitor a company’s actions by exercising rights and powers provided in the Company Law and the company’s articles of association. However, a major institutional investor or a large and influential group of shareholders can always negotiate with the company to gain some degree of preferential treatment, rights and powers, which should be rectified through a shareholders’ resolution before coming into effect.

China’s Company Law does not specifically provide regulations on shareholding through nominees and there is no law or regulation regarding the rights and powers of the nominee. However, according to the mainstream in practice and judicial decisions, nominees shall have neither interests nor rights in the shares they hold for the shareholders and they should exercise powers and rights as the shareholder authorised. When the nominees receive any information related to the matters being voted on, they should convey a message to shareholders as soon as possible and vote at the shareholders’ direction.

Shareholders are strongly advised to execute written agreements with nominees to specify rights and obligations for both parties, particularly the nominees’ scope of entrusted powers and rights and the nominees’ default and indemnification liability when such entrusted powers and rights are misused in ways that are detrimental towards shareholders.

According to China’s Company Law, shareholders are allowed to pass a written resolution without holding a shareholders’ meeting or AGM. According to Article 59(3) of the Company Law, with regard to the matters that the shareholders are entitled to adopt resolutions concerning at the shareholders’ meeting or AGM, the resolutions may be made directly without convening the meeting – provided that all shareholders agree on the resolved matter without any dissent. All shareholders must sign on the resolution document or affix their official seals to it.

Under China’s Company Law, only shareholders of LLCs enjoy pre-emption rights when the companies issue new shares. Shareholders of a company limited by shares do not naturally enjoy such right.

According to Article 227 of the Company Law, when an LLC increases its registered capital, its shareholders will ‒ under the same conditions ‒ have the pre-emptive right to subscribe for the increased capital in proportion to their contributed capital of the company, with the exception that all shareholders agree not to subscribe for the increased capital on a pre-emptive basis in proportion to their contributed capital.

However, when a company limited by shares issues new shares to increase its registered capital, its shareholders shall not enjoy the pre-emption right to subscribe for the increased shares – unless such matter is otherwise specified in the company’s articles of association or determined by a resolution of the shareholders’ meeting or AGM.

Procedures and restrictions in respect of share transfer and disposal may vary in accordance with the type of company under China’s Company Law, as follows.

• For LLCs, according to Article 84 of the Company Law, shareholders can freely transfer their shares among the existing shareholders. If a shareholder wishes to transfer its share to a third party outside the company, it must send a written notification to other shareholders in advance, notifying other shareholders about the following matters:
1. the number of shares it plans to transfer;
2. the intended price of such transfer;
3. the payment method of the transfer price; and
4. the period of transfer and payment.

Other shareholders shall enjoy the pre-emptive right to subscribe and purchase the transferred shares under the same conditions listed in the written notification.

• For companies limited by shares, there are no restrictions on the transfer and disposal of shares, unless the company is a listed company at a stock exchange. For a listed company, the following restrictions of share transfer and disposal shall apply.
1. The shares issued by the company before its IPO must not be transferred within one year from the date when the company’s shares are listed and traded in a stock exchange, unless relevant laws, regulations or the China Securities Regulatory Commission (CSRC) otherwise stipulate.
2. Directors, supervisors and senior officers of the company must declare to the company the number of shares held by them and any change thereof. During the term of office determined when they take the positions, the shares transferred each year must not exceed 25% of the total number of shares held by them in the company. The shares held by the aforesaid persons must not be transferred within one year from the date when the company’s shares are listed and traded in a stock exchange. The aforesaid persons must not transfer the shares held by them in the company within six months after they leave their posts. The articles of association of the company may have other restrictions on the transfer of shares held by the directors, supervisors and senior officers.

Under China’s Company Law, shareholders are entitled to provide security interest with their shares, as the shares are regarded as the properties of the shareholders. According to Article 160 of the Company Law, if the shares of a company limited by shares are pledged within the period during which transfer or disposal is prohibited or limited by relevant laws and regulations, the pledgee must not exercise its rights of pledge within the period.

Under China’s currently effective laws and regulations, shareholders’ obligations to disclose interests are limited to listed companies. According to Article 41 and Article 42 of the Measures for the Management of Information Disclosure of Listed Companies and Article 13 of the Measures for the Management of Listed Companies Acquisition, shareholders’ disclosure obligations are listed as follows.

• Directors, supervisors, senior officers, shareholders holding more than 5% of the shares of a listed company and their persons acting in concert – as well as actual controllers of the company – must report the list of the company’s related parties and the explanations of the affiliated relationship in a timely manner to the company’s board of directors.
• Shareholders or actual controllers holding more than 5% of the shares of a listed company through accepting entrustment or trust must disclose the information of the entrusting parties to the listed company in a timely manner and co-ordinate with the performance of the information disclosure obligations by the listed company.
• Where there is a considerable change in the holdings of shares of shareholders or actual controllers who each hold more than 5% of the shares of the company or in the company they control, or where there is a considerable change in the situation that the actual controller of the company and other enterprises controlled by the actual controller are engaged in the same or similar business as that of the company, the actual controller must proactively inform the board of directors and co-ordinate with the performance of the information disclosure obligations by the listed company.
• When the proportion of the shares held by a single investor or persons acting in concert reaches 5% of the shares issued by a listed company, or increases or decreases each time by 5% after the proportion of the shares held by the investor or persons acting in concert reaches 5%, such investor or persons must submit a written report to the CSRC and the relevant stock exchange, notify the listed company and make a public announcement.

Under China’s currently effective laws and regulations, only a listed company can cancel shares after issue, as private companies do not publicly issue shares. According to CSRC’s Listed Companies Share Repurchase Rules and relevant regulations, a listed company can buy back and cancel part of its shares for the following reasons:

• decrease of the company’s registered capital;
• use of shares for the employee stock ownership plan (ESOP) or equity incentive plans;
• use of shares for the conversion of the convertible issued corporate bonds into shares; or
• where it is necessary to maintain the company’s value and shareholders’ interests.

According to Article 162 of the Company Law, a company shall not be permitted to buy back its own shares unless one of the following situations applies:

• decrease in the company’s registered capital;
• merger with another company holding shares of the company;
• use of shares for the ESOP or equity incentive plans;
• fulfilling the obligation to buy back shares from shareholders who object to the resolution on the company’s merger or division made by the shareholders’ meeting or AGM;
• use of shares for the conversion of the convertible issued corporate bonds into shares; or
• for listed companies, where it is necessary to maintain the company’s value and shareholders’ interests.

If the company intends to buy back shares where there is a decrease in the company’s registered capital or there is a merger with another company holding shares in the company, it will be subject to a resolution of the shareholders’ meeting. If the company intends to buy back shares to use for the ESOP or equity incentive plans, convert issued corporate bonds into shares, or maintain the company’s value and shareholders’ interests, it may be subject to a resolution passed by the board of directors in a meeting that more than two-thirds of the directors attend, according to the articles of association of the company or as authorised by the shareholders’ meeting.

If a listed company is to buy back its own shares, it should disclose relevant information to the public according to China’s Securities Law. If a listed company intends to buy back shares to use for the ESOP or equity incentive plans, convert issued corporate bonds into shares, or maintain the company’s value and shareholders’ interests, such buyback should be conducted through a public and centralised trading process.

In accordance with Articles 210 and 212 of the Company Law, after the company has made up its losses and made allocations to its common reserves, it may pay dividends to its shareholders, as follows.

• For a limited liability company, the remaining profits must be distributed in proportion to each shareholder’s actual capital contribution, unless all the shareholders have agreed otherwise.
• For a company limited by shares, unless otherwise specified in the articles of association, it must distribute its profits in proportion to each shareholder’s shareholdings.

If a resolution to distribute the company’s profits is passed at the shareholders’ meeting or AGM, the board of directors must carry out the distribution within six months of the date of such resolution.

In accordance with Article 59 and Article 71 of the Company Law, the shareholders’ meeting or AGM is entitled to elect and change directors. The election must be adopted by affirmative votes representing more than half of the voting rights held by the shareholders attending that meeting.

The shareholders’ meeting or AGM may resolve to remove a director, and such removal will be effective on the date of such resolution. If a director is removed prior to the expiry of their term of office without any proper cause, the director may request compensation from the company.

Shareholders are allowed to object to a director’s decision or request that the director takes actions.

The criteria for objections or requests usually include:

• whether the director’s decision violates the law, the articles of association, or the shareholders’ agreement;
• whether the director’s decision would be detrimental to the company’s or the shareholders’ interests; or
• whether the director’s decision is based on sufficient information and reasonable judgement.

The process required to file objections or requests usually includes:

• submission of written objections or proposals as stipulated in the company’s articles of association;
• presentation and discussion of the objections or proposals at the shareholders’ meeting or AGM; or
• when necessary or required by law, submission for litigation or arbitration to resolve the dispute.

According to the currently effective Company Law, shareholders have the “right to know”, through which shareholders are allowed to obtain information about the company’s financial condition. However, shareholders usually do not have the direct power to appoint or remove the company’s auditor. Shareholders can express their dissatisfaction with the auditor’s performance or propose the auditor’s replacement at the shareholders’ meeting or AGM.

If the articles of association entitle the shareholders to appoint or remove an auditor, they may do so following a request provided for in the articles of association. If the articles of association do not provide shareholders with the aforementioned power and there is no other agreement between shareholders (and the company) regarding the matter, then shareholders generally have no right to request an audit of the company’s financial status.

Directors are obliged to inform shareholders about the governance of the company. This is a part of director’s duty of loyalty and diligence under the Company Law, and an important approach to the company’s transparency and the protection of shareholders’ rights and interests. Directors must comply with provisions of the Company Law and other relevant laws and regulations to ensure the authenticity, accuracy and integrity of their reports, with no misrepresentations or major omissions and no falsifying of records.

A controlling company has no direct duty or responsibility to other shareholders of the company it controls (“subsidiary”). Under the Company Law, the controlling company and its subsidiary are two independent legal entities, with each responsible for its own shareholders.

However, as the major shareholder of the subsidiary, the controlling company – through its controlling position ‒ can have a significant impact on the subsidiary’s decision-making and management. Therefore, the controlling company’s actions are subject to the Company Law and other relevant laws and regulations. The controlling company should exercise its shareholders’ rights in compliance with laws and regulations and should not damage the rights and interests of other minority shareholders of the subsidiary.

If the company is solvent and facing the possibility of declaring bankruptcy or liquidation, the rights and powers and shareholders may be limited, as the majority of shareholders’ powers may be transferred to the insolvency administrator.

However, shareholders are still entitled to some rights and powers, including participation in the company’s decision-making on whether to apply for bankruptcy, liquidation or restructuring or seek other solutions, by obtaining the specific situation behind and reasons for insolvency as well as other relevant financial information. Shareholders can also actively apply for the company’s liquidation, participate in the liquidation procedure, distribute residual properties, institute litigation (alone or as a representative of all shareholders), and participate in restructuring plans.

Shareholders can vindicate their rights and interests through various legal remedies under the Company Law. According to the Company Law, when shareholders suffer detriment in their interests or rights, they are allowed to take actions against the company ‒ including, but not limited to, representative litigations, the “right to know” and the right to request the dissolution of the company.

Aside from the above-mentioned available actions, shareholders can also request an audit of the company’s accounts and financial records if deemed necessary. However, such request must be put forward for appropriate and proper purposes and in written form. Otherwise, the company is allowed to deny such requests on the ground that it might be detrimental to the company’s interests.

Shareholders enjoy a series of legal remedies against the company’s directors and/or officers, including (but not limited to):

• initiating direct or representative litigations against the company;
• obtaining information through the shareholder’s “right to know” and right of inquiry;
• initiating internal supervisory procedures in accordance with the articles of association;
• initiating litigations directly against the board of directors or board of supervisors; or
• reporting illicit actions to regulatory authorities.

Shareholders can initiate derivative actions under certain conditions, as follows.

• Shareholders must possess the right of action – namely, shareholders initiating derivative lawsuits must individually or collectively hold more than 1% of the company’s shares for more than 180 consecutive days.
• Shareholders must first file a written request to the company’s board of supervisors or board of directors to initiate litigation and can only file derivative lawsuits if the board of supervisors or the board of directors does not act within 30 days after receiving such request or explicitly refuses to act.
• When failure to initiate a derivative lawsuit may lead to irreparable detriments to the company’s interests, shareholders have the right to initiate a lawsuit directly without prior request for action by the board of directors or board of supervisors.

Under China’s Company Law, there are different rules and regulations depending on different types of company. Generally speaking, such rules and “tools” available to activist shareholders may be found in laws and regulations, including (but not limited to) the Company Law, the Securities Law and China’s Code of Corporate Governance for Listed Companies.

Typical “tools” available to activist shareholders includes the “right to know”, the right to vote in the shareholders’ meeting or the AGM, the right to nominate directors, supervisors and officers of the company, the right to submit proposals, and the right to file shareholder representative lawsuits.

Key aims of activist shareholders are to promote the improvement of the company’s corporate governance structure, increase the company’s operational efficiency and promote the value of the company through the exercise of shareholder’s rights.

Activist shareholders may focus on the company’s dividend distribution, board composition (including the board of directors and supervisors), remuneration of company officers, asset restructuring and strategic planning, etc.

Generally speaking, shareholder activism in Chinese companies usually aims to protect the interests of all shareholders, enhance the company’s market competitiveness and achieve long-term investment returns by optimising corporate governance.

Activist shareholders employ diverse strategies under the framework of China’s Company Law and Securities Law, as well as other relevant laws and regulations. Typical strategies include:

• share-building ‒ a strategy that allows activist shareholders to obtain enough shares to influence the company’s decision-making and management, which requires the acquisition of shares by activist shareholders and disclosure of information by the company (if necessary);
• submission of proposal to the shareholders’ meeting or AGM ‒ a strategy that operates within the framework of the currently effective articles of association, utilising the current decision-making process of the company, and usually requires activist shareholders to enlist assistance from other shareholders to obtain enough votes for the meeting;
• public communication and private negotiation among shareholders or between activist shareholders and the company; and
• legal actions against the company, the board of directors or the board of supervisors ‒ for example, litigation and arbitration.

In China, companies in the so-called capital-intensive industries, which heavily rely on capital investment from their shareholders ‒ for example, companies engaging in financial and banking services and private/public fund companies ‒ are common targets of shareholder activism.

Among private companies such as LLCs, activist shareholders are beginning to increasingly focus on the improvement of the whole company’s corporate governance structure and the common welfare and interests of all shareholders, instead of only seeking benefits for individual shareholders.

Among companies listed by stock exchanges in China, activist shareholders are also supported and encouraged by regulatory authorities such as the CSRC and the regulatory sections of the three major stock exchanges (Shanghai, Shenzhen and Beijing). Authorities generally welcome shareholders activism, as it is regarded as a sign of improving investor professionalism and awareness of self-protection ‒ both of which are keystones of a mature capital market.

In China, hedge funds and private equity funds are likely to be more active than other types of shareholders. Professional investment institutions such as hedge funds tend to have more resources and expertise and are able to analyse markets and companies in greater depth, so that they can take more proactive action to achieve their investment objectives.

China has a rapidly developing capital market and a corresponding gradually improving regulatory system, in which institutional investors (most notably private equity funds and public funds) are playing an increasingly prominent role as activist shareholders. The CSRC and other authorities keep on tracking these professional investors, supporting their efforts to create a better environment for all investors while taking actions to ensure fairness and efficiency in the market.

For the time being, there are no specific data or corresponding statistics on the number of activist shareholders’ demands that are met. This is because many cases of shareholder activism, especially in private companies, are not legally required to be publicised and many companies and activist shareholders may regard these cases as trade secrets of the company.

However, with the implementation of various laws and regulations, it can be surmised that public demand for participation is growing and to some extent being met. Further specific surveys and support by official data are needed to obtain accurate statistics.

When dealing with activist shareholders, typical strategies that a company can adopt include strengthening corporate governance, optimising the shareholder structure, and rationally utilising provisions among the articles of association, as well as full and transparent communication and co-ordination with shareholders.

To be more specific, efforts should be made to optimise the company’s information disclosure and enhance transparency, as shareholders are typically not directly involved in the company’s day-to-day operation, management and decision-making. An efficient and transparent disclosure system can eliminate information asymmetry and misrepresentation.

In addition, provisions in the articles of association should be drafted or rectified in a legible and intelligible way, so that rights and obligations of each party and company institution are clear and visible. The company should also maintain the independence of the board of directors and board of supervisors to ensure the fairness and transparency of decision-making process.

Finally, flexibility should be exercised in adjusting the dividend distribution policy of shareholders, so as to positively respond to the reasonable appeals of shareholders and reduce potential conflicts.