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Small and medium-sized enterprises (SMEs) hold a crucial position in China¡¯s national economy and social development. Promoting the growth of SMEs is a long-term strategic goal for China. Preventing legal risks for SMEs and improving their legal framework are essential for the development of SMEs. Legal professionals should conduct in-depth research and provide targeted assistance to help SMEs strengthen their legal infrastructure, supporting their high-quality growth.

Targeting high-quality development

China¡¯s economy has entered a new era, shifting from high-speed growth to high-quality growth. According to the directives of the 20th National Congress of the Communist Party of China, private enterprises must focus on innovation, improve supply quality and standards, and set the goal of high-quality development. In what way can SMEs make the transformation to high-quality development? The following approaches are recommended.

At the macro policy level, further reforms and opening-up are necessary to stimulate market vitality, create a favourable business environment, and protect the rights of private enterprises and entrepreneurs.

For instance, the Ministry of Industry and Information Technology issued the Interim Measures for Handling Complaints on Payment to SMEs, and Guangdong province introduced the Interim Measures for Managing Complaints on Payment to SMEs. These measures aim to address payment issues faced by SMEs and are crucial steps towards fostering a supportive business environment for the development of such enterprises.

At the strategic level, SMEs and entrepreneurs are to discard inefficient models and shift towards high-quality development. They should focus on internal improvements, implementing systematic and lean management based on legal and corporate regulations. SMEs must leverage innovation as the driving force for transformation, keeping pace with market trends and policy changes to achieve steady growth.

Fostering a rule-of-law culture

The foundation and prerequisite for effective governance in SMEs is to shift from the ¡°rule by man¡± approach to ¡°rule of law¡±. In many SMEs, the will of the major owner often represents the company¡¯s will. However, legislation like the Company Law, the Partnership Enterprise Law and Sole Proprietorship Enterprise Law were enacted to regulate corporate management.

The new Company Law, effective from 1 July, has introduced significant reforms in areas such as capital contributions, corporate governance systems, enhanced director responsibilities, protection of minority shareholders¡¯ rights, and strengthened responsibilities for company liquidation and deregistration. These changes will have a substantial impact on the rights and obligations of companies and entrepreneurs.

In compliance with the new Company Law, SMEs must adjust their articles of association, organisational structure, relevant positions and regulations. This requires a fundamental shift in the mindset of business operators, standardising the formulation and operation of corporate charters and systems.

Shareholders should actively participate in the management of companies, fully exercising their rights in personnel appointments, access to information, control of company seals and major decision-making.

Companies must implement a ¡°rule of law¡± ethos in a top-down approach, with leaders setting an example by adhering to national laws and corporate regulations. This will foster a legal culture within companies, strengthening their core resilience against risks.

Sustainable mechanisms

In line with current national policies and legal requirements, SMEs and entrepreneurs must shift from an extensive development model to one focused on high quality and lean management. SMEs should establish an appropriate and sustainable legal risk management system tailored to their specific circumstances, without compromising decision making and operational efficiency.

This mechanism should not complicate management, but rather set up targeted structures and processes. It may even streamline personnel, institutions and procedures to efficiently achieve the goal of legal risk control.

Firstly, governance structures must reflect democratic principles and appropriate supervisory mechanisms. Executive leadership should institute fair, impartial procedures with democratic deliberation rules.

At the managerial level, there should be effective and rational job-level oversight. At the grassroots, channels should be provided for frontline employees to voice feedback, grievances and recommendations regarding the companies and their leadership.

Secondly, companies must establish a dedicated mechanism for legal risk control to strengthen their corporate legal capacity. This should be structured across three levels of oversight. The first level requires that shareholder meetings include supervisory personnel such as independent directors, audit directors and legal officers, ensuring their rights to express independent opinions.

The second level mandates that boards of directors include supervisors or audit directors and legal counsel, safeguarding their authority and independence. The third level involves each company setting up a specific legal risk department, with a panel of external legal experts and professional lawyers to handle specific legal cases.

Finally, companies must continually cultivate and entrench internal cultures of legal compliance. According to the Corporate Legal Risk Management Guide, ¡°Legal risk management requires the participation and accountability of all employees, not just the legal department. It necessitates full engagement to create a sustainable legal risk management mechanism.¡±

Jiang Xiuxian is a partner and Wen Jiankun is an associate at ETR Law Firm