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For many years, mainland China had multiple corporate governance frameworks for foreign-invested enterprises. For example, a Sino-foreign joint venture did not have a shareholders’ meeting as its highest authority, while its board of directors was.

In 2019, the National People’s Congress promulgated the new Foreign Investment Law, which formally grants foreign investors national treatment, except in certain heavily regulated industries such as the financial sector. Since then, China had begun its five-year transition period, ending in 2024, to unify corporate structures for all types of corporations.

This article provides a concise overview of the unified corporate governance structure adopted since then.

Overview

The limited liability company and the joint stock company are the two basic corporate forms in China. Normally, private companies (including private Sino-foreign joint ventures and wholly foreign-owned enterprises) take the form of limited liability companies, while public companies and companies preparing to go public take the form of joint stock companies.

Under the latest PRC Company Law (as amended in 2023 and becoming effective on 1 July 2024), there are many differences between a limited liability company and a joint stock company. To name a few significant ones, a joint stock company is permitted to have preferred shares in addition to ordinary shares, which is one of the most notable developments adopted by the 2023 amendment, while a limited liability company can only have one class of share capital, which precisely refers to the “registered capital” concept under PRC law. A joint stock company has more lenient default share transfer restrictions under the PRC Company Law, while a limited liability company has relatively stricter default share transfer restrictions, which may be contracted out if the documentation is well drafted.

Despite these many differences, not to mention that a public company is also subject to the rules of stock exchanges, their basic corporate governance structures are similar, with three common corporate governance bodies: the shareholders meeting, the board of directors (or sole director, board) and the board of supervisors (or sole supervisor). Below is a brief introduction to each corporate governance body of a limited liability company.

Additional statutory corporate governance requirements are applicable to state-owned enterprises (SOEs) or enterprises in specially regulated sectors.

Shareholders meeting

The shareholders meeting of a Chinese company is composed of all shareholders and is its authoritative body with the power and authority to decide on all fundamental matters of the company. These include the increase or decrease of its registered capital, amendment to its articles of association (the charter documents of a Chinese company), election and replacement of directors and supervisors and determination on their remuneration, consolidation or spin-off or dissolution of the company or change of the corporate form (for example, changing from a limited liability company into a joint stock company for listing purposes).

The PRC Company Law lists eight default matters that are reviewed and approved by the shareholders meeting, among which, in our view and based on observations of the local practice of the companies’ registrar, the shareholders meeting may not delegate these default matters to the board for approval unless expressly permitted by the PRC Company Law. The PRC Company Law only expressly permits the shareholders meeting to delegate to the board the approval of a corporate bond issuance. On the other hand, a company may expand the authority of its shareholders meeting as long as the additional matters are expressly provided for under its articles of association.

In terms of voting, as a limited liability company does not have shares, its shareholders vote based on their shareholding percentages (calculated based on the registered capital a shareholder subscribed or paid and the total registered capital of the company) at a meeting or through written resolutions in lieu of a meeting.

Most matters can be approved by shareholders holding more than 50% of the voting power, and the following matters have to be approved by shareholders holding at least two-thirds of the voting power: increase or decrease of registered capital, amendment to its articles of association, consolidation, merger or spin-off or dissolution of the company, or change of the corporate form. Nevertheless, any resolution passed by written resolutions must be signed by all shareholders.

Shareholders are permitted to agree on specially tailored decision-making mechanisms if these do not violate mandatory rules of PRC law. It is common for a strategic investor to ask for a comprehensive veto at the shareholders or board level, and for a financial minority investor to seek “negative control” under the shareholders agreement and the articles of association of their investee companies.

When considering additional arrangements beyond the default rules in the PRC Company Law, a comprehensive assessment should be conducted in advance. For example, whether the “negative control” would trigger a merger filing in China, which applies to greenfield joint ventures, equity and assets acquisitions, and contractual control.

Board of directors

A Chinese company normally has a board consisting of at least three directors. However, if the company has few shareholders or is small, it may choose to have a sole director instead of a board. It is the shareholders meeting’s authority and power to elect and replace the directors (other than an employee-representative director), but it is practical for shareholders to enter into contractual arrangements regarding directors’ designation and nomination. The employee-representative director is not new and has been widely implemented in SOEs, but the 2023 amendment emphasises this together with other provisions regarding employees’ democratic management in non-SOEs.

An employee-representative director is the representative, directly or indirectly, elected by the employees of the company to hold the director’s office. The new PRC Company Law has complex rules on whether an employee-representative director may be waived.

The board reports to the shareholders and is responsible for convening and presiding over shareholders’ meetings and implementing their resolutions. The board is also the executive body of the company that decides on nine default matters as provided by the PRC Company Law, such as the business plan and investment plan, and the engagement and dismissal of the general manager of the company.

Similar to the authority of the shareholders meeting, the company has the flexibility to grant the board more authority by specifying this in its articles of association, provided that the statutory power of the shareholders meeting may not be delegated to the board unless otherwise expressly permitted by the PRC Company Law.

In terms of voting, each director has one vote, and the chairman does not have any casting vote. The board makes its decision by a simple majority, while if the board decides through written resolutions in lieu of a board meeting, the written resolutions shall be signed by all directors.

The directors owe fiduciary duties and duties of care to the company they serve. The 2023 amendment to the PRC Company Law also strengthened these obligations by incorporating more detailed requirements on self-dealing, corporate opportunities, non-compete, etc., and detailed penalties for breaching these duties.

The board may establish one or more specialised committees under it, such as an audit committee and a compensation committee.

Board of supervisors

Supervisor is a unique concept, serving the function of a “watchdog” for shareholders. Under the new PRC Company Law, a company may have a sole supervisor, or a board of supervisors consisting of at least three supervisors, and at least one-third of the supervisors shall be elected by employees. Previously, a company could have two supervisors, each appointed or nominated by its shareholders, which was the most common structure for a Sino-foreign joint venture.

Supervisors may request a shareholders’ meeting and submit proposals. They also have the power to supervise the directors and senior officers, and even bring a lawsuit against directors and senior officers under certain circumstances.

However, there is a trend for the board to set up an audit committee to replace the board of supervisors.

In general, the 2023 amendment to the PRC Company Law optimises Chinese companies’ corporate governance and also signifies other trends, such as enhancing employees’ participation in corporate democratic management and encouraging Chinese companies to attend to environmental, social and governance matters.

It is recommended to seek assistance in navigating these new trends.

JunHe
20/F, China Resources Building,
8 Jianguomenbei Avenue,
Beijing 100005, P. R. China
Tel: +86 10 8519 1300
Email: junhebj@junhe.com