In the latest in a series on China’s new Company Law, Marco Vinciguerra from HFG Law & Intellectual Property explores changes related to the roles and obligations of shareholders
China’s revised Company Law, which will come into effect on 1 July 2024, has 266 articles, about a third of which have been added or substantially modified. Of these, a number relate to the rights and obligations of shareholders.
This article describes the new provisions of the Company Law that will have a significant impact on the officers (legal representatives, directors and supervisors) and senior managers of LLCs, with, as with parts one and two of this series, a particular regard to foreign-invested enterprises (FIEs).
Legal representatives
The new Company Law will create a significant change, from a practical point of view, in relation to the choice of the legal representative of LLCs, particularly FIEs. While the law currently provides that only the chairman or the general manager of an LLC can be appointed legal representative, under the new Company Law this position may be held by a director or a manager who “represents the company in executing company affairs”.
On the one hand, this gives shareholders a wider choice, but, on the other hand, it must fall onto a person who is actually involved in the management of the company’s activities. For foreign-invested LLCs, this may mean the end of the commonly adopted practice of appointing an individual overseas as a legal representative (just to fill in the position) without such a person being actually involved with the decision-making process of the company.
The new Company Law also states that the resignation of the legal representative from the position of director or manager will also determine the end of their office as legal representative.
Under the provisions currently in force, a legal representative would remain in office until a successor is appointed. This rule sometimes gives rise to situations where a person, having resigned as director or manager, would still be formally the company’s legal representative. The new provisions now require that a successor be appointed within 30 days. However, they do not describe what happens if the appointment of a replacement does not occur within the prescribed term.
Directors
As far as directors are concerned, the new Company Law also introduces a few significant changes.
From 1 July 2024, the board of directors of an LLC should have at least three directors, and there will no longer be an upper limit to the number of directors (currently capped at 13). As in the law currently in force, smaller-scale companies or companies with a small number of shareholders will still have the possibility to appoint a sole director (instead of a board of directors).
The new Company Law also states that if a company has at least 300 employees and there is no employee representative on the board of supervisors, at least one employee representative is required to sit on the board of directors.
This is a significant change, and for relatively large foreign-invested companies, this provision will require adjustments to be made to their organisation and governance structure, especially where the composition of the board of directors has been originally designed to specifically reflect the influence of the shareholders on the company (as is usual for joint venture companies).
The presence of an employee director on the board may also raise concerns about the confidentiality of certain issues dealt with by the directors that may relate to or affect the company’s employees.
It could, therefore, be expected that companies will opt to have employee representatives sitting on the board of supervisors and avoid having one appointed as director.
The new law has also slightly amended the distribution of functions and powers between the shareholders’ meeting and the board of directors. Unlike in the law currently in force, the function and power of “deliberating and approving annual financial budget plans and final account plans of the company” is not listed as an item of the functions and powers attributed to the shareholders’ meeting (thus – by exclusion – attributing the same to the board of directors).
Such an exclusion may be seen as surprising because many corporate legal systems actually consider the power to decide over the budget and approve the financials of the company as a prerogative of the shareholders. The articles of association of the company can, of course, provide for otherwise.
Such a provision consistently goes in the direction that seems to be followed by the new law, that is giving more powers (and a higher level of liability associated with such powers) to the directors.
In this same direction, the new law now considers the directors liable
- (i) for any loss caused to the company for not complying with their duty to call for payment of the subscribed capital by the shareholders and to send a notice of forfeiture of the shareholders’ rights to the defaulting shareholders that have not remedied their default within the grace period assigned to them;
- (ii) for losses caused by not calling the payment of the capital subscription ahead of the agreed term in the event of insolvency of the company;
- (iii) for losses caused to the company as a consequence of providing financial assistance for others to acquire shares in the company;
- (iv) for losses that are caused to the company or its creditors in a liquidation procedure where the directors appointed as liquidators have not fulfilled their duties in a timely manner;
- (v) for losses caused to the company by an illegitimate reduction of capital.
Most of these provisions stating liabilities onto the directors are also applicable to the supervisors and senior managers of an LLC.
The officers and senior personnel of a company should, therefore, start familiarising themselves with the latest requirements relating to the liability assigned to them by the new Company Law.
In this regard, the new law expressly mentions the possibility that a company takes up insurance for the liability of its directors. So called “D&O policies” (i.e. directors and officers insurance coverage) are likely to become more and more commonly used and popular products once the new law comes into force.
