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This article is a continuation of the Practical Guide to the New Company Law (2023 Revision) - Part 1, providing practical interpretations of the relevant modifications in the new law.

X. Corporate Governance

Many issues can be traced back to corporate governance problems, making it a critical aspect of any business. The recent legal revision significantly adjusts corporate governance structures, including the "Three Meetings" (Shareholders' Meeting, Board of Directors, and Supervisory Board) and the roles of executives. However, the delineation of powers remains unclear, such as the surprising removal of items related to business policies and investment plans.

1. Shareholders' Meeting

· Unified Name: Regardless of the company type, the name is uniformly "Shareholders' Meeting." Resolutions made in a limited liability company are now referred to as "Shareholders' Meeting Resolutions."

· No Shareholders' Meeting: A limited liability company can operate with a single shareholder, similar to a single-member limited liability company, without the need for a Shareholders' Meeting.

· Powers: Two statutory powers have been removed from the Shareholders' Meeting: (1) deciding on the company's business policies and investment plans (retained in the Board of Directors' powers as "deciding on the company's business plans and investment schemes") and (2) reviewing and approving the annual financial budget and final accounts (this power is also canceled in the Board of Directors).

· Recommendation: Despite the potential confusion between phrases like "business policies" and "business plans," it is advised to clearly define these terms in the company's articles and allocate powers based on the definitions. Given the critical nature of "business, investment, budget, and final accounts" in fierce market competition, discussions and decisions on these matters are indispensable.

· Company Bond Issuance: Regarding company bond issuance, a crucial aspect of business policies/plans, delegating this to the Board of Directors seems reasonable. However, specifying this separately might indicate that other statutory powers cannot be delegated. This requires further clarification.

2. Board of Directors (Directors/Audit Committee)

· Powers: Refer to the Shareholders' Meeting section for powers.

· Number: The Board can consist of one or more directors, with no upper limit (although an excessive number may impact efficiency).

· Repositioning Board Nature: The new law removes the responsibility of the Board to the Shareholders' Meeting, suggesting that, like the Supervisory Board, the Board is an equal governance body without direct accountability to another. However, directors, elected or replaced by the Shareholders' Meeting, can be dismissed with compensation if no justifiable reason is provided.

· Plural Legal Representatives: According to Article 10(1) of the new law, the company's legal representative, as per the articles, is appointed by a director or manager responsible for executing the company's affairs. This seemingly introduces a plural legal representative system. If unintended, it represents a legislative loophole.

· Employee Directors: Companies with over three hundred employees and state-owned sole proprietorships must have employee directors.

· Audit Committee in the Board: A significant change is the introduction of an Audit Committee in the Board, replacing or exercising the powers of the Supervisory Board. The number of members is not specified, but having an odd number, preferably three or more, seems appropriate.

· Recommendation: Careful consideration is required for smaller boards (e.g., three directors) if setting up a two-member Audit Committee is inappropriate. Additionally, the interaction between the Board's composition and the need for a Supervisory Board in such cases needs clarification.

· Listed Company Board's Audit Committee: While not mandatory, it is advisable for listed companies to establish an Audit Committee for enhanced governance. However, the stipulation that certain Board resolutions require prior approval from the Audit Committee seems redundant, as a majority Board approval should suffice.

· Abolishment of "Executive Director" Title: The title "Executive Director" has been replaced by "Director," causing confusion as the former clearly indicated a company with fewer shareholders or a smaller scale. The uniform "Director" title obscures this distinction.

· Resignation and Dismissal of Directors: Directors can resign (Article 70) and can be dismissed (Article 71).

· Director Compensation System: Unlike the compensation system in Company Law Interpretation (V) Article 3 (2020 Revision), which focuses on "compensation," Article 71(2) of the new law allows dismissed directors to request compensation if no justifiable reason for dismissal exists. This raises several perplexing questions: (i) Why state the reason for dismissal when it is the Shareholders' Meeting's prerogative (even though there will be reasons)? (ii) Determining justifiable and unjustifiable reasons is challenging. (iii) Why should the company compensate for a decision made by the Shareholders' Meeting? Can shareholders who voted in favor be held accountable? (iv) Directors receive remuneration, which should be sufficient. (v) Directors are not laborers; is such a robust compensation system necessary?

3. Supervisory Board/Supervisor/Audit Committee

· No Mandatory Requirement: Regardless of the company type, a Supervisory Board or Supervisor is optional, a significant change in China's corporate governance structure. For many companies, especially those with family members as supervisors, such appointments may be meaningless.

· Supervisory Board's Membership: If a Supervisory Board is established, it must have three or more members, with no upper limit.

· Logic for Smaller Companies: In smaller limited liability companies with few shareholders, the governance structure can be simplified to Shareholders → Board of Directors (→ Manager), excluding the need for an Audit Committee or Supervisor, and possibly even a Manager (limited liability companies).

· Majority Vote Change: The threshold for passing Supervisory Board resolutions changed from "over half" (including self) to "more than half" (excluding self).

· Increased Supervisory Powers: The Supervisory Board can now request reports from directors and senior management, enhancing its supervisory role.

· Complication for Smaller Companies: Smaller companies, with only one director (unable to establish an Audit Committee), may need to add a Supervisor. Alternatively, in such companies, increasing the number of directors to form a Board and subsequently an Audit Committee might be a solution without requiring a Supervisor (Board of Supervisors).

· Logic for Listed Companies: According to the legal structure (Article 121, Article 133, Article 137), if an Audit Committee is established in the Board of Directors of a listed company, there is no need for a Supervisory Board. This raises concerns about weakening supervision. Moreover, how does the Audit Committee and the Supervisory Board coordinate their powers in a listed company with both structures?

· Audit Committee in New Law: The design of the Audit Committee in the new law may seem like a mere change in name without altering the essence. It might be more practical, except for specific company types (public companies, listed companies, state-owned companies, large companies, companies with many shareholders), to let shareholders decide whether to establish it.

4. Manager

· Major Change: The most significant change in the new law is the elimination of specific provisions for the manager's powers, leaving it entirely to the company's articles or Board authorization. It is recommended to specify the manager's powers explicitly in the articles and authorize them through Board resolutions as needed.

· No Manager Option for Limited Liability Companies: Limited liability companies can now operate without a manager, but other company types are required to have one.

5. Communist Party Organization

· Legal Position: The new law establishes the legal status of Communist Party organizations in the governance structure of state-funded companies. According to Article 170, Communist Party organizations in state-funded companies (solely state-owned or state-controlled capital) play a leading role in accordance with the Communist Party of China's charter. They discuss significant operational management matters, support the company's organizational structure in exercising powers according to the law.

· Understanding Party Organization in the New System: In the new legal system, it is crucial to recognize (i) the position and role of Party organizations, emphasizing the unique advantages of Party leadership and Party building in state-owned enterprises, (ii) the necessity of including a Party organization section in the company's articles, specifying the rights and responsibilities of the Party organization in decision-making, implementation, and oversight, making it an integral part of the company's legal governance structure, (iii) the execution of Party organization work, establishing rules for decision-making on "Three Major and One Large" matters (major decisions, important personnel appointments and dismissals, major project arrangements, and large-scale capital operations), requiring prior communication with the Party committee (Party group), and ensuring that Party committee (Party group) members in the Board or the manager's team implement the decisions or opinions of the Party organization.

6. Typology of Corporate Governance Structure

According to the regulations of the new Company Law, the governance structure of Chinese companies can be typified as follows (diagrams not provided here):

· Type One: Sole Proprietorship Companies/Sole Shareholder Companies

· Type Two: Smaller-scale or Few Shareholder Companies

· Type Three: State-Owned Sole Proprietorship Companies

· Type Four: Other Types of Companies

In conclusion, the new Company Law (2023 Revision) brings significant changes to corporate governance structures, requiring careful consideration and adjustment by companies to align with the new legal provisions. The flexible typology of corporate governance structures allows companies to choose a structure that best suits their nature and size, providing more options and adaptability in the evolving business environment.