Update of the Amendment to China’s Company Law
On 30 December 2022, the National People's Congress released the Second Review Draft of the Amendment to the Company Law (the “Second Review Draft”) which is believed to be very close to the final amendment. Although generally maintained the main body of the first review draft issued on 24 December 2021 (the “First Review Draft”, for more details of the first review draft, please refer to our previous article), there are still some important points worth paying attention to.
1. Powers of the Board of Directors
As we have introduced in the previous article, the First Review Draft has granted very broad powers to the board of directors by saying that the board of directors can exercise the powers except for those have been reserved to the shareholders’ meeting. Such an approach was actually a general authorization to the board of directors to handle the day-to-day operation of the company.
But the Second Review Draft has abandoned such an open-end style approach by resuming the non-exhausting list of powers like the Article 46 of the current Company Law. If this was to be approved as the final draft, then shareholders should make sure that all powers of the board of directors shall be specifically stated in the articles of association.
2. Establishment of the Supervisors
In the First Review Draft, all companies, except for those have established audit committee within the board of directors, have to set up board of supervisors or at lease one or two supervisors.
However, in the Second Review Draft, conditioned on unanimous approval of all shareholders, small limited liability company without setting up an audit committee is also permitted to choose not to set up board of supervisors or supervisor(s) at all.
It was based on the theory that in a small limited liability company, shareholders (or only one shareholder in many cases) are usually actively involved in the day-to-day operation of the company, thus there is no much need to set up supervisor to oversee the directors to protect the interest of the shareholders.
3. Audit Committee in a Company Limited by Shares
In the First Review Draft, company limited by shares is allowed to set up an audit committee to monitor the accounting matters of the company and more than half of the members of such audit committee shall be non-executive directors.
The Second Review Draft further hardened the conditions of audit committee by requiring more than half of the members of the audit committee shall be “independent director” and at least one independent director shall be accounting professional. With respect to the condition of “independent director”, the Second Review Draft requires that in order to be eligible to be an independent director, such a director shall not take other position in the company other than the director and shall not hold any relationship with the company that may “possible affect the directors’ independent and fair judgement”.
4. Liability of Audit Committee in Limited Liability Company
In the First Review Draft, when a limited liability company sets up an audit committee, such an audit committee shall monitor the accounting issues of the company as well as other responsibilities provided by the articles of association.
The Second Review Draft requires that in a limited liability company who sets up an audit committee, the audit committee shall exercise the powers and responsibilities of board of supervisors. It is clear that the audit committee’s position to replace the board of supervisors more than merely oversee the accounting issues.
5. Scope of Legal Representative
The Second Review Draft allows that any director and general manager who exercise the company matters on behalf of the company could be company’s legal representative. While in the First Review Draft, only chairman of the board (company sets up a board of directors), executive director (company sets up no board of director) and general manager could be the legal representative.
6. Procedures of Shareholder Meeting and Board of Director Meeting
In the First Review Draft, company is allowed to convene shareholder meeting and board of directors meeting in electronic communication manner if the articles of association allows to do so. But in the Second Review Draft, company is allowed to convene shareholder meeting, board of directors meeting and board of supervisors meeting in electronic communication manner “so long as the articles of association does not provide otherwise.
In practice, electronic manners including online meeting and conference call have long been adopted as ordinary method to convene company meetings, especially during the pandemic of COVID-19 when physical meeting has become inconvenient. The First Review Draft and the Second Review Draft have duly reflected the development of practice.
7. Special Provisions Regarding to Listed Company
The Second Review Draft has introduced a few provisions specially applied to listed companies.
Article 137 of the Second Review Draft requires that in a listed company sets up an audit committee, approval by more than half of the members of the audit committee shall be obtained when the company resolves on the matters including hire of the accounting firm to conduct the audit, appointment and dismissal of the chief financial officer and disclosure of financial reports.
Article 140 of the Second Review Draft requires listed companies to disclose information of its shareholders and ultimate controllers and ensure the accuracy and completeness of such information.
Article 141 of the Second Review Draft prohibits the companies controlled by a listed company to possess shares of such listed company. And if such a controlled company obtained shares of such controlling listed company, the controlled company shall not exercise its voting rights and quickly dispose such shares.
8. Compulsory Deregistration
Article 237 of the Second Review Draft allowed the company registration authority to cancel registration of a company if such company’s business license has been revoked or the company has been ordered to close but the company failed to complete the liquidation within three years. Before such compulsory deregistration, the company registration authority must publish in the enterprise credit information publicity system for at least sixty days. And if there has been no objection raised within such sixty-day period, the company registration authority can cancel the registration of such company.
Such an compulsory deregistration was introduced to deal with the so-called “zombie company” problem which referred to the companies that have actually ceased its operation but have not been duly dissolved and liquidated.
9. Publication of Articles of Association
Article 34 of the First Review Draft says that the registration information and the articles of association of the company shall be publicized to through the enterprise credit information publicity system. However, the wording of Article 32 of the Second Review Draft has stroke out the “articles of association” from the scope of publication. Such an deletion has revealed that consensus has not been reached on whether to publicize the article of association to the general public.
Actually, all companies are obliged to submit articles of association to the company registration authority and update them each time the company makes any amendment to it. And the articles of association can be easily obtained by the general public by making a request to the company registration authority. So the problem here is not whether the general public shall get access to the articles of association, rather the problem is whether the contents of the articles of association (especially those restrictions upon the powers of the senior management) can be used to defense the third party’s claim.