A summary of important changes

The amendments affect a wide range of areas, from taxation to capital contributions to information disclosure to registration. Perhaps no changes are more significant for multinational organisations operating in China than those related to corporate governance.

This article summarises some of the key changes to China’s 2023 company law for multinational businesses, with an emphasis on new corporate governance requirements for limited liability companies, the most popular form of entity for foreign companies operating in China.

Board of shareholders and board of directors

The separation of ownership and management rights is one of the principles of modern enterprise management. China’s new company law removes the duties and powers of the board of shareholders to “decide on the business direction and investment plans of the company” and “review and approve the annual financial budget and financial accounting plan of the company.”

The law now clearly stipulates that the power to “decide on the business plans and investment schemes of the company” shall be vested in the board of directors. In short, the new law has enhanced the autonomous decision-making and independence of the board of directors in the daily operation of a limited liability company (LLC). The new law also abolishes the upper limit on the number of members who can sit on an LLC’s board of directors.

At the same time, there is now a mandatory requirement for an employees’ representative director for all LLCs with more than 300 employees. This aims to protect the rights and interests of employees. Prior to the 2023 amendments, this requirement was only applicable to wholly state-owned companies and to LLCs invested and incorporated by two or more state-owned enterprises or two or more other state-owned investment entities.

Small-scale LLCs or those with fewer shareholders may appoint a director instead of establishing a board of directors, and the director may hold the position of manager at the same time. The concept of “executive director” has been removed in the new law.

The new law also specifies for the first time that the board of directors must check the shareholders’ capital contribution. If the company finds shareholders haven’t made the full capital contribution per the LLC’s articles of association, the company must notify the shareholders in writing to call for the contribution. If these obligations aren’t met, the director may be held liable.

While imposing heavier liability on company directors, the new law introduces liability insurance provisions to reduce the risks of acting as a director.

Supervisor and audit committee

Prior to the recent amendments, LLCs were required to have one supervisor or a board of supervisors to oversee the company’s board of directors and senior management.

Under the new law, LLCs may establish an audit committee instead of a supervisor or board of supervisors. This is the first time since the implementation of the company law in 1994 that LLCs are allowed to have no supervisors.

The audit committee should be composed of directors under the board of directors, and employees’ representatives on the board of directors may serve on an audit committee. The committee can exercise the duties and powers of the board of supervisors as outlined in the new law.

Small LLCs or those with few shareholders under the new law may not have a supervisor or board of supervisors, provided the company has the unanimous consent of all shareholders.

Legal representative

China’s new company law stipulates that a company’s legal representative must be the director or manager representing the company in executing company affairs “in accordance with the provisions of articles of association of the company.” In other words, the legal representative must under the new law actually manage company affairs. The company itself assumes the legal consequences of the civil activities carried out by the legal representative.

If that director or manager resigns, “it shall be deemed as resigning the legal representative role at the same time.”

Manager

The prior company law (2018) set out seven specific duties of an LLC manager, including but not limited to organizing and implementing the company’s annual business plan and investment scheme and formulating the company’s rules and policies.

The new company law provides only that the manager is responsible to the board of directors, must attend its board meetings, and “shall exercise the duties and powers in accordance with the provisions of the articles of association of the company or the authorisation of the board of directors.”

The new law, then, provides more autonomy to the manager. As a result, an LLC’s board of directors should consider developing and implementing controls to ensure the manager performs his or her duties within the scope of the LLC’s articles of association.

Next steps for affected multinationals

Multinational organisations with an existing China LLC should review their articles of association, corporate governance structures and company roles — including legal representatives, directors, supervisors and managers — in light of the recent changes to company law. In some cases, they may need to make changes to comply with the new rules. LLCs that update their articles of association must apply to the governing branch of the Administration for Market Regulation.

To lower risk, affected multinational organisations should consider working with a third-party expert to ensure that their corporate governance structures are aligned with best practices and that their roles and articles of association are compliant with the new rules.