On 29 December 2023, China’s newly revised Company Law was adopted by the 14th National People’s Congress and will come into effect on 1 July 2024.
In this series of articles, we will introduce some important changes regarding China’s new Company Law, to better facilitate our clients with their business compliance in China. This article will focus on the simplification of the corporate governance structure under the new Law.
The Introduction of One-Tier Board
China’s Company Law, like the Netherlands, has adopted a two-tier board system for corporate governance structure since 1993. A two-tier board system means that a company has the following official bodies i) a shareholders’ meeting, (ii) a board of directors and (iii) a separate supervisory board. Under China’s Company Law regime the supervisory board is superior to the board of directors and enjoys the power to appoint or remove the directors, to decide on remuneration, to make major decisions and to supervise. This distinguishes it from the one-tier board system, where one board is responsible for both management and supervision.
Under China’s current Company Law regime, it is indispensable for unlisted joint-stock companies (股份有限公司) and limited liability companies (有限责任公司) to have a shareholder’s meeting, a board of directors and a supervisory body. However, with the coming into effect of the new Company Law this July, the one-tier board system will be introduced. These new changes can be found in the following provisions:
Article 69
A limited liability company may establish an audit committee composed of directors of the board of directors in accordance with the company’s bylaw which exercises the functions of the board of supervisors specified in this Law, and is not required to have a board of supervisors or supervisor.
Article 121
A joint stock limited company may establish an audit committee composed of directors of the board of directors in accordance with the company’s bylaw which exercises the functions of the board of supervisors specified in this Law, and is not required to have a board of supervisors or supervisor. [1]
The above new changes give limited liability companies and joint stock limited companies the freedom to choose their governance structure. After the new Law comes into effect, these two types of companies can, through their articles of association (AoA), design their governance structure in line with their business direction. A company may choose among a two-tier system, a one-tier system, or a hybrid mode of both. The hybrid mode refers to a shareholders’ meeting, a board with an audit committee, and a supervisory board/supervisor. However, it is worth noting that, when adopting the hybrid mode, the supervisory functions may conflict. The company should agree in its AoA to specify which organ is specifically responsible for the supervision.
After adopting the one-tier board, a supervisory board/supervisors is/are not mandatory anymore. Instead, the audit committee within the board of directors will undertake the supervisory function. This simplification of the corporate governance structure will lead to a cost reduction in setting up and operating a company in China.
In addition to the new change in the governance models, Article 128 of China’s new Company Law will provide small-sized joint stock limited companies with the option to simplify the board of directors. They will be able to choose either a board or even only one director:
Article 128
A joint stock limited company that is small or has a small number of shareholders is not required to establish a board of directors, and may have one to two directors who exercise the functions of the board of directors as provided for in this Law. The director may concurrently hold the post of the company’s manager.[2]
From our practical experience, if a Dutch company wants to set up a subsidiary in China, the most preferable approach is to start a limited liability company(Co., Ltd.). With the abovementioned new amendments to China’s Company Law, the setup in China will gain a higher degree of flexibility. For Dutch companies wanting to enter the Chinese market, there will only be fewer obstacles iand more options for the corporate governance.
More information
If you want to learn more about the changes in China’s new Company Law, please check out the following articles in this series. If you have questions about setting up and operating a company in China, please feel free to contact us:
- Job Bezemer 裴耀博先生 (jbz@kneppelhout.nl)
- Victor Zheng 郑琳先生 (vz@kneppelhout.nl)
- Peiying Li 李佩英女士 (pl@kneppelhout.nl)
[1] The English translation of the articles is from pkulaw.com.
[2] Ibid.
