Corporate Governance in China

Sources of corporate governance rules and practices

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The main pieces of legislation that regulate corporate governance in the People’s Republic of China (China) are as follows:

• the Company Law and the judicial interpretations of the Company Law made by the Supreme People’s Court of China, which are applicable to both private and public companies;
• the Foreign Investment Law (to be effective on 1 January 2020) applicable to foreign-invested companies, which will replace and supersede the Wholly Foreign-owned Enterprise Law, the Sino-foreign Equity Joint Venture Law and the Sino-foreign Cooperative Joint Venture and their respective implementation rules;
• specifically to the corporate governance of public companies, it is further governed by the Securities Law, the Code of Corporate Governance for Listed Companies and related administrative measures, guidelines, rules and explanatory notes issued by China Securities Regulatory Commission (CSRC), Chinese stock exchanges (ie, Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)) and other designated trading venues; and
• for companies in the sectors of banking, insurance and securities, other rules and guidelines respectively issued by the China Banking and Insurance Regulatory Commission (CBIRC) and CSRC shall apply.

China adopts a comply or explain approach for the enforcement of corporate governance norms for listed companies.

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

The National People’s Congress and its Standing Committee are the main legislatures for the Company Law, the Foreign Investment Law and the Security Law, which are mainly enforced by the State Administration for Market Regulation (SAMR), the Ministry of Commerce (MOFCOM) and CSRC.

For rules applicable to public companies, CSRC, SSE and SZSE act as both the legislatures and enforcers. Other relevant rules applicable to the sectors of banking, insurance and securities companies are enacted and enforced by CBIRC and CSRC respectively.

Currently, there are no well-known shareholder groups or proxy advisory firms that would exert material influence on corporate governance-related issues of companies.

Rights and equitable treatment of shareholders

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

There are two types of companies with limited liability in China:

• limited liability company (LLC), which only includes private companies; and
• company limited by shares (CLS), which include both private and public companies.

For LLCs, the shareholders are entitled to appoint and remove directors by law in accordance with the method as stipulated in the articles of association. However, an employee representative who serves as a director on the board of directors of an LLC established by two or more state-owned enterprises or other LLCs is elected by the employees.

As for CLSs, resolutions to appoint or remove directors shall be passed by a shareholders’ general meeting by a simple majority of votes cast by shareholders present at the meeting.

Under the Company Law, the shareholders’ meeting is the highest decision-making body, and the board of directors shall be responsible to the shareholders’ meeting and enforce the resolutions of the shareholders’ meeting.

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The Company Law reserves decisions to the shareholders in both LLCs and CLSs on:

• the business direction and investment plans of the company;
• the appointment and dismissal of directors and supervisors and their remuneration;
• resolution on increase or reduction of registered capital of the company;
• issue of corporate bonds;
• merger, division, dissolution, liquidation or change of company form;
• amendment of the articles of association of the company;
• review and approval of reports of the board of directors or supervisors, annual financial budget, accounting plan, the profit distribution plan and loss recovery plan; and
• other matters as provided in the articles of association.

The following additional rights are given to the shareholders:

• the provision of security by the company for a shareholder or the de facto controller of the company must be approved by a resolution of the shareholders’ meeting; and
• in a listed company if the company, within one year, purchases or sells major assets, or provides guarantees to third parties, and the transactional value exceeds 30 per cent of the company’s total assets, the transaction must be approved by a two-thirds majority of the voting rights of the shareholders present in the meeting.

At present, there is no legal concept or practice about non-binding shareholding vote in China.

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

An LLC does not issue shares that shall be substituted for equity interests measured in term of percentages.

In an LLC, the voting rights exercisable by a shareholder at a shareholders’ meeting shall be based on the ratio of its capital contribution, unless otherwise provided in the articles of association of the company.

In a CLS, the fundamental principle of ‘one share, one vote’ is adopted: one share of a shareholder represents one voting right in the shareholders’ meeting. However, under the circumstances that the division of ordinary shares and preference shares is adopted in a CLS, compared with ordinary shareholders, preference shareholders are generally not entitled to attend the shareholders’ general meeting and thus have no voting rights. Preference shareholders are entitled to vote but at a separate class of meeting on a few limited matters (eg, issue of new preference shares, amendment of articles of association related to the preference shares, merger, division, liquidation, or change of corporate form, a single or accumulative reduction of the registered capital of the company exceeding 10 per cent).

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders legally registered in the shareholders’ register are gene­rally allowed to participate in general meetings of shareholders. However, for a general meeting to decide on the matter regarding providing securities to a shareholder or the actual controlling party of the company, such shareholders or the shareholders controlled by the actual controlling party shall not participate in the general meeting of shareholders. Besides, where there are preference shareholders in a CLS, only under limited circumstances can preference shareholders participate in the general meeting of shareholders and vote (see question 5).

Besides physical meetings, for both LLCs and CLSs, shareholders are permitted to pass a resolution in writing without convening a physical shareholders’ meeting in writing as long as such resolution is approved unanimously, and signed and sealed by all the shareholders.

If the company’s articles of association permit, the shareholders’ meeting can be held by telecommunication means. The Company Law is silent on the general requirements applicable to conducting a shareholders’ meeting by telecommunication. It can be safely presumed that holding the shareholders’ meeting by telecommunication is legal provided that the statutory requirement relating to running of the meeting and adoption of resolutions are adhered to and relevant rules specified in the articles of association are followed.

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

In order to convene a meeting of shareholders:

• In a CLS, shareholders who hold 10 per cent or more of the company’s shares for 90 consecutive days or more can convene and preside over a general meeting on their own initiative, if the board of directors and the board of supervisors have failed to fulfil their obligations to convene a general meeting.
• In an LLC, if the shareholder meeting is not called, shareholders who represent 10 per cent or more of the voting rights can convene and preside over the meeting on their own initiative.
• A shareholder in a CLS or an LLC may request a court to order a general meeting to be called. A shareholder may also petition a court to suspend or nullify a general meeting if the procedure or content of the meeting violates any law, administrative regulation or the company’s articles of association.

The Company Law does not provide specific rules on the nomination of directors. Pursuant to Guidelines on Governance of Listed Companies (the Guidelines), listed companies shall stipulate in their articles of association standardised and transparent procedures for nomination and election of directors, and ensure that election of directors are transparent, fair and equitable.

In practice, if a meeting of shareholders is convened, shareholders are able to make shareholder proposals such as nominating a person to be a director before the notice of invitation that includes the programme and agenda of the meeting is circulated to the shareholders. However, in a CLS, any shareholder who holds 3 per cent or more of the shares of the company can submit a written proposal to the board of directors at least 10 days in advance of a general meeting.

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Under Chinese law, a company’s controlling shareholder cannot abuse its position to harm the interests of the company and other non-controlling shareholders. Otherwise such controlling shareholders shall be liable for the damages caused.

As to a listed company, further rules are regulated in Code of Corporate Governance for Listed Companies in China. In accordance with article 19 of the Code, the controlling shareholders owe a duty of good faith towards the listed company and other shareholders. The controlling shareholders should exercise their rights complying with laws and regulations strictly. Any behaviour that could infringe the company’s interest or other shareholders’ legal right is prohibited. The controlling shareholders are also forbidden to acquire additional profits by virtue of their controlling positions.

If the controlling shareholder infringes the lawful rights and interests of the company, causing the company to incur a loss, a shareholder or shareholders of an LLC or a CLS who alone or jointly holds at least 1 per cent of the company’s shares for at least 180 days in succession has the right to request the supervisory board (or the supervisors, for an LLC without a supervisory board) to start legal proceedings in court in respect of the infringement.

If the supervisory board or the supervisors fail to start legal proceedings within 30 days of the date of receipt of the request or, in urgent circumstances where failure to promptly start legal proceedings could cause irreparable harm to the company’s interests, the shareholders have the right, in the interests of the company, to directly start proceedings in a court in their own name.

In addition, if a resolution of the shareholders’ meeting violates any law, administrative regulations or the company’s articles of association, such resolution is null and void. Non-controlling shareholders can request a court to confirm that the resolution is void. Moreover, non-controlling shareholders are entitled to directly initiate a suit in court for the interests infringed by the controlling shareholders.

Can shareholders ever be held responsible for the acts or omissions of the company?

Pursuant to article 20 of the Company Law, the shareholders shall not abuse their shareholders’ rights to cause damage to the company or the interest of other shareholders or abuse independent legal person status of the company and limited liability of the shareholders to cause damage to the interests of the creditors of the company.

Shareholders shall be held responsible for the acts or omissions of the company if the acts or omissions are considered the result of being abused by shareholders’ rights and they cause the company or other shareholders to suffer damage.

Shareholders of a company who abuse the independent legal person status of the company and limited liability of shareholders to evade debts and cause damage to the interests of the creditors of the company shall be jointly liable for the company’s debt.

Corporate control

Are anti-takeover devices permitted?

Under Chinese law, there is no regulation restricting the use of any specific anti-takeover devices; however, the Measures for the Administration of Takeover of Listed Companies set out the basic anti-takeover rule, which is that controlling shareholders or actual controlling parties of a target company should not abuse the shareholders’ rights to damage the legal rights and interests of the target company or any other shareholders.

The directors, supervisors and senior managers of a target company have the duty of fidelity and diligence, and shall equally treat all the buyers that intend to take over the company. The decision made and the measure taken by the board of director of a target company for the takeover shall benefit the said company and its shareholders, and shall not erect any improper obstacles to the takeover by abusing its power, nor may it provide any means of financial aid to the purchaser by making use of the sources of the target company or damage the legal rights and interests of the target company or its shareholders.

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

Under the Company Law, only the shareholders’ meeting in an LLC or the shareholders’ general meeting in a CLS may adopt resolutions on the increase of registered capital or the issue of new shares. In addition, a listed company shall submit an application and documents including the resolution of a shareholders’ general meeting to the CSRC in order to issue new shares.

For shareholders in an LLC, it is explicitly stipulated by the Company Law that they have the pre-emptive right to subscribe to new capital in accordance with the ratio of capital contribution or another ratio as determined by all the shareholders. As for a CLS, the Company Law is silent on the pre-emptive rights of existing shareholders about the new shares. In practice, the shareholders in a CLS may create such pre-emptive rights for themselves by agreement.

For public companies admitted to the National Equities Exchange and Quotation (NEEQ), which is China’s over-the-counter stock trading platform, according to the rules of offering shares, the existing shareholders shall, under the same conditions as for the targeted investors, have the pre-emptive right to the shares being offered, unless otherwise provided by the articles of association of a NEEQ-admitted company.

In the listed companies, such pre-emptive rights can be realised through a placement with the existing shareholders.

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Restrictions on the transfer of fully paid shares in an LLC and a CLS are both permitted.

In an LLC, the transfer of equity interest to an external third party is usually subject to the prior approval of more than half of the other shareholders and the other shareholders have pre-emptive right to acquire such equity interest on similar terms. The articles of association of a company may include certain additional restrictive provisions on the transfer of equity interest, provided that such restrictions do not violate any mandatory rules of Chinese law.

In a CLS, shares held by incorporators shall not be transferred within one year from the date of incorporation of the company. Shares issued by the company before the share offering shall not be transferred within one year from the date on which the shares of the company are listed on a stock exchange.

Furthermore, the directors, supervisors and senior management personnel of a CLS shall not transfer more than 25 per cent of their shareholding in the company each year during their term of appointment or transfer their shares within one year from the date on which the shares of the company are listed on a stock exchange. The aforesaid persons shall not transfer their shares in the company within half a year after leaving their post.

In addition, the articles of association of a CLS may make restrictive provisions on the transfer of shares of held by its directors, supervisors and senior management personnel.

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

As a civil law system country, China has been sticking to the corporate capital principle of the ‘capital maintenance’ rule, meaning a Chinese company shall not reduce its own registered capital except as otherwise mandated by law.

Company law explicitly stipulates a few exceptional circumstances only under which a CLS can make a share buyback, which include the following:

• reduction of its registered capital;
• merger with another company that holds its shares;
• use of its shares for carrying out an employee stock ownership plan or share incentive plan;
• request from shareholders who object to a resolution of a shareholders’ general meeting on merger or division of the company to acquire their shares by the company;
• use of shares for conversion of convertible corporate bonds issued by a listed company; and
• the share repurchase is necessary for a listed company to maintain its company value and protect its shareholders’ equity.

Do shareholders have appraisal rights?

Appraisal rights for dissident shareholders in an LLC are set out in article 74 of the Company Law, which provides a non-exhaustive list of circumstances under which shareholders who cast an opposing vote to a resolution passed by the shareholders’ meeting may request the company to buy back the equity interest held by them based on a reasonable price:

• the company has not made a profit distribution to the shareholders for five consecutive years even though the company has been profitable for those five consecutive years and satisfies profit distribution requirements stipulated by law;
• merger, division and transfer of main assets of the company; or
• where the business term of the company has expired or the company has been dissolved for reasons stipulated in the articles of association, a resolution is passed by a shareholders’ meeting to amend the articles of association for the subsistence of the company.

Where the shareholders fail to conclude an agreement for acquisition of equity interests within 60 days from the date of the resolution by the shareholders’ meeting, the shareholders may file a lawsuit with a people’s court within 90 days from the date of the resolution of the shareholders’ meeting.

As for the dissident shareholders in a CLS regarding the resolution of a shareholders’ general meeting on merger or division, they may also request the companies to acquire their shares at a fair value. (See question 13.)

Responsibilities of the board (supervisory)

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The Company Law requires listed companies to adopt a two-tier board system structure, consisting of a board of directors managing the company and a supervisory board supervising the management.

What are the board’s primary legal responsibilities?

The board of directors are responsible to the shareholders’ general meeting to carry out the following duties:

• convene shareholders’ meetings and report to the board of shareholders;
• execute the resolutions passed by the board of shareholders;
• decide on the business plans and investment schemes of the company;
• formulate the annual financial budget and financial accounting plan of the company;
• formulate the profit distribution plan and loss recovery plan of the company;
• formulate the plan for increase or reduction of registered capital and issue of corporate bonds;
• formulate the plan for merger, division, dissolution or change of company structure;
• decide on the set-up of internal management organisation of the company;
• decide on appointment or dismissal of company managers and their remuneration, and decide on appointment or dismissal of deputy managers and finance controller of the company based on the nomination by the managers; and
• formulate the basic management system of the company.

Duties of a board of supervisors include the following:

• inspect the company finances;
• supervise the performance of duties by directors and senior management personnel and propose to remove a director or senior management personnel who violates the provision of the laws and administrative regulations and the articles of association of the company or the resolutions of the board of shareholders;
• require a director or senior management personnel who acts against the interests of the company to make correction;
• propose to convene ad hoc shareholders’ meeting, convene and chair a shareholders’ meeting when the board of directors fails to convene and chair a shareholders’ meeting in accordance with the provisions of this law;
• make proposals at shareholders’ meetings; and
• file a lawsuit against a director or senior management personnel in accordance with the provisions of article 151 of the Company Law.

Whom does the board represent and to whom does it owe legal duties?

A board of directors has executive rights of the company and a board of supervisors have the right to inspect the company finances and supervise the performance of duties by directors and senior management personnel.

The board of directors and the board of supervisors are independent from each other but both boards owe their legal duties to the shareholders and the company. Directors and senior manager shall not be a member of the board of supervisors.

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Pursuant to the Company Law, shareholders may file a lawsuit against a director or directors to protect the interests of the company, if such director violates his or her fiduciary duties towards the company or violates the provisions of laws and administrative regulations or the articles of association of the company, and the board of supervisors does not take actions within 30 days from receipt of the request of shareholders to file a lawsuit against such directors on behalf of the shareholders.

If the circumstances are urgent and the company would suffer irrecoverable losses if a lawsuit were filed forthwith, the shareholders shall have the right to directly file a lawsuit against directors without sending a request to the board of supervisors.

Do the board’s duties include a care or prudence element?

As stipulated by article 147 of the Company Law, the board of directors and supervisors shall bear a duty of loyalty and duty of diligence towards their company. In addition, pursuant to the Guidelines, directors in listed companies shall perform duties loyally, diligently and prudently, and perform the undertakings.

To what extent do the duties of individual members of the board differ?

Under Chinese practice, in general, the duties of individual members of the board do not differ from each other irrespective of the difference in skill or experience. In most companies in China, directors have the same duties following the provisions of the Company Law and the articles of association. If the board members also serve as officers in charge of a specific aspect of management of the company respectively, the duties of such board members in this sense will differ.

However, for listed companies, the Guidelines stipulate that the professional structure of the board of directors shall be reasonable. Members of the board of directors shall possess the requisite know­ledge, skills and quality for performance of their duties. Furthermore, diversity of members of the board of directors is encouraged.

Pursuant to the Guidelines, the board of directors of a listed company shall set up an audit committee, and may establish the relevant specialised committees such as strategic committee, nomination committee, remuneration and appraisal committee, etc based on the needs. All members of a specialised committee shall be directors. The convener of the audit committee shall be an accounting professional.

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

Pursuant to the Company Law, the board may delegate management responsibilities to managers on the following matters:

• manage the production and business operations of the company and organise and implement resolutions passed by the board of directors;
• organise and implement the annual business plan and investment scheme of the company;
• draft the plan for setting up the internal management organisation of the company;
• draft the basic management system of the company;
• formulate company rules and policies;
• recommend the appointment or dismissal of management staff other than those positions that are to be decided by the board of directors; and
• other duties and rights granted by the board of directors.

In addition, the board of directors in a listed company may authorise certain matters to the specialised committees (see question 20). Meanwhile, it is stipulated by the Guidelines that major matters of a listed company shall be decided collectively by the board of directors, and the board of directors shall not authorise the chair or the general manager to exercise powers vested statutorily in the board of directors.

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

Under Chinese law, there is no legal concept of non-executive director.

As for independent directors, Chinese law requires that a listed company shall establish an independent director system and at least one-third of board members shall be independent directors including at least one accounting professional.

The term ‘independent director of a listed company’ under Chinese law is defined as a director who does not hold any position in the company other than director and who has no relationship with the listed company engaging him or her or its principal shareholders that could hinder his or her making independent and objective judgements.

In addition to the functions and powers granted directors under the Company Law and other relevant laws and regulations, listed companies should grant independent directors the following special functions and powers:

• major related-party transactions (referring to transactions that the listed company intends to conclude with the related party and whose total value exceeds 3 million yuan or 5 per cent of the company’s net assets audited recently) should be approved by the independent director before being submitted to the board of directors for discussion; before the independent director makes his or her judgement, an intermediary agency can be employed to produce an independent financial advisory report, which will serve as the basis for his or her judgement;
• put forward the proposal to the board of directors relating to the appointment or removal of the accounting firm;
• propose to the board of directors to call an interim shareholders’ meeting;
• propose to call a meeting of the board of directors;
• appoint the external auditing or consulting organisation independently; and
• solicit the proxies before the convening of the shareholders’ meeting.

Apart from above duties, the independent director shall provide an independent opinion on the following matters to the board or directors or to the shareholders’ meeting:

• nomination, appointment or replacement of directors;
• appointment or dismissal of senior managers;
• remuneration for directors and senior managers;
• any existing or new loan borrowed from the listed company by or other funds transfer made by the company’s shareholders, actual controllers or affiliated enterprises that exceeds 3 million yuan or 5 per cent of the company’s net assets audited recently, and whether the company has taken effective measures to collect the amount due;
• events that the independent director considers to be detrimental to the interests of minority shareholders; and
• other matters stipulated by the articles of association.

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

An LLC shall have a board of directors with between three and 13 members. An LLC with relatively few shareholders or of a relatively small size can have one executive director instead of a board of directors. For an LLC established with investment from two or more state-owned enterprises or two or more other types of state-owned investing parties, the members of its board of directors must include employee representatives of the company.

A CLS shall have a board of directors that is to be composed of five to 19 members.

The composition of directorship is regulated in the articles of association. Filling vacancies on the board or newly created directorship shall be decided by the shareholders’ meeting and the newly created directorship will entail the amendment to the articles of association of the company.

Company law does not set out the criteria a director shall meet; however it provides a negative list and any person falls under such list shall not be a director:

• a person has no civil capacity (under the age of 18 or unable to account for his or her own conduct ) or limited civil capacity (under the age of 18 or unable to fully account for his or her own conduct);
• a person who has been convicted for corruption, bribery, conversion of property or disruption of the order of socialist market economy and a five-year period has not lapsed since expiry of the execution period or a person who has been stripped of political rights for being convicted of a crime, and a five-year period has not lapsed since expiry of the execution period;
• a person who acted as a director, factory manager, manager in a company that has been declared bankrupt or liquidated and who is personally accountable for the bankruptcy or liquidation of the company, and a three-year period has not lapsed since the completion of bankruptcy or liquidation of such company;
• a person who has acted as a legal representative of a company that has had its business licence revoked or been ordered to close down for a breach of law and who is personally accountable, and a three-year period has not lapsed since the revocation of the business licence of such company; and
• a person who is unable to repay a relatively large amount of personal debts.

At the incorporation of a company, the identity information of each member of the board of directors shall be registered with the commercial registry and any changes regarding the board members shall also be registered with the commercial registry. The names of board members of a company can be found at the nationwide company registration search system, the National Enterprise Credit Information Publicity System.

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

Company law does not require the separation of the functions of board chair and CEO or president. For an LLC, especially a relatively small ones, it is not uncommon that a person plays a dual role of board chair and CEO. For a CLS, the separation of board chair and CEO roles is widely deemed as a more reasonable approach to avoid conflicts of interest.

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Pusuant to the Guidelines, the board of directors of a listed company shall set up an audit committee, and may establish the relevant specialised committees such as strategic committee, nomination committee, remuneration and appraisal committee, etc as required.

The audit committee shall supervise and evaluate external and internal audit work and internal control, propose appointment or replacement of external audit firm, examine the company’s financial information and disclosure thereof.

The key duties of the strategic committee are to study the com­pany’s long-term development strategies and major investment decisions and make recommendation thereto.

The key duties of the nomination committee shall include study the selection standards and procedures for directors and senior management personnel and make recommendation thereto, shortlist qualified candidates and review candidates for the aforesaid positions.

The remuneration and appraisal committee shall study appraisal standards for directors and senior management personnel, conduct appraisal and make recommendation thereto; and study and examine remuneration policies and schemes for directors and senior management personnel.

Members of the special committees shall be composed of directors. Moreover, independent directors shall constitute the majority of members in the audit committee, the nomination committee and the remuneration and appraisal committee and act as the convener. The convener of the audit committee shall be an accounting professional.

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

For an LLC, there is no minimum requirement on the number of meetings of the board of directors to be held annually, but the board of supervisors shall convene at least one meeting per year.

For a CLS, it is required by company law that the board of directors shall convene at least two meetings every year and the board of supervisors shall convene at least one meeting every six months.

The Guidelines state only that the board of directors shall convene meetings on a regular basis.

Is disclosure of board practices required by law, regulation or listing requirement?

The board practices of an LLC and a CLS are mainly set out in the Company Law and the articles of association. Companies are only allowed to set up their own rules of board practices in the articles of association when the Company Law does not stipulate otherwise. Article 48 of the Company Law states that board minutes should be made for each board meeting, which shall be signed by all the directors present at the meeting. Resolutions should be passed through voting by all the directors present, with each director having one vote.

Nevertheless, disclosing the articles of association to the public is not obligatory. Authorised natural persons or qualified lawyers may retrieve companies’ files from local counterparts of SAMR from which the articles of association could be acquired.

Listed companies, however, are subject to more rigorous regulations. Listed companies should disclose regularly through publishing their regular reports (ie, annual reports, semi-annual reports, quarterly reports). An annual report should include, among others, reports of board of directors, where the committee structures, number of board meetings, resolutions, and attendance would be covered.

In addition, listed companies should also formulate a system to manage information disclosure. The Measures of Disclosure gives a wide range of the items that this system should embrace. These include, inter alia, the duties of reporting, deliberating and disclosing for the directors, the board of directors, the supervisors, the board of supervisors, and senior managers.

With regard to the board of directors’ procedural rules, article 29 of the Guidelines specifies that the rules of procedure for the board should be formulated and be incorporated into a company’s articles of association. Board meeting should be conducted strictly according to the rules of procedure.

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

It is specifically enumerated under article 37 of the Company Law that the shareholders’ meeting should exercise a number of powers. These powers are inherent and therefore cannot be derogated or circumvented by the articles of association or other shareholders’ agreements. One of these powers is to appoint and remove directors, as well as to decide their salaries and compensations.

Article 45 of the Company Law provides certain autonomy to companies when it comes to the tenure of directors, requiring the tenure to be set forth in the articles of association, but subject to a three-year maximum. Upon re-election or re-appointment, they may continue to serve as directors in the company.

For listed companies, a contract should be formed between the company and the director specifying their rights and obligations, the tenure of the director, the liabilities when the statutory or contractual obligations are breached, and the compensation when the contract is terminated prematurely. The principle of fairness should be applied when considering the amount of compensation, while keeping the company’s lawful interests unharmed and any behaviour amounting to the transmission of interests barred.

As in LLCs and CLSs, according to the Guidelines, the remuneration of directors should be decided by shareholders’ meetings. Board committees, such as remuneration and appraisal committees, may also be set up to study and review directors’ remuneration schemes. It is, however, not mandatory under the Guidelines to have such a committee in place.

The board of directors should report directors’ performance, the assessment results and remuneration to shareholders’ meetings, which should eventually be disclosed by the company.

It is expressly prohibited under the Company Law to provide loans to directors, either directly or indirectly through subsidiaries.

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

As mentioned, in LLCs or CLSs, the board of directors should hire or dismiss the manager, the vice-manager, the finance manager, as well as to decide their salaries and compensations. Usually the articles of association will provide further details about the factors that may affect the remuneration of senior managers.

It is expressly prohibited under the Company Law to provide loans to senior managers, either directly or indirectly through subsidiaries.

The picture is very different where listed companies are involved. A few regulations on managers’ remuneration echo those of directors’:

• the remuneration and appraisal committee, if set up, would be responsible for studying and reviewing senior managers’ remuneration;
• the principle of fairness to be applied when considering the amount of compensation, without prejudice to the company’s lawful interests; and
• a comprehensive evaluation mechanism for performance and remuneration must be in place, based on which performance appraisal could be conducted when determining senior managers’ remuneration and other bonuses.

Upon being approved by the board of directors, the remuneration distribution plan for senior managers must then be explained to a shareholders’ general meeting and be disclosed sufficiently.

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

D&O liability insurance was first brought to China in 2002 following the promulgation of the Guidelines.

Article 24 of the Guidelines allows listed companies to purchase liability insurance for directors on the premise that the shareholders’ general meeting gives prior approval. The coverage of such liability insurance should be set out in the contract of employment or services, expressly excluding the liabilities arising out of breach of laws, regulations and the articles of association.

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Under the current legal framework in China, no specific law or regulation has directly touched upon such indemnification and constraints.

Nonetheless, according to the Company Law, the director, executive director or general manager of a company may also be the legal representative of the company. When a company’s legal representative engages in civil activities in conformity with law and the articles of association for and on behalf of the company, all the legal consequences arising therefrom should be borne by the company. If, while performing his or her duties, the legal representative causes harm or damage to third parities, the company should assume the liability. After the company indemnifies the third parties, it may seek to recoup the same from the legal representative who has caused or contributed to such harm or damage.

In short, if the company’s director or executive director is also the legal representative or, if such officer is the general manager who also holds the position of legal representative, then the aforementioned provisions apply.

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The Company Law greatly limits the circumstances when directors and officers’ obligations would be precluded or limited. Distinction should be drawn between non-listed and listed companies.

In non-listed companies, the director should be responsible for resolutions of the board of directors. When any of these resolutions is in violation of laws, regulations, the articles of association or resolutions made by shareholders’ general meetings, causing serious damage to the company, the directors taking part in the resolutions should be held liable for the company’s damages. The liability could only be exempted if the directors raised objections on such resolutions at the board meeting and such objections were recorded in the minutes.

The same provision is laid down in article 23 of the Guidelines, governing directors’ liabilities and exculpation in listed companies.

What role do employees have in corporate governance?

Employees can participate in corporate governance through a unique system, namely the Employee’s Representative Congress (ERC). It is stipulated under the Company Law that companies should adopt democratic management through the ERC or other forms. When considering important operational issues, such as restructuring, employees would be encouraged to give their opinions.

Employees’ rights and benefits could also be protected by a company labour union organised under the Labour Union Law and the Company Law. It is through this built-in organisation that union activities could be carried out for employees, and under certain circumstances, collective contracts with the company would be arranged and signed.

In an LLC jointly set up by two or more state-owed enterprises or other state-owed investors, the board of director should include representatives of employees. However, for other companies (without the involvement of state-owned investors), employees’ participation is not required. The representatives should be elected democratically through the ERC, or other forms of similar nature.

Likewise, representative of employees could also serve as a supervisor in the board of supervisors. The ratio of employee supervisors to non-employee supervisor should be no less than 1:3.

In listed companies, prominent employees may be offered share option incentives in the forms of restricted shares and share options.

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

There is no mandatory requirement or practice that requires evaluation of the board in LLCs or CLSs. They may implement their own evaluation mechanism in the articles of association.

In listed companies, the Guidelines require fair and transparent standards and procedures to be implemented in assessing the performance and fulfilment of duty by directors, supervisors and senior executives. Performance assessment should be organised by the board of directors or the remuneration and appraisal committee, or alternatively, other independent (external) firms. Self-assessment, mutual assessment or other methods are introduced in the Guidelines to assess the fulfilment of duties. Each assessment result and remuneration should be reported to the shareholders’ general meeting and be disclosed.

Disclosure and transparency

Are the corporate charter and by-laws of companies publicly available? If so, where?

In China, the articles of association embody the functions and features of corporate charter and by-laws in combination.

Parts of the company information that has been registered with a local SAMR are publicly available. However, the articles of association, in their entirety, are generally not available for the public. Qualified Chinese lawyers may acquire the articles of association through a local SAMR if certain conditions are met (eg, when they are authorised by the company itself, or in the course of a civil proceeding, by exercising their statutory power of inquiry to retrieve all the company’s files (including articles of association) from the local SAMR).

Investors are able to check the articles of association through website such as CSRC (www.csrc.gov.cn/pub/newsite/), Shanghai Stock Exchange (www.sse.com.cn) and Juchao Information Network (www.cninfo.com.cn/new/index).

What information must companies publicly disclose? How often must disclosure be made?

For non-listed companies, the following information must be disclosed by SAMR and other government departments to the public:

• companies’ registered general information;
• registered movable assets;
• pledges on equity;
• administrative punishments;
• information on grant, alteration or renewal of administrative permit; and
• other information that must be disclosed in accordance with law.

In addition, companies must submit their annual reports for the previous year to the online credit disclosure system (www.gsxt.gov.cn/index.html), the information contained within which will be disclosed to the public, including:

• postal address, postcode, telephone number, email;
• company’s commencement, discontinuation and liquidation;
• company’s investments in other enterprises;
• where the enterprise is an LLC or a CLS, the amounts, time and forms of capital contributions, subscribed and paid-up;
• shareholders’ equity transfer;
• the company’s website and the name, website and other information on online shops engaging in online business; and
• the number of employees, total assets, total liabilities, guarantees provided externally, total owners’ equities, gross operating income, prime operating income, total profits, net margin and total tax payment.

All the above items shall be disclosed to the public with the exception of the last item, which companies may opt to disclose to the public.

For listed companies, the Measures of Disclosure set forth the main documents that should be disclosed: stock prospectuses, bond prospectuses, listing memorandum, periodic reports (annual reports, half-yearly reports, quarterly reports) and interim reports. In summary, any information that would affect investors’ decisions must be disclosed.

Hot topics

Do shareholders have an advisory or other vote regarding remuneration of directors and senior management? How frequently may they vote?

One of the statutory powers of the shareholders’ meetings is to elect and change the directors and supervisors, as well as to decide their salaries and compensation.

The shareholders’ meeting could be a regular one or an interim one. Regular meetings should be held in a timely fashion according to the articles of association. Where an interim meeting is proposed by shareholders representing 10 per cent of the voting rights or more, or by directors representing one-third of the voting rights or more, or by the board of supervisors, or the supervisors (when no board of supervisors is in place), an interim meeting should be held.

In a listed company, the remuneration of directors and supervisors would be decided by the general meeting of shareholders.

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Not applicable.

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

There are a significant number of small or medium-sized private investors in China, making up a large proportion of total investors. Listed companies’ engagement with these private investors and shareholders is mainly led by companies’ investor relations teams.

In 2012, the Shanghai Stock Exchange published a Notice on Further Strengthening Management of Investor Relations of Listed Companies (the Notice). It lays down a set of rules to open up bilateral communication channels between listed companies and small and medium-sized private investors. The aim is to protect private investors’ interests, maximise companies’ interests and further stabilise the market.

In summary, according to the Notice, companies’ investor relations mechanisms should be developed by the board of directors, while contact with investors should be handled by the company secretary, whose performance with respect to investor relations forms part of his or her annual assessment conducted by the Shanghai Stock Exchange. The board of supervisors would maintain effective oversight.

Communication with investors would be done through a hotline, fax, email, etc. The hotline would be manned with designated personnel during working hours. Listed companies should make at least one public announcement on a quarterly basis containing reply and feedback to investors.

Companies should make efforts to facilitate investors’ participation, inquiry in investors’ meetings and ensure sufficient time for communication between shareholders and investors. Proper and reasonable arrangements should be made for investors’ visiting and discussions.

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Generally, the methodology towards disclosing environment-related information is to combine mandatory disclosure with voluntary disclosure.

According to the amended Environment Protection Law of China, companies that discharge pollutants must disclose to the public the names of their major pollutants, discharge methods, discharge concentration and total volume of discharged pollutants, any discharge beyond the approved quota, as well as information relating to construction and operation of pollution-preventing facilities.

In addition, listed companies are subject to further disclosure requirements. Apart from the environment information (including the information of serious pollution in the course of major asset trans­actions), a listed company should also disclose information pertaining to poverty alleviation and other social responsibilities.

Companies are also encouraged to voluntarily disclose any other information that promotes environment protection.

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

Not applicable.

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

Not applicable.

Update and trends

Please identify any new developments in corporate governance over the past year (including any significant proposals for new legislation or regulation, even if not yet adopted). Please identify any significant trends in the issues that have been the focus of shareholder interest or activism over the past year (without reference to specific initiatives aimed at specific companies).

On 30 September 2018, the CSRC issued the revised Guidelines on Governance of Listed Companies, which is the first revision made to the Guidelines since their enactment in 2002. Some key changes under the revised Guidelines include:

• requiring companies to establish party organisations (representative units of the Communist Party intended to play a political role in the company and ensure implementation of state objectives and policies) and incorporating the relevant requirements on party work into the articles of association of state-controlled listed companies (article 5);
• promoting board diversity (article 25);
• further setting out the rules on the board secretary (article 28);
• strengthening audit committee functions (articles 38 and 39);
• restricting powers of controlling shareholders (Chapter 6); and
• establishing environmental, social and governance requirements, such as green development and targeted poverty alleviation. Companies are encouraged to develop concepts of ‘innovation, coordination, green development, openness, sharing’ and social responsibilities (articles 3 and 86).

New interpretation of the Company Law

China’s Supreme Court has issued the fifth judicial interpretation of the Company Law (the Interpretation), which came into force on 29 April 2019. The Interpretation strengthens the minority shareholder protection mechanism by including application for nullification or cancellation of affiliate transactions in the scope of shareholder derivative action. In addition, for the first time under Chinese law the Interpretation formally introduces the rule that the shareholders’ meeting is entitled to remove a director without cause before expiry of his or her term of office, which indicates that the legal nature of the relationship between shareholders and directors under Chinese law is an agency appointment contract. The Interpretation also stipulates that directors who are removed by the shareholders’ meeting may be entitled to indemnity according to laws, administrative regulations, the articles of association of the company or the contract, and the reasonable amount of indemnity shall take into account factors such as the reasons for removal, the rest of his or her term of office and his or her remuneration.