On December 29, 2023, the "Company Law of the People's Republic of China" was revised and adopted by the Seventh Meeting of the Standing Committee of the Fourteenth National People's Congress of the People's Republic of China, and will be implemented on July 1, 2024. Since its promulgation in 1993, China's "Company Law" has undergone two major revisions and four amendments. The 2023 revision is the second major revision. The current 2018 "Company Law" has a total of 218 articles. The revised "Company Law" deletes 16 articles, adds and modifies 228 articles, for a total of 266 articles. This revision is the largest ever and will have a significant impact on all companies in China, as well as the company's directors. This article analyzes the impact and countermeasures of the newly revised "Company Law" in 2023 on the company's directors from the perspective of the company's directors. (Unless otherwise specified, the companies mentioned in this article refer to limited liability companies and joint stock limited companies.)

 

1. A company director who represents the company in the execution of company affairs may serve as the legal representative.

 

Article 10, paragraph 1 of the revised "Company Law" in 2023 stipulates that: "The legal representative of the company shall be a director or manager who represents the company in the execution of company affairs in accordance with the provisions of the company's articles of association.". The above provisions mean that after the implementation of the "Company Law" on July 1, 2024, the director who performs company affairs can serve as the legal representative, which expands the scope of directors being elected as legal representatives.

 

2. It is newly added that the company's board of directors can use electronic communication methods, unless otherwise stipulated in the company's articles of association.

 

Article 24 of the revised "Company Law" in 2023 stipulates that: "Shareholders' meetings, board meetings, and supervisory board meetings can be convened and voted on by means of electronic communication, unless otherwise stipulated in the company's articles of association.". This newly added provision must be added in the amendment of the company's articles of association, and it must be clearly stated in the company's articles of association whether the board of directors can use electronic communication methods.

 

3. The company's board of directors has the obligation to urge payment, and those who fail to perform the obligation shall be liable for compensation.

 

Article 51 of the revised "Company Law" in 2023 stipulates that: "After the establishment of a limited liability company, the board of directors shall verify the capital contributions of the shareholders, and if it is found that the shareholders have not paid the capital contributions stipulated in the company's articles of association on time and in full, the company shall issue a written payment notice to the shareholder to urge the payment of the capital contribution. If the obligations stipulated in the preceding paragraph are not performed in a timely manner, resulting in losses to the company, the directors who are responsible shall be liable for compensation." Article 107 stipulates that: "The provisions of Articles 44, 49, Paragraph 3, 51, 52, and 53 of this Law shall apply to joint stock limited companies."

 

This is a newly added provision. On the one hand, it clarifies the board of directors' responsibility for capital adequacy, and on the other hand, it distinguishes between directors with different performance of duties, and imposes liability for compensation to the company on directors who have the obligation to urge payment, which avoids the drawbacks of joint and several liability. This means that the board of directors' obligation to urge payment needs to be amended and added to the company's articles of association, and the rules of procedure for the board of directors also need to be amended and added to the rules for direct responsibility for urging payment.

 

4. Company directors who assist shareholders in withdrawing capital contributions shall be jointly and severally liable.

 

Article 53, paragraph 2 of the revised "Company Law" in 2023 stipulates that: "If the provisions of the preceding paragraph are violated, the shareholder shall return the withdrawn capital contribution; if losses are caused to the company, the directors, supervisors, and senior managers who are responsible shall be jointly and severally liable with the shareholder." Article 107 stipulates that: "The provisions of Articles 44, 49, Paragraph 3, 51, 52, and 53 of this Law shall apply to joint stock limited companies.". This provision stipulates that supervisory directors shall not collude with shareholders who withdraw capital contributions to harm the interests of the company.

 

5. The company's board of directors' powers have been deleted from "formulating the company's annual financial budget plan and final accounts plan", and new powers have been added that can be granted by the shareholders' meeting. The power to "decide on the company's business plan and investment plan" is still retained, and a new provision stipulates that restrictions on the board of directors' powers in the company's articles of association shall not be used to counter bona fide counterparties.

 

Article 67 of the revised "Company Law" in 2023 stipulates that: "A limited liability company shall have a board of directors, unless otherwise stipulated in Article 75 of this Law. The board of directors shall exercise the following powers: (1) convening shareholders' meetings and reporting work to the shareholders' meetings; (2) implementing the resolutions of the shareholders' meetings; (3) deciding on the company's business plan and investment plan; (4) formulating the company's profit distribution plan and loss recovery plan; (5) formulating the company's plan to increase or decrease registered capital and issue company bonds; (6) formulating the company's plan for merger, division, dissolution, or change of company form; (7) deciding on the establishment of the company's internal management organization; (8) deciding on the appointment or dismissal of the company's manager and matters related to his remuneration, and deciding on the appointment or dismissal of the company's deputy manager, financial officer and matters related to their remuneration based on the manager's nomination; (9) formulating the company's basic management system; (10) other powers stipulated in the company's articles of association or granted by the shareholders' meeting. Restrictions on the powers of the board of directors in the company's articles of association shall not be used to counter bona fide counterparties." Article 120, paragraph 2 stipulates that: "The provisions of Articles 67, 68, paragraph 1, 70, and 71 of this Law shall apply to joint stock limited companies.". It can be seen that the status of the board of directors has been strengthened, and the above provisions should also be amended and added to the company's articles of association.

 

6. The company's board of directors should be composed of employee representatives, provided that the company has more than 300 employees, and the upper limit on the number of board members has been removed.

 

Article 68, paragraph 1 of the revised "Company Law" in 2023 stipulates that: "The board of directors of a limited liability company shall have three or more members, and its members may include employee representatives of the company. A limited liability company with more than 300 employees shall have employee representatives on its board of directors, unless a supervisory board is established in accordance with the law and has employee representatives of the company." Article 120, paragraph 2 stipulates that: "The provisions of Articles 67, 68, paragraph 1, 70, and 71 of this Law shall apply to joint stock limited companies.". This provision does not limit the upper limit on the number of board members, adjusts the rules for the establishment of employee directors, and clarifies that it applies to both limited liability companies and joint stock limited companies. This means that the above two provisions need to be amended and added to the company's articles of association.

 

7. New rules for resignation of company directors have been added.

 

Article 70, paragraph 3 of the revised "Company Law" in 2023 stipulates that: "If a director resigns, he shall notify the company in writing, and the resignation shall take effect on the date the company receives the notice, but if there is a situation stipulated in the preceding paragraph, the director shall continue to perform his duties." Article 120, paragraph 2 stipulates that: "The provisions of Articles 67, 68, paragraph 1, 70, and 71 of this Law shall apply to joint stock limited companies.". This provision adds new rules for the resignation of directors of limited liability companies and joint stock limited companies, which is also an addition to the content of the amendment of the company's articles of association.

 

8. The company's board of directors can choose to set up an audit committee composed of directors to exercise the powers of the supervisory board as stipulated, without setting up a supervisory board or supervisors.

 

Article 69 of the revised Company Law of 2023 stipulates: "A limited liability company may, in accordance with the provisions of the company's articles of association, establish an audit committee composed of directors in the board of directors to exercise the powers of the board of supervisors stipulated in this Law, without establishing a board of supervisors or supervisors. Employee representatives among the members of the company's board of directors may become members of the audit committee." Article 121, paragraph 1, stipulates: "A joint stock limited company may, in accordance with the provisions of the company's articles of association, establish an audit committee composed of directors in the board of directors to exercise the powers of the board of supervisors stipulated in this Law, without establishing a board of supervisors or supervisors." The aforementioned provisions will give limited liability companies and joint stock limited companies the option to choose their own governance model, and they can continue to retain the dual structure of the board of directors and the board of supervisors, or they can not set up a board of supervisors, but they must set up an audit committee in the board of directors to exercise the powers of the board of supervisors; the joint stock company also emphasized that more than half of the members of the audit committee must be independent directors.

 

At the same time, Article 137 of the revised Company Law of 2023 stipulates that listed companies shall set up an audit committee in the board of directors to make pre-approval of four types of resolutions related to the board of directors' financial and audit work. Article 176 stipulates that a wholly state-owned company shall set up an audit committee composed of directors in the board of directors to exercise the powers of the board of supervisors as stipulated, without setting up a board of supervisors or supervisors.

 

Whether to establish an audit committee should be carefully selected, and limited liability companies that do not establish a board of supervisors (supervisors) should also improve the company's articles of association to supervise and restrict major shareholders in order to protect the rights and interests of minority shareholders. After the company determines to choose a corporate governance model, it must amend the company's articles of association to stipulate the mechanism of this governance model.

 

IX. Added rules on the number of attendees and voting ratio of the board of directors meetings of limited liability companies.

 

Article 73, paragraph 2 of the revised Company Law of 2023 stipulates: "A board meeting shall be held only if more than half of the directors are present. A resolution of the board of directors shall be passed by more than half of all directors.", the number is often included in the expression of one-half, while more than half clearly does not include the number. The pre-revision "Company Law" did not stipulate the voting rights ratio for resolutions made by the board of directors, but instead stipulated it in the company's articles of association. Therefore, the above-mentioned newly added provisions are also contents that limited liability companies must add when amending their articles of association.

 

X. Smaller companies or companies with fewer shareholders may not have a board of directors, but may have one director, and the term "executive director" has been abolished.

 

Article 75 of the revised Company Law of 2023 stipulates: "A limited liability company with a small scale or a small number of shareholders may not have a board of directors, but may have one director who exercises the powers of the board of directors stipulated in this Law. The director may also serve as the company's manager." Article 128 stipulates: "A joint stock limited company with a small scale or a small number of shareholders may not have a board of directors, but may have one director who exercises the powers of the board of directors stipulated in this Law. The director may also serve as the company's manager."

 

It can be seen that the company's job settings will no longer have the term executive director, and the company's articles of association and industrial and commercial registration matters should also be amended accordingly.

 

XI. The company's directors shall submit a report on the performance of their duties at the request of the board of supervisors.

 

Article 80 of the revised Company Law of 2023 stipulates: "The board of supervisors may require directors and senior managers to submit reports on the performance of their duties." Article 131 stipulates: "The provisions of Articles 78 to 80 of this Law shall apply to the board of supervisors of a joint stock limited company."

 

With the above-mentioned newly added provisions, the company's directors will have one more work task.

 

XII. More than half of the members of the board of directors of a wholly state-owned company shall be external directors.

 

Article 173, paragraph 2 of the revised Company Law of 2023 stipulates: "More than half of the members of the board of directors of a wholly state-owned company shall be external directors, and there shall be employee representatives of the company."

 

XIII. Added the rules for the recognition of de facto directors.

 

Article 180 of the revised Company Law of 2023 stipulates: "Directors, supervisors, and senior managers owe a duty of loyalty to the company, and shall take measures to avoid conflicts between their own interests and the company's interests, and shall not use their powers to seek improper benefits. Directors, supervisors, and senior managers owe a duty of diligence to the company, and shall exercise their duties with the reasonable care that managers should generally have for the best interests of the company. If the controlling shareholder or actual controller of the company does not serve as a director of the company but actually performs the company's affairs, the provisions of the preceding two paragraphs shall apply."

 

The above-mentioned newly added provisions clarify that the controlling shareholder and actual controller of the company who do not serve as directors of the company but actually perform the company's affairs can be recognized as de facto directors and owe a duty of loyalty to the company.

 

XIV. Added rules on the avoidance of voting by related directors on matters of conflict of interest.

 

Article 185 of the revised Company Law of 2023 stipulates: "When the board of directors makes resolutions on matters stipulated in Articles 182 to 184 of this Law, related directors shall not participate in the voting, and their voting rights shall not be included in the total number of voting rights. If the number of non-related directors attending the board meeting is less than three, the matter shall be submitted to the shareholders' meeting for deliberation."

 

The above-mentioned newly added provisions are essential contents for the company to amend its articles of association, and strengthen the fairness and impartiality of the board of directors' resolutions.

 

XV. A company director who causes damage to a third party due to intentional or gross negligence in the performance of his duties shall be liable for compensation.

 

Article 191 of the revised Company Law of 2023 stipulates: "If a director or senior manager causes damage to others in the performance of his duties, the company shall be liable for compensation; if the director or senior manager is intentionally or grossly negligent, he shall also be liable for compensation." This is a newly added provision.

 

XVI. Company directors can enjoy the benefits of liability insurance.

 

Article 93 of the revised Company Law of 2023 stipulates: "The company may, during the director's term of office, purchase liability insurance for the director's liability for compensation for performing the company's duties. After the company purchases or renews liability insurance for the director, the board of directors shall report to the shareholders' meeting the insured amount, coverage and premium rate of the liability insurance, etc."

 

This is a newly added provision, and the company must purchase liability insurance for directors performing the company's duties.

 

XVII. A company director who is responsible for illegally distributing the company's profits shall be liable for compensation.

 

Article 211 of the revised Company Law of 2023 stipulates: "If a company distributes profits to shareholders in violation of the provisions of this Law, the shareholders shall return the profits distributed in violation of the provisions to the company; if losses are caused to the company, the shareholders and the directors, supervisors, and senior managers who are responsible shall be liable for compensation."

 

This is a newly added provision, and the supervision of company directors' performance of duties should be more diligent, otherwise they will bear legal responsibility.

 

XVIII. The company's board of directors has a statutory obligation to distribute profits within six months.

 

Article 189, paragraph 4 of the revised Company Law of 2023 stipulates: "If the shareholders' meeting makes a resolution to distribute profits, the board of directors shall distribute the profits within six months from the date of the resolution of the shareholders' meeting."

 

This is a new regulation that stipulates the statutory period for profit distribution and assigns this statutory obligation to the board of directors. The aforementioned new regulation is an essential part of amending the company's articles of association.

 

19. Company directors may be liable for compensation for illegal capital reduction.

 

Article 226 of the revised 《Company Law》 in 2023 stipulates: "If the registered capital is reduced in violation of the provisions of this Law, the shareholders shall return the funds they have received, and the reduction or exemption of shareholders' contributions shall be restored to their original state; if losses are caused to the company, the shareholders and the directors, supervisors, and senior managers who are responsible shall be liable for compensation."

 

This new regulation supervises and urges company directors to perform their duties legally and compliantly, otherwise they will be liable for compensation.

 

 

Author's Profile

 

Xu Xiaoye is a lawyer, female, with a Master of Laws degree from Guangxi Normal University. She is a partner at Guangxi Tongwang Law Firm, a member of the Corporate Law Professional Committee of the Guangxi Bar Association, a lawyer specializing in corporate law as assessed by the Guangxi Bar Association, a resident lawyer at the Guangxi Police Association Public Security Police Legal Service Center Workstation, and a lawyer at the Guangxi High-Quality Farmers Training Legal Service Base.

 

Lawyer Xu Xiaoye specializes in professional fields such as corporate governance, investment and financing, contracts, equity, mergers and acquisitions, due diligence, and civil and commercial litigation. She has served or currently serves as a legal advisor to several banks, state-owned enterprises, and large enterprises. She has provided clients with special legal services such as due diligence, equity transfer, and mergers and acquisitions on many occasions. She is also good at analyzing various legal relationships from a litigation perspective, which can effectively help clients gain a favorable position in the litigation process. With nearly ten years of practice experience and rich practical experience, Lawyer Xu Xiaoye is good at providing clients with professional customized solutions for various problems encountered in investment and financing, corporate governance, mergers and acquisitions, and civil and commercial litigation.