According to Article 42 of the <Foreign Investment Law of the PRC> and Article 44 of the <Implementation Regulations for the Foreign Investment Law of the PRC>, which came into effect on 1 January 2020, the organizations and structures of all existing foreign-invested enterprises established in accordance with the old foreign invested enterprise laws shall, within five years from the implementation of the Foreign Investment Law, be adjusted in accordance with the provisions of the <Partnership Enterprise Law of the PRC> and <Company Law of the PRC> (hereinafter “Company Law”) and the adjustment shall be filed accordingly. The adjustment we talk about here is mainly the adjustment of the corporate governance structure. For example, under the <Sino-foreign Joint Ventures law> (hereinafter “JV law”), the Board of Directors is not only the highest authority of the JV, but also the executive and supervisory body. However, according to the Company Law, the decision-making power, executive power and supervision power of the company shall be exercised by the shareholders’ meeting, the board of directors and the supervisory board respectively.
This post would like to take a joint venture enterprise as an example to explore how to undertake such adjustments.
As discussed before, the <JV law> and the <Implementing Regulations of the JV Law> provide for the Board of Directors of a JV to be the highest authority of the joint venture and to decide all major issues of the joint venture. The parties to the joint venture shall, through consultation, determine the number of directors appointed by each party. So, by appointing their respective directors to participate in the resolutions of the board of directors, the shareholders of the joint venture indirectly exercise the decision-making and management rights of the company.
In addition, although shareholders of a joint venture may specify their rights and remedies in shareholder agreements, articles of association, etc., the Joint Venture Law does not provide for shareholders’ rights and remedies expressly. Once the initial articles of association are singed, the subsequent amendments and supplements will be decided by the board of directors, and the will of the shareholders will not be directly expressed.
On the other hand, the Company Law clearly stipulates that shareholders may exercise direct control, decision-making and management rights over the company through the shareholders’ meeting. The shareholders’ meeting is the authority of the company, the main functions and powers of which include determining the company’s operational strategies and investment plans, electing and replacing directors and supervisors who are not employees of the company, deciding on remuneration of the directors and supervisors, making resolutions to increase or decrease of the company’s registered capital, making resolutions on the company’s merger, division, dissolution or change of the company’s form, and amending the company’s articles of association etc. According to the Company Law, any resolutions made by the shareholders’ meeting on major issues of the company must be approved by shareholders representing more than two-thirds of the voting rights. It can be said that compared to the JV Law, current Company Law provides a better protection for shareholders’ rights and interests.
However, it is worth noting that, in general, the voting rights of the shareholders’ meeting depend on the proportion of shares held by shareholders, while the voting rights of the board of directors depend on the number of directors. According to the JV law, the decision of the board on important issues requires the unanimous consent of all directors present at the meeting. The minority shareholders of a joint venture may appoint directors to participate in the resolutions of the board of directors and veto the resolutions on major issues through the directors they appointed, in this perspective, you may say that the rights of the minority shareholders are better protected under the JV Law.
Article 43 of the <Company Law> stipulates: “The meeting of the shareholders of a limited liability company shall exercise their right to vote in proportion to the capital contribution, unless otherwise provided in the articles of association of the company.” Thus, minority shareholders may claim a veto on certain major issues at the shareholders’ meeting or the board of directors of the company and specify the veto accordingly in the articles of association.
Obviously, the adjustment and transformation of corporate governance structures is going to be a long and cumbersome process. Our suggestions are therefore as follows:
I. Amending articles of association.
To be undertaken in accordance with the provisions of the Company Law, the authorities of the shareholders’ meeting shall be separated from the powers of the board of directors and attributed to the shareholders’ meeting. At the same time, re-specify the scope of authority and resolution procedures of the shareholders’ meeting and the board of directors.
II. Reset the structure.
Set up the shareholders’ meeting of the company, then re-elect the board members to form a new board of directors.
III. Complete the registration.
Carry out the registration of the relevant changes in accordance with the specific provisions of the supervisory authority.
Useful link:
State Administration for Market Regulation
