New Supervisory Requirements Under China’s 2024 Company Law
- Jun 27, 2024
- Posted by: sinovestconsulting
- Category: Legal & Regulation
New Supervisory Requirements Under China’s 2024 Company Law
This article provides a comprehensive overview of the new requirements and responsibilities for supervisors under China’s Company Law, which will come into effect on July 1, 2024. The law mandates specific supervisory structures within companies to enhance governance and accountability. Exceptions to these requirements are also outlined, offering flexibility under certain conditions. The role of supervisors is crucial in safeguarding the interests of shareholders and ensuring the company’s adherence to legal and ethical standards. This piece aims to elucidate the eligibility criteria, powers, and legal obligations of supervisors, highlighting their significance in the corporate framework.
Under China’s Company Law which will come into effect on 1st July 2024, the companies are required to have one or two supervisor (s) or establish a board of supervisors which means at least three supervisor (s); however there are exceptions: 1) A Limited Liability Company, with the unanimous consent of shareholders or with an audit committee exercising the powers of the supervisors, may not have supervisor(s); 2) A Joint-Stock company, with an audit committee exercising the powers of the supervisors, may not have supervisor(s).
The role of the supervisor(s) is meant to enhance accountability, mitigate risks, and protect the interests of the shareholders. Taking a limited liability company as an example, the main powers and obligations of the Supervisor(s) are summarized as follows:
Who can be the Supervisor(s)?
- First of all, the directors and senior managers may not concurrently serve as supervisor(s).
- A natural person with full civil liability, not in the circumstances prescribed in the Company Law:
- Less than 5 years since the date of the completion of the penalty of being sentenced for corruption, bribery, misappropriation of property and undermining the social market economic order;
- Not exceeding 5 years since the date of the completion of the penalty of being deprived of political rights due to a crime;
- Less than 3 years since the date of completion of the bankruptcy liquidation of a company; serving as a director, factory director, or manager of the company undergoing bankruptcy liquidation, and is personally responsible for the bankruptcy of the company;
- Not exceeding 3 years since the company had its license revoked; Serving as the legal representative of the company that has had its business license revoked or ordered to close due to violation of laws, and bearing personal responsibility;
- A large amount of personal due debt has not been paid off.
Note: If a company elects or appoints supervisor(s) in violation of the above provisions, this election, appointment or hiring shall be invalid
The term of office of supervisor(s) is generally stipulated in the company’s articles of association and can be either fixed-term or non-fixed term. Each term shall not exceed 3 years but can be re-elected. Supervisor(s) may be dismissed by resolution of the shareholders’ meeting during their term of office.
The new Company Law brings a substantial enhancement in the governance framework of Chinese companies. Supervisors are endowed with significant powers to ensure the company operates within the legal and regulatory boundaries, maintaining high standards of integrity and transparency. Their role is pivotal in monitoring and influencing the company’s management to align with shareholders’ interests and legal requirements. Below is a detailed outline of the powers and responsibilities assigned to supervisors under the new law.
The powers of the Supervisor(s）
The board of supervisors, or the individual supervisor(s) have the following powers and responsibilities stipulated by the Company Law:
- Checking the company’s finances;
- Supervising the performance of the company’s duties by directors and senior managers, and making recommendations for the dismissall of directors and senior managers who violate laws, administrative regulations, company’s articles of association, or shareholders’ meeting resolutions;
- Requiring directors and senior managers to make corrections when their actions harm the interests of the company;
- Proposing to convene extraordinary shareholders’ meetings outside the number stipulated in the articles of association, and convening and presiding over the shareholders’ meeting when the board of directors fails to perform this duty as is normally required;
- Putting forward proposals to the shareholders’ meeting;
- Initiating lawsuits against directors and senior managers in accordance with the Company Law;
- Any other powers stipulated in the company’s articles of association.
In addition to their routine supervisory duties, supervisors hold significant authority in safeguarding the company’s financial and operational integrity. They play a proactive role in identifying and addressing any irregularities within the company. Their responsibilities extend beyond mere oversight to active intervention when necessary, ensuring that the company remains compliant with legal and regulatory standards.
- If the board of supervisors or supervisor(s) that the company’s operating conditions are abnormal, they may conduct an investigation. This investigation ifnecessary, can be assisted by an accounting firm hired by the supervisor(s) at the company’s expense;
- If a director or senior manager violates the laws and administrative regulations or the company’s articles of association in the performance of their duties and powers, and this violation causes the company to suffer damages, they will bear liability for compensation. In these circumstances, the shareholder(s) of a limited company may submit a request in writing to the board of supervisors or the supervisor(s) to file a lawsuit with a people’s court.
The legal liabilities of the Supervisors
- Duty of loyalty. The duty of loyalty means that the supervisors should abide by laws, regulations and the provisions of the company’s articles of association, and faithfully perform their duties. Responsible for safeguarding the interests of the company and shall not operate for oneself or for others a company that competes with the company where he or she works or engage in the activities that harm the interests of the company.
- Duty of diligence. The duty of diligence means that directors, supervisors, and senior managers should act in a reasonable and prudent attitude of a normal person, fulfilling his duties and safeguarding the interests of the company.
- Supervisors may not take advantage of their powers to accept bribes or other illegal income or misappropriate the company’s property.
Supervisors who are found to violate any laws, administrative regulations, or the company’s articles of association when performing their duties, and where these violations cause losses to the company, will be liable for compensation.
These requirements under China’s new Company Law aims to strengthen corporate governance, ensuring that companies operate with greater transparency and accountability, thereby fostering a healthier business environment.
