China’s Revised Company Law in Effect from July 1

On July 1, 2024, the Chinese Revised Company Law went into effect. The Law introduces several significant changes, particularly in enhancing employee participation in corporate governance. Notably, the revision mandates that companies with 300 or more employees must have employee representatives on their board of directors, unless they already have a board of supervisors with members elected by the Employee Assembly.* This requirement also applies to foreign-invested companies in China. Additional changes to corporate governance structures introduced by the Revised Law include the Establishment of an Audit Committee, No Board of Directors for Small Joint-Stock Companies, No Supervisors for Small LLCs, Transfer of Powers to the Board of Directors and Expanded Scope for Appointment of Legal Representatives.

In a blog piece posted prior to the approval of the revised Chinese Company Law, the Asian Corporate Governance Association (ACGA) covered the proposed draft and indicated that some amendments are related to what it recommended in its 2018 report on China “Awakening Governance’’. Particularly, their recommendation to a move “to either see supervisory boards have their powers strengthened or delineated, or that they be phased out entirely”.

* China has a ‘two-tier’ board system: a board of directors and a supervisory board, or board of supervisors. The Board of Directors is the decision making unit while the Board of Supervisors serves as a monitoring mechanism. According to the ACGA, “unlike other ‘two-tier’ regimes however, in practice supervisory boards have limited authority over directors and management. Their oversight function is formalistic and adds little value to companies or assurance to shareholders. Members typically lack relevant business credentials and are appointed (and fired) by controlling shareholders.”