The Evolving Role of Company Supervisors in China Under the New Company Law

The amended Company Law of the People’s Republic of China, which will come into effect on July 1, 2024, introduces significant changes to the requirements and responsibilities of company supervisors. These changes aim to enhance corporate governance and provide greater flexibility in organizational structures for businesses operating in China.

Supervisor Requirements Under the 2018 Company Law

Under the previous 2018 Company Law, all limited liability companies (LLCs) and joint-stock companies were required to establish a board of supervisors with at least three members. The board had to include shareholder representatives and an appropriate proportion of employee representatives, with at least one-third of the board held by employee representatives.

Changes Under the 2023 Draft Company Law

The 2023 Draft Company Law introduces two major changes regarding supervisor requirements:

1. Wholly State-Owned Corporations (WSO) are now obliged to establish an audit committee composed of directors to exercise the duties of the board of supervisors, no longer having a board of supervisors or individual supervisors.

2. Limited Liability Companies and Joint-Stock Limited Companies may be exempted from having supervisors upon approval by all shareholders.

These amendments provide greater flexibility for companies to optimize their governance structure based on their specific needs and size.

Expanded Duties and Liabilities for Supervisors

The 2023 Draft Company Law also significantly expands the duties and liabilities of directors, supervisors, and senior officers. For example:

– The duties of loyalty and care are expressly defined and will be applicable to controlling shareholders and actual controllers who do not act as directors but implement corporate affairs.

– Supervisors who fail to perform their duties may be held liable for losses caused to the company.

– Directors, supervisors, and senior officers may be held jointly and severally liable with shareholders for illegally withdrawing capital contributions or making illegal profit distributions.

These changes highlight the increased importance placed on the role of supervisors in ensuring legal compliance and protecting the interests of the company and its stakeholders.

Implications for Foreign-Invested Enterprises

The amendments to the Company Law will have a profound impact on business practices in China. Foreign-invested enterprises (FIEs) should closely monitor the implementation regulations and judicial practices following the effectiveness of the 2023 Company Law. It is advisable for FIEs to promptly adjust their organizational structures and internal procedures to ensure compliance and smooth business operations.

In conclusion, the 2023 Draft Company Law introduces significant changes to the requirements and responsibilities of company supervisors in China. While providing greater flexibility in organizational structures, the law also emphasizes the expanded duties and liabilities of supervisors in upholding corporate governance and protecting the interests of the company and its stakeholders. FIEs should closely follow the implementation of these changes and make necessary adjustments to their operations to ensure compliance with the new regulations.

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