Corporate governance and directors' duties in China: overview

A Q&A guide to corporate governance law in China.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.

To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.

The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg.

Contents

Corporate governance trends

1. What are the main recent corporate governance trends and reform proposals in your jurisdiction?

On 19 January 2015, the Ministry of Commerce published the draft version of the PRC Foreign Investment Law for public comment. If adopted, foreign investment vehicles in the form of wholly foreign-owned enterprise, Sino-foreign equity joint ventures and Sino-foreign co-operative joint ventures will cease to exist. Accordingly, the corporate governance of such vehicles will change. For example, for a Sino-foreign equity joint venture, the highest authority will change from the board of directors to the shareholders' meeting to be consistent with the relevant provisions under the PRC Company Law.

 

Corporate entities

2. What are the main forms of corporate entity used in your jurisdiction?

The main forms of corporate entity in China are limited liability companies and companies limited by shares. Companies limited by shares also include listed companies and unlisted companies.

 

Legal framework

3. Outline the main corporate governance legislation and authorities that enforce it. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? List any such groups with significant influence in this area.

The PRC Company Law is the principal legislation regulating corporate governance in China. It applies to both limited liability companies and companies limited by shares, and regulates all aspects of companies, including:

  • The shareholders' rights.

  • The responsibilities and duties of the:

    • board of directors;

    • supervisors; and

    • other senior management.

Listed companies in China are additionally subject to the more stringent corporate governance rules, for example the PRC Securities Law, the Governance Rules on Listed Companies and other pertinent regulations.

The Ministry of Commerce, the State Administration for Industry and Commerce (SAIC) and their local counterparts are primarily responsible for the enforcement of good corporate governance. The China Securities Regulatory Commission (CSRC) and the stock exchanges in Shanghai and Shenzhen also monitor the corporate governance of listed companies. In China, there are no well-known shareholder activist groups or proxy advisory firms.

 
4. Has your jurisdiction adopted a corporate governance code?

In China, a corporate governance code that applies to all companies does not exist. The Governance Rules on Listed Companies only regulate listed companies, and cover items including:

  • Shareholders' rights.

  • Shareholders' meetings and related party transactions.

  • Basic code of conduct of the controlling shareholders.

  • Independence of the listed company.

  • Appointment of directors and composition of the board and the committees.

  • Rules of procedure of the board.

  • Independent directors.

  • Duties and composition of the supervisory board.

  • Rules for procedures of the supervisory board.

  • Performance appraisal of directors, supervisors and managers.

  • Appointment of managers and related parties.

  • Information disclosure.

The Governance Rules on Listed Companies set out the principles and guidelines for the basic code of conduct and corporate governance of listed companies. A listed company must formulate or amend its articles of association and detailed governance rules to reflect the content of the Governance Rules on Listed Companies. The rules do not specify the legal consequences of non-compliance. However, the China Securities Regulatory Commission (CSRC) can require a listed company to rectify serious issues.

For companies like securities companies, commercial banks and trust companies, special corporate governance codes apply.

 

Corporate social responsibility and reporting

5. Is it common for companies to report on social, environmental and ethical issues? Highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

There is no legal requirement or best practice on corporate social responsibility in China.

 

Board composition and restrictions

6. What is the management/board structure of a company?

Structure

In China, the predominant board structure for companies is a single board of directors (one-tier structure). However, companies must also establish a supervisory board to supervise the behaviour of the board of directors and better protect the interests of the shareholders.

Management

The management of a company usually comprises the general manager, deputy general manager(s) and the department managers.

Board members

The board of directors comprises directors including one chairman. The board of directors cannot have more than one chairman, but it is not mandatory to have a vice-chairman. A limited liability company operating on a small scale or with few shareholders can have one executive director instead of establishing a board of directors.

Employees' representation

For a limited liability company or a company limited by shares, its board members can include an employees' representative, but this is not mandatory. However, for a wholly state-owned enterprise or a limited liability company established by more than two state-owned entities, one of its board members must be an employees' representative.

A limited liability company or a company limited by shares must also have a supervisory board which comprises no less than three members, among which at least one third of the members must be employees' representatives. However, a limited liability company operating on a small scale or with few shareholders can have one to two supervisors instead of establishing a supervisory board. In such cases, the supervisors do not have to be representatives of the employees.

Number of directors or members

For a limited liability company, a board of directors must have three to 13 members. Companies operating on a small scale or with few shareholders can have one executive director instead of establishing a board of directors. However, for Sino-foreign joint ventures in the form of a limited liability company, the board of directors must comprise no less than three members.

For a company limited by shares, the members of the board of directors must have five to 19 members.

A limited liability company or a company limited by shares must have a supervisory board, which comprises no less than three members. However, a limited liability company operating on a small scale or with few shareholders can have one to two supervisors instead of establishing a supervisory board.

 
7. Are there any general restrictions or requirements on the identity of directors?

Age

In general, a natural person over 18 years old can become a director.

Nationality

A director is not required to be resident in China and there is no nationality requirement.

Gender

There is no gender requirement.

 
8. Are non-executive, supervisory or independent directors recognised or required?

Recognition

Only listed companies must have independent directors.

Board composition

For listed companies at least one-third of the directors on the board must be independent. Among the independent directors, at least one must be a professional accountant. If a listed company establishes any of the following, independent directors must account for more than half of the members:

  • A remuneration committee.

  • An audit committee.

  • A nomination committee.

  • Any other committees under the board of directors.

Independence

An independent director must not hold any position in the company and must not have any relationship with the company or its principal shareholders that could hinder him or her from making independent and objective judgments. In addition, an independent director must not own more than 1% of the shares in the company.

 
9. Are the roles of individual board members restricted?

A director cannot be the supervisor of the company. An independent director of a listed company must not be the company's employee.

 
10. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

Generally, the members of the board of directors are appointed by the shareholders' meeting. For Sino-foreign joint ventures, each shareholder can appoint its directors to the board of directors.

Removal of directors

The members of the board of directors are removed by the shareholders. For Sino-foreign joint ventures, each shareholder can remove its directors from the board of directors.

 
11. Are there any restrictions on a director's term of appointment?

Directors have a maximum term of office of three years. A director's term of appointment is renewable by reappointment, except in the case of directors of Sino-foreign equity joint ventures, who have a maximum term of office of four years.

A director of a Sino-foreign equity joint venture can be reappointed after his four years in office.

 

Directors' remuneration

12. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

It is not mandatory for directors to be employed by the company. However, an independent director of a listed company must not be the company's employee.

Shareholders' inspection

It is not mandatory for a company to sign a service contract or employment contract with its board members for their services.

In general, the shareholders' meeting is entitled to inspect a director's service contract, if one exists.

 
13. Are directors allowed or required to own shares in the company?

Generally directors are allowed to own shares in the company unless otherwise agreed. However, an independent director of a listed company must not own more than 1% of the shares in the company.

 
14. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

The remuneration of directors is determined by the shareholders' meeting. For Sino-foreign joint ventures, usually the investors jointly agree on the directors' remuneration.

Disclosure

For listed companies, the remuneration of directors must be disclosed in the annual report and the independent director has the right to give opinions on the remuneration of directors.

Shareholder approval

The remuneration of directors is determined by the shareholders' meeting, except for Sino-foreign joint ventures, in which the investors jointly agree on remuneration.

 

Management rules and authority

15. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

The rules of procedure and voting procedures of the board of directors of a limited liability company must be stipulated in its articles of association. For a company limited by shares, the board of directors must convene at least two board meetings annually. A meeting of the board of directors can be held only when more than half of the board of directors are present.

For Sino-foreign joint ventures, a board meeting must be convened at least once annually. A meeting of the board of directors can be held only when more than two-thirds of the board of directors are present.

The board of directors must record minutes from the meeting and the directors present at the meeting must sign on the minutes of the meeting. The board of directors must exercise one vote per person for passing of resolutions.

 
16. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

The shareholders' meeting (or the shareholder) instead of the board of directors is the highest authority of a company (except for Sino-foreign joint ventures). The board of directors must be accountable to the shareholders' meeting and must exercise the powers and functions provided in the articles of association of the company and the following powers and functions:

  • Convene shareholders' meetings and report to the shareholders' meeting.

  • Execute the resolutions passed by the shareholders' meeting.

  • Decide on the business plans and investment schemes of the company.

  • Formulate the annual financial budget and financial accounting plan of the company.

  • Formulate the profit distribution plan and loss recovery plan of the company.

  • Formulate the plan for increase in or reduction of registered capital and issue of corporate bonds.

  • Formulate the plan for merger, division, dissolution or change of company structure.

  • Decide on the set-up of internal management organisation of the company.

  • Decide on appointment or dismissal of general managers, deputy managers and finance controller and their remuneration.

  • Formulate the basic management system of the company.

For the powers and functions exercised by the shareholders' meeting, see Question 32.

Restrictions

The powers of directors can be restricted in the articles of association of the company. However, no statutory provision restricts the powers of directors.

 
17. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

Other than the matters requiring the resolution of the board of directors under statutory law, the board of directors can delegate its responsibility for special issues to management. PRC law does not specify whether the board can delegate responsibility for specific issues to individual directors.

The board is not required to delegate certain responsibilities, such as auditor, appointment or directors' remuneration.

 

Directors' duties and liabilities

18. What is the scope of a director's general duties and liability to the company, shareholders and third parties?

Directors must comply with the provisions of law and administrative regulations, and the articles of association of the company, and bear fiduciary duties towards the company.

Directors must not:

  • Abuse their duties and rights.

  • Receive bribes or other illegal income.

  • Embezzle company assets.

A director who violates the provisions of law and administrative regulations or the articles of association of the company in his/her performance of powers and functions, causing the company to suffer damages is liable to pay compensation.

 
19. Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors.

According to the PRC Company Law, a director must not:

  • Misappropriate company funds.

  • Deposit company funds into a bank account opened in his/her name or in the name of others.

  • Use company funds to make loans to others or provide a guarantee for others without the consent of the shareholders' meeting or the board of directors, in violation of the provisions of the articles of association of the company.

  • Enter into contracts with the company or carry out transactions with the company in violation of the provisions of the articles of association of the company or without the consent of the shareholders' meeting.

  • Abuse his/her powers and functions to seize commercial opportunities of the company for himself/herself or others or engage in similar business as the company's on his/her own or with others without the consent of the shareholders' meeting.

  • Pocket commissions for transactions between the company and other parties.

  • Disclose company secrets arbitrarily.

  • Do any other act, which violates his/her fiduciary duties towards the company.

Income received by directors and senior management personnel in violation of the above provisions will belong to the company.

 
20. Briefly outline the potential liability for directors under securities laws.

Directors of a listed company as an insider must not buy or sell securities of the company or divulge such information or procure others to buy or sell such securities before the insider information is made public. Directors of a listed company who commit these activities will be ordered to dispose of the securities held illegally and the illegal income will be confiscated. Furthermore, a fine ranging from one to five times the amount of illegal income will be imposed. If there is no illegal income or the amount of illegal income is below CNY30,000, a fine ranging from CNY30,000 to CNY600,000 will be imposed. Where an act of insider trading causes the investors to suffer losses, the insider is liable to pay compensation in accordance with the provisions of the law.

Directors of a listed company who buy and sell the company's shares in violation of the statutory provisions (that is, sell shares of the company within six months of the purchase of those shares or buy shares of the company within six months of the sale of those shares, will be issued a warning and may be subject to a fine ranging from CNY30,000 to CNY100,000.

Where the prospectus for share listing or other offering documents or other information disclosed by a listed company contains fraudulent information, misleading representation or major omission which causes the investors to suffer loss in securities transactions, the listed company is liable to pay compensation. The directors, supervisors, senior management personnel of the listed company, other personnel who are directly accountable and the sponsor and underwriter(s) bear joint and several liability for compensation with the listed company, unless they can prove that they are not at fault.

 
21. What is the scope of a director's duties and liability under insolvency laws?

The PRC Enterprise Insolvency Law is the main legislation governing insolvency issues of companies in China. According to the PRC Enterprise Insolvency Law:

  • Where any director of an insolvent enterprise exploits their position of authority for any improper acquisition of income and occupation of enterprise assets from the enterprise, the insolvency administrator will recover the said income and enterprise assets from this director.

  • Unless otherwise approved by the People's Court, no director of an insolvent enterprise can transfer his/her shares in the enterprise to any third party, during the insolvent period.

  • Any director of an enterprise who violates the duties of loyalty and diligence and causes the insolvency of the enterprise bears civil liability pursuant to the law.

A person mentioned above cannot act as a director, supervisor or senior management personnel of any enterprise within three years from the completion of insolvency proceedings.

 
22. Briefly outline the potential liability for directors under environment and health and safety laws.

There is no potential liability for directors.

 
23. Briefly outline the potential liability for directors under anti-trust laws.

There is no potential liability for directors.

 
24. Briefly outline any other liability that directors can incur under other specific laws.

There is no other liability that directors can incur.

 
25. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

PRC law does not clearly provide whether a company or shareholder can restrict or limit the liability of a director.

The directors of a company limited by shares are liable for resolutions of the board of directors. Where a resolution of the board of directors violates the provisions of law and administrative regulations or the articles of association of the company or a resolution of the shareholders' general meeting and causes the company to suffer serious damages, directors who adopted the resolution are liable to pay compensation to the company. If a director can prove that he/she objected to the resolution and the objection is recorded in the meeting minutes, the liability of that director can be waived.

However, in practice it is not uncommon that a company's articles of association include a clause stating that if a director in performing his or her duties on behalf of the company incurs liability towards third parties or the company, he or she is indemnified by the company, except for intentional or gross negligence or serious dereliction of his or her duties.

 
26. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

Directors' and officers' liability insurance is permitted but is not common practice in China. PRC law does not prohibit the company from paying the premiums, but only the Governance Rules on Listed Companies explicitly stipulate that subject to the approval of the shareholders' meeting, a listed company may purchase liability insurance for its directors.

 
27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

There is no concept of a de facto director under PRC law. According to the PRC Company Law, shareholders must not:

  • Abuse their shareholders' rights to cause damage to the company or the interests of other shareholders.

  • Abuse the independent legal person status of the company and limited liability of the shareholders to cause damage to the interests of the creditors of the company.

Shareholders of a company who abuse their shareholders' rights and cause the company or other shareholders to suffer damages are liable to pay compensation in accordance with the law. Shareholders of a company who abuse the independent legal person status of the company and limited liability of shareholders to evade debts and cause damage to the creditors of the company are jointly and severally liable for the company's debt.

Therefore, if a parent company or controlling shareholder violates laws, regulations or articles of association and causes damage to the company or the creditors of the company, even though such parent company or controlling shareholder is not regarded as a de facto director under PRC law, they can be liable as a shareholder.

 

Transactions with directors and conflicts

28. Are there general rules relating to conflicts of interest between a director and the company?

The controlling shareholders, actual controlling party, directors, supervisors and senior management personnel of a company must not use their relationship to cause damage to the company's interests. Persons who violate this provision and cause the company to suffer losses are liable to pay compensation.

 
29. Are there restrictions on particular transactions between a company and its directors?

A director cannot conclude contracts in violation of the articles of association, or enter into any transactions with the company without the consent of the shareholders' meeting.

A company limited by shares cannot provide loans to its directors, supervisors or senior management personnel directly or through its subsidiaries. However, for a limited liability company, there is no such restriction.

A director of a listed company must abstain from voting on a resolution or vote on behalf of another director if he/she is a related party in the matter to be resolved. The meeting of the board of directors can be constituted by more than half of those directors who are not a related party. A resolution of the board of directors is adopted by a simple majority of votes cast by directors who are not a related party. Where the number of directors who are not a related party is less than three, the matter is submitted to the shareholders' meeting of the listed company for review.

 
30. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

Directors of a company limited by shares must declare their shareholding in the company and changes in that shareholding to the company; and must not transfer more than 25% of their shareholding in the company during their term of appointment or transfer their shares within one year of the date on which the shares of the company are listed on a stock exchange. Such persons must not transfer their shares in the company within half a year after leaving their post. The articles of association of the company can restrict the transfer of shares of the company held by directors, supervisors and senior management personnel.

Gains made by a director, supervisor, executive or a shareholder of a listed company holding 5% or more of the shares of the listed company from selling shares of the company within six months of the purchase of those shares or buying shares of the company within six months of the sale of the shares, belong to the company; the board of directors of the company will collect such gains.

Directors of a limited liability company do not have these restrictions.

 

Disclosure of information

31. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

Generally directors do not have to disclose information about the company to shareholders, the public or regulatory bodies. However, directors of listed companies must make written endorsements on the regular reports of the company.

 

Shareholder rights

Company meetings

32. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

For a limited liability company, the frequency of shareholders' meeting is subject to the articles of association of the company. Usually, it is held once a year.

For a company limited by shares, an annual shareholders' meeting must be held each year. But there is no statutory requirement regarding when the meeting must be held.

The following issues must be discussed and approved by the shareholders' meeting:

  • Decision on the business plan and investment plan of the company.

  • Election and replacement of directors and supervisors and decision on the remuneration of directors and supervisors.

  • Examination and approval of the reports of the board of directors.

  • Examination and approval of reports of the supervisors or the supervisory board.

  • Examination and approval of the annual financial budget and final account plan of the company.

  • Examination and approval of the profit distribution plan and loss recovery plan of the company.

  • Increase in or reduction of the registered capital of the company.

  • Issue of corporate bonds.

  • Merger, division, dissolution, liquidation or change of company form of the company.

  • Provision of security for the majority shareholder(s) or actual controller.

  • Amendment to the articles of association of the company.

For listed companies, more matters require the resolution of the shareholders' meeting, for example, acquiring or selling major assets or providing guarantees in an amount (within one year) exceeding 30% or more of its assets.

For a Sino-foreign joint venture enterprise, the highest authority is the board of directors. The above matters require a resolution of the board of directors and only the decisions on the appointment of the directors and supervisors are reserved for the shareholders.

 
33. What are the notice, quorum and voting requirements for holding meetings and passing resolutions?

For a limited liability company, the meeting notice must be delivered to the shareholders 15 days in advance. The voting rights exercisable by shareholders at a shareholders' meeting are based on the ratio of capital contribution, unless otherwise provided in the articles of association of the company. The voting requirements are subject to the articles of association of the company. However, resolutions on amendments to the articles of association of the company, increase or reduction of registered capital, and company merger, division, dissolution or change of company structure must be passed by shareholders holding two-thirds or more of the voting rights. In addition, subject to the unanimous consent of shareholders, the shareholders' resolution can be made in writing without meeting.

For a company limited by shares, the meeting notice must be delivered to the shareholders 20 days in advance (or 30 days in advance, in case of issuance of bearer shares). Shareholders attending a shareholders' general meeting exercise one vote per share. The shareholders' resolution is adopted by a simple majority of votes cast by shareholders present at the meeting. An amendment to the articles of association of the company, increase or reduction in registered capital, merger, division, dissolution or change of company structure is passed by two-thirds majority of votes cast by shareholders present at the meeting.

 
34. Are specific voting majorities required by statute for certain corporate actions?

For both limited liability companies and companies limited by shares, the following matters must be subject to the approval of shareholders holding more than two-thirds voting rights in the company:

  • Increase in or reduction of the registered capital of the company.

  • Merger, division, dissolution, liquidation or change of company form of the company.

  • Amendment to the articles of association of the company.

For a listed company, apart from the above matters, the acquiring or selling of major assets or provision of guarantees in an amount (within one year) exceeding 30% or more of its assets must also be resolved by two-thirds of votes cast by shareholders present at the meeting.

In Sino-foreign joint ventures, the highest authority is the board of directors. For Sino-foreign equity joint ventures, the following issues require the unanimous resolution of the directors present at the board meeting:

  • Amendment of the articles of association.

  • Suspension or dissolution of the company.

  • Increase in or decrease of the registered capital.

  • Merger or spin-off of the company.

In addition to these issues, for Sino-foreign co-operative joint ventures, change of legal form and mortgage on company assets also requires the unanimous resolution of the directors present at the board meeting.

 
35. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

For a limited liability company, an extraordinary shareholders' meeting must be convened if required by the shareholders who individually or jointly hold more than 10% of the voting rights of the company.

For a company limited by shares, if the board of directors is unable to or fails to convene a shareholders' meeting, the supervisory board must convene and chair a meeting promptly. If the supervisory board fails to convene and chair the meeting, the shareholders who individually or jointly hold more than 10% of the voting rights of the company for 90 consecutive days can convene and chair the meeting. Furthermore, the shareholders who individually or jointly hold more than 3% of the shares in a company can submit an interim proposal in writing within ten days before the convening of a shareholders' meeting.

 

Minority shareholder action

36. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

If the convening procedures and voting method of a meeting of the board of directors or a shareholders' meeting violates the provisions of law and administrative regulations or the articles of association of the company, or the contents of the resolution violate the articles of association of the company, the shareholders can apply to the People's court within 60 days from the date of resolution for revocation of the resolution.

If directors or senior managers of a company breach the law, administrative regulations or the articles of association of the company in the performance of their functions and cause losses to the company, any shareholder (in a limited liability company) or the shareholders who individually or jointly hold more than 1% of the voting rights of the company for 180 consecutive days (in a company limited by shares) can request the supervisory board or the board of directors to initiate a lawsuit against the concerned director or senior managers.

Where the supervisory board or the board of directors refuses to file a lawsuit or fails to file a lawsuit within 30 days of receipt of the request or where the circumstances are urgent and the company will suffer irrecoverable losses if a lawsuit is not filed immediately, the above mentioned shareholder(s) will have the right to initiate the lawsuit directly in its/their own name to protect the interests of the company. In the event of an infringement of the legal interests of the company by others, which causes the company to suffer damages, shareholders mentioned above may initiate a lawsuit in accordance with the above.

In the event that a director or senior management personnel violates the provisions of the laws and administrative regulations, or the articles of association of the company and infringes upon the interests of the shareholders, the shareholders can initiate a lawsuit.

 

Internal controls, accounts and audit

37. Are there any formal requirements or guidelines relating to the internal control of business risks?

There are no formal requirements or guidelines relating to the internal control of business risks of unlisted companies.

For a listed company, the China Securities Regulatory Commission (CSRC) has issued several guidelines in this regard, most notably the Governance Rules on Listed Companies.

In addition, the Guidelines for the Application of Internal Control in Enterprises promulgated by the Ministry of Finance, CSRC, the National Audit office, China Banking Regulatory Commission and the China Insurance Regulatory Commission provide statutory requirements on the internal control systems of listed companies. Large and medium sized enterprises are encouraged to introduce such systems, but at present it is not mandatory.

 
38. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The board of directors must formulate the annual financial budget and final account plan of the company. If the financial budget and final account plan resolved by the board of directors violates relevant laws, administrative regulations, articles of association or shareholders' resolutions and causes the company to suffer serious damages, the directors who adopted the resolution are liable to pay compensation to the company.

For a listed company, the directors must also make written endorsement on the regular reports of the company, which include the company's accounts. These directors must ensure the truthfulness, accuracy and completeness of information disclosed by the listed company. In the event of failure, the competent authority may give a warning to the directors and impose a fine ranging from CNY30,000 to CNY300,000.

 
39. Do a company's accounts have to be audited?

A company must engage a Certified Public Accountant (CPA) firm to audit its accounts.

 
40. How are the company's auditors appointed? Is there a limit on the length of their appointment?

The appointment or removal of the auditor of a company is decided by the shareholders' meeting or the board of directors as per the articles of association of the company and relevant laws.

For listed companies, initial public offer (IPO) companies and other similar entities, a signing Certified Public Accountant (CPA) (that is, a professional who has obtained the Certificate of Certified Public Accountant and is permitted by the relevant financial authorities to provide auditing, accounting consultancy and other accounting services) must not continuously provide an audit service to that company for more than five years. If two signing CPAs' continuous provision of audit services to the same entity exceeds five years in the same year, only one of them can extend his or her audit service for a maximum of one year.

 
41. Are there restrictions on who can be the company's auditors?

An auditor must obtain a Certified Public Accountant (CPA) certificate and be registered with the provincial level certified public accountants association. The auditor must also join a CPA firm when carrying out his/her auditing work. If the auditor wishes to conduct auditing work which includes securities and futures-related services, the CPA firm which he/she joins must obtain a license for conducting securities related business.

The auditor must keep his/her independence. The Chinese Institute of Certified Public Accountants has issued detailed rules on the independence of auditors, including the following:

  • Auditors must be independent of the company they audit accounts for during the auditing period and the financial statement period.

  • An auditor must not audit the accounts of the company in which he/she or his/her close relatives have economic interests or of which he/she used to be the director, senior manager or specific employee.

 
42. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

Before accepting the non-audit work of the company which the Certified Public Accountant (CPA) firm audits accounts for, the CPA firm must evaluate whether such non-audit work will affect its independence. If it will, the CPA firm must adopt measures to reduce the potential negative effects. If the intended measures cannot reduce the negative effects to a satisfactory extent, the CPA firm must reject such non-audit work.

 
43. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

If an auditor is liable for inaccurate audited accounts, the competent authority can give the auditor a warning, suspend his/her business or revoke his/her Certified Public Accountant (CPA) certificate depending on the severity of circumstances. If the auditor forges the audit report, he/she can be criminally liable. Such liabilities cannot be limited or excluded.

If a public accounting firm is liable for inaccurate audited accounts, it can receive a warning and its illegal income can be confiscated. Moreover, a fine of more than twice and less than five times the amount of the illegal income can be imposed. If the case is serious enough, the business operations of the firm can be suspended or cancelled. If such firm actions cause loss to entrusting parties and other interested parties, the firm is liable to pay compensation in accordance with the law. Furthermore, if a public accounting firm forges an audit report, it can be criminally liable.

 
44. What is the role of the company secretary (or equivalent) in corporate governance?

Unlisted companies are not obliged to appoint a company secretary.

Listed companies must have a board secretary who is responsible for:

  • Preparing shareholders' meetings and board meetings.

  • Keeping documents.

  • Managing shareholders' information.

  • Establishing an information disclosure system.

  • Accepting visits.

  • Communicating with shareholders.

  • Providing publicly disclosed data to the investors.

 

Online resources

National People's Congress

W http://law.npc.gov.cn:87/home/begin1.cbs ( www.practicallaw.com/4-521-7912)

Description. This is an official website of comprehensive PRC laws and regulations, which is maintained by the National People's Congress, that is, the legislative body of China. No English translation is available on this website.



Contributor profiles

Kevin Wang, Partner

CMS

T +86 6289 6363
F +86 6289 0731
E kevin.wang@cmslegal.cn
W www.cmslegal.cn

Professional qualifications. China, Lawyer (2005)

Areas of practice. Corporate; M&A; corporate governance; competition and anti-trust; compliance and anti-bribery; banking and finance.

Recent transactions

  • Advising one of the largest European waste management companies on acquisition of a domestic company, this included conducting complicated legal due diligence, drafting and negotiating all the documentation.
  • Advising one of the largest state-owned enterprises in China on the largest overseas investment in its history, to establish a joint venture with a foreign company to develop two ultra deep water rigs.
  • Advising a global leading new energy developer on the acquisition of a Chinese domestic company. This included conducting legal due diligence, drafting and negotiating all transaction documents.
  • Advising on a series of corporate governance, competition and compliance issues for a large number of leading companies in various industrial sectors.

Languages. Chinese and English.

Publications.

  • Exclusive author of the China Chapter on Corporate Governance, Getting the Deal Through, 2014, 2015.

  • M&A in China special report. Interviewed and published by China Business Law Journal, 2014.

  • China regulations for online providers to benefit banks, e-ComLaw, 2014.


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