Company Law Amendments to Supervisors in China

In 1993, the Chinese company law, introduced the role of the Supervisor in China, both for public and private companies. This role is confirmed in the company law, in force since January 1, 2006, which requires both wholly foreign-owned companies and national companies to adopt a Supervisor and is amended by the company law coming into force in July 2024.

The Supervisors remain in office for three years, which may possibly be extended. The board of supervisors comprising at least three members should include shareholders’ representatives and an appropriate proportion of employee representatives elected by the company’s employees. The role of Supervisor cannot be assumed by everyone and causes of incompatibility are foreseen: the company administrator, members of the board and senior managers cannot take the position of Supervisor simultaneously to their office, so such as public officials, subjects declared bankrupt, those whose business license has been revoked or who have a substantial amount of outstanding debts. If these subjects are equally elected, the appointment is to be considered invalid.

The primary role of the Supervisors is to oversee the activities of the board of directors and senior managers to ensure compliance with laws, regulations, and the company's articles of association. The Supervisor has the power to verify the company's financial statements, business management, the compliance of the decisions of the directors with the decisions of the shareholders' meeting. The supervisor can also monitor the actions that the directors take in the implementation of their duties, request them to refrain from taking any action that may violate the criminal law or the bylaws of the company, or take the necessary remedies to protect the interest of the company. These requests are not binding, but in any case, the Supervisor can propose the revocation of the managers, administrators, and legal representative at the shareholders' meeting. According to the Company Law, Article 78, the board of supervisors shall exercise the following functions and powers:

(1) Inspect the financial affairs of the company;

(2) Supervise performance of the directors and senior officers of their respective duties and propose the dismissal of any director or senior officer who violates any law, administrative regulations, the articles of association, or any resolution of the shareholders' meeting;

(3) Require any director or senior officer to take corrective action where their actions damage the interests of the company;

(4) Propose the holding of interim shareholders' meetings and convene and preside over shareholders' meetings when the board of directors fails to perform its duties in this regard as prescribed in this Law;

(5) Put forward proposals at shareholders' meetings;

(6) Initiate legal action against any director or senior officer in accordance with Article 189 of this Law; and

(7) Any other functions or powers specified in the articles of association.

The 2023 amendments include potential exemptions under which limited liability companies may not be required to establish a supervisory board. Under Article 69, a limited liability company can create an audit committee within its board of directors to perform the duties usually assigned to the board of supervisors, as allowed by its articles of association, and can include employee representatives on this committee without needing a separate board of supervisors. An audit committee consists of three or more members, and a majority of the members shall not hold any position in the company other than director, and shall not have any relationship with the company that may affect their independent and objective judgment. Any employee representative among the members of the board of directors may become a member of the audit committee. While this exception aims to facilitate the governance structure of companies obligated to maintain an audit committee, it raises concerns about its effectiveness. The potential for conflicts of interest emerges, given that the audit committee consists of directors who may encounter challenges when overseeing their peers.

The general obligation of loyalty and diligence of the Supervisor is reinforced by provisions of criminal law, the purpose of which is to guarantee the impartial execution of duties and at the same time of protecting company property and assets from theft or "temporary diversion" from its staff. As a rule, the Supervisor does not hold decision-making powers, he is also immune from indirect liability for corporate crimes. Its powers to control the company's financial statements can potentially lead to liability for indirect corruption crimes by non-state parties (Article 163 of the Criminal Law). Since he can be part of the liquidators of the company, any dissimulation or transfer of ownership will be punished by way of embezzlement (Article 271 Criminal Law) or embezzlement (Article 272 Criminal Law). Other provisions apply to the same actions if they are committed by state personnel to whom tasks have been delegated by private companies.