Corporate Organs

(1)
1. Overview: corporate governance
2. Shareholders’ Meeting
3. Board of Directors

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1. Overview: : Corporate
governance

 What is corporate governance?

 Corporate governance
 An amorphous term
 Objective of CG: reduce agency costs
 Three basic agency problems
 The opportunism of managers vis-à-vis shareholders
 The opportunism of controlling shareholders vis-à-vis minority
shareholders;
 The opportunism of shareholders as a class vis-à-vis other
corporate
constituencies, such as creditors and employees

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 CG measures
 Legal measures
 Internal/structural measures
 Duties imposed upon directors and managers
 Measures affecting board composition and structure
 Shareholder voting rights
 Shareholder litigation rights
 Regulatory regime (Information disclosure regime)

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CG
measures
 Legal measures
 Internal/structural measures
 Board composition and structure (independent directors,
general manager + chairperson, supervisory board…)
 Incentive mechanism: Executive pay

 Duties imposed upon directors and managers

 Ownership structure

 Shareholder rights: voting rights; proposal rights…

 External/institutional measures
 Shareholder litigation rights/mechanisms
 Regulatory regime: information disclosure regime, regulator…
 General legal environment: judicial independence/capacity

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CG measures
(cont)
Market disciplines
 Capital market: fundraising
 pricing capital costs
 Market for corporate control: hostile
takeovers
 monitoring managerial performance
 Product market:
 competitive pressure
 Managerial labor market:
 reputational capital

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CG measures
(cont.)
 Social forces
 Personal integrity and responsibility
 Social norms:
 Religious belief;
 cultural factors (Confucianism)

 Immanuel Kant
 “Two things fill my heart with renewed and increasing
awe and reverence ….: the starry sky above me and
the moral law inside me”
 Mencius
 富贵不能淫 , 贫贱不能移 , 威武不能屈 , 此之后
谓大 丈 夫 (It is a true great man whom no
money and rank can confuse, no poverty and
hardship can shake, and no power and force
can suffocate)

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 China’s problem
 law?
 Market?
 Ethics?

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 A dual board structure in China
 General meetings
 Board of directors
 Board of supervisors

 Cf. Common law jurisdictions: a unitary board or one-tier

board
 General meetings
 Board of directors (independent directors)

 Reform : choose one-tier board

 establish audit committee in the board of directors to
replace board of supervisors

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2. Shareholder
meetings
 Shareholder-Meeting-centered
 Shareholder-Meeting is the highest authority
 Terms
 Overseas: General meeting; meeting of members
 LLC: shareholder’s meeting （股东会）
 JSC: shareholder’s assembly （股东大会）

 Cf NPC

 2023 Company Law:

 股东会 for both LLC and JSC

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 General powers: s 59 (LLC), s 112 (JSC, refer to s 59)
 Constitutional structure:
 alter constitutional terms; dissolution of the company
 Capital structure:
 Increase or reduce share capital
 the composition of the board:
 appointment and removal of directors and supervisors and decide
their remunerations
 Certain major issues:
 Decide financial and operating policies (Deleted in 2023 version)
 Approve annual budget and dividend plan (Deleted in 2023
version)
 M&A; change company type etc
 Other powers as set out in the constitution

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 Specific powers
 Article 15 (for both LLC and JSC): provision of guarantee
 …
 If a company intends to provide guaranty to a
shareholder or actual controller of the company, it
shall make a resolution through the shareholder's
meeting.
 …
 To be discussed in more detail later
 Article 135
 Where a listed company purchases or sells any important
asset or provides a guaranty of which the amount exceeds
30% of its total assets to others, a resolution shall be made
by the shareholders’ meeting and shall be adopted by
shareholders representing 2/3 of the voting rights of the
shareholders in presence.
 …

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 Article 104 (JSC only)
 The important matters, such as the company to transfer or
accept any significant asset or to provide a guaranty for
any other person shall be decided by the shareholders'
assembly according to this Law and the bylaw, the board of
directors shall timely call a shareholders' assembly to vote
on these matters. (Deleted in the 2023 version)
 Article 135 (listed companies only)
 Where a listed company purchases or sells any
important asset or provides a guaranty of which the
amount exceeds 30% of its total assets to others, a
resolution shall be made by the shareholders’ meeting
and shall be adopted by shareholders representing 2/3
of the voting rights of the shareholders in presence.

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GM
(cont)
 Cf. Common law system
 Board of directors-centered model
 US: most typical
 Australian: Corporations Act 2001
 s198A(1): the business of the company is to be managed by or under the
direction of the directors
 s 198A(2): directors may exercise all the powers except any powers that
are required to be exercised by shareholders

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GM
(cont)
 SH decision making:
 Holds a meeting
 Types of meeting
 Periodical general meeting
 LLC: constitution
 JSC: once a year
 Extraordinary general meeting
 Without a meeting
 available only to LLC
 ALL the shareholders (entitled to vote) must sign the resolution: s 37

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 Who has power to initiate (propose) a
shareholder meeting?
 Art. 62 (LLC):
 Regular meetings shall be convened on time
in
accordance with constitution.
 The convening of an extraordinary meeting may be
proposed by shareholders representing at least one‐
tenth of voting rights, or by at least one‐third of the
directors, or by supervisory board.

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 Article 113 (JSC): An annual session of the shareholders’
meeting shall be held each year. Under any of the following
circumstances, an interim shareholders’ assembly session shall
be held within 2 months:
 (1)The number of directors is less than two-thirds of the number
of directors as required by this law or the number of directors as
specified in the articles of association;
 (2)The un-recovered losses of the company reach one-third of
the total capital;
 (3)At the request of the shareholders separately or
aggregately
holding 10% or more of the company''s shares;
 (4)The board of directors deems it necessary;
 (5)At the request of the board of supervisors; and
 (6)Other circumstances as specified in the articles of
association.

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 2:Who has power to convene a shareholder meeting?
 Article 63 (LLC)
 The shareholders' meetings shall be convened by the board of
directors and presided over by the chairman of the board of
directors. If the chairman is unable or fails to perform his duties,
the meetings thereof shall be presided over by the deputy
chairman of the board of directors. If the deputy chairman of the
board of directors is unable or fails to perform his duties, the
meetings shall be presided over by a director elected by a
majority of the directors.
 If the board of directors is unable or fails to fulfill the duties of
convening the shareholders' meeting, the board of supervisors
may convene and preside over such meetings. If the board of
supervisors does not convene or preside over such meetings,
the shareholders representing 1 / 10 or more of the voting rights
may convene and preside over such meetings on their own
initiatives.

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 Article 114 (JSC)
 A session of the shareholders’ assembly shall be convened
by the board of directors and shall be presided over by the
chairman of the board of directors...
 If the board of directors is unable or fails to fulfill the
obligation of convening the meetings of the shareholders’
assembly, the board of supervisors shall convene and
preside over such meetings.
 If the board of supervisors does not convene or preside
over such meetings, the shareholders separately or
aggregately holding 1/10 or more of the shares may
convene and preside over such meetings on their own
initiative.
 Shareholders, individually or collectively holding more
than ten percent of the company's shares, requesting
the convening of an extraordinary shareholders'
meeting, the board of directors and the supervisory
board shall, within ten days from the date of receiving
the request, decide whether to convene the
extraordinary shareholders' meeting and provide a
written response to the shareholders.
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 Notice requirement
 Article 64 (LLC)
 Every shareholder shall be given a notice 15 days before
a shareholders' meeting is held
 unless it is otherwise specified by the bylaw or it is
otherwise
stipulated by all the shareholders.
 Article 115(1) (JSC)
 For a shareholders' assembly meeting to be held, a notice
shall be given to each shareholder 20 days in advance, which
shall state the time and place of the meeting, and the matters
to be deliberated at the meeting. For an interim meeting of
the shareholders' assembly, a notice shall be given to each
shareholder 15 days in advance.

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 Shareholders’ Extempore Motion
 Art. 115 (2)
 The shareholders separately or aggregately holding 1%
more
or of the shares of the company may put forward a
interim
written proposal to the board of directors 10 days before
shareholders'
a assembly is
 The board of directors may notify other shareholders within
held.
days and submit the interim proposal to the meeting of
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shareholders'
the assembly for
 However, temporary proposals that violate laws, administrative
deliberation.
regulations, or the provisions of the company's articles of
association, or those that do not fall within the scope of the
authority of the shareholders' meeting are exceptions. The
company is not allowed to increase the shareholding ratio
required for proposing temporary proposals by shareholders.
 Article 115 (3)(4)
 For companies with publicly issued shares, the notices as
stipulated in the preceding two paragraphs shall be made
through public announcements.
 The shareholders' meeting shall not make resolutions on
matters not specified in the notice.
 Voting rules
 1: How to decide voting power?
 Article 65 (LLC):
 The shareholders shall exercise their voting rights at the
shareholders‘ meetings based on their respective
percentage of the capital contributions ( 出资比例， not
paid capital)
 unless it is otherwise prescribed by the bylaw.
 Article 116 (JSC):
 When a shareholder attends a meeting of the
shareholders' assembly, he shall have one voting right for
each share he holds.

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 2. how much voting power is needed to pass
resolutions?
 Article 66 (LLC)
 Unless it is otherwise provided for by this Law, the
discussion methods and voting procedures of the
shareholders' meeting shall be provided for in the bylaw.
 Resolutions of the shareholders' meeting should be
adopted by shareholders representing more than half of
the voting rights.
 A resolution made at a shareholders' meeting on
revising the bylaw, increasing or reducing the registered
capital, merger, split-up, dissolution or change of the
company form shall be adopted by the shareholders
representing 2 / 3 or more of the voting rights.
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 Article 116 JSC
 When any resolution is to be made by the shareholders'
meeting, it shall be adopted by shareholders
representing more than half of the voting rights of the
shareholders in presence.
 When the shareholders' meeting makes a decision to
modify the bylaw, or to increase or reduce the
registered capital, or a resolution about the merger,
split-up, dissolution or change of the company form,
such a decision shall be adopted by shareholders
representing 2/3 or more of the voting rights of the
shareholders in presence.

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 Vanke （万科）
 Total: Between 30% and 40%
 If first shareholder and management are
excluded: between 15 and 20%

Time Shareholder Meeting Attendance rate

18/3/2014 2013 annual meeting 30.15%
12/6/2014 2014 first special meeting 35.67%
27/11/2014 2014 second special meeting 36.19%
21/5/2015 2014 annual meeting 34.26%
31/8/2015 2015 first special meeting 38.65%

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 Any quorum requirements for JSC shareholder
meetings?
 if shareholder in attendance only hold 30% of the total
voting rights, then according to Article 104,
shareholders in attendance only hold 15% of total
voting rights will have authority to pass generic
resolutions, 20% voting rights enough to pass special
resolution.
 Possible solutions?
 Corporate law in other countries usually have
quorum requirement.
 Constitution may make this clear in order to forestall
potential
problems.

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Cumulative
voting
 Article 117 (JSC)
 A shareholders' assembly may adopt a cumulative voting
system to elect the directors or supervisors according to
the bylaw or its resolutions.
 The term "cumulative voting system" as mentioned in
this
Law refers to a system of voting by shareholders for the
election of directors or supervisors at a meeting of the
shareholders' assembly in which the shareholder can
multiply his voting rights by the number of places (not
candidates) and vote them all for one candidate for
director or supervisor （集中使用）
 Translation problem: the number of places (not candidates)
 helps strengthen the ability of minority shareholders to elect a
director
 NOTE:
 May be adopted by LLC through constitution: Article 66

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 Corporate Governance Code for Listed
Companies (issued in 2002, revised in 2018):
s17
 CV must be adopted in a listed company if there are
shareholders holding more than 30% of voting power
either individually or with parties acting in concert

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原文

 本法所称累积投票制，是指股东大会选举董事或者
监事时，每一股份拥有与应选董事或者监事人数相
同的表决权，股东拥有的表决权可以集中使用。

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Case
study
 Facts:
 A JSC has 100 shares in total. The controlling
shareholder controls 70 shares, other
shareholders control 30 shares. Now, the
company has four director candidates (A, B, C, D)
for three positions. The controlling shareholder
wants to elect A, B, C while minority shareholder
wants to elect D
◼Q:
 Would it be possible for minority shareholders to
elect D under the regular voting system?
 What if the cumulative voting system is used?

 What if the controlling shareholder has 80%?

 the minimum shareholding to succeed
Required shareholding threshold=
（ ND*TS ） / （
TD+1 ）
◼ND: number of directors the minority wants to elect
◼TS: Total shares that are voted

◼TD: Total number of directors to be elected

 (1* 100)/(3+1)=25; so need more than 25%

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 Limited function of cumulative voting
 it does not help you if you have tiny amount of
shares
 Remember that shareholder meeting has powers
to remove directors. Should a majority be
allowed to remove a director who was elected by
the minority through shareholder meeting?
 NY Bus. Corp law (2007) provides that a director elected
by cumulative voting may not be removed when the
votes cast against his removal would be sufficient to
elect him if voted cumulatively at an election…

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 International experiences
 Statutory default in Japan, but is routinely avoided
by charter provisions
 In the UK and the US, companies may adopt CV,
but rarely do so
 CV was common in the US at the turn of the 20th
century
 In EU, CV has failed to gain much traction
 Why?

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3.Membership

Board of
directors
In LLC, more than 3 members: s 68


A limited liability company shall have three or more members on its


board of directors, and among them, employee representatives may
be included.
 For limited liability companies with more than three hundred
employees, in addition to establishing a supervisory board in
accordance with the law and having employee representatives, the
board of directors shall include employee representatives.
 Employee representatives on the board of directors are elected
democratically by the company's employees through a workers'
representative assembly, employees' assembly, or other forms of
democratic elections.
 The board of directors should have one chairman, and a vice
chairman may be appointed. The method of appointing the chairman
and vice chairman is stipulated in the company's articles of
association.
 In JSC, more than 3 members: s 120
 A joint-stock limited company shall establish a board of directors,
except as otherwise provided in Article 128 of this law. The provisions
of Article 67, the first paragraph of Article 68, Article 70, and Article 71
of this law shall apply to joint-stock limited companies.
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 Structure of board
 S68 (LLC):
 The board of directors shall have one chairperson and
may have one or more deputy chairpersons.
 The appointment of the chairperson and deputy chair
shall be specified in the bylaw
 S122 (JSC):
 The board of directors shall have one chairperson and
may have deputy chairperson(s).
 The chairperson and deputy chairperson(s) shall be
elected by more than half of all the directors.

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 Term: s 70 (LLC); s120 (refer to s 70)
 Max 3 years;
 reappointment permitted

 S 71
 The shareholders' meeting may resolve to remove a director, with
effect on the date of resolution.
 If a director is removed before expiration of his term of office
without good reason, the director may request compensation from
the company.

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 Powers: s 67 (LLC); s120 (refer to s67)
 (1) Convening shareholders' meetings and presenting
reports thereto;
 (2) Implementing the resolutions made at the
shareholders' meetings;
 (3) Determining the company's business and investment
plans;
 (4) Working out the company's annual financial budget plans
and final account plans; (Deleted in the 2023 version)
 (5) Working out the company's profit distribution plans and loss
recovery plans;
 (6) Working out the company's plans on the increase or
reduction of registered capital, as well as on the issuance of
corporate bonds;
 (7) Working out the company's plans on merger, split, change of
the company form, or dissolution, etc.;

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 (8) Making decisions on the establishment of the
company's internal management departments;
 (9) Making decisions on hiring or dismissing the
company's
manager and his salary and compensation, and,
according
to the nomination of the manager, deciding on the
hiring or
dismissal of vice manager(s) and the persons in
charge of
finance as well as their salaries and compensations;
 (10) Working out the company's basic management
system; and
 (11) Other functions as specified in the bylaw or

granted by the shareholders' meeting.

 Limitations on the powers of the board of directors

in the company's articles of association shall not be

effective against bona fide third parties.

 Comments
 Cf powers of shareholders’ meeting (s59)
 Can the bylaw change the power allocation between SH 38
meetings and board of directors?
 Meetings of board of directors: who convenes and
presides
 s 72 (LLC):
 A meeting of the board of directors shall be convened and presided over
by the chairman of the board of directors.
 If the chairman of the board of directors is unable or fails to perform his
duties, it may be convened or presided over by the deputy chairman of
the board of directors.
 If the deputy chairman of the board of directors is unable or fails to
perform his duties, it may be convened or presided over by a director
whom is jointly recommended by half or more of the directors.
 S 122(JSC) (almost the same as s72)
 The chairman of the board of directors shall convene and preside over the
meetings of the board of directors and check the implementation of the
resolutions of the board of directors. The deputy chairman shall assist the
chairman to work.
 If the chairman is unable or fails to perform his duties, the deputy chairman
shall perform such duties.
 If the deputy chairman of the board of directors is unable or fails to perform
his duties, a director who is jointly recommended by half or more of the
directors shall perform such duties.

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 Procedure of meetings
 Article 73(LLC)
 Unless it is otherwise provided for by this Law, the
discussion methods and voting procedures of the board
of directors shall be specified by the bylaw.
 No meeting of the board of directors may be held
unless a majority of the directors are present. When the
board of directors makes a resolution, it shall be
adopted by a majority of all the directors.
 The board of directors shall make minutes of the
decisions about the matters discussed at the meetings
thereof. The shareholders who attend the meeting shall
affix their signatures to the minutes.

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 JSC
 Article 123 (JSC): regular and interim meetings
 The board of directors shall convene at least two
meetings every year and shall give a notice to all
directors and supervisors 10 days before it holds a
meeting.
 The shareholders representing 1/10 or more of the voting
rights, or 1/3 of the directors, or the board of supervisors may
put forward a proposal to hold an interim meeting of the
board of directors. The chairman of the board of directors
shall, within 10 days after he receives such a proposal, call
and preside over a meeting of the board of directors.
 If the board of directors holds an interim meeting, it may
separately decide the method and time limit for the
notification about convening meetings of the board of
directors.
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 Article 124 (JSC) : quorum and pass requirement
 No meeting of the board of directors may be held unless
more than half of the directors are present.
 When the board of directors makes a resolution, it shall be
adopted by more than half of all the directors （全体董事的
过 半数）
 Unclear: all the directors in presence?
 Article 125
 The meetings of the board of directors shall be attended by
the directors in person. Where any director is unable to
attend the meeting for a certain reason, he may, by issuing a
written proxy, entrust another director to attend the meeting
on his behalf, and the proxy shall state the scope of
authorization.

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 Article 124
 The board of directors shall prepare minutes regarding the
resolutions on the matters discussed, which shall be
signed by the directors in presence.
 Same as s73 (LLC)
 Article 125
 The directors shall be responsible for the resolutions of the
board of directors.
 Where a resolution of the board of directors is in violation of any
law, administrative regulation, bylaw, or resolution of the
shareholders' meeting and causes any serious loss to the
company, the directors who participate in adopting the resolution
shall make compensation.
 If a director is proven to have expressed his objection to the
vote on such resolution and his objection was recorded in the
minutes, then the director may be exempted from liability.
 Comments: is this director duty issue?

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 Voting
 S 73 (LLC):
 In the voting on a resolution of the board of directors,
every director shall have one vote.
 S 124 (JSC): same as above
 For the voting on a resolution of the board of directors,
each director shall have one vote only.

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 Special requirement for listed Cos: Ch 4, Pt 5
 Article 136:
 The specific management measures shall be stipulated by
the State Council's securities regulatory authority.
 In addition to the matters specified in Article 95 of this Law,
the bylaw of a listed company shall also specify, in
accordance with the provisions of laws and administrative
regulations, the composition and powers of special
committees of the board of directors, as well as matters
related to the compensation and performance evaluation
mechanism for directors, supervisors, and senior executives.
 Article 138
 A listed company may have a secretary of the board of
directors, who shall be responsible for the preparation of the
sessions of shareholders' assembly and meetings of the board
of directors, the preservation of documents, the management
of the company's stock rights, and the information of
disclosure, etc.
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 Article 139
 If a director or any matter subject to resolution at a board
meeting of a listed company is related to an enterprise or
individual, the director concerned shall promptly report it in
writing to the board of directors. A director with such a
relationship shall not exercise the voting rights on the
resolution and may not act as a proxy for other directors.
 The board meeting may be held with the attendance of half
of unrelated directors, and resolutions of the board meeting
must be approved by half of unrelated directors.
 If the number of unrelated directors attending the board
meeting is less than three, the matter shall be submitted to
the shareholders' meeting of the listed company for
consideration.
 Comments: why does this voting restriction apply only to
listed companies?

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