Employees’ Participation in Corporate Governance under the Revised Chinese Company Law

China’s Revised Company Law will take effect on 1 July 2024. In this Legal Update, we will highlight three of the most essential measures to strengthen employees’ participation in the corporate governance of companies.

On 29 December 2023, the Seventh Session of the Standing Committee of the Fourteenth National People’s Congress of China adopted the Revised Company Law. The Revised Company Law will take effect on 1 July 2024. We reported on the Revised Company Law earlier in a Legal Update, compiling what we consider to be the Top 10 Changes for Foreign Companies Under China’s New Company Law.
 
Among the many, at times fundamental changes introduced by the Revised Company Law, it also considerably strengthens the employees’ participation in the corporate governance of companies. For example, the Revised Company Law explicitly emphasizes in the legislative purpose of the Company Law in Article 1 the protection of the legitimate rights and interests of employees. To the same end, it requests that companies shall consider the interests of their employees during their business activities and requires companies to take concrete measures to establish and improve a system of the so-called “democratic corporate governance”.

In this Legal Update, we will, therefore, highlight three of the most essential measures introduced by the Revised Company Law to strengthen employees’ participation in the corporate governance of companies.

The Revised Company Law specifies, for the first time at the national law level, that the basic form of the democratic corporate governance system is the assembly of employee representatives.

The Provisions on Democratic Governance of Enterprises, jointly issued by six departments of the Chinese State and Communist Party in 2012, and certain local regulations (e.g., the Regulations of Shanghai on the Assembly of Employee Representatives), have also stipulated that the assembly of employee representatives shall be the basic form of the democratic corporate governance system. However, except for State-owned enterprises, China’s Constitution and relevant laws such as the Labor Law, the Labor Contract Law, the Trade Union Law, and the current Company Law have, so far not provided for similar provisions in this regard for companies in general.

Article 17(2) of the Revised Company Law now stipulates that the assembly of employee representatives shall be the basic form of the democratic corporate governance system and that this shall apply to all companies. That means, regardless of whether a company is private or state-owned, whether it is a limited liability or a stock corporation. This is a notable development, as democratic corporate governance as a requirement for all companies is set out in national law for the first time.

The currently applicable rules in China for democratic corporate governance within a company or other enterprises are as follows:

An enterprise shall decide whether to convene an assembly of employee representatives or an assembly of all employees according to the Provisions on Democratic Governance of Enterprises, relevant local regulations, and subject to the number of its employees. In general, an enterprise with 100 or more employees shall convene an assembly of employee representatives; an enterprise with fewer than 100 employees should convene an assembly of all employees. An assembly of employee representatives (or an assembly of all employees, the “Employee Assembly”) is an organ for employees to exercise their power of democratic governance of the enterprise.

When an enterprise convenes an Employee Assembly, the number of employee representatives shall be not less than five percent of the total number of its employees but in no event less than thirty. Among the representatives, the number of managers and executives of or above the middle level shall not exceed 20% of the total number of employee representatives. The office term of an Employee Assembly is three to five years.

The trade union of an enterprise is the executive organ of its Employee Assembly and is responsible for the daily work of the Employee Assembly. Higher-level trade unions provide guidance and assistance to enterprises (especially those without their own trade unions) in establishing and improving the Employee Assembly system. An Employee Assembly shall be convened at least once a year, and more than two-thirds of the employee representatives must be present at the plenary session of an Employee Assembly. Elections and votes on relevant matters at an Employee Assembly require a majority of all employee representatives.

The Revised Company Law explicitly requires that when a company is considering dissolution or applying for bankruptcy, it shall listen to the opinions of its trade union and the opinions and suggestions of its employees through the Employee Assembly or by other forms.

Pursuant to the Labor Contract Law, the current Company Law, the Provisions on Democratic Governance of Enterprises and relevant local regulations, an Employee Assembly shall usually exercise the following powers and functions:

(I) Listening to the reports from the main persons responsible for the enterprise on the enterprise’s development planning, annual production and operation management, enterprise reform and formulation of major rules and regulations, employment issues, conclusion and implementation of labor contracts and collective contracts, production safety, and payment of social insurance premiums and housing provident funds; and making comments and suggestions thereon;

(II) Deliberating the rules and regulations or major proposals formulated, amended or adopted by the enterprise which may directly affect the immediate interests of its employees, such as remuneration, working hours, rest and vacation, occupational safety and health, insurance and welfare, employee training, labor discipline, and the management of labor quotas; and making comments and suggestions thereon;

(III) Deliberating and adopting the draft collective contracts, the plan for the use of the employees’ welfare fund drawn down in accordance with the relevant national regulations, the plan for adjusting the rate and timing of the payment of housing provident funds and social insurance premiums, the recommendation of candidates for model employees and other important matters;

(IV) Electing or dismissing employee directors and employee supervisors, electing employee representatives to meetings of creditors and creditors’ committees of the enterprise subject to bankruptcy proceedings in accordance with the law, and recommending or electing management personnel of the enterprise as authorized;

(V) Reviewing and monitoring the implementation of labor laws and regulations and labor rules by the enterprise, democratically evaluating the leaders of the enterprise, and making recommendations on rewards and punishments; and

(VI) Such other powers and functions as may be provided by laws or regulations.

Article 17(3) of the Revised Company Law explicitly requires that when a company is considering dissolution or applying for bankruptcy, it shall also listen to the opinions of its trade union and the opinions and suggestions of its employees through the Employee Assembly or by other forms.

However, the Revised Company Law does not specify the legal consequences if the company fails to comply with the above requirements. The invalidity, revocability, and ineffectiveness of the company’s resolutions, as stipulated in the Revised Company Law, also do not seem to be directly applicable if the company adopts resolutions without listening to the opinions of its employees. For example, if the shareholders’ meeting or the sole shareholder of a company resolves to dissolve the company in accordance with its articles of association without listening to the opinions and suggestions of its trade union and employees, will this necessarily result in the statutory termination of the labor contracts of the company’s employees in accordance with the Labor Contract Law?

According to the Regulations on Democratic Governance of Enterprises, matters that shall be submitted to the Employee Assembly for consideration, adoption, or decision are invalid if they were not considered, adopted, or decided by the Employee Assembly in due process. Local rules and regulations, such as the Regulations of Shanghai on the Assembly of Employee Representatives, stipulate that if a matter that shall be submitted to the Employee Assembly for deliberation and adoption according to laws and regulations is not submitted for deliberation and adoption in due process, the decision made by the enterprise on such matter shall not be binding on its employees.

In view of the above, to minimize relevant legal risks, it is recommended that when considering and deciding on restructuring, dissolution, application for bankruptcy, and other major operational issues, as well as when formulating important rules and regulations, companies should not only comply with the procedures for convening shareholders’ and board meetings as well as the voting methods stipulated in the Company Law and its articles of association, but also listen to the opinions and suggestions of its trade union and employees. For evidentiary purposes, such a process should be well recorded.

Most notably, the Revised Company Law stipulates that a company with 300 employees or more shall have employee representatives on its board of directors, unless it already has a board of supervisors with employee supervisor(s) elected by the Employee Assembly.

In order to further reinforce democratic corporate governance and safeguard the legitimate rights and interests of employees, the legislator has also sought to improve the provisions relating to employee representation on the board of directors by revising the Company Law. The current Company Law only stipulates that the boards of directors of wholly State-owned companies shall have employee representatives; however, it is not mandatory for the boards of directors of other limited liability companies and stock corporations to have employee representatives.

Articles 68(1) and 120(2) of the Revised Company Law now require a company, whether State-owned or private, whether limited liability companies or stock corporations, with 300 employees or more to include employee representatives on its board of directors unless the company already has a board of supervisors with employee supervisor(s) elected by the Employee Assembly. A specific ratio of the employee representatives included in the board of directors is not prescribed.

Nonetheless, the Revised Company Law also permits a company that is small in size or has a small number of shareholders to have neither a board of directors nor a board of supervisors (see Articles 75, 83, 128, and 133 of the Revised Company Law). In practice, especially in the case of limited liability companies, it is very common to find companies with a small number of shareholders (e.g., one or two shareholders) but a large size (300 employees or even more). Whether such companies would be exempted from the inclusion of employee representatives on boards in case they chose not to set up either a board of directors or a supervisory board is not clear yet.

These questions and other related questions will very likely have to be clarified by judicial interpretations or practice, such as the practice of the Administration for Market Regulation (AMR).

Based on the legislative purpose of reinforcing democratic corporate governance and safeguarding the legitimate rights and interests of employees, for the time being, it might be reasonable to understand that the Revised Company Law would rather require all companies with 300 employees or more (even if the number of shareholders is relatively small) to establish either a board of directors with certain employee representatives or a board of supervisors with at least one-third of its members being employee representatives.