The Revised Company Law and State-Owned Enterprise Governance

The Revised Company Law and State-Owned Enterprise Governance

1. Introduction

(1) Background and significance of the revised Company Law revision

On December 29, 2023, the seventh meeting of the Standing Committee of the 14th National People's Congress reviewed and approved the newly revised Company Law of the People's Republic of China (hereinafter referred to as "The Revised Company Law"). This law will be officially implemented on July 1, 2024. This revision is the largest revision since the promulgation of the Company Law in 1993. It involves many substantive changes and more than 228 new and modified provisions.

The macro background of this revision is the requirement of the times to deepen reform and opening up, optimize the business environment, and promote high-quality economic development. Its core goals are to improve the modern enterprise system with Chinese characteristics, promote entrepreneurship, safeguard the legitimate rights and interests of companies, shareholders, employees and creditors, maintain social and economic order, and promote the development of a socialist market economy. Specifically, the revised Company Law aims to further stimulate market vitality and enhance the endogenous power of economic development by improving company establishment and exit mechanisms, optimizing corporate governance structures, strengthening shareholder rights protection, standardizing capital systems and other reforms.

What deserves particular attention is that the revision of the revised Company Law is closely linked to the deepening of the reform of state-owned enterprises. General Secretary Xi Jinping emphasized that adhering to the party's leadership of state-owned enterprises is a major political principle, and establishing a modern enterprise system is the direction of state-owned enterprise reform and must be consistent. Since the 18th National Congress of the Communist Party of China, the Party Central Committee has made a series of major decisions and arrangements focusing on deepening the reform of state-owned enterprises, improving the state-owned assets supervision system, and strengthening party leadership. The revision of the revised Company Law is an inevitable requirement and important legal guarantee for implementing these decisions and arrangements, consolidating and deepening the results of state-owned enterprise governance reforms, improving the modern enterprise system with Chinese characteristics, and promoting high-quality development of the state-owned economy.

(2) The research scope and core issues of this article

As the "root" and "soul" of the socialist economy with Chinese characteristics, state-owned enterprises' standardization and legalization of corporate governance are directly related to the healthy development of the national economy and the safe appreciation of state-owned assets. The many revisions of the revised Company Law, especially the special provisions for state-invested companies, major adjustments to the company's capital system, the strengthening of directors' fiduciary obligations and responsibilities, and the improvement of the legal representative system, will have a profound impact on the corporate governance structure, operating mechanism, risk management and even strategic decision-making of state-owned enterprises.

This article will focus on the impact of the revised Company Law on the corporate governance of state-owned enterprises in the following four core areas:

1. Special provisions for state-invested companies: Analyze the reshaping of the governance framework of wholly state-owned companies and state-owned capital holding companies by adding a special chapter.

2. Corporate capital system reform: Discuss the new challenges posed by new regulations such as the five-year paid-in period, accelerated maturity of capital contributions, and non-monetary capital contributions on the capital structure, financing investment, and risk management of state-owned enterprises.

3. Strengthening of directors’ fiduciary obligations and responsibilities: Interpret the details of the obligations of loyalty and diligence and their legal responsibilities, and evaluate the new standards they set for the performance of directors of state-owned enterprises.

4. Improvement of the legal representative system: Analyze changes in the appointment, powers, and responsibilities of legal representatives and their impact on the exercise of representation rights and responsibilities of state-owned enterprises.

Through an in-depth discussion of the above topics, this article aims to provide valuable legal analysis and compliance guidance for state-owned enterprises and their managers, investor representative organizations, legal advisors and relevant regulatory authorities to better understand and apply the revised Company Law and promote the modernization of state-owned enterprise governance systems and governance capabilities.

(3) Preliminary observations on the governance of state-owned enterprises

The revision of the revised Company Law is unprecedentedly large and wide-ranging. Judging from preliminary observations, this revision reflects several important trends in the governance of state-owned enterprises: First, it places more emphasis on standardization and the rule of law, and elevates some effective state-owned enterprise reform experience and regulatory requirements into legal norms, such as the legalization of the role of party organizations, the outside director system, mandatory compliance management, etc.; second, it strengthens the principle of capital enrichment and puts forward stricter requirements for shareholders' capital contribution responsibilities. The requirements are aimed at consolidating the company's capital base and protecting the interests of creditors; thirdly, it has significantly strengthened the responsibility constraints on directors, supervisors, and senior managers (directors, supervisors, and senior managers), refined fiduciary obligations, and increased accountability to enhance the effectiveness and accountability of corporate governance; fourthly, it has paid more attention to balancing the interests of all parties, and while strengthening the supervision of investors, it has also paid attention to the protection of the rights and interests of small and medium-sized shareholders and employees. These changes indicate that state-owned enterprises will face stricter compliance requirements, more refined governance standards and clearer legal responsibilities, which will bring profound changes to their internal management and external operations.

(4) A brief table of the core changes of the old and the revised Company Law and their impact on state-owned enterprises

For ease of understanding, the following table briefly summarizes the main changes in the new and old the Company Law in the four core areas focused on in this article and their initial impact on state-owned enterprises:

Table 1: A brief list of core changes in the old and the revised Company Law and their impact on state-owned enterprises

2. Special Provisions for State-Invested Companies: Reshaping the Governance Framework of State-owned Enterprises

Chapter 7 of the revised Company Law is dedicated to "Special Provisions on the Organizational Structure of State-Invested Companies", which is one of the major highlights of this revision. It reflects the full consideration of the particularity of state-owned enterprises at the legislative level and aims to summarize and consolidate the results of the reform of state-owned enterprises and provide a more solid legal basis for improving the modern enterprise system with Chinese characteristics.

(1) From “wholly state-owned companies” to “state-funded companies”: scope definition and legislative evolution

1. Definition and scope expansion

Paragraph 2 of Article 168 of the revised Company Law clearly stipulates, “The term “state-invested companies” as mentioned in this Law refers to wholly state-owned companies and state-owned capital holding companies funded by the state, including state-funded limited liability companies and joint-stock companies.” This marks an important expansion of the regulatory scope of state-owned enterprises at the legislative level. The old the Company Law mainly set up a "wholly state-owned company" section under the limited liability company chapter, and the regulatory objects were relatively narrow. The new law explicitly brings state-owned capital holding companies (including limited liability companies and joint-stock companies) into the scope of application of special regulations. This conforms to the trend of equity diversification and mixed ownership reform of state-owned enterprises in recent years, and reflects the reality that a large number of wholly state-owned companies have been transformed into state-owned holding companies. From a legislative perspective, upgrading the regulations on state-invested companies from a "section" to an independent "chapter" also reflects its increased importance.

2. Principles applicable to first-level companies

It should be noted that according to the provisions of Article 169 of the revised Company Law on the institutions that perform the responsibilities of investors, and combined with the State-owned Assets Supervision and Administration Commission of the State Council’s practice of defining the scope of “state-funded enterprises”, it is generally believed that the special provisions of Chapter 7 mainly apply to first-level companies established with direct investment from the State Council or local people’s governments and their authorized agencies (i.e., the group headquarters level), and do not of course include subsidiaries at all levels invested and established by state-funded companies. This means that a large number of state-owned enterprise subsidiaries may still mainly apply the general provisions of the Company Law on ordinary limited liability companies or joint stock companies in legal form. However, this does not mean that subsidiaries can completely escape the special requirements of state-owned assets supervision. In practice, these subsidiaries still need to consciously absorb and internalize the spirit of Chapter 7 of the revised Company Law and various regulations on state-owned assets supervision through company articles of association, internal rules and regulations, etc. This undoubtedly puts forward higher requirements for state-owned enterprise groups to strengthen compliance management and system construction at all levels.

3. Connections and differences with the "Enterprise State-owned Assets Law"

The concept of "state-invested companies" introduced in the revised Company Law is both related to and different from the concept of "state-owned enterprises" in the "State-owned Enterprises Law of the People's Republic of China" (hereinafter referred to as the "State-owned Assets Law") implemented in 2009. Article 5 of the "State-owned Assets Law" defines a wider scope of "state-invested enterprises", including wholly state-owned enterprises, wholly state-owned companies, state-owned capital holding companies and state-owned capital-participating companies. In contrast, the scope of application of Chapter 7 of the revised Company Law is more focused and clearly excludes companies with state-owned capital participation. At the same time, with the advancement of enterprise restructuring, the new law will naturally no longer cover the non-corporate form of "wholly state-owned enterprises". This difference reflects the positioning of the Company Law as an organizational law, which mainly regulates corporate legal persons, while the State-owned Assets Law focuses on the supervision of state-owned assets.

(2) Clarification of the institutions that perform the investor’s responsibilities

Article 169 of the revised Company Law clarifies the entity that performs the investor's responsibilities of a state-invested company: "For a state-invested company, the State Council or the local people's government respectively performs the investor's responsibilities on behalf of the state in accordance with the law and enjoys the rights and interests of the investor. The State Council or the local people's government may authorize the state-owned assets supervision and administration agency or other departments and institutions to perform the investor's responsibilities for the state-invested company on behalf of the people's government at the same level." Compared with previous practice in which the State-owned Assets Supervision and Administration Commission at all levels mainly performed investor responsibilities on behalf of investors, this provision confirms and expands the scope of institutions that perform investor responsibilities at the legal level, clarifying that the financial department or other government departments and agencies can also be authorized to perform this responsibility.

For wholly state-owned companies, since they have only one shareholder (i.e. the state), Article 172 of the revised Company Law stipulates that there will be no shareholders' meeting, and the powers of the shareholders' meeting will be exercised by institutions that perform the duties of the investor. Institutions that perform investor responsibilities can authorize the company's board of directors to exercise some of the powers of the shareholders' meeting to improve decision-making efficiency. However, major matters involving the company's fundamentals and direction, such as "the formulation and modification of the company's articles of association, the company's merger, division, dissolution, application for bankruptcy, increase or decrease in registered capital, distribution of profits," must still be decided by the institution that performs the responsibilities of the investor. It is worth noting that the new law clearly lists "the formulation and modification of the company's articles of association" and "distribution of profits" as the exclusive decision-making power of the investor organization, further strengthening the investor's control over the company's top-level design and distribution of core interests. At the same time, the new law deletes the provisions in the old law that require the approval of the people's government at the same level for matters such as mergers, divisions, dissolutions, and applications for bankruptcy of "important wholly state-owned companies." This adjustment reflects the reform direction of separation of government and enterprises. It will reasonably shift some decision-making authority to the investor institution or company level, which will help reduce administrative intervention and improve the efficiency of state-owned capital operations.

(3) Legalization of the leadership role of party organizations

Upholding the party's leadership is the essential feature of the modern enterprise system with Chinese characteristics. Article 170 of the revised Company Law clearly stipulates: "The organizations of the Communist Party of China in state-funded companies shall play a leadership role in accordance with the provisions of the Constitution of the Communist Party of China, study and discuss major business and management matters of the company, and support the company's organizational structure in exercising their powers in accordance with the law."

This provision is of milestone significance. It formally establishes the legal status and role of party organizations in the governance structure of state-funded companies for the first time at the national basic legal level. Previously, the role of party organizations in the governance of state-owned enterprises was mainly implemented based on intra-party regulations (such as the Constitution of the Communist Party of China, the Regulations on the Work of Grassroots Organizations of State-owned Enterprises of the Communist Party of China (Trial)) and normative documents from departments such as the State-owned Assets Supervision and Administration Commission. The new law clearly writes the leadership role of the party organization in "guiding the direction, managing the overall situation, and ensuring implementation", especially the requirement to "research and discuss the company's major business management matters" (i.e., the pre-decision-making research and discussion procedures for "three important and one" matters) in the Company Law, which greatly enhances its legal effectiveness and rigid binding force.

Integrating the party's leadership into the legalization of corporate governance provides solid legal support for state-owned enterprises to adhere to "two consistency" and ensures the party organization's voice and influence in major decision-making. However, this also poses new requirements and potential challenges to the actual operations of state-owned enterprises. On the one hand, enterprises need to further improve the party committee (party group) rules of procedure in accordance with the requirements of the new law, optimize the list of pre-study and discussion matters, and ensure that the party organization effectively performs its duties. On the other hand, how to handle the relationship between the research and discussion opinions of the party organization and the final decision-making power of the board of directors in practice, especially in mixed-ownership enterprises, how to balance the opinions of the party organization, the requirements of directors to be responsible to all shareholders based on their fiduciary duties, and the efficiency of the company's business decision-making will be an important issue facing the governance of state-owned enterprises. The party organization's preliminary research and discussion does not replace the decision-making power of the board of directors, but provides it with political control and direction guidance. But when there are differences of opinion between the two, how to coordinate and resolve them to avoid governance deadlock or potential legal liability conflicts requires more refined institutional design and practical exploration.

(4) Board of Directors, Board of Supervisors/Audit Committee and Outside Directors

1. Requirement of majority of outside directors

In order to optimize the board of directors' structure, strengthen the independence and scientific nature of decision-making, and prevent insider control, Article 173 of the revised Company Law clearly stipulates: "More than half of the board members of a wholly state-owned company shall be outside directors." Outside directors are usually appointed by institutions that perform their duties as investors. They do not hold other positions in the company other than directors. They have no relationship with the company that may affect their independent and objective judgment. Their remuneration is also borne by the appointing institution. This provision elevates the experience of implementing the outside director system in the reform of state-owned enterprises to a legal requirement, which is of great significance for improving the checking and balancing capabilities and decision-making quality of boards of directors of wholly state-owned companies. Although this provision clearly targets "wholly state-owned companies", considering that the outside director system is a common requirement of current state-owned assets supervision for all types of state-owned enterprises (including holding companies), this provision also has important demonstration and guiding significance for state-owned holding companies.

2. The audit committee replaces the supervisory board

In terms of supervision mechanism, the revised Company Law introduces greater flexibility. Article 176 stipulates: “Where a wholly state-owned company sets up an audit committee composed of directors on the board of directors to exercise the powers of the board of supervisors stipulated in this law, it shall not have a board of supervisors or supervisors.” This means that wholly state-owned companies can choose to establish an audit committee under the board of directors to perform supervisory responsibilities, thereby adopting a single-layer governance structure. This option is also given to ordinary limited liability companies (Article 69) and joint stock companies (Article 121). The establishment of an audit committee, with directors (especially external directors with strong independence) assuming supervisory functions, is considered to be more professional and efficient than the traditional board of supervisors model, and can help overcome the problem of weak supervision by the board of supervisors.

However, the application of this provision to wholly state-owned companies may have problems in coherence with other existing laws and regulations. For example, regulations such as the State-owned Assets Law and the Interim Regulations on the Supervision and Administration of State-owned Assets of Enterprises still require wholly state-owned companies to establish supervisory boards. Therefore, if a wholly state-owned company chooses to establish an audit committee instead of a board of supervisors in accordance with the revised Company Law, it remains to be further clarified whether it will conflict with these state-owned assets supervision regulations and create a compliance dilemma. This may require the State Council or the state-owned assets supervision department to issue supporting regulations to coordinate the application of the law, or wholly state-owned companies still need to carefully evaluate in practice and temporarily maintain the setting of the supervisory board to meet all regulatory requirements. For state-owned capital holding companies, there are no special provisions in Chapter 7 of the revised Company Law, so they can freely choose the supervision mode based on Article 69 or Article 121.

3. Employee Director

The revised Company Law also strengthens employee democratic management. Articles 68 and 121 stipulate that for companies with more than 300 employees (limited liability companies and joint stock companies), in addition to having a board of supervisors in accordance with the law and including employee representatives of the company among its members, there should be employee representatives of the company among the members of the board of directors. For wholly state-owned companies, Article 173 also clearly requires that there should be company employee representatives among the board members. Employee directors are democratically elected by the company’s employees through employee congresses, workers’ conferences or other forms of democracy. This guarantees employees' right to participate and have a voice in corporate governance, and helps safeguard employees' legitimate rights and interests.

(5) Mandatory compliance management requirements

Article 177 of the revised Company Law clearly stipulates for the first time at the legal level: "State-funded companies shall establish and improve internal supervision and management and risk control systems in accordance with the law, and strengthen internal compliance management."

Prior to this, the requirements for strengthening the compliance management of state-owned enterprises were mainly reflected in the normative documents issued by the State-owned Assets Supervision and Administration Commission and other departments (such as the "Measures for the Compliance Management of Central Enterprises", etc.). The new law elevates this requirement to the level of basic national law, highlighting the extreme importance that the state attaches to the legal and compliant operation of state-owned enterprises, and also provides the highest-level legal basis for state-owned enterprises to promote the construction of compliance systems. This means that establishing a sound and effective internal control, risk control and compliance management system is no longer just a regulatory requirement or management need, but a legal obligation that state-owned investment companies (including wholly state-owned and state-controlled companies) must fulfill. State-owned enterprises need to take this opportunity to comprehensively review and improve their compliance management organizational structure, institutional processes, risk identification and assessment, compliance review, accountability and compliance culture construction to ensure that corporate operations and management activities operate on the track of the rule of law, effectively prevent and resolve various risks, and ensure the safety of state-owned assets and the sustainable development of enterprises.

(6) Comparison of governance requirements for state-invested companies

In order to more clearly display the specific governance requirements for different types of state-invested companies in Chapter 7 of the revised Company Law, the following table is specially prepared:

Table 2: Comparison of governance requirements for state-funded companies

3. Corporate Capital System Reform: New Challenges in Capital Structure and Risk Management of State-owned Enterprises

The revised Company Law has carried out major reforms to the company's capital system, the core of which is to strengthen the principle of capital enrichment. This has brought new challenges and requirements to state-owned enterprises and their investment activities that have long been accustomed to the subscription system.

(1) Five-year payment period and capital contribution method of a limited liability company

Article 47 of the revised Company Law stipulates: "The registered capital of a limited liability company is the capital contribution subscribed by all shareholders registered with the company registration authority. The capital contribution subscribed by all shareholders shall be paid in full by the shareholders in accordance with the provisions of the company's articles of association within five years from the date of the company's establishment." This provision marks the shift from the full subscription system in my country's limited liability company capital system to a limited-time subscription system after the reform in 2014. Although shareholders are still allowed to subscribe, a hard deadline is set for payment within five years. Where laws, administrative regulations and State Council decisions have special provisions for specific industries or situations (such as financial institutions, etc.), those provisions shall prevail.

In terms of investment methods, Article 48 of the revised Company Law, while retaining traditional methods such as currency, physical objects, intellectual property rights, and land use rights, clearly lists non-monetary properties such as "equity, creditor's rights" that can be valued in currency and can be transferred in accordance with the law as price contributions. This provides a clearer legal basis for state-owned enterprises to invest in their subsidiaries' equity or claims on other enterprises, helping to revitalize existing assets and optimize capital structure. But at the same time, Article 48 also emphasizes that non-monetary property used as investment must be "valued, verified, and property rights must not be overvalued or undervalued", and property rights transfer procedures must be completed in accordance with the law.

These regulations will have a direct impact on state-owned enterprises establishing new limited liability companies or participating in joint venture projects. First of all, the five-year paid-in requirement means that more prudent capital planning is required at the beginning of setting up a company to ensure the ability to complete the capital contribution within the specified period and avoid excessive subscription and failure to implement it. Secondly, when making external investments, especially when participating in projects led by non-state-owned capital, it is necessary to strengthen due diligence and verify the capital contributions of the target company and its original shareholders, including the paid-in ratio, capital contribution plan, etc., to assess potential risks. Thirdly, if non-monetary means of capital contribution such as equity or debt are used, a qualified appraisal agency must be hired to conduct a fair assessment and the ownership change registration must be completed in a timely manner to ensure that the investment is legal and effective and to prevent legal risks caused by improper valuation or ownership defects.

(2) Transition and adjustment of existing companies

The five-year paid-in provisions of the revised Company Law have a “retroactive” effect and are also applicable to existing companies established before July 1, 2024. This means that a large number of companies established under the old subscription system with long subscription periods or even no clear deadlines will need to be adjusted.

In order to smooth the transition, on July 1, 2024, the State Council promulgated the "Regulations of the State Council on the Implementation of the Registered Capital Registration Management System of the Company Law of the People's Republic of China" (hereinafter referred to as the "Regulations"). According to Article 3 of the "Regulations", for companies established before the implementation of the revised Company Law, if the capital contribution period exceeds the period stipulated in the new law (five years), the capital contribution period shall be adjusted to within five years within the three-year transition period (i.e., July 1, 2024 to June 30, 2027). However, the "Regulations" also provide certain flexibility: if the remaining capital contribution period is less than five years, no adjustment is required; if the remaining capital contribution period is longer than five years, it can be adjusted to five years during the transition period, or you can choose to adjust it to a period of no more than five years starting from July 1, 2027. In addition, the "Regulations" also clarify that for some special circumstances, such as undertaking major national strategic tasks, related to the national economy and people's livelihood, involving national security, etc., a longer investment period may be allowed with the approval of the competent department of the State Council or the provincial government.

For existing state-owned enterprises, self-examination and adjustments need to be completed within a three-year transition period. Key coping strategies include:

1. Complete the actual payment on schedule: For state-owned enterprises with strong financial strength and reasonable subscribed capital, they can complete the actual payment as planned within the adjusted period.

2. Payment in batches: Within five years (or an adjusted period), the payment will be completed in stages and batches according to business needs and funding conditions.

3. Reduce registered capital (capital reduction): For state-owned enterprises whose subscribed capital is too high and far exceeds actual operating needs, the registered capital can be reduced to a reasonable level through legal procedures. Ordinary capital reduction procedures are more complicated and require preparation of a balance sheet and property list, notification and announcement to creditors (the announcement period is no less than 45 days), and other procedures. Article 224 of the revised Company Law also requires capital reduction in equal proportions in principle, unless otherwise provided by law, otherwise agreed by all shareholders of a limited liability company, or otherwise stipulated in the articles of association of a joint stock company. Targeted capital reductions (non-equal proportions) usually require more stringent conditions, such as the unanimous consent of all shareholders.

4. Simple capital reduction to make up for losses: Article 225 of the revised Company Law adds a simple capital reduction system, which allows companies to make up for losses through capital reduction if they still have losses after using the provident fund to make up for losses. Such capital reduction does not require notification or announcement to creditors. However, this has strict application prerequisites, that is, it must be used to make up for losses, and cannot be distributed to shareholders or exempted from their capital contribution obligations.

5. Cancellation or reorganization: For companies that are truly unable to complete paid payments and have no actual operations, cancellation according to law may be considered.

No matter which method is adopted, the company needs to publish its adjusted shareholder subscription and actual payment information, capital contribution period, etc. through the national enterprise credit information disclosure system within the specified time (within 20 working days from the date of generation of relevant information). Those who fail to adjust the investment period and registered capital as required, or fail to disclose information in accordance with the law, will face consequences such as orders from market regulatory authorities to make corrections, special notices for disclosure, and even administrative penalties.

The five-year payment rule and transition period arrangements have undoubtedly brought significant financial planning pressure and compliance management burden to many state-owned enterprises. Especially for large platform companies or investment entities that were established in a relaxed subscription environment and have registered capitals of hundreds of millions or even billions, how to raise huge amounts of funds to complete paid-in within a limited time, or to adjust the capital structure through complex capital reduction procedures, will be an arduous task. This requires state-owned enterprises to attach great importance to capital assessment and path planning in advance to ensure that compliance adjustments are in place during the transition period and to avoid legal risks and credit impacts caused by overdue completion.

(3) Capital contribution accelerated maturity system and its risks

Article 54 of the revised Company Law stipulates: "If the company cannot pay off its due debts and clearly lacks the ability to pay off debts, the company or creditors have the right to require shareholders who have subscribed for capital contributions but have not yet expired to pay capital contributions in advance." This provision transforms the "accelerated expiration" of shareholders' capital contribution obligations from an exception in past judicial practice (mainly limited to bankruptcy proceedings or specific avoidance behaviors) into a general and normalized institutional arrangement.

Compared with previous judicial interpretations such as the "Nine Minutes of the People", the new law's accelerated expiration system has undergone significant changes in terms of application conditions and initiating entities:

1. The trigger threshold is lowered: the trigger condition is adjusted from the previous "obvious lack of solvency and reasons for bankruptcy" to "the company is unable to pay its due debts", and there is no need to prove "obvious lack of solvency". This means that as long as a company defaults on its maturing debt, accelerated maturity may be triggered, and the threshold is significantly lowered.

2. Expanded scope of application: It is no longer limited to company dissolution, liquidation or bankruptcy proceedings, but can also be applied when the company continues to operate.

3. The startup entity is clear: it is clearly started by the "company" or the "creditor of the expired creditor's rights".

The normalization of the accelerated capital contribution expiration system means a significant increase in potential risks for state-owned enterprises as shareholders (especially controlling shareholders or sole shareholders) and their investment representative institutions. Under the old subscription system, the longer subscription period constituted a “risk cushion” for shareholders to a certain extent. Under the new rules, once an invested subsidiary or joint venture encounters operating difficulties and is unable to repay its due debts on time, the state-owned enterprise as a shareholder may face the risk of being called back by the company or its creditors at any time for undue capital contributions. This essentially transfers part of the credit risk originally borne by the company's creditors to the company's shareholders. For state-owned enterprises, this may cause expected long-term investment commitments to instantly transform into actual short-term funding pressures, posing a potential impact on their own cash flow and financial stability, and may even affect their own credit ratings and financing capabilities. Therefore, when state-owned enterprises invest overseas, they must not only evaluate the business prospects of the project itself, but also carefully evaluate the solvency and financial risks of the invested enterprise, and consider adding corresponding risk mitigation clauses to the investment agreement.

(4) Capital system of joint-stock companies: paid-in and authorized capital

For joint-stock companies, the revised Company Law has also made important adjustments:

1. Actual payment by promoters: Article 98 stipulates that the promoters of a joint-stock company (whether initiated or established by raising funds) shall pay the full amount of the shares subscribed by them before the establishment of the company. This changes the practice of initiating establishment subscriptions and raising establishment contributions under the old law, and uniformly requires promoters to make actual contributions, which strengthens the authenticity of capital in the establishment stage.

2. Authorized capital system: Article 152 introduces the authorized capital system, which allows the company's articles of association or shareholders' meeting to authorize the board of directors to decide within three years to issue new shares not exceeding 50% of the issued shares (except for capital contributions with non-monetary assets). This gives the board of directors of a joint stock company greater financing flexibility and efficiency, allowing the company to quickly replenish capital according to market conditions and development needs without the need to convene shareholders' meetings for approval every time.

3. No-par value shares and class shares: The new law also introduces the system of no-par value shares (Articles 96 and 142) and class shares (Articles 144 to 146). Class shares allow a company to issue shares with different rights in terms of profit distribution, voting rights, transfer restrictions, etc. For example, it can issue shares with more or less voting rights than ordinary shares, shares with priority or inferiority in the distribution of profits or residual property, etc. This provides state-owned enterprises with more diversified equity structure design tools when participating in the establishment or investment of joint-stock companies, and helps to achieve refined arrangements for company control and income distribution when introducing external investors, implementing employee stock ownership plans or making special financing arrangements. For example, it is possible to attract more social capital to participate while maintaining the control of state-owned capital by setting up classes of shares with special voting rights.

(5) Impact on capital operations and risk management of state-owned enterprises

Overall, the reform of the capital system poses comprehensive challenges to the capital operations and risk management of state-owned enterprises:

1. Capital planning needs to be more prudent: The five-year paid-in period and accelerated maturity risk require state-owned enterprises to conduct more stringent capital demand calculations and capital contribution capacity assessments when establishing subsidiaries and investing abroad to avoid over-commitment.

2. Investment due diligence needs to be more in-depth: For target companies that intend to invest or acquire, whether the shareholders’ capital contributions are in place and whether there are accelerated maturity risks must be the core content of the due diligence investigation.

3. Non-monetary investment needs to be more standardized: When investing in non-monetary assets such as equity and debt, the evaluation and ownership transfer procedures must be strictly followed to prevent legal risks.

4. Risk monitoring needs to be more proactive: It is necessary to strengthen the monitoring of the financial status and solvency of participating companies, and establish an early warning mechanism to deal with the potential risk of accelerated maturity of capital contributions.

5. Capital operation tools need to be more flexible: New tools such as authorized capital systems and class shares provide greater space for state-owned enterprises to carry out financing and equity structure design at the joint-stock company level, but they also require enterprises to have the corresponding professional capabilities to use these tools.

4. Strengthening of directors’ fiduciary obligations and responsibilities: a new standard for the performance of directors of state-owned enterprises

The revised Company Law significantly strengthens the requirements for the fiduciary obligations of directors, supervisors, and senior managers (collectively referred to as "directors, supervisors, and senior managers") and details the legal liability they may bear for breach of obligations. This imposes higher performance standards and more severe responsibility tests for directors of state-owned enterprises who are in complex environments and have special missions.

(1) Definition and refinement of the obligations of loyalty and diligence

Article 147 of the old the Company Law only stipulates in principle that directors, supervisors and senior executives have the duty of loyalty and diligence, but does not define it in detail. Article 180 of the revised Company Law clarifies and refines this:

1. Duty of loyalty: “Directors, supervisors, and senior managers have a duty of loyalty to the company. They should take measures to avoid conflicts between their own interests and the company’s interests, and must not use their powers to seek improper benefits.” This emphasizes two core elements: first, the initiative to avoid conflicts of interest (taking steps to avoid them), and second, the prohibition of using one's authority for personal gain.

2. Duty of diligence: “Directors, supervisors, and senior managers have a duty of diligence to the company, and when performing their duties, they should exercise the reasonable care normally expected of managers in the best interests of the company.” This establishes an objective standard (the reasonable care normally owed by managers) and a subjective goal (the best interests of the company).

In addition, Paragraph 3 of Article 180 also extends the above obligations to "the company's controlling shareholders and actual controllers who do not serve as directors of the company but actually perform company affairs", plugging the loophole for behind-the-scenes controllers to evade their fiduciary obligations.

The new law also stipulates types of violations of the duty of loyalty in Articles 181 to 184:

1. Absolutely prohibited behaviors: including embezzling company property, misappropriating company funds, accepting bribes, misappropriating commissions, disclosing company secrets without authorization, etc. These behaviors are prohibited under any circumstances.

2. Relatively prohibited behaviors: mainly related to related transactions (self-dealing), usurping the company's business opportunities and engaging in competing with the company. These behaviors are not absolutely prohibited, but must comply with strict procedural requirements, that is, report to the board of directors or shareholders' meeting, and be approved by a resolution of the board of directors or shareholders' meeting in accordance with the company's articles of association. The new law clearly includes supervisors as subjects of these obligations.

(2) Specific circumstances and legal consequences of directors’ responsibilities

The revised Company Law clarifies or strengthens the liability of directors, supervisors and senior executives (especially directors) for breach of fiduciary duties or other legal obligations in multiple clauses:

1. Responsibilities related to investment

(1) The board of directors has the obligation to verify shareholders’ capital contributions and make calls (Article 51). If a director fails to fulfill this responsibility and causes losses to the company (such as financing costs or losses due to shareholders' failure to contribute capital), the responsible director shall be liable for compensation.

(2) If a shareholder withdraws his capital, the responsible directors, supervisors, and senior managers shall bear joint liability for compensation with the shareholder (Article 53). This expands the scope of the judicial interpretation of the old law that mainly held the facilitators responsible.

2. Liability for illegal distribution of profits

If a company illegally distributes profits to shareholders, the shareholders shall return them; if losses are caused to the company, the responsible directors, supervisors, and senior managers shall be liable for compensation (Article 211).

3. Responsibility for harming the company’s interests

(1) Directors, supervisors and senior management who violate the provisions of laws, administrative regulations or the company's articles of association when performing their duties and cause losses to the company shall bear liability for compensation (Article 188). This is a general provision for liability.

(2) Directors, supervisors and senior management who use related relationships to harm the interests of the company and cause losses to the company shall bear liability for compensation (Article 22, Paragraph 2).

(3) If a director, supervisor or senior executive violates the provisions of Articles 181 to 184 on the duty of loyalty (such as misappropriating property, improper related transactions, usurping opportunities, competing with the company, etc.), the income earned shall belong to the company; if any loss is caused to the company, he shall be liable for compensation.

(4) If the resolution of the board of directors violates laws, administrative regulations, the company's articles of association, or shareholders' meeting resolutions, causing the company to suffer serious losses, the directors who participated in the resolution shall be liable to the company for compensation. However, if it is proven that the director expressed his dissent during the voting and recorded it in the minutes of the meeting, the director may be exempted from liability (Article 190).

(5) If a company violates regulations and provides financial assistance to others to acquire shares of the company, causing losses to the company, the responsible directors, supervisors and senior management shall be liable for compensation (Article 163).

4. Liability for damage to third parties

If a director or senior manager performs his duties and causes damage to others, the company shall first bear the liability for compensation; however, if the director or senior manager commits intentional or gross negligence, he shall also bear liability for compensation (Article 191). This clarifies the personal liability of directors, supervisors and senior officers to third parties under certain circumstances.

5. Joint and several liability to obey the controller’s instructions

If a company's controlling shareholder or actual controller instructs a director or senior manager to engage in behavior that damages the interests of the company or shareholders, he shall be jointly and severally liable with the director or senior manager (Article 192). This places an increased burden on “obedient” directors to exercise independent judgment on the controller’s instructions.

(3) Impact and challenges on directors of state-owned enterprises

The strengthening of fiduciary obligations and responsibilities is both a constraint and a challenge for directors of state-owned enterprises:

1. Personal risks and accountability pressures have increased dramatically: Clearer obligation standards and broader scope of responsibilities mean that the personal legal risks of state-owned enterprise directors (including external directors and employee directors) have increased significantly. Any failure in the performance of duties, whether due to poor decision-making, negligent supervision or failure to effectively prevent breaches, may result in liability for damages.

2. The balance problem of "dual responsibilities": Directors of state-owned enterprises often need to find a balance between pursuing the company's commercial interests (responsible to the company and all shareholders) and executing national strategies and fulfilling social responsibilities (responsible to state-owned investors). The "best interests of the company" and "reasonable care" standards established in Article 180 of the new law provide a legal basis for judging duty performance, but they also make it more difficult for directors to make decisions when faced with potential conflicts (for example, an investment is in line with national strategy but has high commercial risks), and requires prudent argumentation and compliance operations to avoid being found to have violated the duty of diligence.

3. Complexity of conflict of interest management: The state-owned enterprise system is huge and related-party transactions are frequent. Directors (especially those from within the group or related ministries) are more likely to face potential conflicts of interest. The new law strictly regulates related-party transactions, corporate opportunities, and competing with the company, requiring directors of state-owned enterprises to handle such matters more vigilantly and transparently, and strictly perform reporting and avoidance obligations.

4. Higher requirements for independence and professionalism: In the face of possible improper instructions from controlling shareholders or actual controllers (usually state-owned assets regulatory agencies or superior groups), the joint liability provisions of Article 192 of the new law require directors (especially outside directors) to maintain independent judgment, dare to say "no" to instructions that harm the company's interests, and retain relevant evidence. At the same time, the "reasonable care that managers usually owe" required by the duty of diligence also means that directors need to have corresponding professional knowledge and abilities, actively understand the company's situation, and prudently participate in decision-making.

5. Increased demand for compliance and risk prevention: In order to cope with increased liability risks, directors of state-owned enterprises need to promote the company to establish a more complete internal control and risk management system to ensure that decision-making procedures are compliant and information disclosure is sufficient. Individual directors should also enhance their “awareness of leaving traces” and ensure that there are written records of opinions and objections during major decision-making processes. Additionally, demand for and interest in directors' and officers' liability insurance is likely to increase.

Although this significantly increased responsibility standard and personal risk is intended to promote directors' diligence and improve corporate governance, it may also bring about some negative effects. Overly stringent accountability, especially in the complex operating environment and decision-making context of state-owned enterprises, may discourage some capable professionals from serving as directors of state-owned enterprises (especially outside directors or independent directors with higher risks), resulting in the so-called "chilling effect" or talent "driving effect." Directors may also become overly conservative in order to avoid risks and tend to choose low-risk options, thereby inhibiting the innovation vitality and development potential of the enterprise. How to strike a balance between strengthening accountability and encouraging responsibility will be an issue that needs attention during the implementation of the law.

(4) Directors’ main liability for compensation under the revised Company Law

The following table summarizes the main situations in which directors may be liable for compensation in the revised Company Law:

Table 3: Directors’ main liability for compensation under the revised Company Law

5. Improve the legal representative system: clarify the representation rights and responsibilities of state-owned enterprises

The legal representative is the core person in charge of conducting civil activities on behalf of the company. The revised Company Law has improved the legal representative system in many aspects, aiming to clarify its selection qualifications, streamline resignation procedures, and define legal responsibilities, which will have an important impact on the exercise of representation rights and responsibility-bearing mechanisms of state-owned enterprises.

(1) New changes in selection qualifications and procedures

Paragraph 1 of Article 10 of the revised Company Law stipulates: "The legal representative of the company shall be the director or manager who represents the company in executing corporate affairs in accordance with the provisions of the company's articles of association." Compared with Article 13 of the old law, which limited it to “chairman, executive director or manager,” the new law expands the scope of selection of legal representatives. This means that, in addition to the chairman and managers, other directors who "execute corporate affairs on behalf of the company" are also eligible to be elected as legal representatives. However, it is generally believed that directors who mainly perform supervisory duties but do not directly perform company affairs (such as outside directors and independent directors) are not suitable to serve as legal representatives.

At the same time, Article 46 (Limited Liability Company) and Article 115 (Joint Stock Company) of the new law no longer require the company's articles of association to state the specific name of the legal representative, but require the "methods for the creation and change of the company's legal representative" to be stated. This simplifies the procedure for changing the legal representative. When a company changes its legal representative, it no longer needs to go through the complicated procedure of amending the company's articles of association, which usually requires a special resolution of the shareholders' meeting, and improves the efficiency of the change. The company may stipulate in its articles of association that the legal representative shall be elected or appointed by the shareholders' meeting, the board of directors or other means, and shall stipulate the corresponding procedures.

(2) Resignation rules and replacement mechanism

In practice, it is a long-standing problem that it is difficult to register changes after the legal representative resigns, resulting in the "nominal" legal representative being forced to bear undue legal risks. The revised Company Law has made important improvements to address this issue:

1. Resignation linkage rules: Paragraph 2 of Article 10 stipulates: “If a director or manager who serves as the legal representative resigns, he shall be deemed to have resigned as the legal representative at the same time.” This "automatic resignation" rule clarifies the binding relationship between the legal representative's position and his position as director or manager, provides a clear legal path for the legal representative to voluntarily resign, and helps solve the problem of "difficulty in resignation and removal".

2. Time limit for compulsory replacement of office: Paragraph 3 of Article 10 stipulates: "If the legal representative resigns, the company shall determine a new legal representative within thirty days from the date of resignation of the legal representative." This sets clear re-appointment obligations and time limits for the company, aiming to urge the company to fill the vacancy of the legal representative in a timely manner and avoid affecting the company's normal operations.

3. Change registration procedures: Article 35 clearly stipulates that if a company changes its legal representative, "the application for change registration shall be signed by the changed legal representative." This solves the question of who is responsible for signing the change application in practice and helps improve the efficiency of change registration, especially when the original legal representative fails to cooperate.

While the new rules are intended to improve efficiency and resolve practical challenges, the thirty-day mandatory reinstatement time limit may pose a challenge for state-owned enterprises. The selection of important leaders of state-owned enterprises (usually serving as legal representatives) often involves a series of procedures such as organizational inspections, approval by superior authorities or state-owned assets supervision agencies, and party organization research. These procedures usually take a long time and may be difficult to complete in just thirty days. This may cause state-owned enterprises to face the dilemma of being unable to complete the replacement appointment on time after the resignation of the legal representative, and there is a risk of temporary vacancy of the legal representative or procedural violations. This reflects the practical contradictions that may exist when unified legal provisions are applied to state-owned enterprises with special personnel appointment and removal processes. In the future, more operational arrangements for such situations may need to be made through judicial interpretations or supporting rules.

(3) Definition of legal liability of legal representative

The revised Company Law also defines the legal responsibilities of the legal representative more clearly:

1. Attribution of consequences of representative behavior: Paragraphs 1 and 2 of Article 11 reaffirm the basic principles of the legal representative’s representative authority: the legal consequences of civil activities conducted by the legal representative in the name of the company shall be borne by the company; restrictions on the legal representative’s powers in the company’s articles of association or shareholders’ meetings shall not antagonize bona fide counterparts.

2. Liability for duty torts: Paragraph 3 of Article 11 adds a new provision: "If a legal representative causes damage to others due to the performance of his duties, the company shall bear civil liability. After the company bears civil liability, it may recover compensation from the at-fault legal representative in accordance with the provisions of the law or the company's articles of association." This provision clarifies the rules for companies to bear external responsibilities and recover compensation from internally responsible legal representatives. On the one hand, it protects bona fide third parties, and on the other hand, it also strengthens the liability constraints on legal representatives and prevents them from abusing their powers.

3. Responsibility for verification of capital contribution: Article 50 of the new law stipulates that the capital contribution certificate issued by a limited liability company to shareholders shall state the amount of capital contribution subscribed and paid in, the date of capital contribution, the method of capital contribution, etc., and shall be signed by the legal representative. This, to a certain extent, strengthens the legal representative’s responsibility to verify shareholders’ capital contributions.

(4) Impact on the leadership structure and operational efficiency of state-owned enterprises

The improvement of the legal representative system has many impacts on state-owned enterprises:

1. Selection flexibility and potential impact: A wider selection scope (executive directors or managers) theoretically provides more choices for state-owned enterprises, but in practice, the legal representatives of state-owned enterprises are usually still served by core leaders such as party committee secretaries, chairman or general managers, and the expansion of the selection scope may have limited impact. However, clarifying that the legal representative must be a person who "performs company affairs" will help avoid the phenomenon of a "nominal" legal representative.

2. Standardization of leadership transition: Clear resignation rules and replacement time limits help standardize the leadership change process of state-owned enterprises and reduce governance uncertainty caused by personnel changes, but it also puts forward higher requirements for the efficiency of personnel appointments and removals in state-owned enterprises.

3. Increased awareness of responsibility and duty performance requirements: Clear recovery mechanisms and investment verification responsibilities will prompt state-owned enterprise leaders who serve as legal representatives to exercise their representation rights more prudently, pay attention to legal risks in operation and management, and enhance their sense of responsibility.

4. Potential improvement in operational efficiency: Simplifying the change registration procedure (without the need to amend the articles of association or sign an application for a new legal representative) will help improve the efficiency of processing related legal affairs.

6. Conclusion and suggestions

(1) Summary of the overall impact of the revised Company Law on the governance of state-owned enterprises

The revision of the revised Company Law has had a systemic and profound impact on the corporate governance of state-owned enterprises. Through a series of major measures such as establishing a special chapter for state-funded companies, reforming the company's capital system, strengthening the fiduciary obligations and responsibilities of directors, and improving the legal representative system, the new law aims to bring state-owned enterprises more comprehensively and deeply into the track of standardization and rule of law.

Overall, the new law embodies the following core orientations:

1. Consolidate and deepen the achievements of state-owned enterprise reform: Legalizing the leadership role of party organizations, implementing a majority of outside directors, and mandating compliance management are written into law, which reflects the absorption and solidification of the successful experience of state-owned enterprise reform in recent years.

2. Strengthen capital constraints and risk awareness: Institutional arrangements such as the five-year paid-in period and accelerated maturity of capital contributions have significantly increased the requirements for the company's capital adequacy, aiming to consolidate the foundation for corporate development and protect the interests of creditors, while also increasing the risks for shareholders (including state-owned investors).

3. Improving the responsibilities and responsibilities of governance entities: By refining the fiduciary obligations of directors, supervisors and senior management, expanding the scope of responsibilities, and clarifying the responsibilities of legal representatives, the accountability of the company's management has been increased, with the aim of promoting their diligence and responsibilities and improving governance efficiency.

4. Promote the optimization and balance of the governance structure: The introduction of audit committee options, class stock system, etc. provides more flexibility and choice space for the corporate governance structure. At the same time, it also pays attention to the democratic management of employees and the protection of the rights and interests of small and medium-sized shareholders.

The revised Company Law provides a more complete legal framework for state-owned enterprises to improve the modern enterprise system with Chinese characteristics, and helps to promote state-owned enterprises to improve their governance levels, enhance market competitiveness, and achieve high-quality development.

(2) Opportunities and challenges in improving efficiency, transparency, accountability and risk management

The implementation of the revised Company Law has brought opportunities for state-owned enterprises to improve their corporate governance levels, but it is also accompanied by challenges that cannot be ignored:

1.Opportunity

(1) Efficiency improvement: The option of the audit committee to replace the board of supervisors, the authorized capital system, simplified legal representative change procedures, etc. can help simplify the governance level and improve decision-making and financing efficiency.

(2) Enhanced transparency: Mandatory information disclosure requirements (such as investment information, equity changes, etc.), as well as stricter reporting requirements for related-party transactions and other matters, will help improve the transparency of company operations.

(3) Strengthening of accountability: Clear standards for directors’ fiduciary obligations and clear legal accountability mechanisms lay the foundation for establishing an effective accountability system.

(4) Standardization of risk management: Mandatory compliance management requirements and capital replenishment principles will promote state-owned enterprises to establish a more complete risk prevention system.

2. Challenge

(1) Financial and compliance pressure: The five-year payment period puts great pressure on the capital arrangements of existing companies; adapting to the requirements of the new law requires a large amount of compliance costs.

(2) Risks and willingness of directors to perform their duties: Increased responsibilities may cause directors (especially outside directors) to be unwilling to hold office or be overly conservative, affecting the quality and efficiency of decision-making.

(3) Difficulties in the connection and application of rules: Some provisions of the new law (such as the establishment of audit committees) may conflict with existing state-owned assets supervision regulations; there is still ambiguity in the definition of the scope of application of Chapter 7 (such as the actual control of enterprises).

(4) Practical operational obstacles: Some procedural requirements (such as the replacement of the legal representative within 30 days) may be difficult to fully adapt to the special personnel procedures of state-owned enterprises.

(5) Effective management of conflicts of interest: How to effectively identify, report, avoid and manage complex conflicts of interest faced by directors of state-owned enterprises in practice still needs to explore effective mechanisms.

(3) Compliance and governance suggestions for state-owned enterprises to adapt to the new law

Facing the profound changes brought about by the revised Company Law, state-owned enterprises should proactively adapt and turn challenges into opportunities to improve governance levels. The following measures are recommended:

1. Comprehensive review and revision of the company’s articles of association: This is the basic work to adapt to the new law. The company's articles of association and relevant internal governance documents should be systematically sorted out and comprehensively revised in accordance with the requirements of the new law. Focus on: special regulations for state-funded companies (such as the role of party organizations, external directors, the establishment of audit committees, etc.), capital systems (subscription deadlines, capital contribution methods, etc.), the division of powers of the shareholders’ meeting/board of directors/board of supervisors (or audit committee), fiduciary duties and responsibilities of directors and supervisors, related transactions and company opportunity management procedures, methods for the creation and change of legal representatives, etc., to ensure that they are completely consistent with the provisions of the new law.

2. Improve the internal governance mechanism: improve the "three meetings and one layer" operating mechanism, optimize the board of directors structure and rules of procedure, and clarify the boundaries of powers and responsibilities of each governance body. If you choose to establish an audit committee, you need to clarify its composition, responsibilities and rules of procedure. According to the mandatory requirements of Article 177, a sound internal supervision and management, risk control and compliance management system must be established and compliance requirements embedded in business processes. Develop clear related party transaction management methods and business opportunity judgment and processing procedures.

3. Capital planning and risk response: Immediately conduct a comprehensive investigation of the registered capital, subscription period, and actual payment status of the enterprise and its subsidiaries at all levels. According to the requirements of the "Regulations", formulate practical capital contribution plans or capital reduction plans to ensure that adjustments are completed during the transition period. Strengthen financial monitoring of investment companies, assess and prevent the risk of accelerated expiration of shareholders’ capital contributions. When making new investments or mergers and acquisitions, make the investment compliance of the target company and its shareholders a core due diligence content.

4. Training and guarantee for directors and senior executives: Organize directors, supervisors and senior executives to systematically learn the revised Company Law, especially the new regulations on fiduciary obligations and legal responsibilities, to enhance their compliance awareness and ability to perform their duties. Establish a complete support system for directors to perform their duties and provide necessary legal advice and information support. Review and timely adjust liability insurance plans for directors and senior managers to provide reasonable protection for normal performance of duties. Emphasize and standardize the recording of the decision-making process to provide a basis for directors to prove their diligence and responsibility.

5. Strengthen communication and coordination: Regarding the ambiguous areas that exist in the application of the new law (such as the application of Chapter 7 to actually controlled enterprises) or possible conflicts with existing regulatory regulations (such as the relationship between the audit committee and the board of supervisors), it is recommended to proactively communicate with state-owned assets supervision agencies, market supervision departments, etc., to seek clear guidance and ensure compliance operations.

The implementation of the revised Company Law marks that our country's corporate legal system has entered a new stage, and also puts forward new and higher requirements for the corporate governance of state-owned enterprises. Only by deeply understanding, accurately grasping, and actively adapting to the provisions of the new law, state-owned enterprises can continue to improve their corporate governance systems, strengthen risk management and compliance operations, and achieve steady and long-term development in the new legal environment and achieve high-quality development.