Business formation and management in China has a long and winding history tracing back thousands of years. It went through ancient private development, the more recent communist planned economy and now the process of re-privatization. In the current stage, China has a mixed private and state-owned economic structure, a step in the transition to a more complete market economy. Given the increasingly open market economy, the CPC still retains firm control of all Chinese political matters, which unavoidably involves state control of certain major industries, and to a lesser extent, the economy as a whole. Therefore, there are varying degrees of governmental monitoring depending on the sector of the economy in question.
Having developed against the backdrop of China’s unique culture, Chinese business management possesses characteristics that are quite different from Western concepts of corporate governance. For example, Confucianism places great emphasis on relationships between people and the need for a proper social hierarchy. The practical effect of this is the existence of great bureaucracies, which still stand in China today. There also exists a preeminence placed on the superior person in the relationship. The inferior is expected to follow the lead of the superior without question. Such tradition leads to a lack of accountability of high level business officials. Another phenomenon in the Chinese business world is the latent but important rule of the game, “GuanXi,” meaning personal connections. Such connections can override any regulations or even the rule of law. Naturally, such practice leads to unfairness and inefficiency in conducting and managing business.
However mixed and different the Chinese business environment is, increasing globalization and the rise in international trade demonstrate the need for a more unified international standard for business formation and management. The Chinese government has adopted several regulations regarding business formation and corporate governance in order to develop an economic environment that is more compatible with international norms. . The major regulations include The Company Law of People’s Republic of China, Partnership Law of People’s Republic of China and Sole Proprietorship Enterprise Law of People’s Republic of China. A comparison of Chinese Company Law with its American equivalent may provide a better understanding of the current Chinese corporate governance regulations.
The Chinese company law was drawn closely based on Western countries’ existing corporate laws. Combined with the Chinese political and economic characteristics, there are a lot of similarities between the Chinese Company Law and American corporate law with few distinctions.
In term of formation, the Chinese company law lists criteria for establishing both LLC and Joint Stock Limited Companies which then can become listed companies once certain stricter criteria is met. There are two forms of joint stock limited company: Sponsorship or Public Offers, establishment of both is subjected to the approval of the State’s authorities. Furthermore Joint Stock Limited Companies also need approval for share issuance. . There are stringent requirements for Joint Stock limited companies to become listed companies in terms of the amount of capital and profitable years of operation. A listed company then is under the regulation and monitoring of state security regulatory authority.
Registering the articles of association with the State authorities is a requirement for formation of corporations… As in American corporate law, both LLC and the joint stock limited companies possess separate and independent legal identity while the shareholders’ liability is limited to their paid up capital contributions… As in the United States, shareholders share profits according to their capital contributions. Shareholders can also transfer their shares through stock market, or in the case of LLCs, with the majority consent of the Shareholders’ Committee and finally in some cases a buyout is mandated by law.
Also as in U.S. corporate law, the Chinese Company Law includes sections on piercing the corporate veil. A key difference in China is the application of such principles by the courts – while the U.S. courts are often reluctant to pierce the corporate veil the Chinese courts are more eager to do so resulting in much less protection of the corporate identity in Chinese company law; any illegal activities can result in loss of the corporate identity and can lead to personal liability.
Compared to American corporate law, China’s Company law mandates more stringent minimum capital requirement for both LLC and Joint Stock Limited Companies. For example, 100,000 RMB is the minimum capital investment for a LLC, while a joint stock limited company requires 10,000,000 RMB as the minimum capital investment. Shareholders are not allowed to withdraw their capital investment once the company is registered with the state and capital certification is required for state registration of both LLC and JSLCs. Under Chinese company law, limited companies can not be capital contributors to other limited companies. In other words, limited companies in China can not be partners of limited partnerships or shareholders in other corporations.
In term of corporate governance, like American corporate structure, the Chinese company law requires all limited companies, except for LLCs with very few shareholders, to elect a Board of Directors at the shareholders’ meeting to handle daily business management and select officers. Also similar to American corporate governance principles, both shareholders and directors owe duties of loyalty and best interest to the company and to the other shareholders. Limited companies have to keep adequate business records and shareholders have the right to exam the company’s record. Shareholders also have the right of derivative law suit and enjoy the court’s judicial review power. The People’s Court has the power to nullify and void any company resolution reached in shareholders’ or directors’ meetings.
A significant difference compared with U.S. corporate governance is the mandatory appointment of a General Manager by the Board of Directors responsible for implementing the Board’s resolutions. Furthermore the General Manager is responsible for running the day to day affairs of the company. In addition to the Board of Directors, shareholders in a limited company must, with the exception of small LLCs, elect a Board of Supervisors in charge of reviewing and monitoring the activities of directors, the general manager, and company affairs in general, similar to the function of outside counsel in American corporate governance.
Give this multi-layered management structure, the Chinese company law states that the Shareholders’ Committee, which consisted of all shareholders, is the authoritative organ of a limited company. In a typical American corporation, shareholders only vote on major business decisions, for example, merger or sale. At all other times, the Board of Directors makes daily business decisions and adopts resolutions. Shareholders are often prohibited from interfering with the Board’s decision-making process. In contrast, the Chinese company law mandates that the Shareholders’ Committee make all the important business decisions, including issuing company bonds, changes in registered capital, adopting amendments of the article of association. Such decisions need majority votes of the Committee. Resolution reached by the Board of Directors’ must be approved by the Shareholders’ Committee before they can be adopted. The Board of Directors is accountable to the Shareholders’ Committee and is mainly in charge of implementing the resolution adopted by the Shareholders’ Committee and managing other daily business. The General Manager then is accountable to the Board of Directors, while the Board of Supervisors is an independent monitoring agency. The law also mandates that all directors, managers and supervisors owe duties of best interest and loyalty to the company; anyone violating these duties is subjected to compensation to the company and the statute does not provide for indemnification.
Due to the unique Chinese political and economical environment, the Chinese company law has some distinctive provisions that are different from American corporate law. For example, the Chinese company law mandates that all limited companies establish a Chinese Communist Party organization within the company for the purpose of state monitoring. Also, all employees of limited companies that have more than three employees must have labor union memberships and elect union representatives. Those union representatives must participate in all board meetings when the company is adopting polices regarding worker’s benefits. No public servant is allowed to serve as director, supervisor or general manager of a limited company. There are also special provisions regulating wholly state-owed limited companies or companies that are in transition from state-owned to private business, for example, in such companies, no Shareholders’ Committee is allowed; all decision power lies with the relevant State authority.
As mentioned earlier, the practical Chinese economic, political and cultural issues are still very much present today in China’s business environment… They are still impacting the efficiency and enforcement of the Chinese company law and the implementing of international economic standards in China. In the process of Chinese economic transition from the planned economy to a market economy, implementing relevant laws and regulations is the first step toward change. At the same time as creating a more unified international economic and legal environment, China is also developing a legal system that is more suitable for its unique socioeconomic situation. The process is a long and difficult one, but one which will no doubt meet with success…