Interview with Zhu Changming: How to meet the standards of state-owned enterprises in the new company law examination

From July 1, 2024, the newly revised Company Law of the People's Republic of China (hereinafter referred to as the "New Company Law") will come into force.

The new company law imposes new requirements on registered capital, shareholders' rights and responsibilities, and the rights and responsibilities of directors, supervisors, and senior management (hereinafter referred to as "directors, supervisors, and senior management"), which also brings new challenges to Chinese market players. State-owned enterprises need to make more adjustments due to their special shareholder structure and management system. In the past two weeks, the State-owned Assets Supervision and Administration Commission of the State Council has carried out two trainings on the new company law, and some local state-owned assets supervision and administration departments have also carried out relevant training.

In an exclusive interview with the Economic Observer, Zhu Changming said that after the implementation of the new company law, the traditional management and control model of state-owned enterprises will face huge legal risks and need to make a series of adjustments, but the new company law has also opened up new space for the mixed reform of state-owned enterprises and the operation of state-owned assets.

|Interview|

Economic Observer: What risks did you warn of in the process of training state-owned enterprises on the new company law?

Zhu Changming: First of all, the traditional management and control model of state-owned enterprises faces huge legal risks. The new company law will strengthen the independent operation rights of companies and promote the separation of shareholder ownership and management rights, so as to completely end the traditional management and control model of state-owned enterprises. If the SOE does not effectively reform the corporate management and control model, the controlling shareholder and actual controller of the company may be jointly and severally liable, which increases the risk of litigation for the first-tier company and even the SASAC.

Second, part-time directors, supervisors, and nominee directors, supervisors, and senior executives will face huge risks. The New Company Law strengthens the liability of directors, supervisors and senior executives to perform their duties, stipulates 14 types of liability or joint and several liability of corporate executives, and increases the risk of performance of duties by senior executives of state-owned enterprises, especially the risks of part-time external directors and supervisors and nominal directors, supervisors and senior executives. This will force the reform of the system and mechanism of state-owned enterprises and improve the system of full-time external directors and supervisors of state-owned enterprises.

Third, the process of equity diversification and mixed reform of state-owned enterprises will also be greatly affected. In view of the past inflated registered capital, the New Company Law further improves the registered capital subscription system of companies, stipulating that shareholders must pay in place within five years to subscribe to the registered capital, and the same applies to surviving companies. At the same time, the new company law also stipulates the obligation of the board of directors to call for shareholders' capital contributions and the joint and several liability of shareholders for capital contributions, which will have an impact on the process of equity diversification and mixed ownership of state-owned enterprises. In the past, a considerable proportion of state-controlled mixed-ownership enterprises had false capital contributions or long-term subscriptions by shareholders, and the next step was to rectify. Otherwise, the state-owned shareholders or directors of the company will be jointly and severally liable.

Economic Observer: Articles 4, 22 and 89 of the New Company Law have attracted the attention of many state-owned enterprises, why?

Zhu Changming: Many shareholders of state-owned enterprises misunderstand Article 4 and think that they have the right to directly participate in the major decision-making of the subsidiary and directly decide on the management of the subsidiary. However, according to the New Company Law, shareholders should exercise their shareholder rights by attending the shareholders' meeting of the subsidiary.

Article 22 stipulates that the controlling shareholder and the actual controller shall be liable for compensation for the damage to the interests of the company by taking advantage of the related relationship.

Article 89 sends a signal that under the traditional management and control model, the controlling shareholder of a state-owned enterprise is prone to abuse its shareholder rights, and other shareholders may request the company to repurchase its shares in accordance with this clause and thus withdraw from the company.

Economic Observer: The new company law also makes new requirements for the rights and responsibilities of directors, supervisors, senior executives and shareholders, how should we view it?

Zhu Changming: Article 180 stipulates the de facto director system. In the case where the controlling shareholder or actual controller of a state-owned enterprise does not serve as a director of the company but actually performs the company's affairs, the controlling shareholder or actual controller is deemed to be a "de facto director", resulting in the controlling shareholder or actual controller having a duty of loyalty and diligence and assuming the relevant legal liabilities of the director, breaking through the boundary of limited liability of shareholders. However, if the controlling shareholder or actual controller of a SOE instructs the directors or senior management to engage in acts that harm the interests of the company or shareholders, the controlling shareholder or actual controller of the SOE shall be jointly and severally liable with the directors and senior executives, breaking through the boundary of limited liability of shareholders.

Article 21 and Article 23 are also related to this, according to which shareholders of state-owned enterprises shall exercise their shareholder rights by participating in shareholders' meetings, appointing directors and supervisors, etc., and shall not abuse their shareholder rights to harm the interests of the company or other shareholders, otherwise they shall be liable for compensation. In addition, the corporate personality denial system includes vertical corporate personality denial between parent and subsidiary, horizontal legal personality denial between affiliated companies, and legal personality denial of one-person companies. In the above circumstances, the shareholders bear joint and several liability, breaking through the boundary of the limited liability of shareholders.

Economic Observer: What problems still exist in the corporate governance of state-owned enterprises?

Zhu Changming: Many state-owned enterprises ignore the level, type and equity structure of the company, and rigidly copy the corporate governance model of "three committees and one layer", resulting in a single and rigid corporate governance structure. The degree of separation between the controlling shareholders of state-owned enterprises and the investment companies is low, and the contradiction between the ability of shareholders to exercise their rights and corporate governance is becoming increasingly prominent. In the practice of corporate governance, SOEs do not pay much attention to the convening of governance entities, such as holding meetings to deliberate and vote on relevant issues, and are accustomed to completing decision-making through soliciting opinions, subpoena, and countersigning afterwards, which not only leads to unsatisfactory decision-making results, but even leads to defects in the effectiveness of resolutions.

Economic Observer: How should SOEs use the new company law to optimize their governance model?

Zhu Changming: The new company law introduces a diversified corporate governance model, fully takes into account the special governance needs of companies of different sizes, and uses more arbitrary norms to respect corporate autonomy, which also provides flexible space for the subsequent reform of the system and mechanism of state-owned enterprises.

Of course, the diversified corporate governance model also increases the difficulty of SOEs in designing corporate governance structures, which need to be combined with the reform of the SOE management and control model, and also need to fully authorize directors, supervisors and senior executives.

Many SOEs do not attach importance to the role of the company's articles of association, and the revision of the articles of association is limited to completing the actions stipulated in the new company law, and the previous practice is still continued in the company's internal governance and operation, which is contrary to the requirements of SOE compliance management and increases the risk of illegal business decisions of SOEs.

In accordance with the requirements of the new company law, state-owned enterprises should also entrust major matters to a board of directors with more scientific and professional decision-making, and the board of directors should further entrust certain matters to managers who are better at executing them, so as to form an authorization mechanism for division of labor and cooperation and smooth operation. Therefore, the performance management of the board of directors and directors will become the key to the construction of the board of directors of state-owned enterprises in the future, and state-owned enterprises should build a performance evaluation mechanism of the board of directors and strengthen the performance management of directors, especially outside directors. However, at present, the majority of outside directors of SOEs are part-time directors and do not receive remuneration in the company, so if they are not converted to full-time directors, the performance management of the board of directors and directors will become a dead letter, and it will be difficult to achieve the effect of the decision-making function of the board of directors.

Economic Observer: Some state-owned enterprises say that the new company law will have an impact on the mixed reform, what is the impact?

Zhu Changming: In the past, the Company Law provided for an indefinite subscription system for the registered capital of a company, which led to a large number of companies in practice due to the long subscription period of the company, which affected the integrity of capital contribution, the security of transactions, and harmed the interests of creditors. In the reform of equity diversification and mixed ownership of state-owned enterprises, external investors have not made huge capital contributions and are in a state of long-term subscription, which damages the rights and interests of state-owned shareholders and weakens the effect of mixed ownership reform.

The Economic Observer: What advice do you have for this?

Zhu Changming: For the establishment of a new company, the state-owned promoter shareholders should pay attention to the actual payment of other shareholders, and have the necessary understanding of the capital contribution strength and property of other shareholders before the establishment of the company. The amount of registered capital is set according to the capital contribution strength of the promoter shareholders, and other shareholders are urged to complete the paid-in obligations within 5 years to avoid joint and several liability. Therefore, after the implementation of the new company law, state-owned enterprises should take effective measures to prevent the risk of equity cooperation in the process of promoting equity diversification, mixed ownership reform and coordinated development of the people.

In order to avoid inconsistencies in the application of the capital system to new and old companies and strengthen the uniformity of the application of the law, the new company law breaks with the convention and does not follow the principle of "the law does not apply retroactively", but both new and old companies must implement the "limited subscription system", and it is clear that the five-year paid-in period will apply to all companies. Therefore, state-owned enterprises should sort out the surviving companies, comprehensively investigate the capital contribution capacity and capital contribution risks of external investors and shareholders for equity diversification and mixed-ownership enterprises, and the board of directors of state-owned enterprises should fulfill the obligation to call for capital contributions, and for external investors with high subscribed capital contributions and no actual capital contribution capacity, they should avoid capital contribution risks by reducing or canceling capital during the transition period.

Economic Observer: What does the new provisions on enterprise investment in the new company law mean for the restructuring and integration of state-owned enterprises and capital operation?

Zhu Changming: The new company law relaxes the restrictions on the status of companies investing abroad. In the past, the Company Law imposed strict restrictions on a company's foreign investment, strictly stipulating that a company "shall not become a contributor who is jointly and severally liable for the debts of the invested enterprise". The above-mentioned provisions can no longer meet the needs of the development of the market economy. The New Company Law adopts a principle-based approach to foreign investment by companies.

At this stage, there are still some problems in the operation of state-owned capital and the integration and reorganization of state-owned enterprises. Although the market supervision department has issued regulations on equity and debt contribution, the level of effectiveness is low, and state-owned enterprises do not generally use equity and debt as a method of capital contribution, which greatly reduces the efficiency of state-owned capital operation and the integration and reorganization of state-owned enterprises.

In addition, state-owned enterprises are limited by strict state-owned assets supervision and regulations, it is difficult to take the initiative to implement "different rights of the same shares", and ordinary shares with the same rights cannot meet the requirements of different types of shareholders, and it is difficult to meet the needs of innovative development and market-oriented financing, and the rigid equity financing model seriously restricts the effectiveness of state-owned capital in the development of emerging industries.

The New Company Law includes equity and debt in the statutory capital contribution method, which provides a new tool for the integration and restructuring of state-owned assets and state-owned enterprises. Equity and debt contribution is particularly suitable for the professional integration of existing assets: equity contribution is the "equity replacement" of both parties to the restructuring, while debt contribution can reduce the asset-liability ratio of state-owned enterprises and resolve debt risks. Since the equity debt contribution does not need to go through the process of entering the market, it will undoubtedly greatly improve the efficiency of restructuring and reduce the cost of restructuring.

In addition, the simplification of the equity transfer process in the new company law, the provisions of the no-par share system and the provisions of the class share system are all conducive to the operation of state-owned capital.

The introduction of non-par shares is expected to solve the financing difficulties of distressed companies, help distressed listed companies introduce new investors to inject incremental funds, and help distressed companies get out of trouble.

The class share system will enrich the types of equity structure of state-owned enterprises and promote the improvement of corporate governance and operation mechanisms of state-owned enterprises, which will have an important impact on the operation of state-owned capital. Innovative enterprises can be granted preferred shares to financial investors and voting shares to core management when financing or mixed-ownership reform.

Class stocks have a great impact on innovative state-owned enterprises, especially innovative state-owned enterprises that enter emerging industries and future industries, and should make full use of the advantages of class stocks to finance, integrate wisdom and integrate social innovation resources, and thus force the reform of enterprise system and mechanism. However, class stocks also put forward higher requirements for the market-oriented ability and corporate governance ability of state-owned enterprises, and if they are not properly applied, they will also produce greater equity risks, corporate governance risks, and state-owned assets regulatory risks.

Economic Observer: Some senior executives of state-owned enterprises say that they are not yet comfortable with the new company law, what advice do you have?

Zhu Changming: At present, state-owned enterprises have generally established internal control and compliance systems, but in the face of complex market environment and fierce market competition, the existing internal control and compliance systems are not enough to effectively prevent and resolve operational risks. SOE executives also lack a comprehensive understanding of the importance of internal control and compliance, the role of the existing compliance system is not fully reflected, and the form of SOE compliance management is greater than the content, which creates opportunities for the occurrence of violations, and the situation of SOE executives being held accountable for violations is not optimistic.

In order to ensure that SOEs can effectively prevent operational risks and reduce the performance risks of SOE executives, SOEs should combine the implementation of the New Company Law with the compliance construction of SOEs as soon as possible, earnestly do a good job in the "internalization of external regulations", translate the compliance obligations of the New Company Law into internal management requirements, improve the corresponding internal rules and regulations, further establish and improve the corporate compliance management system and operation mechanism, provide effective support for the compliance of SOE executives, and ensure that compliance requirements are integrated into job responsibilities and work processes.

In the next step, in order to motivate the executives of state-owned enterprises to be proactive, dare to dare to invest, and go all out to run the enterprise well, state-owned enterprises must integrate the management of internal control compliance and accountability for violations, and establish and improve the compliance exemption system while consolidating the responsibilities of senior executives under the new company law, and connect it with the accountability system for illegal operation and investment, and combine it with the performance evaluation of senior executives of state-owned enterprises. For the performance of duties within the scope of due diligence and compliance exemption, they should be exempted from liability in accordance with relevant regulations, and together with the D&O liability insurance system, they should escort the exercise of power and performance of duties by senior executives of state-owned enterprises.