Chinese Business Lawby Yu Danling ISBN: 9787300219561

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PART ⅠCORPORATION LAW11Evolution of the Chinese Corporation LawThe development of the Chinese Corporation Law has been a part of the initiation to reform the overall legal framework of the business law. The initiation for the legal reform started in the late 70s of the last century which marked the early beginning of the openingup reform of the country. The initiators of the reform were the sizable business entities both of the state and nonstate sectors. Consequently, the beneficiaries of the reform were not only the stateowned business entities but also private business entities. The ensuing economic reform testified to the need for a uniform national legal framework for the business law. The need for a body of corporation law to guide business associations and organizations became evident. This need for a national business law legal framework, however, was not validated by the national legislature until the year of 1993 when the Chinese National Peoples Congress promulgated the Corporation Law. The Corporation Law of 1993 facilitated the undergoing economic reform that helped the transformation of a socialist planned economy into a marketoriented economic system. The Corporation Law of 1993 was subsequently amended by the National Peoples Congress in 1999 and 2004. The next revision was in 2005 with the revisions becoming effective January 1, 2006. The Corporation Law has been again revised in December of 2013 with the revisions becoming effective March 1, 2014. Each round of the revision of the corporation law has marked a milestone for the development of the Chinese Corporation Law. The amendment of the first instance resolved the issue with respect to the supervision and management of the stateowned property and aimed at promoting the growth of high technology by condoning a higher level of recognition for technology contribution to the registered capital of corporations. The amendment of the second instance abolished governmental approvals once necessary for the issuance of stocks above par value. The later revision of 2005 provided for the basic framework of the corporation law by adopting a more balanced approach toward the modern form of corporate governance. The revisions of 2014 mainly abolished the requirement of the minimum registered capital contribution for corporations. No minimum registered capital is required and the requirement of the initial contribution of the registered capital，that of the proportion of cash contribution and the schedule of contributions were abolished. The reform under the Corporation Law of 2014 is to transform the system of the paidin contribution of the registered capital to that of the subscription of the registered capital. Under the newly established subscription system, shareholders may agree as to the subscribed amount, contribution methods, and the schedule of the registered capital contribution. 12Legal FrameworkThe governing regime of the corporation law is consisted of the Chinese Constitutional law, the national laws promulgated by the Chinese National Peoples Congress，regional and local laws enacted by regional and local legislative authorities，and the administrative rules and regulations enacted by the Chinese State Council as well as the departmental rules issued by the cabinet departments under the State Council. The Chinese Constitutional law is the fundamental law of the land that provides for the overall governance structure for the regulation of corporations. Lending legitimacy to the existence and establishment of corporations, the Constitution states that the current economic ownership is a tiered ownership system consisting of public and private elements. Private ownership coexists with the public ownership with the public ownership remaining at the core. The Constitutional Law allows different modes of distribution which validates the existence of economic organizations of either public or private ownership. As it is written into the Constitutional Law, private business may legitimately function in the economic system. The role of governments is to protect the lawful rights and interests of business individuals and private businesses by guidance, supervision and regulation. Aside from the Constitution Law, the Corporation Law, the Civil Law, the Securities Law, the Bankruptcy Law, and the Commercial Banking Law together form the main body of law for the governance regime of corporations. If a corporation involves foreign investment interest, it is subject to foreign investment related laws. Foreign investment related laws include, among other things, the Equity Joint Venture Law, the Cooperative Joint Venture Law, and the Wholly Foreign Owned Enterprise Law. Administrative rules and regulations compose another important part of the governing regime. Administrative rules and regulations are issued by the State Council and the authorized agency departments to exercise regulation and supervision over corporations. The departments that issue rules governing corporations are mainly the State Administration of Industry and Commerce (SAIC), the State Administration of Foreign Exchange (SAFE), the State Administration of Taxation (SAT), the State Asset Supervision and Administration Commission (SASAC), and the China Securities Regulatory Commission (CSRC). 13Corporations131General IntroductionA corporation is an artificial entity created by law to act within the scope of the law to achieve designated purposes. Being an artificial entity, a corporation can act only through agents. The agents of the corporation are officers and managers who are entrusted with powers to act on behalf of the corporation. A corporation has the capacity to undertake civil actions. Such civil acts include ownership of property, entering into contracts, and suing or being sued under the name of the corporation. In theory, a corporation may enjoy a perpetual existence. Under the Corporation Law, a corporation is a legal person that has independent business property and may exercise property rights attendant thereto. A corporation has limited liability. As the corporation owns corporate assets, shareholders no longer own the assets or capital once their contributions have been made to the corporation. The corporation is liable for its debts to the extent of the entire property. Shareholders are liable for corporate debts to the extent of the shares they own or contributions they made to the corporation. The agents of the corporation including officers and managers are not generally liable to the debts of the corporation. The Corporation Law, however, still imposes certain personal liabilities on shareholders. The law may hold shareholders, especially controlling shareholders, personally liable in the event that the shareholders have abused their shareholder position. To find otherwise would be tantamount to condoning an abuse of the limited liability protection of the corporation by giving the wrongdoers an unfair advantage over the rights and interests of creditors. 132Piercing the Corporate VeilThe Corporation Law of 2005 has introduced the doctrine of “piercing the corporate veil”. The purpose of which is to impose liability upon shareholders, especially controlling shareholders that are found to have abused their positions. To pierce the corporate veil is to remove the identity of corporate legal personality to hold the shareholders or shareholder corporation liable. The doctrine may be applied under the circumstances where a shareholder abuses the independent identity of the juridical person of the corporation or shareholder limited liability to evade her liability with respect to the payment of debts or where the shareholder comingles her personal funds with the assets of the corporation. This may normally occur in a corporation with a single shareholder who would use the funds and assets of the corporation as if they were her personal own. The legal significance of this doctrine is to minimize the absolute effect of the limited liability born by the corporate entity. China has written the doctrine of veil piercing into the Corporation Law when it was revised in 2005. Despite the fairly recent codification, the courts have sought to apply the principle of veil piercing even before 2006. The instance of this is the Supreme Court decision in 1994 that responds to an inquiry made by the High Court of Guangdong Province. The Supreme Peoples Court implies in its response that the application of veil piercing may be permissible if the actual capital contribution made to a corporation is less than the amount of the capital registered under the corporation concerned. It is indicated that undercapitalization could be a factor in weighing toward the application of the doctrine of piercing the corporate veil. However, it is interesting to note that the later revised Corporation Law does not include the response of the Supreme Peoples Court of 1994 in its codification that undercapitalization may serve as a consideration factor in cases of corporate veil piercing. The Corporation Law of 2005 offers two provisions regarding the doctrine of veil piercing. The Corporation Law states that “where any shareholders of a corporation evades the payment of debt by abusing the independent identity of juridical person or the shareholders limited liabilities, and thus seriously damaging the interests of creditors, it shall bear joint liabilities for the debts of the corporation.” It focuses on two factors that the courts should consider in deciding whether to pierce the corporate veil that (1) whether the abuse results in nonpayment of debts and (2) whether this nonpayment causes any actual injury to the creditor. The law further provides for the circumstance of the commingling of funds in a single shareholder limited liability corporation that “if the property of the shareholder of a single person limited liability corporation is not independent from that of her own,the share holder shall bear joint liabilities for the debts of the corporation.” Currently, the factors for the courts to consider whether to pierce the corporate veil are largely of two parts as previously described. The concern under the law seems to be centered upon the protection and rights of creditors. The law, however, does not suggest the presence of fraud to be a factor for judicial consideration. The doctrine in effect grants the courts more discretion in holding shareholders liable for their abuses. The reading of the judicial practice has suggested that the courts may give a narrow reading of the law and limit the application of the doctrine to the circumstances where the rights and interests of creditors could be jeopardized.14Types of Corporations141Limited Liability Corporations and Joint Stock CorporationsThere are mostly two types of corporations in China: limited liability corporations (LLCs) and joint stock limited corporations (JSCs). A limited liability corporation is privatelyheld, usually small in scale, and owned by a small number of shareholders. The shareholders enjoy their rights in proportion to their capital contributions to the corporation. The shareholders may agree otherwise with respect to their rights regarding management and profit if agreed to by all shareholders in the articles of incorporation. Moreover, shareholders may make decisions with respect to the structure and management of the corporation. Such matters will be delineated in the articles of incorporation. In general, the Corporation Law lends a greater degree of freedom to the management and operation of a limited liability corporation. A joint stock corporation is usually a mid to large size enterprise. The governance structure of a joint stock corporation is a corporate institution composed of shareholder meetings, a board of directors, a board of supervisors, and a body of executive management. A joint stock corporation enjoys limited liability. A joint stock corporation may be established upon the issuance of stocks to incorporators. It may issue one part of its stocks to incorporators and the other to investors. In a partial purchase of stocks, incorporators must purchase a required 35% minimum of the total number of the stocks of the corporation. The Corporation Law of the Peoples Republic of China,art. 84(2014)(P.R.C).A joint stock corporation may decide to issue shares to the public or specified investors for the subscription. It may also choose to list the shares on the stock exchange. A joint stock corporation with its stocks offered and traded on a stock exchange is a public corporation. In practice, a corporation may change from a limited liability corporation to a joint stock corporation or a joint stock corporation to a limited liability corporation upon satisfaction of statutory requirements. 142Special Types of Corporations in ChinaThe Corporation Law has set forth certain special types of corporations. They are the single shareholder limited liability corporations, wholly stateowned corporations, and public corporations. 143The Single Shareholder Limited Liability CorporationsA single shareholder corporation or wholly stateowned corporation is a limited liability corporation. Listed corporations are required to be established and organized as joint stock corporations. One revision under the Corporation Law of 2005 is that it allows one person to establish a limited liability corporation. Under the previous version of the Corporation Law, a limited liability corporation was required to have minimum two shareholders. Before the Corporation Law of 2005 came into being, there had already been corporations of a single shareholder in practice. Such corporation operated and maintained business activities by having a shadow shareholder. By giving recognition to the validity of a single shareholder corporation under the Corporation Law of 2005, the national legislature has actually provided the legal basis for the practice of a wholly stateowned corporation or a wholly foreignowned enterprise. Specifically, a single shareholder limited liability corporation is a corporation with one shareholder. Such shareholder could be a natural person or a legal person. A natural person may establish only one single shareholder limited liability corporation.The Corporation Law of the Peoples Republic of China, art. 58 (2014)(P.R.C.) Such limited liability corporation may not invest to establish a single shareholder limited liability corporation. Under the Corporation Law of 2005, the minimum amount of the registered capital for such corporation was a required RMB 100000 yuan. And the payment was required to be made in lump sum. The Corporation Law of 2014 has abolished both of the requirements for a singleshareholder LLC. Upon filing for the corporate registration, the limited liability corporation with a single shareholder is required to state that it is solely funded by one natural person or one legal person which will be shown in the business license of the corporation. A single shareholder limited liability corporation may use a simplified style of management. Any shareholder meeting decision is required by the Corporation Law to be in writing and kept with the corporation. A single shareholder limited liability corporation is also required to make an audited financial statement at the end of each fiscal year. By virtue of the legislative validation of the limited liability corporation with a single shareholder, a foreign individual investor may set up a wholly foreignowned enterprise by herself. She is required, however, to comply with all the relevant provisions of the Corporation Law and that of the Wholly Foreign Owned Enterprise Law unless that she would opt to establish the enterprise in a Free Trade Zone. 144The Wholly Stateowned CorporationsA wholly stateowned corporation is another type of corporation specific to corporations in China.A wholly stateowned corporation is a limited liability corporation established through investment by the state. Here, the state refers to the authority agencies authorized by the State Council or the local peoples governments to be in charge of the management and supervision of stateowned assets by performing the functions of capital contributors or shareholders. The Stateowned Assets Supervision and Administration Commission of the State Council and its local offices (SASAC) may authorize the board of directors of a wholly stateowned corporation to exercise certain functions of the shareholder meeting and decide with respect to the priorities for the corporation. Such delegated authority to the board of directors may not, however, include the decisions with respect to mergers, divisions, dissolutions, petitions for bankruptcy, or an increase or decrease in the corporations registered capital or the issuance of corporate bonds. Decision making power and authority regarding the aforementioned major corporate activities shall be examined by the SASAC and reported to the peoples government concerned for approval. A chairman, vice chairman, directors, or senior management officers of a wholly stateowned corporation may not hold concurrent positions in any other limited liability corporations, joint stock corporations, or any other types of economic organizations unless it is specifically approved and permitted by the SASAC. 145Public CorporationsPublic corporations are joint stock corporations that may trade their stocks on the stock exchange. The listing of the shares or stocks of joint stock corporations currently needs to be approved by the relevant government authority. China Securities Regulatory Commission is the main authorities responsible for such approval. The governance framework for a joint stock corporation is the Corporation Law and the Securities Law. 15Establishment of a Corporation151In GeneralThis subchapter will introduce the ways as to how to achieve the purpose of the establishment of a corporation. The Corporation Law prescribes the legal requirements with respect to the establishment of a corporation. The requirements are as follows:(i)There must be a sufficient number of incorporators; (ii)There is no statutory minimum amount for the registered capital; (iii)The incorporator shall prepare the articles of incorporation; (iv)The corporation shall have a name and domicile;and(v)The issuance of the shares of a joint stock corporation shall comply with the law. 152IncorporatorsAn incorporator is a person who prepares the filing of necessary documents with the registration authorities and takes both internal and external steps to form and establish a corporation. Under the Corporation Law, incorporators shall proceed in compliance with the provisions set out under the law and satisfy the qualification requirements. As incorporators, they are required to exercise the rights and perform the obligations under the law. The incorporators may be subject to legal liabilities upon violation of law. The statutorily required number of incorporators for a limited liability corporation is a minimum of 2 persons up to a maximum of 50 persons. The Corporation Law of the Peoples Republic of China, Art. 24 (2014). A joint stock corporation may have up to 200 shareholders. The Corporation Law of the Peoples Republic of China, Art. 78 (2014). It is required that at least half of the incorporators of a joint stock corporation shall reside in China. The law imposes no nationality requirement for an incorporator. A natural person, partnership, or corporation that has not been otherwise prohibited from being an incorporator may serve as the incorporator of a corporation. However, a person with limited civil capacity under the law is restricted of serving as an incorporator. An incorporator is obligated under the law and the articles of incorporation to perform certain obligations. Such obligations include the making of full payment of capital contribution for a limited liability corporation. The Corporation Law of 2005 requires that the incorporators pay no less than 20% of the registered capital prior to the establishment of a limited liability corporation. The remaining portion is required to be paid up within two years after the establishment of the corporation. The possible exception is the payment of capital contribution of an investment company. In the case of an investment company, the incorporators shall pay the remaining portion within the five years after the initial lump sum has been paid up. The Corporation Law of 2014, however, has done away with such statutory minimum registered capital requirement and the statutory contribution timetable. Incorporators are left on their own to decide with regard to the contribution of the registered capital. The incorporators of a joint stock corporation may agree with respect to their rights and obligations and provide for their agreements in the articles of incorporation. A joint stock corporation may be established by either issuing all stocks to the incorporators or issuing part of the stocks to the public. If it is established by issuing all of the stocks to the incorporators, the incorporators must subscribe to the full amount of shares prescribed in the articles of incorporation. If it is established by issuing part of the stocks to the public, the incorporators are required to be subscribing to no less than 35 percent of the total amount of shares. The subscribers shall pay for their subscription. An incorporator in breach of the subscription obligations shall make compensation to the nonbreaching subscribers. An incorporator or a shareholder that fails to make payment under the subscription agreement or that fails to make payments in due course is required to make up the defaulted amount owed to the corporation. The other defaulting and nondefaulting shareholders shall bear joint and several liability for the debts owed to the corporation. The Corporation Law prescribes the liabilities that an incorporator of a joint stock corporation may shoulder. Under the law, an incorporator shall assume the following liabilities:(i)If the incorporation fails, the incorporators shall bear joint and several liability for the debts and expenses resulting from any preestablishment activities. The incorporators shall also be liable for refunding the paidin capital plus any interest. (ii)If an incorporator negligently infringes the interest of the corporation during the establishment, it shall be held liable for any damages. (iii)A person who fraudulently registers a corporation shall rectify the situation and is subject to a fine by the registration authority. If the circumstances are serious, the registration of the corporation will be cancelled or the business license revoked.153CapitalThe concept of registered capital has been awarded much importance under the previous versions of the Corporation Law. The Chinese legislature once adopted the system of requiring registered capital with a view toward the creditor protection. The Corporation Law of 2014 has abolished the requirement for the minimum registered capital and statutory time table for registered capital contributions. In general, the concept of registered capital is the equivalent of that of equity. In a limited liability corporation, registered capital amounts to the capital contributions by shareholders. In a joint stock corporation, registered capital is the total amount of equity subscribed to by incorporators or the total amount of equity paid by incorporators and public investors. Under the Corporation Law of 2005, the minimum amount of capital required for a limited liability corporation is RMB30000 yuan and the minimum for a single shareholder limited liability corporation is RMB 100000 yuan. The requirement for a joint stock corporation is RMB 5 million yuan. The revised Corporation Law of 2014 has now abolished the relevant requirement regarding registered capital by no longer requiring the minimum capital contribution, the paidin capital contribution, and the required initial installment payment. By this, the law has transformed itself from the system of the paidin capital registration to the system of the subscription of registered capital. The corporation shall be responsible for the truth and veracity underlying the subscription on its own terms. The threshold for establishing a corporation has thus been lowered. Capital contributions to a corporation may be made in cash or lawfully transferable noncurrency property. The lawfully transferable noncurrency property is also regarded as noncash form of contribution. Such noncash form of contribution includes intellectual property rights and land use rights. In general, labor services, credit, the name of a natural person, business reputation, a franchising right, or property with secured interest is not allowed to be contributed as part of the registered capital. The previous requirement under the Corporation Law of 2005 regarding the minimum amount of cash capital contribution for a limited liability corporation has been abolished under the Corporation Law of 2014. The use of noncash property as capital contribution is required to be evaluated and verified by the relevant authority. The legal requirements have been imposed upon the evaluation of the noncash form of the contribution to disallow any overvaluation or undervaluation.With regard to the investment issue of a corporation, the Corporation Law has freed up the former restrictions upon the investment ability of a corporation. Currently, a corporation may effectively invest in a business enterprise which may be a limited liability corporation or a joint stock corporation. But a corporation is prohibited from investing into a general partnership as a general partner.The Corporation Law of the Peoples Republic of China, art.15 (2014). As such, the Corporation Law has left the issue of investment to the decision of the corporation. 154Articles of IncorporationThe articles of incorporation of a corporation is the establishment constitution of the corporation. It works by exerting its binding power over the shareholders, directors, supervisors, and senior management officers. The Corporation Law defines the concept of senior management officers as to include the manager, deputy manager, person in charge of financial affairs, and secretary of the board of directors of a public corporation. The articles of incorporation may stipulate any other person to be a member of the senior management officers. The Corporation Law of the Peoples Republic of China, art. 11 (2014). The articles of incorporation are agreed to and written by the incorporators that need to be adopted at the inaugural assembly of the corporation if established by the issuance of shares. They may be amended but the amendments are required to be filed for registration. Generally, the articles of incorporation will address the following major matters:The Corporation Law of the Peoples Republic of China, art. 31(2014). （i）Information about the corporation, name, domicile, business scope, and the subscription of the registered capital;（ii）Information about shareholders and their rights;（iii）Information regarding the corporate structure and procedures of the shareholder meeting and the board of directors; and（iv）Circumstances under which the corporation may become dissolved and the liquidation procedures. 155Name and DomicileA corporation has a name and place of residence. The place of residence is referred to as the domicile. The name and domicile of the corporation need to be set out in the first clause of the articles of incorporation. The name of the corporation, once became approved by and registered with the corporation registration authority enjoys legal protection. The naming of the corporation is required to comply with the relevant provisions of the Corporation Law and relevant the rules and regulations. A corporation needs to procure the approval for the choice of the name before establishment. Once it is approved, the name will be kept for reservation for six months during which time it may not be used for other business activities or be transferred.A corporation established as a limited liability corporation will indicate that it is a limited liability corporation in its name and add the words of “limited liability corporation” or “limited corporation” to the name of the corporation. Likewise, a joint stock corporation will indicate that it is a joint stock corporation in its name and add the words of “joint stock limited corporation” or “joint stock corporation” to the name. The Corporation Law of the Peoples Republic of China, Art. 8 (2014). 156Establishment ProceduresWith respect to establishing a corporation, the incorporators will first formulate the articles of incorporation. The articles of incorporation are largely the product wherein the shareholders or incorporators record their agreements with respect to the rights and obligations. The next step for the incorporators and investors is that they will complete the capital contribution to the corporation in accordance with their ratio of subscription as agreed to in the articles of incorporation. Finally, the incorporators will go to the corporation registration authority for registration procedure. The registrants will have the possibility of completing the applications via facsimile, electronic mail, or other electronic means. The registration authorities will request, among other things, the details of the name of the corporation and domicile, the name of the legal representative, the type of the enterprise, the business scope, the term for business operation, and the names of the shareholders or that of the incorporators. The corporation registration authority is the State Administration of Industry and Commerce (SAIC) and its regional and local offices. The State Administration of Industry and Commerce refers to the national office of industry and commerce in Beijing while the regional and local offices reside throughout the country. The national office of the State Administration of Industry and Commerce regularly handles the registration of foreign invested enterprises, the registration of stateowned corporations with capital contributions represented by the State Administration of Stateowned Asset Commission and any other corporations with the SASAC being an investor and holding more than 50 percent of the shares, and the registration of any other corporations required by law or administrative regulations to be registered with the national office of the SAIC. The SAIC may delegate, however, certain of its registration duties to the local offices. Foreign investors are advised to check with the office of the SAIC to learn of any information regarding a local or regional authorized registration at the local or regional level. Usually, the local or regional offices of the SAIC will handle the registration of a stateowned corporation and the corporations with which the SASAC is an investor with less than 50% of the shares.The Regulations on the Administration of the Registration of Corporations, State Council, art. 7 (2005). Joint stock corporations may register with the city level office of the SAIC. The Regulations on Administration of the Registration of Corporations, State Council, art. 8 (2005). If a corporation is established by public stock issuance, the law requires the incorporators publish the prospectus and prepare the necessary stock subscription forms. The forms usually include the number of stocks subscribed to by each of the incorporators, the value and the issuing price of the stock, the purpose of the financing, the rights and obligations of the subscribers, and the representation that the subscribers will revoke the subscriptions if the offering is undersubscribed on the closing date. 157Inaugural AssemblyAn inaugural assembly is a meeting of the incorporators or subscribers where decisions are made regarding the establishment of the corporation prior to the implementation of registration procedures. The incorporators will hold an inaugural assembly. The incorporators will inform the subscribers of the date upon which the inaugural assembly is to take place or they may also publicly announce the date of the assembly 15 days in advance. At the inaugural assembly, the incorporators will adopt the articles of incorporation, elect the members of the board of directors and the board of supervisors, and examine the value of the noncash contributions by the incorporators. A resolution adopted at the inaugural assembly requires an affirmative vote by the incorporators or subscribers. Within a period of 30 days after the inaugural assembly, the board of directors will file a registration application with the local, regional, or national office of the SAIC. Upon finding of a satisfying production of necessary documents, the office of the SAIC will proceed to register the corporation. The SAIC will issue a business license to the corporation with the name, domicile, scope of business, and the name of the legal representative of the corporation. The date for the issuance of the business license is the date on which the corporation becomes established. 16Corporate Capital161Corporate CapitalIn general, the capital of a corporation includes equity capital, debt, and the capital generated by the corporation during the conduct of business and operation. By a narrow approach, corporate capital means to include only equity of the corporation. Under the Corporation Law, equity is the total amount of the contribution from the shareholders when the corporation is founded and it is stated in the articles of incorporation of the corporation. Debts may be raised from financial institutions, shareholders, or public investors. They may be short term debts or long term debts. The capital generated by the corporation is the internal generated funds. The internal generated funds are retained earnings, distributions to the wealth accumulation fund, and fund from the transfer of assets by the corporation. The corporation is an enterprise legal person with independent property and proprietary rights. It owns the corporate property in the name of the legal person and is liable to the debts to the extent of the corporate property. 162Equity CapitalEquity appears in many forms. In China, most often, equity is registered capital. Under the law, registered capital is the total amount of property subscribed to by shareholders at the time of the establishment. The Corporation Law provides that registered capital is the amount of the capital contribution subscribed to by shareholders for a limited liability corporation. Insofar as a joint stock limited liability corporation is concerned, register capital is the total amount of equity subscribed to by promoters. The practice of requiring minimum registered capital has undergone certain changes. Formerly, there was a minimum registered capital requirement under the Corporation Law of 2005. The minimum registered capital requirement for a joint stock limited liability corporation is RMB five million yuan or above and RMB 30000 yuan for a limited liability corporation. The minimum registered capital shall be written into the corporate articles of incorporation and registered with the registration authority that will be examined and confirmed by the registration authority. Moreover, registered capital shall be either paid up at the time the corporation is founded or paid in installments. The Corporation Law of 2014 has abolished such minimum registered capital requirement and the statutory scheduled payment timetable.163Forms of ContributionThe shareholders of a limited liability corporation or the promoters of a joint stock limited liability corporation may contribute either tangible property or intangible property, such as IP rights and land use rights. The intangible property for the contribution purpose is required to be evaluated, appraised, and confirmed to discourage overrating or underrating. The transfer of property rights from the shareholders to the corporation will need to be made. For a joint stock limited liability corporation by way of promotion establishment, the registered capital is the total amount of equity paid up by promoters at the corporation registration authority. The Corporation Law of 2014 no longer requires such contribution.For an investment corporation under the Corporation Law of 2005, the requirement is that the contribution needs to be made and completed within five years after the corporation is established . Such requirement is no longer valid under the Corporation Law of 2014. 17Rights of ShareholdersThe major rights of shareholders are the right to profit and participate in the management of the corporation. The right to profit includes the right to share in the profit distribution of the corporation, the right to the residual asset distribution of the corporation, and the right to subscribe to new shares. The right to participate in the management of the corporation includes the right to vote, the right to call a shareholder meeting, and the right to inspect the corporation books and records. The right to profit distribution may only be realized,if the operation condition of the corporation permits. Profit distribution can only be made when the corporation has net profit after the loss has been made up and the withdrawal of the lawfully established funds has been completed. The right to the residual asset distribution may be exercised under the condition that all debt obligations have been performed. The shareholders may have the right to subscribe to newly issued shares of the corporation on a pro rata basis. The right to vote is the major manifestation of the shareholder right to participate in the management of the corporation. At a shareholder meeting, a shareholder enjoys one share one vote. The resolution of the shareholder meeting needs to be approved by the majority of the shareholders present. The shareholders right to know refers to the right to know the operation condition and the financial condition of the corporation and the right to propose and make enquiries regarding the situation of the corporation.The shareholders of a limited liability corporation may inspect the articles of incorporation, resolutions of the shareholder meetings, resolutions of the meetings of the board of directors, resolutions of the board of supervisors, the financial and accounting reports, and the accounting records and make copies thereof. The right to know for shareholders in a joint stock limited liability corporation is quite similar to that in a limited liability corporation except that the shareholders of the former may not make copies of the books and records inspected. Nonetheless, the right to know is not totally unrestricted. A corporation may disagree and decline the request from a shareholder if it finds any impropriety that may be harmful to the interests of the corporation.Another manifestation of the shareholder right to participate in the management in the corporation is the shareholder right to sue. The Corporation Law provides for the right to sue by shareholders if any shareholder has inflicted harm upon the interests of other shareholders or the conduct of the senior management or the directors of the board has encroached upon the interests of the shareholders. Under such circumstances, the shareholder may exercise the right to sue. 18Corporate Finance181General ConceptThe capital of a joint stock limited liability corporation may be divided into shares with each share being in equal value. The smallest unit of the capital of a corporation is one share. The shares are in the form of the stocks of the corporation. The shares can be of two types: common stocks or ordinary shares and preferred shares. One share enjoys one vote. A shareholder enjoys rights in proportion to the shareholding. Such rights include the right to profit and to vote. The right to profit is the right to receive dividends and the right to receive the residual property of the corporation upon liquidation. Normally, the rights associated with each type of shares are more or less similar with common shareholders as. A common shareholder enjoys the rights to vote and make decisions as to the major business affairs. The right to profit held by common shareholders may be exercised only after the preferred shareholders.The Corporation Law does not, however, specifically provide for the preferred shares that a corporation may issue. The law empowers the State Council to stipulate any other kind of shares than common stocks. Preferred shares are, in fact, adopted by Chinese corporations. The practice with regard to the preferred shares is rather similar to that in the civil law countries and common law countries. Preferred shareholders are preferred over common shareholders in profit distribution and receipt of residual assets in terms of sequence. However, preferred shareholders have no right to vote and participate in the management of the corporation.182Types of StocksCurrently, stocks may be registered stocks or bearer stocks. Registered stocks are normally issued by the corporation to its promoters and legal person shareholders. Such stocks require the registry of the names of the promoters and the legal persons. Upon transfer, the name of the transferee shareholder is required to be registered with the corporation to validate the transfer. Bearer stocks do not need to be registered with the corporation and can be transferred upon endorsement.19Corporate Governance191Corporate InstitutionCorporate institution consists of the shareholder meeting, the board of directors, and the board of supervisors. The shareholder meeting is a major part of the corporation institution. The shareholder meeting acts by resolutions which will be executed by the board of directors. The shareholder meeting is mandatory under the Corporation Law. Excepting a wholly stateowned enterprise or a single shareholder limited liability corporation, a limited liability corporation or a joint stock limited liability corporation is required under the Corporation Law to have shareholder meetings.The board of directors is the institution that is responsible for the execution of business affairs of the corporation. The directors on the board will be elected by the shareholder meeting. In a limited liability corporation that is established without a board of directors, the executive director could be responsible for the corporate business affairs. The establishment of the board of directors is mandatory under the law.The board of directors may hire managers by delegating the management of business affairs. Managers are agents who are responsible for executing the decisions and resolutions made by the board. The power of decisions rests with the board of directors, not with the managers.The Corporation Law requires the establishment of the board of supervisors as the supervision institution in a corporation to supervise the execution of business affairs by directors and managers and the financial and operation condition of the corporation. The board of supervisors reports to the shareholder meeting. The shareholder meeting elects supervisors. The employee representatives on the board of supervisors are elected by the employee representative assembly.A limited liability corporation without a board of supervisors may have one to two supervisors. The board of supervisors is likewise mandatory under the Corporation Law.192The Shareholder MeetingThe Corporation Law gives broad powers to the shareholder meeting including making decisions regarding the operation and investment plans of the corporation, electing or changing directors or supervisors who are nonemployee representatives, making decisions regarding the compensation matters involving directors and supervisors, approving the report of the board of directors and the report of the board of supervisors, approving the financial and fiscal plans and the profit distribution plan, making decisions with respect to the increase or decrease of the registered capital, resolving with respect to the bond issuance, mergers, divestitures, change of corporate form, dissolution, or liquidation, and amending the articles of incorporation. There are regular shareholder meetings and special shareholder meetings. In a limited liability corporation, a regular shareholder meeting is a scheduled meeting. A special shareholder meeting can be called for upon a proposal by shareholders with onetenth of the votes or with onethird of the votes or by the board of supervisors. The Corporation Law of the Peoples Republic of China, art. 39 (2014)(PRC.)In a joint stock limited liability corporation, a regular shareholder meeting is held annually. The Corporation Law provides that a joint stock limited liability corporation may call for a special shareholder meeting if no quorum present on the board of directors, if upon request from the shareholders with 10% or more of the shares of the corporation singularly or jointly, if the board of directors deems it necessary or if under the proposal from the board of supervisors.The Corporation Law of the Peoples Republic of China, art.100 (2014)(PRC.)The shareholder meeting in a limited liability corporation will be called for or presided over by majority shareholders. The shareholder meeting of a joint stock limited liability corporation will be called for by the board of directors and presided over by the chairperson of the board of directors. A shareholder meeting resolution is of regular resolution and special resolution. The Corporation Law provides that a shareholder resolution shall be approved by one half of the shareholders with votes present at the meeting. This is a regular resolution of the shareholder meeting. However, a resolution to amend the articles of incorporation, an increase or decrease of registered capital, mergers, divestitures, dissolution, or change of the corporate form will require a special resolution of the shareholder meeting to be approved with twothirds or more of the votes by the shareholders present at the meeting.The approval of the shareholder meeting is required for the transfer of major corporate assets or the provision of an external guarantee. A public company will need the approval of the shareholder meeting with a twothirds votes of the shareholders present at the meeting if within one year it will have transferred its major assets or provided a guarantee exceeding 30% of the capital of the corporation. The Corporation Law of the Peoples Republic of China, art. 121 (2014)(PRC.) Shareholders in a limited liability corporation will vote in proportion to their equity contribution whereas shareholders in a joint stock limited liability corporation will enjoy one share one vote. Voting to elect the directors of the board of directors may adopt straight voting or cumulative voting. The law allows cumulative voting by providing that the shareholder meeting to elect directors or supervisors may adopt cumulative voting in accordance with the articles of incorporation or resolutions of the shareholder meeting. The Corporation Law of the Peoples Republic of China, art. 105 (2014)(PRC.) Cumulative voting is a voting method that improves minority shareholders chances of naming representatives on the board of directors. In regular or statutory voting, shareholders must apportion their votes equally among candidates for directors. Cumulative voting allows a shareholder to cast all of its votes for one candidate. Assuming a shareholder owns 100 shares and there are six directors to be elected，the regular method allows the shareholder to cast 100 votes for each of the six candidates for a director which is a total of 600 votes. The cumulative voting method allows the same 600 votes to be cast for one candidate or split as the shareholder pleases. Proxy voting is provided for under the law whereunder a shareholder may attend a shareholder meeting through proxy.The Corporation Law of the Peoples Republic of China, art.106 (2014)(PRC.) Proxy voting is only applicable to a joint stock limited liability corporation in China. 193The Board of DirectorsThe Corporation Law provides for the constituent number of the board of directors for both a limited liability corporation and joint stock limited liability corporation. A limited liability corporation will have a board of directors from 3 to 13 persons.The Corporation Law of the Peoples Republic of China, art.44(2014)(PRC.)A joint stock limited liability corporation will have from 5 to 19 persons.The Corporation Law of the Peoples Republic of China, art.108 (2014)(PRC.) A limited liability corporation that is small in scale or with a limited number of shareholders without the establishment of the board of directors may have one executive director. The Corporation Law of the Peoples Republic of China, art. 50 (2014)(PRC.)The members of the board of directors are elected by shareholders. The board of directors shall have employee representatives elected at the employee representative assembly in a limited liability corporation if such corporation is invested by more than two stateowned enterprises or more than two stateowned investment entities. The board of directors is accountable to the shareholder meeting by reporting to shareholder meetings, executing the resolutions of shareholder meetings, making decisions regarding the operation plan and investment plan of the corporation, making annual fiscal budgetary plan, profit distribution plan, and plans regarding an increase or decrease of registered capital of the corporation and bond issuance, formulating plans regarding mergers, divestitures, a change of corporate form or dissolutions, making decisions regarding management structure, appointing or removing managers, making decisions regarding their compensation matters and appointing or removing deputy managers or financial officers and making decisions regarding their compensation matters, and formulating the basic management system of the corporation.The board of directors may have other functions and powers as provided for under the articles of incorporation. A corporation will have one chairperson and deputy chairpersons. The election of a chairperson or deputy chairperson will need a simple majority vote by the directors. The chairperson calls for and presides over the meeting of the board of directors and examines the execution of the resolution of the board of directors.The meeting of the board of directors may either be a regular scheduled meeting or a special meeting. The board of directors hold meetings at least twice annually. Shareholders representing more than onetenth of the votes and represented by more than twothirds of directors or supervisors may propose a special meeting of the board of directors. One director has one vote. The law gives a freer rein to a limited liability corporation regarding the procedures and voting by the board of directors by requiring that a quorum of more than one half of the directors to be present at the meetings of the board of directors. The Corporation Law of the Peoples Republic of China, art. 111 (2014)(PRC.) A resolution of the board of directors needs the approval from more than one half of all directors.The term of a director may not exceed three years per term and he may be reelected. The staggered term is not an option under the law. A director may be removed by the shareholder meeting without cause or by the peoples court with cause. He will be compensated according to the decisions of the shareholder meeting for salary, bonus, or stock options. He may also incur liabilities for the resolution of the board of directors. But a director who disagrees in writing while casting her vote may be exonerated from liabilities. 194ManagersManagers make business decisions. The institution of management is not a mandatory establishment under the law. The law provides that a limited liability corporation or joint stock limited liability corporation may have managers. The articles of incorporation will generally provide for the appointment and removal of managers by the board of directors. In general, the law does not restrict the qualifications of managers nor the number of positions a manager may hold within the corporation. A manager may be a shareholder and director.Managers are appointed by the board of directors and accountable to the board of directors for the operation and management, the execution of the resolutions of the board of directors, formulating annual operation plans and investment plans, the establishment of management and regulation of the corporation, and making proposals regarding the appointment or removal of deputy managers, financial managers, or any other person of the corporation. Managers may be present at the meeting of the board of directors. The remuneration of managers will be decided by the board of directors. In a joint stock limited liability corporation, the decision by the board of directors regarding the remuneration of managers will need to be disclosed to the shareholders.195The Board of SupervisorsThe board of supervisors will have one chairperson and one deputy chairperson elected by more than half of the supervisors. The board of supervisors may not be less than three persons for a limited liability corporation or if the corporation has a few shareholders or is small in scale, the corporation may have one to two supervisors. The board of supervisors will include shareholder representatives and employee representatives. The board of supervisors in a joint stock limited liability corporation may not be less than three persons with appropriate representation from shareholders and employee representatives. The employee representatives will be elected at employee representative assembly or through any other democratic elections. The employee representatives are selected in proportion to the number of employees of the corporation. Normally，the employee representation is not less than onethird of the supervisors on the board of supervisors. The board of supervisors has one chairperson elected by more than half of the supervisors. Directors or senior managers may not be supervisors. As in the case of a limited liability corporation, directors or senior managers of a joint stock limited liability corporation may not serve as supervisors. The term of a supervisor is three years and a supervisor may be reelected. The board of supervisors may examine the financial affairs of the corporation, supervise the performance of the directors or supervisors, propose to remove the directors or senior managers who are in violation of laws, rules, the articles of incorporation, or the resolution of the shareholder meeting, request the directors or senior managers to rectify acts contravening the interests of the corporation, propose a preliminary shareholder meeting and submit proposals to the shareholder meeting, and litigate against the directors or senior managers in accordance with the law. Supervisors may be present at the meetings of the board of directors and inquire into or propose resolutions for the board of directors and may propose a preliminary meeting of the board of supervisors. The board of supervisors may initiate investigations into the business affairs of the corporation and hire accounting firms when needed upon discovery of any irregularities of business operation. The corporation pays for the necessary expenses. The board of supervisors in a limited liability corporation holds an annual meeting whereas a joint stock limited liability corporation holds meetings twice annually.196Special Provisions for Public CorporationsThe regulatory scheme relating to public corporations requires that they comply with not only the general law, rules,and regulations governing joint stock limited liability corporations but also securities law, special trading regulations, administrative rules，and stock exchange regulations. The Corporation Law mainly provides for the organizational structure of a public corporation including the procedures for the share transfer, the transfer of major assets, the provision of guarantee that exceeds the statutory limit, the establishment of independent directorship, the provision of a secretary to the board of directors, and related transactions.1961TransferA transfer of major assets or the provision of guarantee exceeding 30% of the corporation assets within one year will need shareholder meeting resolution and more than twothirds of the vote of the shareholders present at the meeting. The transfer of major assets generally includes a transfer of the total assets that exceeds the proportion of 50% of the total assets in the audited consolidated balance sheet of the last fiscal year of the corporation and the transfer of the net assets that exceeds the proportion of 50% of the net assets in the audited consolidated balance sheet of the last fiscal year of the corporation. The transfer of major assets also include the transfer of the assets that exceeds the proportion of 50% of the main business volume in the audited consolidated balance sheet of the fiscal year.1962Independent DirectorsThe Corporation Law endorses the system of independent directorship. A public corporation is required to have independent directors.The Corporation Law of the Peoples Republic of China, art.122 (2014)(PRC.) An independent director is a director that holds no other posts within the corporation and without any relationships with the corporation or the major shareholders that may hamper independence. An independent director owns the duty of loyalty and duty of care to the corporation and shareholders. A public corporation is required to have at least onethird of the board of directors as independent directors. In principle, an independent director may only hold independent directorship positions at maximum five public companies.To ensure independence, the law restrains certain persons from occupying the posts of independent directorsThe staff members of the public corporation, the direct relatives and major social relations of such staff members, the top ten natural person shareholders and their direct relatives that directly or indirectly hold more than 1% of the issued shares of the public corporation, a shareholder unit that directly or indirectly holds more than 5% of the issued shares of the public corporation, the staff members and their direct relatives that hold posts within the top five shareholder units of the public corporation, or persons who provide financial, legal, and consulting services to the public corporation or the affiliates.The board of directors, the board of supervisors, or shareholders singularly or jointly holding more than 1% of the issued shares of the public corporation may propose candidates the independent directors subject to the decision of the election of the shareholder meeting. The securities supervisory and regulatory commission may conduct an examination as to the qualification and independence of an independent director. An independent director may be reelected but not more than 6 years.Approval from independent directors regarding a major related transaction is required before the report regarding the transaction is submitted to the board of directors. Independent directors may hire independent financial consulting services to make evaluations of the transaction. They may independently hire external audit and consulting agency. An independent director may convey its opinions regarding any damages to the interests and rights of minority shareholders. The powers of independent directors include the right to make proposals regarding the hiring of an accounting firm for the board of directors, a preliminary shareholder meeting to the board of directors, and the meeting of the board of directors. The exercise of such powers requires the approval of more than one half of independent directors. In addition, an independent director will provide independent opinions regarding the nomination and removal of the directors, the appointment or removal of senior managers, and the remuneration of directors and senior managers. The articles of incorporation may provide for any other powers of an independent director.An independent director enjoys equal rights as that of any other directors including the right to know about corporate affairs、An independent director may seek the assistance from the public corporation which may not interfere in the work of independent directors. The public corporation will also need to provide any necessary working condition and cooperation to facilitate the performance of the duties of independent directors.A public corporation appoints a secretary to the board of directors responsible for the organization of shareholder meetings and meetings of the board of directors. A secretary to the board of directors will prepare document depository, maintain, and manage information and material relating to shareholders and the duty of information disclosure by the public corporation. A secretary to the board of directors is a member of the senior management whose major obligations are to assist in handling the daily activities of the board of directors.The Corporation Law of the Peoples Republic of China, art.216 (2014)(PRC.) The secretary is appointed or removed by the board of directors.197Corporate RepresentativesA corporate representative is a person who represents the corporation. A corporate representative enjoys the right to externally represent the corporation in activities ranging from business operation to negotiation. Under the Corporation Law, a corporate representative is referred to as a legal person representative. A chairperson, an executive director, or a manager may be a legal person representative of the corporation in accordance with the articles of incorporation.198Restrictions and DutiesThere are restrictions on the qualifications, duties, and activities of the persons involved in the operation and management. A person may not serve as a director, supervisor, or senior management officer if she (i) lacks civil capacity or has only limited civil capacity; (ii) has been sentenced to any criminal penalty for corruption, bribery, encroachment of property, misappropriation of property, or disrupting the economic order of the socialist market economy with such sentence having been less than five years since the completion date of the execution of the penalty or has been deprived of political rights for committing a crime with such sentence having been less than three years since the completion date of the execution of the penalty; (iii) is a former director, factory director, or manager of a corporation that went bankrupt and was liquidated and was personally liable for such bankruptcy or liquidation and three years have not passed since the date of the completion of the bankruptcy or liquidation proceeding; (iv) has served as the legal person representative of a corporation whose business license has been revoked and for which the person was personally liable because of violation of law in the last three years; and (v) has a relatively large amount of overdue personal debt.The Corporation Law of the Peoples Republic of China, art.146 (2014)(PRC.)The election or appointment of such persons would be invalid and such persons though elected or appointed will be dismissed from the position in question.The Corporation Law of the Peoples Republic of China, art.146 (2014)(PRC.) Directors, supervisors, and senior management officers owe duty of care and duty of loyalty to the corporation.The Corporation Law of the Peoples Republic of China, art.147 (2014)(PRC.) They must act in ways pursuant to laws, regulations, and the articles of incorporation. No director, supervisor, or senior management officer may take any bribe or other illegal gains by taking advantage of the position nor encroach upon the properties of the corporation.The Corporation Law of the Peoples Republic of China, art.147 (2014)(PRC.) 199Invalid Corporate Resolutions and ReliefAn invalid resolution of the board of directors and a resolution of the shareholder meeting could be cancelled or voided. A resolution is deemed defective if in violation of laws and rules or internal regulations of the corporation such as the articles of incorporation. The law has sp