Corporate Organ in China - Essay Example

Introduction The People Republic of China Company laws has been effective from January, 2006. The PRC Company Law is considered to be comprehensive legal framework, and modified version of Old Company Law. The Company Law enacts 41 new articles and 137 amended articles, more than 45 previous articles were either removed or amended. The salient features of the PRC Company Law 2005, protection of interest and finances of the share holders having small stakes, lifting of corporate barrier, improvement of corporate governance through new implementations. The Company Law has introduced dynamic amendments to protect the interests of joint stock limited companies and incorporating limited liability companies. The PRC Company Law 2005 has enhanced corporate governance, transparency and minority shareholders protection. The terms and conditions for the establishment of the liability companies and joint stock limited entities have been softened. Corporate Governance The Company Law 2005 has barred the directors and management of the limited company from the violation and contradiction of their official duties and responsibilities towards the company. According to the law, in case of any mismanagement or financial manipulation, it is the controlling shareholder, director or senior manager, who is personally responsible for their failure to handle conflict of interest situation. The approach has been responsible for the lifting of corporate veil. The directors of Chinese public listed companies have been barred from participation in any matter, which has direct relevance with tier authority, based on interest. The approved PRC Company Law has encouraged the accountability process, and has recommended strong action against the controlling shareholder, if found guilty of abusing the profits and benefits of limited liability. (Which corporate organ has ultimate control over the company's management under the PRC Company Law 2005) Protection of Minority Shareholder The previous PRC Company Law failed to protect the legitimate and financial interest of minority shareholders. The new draft of PRC Company Law, which has been implemented since 2006, has permitted the minority shareholder to request the reimbursement of their shares in case of the failure of the profit generating company to provide dividends to the minority shareholders for 5 consecutive years. In case 1 if the company disapproves the disposal of its major assets, or in case if the company is involved in any merger or acquisition deal, the minority shareholder has the right to pressurize the company for the purchase of their shares. The minority shareholder also has the legal authority to take judicial action against the directors, if the directors are involved in embezzlement of funds, or breach of fiduciary duties. The PRC Company Law has authorized the .3% of the total shareholders to request the Board of directors, and seek their opinion and consideration towards the submitted proposals and agenda. The shareholders also have the right to call upon Board of directors meeting in case of violation of an article or law is observed. The PRC Company has further authorized 10% of the shareholders to seek liquidation of the company through submission of a petition in People's Intermediate Court2. The shareholders have the right to access and secure company's corporate records, accounts and articles. Limited Liability Companies: Gains for Minority Shareholder The PRC Company Law has abolished the previously approved system, according to which the company intending to launch their subsidiary were to contribute 50% ceiling on such investment activities. The PRC Company Law has encouraged the companies to establish their subsidiaries unconditionally3. The company law has further encouraged the involvement and participation of the local shareholders by increasing the non cash contribution from 20% to 70%. Even those shareholders having intellectual property rights have the grant to contribute and participate in shares transaction. However condition has been imposed on the acquisition of shares in exchange for intellectual property, provided assets can be transferred and properly appraised. The offer is valid only for the local shareholder, and the foreign shareholders can only apply their non cash contribution up to the level of 20%. The value of the minimum registered capital has been reduced one-third, and has dropped to Rmb 30,000; the provision is applicable unless specific prohibition is imposed. 4 According to the Business Guide, The mode of payments and installments limits has been revised. Under the Company Law 2005, the first installment shall not be less than 20% of the officially registered capital. The amount has to be paid with a period of 2 years, after is issuance of the business license. Involvement of MD and Vice Chairman The previous company law authorized the chairman to be the legal representative of the limited company. The authority of the Chairman was chosen because of their adherence to the contracts, which demand legal binding. The absence of the Chairman due to official engagements was responsible for unexpected delays, which hampered the corporate proceedings. The new company law has allowed the vice chairman or the managing director to be the legal representative of the company. Single Shareholder The PRC Company Law 2005 has approved an individual to be the single shareholder of the company, provided that the registered capital remains constant at Rmb 100,000. The installment laws are not applicable in this case. It is therefore believed that the single shareholding will encourage foreign investment, and will increase the number of joint-venture opportunities. The current company law has authorized the shareholders to subscribe for additional equity, even if the amount is higher than the original capital contributions. Joint Stock Companies In the case of joint stock limited company the amount of registered capital has been reduced from Rmb 10 million or Rmb 5 million. The strength of the promoters is between 20 and 200. The Joint Stock companies have the similar scheme for the installments, with more flexibilities and incentives in terms of remission through installments. The PRC Company law has allowed the transference of the shares of passage of a year from the date of incorporation of the company. In case if the joint stock limited company is public company, and has its shares floated among the public in bulk, the directors, senior managers, and supervisors are liable to dispose off their shares after a period of a year from the date when the company was listed in stock exchange. (What kinds of powers are vested in this organ) Local Investor: Major Organ The major objective of the new PRC Company Law is to ensure the effective incorporation process through achieving certain parameters. The new law has already reduced the minimum registered capital requirement for a limited liability company, and the local investors have expressed their willingness and interest to participate in the process, and struggle for its expedition, which will correspondingly enhance the performance and activities of stock market and corporate sector. The main organ which is likely to make most out of these incentives and policies is he local share holder. The new law has removed the connection between the industrial sectors, and has launched minimum registered capital. 5The new law has announced the reduction in the number of promoters to two, permission for 5 promoters was granted for the establishment of a joint stock limited company. The new law has placed the value for the minimum registered capital for a company limited by shares to Rmb 500,000, which was previously placed at Rmb 10 million. The PRC Company Law 2005 is considered to be an appropriate approach, but few analysts are of the opinion that the reduced values will be ignored by the government officials, and the companies will be required to own their personal funds necessary for the implementation of the business goals, therefore higher capital amount will be required, and the minimum value for the registered capital will be of no compliance. The interests of the local shareholder have been protected, they have been offered with possible assistance. The foreign investor although have several economic barriers to be crossed, so as to participate in the stock activities, and file for registered market, the regulations with reference to these formalities and activities have further increased the amount of investment. The Company Law 2005 has allowed less than 70% of the registered capital of companies in non-cash assets6. It is therefore believed that the local shareholder can eventually make much out of these schemes, and the ignorance about the financial capacity has further encouraged the enthusiastic and talented youth and investors to avail the provided opportunity to the maximum. The defined non cash assets should be monetarily valued and legally transferred. The New Law has resolved the misconceptions and misinterpretation of the shares' status. The contribution of the shares towards registered capital was previously unclear; the approved Company Act 2005 has partially resolved certain ambiguities. The New Law7 has failed to deliver the structuring reforms required by the company's share capital to be later categorized into common and preferred shares. The New Law has allowed the establishment of the company owned by single shareholder. The establishment of domestic limited liability company has been supported by the New Law; the established company has been allowed to be operated by the single share holder. The Company Law 2005 has provided the local share holder with ample opportunity to broaden the horizon of his planning and investment, and has opened the scope of activities8. The Company Act has provided additional opportunity to the shareholder, to authorize the limit of any investment by the company in other companies. The law has barred the company for approving invested entity's debts through the undertaking of joint liability. The law has introduced required provisions with reference to the enhancement of security. According to the law, the company has the right to protect the liabilities of the shareholder, and in other case, the shareholders have the right to secure the liabilities of the company, after getting approval of the board of directors of the company, or through the approval of the non-interested shareholders at general meeting. The law has protect the rights of the minority shareholders, the shareholders have been provided with the provisions for the repurchase of their owned company's share, in case of their opposition towards any agreement of acquisition and merger. In case if the minority shareholders contradict the disposal of major asset, the minority shareholder has the right to pressurize the company for the repurchase of their shares. In case of company's failure9 to offer dividends, and if the shareholder has opposed the renewals of the company's term, the shareholder has the right to claim the repurchase of their shares. The New Law has provided the shareholder with practical means to ensure that company has adopted moral and legal code of conduct; the shareholder has the access to study and copy the company's article of association, accounts, minutes of board and shareholders' meeting. The shareholders having population of less than 10% have the right to claim for the liquidation of the company, and the proposals can be submitted to People's Court, therefore the shareholder has an additional authority, discrete of power10. The State Administration which previously hold legitimate access to the reports and documents of the company, have loss their sole authority. The law has further protected the rights of the shareholders, through lifting the corporate veil, through the company laws the shareholders found guilty of misusing or false manipulation of accounts and share value will be held accountable. (What will (or 'should') happen when that organ is unavailable) In any of the case it is difficult to expect the absence of the organ i.e. shareholder. The involvement and the participation of the shareholders are therefore consistent, and plays legitimate role as observer, participant and contributor towards the progress and development of the company. The accountability of the plans and policies approved by the board of directors has been conducted by the shareholders, and the shareholders have therefore continuous involvement into the matters, and their absence has least possibility. Comparison with the Global Corporate Governance trends The PRC Company Law has taken into consideration the rules of conflicts of interests. The authorities including controlling shareholder, effective controller, director, or senior manager of a company in case found guilty of taking advantage of relationship, that affects the company's performance and growth, are liable to punishment and inquiry. In many of the cases the shareholders feared about the initiatives and plans of the directors, the company law has barred the director from their active participation in the issues, which are of any interest or gain for these directors. Concept of Social Responsibility The international trends in the corporate laws have been included in the company law. The PRC Company law 2005 is the manifestation of the international practices with reference to the corporate law. The scope and application of these formalities is considered to be limited. This requires the efforts and involvement of the People's Court in deliver and guide the directors through submission of proposals and substantial concepts. Read More