Introduction
This unit treats the company as a legal decision-making system. Corporate personality and limited liability tell us that the company can hold property and bear obligations in its own name. Corporate governance asks the next question: who may cause the company to act, who supervises that power, and what happens when one organ crosses the line into another organ’s domain?
The theoretical starting point is the separation of ownership and control. Shareholders supply risk capital, but directors and managers usually make business decisions. That separation makes scale and professional management possible, but it also creates agency costs, information asymmetry, and conflicts among managers, controlling shareholders, minority shareholders, creditors, employees, and public-market investors.
Three theories give students the vocabulary for the rest of the unit. Agency theory assumes that managers may pursue their own interests unless law, markets, monitoring, and incentives align them with shareholders. Stakeholder theory asks whether governance should account for employees, creditors, consumers, communities, the environment, and other constituencies affected by corporate conduct. Stewardship theory starts from a more trusting view of management and asks whether excessive monitoring may weaken professional commitment and long-term performance.
The revised Company Law then converts those theories into institutional design. It reallocates power between shareholders’ meetings and boards, allows audit committees to replace supervisors, broadens the legal representative rule, simplifies small-company governance, strengthens employee representation, and gives listed companies a more regulated governance layer through CSRC rules. The result is not a pure Anglo-American board model or a pure continental supervisory-board model. It is a flexible Chinese dual-track structure: companies may retain a traditional supervisor system, or use a board audit committee as the internal supervisory organ where the statute permits or requires it.
The central theme is therefore power plus accountability. The shareholders’ meeting remains the authority for fundamental structural decisions. The board becomes the core business decision-making organ. Managers execute under the articles or board authorization. Supervisors or audit committees monitor directors and senior managers. The legal representative binds the company externally, subject to protection for good-faith counterparties. Courts then police procedure, statutory organ boundaries, abuse of majority power, and the limits of company autonomy.
Key Legal Issues
- The governance problem created by separation of ownership and control.
- The relationship among agency theory, stakeholder theory, and stewardship theory.
- The legal status and external effect of the legal representative.
- Shareholders’ meeting powers after the deletion of operating-policy and annual-budget approval from the statutory list.
- Board powers after Article 67’s stronger role for operating plans, investment plans, internal organization, manager appointment, basic management systems, and delegated powers.
- Managerial authority as an articles-based or board-authorized function rather than a statutory catalogue.
- Supervisory design: traditional supervisors and supervisory boards, audit committees in limited liability companies, and mandatory audit committee governance for listed companies.
- Employee participation, especially the employee-director requirement for companies with more than 300 employees unless employee supervisors are already used.
- Small-company simplification through a single director and, where permitted, reduced or omitted supervisor structures.
- Listed-company governance as a company-law and securities-law hybrid.
- Resolution validity, voidability, non-establishment, and judicial restraint in business-judgment matters.
- Ultra vires organ decisions: when shareholders’ meetings cannot take board powers upward, and when boards cannot receive powers reserved by statute to shareholders.
- The role of articles of association in allocating open-textured matters such as guarantees, major investments, asset disposals, meeting procedure, and authorization rules.
- Comparative models: one-tier boards, two-tier boards, hybrid structures, audit committees, independent directors, and comply-or-explain codes.
Hypotheticals
- The board removes a general manager after a short meeting. The manager sues, arguing that the business reasons were false.
- A shareholders’ meeting directly decides a specific operating matter that the articles and Company Law place with the board.
- The shareholders’ meeting authorizes the board to amend the articles, approve mergers, and change registered capital whenever needed.
- A board makes an external guarantee decision, while a minority shareholder argues that the articles reserve major guarantees to the shareholders’ meeting.
- A listed company replaces its board of supervisors with an audit committee but does not update its articles or committee procedures.
- A company with 350 employees has no employee director and no employee supervisor.
- A legal representative resigns but the company refuses to file a change registration and a counterparty signs a new contract during the gap.
- Controlling shareholders amend the articles to accelerate all shareholders’ capital contribution dates, over minority objection.
- A private company relies on unanimous informal shareholder consent instead of holding a formal meeting.
Governance Framework
| Layer | Core Question | Main Sources |
|---|---|---|
| Theory | Why do companies need governance rules at all? | Jensen and Meckling; Freeman; Donaldson and Davis; Anatomy |
| Organ design | Which organs must or may be established? | Company Law arts. 58-86, 112-128, 121, 137 |
| Power allocation | Which decisions belong to shareholders, the board, managers, supervisors, or audit committees? | Company Law arts. 59, 67, 74, 78, 112, 120, 126 |
| External representation | When does the company bear acts of the legal representative? | Company Law arts. 10-11; Civil Code background rules |
| Public-company layer | What extra governance constraints apply to listed companies? | CSRC governance code, articles guideline, shareholders’ meeting rules, independent-director measures |
| Conflict handling | What if a decision is procedurally flawed, substantively beyond power, or abusive? | Company Law resolution rules; Interpretation IV; Jiu Min Minutes; SPC draft interpretation |
| Comparative law | How do other systems distribute power and supervision? | UK, Delaware/MBCA, Germany, Singapore, Hong Kong, OECD materials |
Organ Powers
| Organ | Legal Position | Core Powers | New Law Signal |
|---|---|---|---|
| Shareholders’ meeting | Power organ | Elect and remove directors and supervisors; approve board and supervisor reports; approve profit distribution and loss recovery; decide capital increase or reduction, bond issuance, merger, division, dissolution, liquidation, change of form, and articles amendment | The list is more structural. The old operating-policy, investment-plan, and annual-budget items were removed. |
| Board | Business decision-making organ | Convene shareholders’ meetings; execute shareholder resolutions; decide operating and investment plans; formulate profit distribution, capital, bond, merger, division, dissolution, and form-change plans; set internal institutions; appoint or dismiss managers and finance heads; make basic management systems | The board has stronger operating authority and may receive other powers through the articles or shareholders’ meeting, subject to statutory limits. |
| Manager | Executive organ | Acts under the articles or board authorization and attends board meetings | The old statutory catalogue of manager powers was deleted, making authority more articles-based and board-based. |
| Supervisory board or supervisors | Traditional internal supervision | Inspect finance; supervise directors and senior managers; propose removal; require correction; propose and convene shareholders’ meetings when needed; bring litigation on behalf of the company | The system remains available, especially for non-listed companies and companies choosing a two-tier approach. |
| Audit committee | Board committee with supervisory functions | Exercises statutory supervisor powers where established; for listed companies, must approve key audit, finance, and reporting matters before board action | The audit committee is the path toward a one-tier governance model and replaces supervisors in listed-company governance. |
| Legal representative | External representative | Acts in the company’s name; external legal consequences ordinarily belong to the company | Articles or shareholder restrictions on representative authority cannot be used against a good-faith counterparty. |
Two points deserve emphasis. First, “shareholders’ meeting as power organ” does not mean shareholders can manage every company matter directly. Second, “board-centered governance” does not mean the board can take over statutory shareholder powers. The revised Company Law pushes operating decisions toward the board while preserving shareholder authority over fundamental structural decisions.
Legislation
Start with the revised Company Law. Articles 10 and 11 govern the legal representative: the representative may be a director who executes company affairs or the manager, and the company bears the legal consequences of representative acts in the company’s name, while internal limits cannot defeat a good-faith counterparty.
Articles 58 to 86 are the core limited liability company governance provisions. Article 59 defines the shareholders’ meeting’s structural powers and allows board authorization for bond issuance. Article 66 sets the special two-thirds rule for amendments to the articles, capital changes, merger, division, dissolution, and change of company form. Article 67 defines board powers, including operating plans, investment plans, internal institutions, manager appointment, and basic management systems. Article 68 sets board composition and employee-director rules. Article 69 allows an audit committee to exercise supervisor powers in a limited liability company. Article 74 makes the manager’s powers depend on the articles or board authorization. Article 75 allows small companies to use a single director. Articles 78 to 86 cover supervisors and supervisory boards.
For companies limited by shares, Articles 112, 120, 121, 126, and 128 adapt the same basic structure. Article 121 is especially important because it sets the audit committee’s minimum composition and independence requirements where a company limited by shares uses an audit committee instead of supervisors. Article 137 adds listed-company audit committee pre-approval for hiring or dismissing auditors, appointing or dismissing the finance head, and disclosing financial reports.
Articles 178 to 193 belong partly in Unit 5, but Unit 4 needs their governance architecture. Article 178 sets negative qualifications for directors, supervisors, and senior managers. Article 180 defines loyalty and diligence, and extends those duties to controlling shareholders and actual controllers who do not formally serve as directors but actually execute company affairs.
The CSRC governance materials provide the public-company layer. The revised Code of Corporate Governance for Listed Companies is CSRC Announcement [2025] No. 18 and takes effect on 1 January 2026. It updates rules for directors, senior managers, controllers, incentives, related-party review, disclosure, internal control, sustainability reporting, and governance improvement. The Guidelines for Articles of Association of Listed Companies are CSRC Announcement [2025] No. 6, effective from 28 March 2025. They are the direct drafting template for listed-company articles under the revised Company Law. The listed-company shareholders’ meeting rules and independent-director measures then supply procedural and supervisory detail.
The SPC draft Company Law interpretation, released for public comment on 30 September 2025, is not binding law. It is still useful because Article 10 of the draft would treat statutory organ boundaries as hard limits: a resolution that transfers powers legally reserved to the shareholders’ meeting down to the board, or powers legally reserved to the board up to the shareholders’ meeting, may be invalid. Students should mark this as judicial direction rather than enacted interpretation.
Use Interpretation IV and the Jiu Min Minutes for the older but still important resolution-validity and external-guarantee framework. Use the enterprise democratic-management provisions and state-owned asset rules when governance involves employee participation or state-invested companies.
Cases
Guiding Case No. 10, Li Jianjun v. Shanghai Jiadongli, is the core resolution-review case. The board removed the general manager. The court held that a resolution challenge asks whether the convening procedure, voting method, or resolution content violates law, administrative regulations, or the articles. If those requirements are satisfied, the truth or commercial sufficiency of the board’s removal reasons is not normally for judicial review. The case is a clean way to teach judicial restraint and corporate autonomy.
Xu Minghong v. Quanzhou Nanming Real Estate is useful for board-resolution form. It helps students distinguish a genuine collective board decision from signatures, informal communications, or documents that do not amount to organ action. In a system that allows flexible governance structures, formal decision identity still matters.
Hongda, the SPC Gazette contribution-period case, belongs in Unit 4 as well as Unit 3. It shows that shareholders’ meeting majority power has substantive limits. A controlling shareholder cannot use a formal articles amendment to deprive another shareholder of a negotiated contribution-period benefit without legal basis or urgent justification. This is an example of the boundary between majority governance and abuse of majority position.
The reported Xuzhou Intermediate Court case, (2024) Su 03 Min Zhong No. 5818, is useful as a current teaching problem on upward seizure of board power. Practice commentary reports that the court treated a shareholders’ meeting decision on concrete operating management matters as beyond shareholder authority. Because the primary judgment is not linked in the course library, teach it as a reported example and pair it with the SPC draft interpretation and the China Business Law Journal note.
The legal-representative cases in the materials page show a different governance conflict: the public register may show one representative, while internal appointment, resignation, removal, or nominee arrangements point elsewhere. These cases are useful for asking when registration protects outsiders, when a company must cooperate in change or expungement, and how internal authority interacts with external reliance.
The comparative cases sharpen the same questions. Automatic Self-Cleansing teaches that majority shareholders do not automatically possess ordinary management authority when the articles allocate management to the board. Re Duomatic shows when unanimous informal shareholder consent may substitute for formal procedure. Schnell and Blasius show Delaware’s equitable limits on technically valid governance maneuvers that obstruct shareholder voting.
Comparative Materials
The classic structural contrast is between one-tier and two-tier governance. In a one-tier system, the board combines executive and non-executive directors, and monitoring is supplied through independent directors, audit committees, fiduciary duties, disclosure, and market pressure. The United States, the United Kingdom, Hong Kong, and Singapore are useful comparators, though each has its own public-company overlay.
In a two-tier system, the management board runs the company while a separate supervisory board appoints, supervises, and sometimes removes management. Germany is the leading comparator. Its stock corporation law and corporate governance code also show how employee participation and supervisory-board design can be built into company governance rather than treated as external labor law only.
OECD’s 2025 Corporate Governance Factbook reports that among 52 economies, 24 favor one-tier board structures, 7 favor two-tier structures, 18 allow both, and 3 use hybrid systems. It also describes China’s revised Company Law as moving listed companies toward a one-tier audit-committee model. This is a helpful external description, but students should still read the Chinese statute carefully: non-listed Chinese companies retain meaningful choice between supervisors and audit committees.
The United Kingdom illustrates the comply-or-explain tradition. The 2024 UK Corporate Governance Code applies for financial years beginning on or after 1 January 2025, while Provision 29 applies from 1 January 2026. Its method is not to prescribe every governance structure as hard law, but to require listed companies to either comply or give meaningful explanations.
The United States supplies the board-primacy and shareholder-power debate. Delaware law gives boards broad management authority, but fiduciary duty litigation, equitable principles, shareholder voting rules, and charter or bylaw design constrain opportunism. Bebchuk’s shareholder-power argument is useful because it pushes students to ask whether board authority should be reduced when shareholders can coordinate effectively.
China’s revised model is best understood as selective convergence. It borrows audit committee and independent director tools from one-tier systems, retains supervisor options for many companies, strengthens employee participation for larger companies, and uses mandatory rules to protect statutory organ boundaries. The hard comparative question is whether China’s hybrid model will reduce agency costs or simply add another layer of formal compliance.
Readings
Use the theory readings first. Jensen and Meckling gives the agency-cost framework. Freeman supplies the stakeholder vocabulary. Donaldson and Davis gives students a management-theory alternative to suspicion-based monitoring. The Anatomy of Corporate Law then connects those theories to the three recurring agency conflicts: managers versus shareholders, controllers versus minority shareholders, and shareholders versus creditors, employees, or other constituencies.
For Chinese black-letter law, students should read the Company Law provisions listed in the core index, the 2026 listed-company governance code, the 2025 listed-company articles guideline, the shareholders’ meeting rules, and the independent-director measures. These materials show how company law and securities regulation now interlock.
For judicial materials, start with Guiding Case No. 10, Xu Minghong, Hongda, Interpretation IV, the Jiu Min Minutes, and the SPC draft interpretation. The China Business Law Journal note on shareholders’ meeting and board powers is a useful bridge because it explains why the draft interpretation matters for organ-boundary disputes.
For employee participation, use Taylor Wessing, PwC, and Shen and Faure. Ask students to separate three questions: when the employee-director rule is triggered, which organ design the company has selected, and whether the articles and actual election process match that selection.
For comparative law, use the OECD principles and Factbook, the UK and German governance codes, Delaware and MBCA statutory materials, Hong Kong and Singapore legislation, and the UK/Delaware cases. Students should compare not just labels such as “board” and “supervisor,” but the enforcement ecology around those labels.
Core Statutory Index
| Topic | Core Source |
|---|---|
| Legal representative appointment and resignation | Company Law art. 10 |
| Legal consequences of representative acts | Company Law art. 11 |
| LLC shareholders’ meeting | Company Law arts. 58-66 |
| LLC board powers and composition | Company Law arts. 67-73 |
| LLC manager | Company Law art. 74 |
| Small LLC single-director structure | Company Law art. 75 |
| LLC audit committee | Company Law art. 69 |
| LLC supervisors and supervisory board | Company Law arts. 76-86 |
| Company limited by shares shareholders’ meeting | Company Law arts. 112-119 |
| Company limited by shares board | Company Law arts. 120-127 |
| Company limited by shares audit committee | Company Law art. 121 |
| Small company limited by shares single-director structure | Company Law art. 128 |
| Listed-company audit committee pre-approval | Company Law art. 137 |
| Director, supervisor, and senior-manager qualifications | Company Law art. 178 |
| Loyalty and diligence, including de facto controller execution | Company Law art. 180 |
| Listed-company governance code | CSRC Announcement [2025] No. 18 |
| Listed-company articles guideline | CSRC Announcement [2025] No. 6 |
| Listed-company shareholders’ meeting procedure | CSRC Announcement [2025] No. 7 |
| Draft ultra vires organ-resolution rule | SPC draft Company Law interpretation art. 10 |
Teaching Notes
Teach this unit as a sequence: theory, organ map, power allocation, conflict handling. Students often memorize that the shareholders’ meeting is the “power organ” and then assume it can decide everything. The revised Company Law is more subtle. It preserves shareholder authority over structural matters while moving business judgment toward the board and execution toward management.
Be explicit about the dates. The revised Company Law has been in force since 1 July 2024. The CSRC listed-company articles guideline is Announcement [2025] No. 6 and has applied since 28 March 2025. The revised listed-company governance code is Announcement [2025] No. 18 and takes effect on 1 January 2026. The SPC Company Law interpretation is still a 30 September 2025 draft, not a binding judicial interpretation.
Use hypotheticals to force students to identify the disputed organ first. A case may look like a shareholder-rights dispute, but the real question may be board authority. A case may look like a board-resolution dispute, but the real question may be article-based delegation, external reliance, or abuse of majority power. This habit will carry forward into Unit 5 on duties and Unit 6 on shareholder remedies.