Company Supervisors in China – Obligations, Liabilities and Legal Requirements

Company supervisors in China play a crucial role in upholding corporate governance and ensuring legal compliance within organizations. As overseers of executive actions, supervisors act as a safeguard against potential misconduct or irregularities, contributing to the overall transparency and integrity of business operations. Most foreign companies operating in China are required to appoint supervisors, and many must also set up a board of supervisors.

By providing an additional layer of oversight, the role of supervisors and the board of supervisors is meant to enhance accountability, mitigate risks, and protect the interests of shareholders.  

Under China’s Company Law, all companies are required to appoint supervisors, and in some cases, to establish a board of supervisors. Company supervisors are bound to the company’s articles of association (AoA) and bear corresponding legal liability. 

On December 29, 2023, the Standing Committee of the National People’s Congress (NPC) adopted an amendment to China’s Company Law (the “2023 Company Law”). The final version of the 2023 Company Law, which will come into force on July 1, 2024, makes a few changes to the requirements for company supervisors. 

In this article, we explain the current requirements for company supervisors in China, including their roles and responsibilities, the appointment process, and legal liabilities within the company. 

Requirements for supervisors and the board of supervisors 

An LLC that is either smaller in scale or has a small number of shareholders may have only one or two supervisors and does not need to set up a board of supervisors. 

In both LLCs and joint-stock companies, the board of supervisors must include shareholder representatives and an appropriate proportion of company employee representatives. At least one-third of the board must be held by employee representatives. This proportion must be stipulated in the company’s AoA. 

Meanwhile, the amended company law introduced two major changes regarding supervisor requirements: 

1. Allowing companies to establish an audit committee in lieu of a board of supervisors; and
2. Exempting small LLCs from having supervisor(s). 

Supervisor eligibility requirements

First of all, directors and senior managers may not concurrently serve as supervisors. 

In addition, anyone who falls under any of the following circumstances is not permitted to serve as a supervisor: 

• Has no civil capacity or has limited civil capacity (generally, those aged over 18); 
• Has been sentenced for corruption, bribery, encroachment of property, misappropriation of property, or undermining the socialist market economic order and a five-year period has not lapsed since the expiration of the penalty expired, or has been deprived of political rights due to a crime and a five-year period has not lapsed since the expiry of the penalty expired; 
• Is serving as a director, factory director, or manager of a company or enterprise undergoing bankruptcy liquidation, and is personally responsible for the bankruptcy of the company or enterprise, and less than three years have elapsed since the date of completion of the bankruptcy liquidation; 
• Is serving as the legal representative of a company or enterprise that has had its business license revoked or ordered to close due to a legal violation and bears personal responsibility for the violation, and a three-year period has not elapsed since the revocation of the business license of the company; or 
• Has a large amount of personal debt that has not been paid off on time. 

Election of company supervisors 

• Company supervisors who are not employee representatives are selected by the shareholders’ meeting. 
• The employee representatives on the board of supervisors must be democratically elected by the employees through employee congresses, workers' conferences, or other forms of democratic meetings. 
• The chairman of the board of supervisors must be elected by a majority of the supervisors on the board.
• If the chairman of the board of supervisors is unable or fails to perform their duties, then more than half of the supervisors can jointly elect a supervisor to convene and preside over the meeting of the board of supervisors.  

• The board of supervisors and supervisors are selected by the founding members after they have made sufficient capital contributions as stipulated in the company’s AoA. The company’s supervisors and members of the board of supervisors must be written in the AoA. 
• The employee representatives on the board of supervisors must be democratically elected by the employees through employee congresses, workers' conferences, or other forms of democratic meetings. 
• The chairman and vice chairman of the board of supervisors must be elected by a majority of the supervisors on the board.  

If a supervisor's term expires and they are not re-elected in time, or if a supervisor resigns during their term and the members of the board of supervisors fall below the required number, then the original supervisor must continue to perform their duties as a supervisor until the re-elected supervisor takes office. 

In addition to electing the supervisors in an LLC, the shareholders’ meeting also has the power to replace supervisors, provided they are not employee representatives, and decide on their remuneration. 

Responsibilities of company supervisors and the board of supervisors 

1. Checking the company’s finances;
2. Supervising the performance of the company’s duties by directors and senior managers, and making recommendations for the removal of directors and senior managers who violate laws, administrative regulations, company AoA, or shareholders’ meeting resolutions;
3. Requiring directors and senior managers to make corrections when their actions harm the interests of the company;
4. Proposing to convene additional shareholders' meetings outside the number stipulated in the AoA, and convening and presiding over the shareholders' meeting when the board of directors fails to perform this duty as is normally required;
5. Putting forward proposals to the shareholders’ meeting;
6. Initiating lawsuits against directors and senior managers in accordance with the Company Law; and
7. Any other powers stipulated in the company's AoA. 

If the board of supervisors or supervisors of a company without a board of supervisors discovers that the company's operating conditions are abnormal, they may conduct an investigation; if necessary, they may hire an accounting firm to assist them in their work at the company's expense.

The board of supervisors is required to hold at least one meeting every year in an LLC, and every six months in a joint-stock company. Supervisors may also propose to convene additional meetings outside the required number. The board of supervisors must keep minutes of its decisions on the matters discussed, which must be signed by all of the supervisors in attendance.

The company can stipulate its own discussion methods and voting procedures of the board of supervisors, which must be written in the AoA. 

Resolutions of the board of supervisors must be approved by more than half of the supervisors. Minutes of the meetings of the board of supervisors must be recorded and signed by the supervisors who attended the meeting. 

The shareholders’ meeting is responsible for reviewing and approving reports compiled by the board of supervisors (or supervisors in the case of a company without a board of supervisors). 

Where a director or senior executive violates the laws and administrative regulations or the AoA of the company in the performance of their duties and powers, and this violation causes the company to suffer damages, they will bear liability for compensation. In these circumstances, a shareholder or a group of shareholders of an LLC, or in the case of a joint-stock, a shareholder or shareholders who have held at least one percent of shares in the company for 180 consecutive days, may submit a request in writing to the board of supervisors or the supervisor (in the case of an LLC which has not established a board of supervisors) to file a lawsuit with a people's court. 

Legal liabilities of supervisors 

Supervisors who are found to violate any laws, administrative regulations, or the company's AoA when performing their duties, and where these violations cause losses to the company, will be liable for compensation. 

If a supervisor is found to have committed any of these violations, a company shareholder (or multiple shareholders) of an LLC (or, in a joint-stock company, a shareholder or shareholders who have held at least one percent of shares in the company for 180 consecutive days), may request the board of directors (or the executive director in an LLC without a board of directors) to file a lawsuit to the people’s court in writing.  

Requirements for supervisors and boards of supervisors in foreign companies

That is to say, any FIEs established after January 1, 2020 (when the FIL came into effect) and in accordance with the Company Law need to appoint supervisors and a board of supervisors, as applicable.  

Meanwhile, according to Article 42 of the FIL, the Wholly Foreign-owned Enterprises (WFOE Law), the Law on Sino-foreign Cooperative Joint Ventures (CJV Law), and the Law on Sino-foreign Equity Joint Ventures (EJV Law) were repealed simultaneously when the new FIL came into force on January 1, 2020. 

However, FIEs established in accordance with these three laws before the FIL took effect may retain their original organizational structures for five years after January 1, 2020, that is, until the end of 2024. While the WFOE law has provisions on supervisors, the CJV Law and EJV Law do not mention supervisors. In theory, this means that FIEs established in accordance with the CJV Law and the EJV Law are not required to have supervisors or a board of supervisors until the end of 2024. 

Establishment of an audit committee in lieu of a board of supervisors

The 2018 version of the Company Law required companies to set up a board of supervisors to oversee the company’s affairs. However, this board has generally not had a lot of use in practice, which may be the reason that the 2023 Company Law has introduced this new body. 

The audit committee in a joint-stock company must have at least three members, of which more than half (at least two if the committee only has three members) do not hold any other positions within the company other than the director. They must also not have any relationship with the company that could affect their independent and objective judgment. 

Employee representatives who are members of the company’s board of directors can become members of the audit committee (in both joint-stock companies and LLCs). 

The new law outlines specific provisions for the deliberation and voting procedures of the audit committee of joint-stock limited companies and publicly listed companies. These provisions are as follows: 

• Resolutions made by the Audit Committee must be approved by more than half of its members. 
• Each member of the Audit Committee has one vote for resolutions. 
• The deliberations and voting procedures of the audit committee shall be stipulated. 
• The company’s AoA, except where otherwise stipulated in the Company Law. 
• The company may set up other committees on the board of directors following the provisions of the company’s AoA. 

No supervisors required for small LLCs