23 Matters That Can be Customized in a Company’s Articles of Association (Part III)

The Articles of Association (“AOA”) is the cornerstone document of a company, which sets out critical matters such as the company’s name, registered address, business scope, management system, and other foundational elements. As a written instrument, the AOA defines the basic rules for the company’s organization and operations, serving as a key reference for its governance.

According to the Company Law of the People’s Republic of China  (“Company Law”):

A company shall formulate its articles of association pursuant to the law when it is established, which shall be binding on the company, shareholders, directors, supervisors and senior executives.

The AOA represents the collective intention of all shareholders, laying out the fundamental principles for the company’s structure and activities. For this reason, the AOA is often referred to as the “constitution” of the company. It plays a vital role in ensuring the company’s smooth operation, standardizing corporate governance, preventing deadlocks, and safeguarding shareholders’ rights.

In modern corporate law, company autonomy is a core principle, granting shareholders the right to decide on various matters through the AOA. As companies evolve in complexity—encompassing diverse shareholder compositions, governance structures, and personnel—leveraging the legal framework to define key matters in the AOA becomes essential. This allows shareholders to shape governance arrangements that align with their specific objectives.

In this article, we introduce 23 matters that can be freely agreed upon in a company’s AOA in China.

Board of supervisors/supervisor

Legal provisions

According to Article 76 of the Company Law, a limited liability company must establish a board of supervisors with more than three members. The board of supervisors should include shareholder representatives and an appropriate proportion of employee representatives, with employee representatives making up no less than one-third. The specific proportion is determined by the company’s AOA. Employee representatives are elected through an employee representative assembly, an employee meeting, or other forms of democratic election.

Article 83 stipulates that smaller companies or companies with fewer shareholders may appoint one supervisor instead of a board of supervisors; a company can choose not to have a supervisor with the consent of all shareholders.

Legal analysis

This rule mainly concerns the composition of the board of supervisors. Supervisors have the right to inspect the company’s finances, supervise directors and senior management, propose dismissals, suggest convening an extraordinary shareholders’ meeting, or under certain conditions, preside over the shareholders’ meeting, submit proposals to the shareholders’ meeting, and initiate lawsuits against directors or senior management causing harm to the company. Their main role is to oversee the actions of the shareholders’ meeting, board of directors, and senior management, ensuring they act legally and diligently. For companies with a board of supervisors, employee representation is mandatory, and the specific proportion is stipulated in the AOA, but it cannot be less than one-third.

Practical suggestion

For companies with many shareholders, establishing a board of supervisors is advisable. If minority shareholders do not actively participate in governance, increasing the proportion of employee supervisors may encourage engagement and curb the influence of major shareholders.

Term of supervisors

Legal provisions

Article 77 of the Company Law states that the term of office for a supervisor is three years. Supervisors may be re-elected upon expiration of their term. If a supervisor’s term expires without timely re-election or if resignation results in a board of supervisors with fewer than the statutory number, the original supervisor must continue to perform his/her duty until the newly elected supervisor takes office in accordance with laws, administrative regulations, and the company’s AOA.

Legal analysis

Unlike directors whose term is stipulated by the AOA and cannot exceed three years, a supervisor’s term is set by law at three years. But a supervisor’s term is also calculated in terms of office, not individual tenure. Supervisors must continue their duties if not replaced, which is a legal obligation. Meanwhile, the company should re-elect or fill the position in a timely manner.

Practical suggestion

Despite that the supervisor’s term is legally fixed at three years and cannot be altered, specific duties and performance methods can be specified by the AOA.

Supervisory board/supervisor’s powers

Legal provisions
According to Article 78 of the Company Law, the board of supervisors, or the supervisor in companies without a board of supervisors, exercises the power to inspect the company’s finances and other powers stipulated in the AOA.

Legal analysis

The board of supervisors or a sole supervisor is tasked with overseeing directors and senior management to safeguard the company’s interests, ensuring their actions comply with the law and prioritize the company’s welfare. This structure provides minority shareholders with a mechanism to exercise certain rights and influence corporate governance. Expanding the powers of the board of supervisors or a supervisor enhances their ability to oversee directors and senior management, ultimately supporting the protection of minority shareholder rights.

Practical suggestion
In disputes over authority among shareholders, the position of supervisor is often the easiest to secure. To strengthen the oversight of directors and senior management effectively, it is recommended to expand the powers of the board of supervisors/supervisor through provisions in the AOA. This approach empowers minority shareholders to impose checks on directors and senior management, who are typically appointed or influenced by major shareholders, thereby promoting balanced governance and accountability.

Meeting procedures and voting procedures for the board of supervisors

Legal provisions

Article 81 of the Company Law states that the board of supervisors shall convene at least once a year, and a supervisor may propose an extraordinary supervisory board meeting. The meeting procedures and voting procedures of the board of supervisors, unless otherwise provided by law, are specified in the AOA. The Board of supervisors resolutions must be approved by more than half of the supervisors.

Legal analysis

The board of supervisors has both regular and extraordinary meetings. Supervisory board resolutions must be approved by more than half of the total supervisors. The AOA may specify details such as quorum requirements, notification methods, timing, voting procedures, and formats (e.g., raised hands or anonymous ballots).

Practical suggestion

The board of supervisors’ primary function is to supervise and limit the board of directors and senior management, serving as an important channel for minority shareholders to safeguard their rights and participate in company operations. The board of supervisors’ meeting procedures should be set according to its composition, specifying attendance requirements (e.g., a minimum quorum). Voting procedures can also be clearly defined in the AOA to enhance meeting efficiency and the legitimacy of resolutions.

Transfer of shares in a limited liability company

Legal provisions

Article 84 of the Company Law states that shareholders of a limited liability company may transfer their shares to each other. When transferring shares to non-shareholders, the transferring shareholder must notify the number of the shares to be transferred, price, payment method, time, etc. to other shareholders in writing, and other shareholders have the pre-emptive rights under the same conditions. If other shareholders do not respond within 30 days, they are considered to waive their pre-emptive rights. If two or more shareholders exercise the pre-emptive right, the respective purchase ratio shall be determined through negotiation; If no agreement can be reached through negotiation, the pre-emptive right shall be exercised according to the respective proportion of investment at the time of transfer. Where the AOA provide otherwise for the transfer of equity, such provisions shall prevail.

Legal analysis

Since an LLC emphasizes the personal relationships between shareholders, share transfers are crucial for maintaining shareholder stability. Shareholders are generally free to transfer shares among themselves; however, transferring shares to outsiders requires other shareholders to waive their pre-emptive rights. This provision balances shareholders’ freedom to dispose of their shares with the need to promote stability within the company. Considering the personal nature of shareholder relationships, the law allows the company’s AOA to stipulate specific conditions and procedures for share transfers. These provisions in the AOA take precedence over statutory provisions.

Practical suggestion

Shareholders should carefully decide whether to restrict or relax conditions for share transfers based on the company’s intended character. Founding shareholders must determine whether the company will operate with a more closed or open approach to share transfers. For a more closed company, the AOA should impose stricter conditions on share transfers, while a more open company can adopt more lenient provisions. The AOA may address aspects such as notification requirements and pre-emptive rights. However, it is important to note that provisions prohibiting shareholders from transferring their shares are invalid, as they unreasonably restrict shareholders’ rights.

Succession of shares/shareholder qualification

Legal provisions

Article 90 of the Company Law states that after the death of an individual shareholder, their lawful heir may inherit their shareholder qualification unless otherwise stipulated in the AOA.

Legal analysis

This provision addresses the inheritance of shareholder qualifications, recognizing the dual nature of equity: it combines property rights with personal attributes. Failing to distinguish between these two aspects during inheritance could result in complications. For example, heirs may include multiple individuals, minors with limited civil capacity, or persons without civil capacity, potentially disrupting the balance among existing shareholders and undermining the company’s governance structure.

To address these risks, the law permits differentiation between inheriting equity (the property right) and shareholder qualifications (the personal attribute). While lawful heirs can inherit both equity and shareholder qualifications by default, the AOA can stipulate otherwise. Specifically, the AOA may include provisions preventing heirs from automatically acquiring shareholder qualifications, preserving the intended composition and dynamics of the company.

Practical suggestion

Founding shareholders should address this issue early on in the company’s AOA. For family-owned businesses, it may be appropriate to allow heirs to acquire shareholder qualifications. However, for non-family businesses, it is advisable to stipulate that heirs should not automatically obtain shareholder qualifications, given the unpredictability of whether heirs are suitable to serve as shareholders. The AOA can adopt a broad provision stating that heirs cannot acquire shareholder qualifications or include detailed provisions specifying circumstances under which heirs are disqualified (e.g., minors, individuals lacking civil capacity, etc.). When stipulating that heirs cannot acquire shareholder qualifications, the articles should clearly outline how the inherited equity will be handled, including the method of transfer, valuation, and other relevant arrangements.

Cumulative voting system

Legal provisions

Article 117 of the Company Law allows cumulative voting for electing directors or supervisors, where each share grants a number of votes equal to the number of directors or supervisors to be elected.

Legal analysis

In joint-stock companies, equity is often dispersed among a large number of small and medium shareholders. Within the governance structure of such companies, the board of directors and the board of supervisors hold significant power and play pivotal roles. Control over the company is typically exercised by influencing the board of directors whose members are elected at the shareholders’ meeting.

When voting is based solely on shareholding proportions, small and medium shareholders often face challenges in electing their representatives to the board of directors. To address this issue, the Company Law introduced the cumulative voting system, specifically designed to protect the interests of small and medium shareholders.

This system applies exclusively to the election of directors and supervisors at shareholders’ meetings. Its adoption requires either a resolution passed at the shareholders’ meeting or explicit inclusion in the Articles of Association (AOA).

The cumulative voting system multiplies each shareholder’s voting power by the number of directors to be elected, allowing them to concentrate all their votes on a single candidate. For example, if the board comprises nine members and a shareholder holds 10,000 shares, the shareholder can cast 90,000 votes for a single candidate. This significantly enhances the ability of small and medium shareholders to elect their preferred representatives to the board by consolidating their voting power.

Practical suggestion

The cumulative voting system limits the absolute control of major shareholders in the election process of directors and supervisors, empowering small and medium shareholders in joint-stock companies to nominate their representatives to the board of directors and safeguard their interests. Under the Company Law, adopting this system must either be specified in the AOA or determined by a resolution of the shareholders’ meeting.

Compared to a shareholders’ meeting resolution, including the cumulative voting system in the AOA provides greater stability and effectively prevents major shareholders from arbitrarily deciding its implementation to serve their interests. Therefore, small and medium shareholders should be particularly attentive during the inaugural meeting when the AOA is being reviewed, ensuring the adoption of the cumulative voting system to avoid potential disadvantages in the future.

Meeting procedures and voting procedures for supervisory board in joint-stock companies

Legal provisions

Article 132 of the Company Law requires the board of supervisor of a joint-stock company to convene at least one meeting every six months. Supervisors may convene an interim meeting of the board of supervisors. The AOA may stipulate the meeting and voting procedures, with resolutions requiring approval by more than half of the supervisors.

Legal analysis

This provision differs from the rules governing the board of directors. Under the Company Law, joint-stock companies are not granted discretion to customize the discussion and voting procedures for the board of directors through the AOA. The law explicitly prescribes the requirements for board meetings in joint-stock companies, leaving limited flexibility for customization.

This approach considers the significant authority already vested in the board of directors of a joint-stock company. In this context, the role of the board of supervisors becomes even more critical. Consequently, the law permits the company’s AOA to freely define the procedures for meetings and voting of the board of supervisors, except where explicitly stipulated by law. This flexibility allows shareholders to design efficient and practical procedures for deliberation and decision-making that align with the company’s specific needs.

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