The Employee Representative on the Board of Directors of Chinese Companies under the Revised Company Law

However, a detailed analysis of the legal background and current legal practice reveals a different picture. The previous Company Law already permitted the optional appointment of employee representatives in a Chinese limited liability company. The revised Company Law, which came into force on 1 July 2024, contains clear regulations on employee representatives.

If the board of directors of a Chinese limited liability company, which is usually the legal form of subsidiaries of foreign companies in China, has three or more members, the members may include representatives of the company's employees. For a limited liability company with 300 or more employees, an employee representative is mandatory among the members of the board of directors, unless the company already has a supervisory board with an employee representative.

This means that the employee representative is not relevant at all for many Chinese subsidiaries. The majority of these companies, especially small and medium-sized enterprises, are likely to have fewer than 300 employees in China. Before 1 July 2024, the inclusion of an employee representative on the board of directors was only mandatory if the company was a state-owned enterprise, regardless of the number of employees.

It is currently legally controversial, probably also because there is still a lack of relevant practice or precedents, whether an employee representative is dispensable for affected companies if a single board member is appointed instead of a board of directors with at least three members. According to the wording of the revised Company Law, this should be possible. The meaning and purpose of the board of directors function, in particular its legally assigned tasks, also clearly indicate that an individual board member must always be appointed by the shareholder. The opposing opinion overlooks the fact that in Chinese company law, the board of directors mainly performs executive tasks and implements the interests of the shareholder. An employee representative as an individual board member would be put in a situation where he or she has to represent the interests of the shareholder and the employees at the same time. This irresolvable conflict of interests must be avoided. However, even if a board of directors exists without employee representatives and is to be retained, a supervisory board can always be set up as an alternative instead of an individual supervisory director, in which an employee representative is then included. Supervisory board members may attend board of directors meetings, ask questions and make proposals on board of directors resolutions, but do not have voting rights on the board of directors.

But what is to be made of the view that an employee representative must be a member of the Communist Party? On the one hand, party cells could already be established in Chinese companies under the Company Law in force before 1 July 2024. However, unlike in companies with state participation, the law expressly does not provide for a leading function of such a party cell within the company. There is no known regulation requiring employee representatives on the board of directors to be party members.

On the other hand, the provisions of the revised Company Law are also very clear here. Accordingly, employee representatives on the board of directors are democratically elected by the company's employees in an employee representatives' meeting, the employees' meeting or in another form. An employee representative is therefore elected from the ranks of all employees, regardless of whether they are party members or not. In this context, it is to be expected that the competent authorities (usually the Administration of Market Regulation) will scrutinize the election procedure very closely. The rules on democratic corporate governance from 2012 can serve as a point of reference for the selection of candidates for the position of employee representative and the election procedure.

If an employee representative is included in the board of directors, it will be particularly important to provide the board of directors with rules of procedure that regulate in detail the powers, rights and, in particular, duties of the board of directors, especially with regard to confidentiality. In this context, we also recommend concluding a separate agreement with each member of the board of directors. This is also against the background of the duties of loyalty and care of board members explicitly regulated in the revised Company Law.

Overall, it remains to be seen how the function of the employee representative can be structured in practice and whether affected companies can avoid an appointment by adapting their corporate governance. It should be noted that the revised Company Law now expressly regulates the protection of the legal rights and interests of employees as a legal purpose.

We will be happy to advise you on questions regarding the employee representative or any other questions in connection with the revised PRC Company Law.