The New Company Law: Part 3 - Impact on officers

In this part we will describe the new provisions of the Company Law that will have a significant impact on the officers (legal representative, directors, supervisors) and senior managers of LLCs, with, as we did in Part I and II, a particular regard to foreign-invested enterprises (FIEs).

We focus here on legal representative and directors. The fourth and last part will deep into the impact on supervisors and senior managers.

Legal representative

The new Company Law will bring a significant change, from a practical point of view, in relation to the choice of the legal representative of LLCs, affecting more particularly FIEs. Whilst the law currently provides for that only the chairman or the general manager of an LLC can be appointed legal representative, pursuant to the new Company Law such position may be held by either one of the directors or a manager who “represents the company in executing company affairs”. 

On the one hand, the choice is, therefore, wider for the shareholders, but, on the other hand, it must fall onto a person who is actually involved in the management of the company’s activities. For foreign-invested LLCs, this may mean the end of the commonly adopted practice to appoint an individual overseas as legal representative (just to fill in the position) without such a person being actually involved with the decision-making process of the company.

The new Company Law also states that the resignation of the legal representative from the position of director or manager will also determine the end of office as legal representative. 

Under the provisions currently in force, a legal representative would remain in office until a successor is appointed. This rule sometimes gives rise to situations where a person, having resigned as director or manager and, therefore, no longer holding any relationship with the company, would still be formally the company’s legal representative.

The new provisions now require that a successor be appointed within 30 days. However, they are silent on the event (and consequences) where the appointment of a replacement does not occur within the prescribed term.

Directors

As far as directors are concerned, the new Company Law also introduces a few significant changes.

From 1st July 2024 the board of directors of an LLC shall have at least three directors and there will no longer be an upper limit to the number of directors (currently capped at 13). Like in the law currently in force, smaller scale companies or companies with a small number of shareholders will still have the possibility to appoint a sole director (instead of a board of directors).

The new Company Law also states that, if a company has not less than 300 employees and there is no employee representative on the board of supervisors, at least one employee representative is required to sit on the board of directors. 

This is a significant change and for relatively large foreign-invested companies this provision will require adjustments to be made to their organisation and governance structure, especially where the composition of the board of directors has been originally designed to specifically reflect the influence of the shareholders on the company (as it is, typically, in joint venture companies). 

The presence of an employee director in the board may also raise concerns as to the confidentiality of certain issues dealt with by the directors and that may relate to or affect the company’s employees.

We would, therefore, expect that companies will rather opt to have employee representatives sitting on the board of supervisors, and avoid having one appointed as director.

The new law has also slightly amended the distribution of functions and powers between the shareholders’ meeting and the board of directors. Unlike in the law currently in force, the function and power of “deliberating and approving annual financial budget plans and final account plans of the company” is not listed as an item of the functions and powers attributed to the shareholders’ meeting (thus - by exclusion - attributing the same to the board of directors). 

Such an exclusion may be seen as surprising because many corporate legal systems actually consider the power to decide over the budget and approve the financials of the company as a prerogative of the shareholders. The articles of association of the company can, of course, provide for otherwise.

Such a provision consistently goes in the direction that seems to be followed by the new law, that is giving more powers (and a higher level of liability associated with such powers) to the directors.

In this same direction, for example, the new law now considers the directors liable 

• (i) for any loss caused to the company for not complying with their duty to call for payment of the subscribed capital by the shareholders and to send a notice of forfeiture of the shareholders’ rights to the defaulting shareholders that have not remedied their default within the grace period assigned to them, 
• (ii) for losses caused for not calling the payment of the capital subscription ahead of the agreed term in the event of insolvency of the company, 
• (iii) for losses caused to the company as a consequence of providing financial assistance for others to acquire shares in the company, 
• (iv) for losses that are caused to the company or its creditors in a liquidation procedure where the directors appointed as liquidators have not fulfilled their duties in a timely manner, 
• (v) for losses caused to the company by an illegitimate reduction of capital.

Most of these provisions stating liabilities onto the directors are also applicable to the supervisors and senior managers of an LLC.

The officers and senior personnel of a company should, therefore, start familiarising themselves with the latest requirements relating to the liability assigned to them by the new Company Law.

In this regard, the new law expressly mentions the possibility that a company takes up insurance for the liability of its directors. So called “D&O policies” (i.e. directors and officers insurance coverage) are likely to become more and more commonly used and popular products once the new law comes into force.

(to be continued)