What’s the most classic statement in corporate law? I’d say it has to be this one: “Unless otherwise provided in the company’s articles of association.” Corporate law features both mandatory provisions and discretionary (empowering) provisions. While mandatory provisions generally must be strictly adhered to, discretionary provisions offer shareholders the flexibility to tailor their cooperation models according to their specific needs. In the past, people tended to pay little attention to a company’s articles of association, viewing them merely as a formality. However, entrepreneurs are increasingly recognizing the importance of the articles of association—as a “constitutional” document for the company—and are eager to make full use of the empowering clauses to craft articles that best suit their unique circumstances. The article we’re sharing today provides an overview of these empowering clauses in corporate law, and we hope it will prove helpful to all of you.

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Compared with the original Company Law, the most significant highlight of the 2006 Company Law is its full respect for shareholders’ autonomy in determining their own affairs. Many corporate governance issues are now left to the discretion of shareholders themselves and can be explicitly stipulated in the company’s articles of association. The 2013 amendment further expanded the scope of shareholder autonomy. These seemingly minor regulatory changes—delegating authority and granting powers—carry substantial practical value. This article provides a comprehensive overview of the matters that the Company Law allows companies to freely specify in their articles of association, and offers a preliminary exploration of their practical significance.

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I. Legal Representative

1. Legal provisions

Article 13 of the Company Law stipulates that the legal representative of a company, in accordance with the provisions of the company’s articles of association, shall be the chairman of the board, an executive director, or a manager, and shall be duly registered in accordance with the law.

2. Practical Analysis

According to the corporate governance structure established by the Company Law, the board of directors is the highest decision-making body at the operational level of the company, and the chairman of the board serves as its organizer and representative. The general manager (referred to as “manager” in the Company Law but commonly called “general manager” in everyday usage; this article uses the term “general manager” to reflect the meaning of “manager” in the Company Law) is the organizer and executor responsible for implementing the company’s operational activities. The legal representative is the person authorized by law to represent the company externally, and any statements or actions taken by him/her in a legal sense can be regarded as the company’s own statements and actions. The question of who should serve as this company’s representative—whether it should be the chairman, as the representative of the company’s decision-making level, or the general manager, as the leader of the execution level—is a matter that has posed considerable dilemma for lawmakers. Ultimately, the Company Law decided to leave the choice to the shareholders.

From a practical perspective, the significance of the legal representative lies in: controlling the company’s major business activities through the use of seals and the signing of documents; and representing the company externally in conducting business.

When deciding on the appointment of a legal representative, shareholders generally need to weigh the following factors:

1) Trust and Checks and Balances

From the perspective of hierarchical power, the chairman of the board outranks the general manager. When the status of legal representative is conferred upon the chairman, the chairman’s actual authority significantly increases. Conversely, when the status of legal representative is assigned to the general manager, since the general manager is responsible for organizing and implementing the company’s operations and is also authorized to represent the company externally, the general manager’s actual authority expands dramatically—and there is even the potential for the general manager to effectively sideline the board of directors and the chairman. How to allocate control over corporate management between the chairman and the general manager requires shareholders to take a comprehensive consideration.

2) The battle for corporate control

The degree of involvement in and control over a company’s operations is a matter that every shareholder should pay close attention to—and indeed, must pay close attention to. From a practical standpoint, the factors that determine corporate control include: the company’s legal representative, the composition of the board of directors, supervisory board, and senior management, the management of the company’s and its legal representative’s seals, and the control over financial records, among others. Among these factors, the legal representative and the company seal hold particularly significant importance for determining control. When one shareholder nominates a candidate for chairman while the other shareholder recommends a candidate for general manager, the identity of the legal representative and the person nominated as chief financial officer will directly and substantially impact the company’s level of control.

3) Identity characteristics of the Chairman and General Manager

When the chairman of the board is appointed by the shareholders and the general manager is a professional manager recruited from the public, it is generally not advisable for the general manager to serve as the legal representative. If one of the chairman or the general manager does not meet the qualifications required to serve as the legal representative—for example, if they have been placed on the Administration for Industry and Commerce’s blacklist of individuals prohibited from serving as legal representatives—then only the other party can assume this role.

3. Operational Recommendations

The company’s articles of association shall clearly stipulate that the legal representative of the company shall be the chairman of the board, the executive director, or the general manager—specifying the position rather than the individual person—to avoid having to amend the articles of association due to personnel changes.

II. Foreign Investment and Foreign Guarantees

1. Legal provisions

Article 16 of the Company Law stipulates that when a company invests in other enterprises or provides guarantees for others, such decisions shall be made by the board of directors or by the shareholders’ meeting or general meeting of shareholders, in accordance with the provisions of the company’s articles of association. If the company’s articles of association set limits on the total amount of investments or guarantees as well as on the amount of each individual investment or guarantee, such amounts shall not exceed the prescribed limits.

2. Practical Analysis

Investing involves risks, and decisions must be made with caution. External guarantees may expose the company to substantial losses due to its potential liability for contingent debts. For these two types of actions—whether to proceed or not—the Company Law leaves the decision entirely to the shareholders themselves, but requires that such decisions be clearly stipulated in the company’s articles of association. The specific details to be clarified include whether shareholders will make these decisions independently or delegate authority to the board of directors, as well as limits on the amount and total sum of individual investments or guarantees.

Given that both investments and guarantees may significantly affect shareholders’ equity, it is generally safer for shareholders themselves to make the decision—i.e., by resolution of the shareholders’ meeting or general shareholders’ meeting. When shareholders have sufficient confidence in the board of directors, they may consider authorizing the board to make decisions.

Moreover, the autonomy in making guarantee decisions is limited solely to external guarantees. When a company provides a guarantee for its shareholders or de facto controllers, such decision must be approved by a resolution of the shareholders’ meeting or general shareholders’ meeting. Furthermore, shareholders referred to in the preceding paragraph, or shareholders controlled by the de facto controllers referred to in the preceding paragraph, may not participate in the voting on matters specified in the preceding paragraph. Such a vote shall be passed by a majority of the voting rights held by the other shareholders present at the meeting.

3. Operational Recommendations

Decisions regarding foreign investments and external guarantees can be addressed either within the scope of authority vested in the shareholders’ meeting or general shareholders’ assembly, or within the authority of the board of directors; alternatively, they can be set forth separately as a distinct provision. From the perspective of clarity and precision, the author prefers to present these matters as independent, dedicated provisions—indeed, they could even be grouped together with other key concerns into a separate chapter for specific stipulations. Regardless of the format chosen, it is essential to clearly define the decision-making body, investment limits, and other relevant details.

III. Shareholders’ Contribution Timings

1. Legal provisions

Articles 25 and 26 of the Company Law stipulate that the registered capital of a limited liability company shall be the total amount of contributions subscribed by all shareholders as registered with the company registration authority, and the timing of shareholders’ contributions shall be specified in the company’s articles of association.

2. Practical Analysis

Under the paid-up capital system, shareholders are required to fully pay up their entire registered capital at the time of company incorporation. Later, a compromise approach combining paid-up capital with subscribed capital was adopted: at the time of incorporation, the amount of capital that must be actually contributed shall not be less than 20% of the registered capital, and a maximum period of two or five years is set for the subsequent full payment of the registered capital.

Currently, with the exception of entities subject to special restrictions, a fully subscribed capital system is adopted. The amount of capital subscribed by shareholders and the timing of their contributions are entirely determined by the shareholders themselves and must be specified in the articles of association. Shareholders are required only to make their full contributions by the agreed-upon deadline. If the agreed-upon contribution deadline arrives but a shareholder deems it necessary to extend the deadline, the contribution deadline can be adjusted by amending the articles of association.

Moreover, the company’s articles of association stipulate that the timing of capital contributions carries two practical implications: First, once the due date arrives, shareholders are obligated to fully pay their respective capital contributions to the company. If this obligation remains unfulfilled, the company’s creditors may demand that the shareholders meet their contribution obligations in order to repay the company’s debts. Second, shareholders who fail to fulfill their current-period contribution obligations shall bear contractual liability to those shareholders who have already made their contributions on time and in full.

3. Operational Recommendations

For companies in special categories such as banks, insurance firms, financial institutions, fund management companies, and investment firms, there are still restrictions on the amount of registered capital and the timing of its payment. Due to space limitations, the author will not provide a detailed summary here. In practice, when registering companies in these special categories, it is essential first to carefully review and study the legal and policy requirements governing industry regulation.

For ordinary companies, corporate law grants ample autonomy. Nevertheless, the author still recommends that shareholders, based on factors such as the project’s development plan, the funding utilization plan, and their own financial arrangements, set reasonable and feasible amounts of subscribed capital contributions as well as specific timelines for actual contributions.

IV. Dividend Distribution and Subscription for Capital Increase

1. Legal provisions

Article 34 of the Company Law stipulates that shareholders of a limited liability company shall distribute dividends in proportion to their actual contributions. When the company raises new capital, shareholders have the right to subscribe for the new capital first, also in proportion to their actual contributions. However, this does not apply if all shareholders agree otherwise and decide not to distribute dividends or subscribe for new capital according to their contribution proportions.

2. Practical Analysis

Shareholders differ in terms of background, capabilities, resources, and expectations. Some shareholders do not place much emphasis on gaining actual control over the company and are willing to cede some governance authority. At the same time, however, they hope that dividend distribution will be appropriately tilted in their favor. To address this situation, corporate law provides a general rule: shareholders shall receive dividends in proportion to their respective contributions actually paid. At the same time, however, the law fully respects the autonomy of shareholders’ intentions and permits them to modify the dividend distribution rules through agreement. Once such an agreement is reached, there are no restrictions whatsoever on the revised distribution ratios or methods—these are entirely subject to mutual negotiation among the shareholders.

From a practical perspective, the following issues deserve attention:

1) A limited liability company may distribute dividends, either in part or in full, preferentially to a specific group of shareholders; it may allocate dividends among different shareholders according to varying proportions; it may also agree that a fixed proportion of the profits will be prioritized for certain shareholders, with the remaining portion then distributed among all shareholders... and so forth—there are no special restrictions under corporate law.

2) The distribution of dividends may be agreed upon by the shareholders themselves, provided that the company is profitable and has distributable profits. When the company incurs a loss, no dividends shall be distributed. If the company makes only a small profit and cannot meet the fixed-proportion return requirements of certain shareholders, dividends may only be distributed to those shareholders from the available distributable profits; assets other than dividends may not be distributed at will.

3) The issue of “preferred shares.” In practice, some companies request that their equity structure be designed according to the concept of “preferred shares,” meaning that certain shareholders would have priority over common shareholders in terms of distribution of company profits and residual assets, yet their rights to participate in corporate decision-making and management would be restricted. In fact, China’s Company Law does not explicitly provide for a preferred-share system. Currently, at the State Council level, only pilot programs for preferred shares are being conducted, and these pilots are limited to specific joint-stock companies. However, with regard to limited liability companies, the Company Law allows shareholders to independently agree on rules governing shareholder meetings and permits shareholders to determine the allocation of dividends. By leveraging this degree of autonomy, shareholders can already design their own “preferred-share” systems within the framework of limited liability companies.

With regard to the subscription of additional capital, the general principle is that shareholders have the right to subscribe for the additional capital in priority according to their respective paid-up capital contribution ratios. Shareholders may modify this principle through agreed-upon arrangements.

3. Operational Recommendations

As for agreements on dividend distribution and subscription of additional capital contributions, the Company Law does not require such agreements to be explicitly stated in the company’s articles of association. In practice, these agreements can either be stipulated in the articles of association or otherwise agreed upon by all shareholders through alternative means. However, given the varying levels of enforcement standards and differing interpretations of the law among departments such as industrial and commercial authorities, tax authorities, and auditing agencies, it is advisable—out of caution—to clearly set forth these agreements in the company’s articles of association. This approach can help avoid numerous unnecessary explanations and communication efforts.

V. Conditions for Equity Transfer

1. Legal provisions

Article 71 of the Company Law stipulates: Shareholders of a limited liability company may transfer all or part of their equity interests to each other.

When a shareholder transfers equity interests to a person other than another shareholder, such transfer shall be subject to the approval of more than half of the other shareholders. The transferring shareholder shall notify the other shareholders in writing of the proposed equity transfer and seek their consent. If the other shareholders fail to respond within thirty days from the date of receiving the written notice, they shall be deemed to have consented to the transfer. If more than half of the other shareholders object to the transfer, the objecting shareholders shall have the right to purchase the equity being transferred; if they choose not to purchase, they shall be deemed to have consented to the transfer.

Equity transferred with the consent of the shareholders shall, under otherwise equal conditions, grant other shareholders the right of first refusal. If two or more shareholders claim the right of first refusal, they shall negotiate to determine their respective purchase proportions; if no agreement can be reached through negotiation, each shareholder shall exercise the right of first refusal according to their respective capital contribution ratios at the time of the transfer.

If the company’s articles of association provide otherwise regarding the transfer of equity interests, the provisions of the articles of association shall prevail.

2. Practical Analysis

A limited liability company exhibits strong characteristics of personal association; mutual understanding and trust among shareholders form the foundation of their cooperation. Based on this, when shareholders transfer their equity interests among themselves, no consent from other shareholders is required, as no new shareholders are being introduced. However, when a shareholder transfers equity interests to an external party, new “stranger” shareholders will be brought in. Therefore, other shareholders are granted a preemptive right to acquire the equity first, thereby excluding the entry of these “stranger” shareholders. At the same time, however, this preemptive right is stipulated to apply under “identical conditions,” so as to prevent the transferor’s legitimate rights and interests from being compromised.

After setting forth a series of carefully crafted transfer rules, corporate law takes a sudden turn and allows shareholders to bypass the transfer rules prescribed by corporate law altogether. Instead, shareholders may agree upon new transfer rules and explicitly state them in the company’s articles of association. This means that as long as the shareholders have clearly stipulated transfer rules in the articles of association, they may proceed with the transfer according to those agreed-upon terms. Depending on actual needs, the shareholders’ agreement might simplify the transfer process to such an extent that no consent is required and no notification is necessary; or it might make the transfer more complex, even restricting certain shareholders from transferring their equity interests. Regardless of the specific outcome, this practice—allowing shareholders to transfer their equity interests according to pre-agreed rules—carries significant practical importance.

3. Operational Recommendations

In practice, this issue should be given full attention and prominently highlighted to shareholders. If shareholders have specific needs—such as the desire for flexible exit options or the wish to restrict the exit of certain technology-focused shareholders—these provisions should be clearly stipulated in the company’s articles of association.

VI. Powers of the Shareholders’ Meeting, Procedures for Convening, Voting Rights, Methods of Conducting Meetings, and Voting Procedures

1. Legal provisions

Powers of the Shareholders’ Meeting: Article 37 of the Company Law stipulates that the company’s articles of association may specify other powers and functions of the shareholders’ meeting.

Shareholders’ Meeting Convening Procedures: Article 41 of the Company Law stipulates that, when convening a shareholders’ meeting, all shareholders must be notified at least fifteen days prior to the meeting date; however, this requirement does not apply if the company’s articles of association provide otherwise or if all shareholders have otherwise agreed.

Shareholders’ Voting Rights: Article 42 of the Company Law stipulates that at shareholders’ meetings, shareholders exercise their voting rights in proportion to their respective capital contributions, unless otherwise provided for in the company’s articles of association.

Rules of Procedure and Voting Procedures: Article 43 of the Company Law stipulates that, except as otherwise provided by this Law, the rules of procedure and voting procedures of the shareholders’ meeting shall be governed by the company’s articles of association.

2. Practical Analysis

The Company Law stipulates ten powers that must be exercised by the shareholders’ meeting. It also provides that resolutions passed at shareholders’ meetings to amend the company’s articles of association, increase or decrease the registered capital, or resolve on the merger, division, dissolution, or change of the company’s legal form must be approved by shareholders holding more than two-thirds of the voting rights. Beyond these requirements, the Company Law fully allows shareholders to independently agree upon and specify in the articles of association matters such as the addition of new powers for the shareholders’ meeting, the procedures for convening the shareholders’ meeting, the voting rights of shareholders, the methods of conducting meetings, and the voting procedures. The significant practical implications of this comprehensive delegation of authority extend beyond:

1) The vast majority of internal governance matters concerning the shareholders’ meeting can be decided independently by the shareholders themselves. Shareholders can fully reflect their respective interests and demands based on their actual needs.

2) Financial investors can exert greater influence on a company’s operations. Unlike strategic investors, financial investors do not aim to gain controlling interest and typically hold only a small percentage of the company’s equity. By expanding the powers of the shareholders’ meeting and designing a rational voting system—such as granting each shareholder one veto power over certain special matters—they can vote on, and even veto, major decisions in the company’s management and operations, thereby effectively managing investment risks.

3) It becomes possible for shareholders to cede some operational decision-making authority in exchange for preferential treatment in other areas, creating institutional space for a certain degree of structured equity design—for example, the “preferred shares” mentioned earlier.

3. Operational Recommendations

Corporate law respects shareholders’ autonomy, but this does not mean that the more extensive the scope of autonomy, the better. From the perspective of cognitive habits, the rules stipulated by corporate law are widely recognized and accepted. When shareholders make substantial adjustments, these changes may easily be overlooked simply because they do not align with established mental patterns, thus leading to “non-compliance.” Therefore, unless absolutely necessary, it is advisable to minimize adjustments as much as possible. However, if adjustments are made, it is recommended to clearly highlight the adjusted portions or compile them separately into a distinct document, so as to alert users and implementers.

Moreover, in recent years, the private equity (PE) fund industry has been steadily expanding. Many PE firms like to simply adopt foreign “investment term sheets” wholesale for use in China. These imported investment terms often impose an array of “meticulous” restrictions on the invested companies, and such restrictions frequently find their way into the powers of the shareholders’ meeting and the voting rights of shareholders. Based on the author’s experience, such a large number of restrictive clauses does not align with the management style typically adopted by Chinese enterprises. This can easily lead to strained relationships between investors and the invested companies as well as their shareholders, and may even hinder the company’s ability to grow in a flexible, efficient, and rapid manner. Therefore, it is recommended that when expanding the powers of the shareholders’ meeting, the formulation of restrictive clauses should be approached with great care. While taking risk control into account, sufficient attention should also be paid to the need for operational flexibility and convenience.

7. Term of Office for Directors; Election of the Chairman and Vice Chairman

1. Legal provisions

According to Articles 37 and 45 of the Company Law, directors who are not employee representatives shall be elected or replaced by the shareholders’ meeting. The term of office for directors shall be stipulated in the company’s articles of association, but each term shall not exceed three years.

Article 44 of the Company Law stipulates that the board of directors shall have one chairman and may also have a vice-chairman. The procedures for appointing the chairman and vice-chairman shall be specified in the company’s articles of association.

2. Practical Analysis

The term of office for directors may be stipulated in the company’s articles of association, with each term not exceeding three years. However, directors may be re-elected and serve consecutive terms. The election of the chairman and vice-chairman of the board shall be governed by the company’s articles of association; these articles may provide that the chairman and vice-chairman are elected by all directors, or they may specify that the selection is made by the shareholders’ meeting, or even designate individuals nominated by one or more specific shareholders. Meanwhile, the position of vice-chairman may or may not be established, and there may be either one or multiple vice-chairmen.

In practice, the selection of the chairman and vice-chairman often reflects the struggle for corporate control among shareholders. The position of vice-chairman may end up being merely a ceremonial role, or it could—through careful institutional design—enable two or three vice-chairmen to effectively check and balance the chairman. Alternatively, the vice-chairmen, in conjunction with other directors, might even sideline the chairman altogether.

3. Operational Recommendations

The Company Law does not specify how the chairman and vice-chairman of a company are appointed. Therefore, it is crucial to clearly define in the company’s articles of association the procedures for appointing the chairman and vice-chairman. Under no circumstances should the wording be “The appointment of the chairman and vice-chairman shall be governed by applicable laws.”

VIII. Powers of the Board of Directors, Procedures for Board Meetings, and Voting Procedures

1. Legal provisions

According to Article 46 of the Company Law, in addition to exercising the ten statutory powers, the board of directors may also exercise additional powers as stipulated in the company’s articles of association.

Article 48 of the Company Law stipulates that, except as otherwise provided by this Law, the procedures for deliberation and voting of the board of directors shall be governed by the company’s articles of association. Each member of the board of directors shall have one vote in the decision-making process.

2. Practical Analysis

As mentioned earlier, the board of directors is the decision-making body at the operational and management level of the company. The company’s articles of association may expand the board’s statutory powers beyond the ten powers prescribed by law, or they may impose restrictions on the exercise of these powers. The expansion of the board’s powers reflects the shareholders’ delegation of authority to the board; the restrictions placed on the board’s decision-making reflect the shareholders’ cautious approach to risk control. When certain matters that would normally be decided by the general manager are elevated to the board for discussion and decision, it demonstrates an even greater degree of prudence in the company’s operations.

Considering the division of powers between the shareholders’ meeting and the board of directors, as well as the autonomous authorization for expanding or restricting their respective powers, corporate law clearly delineates certain particularly important matters as falling exclusively within the jurisdiction of either the shareholders’ meeting or the board of directors. For all other matters, shareholders are permitted to freely authorize and allocate responsibilities among themselves, the shareholders’ meeting, the board of directors, and the management team. This arrangement is akin to a palace: the ten functions explicitly assigned by corporate law to be exercised separately by the shareholders’ meeting and the board of directors serve as the palace’s load-bearing walls—walls that must not be demolished. All other walls, partitions, and interior decorations, however, can be designed and arranged at the owner’s discretion.

3. Operational Recommendations

Compared to the shareholders’ meeting, the powers and responsibilities of the board of directors can be specified in greater detail and in more quantifiable terms. The board’s decision-making procedures and voting rules should be clearly set forth in the company’s articles of association; otherwise, there could arise a situation where neither laws nor established practices provide a basis for action. Each director has one vote, with no room for negotiation.

9. Powers and Responsibilities of the General Manager

1. Legal provisions

Article 49 of the Company Law stipulates that the general manager of a limited liability company is accountable to the board of directors and exercises the following powers: (1) To preside over the company’s production, operations, and management activities and to organize the implementation of resolutions adopted by the board of directors; (2) To organize and implement the company’s annual business plan and investment proposals; (3) To draft a plan for establishing the company’s internal management structure; (4) To draft the company’s basic management systems; (5) To formulate specific rules and regulations for the company; (6) To propose the appointment or dismissal of the company’s deputy managers and chief financial officers; (7) To decide on the appointment or dismissal of managerial personnel other than those whose appointment or dismissal must be decided by the board of directors; (8) Other powers granted by the board of directors.

If the company’s articles of association provide otherwise regarding the powers and duties of the manager, the provisions of the articles of association shall prevail.

2. Practical Analysis

The Company Law stipulates the powers of the shareholders’ meeting and the board of directors by first listing the explicitly prescribed powers and then adding a catch-all provision—“other powers as specified in the company’s articles of association.” The “other powers” mentioned here coexist with the already listed statutory powers. As for the powers of the general manager, the Company Law adopts a different approach: after listing the powers, it adds a separate clause stating, “If the company’s articles of association provide otherwise regarding the powers of the manager, the provisions of the articles of association shall prevail.” This wording implies that the powers of the general manager as stipulated in the company’s articles of association may override the provisions of the Company Law concerning the general manager’s powers. This distinction should simply be kept in mind in practice.

Moreover, the Company Law establishes a substantial degree of flexibility in the powers vested in the general manager through two provisions: “other powers delegated by the board of directors” and “where the company’s articles of association provide otherwise regarding the powers of the manager, such provisions shall prevail.” When the general manager is fully authorized by both the shareholders’ meeting and the board of directors, he or she can wield immense influence and operate with great freedom; conversely, if the general manager’s powers are deliberately restricted, he or she must proceed with utmost caution and tread carefully. The allocation of management authority among the chairman of the board, the board of directors, and the general manager—and the extent to which shareholders authorize the general manager—must be determined based on a multitude of factors, including shareholder needs and the general manager’s role within the company.

3. Operational Recommendations

Both granting and restricting authority to the general manager are permitted under corporate law, and neither approach is inherently better or worse than the other. However, regardless of which direction is chosen, shareholders should use the company’s articles of association and other complementary management systems to specify and clarify these powers in detail, thereby avoiding ambiguity in authorization and preventing disorder in corporate governance.

X. Inheritance of Shareholder Qualifications

1. Legal provisions

Article 75 of the Company Law stipulates that, upon the death of a natural person shareholder, their lawful heirs may inherit the shareholder status; however, this does not apply if the company’s articles of association provide otherwise.

2. Practical Analysis

A limited liability company possesses both personal and capital characteristics, with the personal characteristic generally considered more prominent. Mutual understanding and trust among shareholders form the foundation of their cooperation. Often, shareholders’ relatives are well-acquainted with other shareholders. Moreover, given considerations such as maintaining the basic stability of the company’s equity structure and reasonably protecting the equity interests of heirs, corporate law allows the shareholder status of a natural person to be inherited by the heir upon the shareholder’s death. However, when the shareholder status is inherited by the heir, the following issues may arise:

1) Upon the death of a natural person, the spouse, parents, and children are the first-order heirs, and the deceased shareholder’s equity is inherited by these heirs. As a result, the number of shareholders rapidly increases, and since each heir may hold significantly different business philosophies, this can lead to difficulties in making operational decisions and managing corporate governance, and may even result in a deadlock in corporate governance. If the deceased shareholder has no first-order heirs, their equity will be inherited by second-order heirs—such as siblings, grandparents, and maternal grandparents. When issues like successive inheritance and derivative inheritance are introduced into the inheritance process, the allocation of equity and corporate governance challenges become even more complex.

2) If any of the heirs are foreigners in a legal sense, the nature of the company will change due to the “foreigner” status of the shareholder. As a result, the approval process for equity changes, the company’s business scope, and its operational activities may all be affected.

3) Some collaborations among shareholders are based solely on trust in the individual shareholders themselves and recognition of their capabilities. However, when it comes to the shareholders’ heirs, the foundation for such collaboration may no longer exist, making it impossible to continue the cooperation.

Based on the above considerations, while the Company Law stipulates that shareholder status can be inherited by heirs, it also adds a proviso allowing shareholders to make agreements regarding inheritance and to specify such agreements in the company’s articles of association.

3. Operational Recommendations

China has entered an era where wealth is increasingly tied to equity ownership, and the growing importance and competition for equity stakes could significantly impact a company’s operations. Therefore, practitioners should pay particular attention to handling issues related to the inheritance of shareholder status. The author suggests that the company’s articles of association should explicitly exclude the inheritance of shareholder status. As a second-best option, shareholders could designate an heir who is recognized by the other shareholders; moreover, it should be clearly stipulated that if the designated heir dies before the original shareholder, the shareholder status will no longer be inheritable.

11. Dissolution of the Company

1. Legal provisions

Article 180 of the Company Law stipulates that a company shall be dissolved for any of the following reasons: (1) the expiration of the business term specified in the company’s articles of association or the occurrence of other dissolution events stipulated in the articles of association; (2) a resolution passed by the shareholders’ meeting or the general meeting of shareholders to dissolve the company; (3) the need for dissolution due to merger or division of the company; (4) revocation of its business license, order to close down, or cancellation pursuant to law; (5) dissolution ordered by the People’s Court in accordance with the provisions of Article 182 of this Law.

2. Practical Analysis

From the perspective of dissolution reasons stipulated by corporate law, dissolutions can be broadly categorized into two major types: voluntary dissolution decided by shareholders and compulsory dissolution imposed by law. Voluntary dissolution by shareholders can further be divided into two subcategories: dissolution agreed upon in advance and dissolution resolved upon after the fact. Among these, agreements made in advance may include the expiration of a pre-set business term or the occurrence of other dissolution grounds specified in the company’s articles of association.

Ideally, a company can come to an end naturally upon expiration of its business term or by resolution of its shareholders. However, in practice, as disputes over corporate interests intensify and individual shareholders’ rights are increasingly infringed upon, it becomes ever more difficult to achieve a smooth dissolution when shareholders seek to protect their rights and minimize losses through such a process. This situation frequently occurs in joint ventures between Chinese and foreign entities, in collaborations between state-owned enterprises and private firms, between original shareholders and financial investors, and between large corporate groups and minority shareholders of small private enterprises. For example:

1) Some investment institutions invest in a company at a high premium, providing far more capital than the original shareholders initially invested. Yet, their equity stake is significantly lower than that of the original shareholders, and they do not participate in the company’s actual operations. When the invested company or its original shareholders act dishonestly, neglect their business responsibilities, and squander the investment institution’s funds, the latter often finds itself “powerless to do anything.”

2) In some Sino-foreign joint ventures, the foreign investor contributes technology, while the Chinese investor provides substantial cash and in-kind assets. However, the enterprise is often controlled by the foreign investor. When the party with actual control maliciously harms the interests of the other party, the remedies available to the aggrieved party often prove weak and ineffective.

Generally speaking, when a company is dissolved in an unconventional manner, shareholders’ equity is likely to suffer substantial losses. Therefore, dissolution is not the preferred approach for protecting shareholders’ interests. However, when the aforementioned circumstances—or similar situations—arise, affected shareholders, if they can follow the prescribed procedures to dissolve the company, can at least mitigate the extent of their losses and prevent further losses from occurring. Based on this consideration, shareholders may, with authorization under corporate law, include additional provisions in the company’s articles of association specifying grounds for dissolution, thereby enabling them to reduce their losses by dissolving the company under extraordinary circumstances.

3. Operational Recommendations

Dissolution of a company is a double-edged sword: while it can protect the interests of minority shareholders and mitigate losses, it may also enable certain shareholders to use the dissolution of the company as a pretext to disrupt the company’s normal operations and harm the rights and interests of other shareholders. The specific circumstances that should be designated as grounds for dissolution vary widely, and the detailed provisions should be tailored according to actual needs. However, in my view, shareholders should exercise extreme caution when predefining grounds for dissolution and strive to maintain the company’s normal operations to the greatest extent possible. Unless absolutely necessary, they should avoid adding new grounds for dissolution or add as few as possible.

12. Powers and Responsibilities of the Executive Director

1. Legal provisions

A limited liability company with a small number of shareholders or a small scale may appoint a single executive director and dispense with the establishment of a board of directors. The executive director may concurrently serve as the company’s manager. The powers and responsibilities of the executive director shall be stipulated in the company’s articles of association.