Corporate Governance Changes Under China's Revised Company Law: What Foreign-Invested Enterprises Need to Know in 2026

China's revised Company Law, which took effect on July 1, 2024, introduces significant changes to corporate governance structures that directly impact foreign-invested enterprises (FIEs) operating in China. These changes represent the most comprehensive reform of corporate law in decades and require FIEs to adapt their governance practices to ensure compliance.

Overview of the Revised Company Law

The revised Company Law replaces the previous version that had been in effect since 2005. The new law addresses several key areas including:

• Enhanced director and supervisor responsibilities
• New requirements for capital contributions
• Strengthened shareholder rights and protections
• Improved corporate governance structures
• Enhanced transparency and disclosure requirements

Key Corporate Governance Changes

The revised law introduces several critical changes that affect how FIEs must structure their governance:

1. Enhanced Director Duties and Responsibilities

The new law significantly expands the duties of directors, including:

• Fiduciary Duty: Directors must act in the best interests of the company and exercise due care in their duties
• Duty of Loyalty: Directors are prohibited from using their positions for personal gain or harming company interests
• Duty of Care: Directors must exercise reasonable care and skill in managing company affairs
• Compliance Obligation: Directors must ensure the company complies with all applicable laws and regulations

2. Revised Board Structure Requirements

The law now provides more flexibility in board composition while maintaining certain requirements:

• Companies may choose to have a board of supervisors or a single supervisor instead of a board of directors
• Employee representation on boards is now mandatory for larger companies
• Independent directors are required for certain types of companies
• Board committees have expanded responsibilities and powers

3. Shareholder Rights and Protections

The revised law strengthens shareholder protections through:

• Enhanced information rights and access to company records
• Improved procedures for shareholder meetings and voting
• Stronger protections against oppression by majority shareholders
• Expanded rights for minority shareholders

Impact on Foreign-Invested Enterprises

FIEs face unique challenges and requirements under the revised Company Law:

1. Capital Contribution Requirements

The new law introduces stricter capital contribution rules:

• All subscribed capital must be fully paid within five years of company establishment
• Accelerated payment schedules for certain types of companies
• Enhanced verification requirements for capital contributions
• Stricter rules for non-cash capital contributions

2. Governance Structure Alignment

FIEs must ensure their governance structures comply with Chinese requirements:

• Alignment of governance documents with Chinese law requirements
• Appointment of qualified directors and supervisors who understand local obligations
• Implementation of required governance committees and processes
• Coordination between Chinese operations and foreign parent company governance

3. Compliance and Reporting Obligations

Enhanced compliance requirements include:

• More detailed annual reporting requirements
• Enhanced transparency in financial reporting
• Regular compliance assessments and reporting
• Coordination with foreign parent company reporting

Director and Officer Liability Implications

The revised law significantly expands potential liability for directors and officers:

Personal Liability for Directors

Directors may face personal liability for:

• Failure to exercise due care in their duties
• Actions that harm company interests
• Non-compliance with legal and regulatory requirements
• Improper use of company assets or information

Insurance and Indemnification Considerations

FIEs should consider:

• Directors and officers (D&O) insurance coverage
• Indemnification agreements with directors and officers
• Personal liability protection for foreign directors
• Liability allocation between parent and subsidiary companies

Compliance Strategies for FIEs

To ensure compliance with the revised Company Law, FIEs should implement the following strategies:

1. Governance Structure Review

Conduct a comprehensive review of existing governance structures:

• Assess current board composition and committee structures
• Review and update articles of association and bylaws
• Evaluate director and supervisor qualifications and responsibilities
• Align governance practices with new legal requirements

2. Director Training and Education

Implement comprehensive training programs for directors:

• Education on new legal duties and responsibilities
• Training on compliance requirements and risk management
• Regular updates on regulatory developments
• Best practices for corporate governance

3. Internal Controls and Compliance Systems

Develop robust internal controls:

• Implement comprehensive compliance monitoring systems
• Establish clear policies and procedures for corporate governance
• Create reporting mechanisms for compliance issues
• Regular governance assessments and audits

4. Documentation and Record-Keeping

Maintain detailed records of governance activities:

• Board meeting minutes and resolutions
• Committee reports and recommendations
• Compliance assessments and remediation efforts
• Director training records and certifications

Practical Implementation Steps

FIEs should take the following immediate actions:

1. Assess Current Compliance: Evaluate existing governance structures against new requirements
2. Update Governance Documents: Revise articles of association and bylaws as needed
3. Implement Training Programs: Begin education for directors and officers
4. Establish Compliance Systems: Deploy monitoring and reporting mechanisms
5. Engage Legal Counsel: Work with experienced corporate law attorneys
6. Review Insurance Coverage: Assess and enhance D&O insurance if necessary

Foreign Investment Law Integration

The revised Company Law must be considered alongside the Foreign Investment Law:

• Coordination between governance requirements under both laws
• Impact on foreign investor rights and protections
• Compliance with both domestic and international obligations
• Alignment of governance structures with investment agreements

Industry-Specific Considerations

Certain industries face additional governance requirements:

Financial Services

Banks and financial institutions must comply with additional regulatory requirements:

• Enhanced capital adequacy requirements
• Additional reporting and transparency obligations
• Specialized governance committees
• Regulatory approval for director appointments

Technology and Telecommunications

Companies in these sectors face additional security and compliance requirements:

• National security considerations in governance
• Data protection and cybersecurity governance
• Specialized technical committees
• Government oversight of certain operations

Penalties and Enforcement

Non-compliance with the revised Company Law can result in:

• Administrative penalties and fines
• Personal liability for directors and officers
• Revocation of business licenses
• Restrictions on future investments

Looking Ahead: 2026 and Beyond

As implementation of the revised Company Law continues, FIEs should expect:

• Additional detailed regulations and implementation guidelines
• Increased enforcement activity
• Refinement of compliance practices based on regulatory feedback
• Evolution of best practices for governance

Conclusion

China's revised Company Law represents a significant shift in corporate governance requirements that directly impacts foreign-invested enterprises. The enhanced duties and responsibilities for directors, stricter capital contribution rules, and improved shareholder protections require FIEs to carefully review and potentially restructure their governance practices.

Success in the Chinese market requires a proactive approach to compliance with the new governance requirements. FIEs that invest in understanding and implementing these changes will be better positioned to operate effectively while minimizing regulatory risks in 2026 and beyond.

Given the complexity of these changes and their potential impact on business operations, FIEs should work closely with experienced legal counsel to ensure full compliance with the revised Company Law.