Legal regulation of companies in the Civil Code of the People's Republic of China
Due to the significant increase in the volume of trade between the Russian Federation and the People's Republic of China, the Russian reader is interested in the existing organizational and legal forms of entrepreneurial activity provided for in the new Chinese Code of the People's Republic of China, including the legal status of a limited liability company and a joint-stock limited liability company, which have great similarities with Russian business entities.
The new provisions in Chinese legislation are the rules on the social responsibility of companies, discussed in the article. The inclusion of these provisions, which represent one of the aspects of the theory of sustainable development, in the Civil Code of the People's Republic of China, according to the author, may be useful for Russian corporations that form the rules of sustainable development in local acts.
Keywords: limited liability company, joint-stock company with limited liability, Civil Code of the People's Republic of China, Law on Companies of the People's Republic of China, legal entity.
The People's Republic of China (hereinafter referred to as the People's Republic of China) has a Civil Code adopted at the 3rd session of the National People's Congress of the Thirteenth Convocation of the People's Republic of China on May 28, 2020 (hereinafter referred to as the Civil Code of the People's Republic of China). Chapter 3 of the Civil Code of the People's Republic of China is devoted to legal entities, it includes four parts: general provisions, commercial legal entities, non-commercial legal entities and special legal entities. Article 57 of the Civil Code of the People's Republic of China provides that an organization with civil legal capacity and civil legal capacity, which has civil rights and carries out civil duties in accordance with the law, is recognized as a legal entity. A legal entity must have its own name, organization structure, location, property or funds. Legal entities include commercial legal entities, non-commercial legal entities and legal entities without the formation of a legal entity. A commercial legal entity is defined as an organization established for the purpose of extracting profit and distributing it among shareholders and other persons participating in it with their contributions. They are limited liability companies, joint-stock limited liability companies and other legal entities (Article 76 of the Civil Code of the People's Republic of China). Other enterprises - legal entities are understood to be enterprises - legal entities that are not limited liability companies and joint-stock companies with limited liability, including an enterprise of public ownership, an enterprise of urban collective ownership and enterprises of rural collective ownership <1>.
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The legal status of these commercial legal entities, called companies, is determined by the Law on Companies of the People's Republic of China" (hereinafter - the Law on Companies of the People's Republic of China), which was adopted at the fifth meeting of the Standing Committee of the Eighth National People's Congress of the People's Republic of China on December 29, 1993 and promulgated by Decree No. 16 of the President of the People's Republic of China <2>. The fourth amendment of the Law on Companies of the People's Republic of China (2008) is currently in force in China, which was adopted at the sixth meeting of the Standing Committee of the 13th National People's Congress on October 26, 2018. <3> According to Article 2 of the Law on Companies of the People's Republic of China, the companies mentioned in this Law belong to limited liability companies and joint-stock limited liability companies established in the territory of the People's Republic of China in accordance with this Law <4>. According to paragraph 2 of art. 50 of the Civil Code of the Russian Federation (hereinafter - the Civil Code of the Russian Federation), legal entities that are commercial organizations can be created in the organizational and legal forms of business partnerships and societies, peasant (farmer) farms, business partnerships, production cooperatives, state and municipal unitary enterprises <5>. Business companies can be created in the organizational and legal form of a joint-stock company or a limited liability company <6>. Therefore, the concept of "company" in the Law on Companies of the People's Republic of China largely corresponds to the concept of "business company" in Russian legislation.
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<5> Federal Law of the Russian Federation. 1994. N 32. Article 50, paragraph 2.
<6> Federal Law of the Russian Federation. 1994. N 32. Article 66, paragraph 4.
Signs of companies in the Civil Code of the People's Republic of China. Neither the Civil Code of the People's Republic of China nor the Law on Companies of the People's Republic of China give a direct definition of a company. According to Chinese scientist Liu Junhai, a company can be defined as a legal entity established in accordance with the law and assuming social responsibilities (obligations) in accordance with the law in order to make a profit <7>. The Civil Code of the People's Republic of China classifies companies as commercial legal entities and in Section II of Chapter III of the Civil Code of the People's Republic of China, which provides that companies as commercial legal entities must meet the following criteria:
Firstly, as one of the types of Chinese legal entities, companies should have common characteristics of Chinese legal entities. The definition of a legal entity in Article 57 of the Civil Code of the People's Republic of China includes three aspects: firstly, the company belongs to a public organization; secondly, the company has civil legal capacity and civil legal capacity; thirdly, the company independently enjoys civil rights and assumes civil duties <8>. Therefore, companies must have common characteristics of legal entities;
Secondly, the company's goal is to make a profit and distribute the profits among its participants (shareholders) <9>. Although a company is established for the purpose of making a profit, if the profit is obtained only for the purposes of its own development and is not distributed among the participants (shareholders), it belongs to non-profit legal entities. The objectives of the establishment of a commercial and non-commercial legal entity differ, which leads to significant differences in legal capacity, characteristics of the institution, the structure of the organization and other aspects. From the point of view of legal capacity, a company can engage in entrepreneurial activity, and a non-profit legal entity, in principle, cannot engage in entrepreneurial activity. According to the signs of establishment, the company must be registered by the registration authority in accordance with the law, and a non-profit legal entity receives the legal status of a legal entity from the moment of creation, unless otherwise provided by law. From the point of view of the organization's structure, the company should establish an authorized body (the highest management body), a supervisory body and an executive body; A non-profit legal entity does not always establish a supreme governing body, and some of them can only establish a decision-making body. In internal and external relations, the company distributes profits and surplus assets of the company among its participants (shareholders), and a non-profit legal entity does not distribute profits and surplus assets among its participants or founders;
Thirdly, the company carries out its corporate actions through its bodies. A company differs from an individual in that its will is formed internally through its bodies, such as the shareholders' meeting (the supreme governing body), the board of directors (the executive body) or the audit commission (the supervisory authority), and in the external activities of the company, the legal representative performs actions on behalf of the company. And regarding the bodies of business companies in Russia, art. 53 of the Civil Code of the Russian Federation provides that a legal entity acquires civil rights and assumes civil duties through its bodies acting in accordance with the law, other legal acts and the constituent document <10>. The bodies of an economic society differ significantly from each other in their competencies, which can be divided into volitional bodies and volitional bodies. Volitional bodies are the bodies of a business company that form its will (the general meeting of participants, the board of directors (supervisory board) and other collegial bodies). Volitional bodies are bodies that simultaneously form the will and express it externally in property turnover (executive bodies - CEO, director, president, chairman, etc.) <11>. A comparison of the signs of the willing bodies of a company in China and a business entity in Russia shows that in external activities Chinese companies are represented by a separate body - the legal representative of the company, and in Russia in external activities the general director of a business entity as a willing body performs actions on behalf of the business entity externally.
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<7> .
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<10> Federal Law of the Russian Federation. 1994. N 32. Article 53, paragraph 2.
<11> Corporate law: textbook for university students / E.G. Afanasyeva [et al.]; ed. by I.S. Shitkin. M.: Walters Kluwer, 2007. p. 155.
Regarding the characteristics of business entities in Russia, business entities in Russia are recognized as corporate commercial organizations with authorized (pooled) capital divided into shares (contributions) of founders (participants). The property created at the expense of the contributions of the founders (participants), as well as produced and acquired by the business company in the course of its activities, belongs by right of ownership to the business company <12>. Among the signs of business companies, according to I.S. According to Shitkina, the following signs can be distinguished: the presence of membership in a business company, the presence of authorized capital divided into a certain number of shares (shares), ownership of property to a business company, the presence of binding rights of the participants of a business company in relation to the company, the organization of management of a business company, which consists in involving the shareholders themselves (participants), the presence of general legal capacity in business entities, as opposed to a special (target) one, established by law for unitary enterprises <13>.
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<12> Federal Law of the Russian Federation. 1994. N 32. Article 66, paragraph 1.
<13> Corporate law. p. 42.
There are many common features in the characteristics of business entities in Russia and companies in China, but there are also differences. The main common features of a business company and a company include:
Firstly, a business entity and a company must have separate property. Article 58 of the Civil Code of the People's Republic of China provides that legal entities must own their own property. Paragraph 2 of Article 2 of the Federal Law No. 14-FZ of February 8, 1998 "On Limited Liability Companies" (hereinafter referred to as the Law on LLC) provides that the company owns separate property recorded on its independent balance sheet, can acquire and exercise property and personal non-property rights on its own behalf, and bear obligations, to be a plaintiff and a defendant in court <14>. Ownership of the property of the participants (shareholders) passes to the company and the business entity after the establishment of the company and the business entity on the basis of which the company and the business entity carry out corporate activities;
Secondly, shareholders (participants) of business entities and companies assume responsibility within the limits of their contributed capital. Paragraph 1 of Article 2 of the Law on LLC states that the company's participants are not liable for its obligations and bear the risk of losses related to the company's activities within the value of their shares in the authorized capital of the company <15>. Article 3 of the Law on Companies of the People's Republic of China also provides for such a principle;
Thirdly, in external activities, the bodies of the company and the business entity carry out activities on behalf of the company and the business entity. But there are also differences in this regard, in the external activities of the company in China they are represented by a separate body - the legal representative of the company, and in Russia - the executive body of a business company;
Fourth, shares or shares of a company and a business entity may be freely transferred, subject to compliance with the requirements of the law and the articles of association. Both articles - Article 71 of the Law on Companies of the People's Republic of China and Article 21 of the Law on LLC of the Russian Federation - provide for the possibility of free transfer to participants (shareholders) of their shares (shares). In the system of separation of ownership and management of a company and a business entity, the free transfer of shares (shares) can maximize their value.
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<14> NW OF the Russian Federation. 1998. N 7. Article 2, paragraph 2.
<15> Federal Law of the Russian Federation. 1998. N 7. Article 1, paragraph 2.
The main differences are the following:
Firstly, the systems of the authorized capital of a company and a business entity are provided for in different ways. The authorized capital of a limited liability company includes the amount of contributions to the authorized capital signed by all participants registered with the registration authority <16>. China has introduced a system of signed contributions to the authorized capital since 2014. Shareholders can make contributions to the authorized capital within the time limits agreed in the founding agreement. And in Russia, each founder of a company must pay in full his share in the authorized capital of the company within the period determined by the agreement on the establishment of the company or, in the case of the establishment of the company by one person, the decision on the establishment of the company <17>. The term of such payment may not exceed four months from the date of state registration of the company, and China does not provide for such restrictions;
Secondly, as already mentioned, in external activities, the body of the company and the business entity carry out various activities on behalf of the company and the business entity. In the external activities of the company in China, they are represented by the body - the legal representative of the company, and in Russia - by the executive body of the business company;
Thirdly, the legal nature of shareholder rights is determined in different ways. According to paragraph 1 of Article 2 of the Federal Law No. 208-FZ dated December 26, 1995 "On Joint Stock Companies", the legal nature of shareholders' rights is determined by the nature of legal relations that arise between the participants of the company and the business company itself in terms of its obligations to the company in the event of its creation. Regarding the legal nature of the company's shareholders' rights, the main point of view in China assumes that the rights of shareholders are the rights of membership, according to this doctrine, the company belongs to the type of corporation, the right of shareholders is the right of shareholders based on their membership in a commercial legal entity, which includes a number of property rights and the right to joint management of the company <18>.
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<17> NW OF the Russian Federation. 1978. N 7. Article 26, paragraph 2.
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Legal regulation of the establishment of companies in the Civil Code of the People's Republic of China. Article 77 of the Civil Code of the People's Republic of China provides that a company is established by registration in accordance with the law. This article sets out the principles of the establishment of a company, at the establishment of which, in accordance with the law, the registration authority issues it a business license. Article 21 of the Regulations on the Management of Registration of Subjects of the PRC Market provides that if an applicant submits an application for registration of an institution and the registration authority registers this organization in accordance with the law, a business license is issued. The date of issue of the business license is the date of establishment of the company. If laws, administrative regulations or decisions of the State Council provide that the establishment of a company is subject to approval by related authorities, the applicant must apply to the registration authority for registration during the validity period of the approval document that was approved by the related authority.
The legal capacity and legal capacity of the company arise from the moment of establishment, i.e. from the moment of issuance of a license to carry out business activities by the registration authority. After the company receives a license to operate, the following legal consequences mainly occur:
Firstly, the company acquires the legal status of a commercial legal entity that allows it to engage in entrepreneurial activities. Article 7 of the "Law on Companies of the People's Republic of China" provides that companies carry out business activities according to registration types and are protected by company legislation after obtaining a license from the company registration authority <19>;
Secondly, the company acquires the exclusive right to its name and has the right to carry out business activities on its behalf. After registration, the name of the company is approved by the registration authority, the company, as a subject of civil turnover, which has the exclusive right to the name, has the right to determine, use, change, alienate or allow other persons to use its name in accordance with the law. No organization or individual is allowed to violate the exclusive right to the company name through interference, misappropriation or forgery (Articles 1013-1014 of the Civil Code of the People's Republic of China);
Thirdly, the company acquires the rights to carry out external activities on its behalf. A company may acquire the right to conduct business and carry out activities on behalf of the company only after registration by the registration authority. A company cannot engage in entrepreneurial activity without registration by the registration authority <20>.
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Legal regulation of the company's organizational structure in the PRC Civil Code. Articles 80 - 81 of the Civil Code of the People's Republic of China provide that a commercial legal entity is obliged to establish a supreme governing body. The Supreme governing body is a body formed by members to vote on important issues of the company's activities in accordance with the law and internal documents, also known as the body of expression of will or the general meeting of members. The supreme management body of the company forms the will of the company and is unique for the corporation, but not for the consortium corporation <21>. The supreme management body of a company in China has the competence to amend the company's articles of association, elect or replace members of the executive body and supervisory authority, as well as other competencies provided for by the Law on Companies of the People's Republic of China or the company's articles of association. The supreme governing body of Chinese companies, although different in name from Russian business entities, plays a crucial role in shaping the will of companies.
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<21> Long Weiqiu. General overview of civil law. 2nd ed. Beijing: Law Press, 2002. p. 338.
Article 81 of the Civil Code of the People's Republic of China provides that a commercial legal entity must establish an executive body. The company must establish an executive body that exercises competence to convene meetings of shareholders (participants), make decisions on business plans and investment programs of the company, make decisions on the creation of internal management bodies of the company and exercise other competencies provided for by the company's charter. The Board of Directors is the executive body of the company and is accountable to the General Meeting of Shareholders. The members of the Board of Directors are elected by the shareholders' meeting of the company, and may also be dismissed by the shareholders' meeting. For limited liability companies with a small number of shareholders or a small size, in practice, an executive director may be created instead of the board of directors to improve the efficiency of the company's activities <22>.
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In its external activities, the company in China is represented by its representative body, the legal representative. Article 61 of the Civil Code of the People's Republic of China provides that the responsible person, on the basis of the law or the articles of association of the company representing a legal entity in the commission of civil actions, is the legal representative of the company. The representative body of the company is the body expressing the will of the company and carrying out civil activities on behalf of the company externally. Unlike the Civil Code of the People's Republic of China, in the Civil Code of the Russian Federation, the external actions of a business company are carried out through its executive body - the director or general director.
Based on the different understanding of the essence of the company, two doctrines have developed in the theory of civil law about the nature of the legal representative of a legal entity: the doctrine of representation and the doctrine of agency. In the countries of the continental legal system, the theory of representation is generally accepted, which believes that a legal entity has the ability to express its will and legal capacity, and in order to exercise this ability, a legal entity must rely on its representative body. The actions of the legal representative of the company as a legal entity are the actions of the company itself, the legal representative is the body of the legal entity, the legal entity and the representative are the same person in such cases. The agency theory is accepted mainly in the countries of the common law system, according to this theory, a legal entity is considered a fiction of its legal capacity. The implementation of the external behavior of a legal entity takes place through an agent to implement the will of the legal entity, the agent and the legal entity mainly rely on agency relations to regulate it <23>. There are various models of representation of companies in China, in general, the model of joint representation, the model of separate representation and the model of sole representation are included:
- the model of joint representation. According to the model of joint representation, the board of directors externally represents the company and holds the position of the legal representative of the company;
- the model of separate representation. According to the model of separate representation, each director or member of the management board of a legal entity can represent the company externally;
- the model of sole representation. In China, the model of sole representation has been adopted, with such a module, only a legal representative has the right to carry out activities on behalf of the company outside <24>. A business company in Russia also adopts such a model, only the sole executive body has the right to carry out activities on behalf of the business company. The legal consequences of the civil actions of the legal representative of the companies committed on behalf of the company are assumed by the company.
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The supervisory body of the company in China is the audit commission, whose members, who are not representatives of employees, are elected or replaced by a meeting of shareholders of the company. According to Article 82 of the Civil Code of the People's Republic of China, a commercial legal entity establishes an audit commission or an auditor as a supervisory authority. The supervisory authority, in accordance with the law, verifies the financial situation of the company, controls the performance of duties by members of the executive body and senior management personnel of the company and exercises other competencies assigned to it by the company's charter. The audit commission or auditors of the company must supervise the company's activities in the following ways, which mainly include two aspects:
first, supervision of the actions of directors and senior management personnel, in circumstances provided for by law, it may be proposed to dismiss directors and senior management personnel who violate the law or the company's charter;
secondly, the correction or termination of the behavior of directors and senior management personnel that infringe on the interests of the company, which violate laws, administrative regulations, articles of association or resolutions of the shareholders' meeting. Auditors also have the right to attend meetings of the Board of Directors and address doubts or suggestions on issues on the agenda (Article 54 of the Law on Companies of the People's Republic of China). If the audit commission or auditors find deviations in the company's activities, they can conduct an investigation; if necessary, they can involve an accounting or other firm to assist in the work at the expense of the company <25>.
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In different countries, the organizational structures of a company and a business entity are arranged differently, and in general, the corporate governance model can be divided into two types: one-level and two-level systems. A single-tier system is presented in the USA, the corporation's bodies consist only of a meeting of shareholders and a board of directors. The Board of Directors is established at the meeting of shareholders, and the competence of the meeting of shareholders is limited to those parts provided for by corporate law and the articles of association of the company that are directly listed, and all non-enumerated competencies belong to the board of Directors. The Board of Directors is a body combining the functions of operational decision-making, business management, supervision of the company's activities and external representation. A two-tier system is presented in Germany, where the company's body consists of a meeting of shareholders, an audit company and a board of directors, there is a hierarchical relationship between the three bodies of the company, that is, the shareholders' meeting when creating an audit commission, the audit commission is responsible to the shareholders' meeting and reports on the work; The Board of Directors is established under the audit commission, which is responsible to the audit commission and reports on its work. The Shareholders' Meeting is the management body of the company; the audit commission is both the supervisory body of the company, as well as the management of the Board of Directors; the board of Directors is the decision-making body on the company's activities, the decision-making body on the company's activities and the representative body in external activities <26>.
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The corporate governance model under the Law on Companies of the People's Republic of China is not similar to either the one-tier system of the United States or the two-tier system of Germany. In accordance with the provisions of the Law on Companies of the People's Republic of China, the company's bodies consist of a meeting of shareholders, a board of directors and an audit commission. The Shareholders' Meeting is an authorized body - the supreme governing body; the Board of Directors is the executive body, the members of the board of Directors are elected or dismissed by the shareholders' meeting; The Audit commission is a supervisory body, the members of the audit commission are elected or replaced by a meeting of shareholders. Regarding the corporate governance model of a business company in Russia. Article 65.3 of the Civil Code of the Russian Federation provides for the specifics of management in a business company as a corporation. The supreme body of the corporation is the general meeting of its members. In business companies, a sole executive body (director, CEO, chairman, etc.) and a collegial management body (board of directors) are formed. The functions of supervision over the actions of the Board of Directors and the executive body of the company are assigned to the audit commission and the auditor of the company <27>.
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<27> NW OF the Russian Federation. 1994. N 32. Article 65.3.
Neither the Chinese model of corporate governance nor the Russian model of corporate governance have yet formed any features from the American or German model. There are not only many similarities between them, but also differences. Regarding the similarities between the two models, the corporate governance of companies and business entities is focused on the shareholders' meeting. But there are differences in the structure and bodies of the organization between them, the executive body is represented in the external activities of a business company in Russia, and in the external activities of a company in China they are represented by a separate body - the legal representative of the company.
In addition, the executive body of the company includes the board of directors or the executive director of the PRC Civil Code, and the executive bodies of the business company include the sole executive body (director, CEO or managing organization, manager) and the collegial executive body (board and directorate) <28>. Moreover, in recent years, there has been a tendency in Chinese corporate law to approach reforms focused on the board of directors as a model of a single-tier system.
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<28> Federal Law of the Russian Federation. 1994. N 32. Art. 69.
Social responsibilities of the company in the Civil Code of the People's Republic of China. Article 86 of the Civil Code of the People's Republic of China provides that when carrying out business activities, a company must comply with the rules of business ethics to ensure the security of transactions, assume control from the state and society, and also bear social responsibilities. Although the purpose of companies is mainly to make a profit, certain restrictions must be observed when making a profit and certain social responsibilities must be borne. The social responsibilities of a legal entity are a novelty in Chinese civil law, the meaning of which includes mainly the following aspects:
first, companies must comply with the rules of business ethics. Companies must adhere to business ethics for their own long-term interests, as well as contribute to maintaining market order in the public interest;
Secondly, the company must ensure the security of transactions. Transaction security is the justification of the trust of the turnover participants in the process of making transactions. The company must act in good faith, take the initiative to disclose information about the transaction and actively fulfill contractual obligations, without prejudice to the legitimate rights and interests of the counterparty in the transaction process;
Thirdly, companies must accept supervision from the state and the public themselves. Effective supervision contributes to the fact that the activities of companies become more reliable and more consistent with the relevant requirements of legislation, business ethics and public interests;
Fourthly, when carrying out business activities, the company is obliged to contribute to the satisfaction of the interests of relevant entities, in addition to the interests of its shareholders, to the maximum extent possible, and maximize the interests of the company. Such social interests include the interests of employees, consumers, creditors, small and medium-sized competitors and the public interests of society as a whole <29>. Despite the fact that art . 86 The Civil Code of the Russian Federation provides for the social obligations of the company, this norm has rather a declarative meaning and cannot be used in judicial practice as a basis for filing a claim. The general provisions section of the PRC Civil Code, in addition to the above general provisions on the establishment, organization structure and social responsibilities of companies, also contains a number of innovative provisions on corporate governance. For example, Article 85 of the Civil Code of the People's Republic of China asserts the protection of the interests of bona fide counterparties in the event that a company makes a decision with a defect, which was previously controversial <30>. In addition, the Law on Companies of the People's Republic of China (2018), as the main separate law regulating the legal status of the company, is currently being revised and will be integrated with the Civil Code of the People's Republic of China.
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