The Division of Powers of Shareholders and Directors

Corporate governance, in form, is an arrangement of corporate governance institutions such as the shareholders’ meeting, board of directors, and supervisors. The division of power among the various institutions of the company has always been a key focus of Company Law. Analysing the current legal provisions and legislative trends in the revised draft, paying attention to the importance of the company’s articles of association (the “AoA”), is especially beneficial for enterprises to effectively avoid legal risks and optimize their own governance capabilities in carrying out compliance work. This article will briefly discuss the division of powers between the shareholders’ meeting and the board of directors.

Ⅰ. Disputes Caused by Powers not Specified in the Company’s AoA

Article 36 of the Company Law clearly stipulates that “the shareholders’ meeting is the authority of the company”, Article 46 of the Company Law stipulates that “the board of directors is responsible to the shareholders’ meeting”, and the Company Law also clearly stipulates the powers of these two institutions. Compared to the highest authority of the shareholders’ meeting, the board of directors belongs to the company’s executive and operational decision-making organs.

Regarding the powers not explicitly listed in the Company Law, the Company Law stipulates that they shall be supplemented by the company’s AoA. When there are no separate provisions or unclear provisions on the powers of the shareholders’ meeting and the board of directors in the AoA, there will be a issue regarding the division of power, which has also led to years of disputes between the control arising from the shareholder meeting and the control afforded to the board.

At present, a common view in judicial practice is that, from the perspective of the formulation process of the AoA, the shareholders’ meeting has the right to specify its major powers in the AoA. The remaining powers beyond the provisions of the AoA should be recognized as the powers that will not significantly impact the operation and development of the company, so they should belong to the board of directors. However , different courts may still have different considerations based on specific cases in judicial practice.

Ⅱ. The Legislative Trend of Director Centralism

In the company laws of Japan and Taiwan, it is clear that the remaining powers of the company are transferred to the board of directors. The authority of the shareholders’ meeting is limited to the matters listed in the law and the company’s AoA, and all specific decision-making powers are exercised by the company’s board of directors. A similar trend can also be seen in the revised draft of China’s Company Law. The revised draft of the Company Law once stipulated that the board of directors is the executive body of the company, exercising powers beyond the powers of the shareholders’ meeting as stipulated in this Law and the company’s AoA, and deleted the provision that “the board of directors is responsible to the shareholders’ meeting”.

Ⅲ. Pay Attention to the Role of the Company’s AoA

Limited liability companies have a high degree of personal cooperation and autonomy. According to the principle of “freedom without prohibition by law”, where the functions and powers of the shareholders’ meeting are delegated to the board of directors other than those matters that under applicable law must be approved by the shareholders representing more than two thirds of voting rights (such as amendment of articles of association, increase or reduction of registered capital), such matters shall generally be upheld by the court. Therefore, if shareholders have special considerations regarding the powers of the board of directors, it is recommended to clarify them in advance in the articles of association.

The above content is provided for informational purposes only. The provision of this article does not create an attorney-client relationship between D’Andrea & Partners and the reader, and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel.