In 2003, foreign company A established company C, a wholly foreign owned enterprise in China, under the then-effective Law on Wholly Foreign Owned Enterprises. As per its articles of association, company C did not establish a shareholders' meeting, with its board of directors, comprising foreign individuals X, Y and Z, serving as the highest authority instead. X was designated as the legal representative.
In 2006, foreign company B became the second shareholder of company C, endorsing its organisational structure and board framework. Over time, company B increased its shareholdings through multiple capital investments, becoming the majority shareholder with a 73% ownership stake, while company C's organisational structure remained unchanged.
In September 2023, company B unexpectedly called for an "extraordinary shareholders' meeting", leveraging its majority stake to forcibly pass a "resolution" replacing the board members and the legal representative. However, no registration changes were filed. In February 2024, the newly appointed legal representative, D, filed a lawsuit on behalf of company C demanding that X and Y return corporate seals and licences.
X and Y engaged the authors to handle the dispute over the return of company C's licences and seals, as well as the company control. Upon review, the authors identified threshold procedural issues: Is company C, represented by D, a proper party to the case? Was there a legitimate and valid internal company resolution confirming D as the legal representative of company C? Given that company C does not have a shareholders' meeting and operates with its board of directors as the highest authority, is the so-called "extraordinary shareholders' resolution" valid?
Based on these considerations, the authors requested the court to suspend the licence return lawsuit and initiated a separate case to challenge the validity of the company resolution. The court ultimately ruled that, in the absence of a shareholders' meeting within company C, the "extraordinary shareholders' resolution" was invalid.
This case raises a critical question: Which rule applies to the identification of a foreign-invested enterprise's (FIE) governance structure, provided that it was established before the Foreign Investment Law took effect?
The Foreign Investment Law and its implementation regulations allow a five-year transition period from 1 January 2020 to 31 December 2024, during which FIEs established before 2020 under previous laws could maintain their original corporate structure and governance mechanisms.
For these legacy FIEs, two critical issues require examination when determining their valid governance structures:
1.Which governing documents should serve as the basis for recognising their governance structure?
2.Should the mandatory provisions under the Foreign Investment Law and the Company Law regarding shareholders' meetings apply?
Governing documents. The legacy FIEs used to be incorporated under the Law on Wholly Foreign-Owned Enterprises, which stipulates in article 11 that wholly foreign-owned enterprises shall operate in accordance with their approved articles of association and be free from interference. The corporate governance structure for the legacy wholly foreign-owned enterprises like company C should be determined by their articles. This allows such enterprises to designate the board of directors as the highest authority without the need for a shareholders' meeting.
This has been affirmed in judicial practice. In the case of Chen Jingyang v Shaanxi Datang Real Estate (2022), the Supreme People's Court clarified: "Shaanxi Datang Real Estate is a wholly foreign owned enterprise. Under article 11 of the then applicable Law on Wholly Foreign Owned Enterprises, the company is entitled to manage its operations in accordance with its approved articles of association and without interference ... Furthermore, article 16 of those articles designates the board of directors as the highest authority, responsible for all major decisions."
This confirms that the organisational structure of an FIE should be determined by its articles of association.
New law's applicability. The Foreign Investment Law explicitly states that the legacy FIEs may retain their existing organisational structures without establishing a shareholders' meeting during the transition period.
From a legislative perspective, the transition provision is designed to ensure a smooth realignment of FIE organisational structures. Directly applying the Company Law after the Foreign Investment Law takes effect – particularly when the board has not passed resolutions to amend the articles or adjust the governance structure – would defeat the intended purpose of a gradual transition.
Given the boundaries between public authority and private rights, public bodies such as the courts and commercial administration cannot impose shareholders' meetings on FIEs either during or after the transition period. Instead, the establishment of a shareholders' meeting must adhere to the company's articles regarding its structure, scope of authority and procedural rules, executed through internal resolution processes.
Article 44 of the Implementation Regulations of the Foreign Investment Law also provides complementary regulatory measures. For legacy FIEs that fail to complete restructuring under the Company Law after the transition period, market supervision authorities will restrict their registration services except for organisational changes, while publicly disclosing their non-compliance.
These measures are meant to prompt legacy FIEs to complete the necessary changes, rather than allowing courts or commercial administration to presume the existence of a shareholders' meeting.
In summary, for FIEs established before the implementation of the Foreign Investment Law, the company's articles of association should serve as the basis for determining organisational structure. Whether during or after the transition period, the provisions of the Company Law cannot be applied directly. Structural changes must be carried out through internal company resolutions and other self-governing procedures.
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