On 2 June 2021, the China Banking and Insurance Regulatory Commission (the CBIRC) issued the new Corporate Governance Rules of Banking and Insurance Institutions (in Chinese: 银行保险机构公司治理准则, 2021 Rules), which came into immediate effect. The 2021 Rules have superseded the Corporate Governance Guidelines on Commercial Banks issued in 2013 and the Guiding Opinions Regulating Governance Structure of Insurance Companies (for Trial Implementation) issued in 2006, aiming to consolidate the existing separate regulatory regimes applicable to banking and insurance institutions respectively into one unified regime.
The 2021 Rules explicitly apply to “banking and insurance institutions” which are incorporated as companies limited by shares, but only apply to limited liability companies (like wholly foreign invested insurance companies or foreign invested insurance joint ventures (collectively, Insurance FIEs)) by reference. In practice, the extent to which the 2021 Rules will apply to limited liability insurance companies (including Insurance FIEs) remains subject to CBIRC’s further interpretation. However, based on our experience and CBIRC’s historical practice, we believe it is likely that CBIRC expects to apply the 2021 Rules to limited liability insurance companies (including Insurance FIEs) on a gradual basis.
We summarise below some key points, particularly in respect of Insurance FIEs.
New powers conferred on shareholders’ meetings and boards of directors
In addition to the existing statutory powers (e.g. those under the PRC Company Law), the 2021 Rules have conferred new powers on shareholders’ meetings. For example, shareholders’ meetings must review and approve proposed stock incentive plans; these powers may not be delegated.
New powers have also been conferred on the board of directors. These include to the ability to formulate a capital plan and internal risk control policies for the company and to establish shareholder-company dispute resolution mechanisms. In general, those board powers can also be delegated, unless delegation is necessary and is done on a case-by-case basis. In particular, the board matters listed below need to be passed by an affirmative vote of at least two-thirds of all the directors in a duly convened meeting – written resolutions are not allowed:
- proposed profit distributions;
- remuneration plans;
- material investments and asset disposals;
- appointment and dismissal of senior management personnel; and
- capital replenishment plans.
Nomination of directors and independent directors
The 2021 Rules set out rules regarding the nomination of directors and independent directors:
- In particular under the 2021 Rules, the threshold for shareholders to nominate directors are relatively low:
- for non-independent directors, a shareholder holding no less than 3% of the total voting rights has the right to nominate; and
- for independent directors, a shareholder holding no less than 1% of the total voting rights has the right to nominate.
- The number of directors nominated by one shareholder (and its affiliates) must generally not exceed one-third of all board members.
- A shareholder (and its affiliates) which has nominated non-independent directors cannot concurrently nominate independent directors.
The 2021 Rules include various other rules applicable to independent directors, such as a maximum term of office and a restriction on taking dual positions. Based on our experience and CBIRC’s historical practice, it is likely that the CBIRC will require all Insurance FIEs to appoint independent directors over time.
Composition of the supervisory board and supervisors’ nomination
Certain rules on the supervisory board are also worth noting:
- The supervisory board must consist of shareholders’ supervisor(s), external supervisor(s) and employee supervisor(s). In particular, an external supervisor is a supervisor who holds no other position in the banking/insurance institution, and has no other relationship with that institution, its shareholders and actual controllers that may influence the supervisor’s independent judgement.
- The supervisory board must have at least three members, and the employee supervisor(s) and external supervisor(s) must comprise no less than one-third of all supervisors.
- Employee supervisors must be nominated by the supervisory board or the banking and insurance institution’s trade union. Other supervisors are to be nominated by the shareholders or the supervisory board.
- Unless otherwise provided, a shareholder (and its affiliates) which has nominated directors should not also nominate supervisors.
These above rules generally reflect the existing regimes that have been applied in the banking sector.
Dual positions restriction
The 2021 Rules expressly prohibit the chairman of the board of directors of banking and insurance institutions from concurrently holding office as the president (i.e. CEO or general manager) of the same institution.
This is a much stricter requirement imposed on the banking and insurance sectors than other, unregulated, sectors. We understand that the banks have already implemented this restriction under regulations already in force.
Following recent CBIRC regulatory trends, there is renewed emphasis in the 2021 Rules on the leadership of the China Communist Party (CCP)’s role. The 2021 Rules have differentiated levels at which CCP-related requirements apply. For state owned banks and insurance companies, the 2021 Rules require (i) the integration of CCP leadership into their articles of association, (ii) CCP members to sit in the board of directors and senior management team, and (iii) major business management matters to be discussed by the CCP committee before submission to the board of directors or senior management for decision. However, for privately owned banks and insurance companies, the 2021 Rules only require the CCP committee to be built into the relevant banks’ or insurance companies’ governance structure on a high level.
The 2021 Rules still do not define “state-owned” banks and insurance companies, which, from a practical perspective, creates ambiguity because state owned assets in China have historically been overseen by various PRC authorities. For example, the Ministry of Finance oversees state owned assets in the financial industry, while the State-owned Assets Supervision and Administration Commission oversees state owned assets in other industries. The extent to which these CCP-related requirements will apply to Insurance FIEs, (especially those with Chinese partners that are state funded), will depend on CBIRC’s interpretation of the rules, as well as the authorities overseeing the relevant state owned assets.
Shareholder’s capital replenishment obligations
The 2021 Rules set out various duties and obligations of shareholders, which, amongst others, require major shareholders (i.e. those holding no less than a 5% stake or voting rights, or otherwise having a significant influence over the company’s operation) to provide a long-term written commitment that they will provide capital replenishment to the banking and insurance institution when necessary.
This capital replenishment obligation has already been imposed in the banking sector, so shareholders of banks having been requested to submit written commitments to CBIRC separately. It is likely that shareholders of insurance companies will be requested by the CBIRC to do the same in the near future.
Amendments to articles
The 2021 Rules require the relevant institutions to include certain statutory provisions in their articles of association. For example, the articles of association must provide for the composition and duties of shareholders’ meetings, the board of directors, the supervisory board and senior management, and specify the respective rights and obligations of the relevant banking and insurance company, as well as its shareholders, directors, supervisors and senior management personnel.
This is not the first time the CBIRC has imposed similar requirements. In 2017, the CBIRC issued guidelines regarding the articles of association of insurance companies and required the relevant insurance companies to set out statutory provisions in their articles within a designated timeframe.
Notwithstanding the above, the 2021 Rules do not require immediate amendments to be made the articles to reflect the statutory provisions; they only provide that banking and insurance institutions must update their articles of association in accordance with laws, regulations and regulatory rules in a timely fashion. However, considering that the five-year grace period provided in the Foreign Investment Law lasts until 31 December 20241 , it is possible that the CBIRC may require the amendments to be made as part of its regular governance inspection or when the relevant banking and insurance institution submits other amendments to the articles for CBIRC’s approval.
The legal consequences of failure to satisfy the statutory requirements are not clearly specified in the 2021 Rules. However, according to the latest Trial Measures for Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions issued by CBIRC in November 2019, failure is likely to result in lower scoring of the relevant institution in a corporate governance regulatory assessment. Depending on the final assessment score, further CBIRC regulatory measures may be triggered, from guidance and regulatory direction to the suspension of certain types of business, restrictions on dividend distribution or administrative penalties.