By Jake Laband
Chinese Communist Party (CCP) officials are increasingly calling on companies to support the creation of party organizations among their employees. The potential for party groups to influence corporate decision making has raised concern among some US company executives: What are foreign companies obligated to do, and how should companies respond to requests to establish party organizations in their China subsidiaries?
Legal requirements for foreign companies
China’s laws governing foreign invested enterprises are silent on party organizations. China’s Company Law, which applies to domestic as well as foreign-invested companies (but not foreign representative offices), does address party organizations, but does not specify their role. Article 19 requires companies to provide the “necessary conditions” for the activities of party organizations, which shall be established within the company according to the CCP Constitution.
Chapter 5 of the CCP Constitution requires the formation of a party organization in companies with three or more party members. The CCP Constitution lays out different expectations for the role of party groups in state-owned enterprises (SOEs) and private companies.
- Article 33 was amended in November to alter requirements for party groups within SOEs. While previous versions of the CCP Constitution called for party groups to play a “core political role,” the revised version calls for these groups to play an expanded leadership role, ensure the implementation of party policy, and discuss and decide major issues for their enterprise.
- In private companies, the CCP Constitution states that party organizations are more focused on making sure the company follows the law and overseeing organizations such as trade unions and the Communist Youth League. No management or governance role is specified. While it is not always clear that the term “private companies” incorporates foreign invested enterprises, this may be the most relevant guidance for foreign companies.
By design, party organizations in SOEs are more prominent and influential. Party regulations issued in June 2015 specify that the chairman or CEO of an SOE should serve as the secretary of the party group, and that other company executives should be included in the party group as well.
The party in foreign-invested enterprises
Based upon the Company Law, party organizations should be permitted to be established in a foreign-invested enterprise – JV or 100% foreign-owned – if it employs three or more party members. No management or governance role is required, however, and company best practices suggest these organizations are not required to hold a managerial function. For example, party organizations could serve as a channel or platform to coordinate local employee non-work activities or management-employee communications.
Joint ventures, especially those with state-owned partners, may face different pressures regarding the role of party organizations, although it is USCBC’s understanding that they are not subject to any legal obligation to allow party groups decision-making power, based on the legal requirements analyzed above.
Some USCBC companies have reported that their state-owned joint venture partners have recently approached them about altering their articles of association to support party groups within the joint venture, even going as far to request that they be amended to allow critical matters to be approved by the party organization before they are presented to the board. Some of these requests likely stem from a party directive issued in March 2017, though companies report receiving similar requests earlier than this. The 2017 directive, entitled “Notice About Firmly Promoting Writing SOE Party Building Work into Company Articles of Association,” requires state-owned enterprises to incorporate party-building principles into their articles of association. However, the notice does not represent a legal requirement and companies have reported successfully pushing back against such requests to allow a simple re-statement in the articles of association of the company’s obligations under the Company Law.
In addition, the laws governing joint ventures specify that amendments to the articles of association require unanimous consent of directors present at the board meeting, meaning the Chinese partner cannot force such changes without the foreign partner’s agreement. In fact, these laws clearly state that the board of directors is the highest decision making body in the company. The Company Law does not specify any particular role for party organizations in foreign-invested enterprises, so any attempt to give a party cell a managerial or governance function can be challenged on this basis.
Companies should be alert to pressures to form party organizations in their China subsidiaries, but also aware of the legal framework and best practices that may limit the impact of such organizations on governance and management. Consulting with legal counsel is always recommended when deciding on a strategy to respond to such requests.