On June 2, 2021, the China Banking and Insurance Regulatory Commission (the so-calledCBIRC) sent the messagePrinciples of Corporate Governance of Banking and Insurance Institutions(in Chinese: Corporate Governance Guidelines for Banking and Insurance Institutions,Regulations 2021), which entered into force immediately. The 2021 rules replaced the regulationsCorporate governance guidelines for commercial bankswhich was released in 2013 andGuidance on the regulatory structure of insurance company management (for trial use)issued in 2006 to consolidate the existing separate regulatory regimes applicable to banking and insurance institutions respectively into a single regime.
The 2021 rules explicitly apply to "banking and insurance corporations" incorporated as limited liability companies through shares, but only apply to limited liability companies (such as wholly foreign equity insurance companies or foreign equity insurance joint ventures (including ,FIE Insurance)) for. In practice, the extent to which the 2021 Rules will apply to insurance limited companies (including Insurance FIEs) is subject to further interpretation by the CBIRC. However, based on our experience and the historical practice of the CBIRC, we believe it is likely that the CBIRC will apply the 2021 rules to insurance limited companies (including insurance FIEs) on a graduated basis.
Below we summarize some of the key points, specifically regarding insurance FIEs.
New powers were given to shareholders' meetings and boards of directors
In addition to existing statutory powers (e.g. under PRC corporate law), the 2021 Regulations gave new powers to shareholders' meetings. For example, shareholders' meetings must review and approve proposed share incentive plans. these rights are not transferable.
The Management Board was also given new powers. These include the ability to formulate a capital plan and an internal risk control policy for the company and to create mechanisms for settling disputes between the shareholder and the company. In general, these board powers can also be delegated, unless delegation is necessary and on a case-by-case basis. In particular, the following matters of the board of directors must be approved by a vote in favor of at least two-thirds of all directors at a duly convened meeting - no written resolutions are allowed:
- proposed profit splits;
- compensation plans;
- tangible investments and sale of assets;
- appointment and removal of senior management and
- capital supplement plans.
Appointment of directors and independent directors
The 2021 Rules set out the rules for appointing directors and independent directors:
- In particular, under the 2021 Rules, the threshold for nomination of directors by shareholders is relatively low:
- in the case of non-independent directors, it has the power to designate a shareholder holding at least 3% of the total voting rights; and
- In the case of independent directors, a shareholder holding at least 1% of the total number of votes has the right to nominate.
- The number of directors nominated by the shareholder (and its affiliates) should generally not exceed one-third of the total number of directors.
- A shareholder (and its affiliates) who has nominated non-independent directors may not also nominate independent directors.
The 2021 rules include various other rules applicable to independent directors, such as a maximum term and two-position limit. Based on our experience and the historical practice of the CBIRC, it is likely that the CBIRC will require all Insurance FIEs to appoint independent directors over time.
Composition of the Supervisory Board and appointment of supervisors
It is also worth noting a few rules for the supervisory board:
- The supervisory board must include shareholder supervisors, external supervisors, and employee supervisors. In particular, an external supervisor is a supervisor who does not hold any other position with the banking/insurance institution and has no other relationship with that institution, its shareholders and beneficial owners that could influence the supervisor's independent judgment.
- The supervisory board must consist of at least three members, and the employee's supervisor or supervisors and the external supervisor must constitute at least one-third of all supervisors.
- Persons supervising employees must be appointed by the supervisory board or the association of the banking and insurance institution. Other supervisors will be appointed by the shareholders or the supervisory board.
- Unless otherwise provided, a shareholder (and its affiliates) who has appointed directors should also not appoint supervisors.
The above principles essentially reflect the existing regimes that have been implemented in the banking sector.
Limitation of double seats
The 2021 Rules expressly prohibit the chairman of the board of directors of banking and insurance institutions from simultaneously serving as president (i.e. chief executive officer or chief executive officer) of the same institution.
This is a much stricter requirement imposed on the banking and insurance sectors than on other, unregulated sectors. We understand that banks have already implemented this restriction based on applicable regulations.
In line with the recent regulatory trends of the CBIRC, the 2021 regulations place a new emphasis on the leadership of the Chinese Communist Party (KKK) role. The 2021 Rules differentiate the levels at which CCP requirements apply. For state-owned banks and insurance companies, the 2021 Rules require (i) the inclusion of CCP leadership in their charter, (ii) CCP members participating in the board and senior management team, and (iii) management of large business matters to be discussed by the Ethics Committee. CCP before submitting them to the board or senior management for decision. However, for private banks and insurance companies, the 2021 regulations only require CCPs to be integrated into the high-level management structure of the relevant banks or insurance companies.
The 2021 rules still do not define "state-owned" banks and insurance companies, which in practice causes ambiguity as state-owned assets in China have been overseen by various authorities in the PRC in the past. For example, the Ministry of Finance oversees state assets in the financial industry, while the State Assets Supervision and Administration Commission oversees state assets in other industries. The extent to which these CCP requirements will apply to underwriting FIEs (especially those with Chinese state-sponsored partners) will depend on the CBIRC's interpretation of the rules as well as the regulators of the relevant government assets.
Obligations to supplement the share capital
The 2021 Bylaws set out various shareholder duties and responsibilities which, among other things, oblige majority shareholders (i.e. holding at least 5% of the shares or voting rights or otherwise having a significant impact on the running of the company) to provide a timely written commitment that they will provide supplementary capital banking and insurance institution when necessary.
The recapitalization obligation has already been imposed on the banking sector, therefore the bank's shareholders were asked to submit separate written commitments to the CBIRC. It is likely that insurance company shareholders will be asked by the CBIRC to do the same in the near future.
Amendments to articles
The 2021 Rules require relevant institutions to include certain statutory provisions in their statutes. For example, the articles of association must provide for the composition and duties of shareholder meetings, board of directors, supervisory board and top management, and specify the respective rights and duties of the banking and insurance company concerned, and as shareholders, directors, supervisors and senior managers.
This is not the first time CBIRC has imposed similar requirements. In 2017, the CBIRC issued guidelines on the statutes of insurance companies and asked the relevant insurance companies to specify statutory provisions in their statutes within a certain period.
Notwithstanding the foregoing, the 2021 Regulations do not require direct amendments to the statutes to reflect statutory provisions. they only stipulate that banking and insurance institutions must update their statutes in a timely manner in accordance with laws, regulations and regulations. However, taking into account that the five-year grace period provided for in ArtForeign Investment Lawlasts until December 31, 20241, it is possible that the CBIRC may request changes as part of its regular management review or when the relevant banking and insurance institution submits other amendments to the Articles of Association for approval by the CBIRC.
The legal consequences of failing to comply with the statutory requirements are not clearly defined in the 2021 Rules. However, according to the latestTrial means of regulatory assessment of corporate governance of banking and insurance institutionsissued by the CBIRC in November 2019, failure may result in a lower rating of the institution in question in the regulatory assessment of corporate governance. Depending on the final outcome of the assessment, further CBIRC regulatory measures may be triggered, ranging from regulatory guidelines and directives to suspension of certain activities, restrictions on dividend distribution or administrative sanctions.