On 29 December 2023, the latest amendment of the Company Law of the People’s Republic of China (“the New Company Law”)[1] was passed and will come into effect on 1 July 2024. It introduced many significant changes to China’s corporate law regime. The last amendment to China’s Company Law prior to this was made in 2018 (“the 2018 Company Law”). On 6 February 2024, the PRC State Administration for Market Regulation (“SAMR”) also issued the draft Provisions of the State Council on the Implementation of the PRC Company Law on the Registration of Registered Capital Management System (“Implementation Provisions”)[2] which details the supporting administrative regulations for the New Company Law. This note will briefly introduce the key changes investors should take note of.
The 2018 Company Law provides that shareholders could determine their capital contribution timeline freely in their articles of association. Under the New Company Law, shareholders must pay their entire subscribed capital contribution within five years of the company establishment date, unless otherwise provided in other laws and regulations (Article 47).
In the Implementation Provisions, a three-year transition period (from July 1, 2024 to June 30, 2027) has been established to allow companies with capital contribution periods exceeding five years to adjust to five years or less. Moreover, limited liability companies established before the implementation of the New Company Law will not be required to adjust the capital contribution period if the remaining capital contribution period is less than five years from July 1, 2027.
To protect the company and creditors’ interest, new rules are introduced to ensure shareholders pay up their full capital contribution. Therefore, if the company is unable to pay its debts, creditors and management of the company can require shareholders to pay any unpaid capital contribution, even if it is before the deadline for the shareholder’s payment (Article 54).
The Implementation Provisions provide that, if the company has a contribution period of over 30 years and capital amount of more than RMB one billion, the SAMR has the right to examine and validate these companies, taking into account the ability of the shareholders to make capital contributions, their main business and the size of their assets, and has the right to request them to make rectification if they consider the registered capital and the contribution period to be clearly abnormal.
When transferring equity interest in a limited liability company to a person other than a shareholder, the requirement for approval by a majority of shareholders has been removed in the New Company Law. The exiting shareholder can now notify shareholders of their intended transfer, and if no one responds within thirty days, their right of first refusal will be deemed to be waived (Article 84).
It is required under the 2018 Company Law that a company must have one or two supervisors or a board of supervisors that oversees the affairs of the company. Now, smaller-scale limited liability companies can choose not to have a board of supervisors, appoint one supervisor, or not have supervisors at all; and smaller-scale joint stock companies can choose not to have a board of supervisors and appoint one supervisor (Article 83 and Article 133).
Instead, an audit committee composed of directors may be set up to exercise the functions of the board of supervisors (Article 69 and 121).
Under the 2018 Company Law, only the chairman, executive director or general manager could be the legal representative of a company. Now, this has been amended so that the legal representative of a company could be a director or general manager who executes the company's affairs on behalf of the company in accordance with the provisions of the company's articles of association (Article 10).
For small joint-stock limited companies, the New Company Law allows the option of not having a board of directors, and appointment of a single director will suffice. The 2018 Company Law only allowed limited liability companies this option (Article 128).
In relation to passing board and shareholder resolutions in a limited liability company, the general resolution of shareholders' meetings shall be passed by the shareholders representing more than half of the voting rights (Article 116), while the resolution of the board of directors shall be passed by more than half of all directors (Article 124). This is newly added to the New Company Law.
Chapter 2 of the New Company Law is a new chapter on company registration, outlining procedure for establishment, change and deregistration of a company. The New Company Law also improves the liquidation system, stating that directors have an obligation to form a liquidation group for liquidation, which consists of all directors, unless otherwise stated in the articles of association or shareholders’ meeting (Article 232).
The 2018 Company Law allows the articles of associations, shareholders’ register, corporate resolutions, accounting books and financial audits to be reviewed by shareholders. The New Company Law will enhance shareholders’ right to review documents, allowing them to review the underlying accounting documents of the company and any of the aforementioned documents of a wholly owned subsidiary of the company (Article 57 and 110).
Further, if a controlling shareholder of a company abuses shareholder rights and materially harms the interests of the company or other shareholders, shareholders will have the right to request the company to purchase their shares at a fair price (Article 89).
Issue
2018 Company Law
New Company Law
Capital Contribution Timeline
Shareholders could determine their capital contribution timeline freely in their articles of association.
Shareholders must pay their entire subscribed capital contribution within 5 years of company establishment date.
A three-year transition period (from July 1, 2024 to June 30, 2027) has been established to allow companies to adjust to the new rule.
More stringent rules on outstanding capital contributions
If the company is unable to pay its debts, creditors and management of the company can require shareholders to pay any unpaid capital contribution.
The SAMR has the right to examine and validate companies with a contribution period of over 30 years and capital amount of more than RMB one billion .
Transfer of Equity Interest of limited liability companies
There is a requirement of approval by majority of shareholders for transfer of equity to a person that is not a shareholder.
The requirement is removed. Instead of approval, the exiting shareholder will notify shareholders of the intended transfer. The right of first refusal is deemed waived if no one responds within 30 days.
Supervisors
There must be one or two supervisors or a board of supervisors.
For smaller-scale limited liability companies and joint-stock limited companies, they can choose not to have a board of supervisors and appoint one supervisor. For smaller-scale limited liability companies, they can also choose not to have supervisors at all.
Instead, an audit committee can exercise the functions and powers of the board of supervisors.
Legal Representatives
Only the chairman, executive director or general manager could be the legal representative of the company.
A director or general manager who executes the company's affairs on behalf of the company could be the legal representative of the company .
Board of Directors
Only limited liability companies had the option of not having a board of directors.
In addition to limited liability companies, small joint-stock limited companies will also have the option of not having a board of directors, and appointment of a single director will suffice.
Board and Shareholders’ Resolutions of limited liability companies
No specific requirement on passing of board or shareholders resolution.
The general resolution of the shareholders' meeting shall be passed by the shareholders representing more than half of the voting rights.
The resolution of the board of directors shall be passed by more than half of all directors.
Company Registration and Liquidation
There was no specific chapter on company registration.
For limited liability companies, the liquidation group should consist of shareholders.
A new chapter is introduced on company registration, outlining procedure for establishment, change and deregistration of a company.
The liquidation system is also improved. Now, directors have an obligation to form a liquidation group which consists of all directors.
Protecting Shareholders’ Rights
The articles of associations, shareholders’ register, corporate resolutions, accounting books and financial audits can be reviewed by shareholders.
In addition to the 2018 Company Law documents, shareholders can also review the underlying accounting documents of the company and any of the aforementioned documents of a wholly owned subsidiary of the company.