Other BriefingsChina’s Revised Company Law in Effect from July 1, 2024: Key Details Here
China’s legislature has adopted an amendment to the country’s Company Law, passing sweeping changes to company capital rules, corporate governance structures, liquidation procedures, and shareholder rights, among others. The new version of the China Company Law has significant implications for companies in China – both old and new – providing more flexibility in areas such as share issuance and corporate structure while strengthening the protection of shareholder rights. Foreign investors and companies are strongly advised to familiarize themselves with the amended China Company Law to assess the possible impact on their investments.
UPDATE (July 1, 2024): The Supreme People’s Court has issued judicial interpretations regarding the application and effectiveness of the Company Law. These interpretations aim to address the issue of applying the new Company Law in conjunction with the old laws. They came into effect on July 1, 2024. The “Interpretations” provide specific guidelines for determining the temporal effect of the Company Law in current judicial proceedings. While adhering to the principle that laws do not apply retroactively, the “Interpretations” differentiate between substantial amendments, new provisions, and detailed regulations based on revisions to the Company Law. The “Interpretations” consist of eight articles, covering general provisions on the temporal effect of the Company Law, favorable retroactive rules for civil legal acts, favorable retroactive rules for contract performance, blank retroactive rules for new provisions, specific retroactive application rules for detailed regulations, legal application for liquidation responsibilities, rules regarding final judgments prioritizing over retroactive rules, and the effective date. Read more here.
UPDATE (June 8, 2024): On June 7, 2024, the draft Provisions on the Registered Capital Registration Management System of the PRC Company Law were adopted during an executive meeting of the State Council. In implementing the registered capital management system, the meeting emphasized the need to adjust investment periods for existing companies, ensure shareholders fulfill their capital contribution obligations, and optimize registration services. On July 1, 2024, the official document was released on the State Council website. Read more here.
UPDATE (February 8, 2024): To provide guidance and ensure the implementation of this transition period, on February 6, the State Council released a draft version of the Provisions on the Registered Capital Registration Management System for public feedback until March 5, 2024. The draft provisions, if adopted in their current form, will also come into force on July 1, 2024.
On December 29, 2023, the Standing Committee of the National People’s Congress (NPC) adopted an amendment to the China Company Law (“2023 Company Law”). The final version of the 2023 Company Law, which will come into force on July 1, 2024, follows many years of draft amendments and deliberations, beginning at the end of 2021.
In an interview with a reporter, a representative from the NPC explained how the 2023 Company Law improves several areas of corporate governance, including the capital contribution system, shareholder rights, and corporate registration and liquidation systems, among many other areas. The amendments also make important changes that bring the China Company Law in line with corporate disclosure requirements introduced in recent years through the corporate social credit system.
Companies that are already established in China or are seeking to enter the Chinese market must familiarize themselves with the latest changes to the Company Law to ensure compliance with the latest requirements.
Changes to provisions on company capital
Changes to subscribed capital payment terms for LLCs
Article 47 of the 2023 Company Law stipulates shareholders of a Limited Liability Company (LLC) must pay their subscribed capital in full within five years of the company’s establishment. In an LLC, the subscribed capital is the company’s registered capital, which must be registered with the company registration authority upon establishment.
A transitional period will be permitted for companies established before the 2023 Company Law comes into effect that have subscribed capital payment terms exceeding this time limit. These companies will be required to gradually adjust the contribution period to meet this requirement.
This change has been introduced to tackle issues with shareholders over-subscribing capital at the initial stage, as well as very long payment terms, which has sometimes resulted in the subscribed capital never being paid in full.
In addition to the new time limit, the 2023 Company Law also stipulates new requirements for companies to disclose their registered capital and raises the penalties for non-compliance.
Article 40 of the 2023 Company Law states that companies must disclose the following information on capital registration through the National Enterprise Credit Information Disclosure System (among other information):
- The amount of capital contribution subscribed and paid by shareholders of an LLC, the method and date of capital contribution, and the number of shares subscribed by the promoters of a joint stock company; and
- Changes to the equity and share information of shareholders of LLCs and promoters of joint stock companies.
Meanwhile, Article 251 stipulates penalties for failure to truthfully and accurately disclose the above information, which may range from RMB 10,000 to RMB 50,000 (US$1,406 to US$7,032), or RMB 50,000 to RMB 200,000 (US$7,032 to US$28,130) if the circumstances are serious. The individual directly responsible for the violation may also be fined between RMB 10,000 and RMB 100,000 (US$1,406 to US$14,065).
Authorized capital system for joint-stock companies
The 2023 Company Law introduces a new authorized capital system for joint-stock companies, in which shareholders’ meetings can “authorize the board of directors to make a resolution on the issuance of corporate bonds” (Article 59).
Under such a system, a joint-stock company only needs to issue some of its shares when it is established, as outlined in its articles of incorporation or memorandum of association. In this way, the board of directors can choose to issue some or all of the remaining shares at a later time if it requires more liquidity.
However, the promoters of a joint-stock company will be required to pay the subscription in full before the company is established. According to the NPC representative, this will facilitate the establishment of the company, improve financing flexibility, and reduce issues such as the virtualization of registered capital.
A new clause also states that shareholders of a joint-stock company or an LLC who fail to pay the subscribed capital contribution on time are liable to pay damages to the company, in addition to the subscribed amount.
More flexibility in share issuance
The 2023 Company Law adds a new clause stipulating the different types of shares that a company limited by shares can issue, in addition to ordinary shares. These shares must comply with the company’s AoA, and may include:
- Preferred and subordinate shares;
- Shares with special voting rights;
- Transfer restricted shares; and
- Other types of shares specified by the State Council.
However, a listed company may not issue shares with more or less voting rights per share than ordinary shares or transfer restricted shares, unless they were issued before the public offering.
Limited companies can also choose to divide their shares into par and no-par value shares, in accordance with the provisions of its AoA. With par value shares, each share is worth the same amount.
Clarification of procedures to reduce registered capital
The 2023 Company Law slightly clarifies the mechanisms for reducing the amount of registered capital by stating that companies are permitted to reduce their registered capital to make up for losses. The mechanism can only be used if the company is still experiencing losses after having utilized its discretionary public reserve fund and statutory public reserve fund to make up for losses (which must be used first per the provisions of Paragraph 2 of Article 214).
However, if the registered capital is reduced to make up for losses, the company may not distribute the capital to shareholders or exempt shareholders from their obligation to pay capital contributions or share payments.
If the company chooses to reduce its registered capital in this way, it does not need to notify creditors within 10 days of the resolution to reduce the registered capital as is normally required. However, it must still announce the reduction in a newspaper or through the National Enterprise Credit Information Publicity System within 30 days of the resolution.
When a company reduces its registered capital, the corresponding reduction in the contribution amount or shares should be made according to the proportion of shareholders’ contributions or holdings. Exceptions are made in the following cases: where the law stipulates otherwise; if there are specific agreements among all shareholders of an LLC; or the AoA of a joint-stock company specify otherwise.
Note that after a company reduces its registered capital, it cannot distribute profits until the cumulative amount of the statutory reserve fund and discretionary reserve fund reaches 50 percent of the company’s registered capital.
Changes to corporate governance structures
Establishment of an audit committee
One of the major changes in the 2023 Company Law is the provision to allow LLCs and joint-stock companies to establish an “audit committee” within the board of directors, in which case it would not need to establish a board of supervisors (or appoint any supervisors). The audit committee can be “composed of directors on the board of directors [and] exercise the powers of the board of supervisors”.
The 2018 version of the Company Law required companies to set up a board of supervisors to oversee the company’s affairs. However, this board has generally not had a lot of use in practice, which may be the reason that the 2023 Company Law has introduced this new body.
The audit committee in a joint-stock company must have at least three members, of which more than half (at least two if the committee only has three members) do not hold any other positions within the company other than the director. They must also not have any relationship with the company that could affect their independent and objective judgment.
Employee representatives who are members of the company’s board of directors can become members of the audit committee (in both joint-stock companies and LLCs).
The new law outlines specific provisions for the deliberation and voting procedures of the audit committee of joint-stock limited companies and publicly listed companies. These provisions are as follows:
- Resolutions made by the Audit Committee must be approved by more than half of its members.
- Each member of the Audit Committee has one vote for resolutions.
- The deliberations and voting procedures of the audit committee shall be stipulated in the company’s AoA, except where otherwise stipulated in the Company Law.
- The company may set up other committees on the board of directors following the provisions of the company’s AoA.
No specific provisions on the deliberation and voting procedures of the audit committee of an LLC have been stipulated.
No board of directors for small joint-stock companies
The 2023 Company Law allows small joint stock companies or joint stock companies with few shareholders the option not to establish a board of directors. The 2018 Company Law only allowed LLCs this option.
In such cases, a single director may be appointed to exercise the functions and powers of the board of directors. The director may also serve as a manager of the company.
No supervisor for small LLCs
The 2023 Company allows small LLCs or LLCs with few shareholders the option not to have supervisor(s), with the unanimous consent of all shareholders.
Allowing board of shareholders to transfer powers to board of directors
The 2023 Company Law makes it clear that the functions and powers of the board of directors are composed of three parts: statutory functions and powers, functions and powers prescribed in the AoA, and authorized powers granted by the board of shareholders or shareholders’ meeting.
In addition, the new law stipulates that the board of shareholders or shareholders’ meeting can authorize the board of directors to make resolutions on some matters within the scope of its functions and powers (such as issuing corporate bonds).
Expanded scope of appointment of legal representatives
The 2018 Company Law requires that the legal representative of company holds the post of chairman, executive director, or manager, which can be difficult to implement in practice. The 2023 Company Law expands the scope of selection of legal representatives to all directors or managers who carry out affairs on behalf of the company.
Changes to provisions on shareholder rights
The 2023 Company Law enhances shareholders’ powers in several ways, enabling them to better protect their rights. These include expanding their right to information, powers to convene extraordinary general meetings, and rights to require share buybacks.
Expanded rights to access information
Article 57 has been amended to allow shareholders of an LLC to request to inspect the company’s accounting vouchers, in addition to the accounting books, as was already permitted under the 2018 Company Law.
In addition, the 2023 law stipulates that shareholders of an LLC can entrust accounting firms, law firms, and other intermediaries to review the company’s AoA, shareholder list, shareholders’ meeting minutes, board meeting resolutions, supervisory board meeting resolutions, and financial accounting reports.
Meanwhile, shareholders of joint-stock limited companies who individually or collectively hold more than 3 percent of the company’s shares for more than 180 consecutive days can review both the company’s accounting books and accounting vouchers, in accordance with relevant provisions.
Shareholders of joint-stock companies are now also permitted to duplicate company materials (AoA, shareholder list, shareholders’ meeting minutes, board meeting resolutions, supervisory board meeting resolutions, and financial accounting reports). The 2018 Company Law only stipulated that shareholders were permitted to inspect these materials.
Besides, the 2023 Company allows shareholders to inspect and duplicate relevant materials of a wholly-owned subsidiary company.
Right to request share buybacks
Under Article 89 of the 2023 Company Law, shareholders have the right to request the company to acquire their equity at a reasonable price if a company’s controlling shareholder abuses shareholder rights and seriously damages the interests of the company or other shareholders.
In addition, Article 161 stipulates circumstances under which shareholders who vote against a resolution of the shareholders’ meeting can request the company to acquire their shares:
- The company has not distributed profits to shareholders for five consecutive years, but the company has made profits for five consecutive years and meets the conditions for profit distribution stipulated in the Company Law;
- The company transfers its main assets; and
- When the specified operational period in the company’s AoA expires, or when other dissolution reasons specified in the AoA occur, and the shareholders’ meeting passes a resolution to amend the AoA to keep the company in existence.
If the shareholder and the company cannot reach a share acquisition agreement within 60 days of the date of the resolution in question, the shareholder may file a lawsuit with the People’s Court within 90 days of the date of said resolution.
The right to require share buyback in the above scenarios does not apply to shareholders of publicly listed companies.
Right to file lawsuits against executives and management of wholly-owned subsidiaries
In a new clause added to Article 189 of the 2023 Company Law, shareholders have the right to sue directors, supervisors, or senior managers of a company’s wholly-owned subsidiaries if they are found to violate laws, administrative regulations, or the company’s AoA, and cause losses to the company.
Under these circumstances, the shareholders of an LLC or the shareholders of a joint-stock company who individually or collectively hold more than 1 percent of the company’s shares for more than 180 consecutive days may request the supervisory board or board of directors of a wholly-owned subsidiary to submit a written request to the People’s Court. Alternatively, they may file a lawsuit directly with the People’s Court in their name.
Loss of shareholder rights for defaulting on capital contributions
The 2023 Company Law adds provisions stipulating the loss of rights for shareholders that owe capital contributions. Under Article 51, if a shareholder fails to pay the capital contribution within the prescribed time and subsequent grace period after the establishment of an LLC, then they can lose the equity of the unpaid capital contribution.
A similar clause is included in the Provisions of the Supreme People’s Court on Some Issues Concerning the Implementation of the Company Law of the People’s Republic of China (3) (“Implementation Provisions 3”). Article 17 of Implementation Provisions 3 states that “If a shareholder of an LLC fails to fulfill their capital contribution obligation or withdraws all capital contributions, and the company urges them to pay or return the capital contribution, and they still fail to pay or return the capital contribution within a reasonable period of time, the company shall disqualify the shareholder as a shareholder by resolution of the shareholders’ meeting. The people’s court shall not support the shareholder’s request to confirm that the termination is invalid.”
Despite the similarity to the “loss of shareholders rights”, the above clause only applies when a shareholder completely fails to fulfill or withdraws their capital contribution, not in cases where a shareholder fails to fulfill only part of their obligations or withdraws part of their capital contributions. The latest amendment thus serves to close a loophole that has been exploited by some shareholders.
Newly added “horizontal” disregard of corporate personality
Disregard of corporate personality, also known as “piercing the corporate veil”, is a doctrine used to prevent shareholders from abusing the limited liability of shareholders and thus harming the interests of creditors.
Under this doctrine, shareholders of a company who abuse the independent legal person status of the company and limited liability of shareholders to evade debts and cause damage to the interests of the creditors of the company shall bear joint liability for the company’s debt, so that the “veil” of the company is lifted or pierced.
While the 2018 version of the Company Law has a provision on the disregard of corporate personality, the 2023 Company Law adds that where a shareholder uses two or more companies under their control to evade debts and damage creditors’ rights by abusing the independent legal personality of the company and limited liability of shareholders, each company shall have joint and several liability for the debts of either company. This is the so-called horizontal disregard of corporate personality.
This change is expected to further protect the creditors of companies and safeguard a fair business environment.
Changes to company establishment and liquidation procedures
Relaxing restrictions on one-person companies
The 2023 Company Law expands the type of company that an individual can open on their own, and the number of companies that a single person can establish.
For instance, it now allows one person to set up a joint-stock company. Under the 2018 Company Law, at least two people are needed to do so.
Specifically, Article 92 says that “To establish a joint-stock company, there shall be at least one and no more than two hundred founding members, and more than half of the founding members must have their domiciles within the territory of the People’s Republic of China.”
This change significantly lowers the entry barriers to starting a business and will provide smaller businesses with the option of starting a joint-stock company, which offers a more flexible financial model.
Simplified deregistration procedures
Article 240 of the 2023 Company Law introduces new “simplified deregistration procedures” for companies that have not incurred any debts during their existence or have paid off all debts. This can only be done upon the commitment of all shareholders.
The simplified deregistration procedures are carried out by announcing the deregistration through the National Enterprise Credit Information Disclosure System for a period of at least 20 days. After the expiration of the announcement period, the company may apply to the company registration authority to cancel the company registration within 20 days, if no objection has been received.
Forced deregistration
The 2023 Company Law adds a “forced deregistration” mechanism for companies that are no longer permitted to operate but have not completed deregistration.
Article 241 states that if a company does not complete its liquidation within three years of having its business license revoked or being ordered to close, the company registration authority may move to deregister the company. It will do this by announcing its intention through the National Enterprise Credit Information Publicity System and giving the company a notice period of at least 60 days. If there has been no objection from the company after those 60 days, then the company registration authority can cancel the company’s registration.
In this case, there will be no change to the responsibilities to the original company shareholders and liquidation obligors.
According to an article posted on the NPC website, this forced deregistration mechanism has been added to deal with the prevalence of “zombie companies” in China – companies that are not in operation but cannot exit the market.
Other changes regarding liquidation
The 2023 Company Law creates a “recovery rule” for voluntary dissolution. Article 230 stipulates that a company may in some circumstances be allowed to continue operating after a voluntary dissolution upon the amendment of the company’s AoA by a resolution of the shareholders’ meeting, if the property has not been distributed to shareholders.
Specifically, this can be done when a company is dissolved due to:
- Expiry of the term of operation stipulated in the AoA of the company or where other circumstances for dissolution stipulated in the company’s AoA occur; and
- A resolution on dissolution passed by the board of shareholders or a shareholders’ general meeting.
Such a resolution and amendment to the AoA to continue the company must be passed by a two-thirds majority of votes cast by its shareholders of an LLC. In the case of joint-stock companies, it must be passed by a two-thirds majority of votes cast by its shareholders present at a shareholders’ general meeting.
In addition, the 2023 Company Law clarifies that directors should serve as liquidators in the case of liquidation. Article 232 stipulates that directors shall form a liquidation group within 15 days of the date on which the cause of dissolution arises. The company directors are also members of the liquidation group by default. If the liquidation obligor fails to perform the liquidation obligation in time and causes losses to the company or creditors, they shall be liable for compensation.
The information provided is for general purposes only and may not account for local variations. No liability is assumed for the completeness or accuracy of the information. For personalized advice on specific business queries, consult our experts at Dezan Shira & Associates by emailing China@dezshira.com.
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China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
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