CHANG TSI
Insights
On 29 December, 2023, the PRC National People’s Congress promulgated the amended Company Law of the People’s Republic of China，which will come into force on July 1, 2024. Given the sweeping revision and its universal impact to all forms of companies in China, we will briefly highlight the key changes of the new Company Law from the perspective of limited liability companies among others, which is preferrable by most of the foreign-invested enterprises, with a view to provide some top-level guidance to foreign investors and their investment in China. The amendment to the Company Law this time concerning the shareholder capital contribution responsibilities and period, the responsibilities of directors, supervisors, and senior officers, and protection of the rights and interests of minority shareholders are noteworthy.
According to the new Company Law, the shareholder of limited liability company shall pay his subscribed capital contribution in full within five years from the date of the company’s incorporation. For existing companies already registered and incorporated before July 1, 2024, if their capital contribution period exceeds the five-year maximum requirement as stipulated in the new Company Law, they shall gradually adjust their capital contribution schedule to comply with the five-year period requirement specified in the new Company Law for the outstanding capital payment. In cases where the capital contribution period or amounts are significantly abnormal, the company registry authority may require timely adjustments. However, there are some unclear points to be clarified for the adjustment requirements in the specific implementation measures and rules, which will be provided and released by relevant authorities.
Besides, the system of forfeiture of shares is stipulated by the new Company Law. If a shareholder fails to pay capital contributions by the date specified in the company’s article of association, and it still fails to fulfill its obligation of capital contribution within the grace period as specified in the written payment demand by the company, the board of directors may issue a resolution and written notice for forfeiture of shares to the shareholder. From the date of the notice, the shareholder loses the rights to the unpaid capital shares.
For foreign-invested enterprises that have already been established but have not fully completed their capital contributions, we recommend conducting sufficient verification and assessment on whether to complete their capital contributions or initiate capital reduction procedures. At the same time, it is suggested to pay attention to the subsequent legislation of the competent authorities and prepare corresponding plans. For the enterprises in plan for establishment, we suggest that the investors carefully consider the requirements of the new Company Law and the business development plan of the enterprise, and set a reasonable initial registered capital correspondingly.
The new Company Law further emphasizes the duty of loyalty and diligence of directors, supervisors and senior officers, and enhances the provisions to restrict directors, supervisors, and senior officers from engaging in affiliate transactions, seeking business opportunities available to the company and competing in the same industry. Secondly, the new Company Law strengthens the personal responsibilities and liability of directors, supervisors and senior officers in case of defective or incomplete contribution of capital. To be specific, the directors, supervisors and senior officers may be liable for compensation for unlawful profits distribution and unlawful registered capital reduction. In addition, when shareholders unlawfully withdraw their paid-in capital contribution and such action causes losses to the company, any directors, supervisors and senior officers, to the extent responsible for any such illegal withdrawl, shall also bear joint and several liability with the shareholder for compensation.
We suggest that companies should provide relevant training for directors, supervisors, and senior officers on the content of the new Company Law. This will enable them to fully fulfill their responsibilities and safeguard the interests of the company; while simultaneously mitigating the inherent risk associated with their roles, performance, and responsibilities.
The new company law emphasizes the protection of the rights of shareholders, especially the minority shareholders, for example, expanding the scope of information that shareholders can access; adding the abusive exercise of the shareholder rights by the controlling shareholder as one of the circumstances where other shareholders can demand the company to repurchase their shares; and clearly stipulating that the company shall decrease its registered capital by the amount of capital contribution or shares according to the proportion of shareholders’ capital contribution, unless otherwise stipulated by law or agreed by shareholders, For investors, when negotiating the exit mechanism for investment projects with all partners, it is necessary to consider the default rule of "proportionate reduction of capital" under the new company law. It is suggested that the investor shall make clear and appropriate provisions on the reduction proportion when signing investment agreements with all shareholders to protect their investment rights.
Apart from the content mentioned above, the amendment to the Company Law also involves many other aspects, such as corporate governance, corporate information publicity and disclosure，the abbreviated procedure for deregistration and liquidation of companies, etc. The new Company Law consists of 15 chapters and 266 articles, and. the content of this revision covers approximately a quarter of length of the previous version of the Company Law. The amendment to the Company Law will have an important influence on the establishment, maintenance and operation of the foreign-invested enterprises in China, worthy of close attention for investors in China.
